Q1 2020 Earnings Call
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Good morning, and welcome to the City office right first quarter 2020 earnings Conference call. All participants will be in listen only mode shouldn't you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After <unk> after todays presentation.
Presentation there'll be an opportunity to ask questions to ask a question May Press Star then one under Touchtone phone.
To withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like turn the conference over to Tony Maretic. Please go ahead.
Good morning, before we begin I would like it direct you to our website at city office REIT Dot Com, where you can view, our first quarter earnings press release and supplemental information package. The earnings release and supplemental package. Both include a reconciliation of non-GAAP measures Dolby discussed today.
Hey to their most directly comparable GAAP financial measures.
Certain statements made today to discuss the company's beliefs or expectations or that are not based on historical fact may constitute forward looking statements within the meaning of the federal securities laws.
Oh the company believes that these expectations reflected in such forward looking statements are based upon a reasonable assumptions. We can give no assurance that these expectations will be achieved.
Please see the forward looking statements disclaimer in our first quarter earnings press release, and the company's falling to the FCC fill factors that could cause material differences between foreign looking statements and actual results.
The company undertakes no obligation to update any forward looking statements that may be made in the course of this call.
I will review our financial results after Jamie for our our Chief Executive Officer discuss so some of the quarters operational highlights I will now turn the call over to Jamie.
Good morning.
Thank you for joining us today, let me start by saying that I Hope you and your families are safe and healthy.
I'd also like to give an enormous thanks to our team they've done a great job dealing with a lot of challenges and insured or businesses remained fully operational.
Since our last earnings call at the end of February changes in the global economic environment have impacted our operations and outlook.
Fortunately City office was well position heading into this downturn with ample liquidity and cash lower leverage levels and a stabilized portfolio of diversified tenants.
With our call today I'd like to discuss the specific impacts we've observed at our company and the strategic decisions, we've made to address current and future uncertainty.
First I will touch on our current operating position and levels of exposure to various elements of risk.
All of our buildings are open and continue to operate.
We've adopted new policies and procedures to incorporate best practices for the safety of our tenants our vendors and our employees.
We stopped all acquisition activity in early March and had no exposure to loss deposits or other closing risks.
Overall.
We had low exposure to a number of the industries that have been severely impacted by cobot 19, including co working retail restaurant and cafes traveling accommodation live event related energy.
Approximately 3.2% of our portfolio by square footage is occupied by tenants in these industries.
In particular, we have very limited exposure to co working space with approximately 1.1% of our four portfolio leased to co working operators and no exposure to we work.
We provided additional information regarding our exposure to these industries on page 15 of our supplemental package.
Our rent collections in March were normal and collections of April contractual base rent total approximately 98% across our portfolio to date.
During the first quarter, we implemented various processes to evaluate non payment and rent relief requests.
And I've been working to find tailored resolutions in each case where warranted.
Our team has done a great job working with various tenants to achieve these collection results.
Delving, a little deeper into April results.
All of our largest 40 tenants pay their rent.
These tenants account for approximately 59% of occupied square footage as of quarter end.
Outside of our top 40, we have approximately 300 tenants with an average size of approximately 7000 square feet.
It is still too early to assess overall collections for may as rent payments generally arrive during the first week of of the month and in some cases are deposited into local accounts, which requires more time to consolidate.
That said, we anticipate that with the economy stalled may will have elevated deferral requests as well.
Well each cases different if we do grant short term rent relief, we generally expect to achieve additional lease term or amortize the unpaid rent starting later in 2020.
Moving to our financial condition.
As I mentioned earlier, we are very strong position.
In March we elected to draw 100 million from our available credit facility and we've maintained an elevated level of precautionary cash.
While there is a negative interest carry while holding this cash given the economic uncertainty we believe it was a prudent steps.
We will continue to maintain elevated cash in the short term as we monitor the situation.
As of March 30, Onest, we had approximately 147 million in unrestricted cash 18 million of restricted cash at our properties and a further $150 million under on an authorized under our unsecured credit facility.
We have no near term capital requirements or debt refinancings that cannot be addressed with our current liquidity.
Providing a counter to these positives and strong financial position is the significant uncertainty around the timing and extensive the economic impacts caused cycle with 19.
While we achieved strong collections in April.
As the downturn length. It's we anticipate further challenges given that we have over 300 tenants, we expect to be granting some rent the for us.
Depending on the length and depth of the economic shutdown.
There will also likely be some business failures as well.
We have provided our thoughts and assumptions on these issues in our updated guidance, which Tony will discuss shortly.
In terms of leasing activity transactions have generally slowed across our portfolio.
While renewal discussions have remained active new leasing has slowed as prospective tenants focus on their own challenges and uncertain requirements.
Our leasing teams have adapted by using virtual tours and other strategies, but we anticipate the timeframe for leasing vacancy will be pushed out.
As a result of the economic uncertainty and the likely impact on the real estate sector. We took a number of steps early on to ensure we were defensively position.
First we refocused our capital allocation strategy.
We paused our acquisition program and given the discounted valuation of our own stock, we reallocated capital to our common share repurchase program.
We believe in the inherent value of our portfolio and while there is dislocation in today's real estate valuations are current price does not reflect fair value.
As a result, we've repurchased over 60 million of common stock.
We believe these purchases will be impactful to our results over the long term.
In terms of the remaining 40 million that has authorized we'll continue to reevaluate market conditions and our stock buyback program.
If we elect in the future to not continue with the buyback any uninvested amounts will be reallocated to further reduce leverage.
Second achieving lower leverage level metrics has been a frequent topic with our shareholders in the past.
We previously laid out a plan that would achieve a gradual reduction by placing lower levels of leverage on acquisitions from each successive capital raise.
With the proceeds from the last equity capital raise not yet deployed we felt that now is the time to accelerate this plan.
Of the approximately 202 million in gross proceeds we raised in the second half of 2019.
We decided to use up to 100 million for the stock buyback program and the remaining cash to reduce overall leverage.
Third we reduced our common stock quarterly dividends from 23, and a half centsper share to 15 cents per share.
This was a tough decision for us as we know the quarterly dividend is an important component of income for many of our shareholders.
The adjusted common stock dividend allows us to operate with lower leverage and has been established the level. We believe will be defensive under these economic conditions.
The impact of these pivots and strategy are reflected in our updated guidance that Tony will discuss more specifically.
To round off my comments I want to reinforce our underlying rationale for the strategic decisions. We've made and how you can expect us to navigate the current environment.
We were well position heading into the current economic pullback.
We've always focused on having well located properties in strong cities and high credit tenants.
While there will be more employers that allow their employees to work remotely in the future we're confident that overtime.
Our cities and properties will recover and we're well positioned.
We believe that the trend towards moving to our less dense lower cost high quality of life markets in the southern and Western US we'll continue to play out.
These factors underpins our confidence in the long term success of the company.
However, we believe that significant impacts on the economy and our portfolio will continue to manifest in the near term.
As such we intend to continue to operate cautiously to protect the long term interest of our shareholders.
We will maintain higher levels of liquidity utilize lower leverage levels and we'll continually review our capital allocation decisions rather than a wait and see approach we've taken measures to whether the current environment and optimism we position ourselves for the long term.
So with that I will turn the call over to Tony to provide further details on our financial results.
Thanks, Jamie.
Ill first address the first quarter's results and then turn to our current outlook and expectations.
As you will see our first quarter results were not significantly impacted by cobot 19, but we are being cautious on our projections for the balance of the year as reflected in our guidance.
On a GAAP basis, our net operating income in the first quarter was 25.4 million.
This represents a 900000 dollar increase relative to the amount reported in the fourth quarter of 2019.
The increase was primarily attributable to the increase in occupancy.
Our bad debt provision for the quarter was only 100000, which was related to those tenants who had business interruptions due to covert 19.
We reported core AFFO of 14.3 million or 26 cents per share, which was also 900000 higher than in the fourth quarter of 2019.
Our first quarter, AFFO was 7.9 million or 14 cents per share.
While we do expect dividend coverage on an AFFO basis in the future.
FFO in this quarter was lower due to elevated costs of tenant improvements and leasing commissions incurred during the quarter tied to strong prior leasing activity.
The largest leasing costs relate to the previously announced 70000 square foot new credit tenant at our Denver Tech property, who executed a 10 year lease.
During the first quarter, we incurred 1.2 million of the 5.0 million tenant improvement allowance for this tenant and we expect the bulk of the remaining tenant improvement allowance of 3.8 million will be spent in Q2 with the rest spilling into Q3.
As a result, we expect our full results will be weighed down until this work is completed.
We also had some continuing capital expenditures the largest of which related to a project at Sorrento Mesa in the quarter.
Through the relative size of our portfolio and the impact of significant leasing in any one quarter. Our AFFO numbers will continue to move around some from quarter to quarter.
We achieved renewal leasing spreads of 6.1% on a cash basis for the quarter.
This strong number indicates rolling up existing leases to market has been a driver of same store NOI growth.
Our first quarter same store cash NOI grew 4.1% versus the first quarter last year.
Denver was one of our best performing markets in the first quarter as the impact of the recent leasing activity is beginning to result in increased cash rents.
Moving onto our balance sheet as Ginny mentioned, our cash unrestricted cash at March 30, Onest totaled 165 million.
This substantial cash balance will ensure we have ample liquidity to complete our stock buyback program and withstand any unforeseen negative economic impacts caused by cobot 19th.
Our total debt net of deferred financing costs at March 30, Onest was $706 million.
Our net debt, including restricted cash to EBITDA was reported that 5.9 times.
At quarter end, our total debt had a weighted average maturity of 4.9 years and 86% of our debt was effectively fixed we have no debt maturities in 2020, and only one maturity in 2021.
During the quarter, we commenced our share repurchase program at March 30, Onest. We had purchased 1.5 million shares. Since then we have continued to buy stock and in the aggregate have repurchased approximately 7.3 million shares. These repurchases were completed at an average gross price at $8 in 26.
Cents per share for total cost of approximately 61 million.
Lastly, we have provided updated full year 2020 guidance in our press release.
Given the number of uncertainties in this economic environment. This was a challenging exercise as it is impossible to know the full impact on the economy at this point.
Therefore, we made our best estimates for the potential impact.
Our guidance involves a range of outcomes, we refer you to the material assumptions and consideration set forth in our earnings press release, which covers these in more detail than I will highlight here the main drivers or revised guidance range are as follows.
First we have removed the impact of any acquisitions from guidance and assumed capital is allocated to our share repurchase program.
Second we have created general provision for uncollectible rents of between 1% and 3% of rental revenue in each of Q2 Q3 and Q4.
While we envision the majority of potential concessions will relate to amortizing unpaid rent in subsequent periods. We felt it was prudent to create a general provision.
Third new leasing activity has slowed and with the economic uncertainty the timing is difficult to predict we deferred new leasing assumptions until 2021 in our forecast.
Based on these revised operating assumptions, our core AFFO yearend occupancy and same store NOI results have been lowered.
Our revised guidance estimates core FFO per share between a dollar seven and a $1.12 for the full year ending December 30, Onest 2020.
Our revised same store cash NOI expectation for the year as negative 4.5% to negative 1.5% using these assumptions.
That concludes our prepared remarks, and we will open up the line for questions operator.
Thank you we will now begin the question answer session.
To ask a question you May proceed Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before press in the keys to withdraw your question. Please press Star then to.
At this time, we will pause momentarily to assemble a roster.
Our first question comes from Barry, Oxford with D.A. Davidson. Please go ahead.
Great. Thanks, guys.
When you're looking at cap rates out in the marketplace.
I'm guessing that you havent seen.
Huge change or a huge increase in cap rates to justify going into the acquisition market where is your implied cap rate for your stock has has has definitely changed in increased is that your thought process.
Thanks for the question Barry.
It's really hard to say what cap rates are in the marketplace right now when.
Goal that hit pretty much everything is frozen deals that were being marketed.
We're going to be revalued, and many sellers have basically put it on pause smartly and I think theres a big question Mark when you're calculating cap rate what net operating income is going to be because there's going to be some follow what market rents are going to be and so there's a lot of uncertainty around that and that was part of the reason why.
We hit the pause, but it's really hard to predict so I don't think you could accurately say where cap rates are in the market today, because nothing's really changing or trading I think what you can focus on is we looked at our own assets, which we know better than anyone.
We know our own prospects of what we think we can do with them and you using stabilized forward looking numbers without covidien right. When you factor that in but just normalized numbers. We think we're buying in the mid to high cap on our own portfolio and so thats a no brainer at a $195 a foot and that's where we're allocating our capital.
Great Great. Thanks, and then Tony a question for you may be more on the accounting side, you had mentioned the bad debt.
And a FFO as we move into next year and year recollecting those rents.
Well that kind of get on wind and we'll see a FFO increased so that I don't know a year or 18 months from now.
The FFO has all been made up.
Yes, it's a good question Barry and work early stages of those discussions on deferrals and I really depend on what the final legal languages, but speaking generally.
On an FX you didnt ask about half of it on AFFO basis, everything gets straight line through gapper likely when we don't see a change which is right. That's why and how is it. Okay. So thats why wasn't exactly yes on an annual basis, what that backing on a straight line rent I think you will see an impact of that in that you'll see a lower AFFO and that you don't receive cash in the period.
And to your point, you'll see a bit of a catch up in 2021 are currently during the year, depending on that particular deal that we that we that we cut with.
Okay, great. Thanks, I just wanted to make sure I was thinking about that correct.
Yes, thanks, guys.
Thanks for the questions.
Our next question comes from Michael Carroll with RBC capital markets. Please go ahead.
Yes, it's Tony can you provide some color on your rent deferral expectations I don't know if I missed this during your prepared remarks, but how many tenants of Ashley requested that the deferral to be each and are you in active discussions with most of those so stay or just how should we think about that.
Sure, Mike, It's Jamie I'll I'll answer that one so it's a little bit of a tough questions to answer because we're in constant dialogue with our tenants about operations and what we should be doing and so we have tracked kind of a wide range of discussions and as anything from asking if they can temporarily give back parking single.
We can do about reducing operating costs seeing a vote deferral requests asking if we have some rent relief programs and a number of larger well capitalized companies you know, but if there had been asked if there was any programs. We had I think if you look at all of those combined it's less than 20 or 20% of our square footage. So.
Not a huge percentage overall and the April collections around Collectability right now is up 2%.
So I think youre going to see that probably increase a bit in may and June.
But it's too early to say.
So all those 20% that have asked for deferrals I guess, what percentage of those are the well capitalized companies that I.
I mean, obviously, you probably will need to offer deferral versus the ones, but for an active discussions book today.
It's a large percentage by square footage the ones that really needed typically are the smaller tenants also translates to smaller square footage for us.
The larger ones with larger square footage asked and we've tracked that.
But it's it's a much smaller number than that needed.
Okay.
The buyback program, how should we think about that I guess, there's 40 million left I.
I guess with the stock's trading up above where you bought back over the past few months I mean are you still going to be actively pursuing that at these levels or what's the best way to think about that.
So for US, we're going to reevaluate here, depending on where the prices.
There is no hard and fast number of what we are going to put out at a minimum the maximum we said would be 100 million. We've completed 60, and so we're really going to reassess here over the coming weeks and months and look at our options and whatever we don't ultimately by in the share buyback will apply against reducing our leverage.
Okay, great. Thanks.
As a reminder, if you would like to ask a question.
Please press Star then one.
Our next question comes from Craig to Sir with B. Riley FBR. Please go ahead.
Hey, good morning, guys.
Let's talk about the remaining lease expirations for 2020, I think it totals about 5% of the portfolio.
Do you get a sense as you're talking to those tenants are they completely on pause or they.
The and indicated any interest in renewing or maybe renewing it with less space I guess any color on kind of where their heads or I would be useful.
Sure Hey, Craig it's Tony here.
Very helpful. If I just talk about the larger leases that we haven't kind of give you a status update we've talked about these tenants in the past among others given the latest so we have five leases that are greater than 3000 square foot set to expire in 2020.
One is already a known renewal.
There are a tenant at or Florida Research Park, we have a second tenants for research Park that we also put a higher probability renewal on those discussions are going on as you can imagine they are a little more sporadic.
Just because with the long people working from home.
We have an update on a tenant that we've talked about in the past, we've a 46000 square foot tenant at our Pima property.
We have discussed on prior calls.
They have an August 31st expiration, we did sign them to a short term extension in Q1. That's included in our leasing statistics that just extended for another three months. So their expiration now in November thirtyth.
If you recall they are building their own campus and will and will vacate on that new timeframe as of November thirtyth.
And then beyond that.
We also have a tenant that is paying below market rents in our Sorrento Mesa property to very valuable Lifesize space.
No we will update on those discussions if you recall, we talked about that those in the past.
And we put a high probability of renewable skill with them.
And then lastly, we have a 30000 square foot tenant at circle point.
September Thirtyth.
Expiration.
Really no real update on dialogue to report, but they do they are a large user and thats submarket and there's a strong possible that they'll move.
As they have other space in a submarket that they may will consolidate into.
Great. Thanks for the death of that color.
You know.
Just circling back to higher handling red deferrals.
It sounds like you're tacking on sort of missed rents as you're working through and then amortizing that.
I guess are you is there a general sense are you trying to collect those rents inside of a year or is it really just sort of on it on a case by case basis.
Maybe I'll kind all over the place.
Craig It it is kind of all over the case.
Our own objective is giving more short term whether thats two to three months.
Hurdle for the tenants that we deem meeting it and we've done a pretty in depth process, where the tenants are filling out.
Various surveys providing us with information on their own business plan, what they're doing what programs, they're looking at the try to get cash in them help sustain themselves.
And for US, we obviously want to maintain our tendency and help.
And so it's been shorter term deferrals, and then starting amortization and it's a wide range of periods, depending on the tenants condition, but we'd like to see some of that commenced in 2020 in some may spill into 2021.
Okay got it.
And just circling back to capital allocation.
You know if this winds up being more of a V shaped recovery not nothing necessarily expecting that would you utilize that excess cash to get back in the acquisitions or are you. It sounds like you really have just a lot more committed to two running a more de leveraged portfolio is that fair assumption.
Our belief is the right approaches having lower leverage.
Internally, we don't have the view that it's going to be a quick bounce back we think it's going to be a couple few months here and then a slower recovery and we're focused on really being well positioned longer.
No that that makes sense.
Alright Thats it for me thank you.
Thanks, Greg.
This concludes our question and answer session I would like turn the conference back over to Jamie for our for any closing remarks.
Thanks for joining today, we hope that everyone stays safe and well goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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