Columbia Property Trust, Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Welcome to the Columbia Property Trust Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to the conference over to Tripp Sullivan of SCR Partners. Please go ahead.

[Tripp Sullivan:]

Thank you, Laura. Good morning, everyone. Welcome to the Columbia Property Trust conference call to review the company's results for the third 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:]

Thank you, Tripp. This has been an eventful quarter for REITs and the market in general. There has been a lot of volatility and nervousness about the global economy. The decision about interest rate hikes in a widening gap in public versus private valuations. We are fallen lease of elements like everyone else that we're not think meaningful impact on our current operation , leasing activity or the execution of our strategy. Of this - is a when it comes to future investments, we're taking advantage of strong capital demands for quality real estate investments to complete our transition in the near-term. If anything, this economic uncertainty reinforces our strategy of transitioning the portfolio to some of the best markets in the country. The true high barrier to market with the deepest tenant and demand and the strongest capital liquidity. We continue to see strong demands in San Francisco, New York, Boston and Atlanta. San Francisco the subject of much speculation about when and how much office demand will - within the tech sector. We have a diverse tenant roster across our San Francisco holdings including financial , legal, and other service companies. We continue to expand strong leasing activities with tetanus as well. None the less we are proactively taking advantage of this leasing environment to show our occupancy in the near-term with attractive tenants with sustainable credit. Washington DC has had its challenges but we are saying improvement as demand is improving and - is being absorbed. In the meantime our Market Square property is holding with attractive rates and a strong pace of leasing activity. Houston is perhaps the most uncertain of our core markets but are three assets there have not suffered impact as they are well leased with solid tenants. With that said leasing activity has slowed for the modest vacancy we do have in the Eastern market. Finally we have 10 assets and non-core markets, six of those in the process of being supposed of now in the remaining four will actually following time. We continue to have significant leasing activity across many of those markets such as Cleveland, Denver, in suburban DC. This will enhance our eventual exit of those properties. We believe we're on the rock track with our strategy and it is showing in our results. We are reporting normal FFO of $.47 in normal AFFO for $.35 for the quarter. We learned our presence in Manhattan with a purchase of 229 W. 43rd , that is historic New York Times building. We sold 11 of the 14 properties previously identified for disposition were $433 million. We expect to complete the disposition of the remaining three assets over the next several months. In addition, we also put another three assets on the market in Cleveland, Baltimore and Newark and expect proceeds in the $600-$700 million range. We completed the joint venture with Blackstone that effectively sold a 49% interest in market square in DC for a gross value of $595 million. Raising $120 million in net proceeds, in addition to taking $159 million of debt off of our balance sheet. We repaid $333 million of secured debt and recast $950 million of unsecured bank debt with my maturities and lower borrowing costs. Finally we completed 509,000 ft.² of leasing including our renewal of our largest 2017 expiration. We now have a very high quality portfolio that results of several years of hard work and discipline location. After completing the latest disposition we identified, whipping up the remaining three announced earlier in the year, adjusting for the impact of the Market Square , I portfolio will have the following characteristics. We will have 22 properties and 12 markets. With 82% of our annualized three's revenue will be sourced from CBD locations and strong urban infill submarkets. 75% of our revenues will be derived from multitenant properties, 62% of those revenues will be sourced for true high barrier markets . Finally, 83% of our revenues will be sourced from our seven target markets. These are the portfolio is where compared to with any other competitors sector. The properly have substantial rent and well-positioned for sustained performance and NAV growth as it is dominated a high quality CBD asset and some of the best high barrier markets in the country. As you heard us a many times over, nothing is more important than proactive leasing and operations in achieving our performance goals. In our same-store portfolio we generated a lot of momentum with new leases and renewals. This is highlighted by the renewal of our largest tenants just this week. In Denver, we just signed a lease renewal with CH2M at extended them to 2032 43 of the four buildings on campus. Thereby significantly increasing the value of the property facing expiration in two years by which now has a will capitalize tenant locked in for an additional 15 years. We get the fourth winning back at the end of the first quarter 2016 but we are very optimistic about the leasing for this attractive buildings in campus in the strong submarket. This is our largest lease operation for 2017 and we are pleased to get it done. PSE&G [ph] Market Square, the addition of Blackstone is a partner in the schedule completion of property renovations this quarter there are good momentum at this property also. While the DC leasing market is still a challenge, we find that several key leases totaling 52,000 square foot on average these were at an 8% low from prior rents. We also have several offers out for additional space. The hundred 27,000 ft.² - lease six margin 30 of this year in the 93,000 ft.² Sherman sterling expiration is scheduled for next March. We are expecting significant traffic for this space and are confident in a good outcome in the your near-term. To date we have already released on a 5% of this expired space, 222 E. 41st in Manhattan is a property that we have only own for several years as you know. Jones Day has been a known without for some time with only six bring next October. We certainly get more questions about this asset than all other assets combined but it is one which we have great confidence. The reception by the Manhattan brokers going to for the reentry of this relatively new building to the market has been fantastic. We have had scores of brokers and prospects visiting on a marketing center and we reveal plans for a fitness and amenities and on the second floor as well as improvements to the front entrance to increase the buildings visibility. All of these have been very well received on the market. We had preliminary offers in hand for two different large blocks of space totaling 120,000 ft.² for the lower portion of the building. Potential full building users have also toward the building and expressed strong interest. With a good about our target of having at least half of the buildings leased in advance of this October 2016 exploration. -- the property in Atlanta is we discussed in the last call, no Rubbermaid is 100% of the property, is next door to our headquarters in the Central Perimeter of Atlanta. That lease expires in March 2020. No recently acquired a much more building to move into next year although they still have 4.5 years remaining on their lease with us. We're working with Newell to potentially structured early termination and/or cooperate with them on subleasing the space. With potential longer-term - direct lease wraps were appropriate. Turning to our recent acquisitions, we're having great results there as well, 650 California 650 California St. required over a year ago, we signed two new leases during the quarter that observed the entire 18 for - for at a gross rate of --. We built these spaces out of spec to generate momentum in the floor leased quickly with these two tenants and they took the space virtually as is. We recently completed our second floor marketing suite which many of you have seen and made improvements to the lobby which have also been well received. It has been widely reported in the local press and we are in discussions with large base users for the 100,000+ square feet of contiguous space we have available when - expires next March. We expect to surpass our targets on this property 315 Park Avenue in Manhattan was acquired in January of this year and together with Ellen L holding who manages and leases on our behalf, we recently held the property that brought in over 300 brokers a few weeks ago to tour the building of the our plans for assets. A similar event drew over 200 attendees this week. The market of this property has been very fantastic. We are in advance lease discussions with several existing $0.02 as well as new tenant prospects. It was an for the reporting of news and that property same. 116 Huntington, the back of Boston was also acquired in generated this year and we have 60,000 ft.² available including the most desirable space on the top two floors. We recently found a small lease in a train proposals for a user for the vacant lower floor. Third our improvement terms were nearing completion and emotion will look to install and additional restaurant operator there. We're also enhancing the lobby and other common areas. Another area in which we are executing well is dispositions. As I mentioned earlier we completed the sale of 11 of the 14 dispositions identified previously for $433 million, 11 assets closed in July of this year. We have three of those left to Sell in one of those are in close by year end. Running through the three, 253 Shuman Blvd was the office headquarters but they vacated as a result of a merger with Office Depot. This building is secured by $49 million nonrecourse CMBS loan. We are entitled to the net cash flow through November 2016 - 2016. We will either have a plan for a new user or possibly return this property to the lender thereby reducing our debt by $49 million, 800 N. Fredrick , in Gaithersburg, it is under contract with a developer for alternative use and we would expect this property to generate approximately 45 man dollars in proceeds when it is completed at year-end 1881 campus common in Reston with the property we acquired in connection with the portfolio deal with our 315 Park Avenue, acquisition, it was our intention all along to resell the assets that the assets had significant leasing activity recently and we want to complete that before putting on the market. We just card for bids on this property and we expect this offers to coming close to our purchase price $64 million or better. For those three assets we're on track to generate at least 150 Main dollars and proceeds and debt reduction. Of course our big transaction news during this quarter was the marketing of three large properties totaling $2.9 million oh - two point 9,000,000 ft.² in New York. We expect to generate gross of $600 million from this sale earlier this year or early 2016. We're confident in the projected pricing in the broad demand for these markets big that timing is difficult to predict. Operating assets are well leased and or improving markets to strong capital flow. We are - to concentrate our portfolio in high barrier and target markets. We encounter the quarter to pursue the joint venture with Blackstone property partners. That is Blackstone core plus investment unit and effectively selling a 49% interest in Market Square. Market Square is our largest is that after all in DC is one of our target markets and we're very confident in the properties performance long-term while so much interest in the asset. There are a few reasons. We strong pricing we achieved was certainly a factor of the gross I you determine at 595 million. It is a few million less than we paid for several years ago, years that have not been counted in the DC office owners. The leasing package required from new tenants are - and we have large blocks of speed that are rolling out . Although spaces represent Grote rollout opportunities as of central cost are required. The transaction generate Jennison your million dollars in gross proceeds consisting of cash and debt reduction because we still believe DC long-term in the performance of this asset, week retain controlling interest in the property. We are also learning property and asset management fees. Finally, the importantly, it provides us with them parching key to establish a key partnership with Blackstone one of the most accomplished State Farm managers which could lead to further opportunities between these three large dispositions in the Market Square joint venture we are expecting approximately $900 million Between these three large dispositions in the Market Square joint venture we are expecting approximately $900 million-$1 billion in gross proceeds that we can use to reduce leverage which we will quickly do in the short-term bridge loan and borrowings on our facility related to the 229 W. 43rd acquisition , two, we will allocate capital to new investments, and three, we will potentially repurchased shares at appropriate price levels. Before we talk about new investments in what we're seeing on that front I want to further address share repurchases. I know I mentioned Jones Day earlier is the topic we get past about the most but this is probably a close second. Some of our investors encouraged is pursuit share buybacks and we have never doubted its benefit under appropriate circumstances. You cannot dispute the short-term wrap up buying significant a discounted shares versus fully priced new real estate investments. I think we also the clear benefit of that as we quickly picked up nearly $13 million of our stock late in the quarter at an average price of $22.45 per share. However I want to be clear we do not view share repurchases as a strategy. We have great capital allocation tools we can use in we will discipline these issues as we are with all capital we put to work for our shareholders. Turning to investment activity we are very pleased with our recent purchase of 229 West 43rd Street during the quarter. Several have per the building and we look forward to showing more viewing convenient. It's purchase allowed us to replicate the strategy we put to good use in San Francisco with the blend of value added acquisitions combined with well leased properties with stable cash flows in our core markets. While we are very confident in the leasing plans and momentum at 222 E. 41st, the Jones Day property, and 315 Park Avenue. We have the balance of debt significant an opportunity we already had in Manhattan with this core asset at 229 was record. Manhattan is a second-largest market now and we will support it with a senior leader at a small team and we hope to higher by early 2016 and that search is already begun. This team will leverage our existing relationships and help us to maximize the value of our investments and also identify new opportunities down the road. We do have a healthy pipeline of healthy acquisition but nothing is imminent at this time. We will be very disciplined at measuring and identifying opportunities that further a strategy. Since we began our transition three and half years ago, we have sold 46 properties and acquired only six. The sixth are having a Germanic impact on our ability to achieve the strong results we expect to deliver. This leads into Jim's territory but I want to highlight and of this activity would be possible without the flexibility we built into the dollars - ballots sheet. As we reload the balance sheet we will continue to be balanced in our decisions. With an emphasis ongoing the asset value over time. As I noted last quarter when it comes to new investments in capital allocation decisions we will continue to focus on making decisions that provide the best long-term returns and we will concentrate the portfolio on highly liquid in high barrier markets and will upload NAV growth as our primary driver that we will balance that with an attractive yield. All of this while maintaining a conservative and flexible balance sheet. With that, Jim , what you walk through the guidance and we will come back at the end for a couple of remarks.

[Jim Fleming:]

Thank you Nelson and good morning everyone. There are a lot of moving parts in our third quarter results and our 2015 guidance from our recent forecasted dividend. All of these are good things and demonstrate continued execution of our strategy but I will spend time this morning walking through the implications of each of these. We had a good quarter with $.47 of normalized FFO driven by our acquisition of 229 West 43rd Street in New York in early August as well as continued G&A savings. We talked about renting our portfolio on average being approximately 8% to 10% below market and we continue to see good results for lease is assigned bring the quarter. For the 139,000 square foot signed in the quarter, we achieved an average 7% increase on a cash basis and a percent increase on a GAAP basis. The majority of these leases were spread across Atlanta, Houston, San Francisco, in New York. As Nelson mentioned earlier we also found the CH2M lease in Denver this week which takes care of our largest 2017 exploration. It extends the lease through 2032. The new leases a 15 to 20% rolldown on a cash basis and a high single-digit roll up on a GAAP basis. By extending them another 15 years, we significantly improve the value of this asset and we will be able to start work immediately on leasing prospects for the one building we will get back in a strong Denver submarket. On page 9 of our supplemental, you'll see that our total GAAP interest expense was $20.2 million for the first quarter , compared to one excuse me compared to the turning $1 million in the square in - for the third quarter a year ago. The prior results exclude most actors expense and interest expense associated with interest rate swaps from our income statement. We no longer have in the third quarter since it was related to the mortgage at 333 Market St. in San Francisco. The increase over the third quarter of 2014 was primarily due to increased debt to fund our acquisitions as well as in unsecured bond offering earlier in the year. It decreased the second quarter which was related to the repayment of mortgage loans on 333 market in San Francisco in 100 E. - and Baltimore and --. You will note we had a loss on our interest rate that was related to the cost to settle the rates on the $450 million term loan and we refinanced during the quarter. A loss on early extension of debt related to paying the 215 York morning as part of the 11 property sale completed early in the quarter. Total capital expenditures in the quarter were $26 million compared to $28.3 million in the second quarter and 18.4 men dollars in the third quarter a year ago. The capital this quarter included 16.9 May dollars of non- recurring building in leasing capital associated with market square at 315 at 315 Park Avenue and 650 California and 221 main. AFFO for the quarter was $.35 per share comparable to the first two quarters of this year and once again providing good coverage for our dividend. Same-store cash for the third quarter was 3.5% lower than the prior year. The decline was primarily from the full buying expiration at market square, the Oracle expiration at one Glenlake in Atlanta in the KeyBanc downsizing in Cleveland. Offset somewhat by leasing at University Circle in Palo Alto. These declines were reversed when we release the vacant space some of which already occurred in all three locations and longer-term we expect to see substantial increases in same-store NOI as we realize the - in our portfolio. I would like to make two additional points on our same-store performance first. While we do expect a modest decline in same-store and align because of these lease expirations, we are now forecasting it to be less of a decline in the guidance we provided at the beginning of the year. Second, I want to call your attention to page 22 of our supplemental package. We added this page to give a clearer picture of the impact of our leasing. This page is broken down in market and for each market it shows a percent lease and percent occupied & economic occupancy. The difference between leased and occupied our leases and signed yet not contributing to FFO our GAAP earnings. The difference between occupied and economic our leases that have commenced or are in free rent so you're not yet contributing to cash NOI. We hope this is useful in addition to the disclosure about our upcoming lease expirations. I discussed in great detail on last quarter's call the significant amount of capital markets activity we completed in the third quarter so I will briefly summarize that activity. With the $433 million in gross proceeds from the 11 property dispositions, were able to facilitate repayment of $333 million in loan secured's at three assets. I say facilitate as a user credit facility to pay up one of those lines and then we pay the facility with a remaining disposition proceeds. We are now left with only six mortgage is throughout the entire portfolio. One of which is now in a JV and another is which on a planned disposition property. The size of our earnings as simple in the quality of the asset in the pull provide a tremendous amount of flexibility for us going forward. In connection with the acquisition of 229 West 43rd Street during the quarter, we also took on $300 million bridge loan that bears interest at 110 basis points over LIBOR and matures in February 2016 with one six-month extension off. We also through down another $200 million on our credit facility. Once again we used our strong balance sheet to take advantage of the investment opportunity. We also recast all $950 million of our unsecured bank debt with lower borrowing costs and longer maturities. By extending the $500 million credit facility to 219 and replacing the $450 million term I mentioned earlier, with a $300 million term loan that matures in 2020, and a $150 million term loan that matures in 2022 , the subsequent up rate from standard to triple be in August with a nice benefit as well and keeping of Lauren cost lower than --. We now have a well whether maturity schedule with an average maturity close to six years once our short-term borrowings have been paid off. We also put capital to work with our share repurchase program by acquiring 570,000 shares for a total expenditure of $12.8 million or a weighted-average price of $22 M those 22 those 2245 a share. After all of this activity we ended the quarter with leverage of 39% which as I mentioned on the last call as at the high-end of where we like to keep leverage. We expect to bring our debt levels down early next couple of quarters as we repay short-term borrowings with the proceeds from the Market Square joint venture in the positions we announced. In fact, our debt today is already down to 36% due to the Market Square transaction this week. In closing of the market was delayed about a month so we worked out lender approval but we are pleased to now have this completed. With a gross asset value of $595 million, back in Blackstone's pro rata share of the $325 million in secured debt on the property, and an adjustment of 12.25 man dollars for above market debt, we received $120 in net proceeds from this transaction. The transaction reduces some of our capital commitments for upcoming lease renewals that we will also lease 49% from this property for the fourth quarter. With the expected sales of Key Tower in Marriott in Cleveland, 100 E. Pratt in Baltimore and Plaza in Newark , we're targeting an additional six and $200 million to 700 million and proceeds. We expect to close was of the sales in early 2016. One of these could close before year-end. These transactions will have more of an impact on 2016 which I will cover in a moment. I want to turn now to guidance for 2015. Our full-year guidance of the dollar 96 to dollar 98 four 2015 which is up from a dollar 85 two $1.91 previously implies a fourth quarter of 44 $1.91 previously implies a fourth quarter of $.44 to 46 of FFO. Last quarter I went through the implications of the NOI loss on the 11 property dispositions and the addition of 229 W. 43rd . There are 2 million reasons for increases in first, we are clearly running well below our forecast on G&A by almost $500,000 per quarter. We're doing a good job of managing instances but we also have not incur the expense yet for adding a senior person in New York as we continue that search. Second reason is we previously left our guidance for uncertainty in the timing of this - but now we know the significant dispositions are likely before in the Lear . Both of these are one-time benefit of September in a result so I would not extrapolate those for a run rate. This guidance also takes into account the Market Square joint venture and the fact if any dispositions to occur they will be close to year end. As far as our expected AFFO is concerned, with $1 nine already in the books for the first three quarters together with a strong fourth quarter we projected, we will have plenty of dividend coverage for 2015. As we look to 2016, we're not prepared to give an exact guidance range for normalized FFO or AFFO at this point. We will give guidance for normalized FFO when we report fourth quarter results in early February. What I can do is walk you through how we think about the year. My suggestion would be to start with the quarter we just reported were FFO was $0.47 or a dollar 88 on an annualized basis. I was attract the FFO contributions for that property in Western Virginia and Maryland which we expect to Sell around year in and as we have said these to generate $100 million in proceeds. I would also subtract the FFO contribution from Cleveland Newark in Baltimore which we have said have a value of 600 which we have said have a value of $600 million-$700 million. Assuming a blended cap rate of 6% to 7% of our assets we would lose about $.45 per year of FFO. Paying off about $400 million of short-term debt at low rates should save about five cents per year. For now, I would ignore the Market Square transaction because it was at a low cap rate and proceeds at a similar rate. I would also ignore to 63 Shuman Blvd because it is relatively small and we plan to earn it at least month - next year. Using this Matthew should expect FFO somewhere around $1.50 or 2016. Not taking into account additional leasing , stock repurchases or acquisitions. Please keep in mind this analysis with leave us with an unused line of credit about $400 million of cash and net debt of about 25%. We also will have a well situated portfolio with substantial embedded rent growth over time. Let me finish with a few comments about our future dividend cover in light of our expectation FFO will be lower in 2016 been in 2015. First as we said in previous calls, our recurring Was at a high level this year because of leasing activity and we expect our recurring CapEx to be lower in 2016. Second, we believe we will see meaningful increases in FFO over the next several years. We take a long-term view of our dividend. Finally, we will continue to have plenty of balance sheet capacity to fund CapEx in our dividend is well as our dividend makes sense of the longer term. With all that in mind the dividend of course amortization and will talk more about it as we provide guidance in earnings conference call. With that I will turn it back over to Nelson to finish up.

[Nelson Mills:]

Thanks, Jim. I want to close by emphasizing we are already seeing substantial and suitable for our strategy. They are clearly reflected in our financial results as well as the enhance quality and value of our portfolio. We are nearing the point of having the transition behind us and we are very pleased with the results of the diligent efforts of our team and our board. We keep knocking down one and general at the next the disposition of this court assets and compelling investments in the strengthening of our team and capabilities and so forth, we provide many data points in recent years for the market to measure our progress and you buy into this must on opportunity for investors. We are very are confident and committed to delivering performance beyond expectations. Thank you for the opportunity to provide this update and now we look forward to answering any questions you may have.

[Operator:]

[Operator Instructions]. And our first question today comes from Sumit Sharma of Morgan Stanley.

[Sumit Sharma:]

I guess I will start with something you mentioned around the $400 million of proceeds you are saying next year after you take the debt out in everything, you also you comment indicate that buybacks may not be top priority or not part of the strategy as you clearly articulated, I guess in terms of acquisitions and you had in admirable track record in enforcing deals with NOI accretion, we have heard a lot about acquisitions being late competitive in the office space so considering market interest could you comment on the strength of your land of how you intend to effectively deployed the end of - in cash?

[Nelson Mills:]

We are in we will continue to be very disciplined and Jim outlined a basic outline after the dispositions are done and after debt is repaid in the capacity of the 400 million in cash he is are creating a baseline for the starting point for next year earnings. In cash and you are correct we don't use buybacks others share back strategy. When we bought our program, I think we were trading in the $21 range and today we are $4 or $5. At a price it makes sense and we have capital capacity at a deep enough discount we will by shares. Again, board decision is a tool we will use and we do not see it as really creating long-term value as progress strategy but a total we will use and have used. As far as acquisition pipeline, the main part of your question, we have been very disciplined and we have worked for a hard to rebuild the portfolio that is included the acquisitions of six assets. One of those was just to accommodate another transaction. We haven't disciplined and will be disciplined. We are very pleased with what we bought so far in the market is competitive but it has been competitive for a couple of years. I think we are demonstrating we're getting the results in San Francisco and in New York. I think those are paying off. Again, as we have said, we will be in no these are uncertain times and we know the markets are competitive in we will measure a lot before we cut and there's nothing imminent . Our focus right now is on leasing and dispose . We do expect further acquisitions but when and what and how much is to be determined.

[Sumit Sharma:]

I guess a quick follow-up, I know I have to take a shot and you may not choose to answer but is there a price NAV cast range that you are looking at for the buyback and secondly and completely nonrelated, the event spreads moderated somewhat compared your prior quarters and I understand this could be a function of mix as the prior quarters contain a lot of San Francisco leasing which in the past you highlighted as an immense Mark to market opportunity. Is this quarter indicative of the set of Norm going forward? I know there is a full expiration coming up in 2016 benefit of that, where else are you seeing pockets of market to market gains?

[Nelson Mills:]

Well, it is much dependent on the mix. In the last quarter we had 50% or something that I can remember the number but there was a simple but because it was a few of our largest San Francisco rollouts, this quarter was a different mix all together. I think on average, a rent rollups across the board are at the 9% to 10% range. That is a mix of the few leases around the portfolio and they will be slight roll downs and we expect Jones Day for example - in we will probably not achieve a rolldown but there is a rolldown. We have a few of those around the portfolio and we also have very dramatic rollups including some in the works in San Francisco. Some recently done in some that are in play. As well as, the 315 Park Avenue. Really, it swing slowly but on average is both in the near-term and over time, we expect substantial rollups. It is hard, Jim I don't know if you want to add, but it is hard to point to a standard to expect quarter to quarter because it is going to be a little lumpy but very positive overall.

[Jim Fleming:]

It is going to be lumpy and there are some roll downs and we talked about the CH2M lease on a cash basis, that is a rolldown. We had a price as you or two ago that was a rolldown. We do have some of those that are legacy properties but on balance on average, we do have a pretty substantial rollup in a good bit of embedded rent growth in the portfolio and it will even out over time.

[Nelson Mills:]

On the discount, required to buy shares, again that is to be determined and it depends on a lot of factors. It depends on capital capacity in our Outlook for other investment opportunities , it is subject to board decision so we will way that as we go. All we can really say is we have been in that range in the last couple of months and we bought shares. Share prices is not substantially recently but we have been demonstrated we will by shares that as far as we can go at that right now.

[Operator:]

Our next question comes from Mitch Germain with JMP Securities.

[Mitch Germain:]

Just the property at 41st St., I know you said you had a couple of otherwise out for some negotiations going on maybe for the building, what is the tenant mix you are talking through there?

[Nelson Mills:]

We are seeing quite a varied interest. As you know, the law firms leading we had law firm interest in financial tenants and even take us type tenants. And, as you know the proximity to patients, we have interest from time to time from - and so forth. It is pretty varied. There are a couple of full building users one of which seems to be taking a more serious look and we cannot speak to the industry or nature of that but let's just say it would be a compelling situation in a good credit quality tenant and we be excited to do it if we can negotiate the right terms. We will have to leave it at that and we're hoping in the next couple of quarters will have a lot more to report on that.

[Mitch Germain:]

I recognize the progress you're making on the disposition front and I think it is positive. But, there is still a whole bunch of host of assets that are still not core to you even after this 546 properties. Why not just cut the cord now and take advantage of the pricing out there?

[Nelson Mills:]

Well, there are four. Maybe five. One we're discussing whether it is a long-term holder not. Maybe for after these are in play. There are not many. They are relatively small. A couple of cases, we are showing leases so it would not be the right time to trigger and we. We may be - after the leasing is done. They do not live collectively in the other part of it is plays to the previous question. The use of capital, these are assets well leased and multitenant assets in pretty good markets and they are doing fine and we would like to take advantage of where the markets are today and take them off the table but they are not doing any harm. These three big assets that we just announced get the best bolt behind us and the other for won't even with the needle. It is something to talk about we will collect this but we're with you. We are looking forward to moving on getting past and getting a stake in the ground as a dental transition that we elected to do for the last three or four for a few more months.

[Mitch Germain:]

The last one for me, the New York Times [ph] acquisition, maybe go through that process when you started discussions. Was it a full bidding process or something that users to off market? I know you did other is with Blackstone. Whatever color I could get I would appreciate. Thanks.

[Nelson Mills:]

It was a fully market asset by Blackstone. I will admit we looked at it early on in we took a look at our first initial look, it was a bit corporate we are in the value add business and that is what we're all about in our acquisitions have been about. We took a closer look at the quality of the cash flow and the quality of the building in quality of the tendency, the asset and everything about it , as we looked at in the pricing quite frankly came in better than we expected on the initial look. We thought it is very core today. It is leased. There are some leases rolling in for three or four years but most are locked away for 10 years. We thought it provided a nice balance and good cash flow by the New York and provided value to our opportunities there. As far as the competitive process, it was unrelated to our Market Square venture completely unrelated with different funds but we are in discussions with Blackstone and we have a relationship as do a lot of folks. We feel like we at least have our foot in the door and had our fair chance. We were able to move quickly and put our balance sheet and flexibility to get it done. Without overpaying, in fact, we were approached since the acquisition by a couple of other major real estate investors about partnering on our value. There has been a bit of an endorsement there. Post-acquisition from other investors who of said I wish we had the property can we have a bite of the apple. We feel good about it on long-term hold and again a nice balance to the heavier value we have.

[Operator:]

Your next question comes from Sheila McGrath with Evercore ISI.

[Sheila McGrath:]

Jim, that was helpful with the baseline guidance. When you get down to the 150 you mentioned, what is the leverage level get down to and you are not assuming , to me, that puts you lower leverage and you're not assuming redeployment into acquisitions and that number. Is that right?

[Jim Fleming:]

You are right. I was trying to give a baseline. I was doing really a - because we have not finished our budget. There are other minor things that will enter in and we will give guidance in February but really to give people some perspective on the big pieces that have changed since the $0.47 the quarter we saw this past quarter but you are right, what that was same as we would get all of these big three properties sold at the end of this year , and some of those could be later that they would be sold by the end of this year and we would be paying off our short-term debt and we would be setting a $400 million of cash for the entire year and we would go into that cash or anything and again this is a baseline but we would just be saying the cash to pay off debt. In the net debt to answer your question handing out the $400 million, the net debt would be 25%. That would be lower than what we targeted in the past.

[Sheila McGrath:]

Okay. So we should - it would be highly likely if you hired acquisitions that you probably won't run the company and 25% level? Correct?

[Jim Fleming:]

We have not done that in the past. I cannot speak to what opportunities we will see , Sheila but clearly with $450 million in cash and nothing to do it would be a plan.

[Sheila McGrath:]

Just on 41st St., if you could give us an update on any indication at this point if you think that might go single tenant or multitenant in any insight on when you might have some news for us there.

[Nelson Mills:]

Well, we have interest from full building users. The plan has always been multitenant. We think it works for a nicely for multitenant. It is good shape to work for multitenant. That is the marketing plan that we have good prospects for an nice two and three and four users. But, honestly we will play out a full building option as well. There is a lot of emphasis to that . Assuming good credit and good rate it is so binary. We are going to give a few more weeks maybe a couple of months at most to play out full building user opportunities that those do not pan out we are very optimistic about getting good momentum on multitenant basis. As we have said, we are still very confident even on multitenant scenario we are committed to having half of this building leased or that is our target by the time Jones day expires. These are directions that we cannot would arrive forever if we are in multitenant route but while we have some prospects and play we will play the rock.

[Sheila McGrath:]

Okay. On - in 650 California, can you remind me of around the rent there and also on aging for you mentioned $75 a foot. For a bigger user at 100,000 ft.² is that a good proxy for the market rent or would it be a little lower ?

[Nelson Mills:]

$75 would be a little stretch for that building. It is a single well it is to force but we also expect this space so we have not - and it will come in at a good rate. I would say 65 or 70 is probably better blended target that we will see. As far as what was in place, they are throughout the building, but I think it is in the 40s for us. $38 gross average for little or. We would be looking at a very substantial roll out in the near-term .

[Sheila McGrath:]

Littler expires is it April or March?

[Nelson Mills:]

March.

[Sheila McGrath:]

Okay, Just a question , as we were walking through our model, NOI for the quarter, it did take a big hit obviously because of the Market Square expiration but I want - I don't want to probably put that in our - as primly vacant but can you remind us again Market Square what you think or what the rental levels will be for backfilling the expiring ? Specs yes.

[Nelson Mills:]

Two things on that Sheila. To answer your question, the net rents we're seeing at market square our - but they are in the low 50s in the gross rents are in the low 80s which is a bit of a rollup from what was in place in both Fulbright which expired in the last quarter and Sherman which expired at the end of first quarter next year we think will be modest rollouts. The other thing about - is page 22 that we refer to a supplemental for example, you'll see we are now in most of this in Market Square is the MC building but we're 82.8% leased and that is low in we certainly expect to get that back up. We have had good leasing momentum but it takes time because it small bites but that is a small runway but even with that we're still in at least 82.8 connected to the 80.1 in a little below that an economic occupancy of 69.7, getting into the analysis of the rental rates, it is what percentage of our square footage and the building is actually paying cash rent and it is only 69.7. There is a good bit of room to go to get us to what we are ready leasing we have leased some of the full there is also clearly a lot of room to go as we release vacancy. The nature of that building tends to be the smaller type. We're talking to all forms and others about bigger block the nature, we have a team there that are very active and productive both our internal team very much as well as our jail 18. We're getting good results but it will come in at 15,000 or 40,000 sort of charts. Special building, a good place to be for government affairs office so we're confident we will get this and keep up with a vacancy.

[Sheila McGrath:]

One other quick question, you mentioned the other exploration of Oracle in the quarter. But that impact the entire quarter?

[Nelson Mills:]

Sheila, I mentioned that as a reference of this quarter over the same quarter last because of the Mac yes it has been the case for a while now. We have vacancy about 100,000 feet.

[Operator:]

[Operator Instructions]. Your next question comes from Brad Burke of Goldman Sachs.

[Unidentified Analyst:]

This is Kevin. I have a quick question. Looking at the 10-Q it looks like the free cash flow to the quarter was $95 million in your giving payments at $113 million. Is it reasonable to think the flash - cash run rate will go higher can you give us an update on the sustainability of that dividend?

[Nelson Mills:]

Kevin, if nothing was to add that is great. The way we look at the dividend is to look at our AFFO and that takes into account the CapEx we spend for recurring projects, releasing space and maintenance CapEx, what it excludes though is what we call incremental CapEx where we're spending many to improve buildings largely those are buildings we have acquired and we acquire buildings at the value add we typically have a fairly healthy CapEx budget we factor in because there are common areas and other improvements that we choose to do as part of our underwriting. When we talk about returns on those, we of course included the capital in our return expectations. For those we do not really do those as a drag on earnings for we do those as one-time items that increase the profitability of the portfolio are part of the acquisition. Looking at AFFO it of course takes into account not all CapEx and not the incremental but the recurring but looking at AFFO we have had healthy coverage last year and we had a dollar 46 of AFO and $1.20 dividend this year and it looks like a dollar nine and it looks like we will be in a similar range is last year. Next year, I agree it will likely be lower because their earnings as we have said will likely be lower but we are not expecting as much CapEx next year as this year. We felt that and we will telegraph that throughout the cause we have had this year so it may be in the range somewhere of our dividend that we fill it is still going to be in pretty good shape nature.

[Unidentified Analyst:]

I will say to that, we knew the short-term diluted impact of our transition obviously coverage's tighter than it was. As Jim said, it could go slightly below for some period of time. The dividend decision is always a decision in there's no guarantee the cutter increase. The important thing that Jim laid out the baseline earlier for the dollar 50. If you don't reinvest capital and so core , remember that is after we have gotten through . There are a couple of assets out there but there are three or four assets that go for a good price but at that point the transition is behind us in the diluted mix is behind us but the other part going on is to future acquisitions more importantly we bought the value add assets like 315 that we are expressing good activity so we're refilling the - very quickly. We are excited about the 16 because even though going from 15 or 16 as Jim pointed out for our FFO moving down is really the end of the transition and now we're sitting with a balance sheet of not only have quality position for growth but in bedded rent rollup we acquired. We're looking forward to maybe Dan guidance this year. We’re looking forward to point you to the upturn through the transition is not turn the other way and that is what this is all for. That is what this was four and while we did it. Anyway, there was a little pressure on the dividend right now and no plan to cut it. It could dollars change but no current based on our vision for what we see with the portfolio and our current plans to cut it in getting better on terms of FFO in coverage going forward.

[Operator:]

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

[Nelson Mills:]

Well, thank you again, for your time and we really appreciate this opportunity to share the information with you and great questions. We are always grateful for those. We look forward to seeing some of you at the NAREIT conference but if not there I will talk to you again soon. Thank you very much.

[Operator:]

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