Q4 2019 Earnings Call

Please press star one on your telephone keypad you May proceed to fuel electro move your question for my question Q.

And what's required operator systems during the conference. Please press star zero when the telephone keypad. Please note. This conference is being recorded I would now like turn the conference over to host Sarah Byrnes, Vice President Investor Relations. Thank you you may begin.

Thank you got it good morning, and thank you for joining after that Scott Caldwell result for the quarter in here at December 31st.

[music] our speakers today are good health bad President and CEO, David Weinberg CLL.

Federal Securities laws.

We were for either the section titled forward looking statements in yesterday's press release.

Well, it's a section entitled risk factors and our most recent annual report on form 10-K for discussion of factors that could cause actual results.

Materially differ from anymore.

[music] the company has no obligation to update or something like any forward looking statements made today. We also to support information on our website at Www Dot if you see our he got.

Including affirmation that may be material.

Today's remarks also includes certain non-GAAP measure please refer to yesterday's press release supplemental containing our fourth quarter 20 or so.

Conciliation of these non-GAAP <unk>.

Our GAAP financial results with that I will turn the call of <unk>.

[music], Thanks, Eric Good morning, and thanks for joining us.

Great comments on market conditions review, our 2019 results.

No update on the company's current activity.

[music] U.S. economy grew 2.1 person in the fourth quarter.

Full year 2019, GDP rose 2.3%.

32.9% of your earlier.

Hundred 45000, new jobs were added in December, leaving the unemployment rate unchanged at 3.5 or shot.

[laughter] range remains a good year low.

The RMS had its best years, since 2014 up 26%, but still underperformed the broader market as the S&P 500 gig 32%.

Yes, it was up 35%.

[music] with respect to interest rates, a 10 year treasury yields roughly 1.6%.

Shorten that occur.

Well I was 1.6% well down over 80 basis points premiere on 22.

Turning to the mortgage markets the supply of debt capital remains inexpensive and available from diverse sources, including CMBS banks life companies a death.

Alright cost for 10 year fixed rate loans decreased to 100 125 basis points from a year ago.

[music], reflecting some spread compression.

Oh rates.

Moderately levered office property, plus or minus 3%.

The U.S. office market in 2019 added roughly 50 million square feet of new supply existing inventory.

Positive net absorption resulted in the vacancy rate falling 50 basis points, 12.1% lowest since 2007.

New supply continues to rise above long term trends.

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Sales volume totaled $115 billion in 2019.

This increase from a year earlier, driven by higher transaction volumes textbooks markets.

Seattle, Boston, San Francisco saw significantly higher volumes compared to 2018.

Turning to our business 2019 was productive here with the execution of some key leases sell three properties.

Proceeds of $812 million.

The payment of $250 million a debt.

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The $429 million special distribution.

Same property cash and why it was up 6.8% versus the prior here.

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As we have discussed previously.

We've been marketing three properties for sale.

After a flurry of activity that culminated yesterday, we closed on the sale of our 286000 square property downward like why don't I Brooklyn.

And the long medical just with the Boston.

Our gross sale price towards $70 million.

Proceeds after credits primarily from contractual lease cost transfer taxes were $259.2 million.

In addition, we entered into a contract to sell tower three trade three.

435000 square foot office property in Bellevue, Washington that we leased to Amazon in 2018.

For a gross sales price for and $1.5 million.

Proceeds after credits primarily for contractual lease cost unprecedented are expected to be approximately $317 million.

We continue to market the sale the 240000 spoke with Green Harris buildings in Georgia.

It's all this disposition activity I want to recognize stellar team effort produced these wins.

Since taking responsibility for each you see in 2014, we sold 162 assets for a total of $7.2 billion.

We have repaid 3.2 billion of debt and preferred.

Page $734 million of common distributions repurchased $245 million common stock.

I have a cast films, including proceeds yesterday sale.

Roughly $3 billion.

Through the conversion of a desperate portfolio bucker manage assets into cash we have created value and optionality.

Today, we're fundamentally different company with a small portfolio high quality assets strong balance sheet their track record of consistent execution.

[music] strategy will continue to be informed by market conditions.

What would be patient disciplined in our evaluation of a broad range investment options.

Spending considerable time evaluating opportunities in the office and office Jason This is.

As well as other sectors, where we see attractive fundamentals.

With a strong team significant balance sheet capacity and patients, we're well positioned to pursue opportunities to create long term value.

That'll turn call over to Dave.

Thank you David and good morning, everyone. The fourth quarter was another strong treatable leasing which finished off another successful year at each you see.

In the quarter, we signed a 153000 square feet of leases consisting of 90000 square feet up new leases at 63000 square feet a renewal.

Rental rates increased 10.1% on a GAAP basis, and 1.5% on a cash basis or seven properties, two and a half million square foot portfolio ended the quarter, 94.7% leased up 120 basis points from this third quarter and up 150 basis points year over year.

Almost all our activity this quarter was 17 script Plaza in Denver.

We signed a 141000 square feet, including a new lease with Salesforce for 64000 square feet.

We're excited to have Salesforce and are building I believe its tendency well try to other technology companies to the property.

We also renewed and expanded KPMG and 70000 square feet at 17th Street Plaza.

With this activity the properties 94%.

As we look back on 2019, we're very pleased with the work done by the two seating.

It was a productive year, especially in terms of value creation.

We sold three properties 17 started type market Street in Philadelphia, 601 away to Avenue in Bellevue and research Park in Austin.

With these dispositions, we exited Philadelphia and sold the other assets to buyers that we're uniquely positioned to ascribe value to development opportunities.

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In terms of leasing for the year, we signed 680000 square feet, consisting of 232000 square feet of new leases and 376000 square feet of renewals rental rates increased 11.6% on a GAAP basis, and 2.3% on a cash basis.

In Boston at 109, Brookline, we renewed Dana Farber for 77000 square feet and quickly back filled a large move out what they knew 71000 square foot lease with a software company.

These deals stabilize the property, 99% leased given this occupancy and unique features of this asset such as its location near Fenway Park in the long wouldn't metal called district, and its potential for lab conversion, we decided to take it to markets.

Investors agreed it was a special opportunity and there was significant interest from multiple well capitalized buyers.

Our largest lease of 2019 was that the Harris building of Washington, DC, well, we extend to Georgetown University and 129000 square feet for two years.

This week's together with the previously side teach in year 112000 square foot lease with the British school at the Green building brought the property, the 100% occupancy and position to be marketed for sale.

Looking ahead, and 2020 or 151000 square feet of leases rolling.

This role is that Bridgepoint square in Austin, 17th Street Plaza in Denver, and 12, 58 Street in Washington D.C.

We expect to get almost all the space back we're seeing strong interest across these properties and are working aggressively to address this rule with that I will turn the call over to Adam.

Thanks, David Good morning, I'll review, our financial results for the quarter and the here.

Funds from operations were 16 cents per share this quarter compared to 21 cents per share in the fourth quarter of 2018.

Asset sales totaling $819 million over the comparative period that negatively impacted epo by nine cents per share.

An additional one cent decrease came from lower interest income.

Offsetting the effects of dispositions and lower interest earned on our bank deposits was four cents per share of interest expense savings once that per share of lower DNA and an additional one cents per share of lower loss on debt extinguishment.

Normalized AFFO for the quarter was 16 cents per share compared to 21 cents a year ago.

With that that FFO normalized step I was impacted by dispositions and lower interest income, partially offset by interest expense savings from debt repayments and lower GNS.

For the full year Epo was 73 cents per share compared to 59 cents and 2018.

Asset dispositions were responsible for a per share decline of 33 cents.

Offsetting this decline was 21 cents per share of higher interest income 14 cents up lower interest expense.

Five cents per share of lower DNA expense at two cents per share for lower income tax.

Our same property results also added four cents.

Normalized FFO per share for the full year was 78 cents compared to 69 cents in 2018.

Higher interest income and lower interest expense NGL day provided growth as did improve same property performance inclusive of lease termination income.

As was the case in each quarter of 2019 dispositions were an offset to growth.

Net operating income and the same property portfolio was down 1.6% in the fourth quarter compared to a year ago.

The decrease was largely due to a roll down in ranked as part of Georgetown University East lease extension and the move out of BT Americas from our property in Boston.

Additionally, real estate taxes were higher quarter over quarter.

We benefited from leasing activity in downtown Austin in Denver, which partially offset lower revenues and higher real estate taxes.

For the quarter same property cash NOI was 15.6 million at 2.9% or $474000 lower than in the fourth quarter of last year.

Improved parking revenue and higher reimbursement income kept revenue flat. Despite a roughly 730000 dollar decrease in rental income.

Primarily from the beat the Americas move out and free rent indoor towns renewal.

Hi, real estate taxes, and H. back expenditures drove expenses higher, causing the decline in fourth quarter cash NOI.

For modeling purposes, 109, Brookline and tower, three threethree contributed $5.8 million of the fourth quarters cash NOI.

I know why for the full year was up 8.8% and cash NOI increased 6.8%.

Leases commencing in Denver in downtown Austin drove the growth as did the burn off a free rent and contributions from higher expense reimbursements.

This growth was partially offset by higher real estate taxes.

Turning to the balance sheet since 2014, we repaid over $3.2 billion of debt and preferred and we currently have $3 billion are over $24 per share in cash.

Liabilities include just 125 million dollar mortgage in addition to $123 million a perpetual preferred.

We're confident that our balance sheet and long term relationships will provide access to debt capital if and when needed.

The sale of 109, Brookline generated sufficient re qualifying income to eliminate the need mentioned on prior calls to invest a portion of our cash and other requalifying investment at 2020.

Taxable gains from this this disposition will total over $220 million and will require the payment of another special dividend.

Assuming the sale of tower 333, which is currently under contract an incremental $190 million have taxable gain will be generated.

We will also generate taxable income in the normal course of our business, which will impact the size at this year's distribution.

We continue to look for opportunities, where our team liquidity and financial strength will provide a competitive advantage. Thank you and but that we will open it up to keep an eye [noise].

At this time, we conducted a question answer session. If you would like to ask questions. Please press star one [laughter] telephone keypad, a confirmation don't indicate your line is my question Q. You mean first start to fuel the term of your question, but in the queue for participants using speaker equipment. They may be necessary to pick up your handset before Christmas turkeys, one moment, please as people for.

Question.

Our first question comes on line of Manny Korchman with Citi. Please proceed with your question.

Hey, good morning, everyone.

Just given your comments on the large move outs are expected move outside of the assets you have left in the portfolio.

We then expect.

You guys to wait to sell those until those are re tenanted. So we're looking at something call. It.

Three or four or five quarters away or is there a chance you sell them.

Or sell the cream, if you will oh selling those left to lease.

Hey, managing its David I would say right now we're focused on selling the assets currently in the markets with respect to the lease role as I said in my prepared remarks, we're aggressively trying to get in front of that and backfill the space, we will be getting back.

And then the decisions around future dispositions and as always we just kind of look at it as we go and all make that decision if and when it's appropriate.

Hi, David just what are the specific or what's the specific timing of those lease rolls or move outs sure. So out of the 151000 square feet Rowley.

We expect to get back about a 140000 square feet.

So I'll break that down to different ways first in terms of timing first quarter about 50000 square feet second quarter 4000 square feet.

Third quarter 30000 square feet.

And fourth quarter 56000 square feet.

The other way to look at it is it's coming from three properties 17th Street Plaza in Denver, 53000 square feet 12, 50 age Street in DC 27000 square feet.

And Bridgepoint square in Austin 60000 square feet.

And is any of that states vacant now on making it easier to release.

Vacant now I'm guessing without having specific information, it's likely that maybe a couple of the tenants given the timing of their expirations of moved out.

Whether its bacon or occupied we are trying to lease the space today.

Thanks, very much David.

Once again, if you like Ted's question. Please press star one on your telephone keypad. Once again, if you like tests question. Please press star one on your telephone keypad. Our next question comes on line of Duncan with Stifel. Please proceed with your question.

Great excellent excellent execution. It looks like you sold a Brooklyn at 900, a thought and Seattle about seven or Bellevue around 730, I thought that makes sense.

I clarify so why don't I am Brookline, we sold at 946 a fluid.

The acid in Bellevue tower, three to three we havent sold yet it's under contract, but at that gross price of 401.5 million, it's actually $922 a foot. It just so happens you're looking at the net price, but because Amazon is just starting its build out there are significant.

Credits, we owe the buyer to cover those costs.

Great. Okay, and then David you mentioned up a term I never heard before you're looking at office portfolios and often office at Jay said portfolios.

Can you describe what that means.

Yeah for US, we just mean businesses that may have a different.

Specific business, but have related office type use meaning can be medical office could be lab could be other businesses that are similar for not the same as office.

Okay and.

And then one last question you know you got an excellent job of.

Buying a commodity portfolio and maximizing dispositions on 162 assets.

And it appears to a lot of people that the market you mentioned the tax driven market Seattle, Boston San Francisco.

Our commanding very very aggressive underwriting and low cap rates.

But what you're good at and what there's a lot up out there.

Our commodity assets commodity portfolio, not a lot of pricing power, but those might trade at a.

Eight cap instead of a four cap.

Well you dive into the commodity business.

By low sell high again.

The way I would say it is I'm not sure.

About the commodity charm, we generally don't like commodity real estate, unless it's fundamentally mispriced.

What we want to find is real estate, where we think we can add long term value maybe to answer your question more specifically, we're not said on any small subset of gateway markets. If we saw value in a portfolio. We're a company that owned assets.

In other markets some would call them secondary markets, we thought that we could add bedroom aggressive asset management and leasing.

And create long term.

Streams that grow we'd be a buyer of those assets.

Great. Thank you.

Thank you John.

We have reached the end of our question answer session and I will turn the call back over to Mr., David Helfand for any closing remarks.

Well, thank you that was exhausting.

We appreciate your interest and we'll see many of you down in Florida. Thanks again.

Concludes todays teleconference. You may now disconnect your lines at this time. Thank you for your participation kind of a wonderful day.

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