Q2 2021 Columbia Property Trust Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin moving.
Mentally until that time your lines will again be placed and held thank you for your patience.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be place and Hello, and thank you for your patience.
Okay.
[music].
Good afternoon, and welcome to the Columbia Property Trust second quarter, 2021 conference call.
All participants will be in listen only mode. After today's presentation there'll be an opportunity to ask questions and instructions will be follow at the time the company released its.
And in its quarterly supplemental package, which can be found in the Investor Relations section of the company's website and on file with the S. E T E on form 8-K.
Columbia is also filed its Q10, 10-Q E. S E T. This afternoon.
Statements made on today's call regarding.
Net 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 India risk factor section of Columbia is for.
<unk> form 10-K, which includes specific risk free training to COVID-19.
Forward looking statements are made based on management's current expectations assumptions and beliefs as well as information available to the company at this time.
Columbia undertakes no obligation to update any room.
Because in this conference call. During this call. The company will also discuss certain non-GAAP financial measures and reconciliations to comparable GAAP financial measures can be found in the supplemental financial data. Please also note that this event is being recorded and an audio replay will be available by this time.
Sure.
With that I would now like to turn the call over to Nelson Mills, President and Chief Executive Officer, You May go ahead Sir.
Thank you operator, and thank you everyone for being with US today I'm joined by our CFO Jim Fleming.
Oh, Jeff Groaning, and Paul <unk>, our head of real.
Real estate operations.
I'll begin with a quick review of our second quarter performance and then discuss some of our recent accomplishments. I'll. Then described several growth drivers that are right around the corner for Columbia before turning the call over to Jim for further details.
Columbia delivered another solid quarter in Q2, which reflects the determination.
Emanation of our team the strength of our operating platform and the world class quality of our portfolio.
After the challenges our industry experienced last year, we continue to see encouraging signs of improving market conditions that will enable meaningful growth and value creation opportunities in the near future.
Our team is working.
Hard to capitalize on attractive lease up opportunities within our core portfolio as well as the nearly 2 million square feet of active development and redevelopment projects, we have coming on line.
For the second quarter of 2021, we again generated solid operational and financial results. Despite the lingering impact of the pandemic.
Although our same store cash NOI was down 8.9%, we produced normalized <unk> of 31 cents per diluted share and ended June with a 93, 5% lease rate.
We continue to collect more than 98% of our contracted rent each month.
Only 2% of rents were deferred.
Third during the quarter.
And fewer than 3% of rents were written off.
The stability of our cash flows is under girded by an average remaining lease term of close to 6 years.
We have just 5.3%.
Annual lease revenue is expiring in the second half of this year and only slightly over.
Percent next year.
Portfolio wide, our vacancy remains relatively limited yet our team was able to turn in our strongest leasing performance in a year.
We leased 75000 square feet in Q2, all with positive cash leasing spreads and with GAAP leasing spreads at nearly 16%.
This continued leasing success reflects the desirability of Columbia is differentiated amenity rich properties strategically.
Located in some of the most sought after neighborhoods.
A significant portion of this quarter's leasing occurred at 116 Huntington in Boston as.
As we announced earlier this week our team secured a series of.
Lease extensions and expansions totaling 27000 square feet.
Which together bring this terrific back bay property to nearly 90% leased.
And we've signed another 6000 square feet with a new tenant this month.
116, Huntington boasting an impressive collection of diverse tenant spanning financial services health care.
Technology.
We also expect to announce a new restaurant operator in the near future further in monetizing this building to serve existing tenants.
And to capture additional market demand.
Looking ahead, we see strong indications of recovering market demand and a substantial increase in leasing activity.
We are conducting.
Care, increasing number of property tours across most of our available space, including our ground up 799 Broadway property and our full building renovation of $1.40, non Madison Avenue in Midtown South Manhattan.
We expect to sign a meaningful number of leases at attractive terms over the next several months.
At 799 Broadway.
And <unk> is on scheduled to be substantially complete next month and we are in advanced discussions with multiple prospective tenants.
Based on this activity, we believe that net effective rents could exceed on average our pre pandemic expectations for this property.
At 80 M Street in Washington D C. We believe.
We're close to signing a lease for most of the remaining new space at rents that are yet again, even stronger than our pre pandemic expectations, reflecting the exceptional status of this pioneering vertical expansion as a reminder, this.
This innovative project will add 3 additional floors to ADM with a total of 105.
5000, new square feet of highly differentiated office and amenity space.
All built using environmentally friendly mass timber construction.
This exciting project remains on track to deliver some of the most appealing office space in D. C by mid 2022.
We're also enthused about our other near term opportunities across our core portfolio.
At University Circle in Palo Alto, we've recently taken back 90000 square feet from Amazon Web services.
AWS was paying a blended rate of $79 per square foot net for this space, which is well below market.
Our west Coast team is already working to maximize the potential of this prime office space and 1 of the silicon.
Icahn Valley's premiere dresses and to drive a considerable roll up in rent as they have so many times before.
At 95, Columbus in Jersey City. We've also just taken back 173000 square feet from purging. This property is conveniently located just across the Hudson River from Manhattan with spectacular views.
In New York and unparalleled transit access.
Our assertive marketing of this attractive block of space is being met with healthy interest.
We are just completing a series of capital improvements that will further amplify the building strong appeal for tenants seeking high end space service and amenities in this desirable Jersey city location.
While these recent explorations will weigh on our second half cash flow. We're excited about the compelling roll up opportunities as we move through the remainder of the year.
Another key leasing opportunity as the prime space available at our iconic market square property centered on Pennsylvania Avenue in our nation's capital.
With our partner Black.
Stone, we're pursuing amenity enhancements to the lobby and the outdoor plaza.
And repositioning the ground level retail and restaurant space, we're seeing strong and steady leasing activity and expect to continue. This unique property is track record of achieving rents in the same range as newly constructed trophy properties within that market.
Across our entire portfolio, we're actively engaged with tenants who are now evaluating and planning for their workplace needs in a post pandemic world, including their immediate needs as employees head back to the office.
Dynamic growth companies like affirm Darkey sign Oracle <unk>.
Pitch book Snap.
Amazon <unk>.
Jim and I and Twitter were all originally attracted by our desirable locations and amenity rich modern office space.
But they have also come to expect the very best and ongoing service and innovation from our team.
As our tenants look to reconfigure for the new normal.
They know they can rely on Columbia to help them prepare for a safe and efficient return to the office.
We take a comprehensive approach that includes attractive and useful amenities state of the art systems and technologies and highly attentive service.
As we continue to benefit from the improving environment.
We're highly optimistic about our ability to grow our pace of leasing at both our existing and newly delivering space.
At the same time, we're continuing to advance new value drivers for Columbia shareholders. For example, our team is investing substantial time and energy in developing implementing and marketing.
A full service flex option at a few select locations across the portfolio. We expect this offering to capture the growing demand for prebuilt monetize space with added services and more flexible terms.
Of course this segment of demand involves higher cost effort.
And the risk associated with shorter lease.
Yes.
But the rent premiums can be substantial and worth pursuing.
We look forward to keeping you updated as we explore this exciting new initiative, which today involves a relatively small portion of our portfolio.
Last week, we and our partners reported that the construction financing has been secured for the history.
Redevelopment of terminal warehouse, a 1.2 million square foot office complex in Manhattan's West Chelsea neighborhood.
Led by Blackstone Group and Goldman Sachs.
This 1.5 billion dollar construction loans paves the way for work to begin in earnest on the conversion of the spectacular 19th century property.
With a highly attractive mix of creative office and retail space.
This impressive landmark property will be replete with historic architectural details and exceptional amenities.
When complete in 2023.
This complex will be designed to attract the same type of forward thinking.
Weighted companies that already dominate Columbia as tenant roster.
We're also looking forward to commencing our unique development opportunity at 101 Franklin in Tribeca.
We continue to progress through the planning stages and given the success, we're having several blocks to the north of 789 Broadway. This is another.
Project, we're eager to advance to generate substantial shareholder value in the coming years.
We continue to recognize the key role that environmental social and governance factors play and our ability to grow shareholder value over the long term as we serve and support our communities.
We have continued to advance our protocols.
Nicolas and programming to address climate change.
Diversity equity and inclusion <unk>.
Provide for the health and wellbeing of our team and tenants and advanced social Justice.
All of which is reported in detail in our latest ESG report. This is available on our website.
India also continues to receive very strong scores from ESG rating providers, such as glass Lewis and ISS in the last quarter alone. We've been recognized as an energy star partner of the year.
A department of energy Green lease leader.
And 1 of Fortune magazine's best workplaces in New York.
Lastly, I'll note that our strategic review process continues.
<unk> guided by our management team and our board shared goal of maximizing value for all of our shareholders.
All parties involved see the embedded value of our existing portfolio of our project pipeline.
And of the strong team and platform.
Columbia has created over the years.
We're committed to transparency throughout this process and look forward to sharing the results of this review in due time.
In summary, the women and men of Columbia property Trust are optimistic about the future and are committed to our mission.
We're in the enviable position of having it.
Incredibly stable portfolio with numerous near and longer term opportunities to unlock NOI growth and drive value creation.
Including nearly 2 million square feet of development projects.
We expect to deliver meaningful cash flow growth over the next 18 months, including all of the leasing opportunities I've described.
Thanks.
I am confident our talented and motivated team will get the job done to deliver on these opportunities.
In fact, although our <unk> has recently pulled back due to a few lease explorations.
We believe that we can generate more than $40 million per year of additional NOI over the next several quarters.
Scribed, just by leasing our existing availabilities.
That's approximately 34 per share just from our existing portfolio.
We're confident that we can deliver incremental results in this range based on the quality of the space. We now have available our leasing team's capabilities and track record.
And the improving levels of leasing demand in our key markets.
I'll now hand, the call over to Jim who will provide more details on our quarterly results our strong financial position.
And our updated outlook for the year.
Thank you Nelson and thank you everyone for joining us today.
Again, our quarterly results were solid.
We generated second quarter normalized <unk> of 31 per diluted share and.
And adjusted <unk> of 23.
Above the level of our 21 quarterly dividend.
As I mentioned last quarter, we are including a line in our income statement for strategic review costs.
What would you are being added back to calculate normalized <unk>, but not for adjusted <unk>.
Our same store cash NOI was down a bit from the second quarter of 2020.
Partly because we didn't have any lease termination fees in the second quarter of this year.
For the full year. However, we still expect our same store cash NOI.
And the range, we originally forecast as Nelson discussed recent move outs are affecting our near term cash flows.
But have also given us highly attractive space to lease combined with our new space soon coming online.
Office compelling near term growth opportunities more on this in a moment.
All.
We will be in collections have remained strong at 98% overall and nearly 99% for our office tenants.
Our write offs and deferrals remained minimal.
And this strength has continued into the third quarter.
We ended June with a lease percentage of 93, 5%.
Down 50 basis points sequentially.
Our rent consistent with our expectations.
Our leasing activity has begun to pick up.
As Nelson mentioned, our team leased 75000 square feet during the quarter.
Not a large number yet, but our strongest performance since the second quarter of last year.
We've remained active through July.
<unk>, including a recently signed at 116 Huntington in Boston.
With several additional leases currently in negotiation across our markets.
Our lease economics have remained favorable with GAAP leasing spreads of 15, 9%, reflecting the embedded potential in our portfolio.
Wow.
It continued to produce solid results despite the pandemic.
What we're most excited about are the near term opportunities to grow our NOI and <unk> in the coming years.
These growth drivers include very desirable space in our existing buildings and high quality development projects, both of which are seeing an uptick in activity.
Pivoting.
As Nelson mentioned, we anticipate that leasing just this space will generate more than $40 million per year of additional net operating income.
After that we have longer term growth drivers to generate further earnings including terminal warehouse and 101 Franklin.
We're coming at these opportunities from a position of strength due to the quality of our portfolio the strength of our tenant roster, our solid balance sheet and our strong liquidity.
We ended June with $58 million in cash on hand.
Access to more than $500 million of additional funds through our revolving credit facility.
And more than $4 billion of unencumbered properties.
Our net debt to real estate asset ratio was 32, 5%.
And our fixed charge coverage ratio stood at $8.1 times.
Our only debt maturity prior to next year is the construction loan on 799 Broadway, which has extension options.
<unk> into 2023.
This financial strength allows us to take a patient and disciplined approach to long term shareholder value creation.
For our 2021 guidance, we're tightening our prior range of $1.23 to $1.30 per share for normalized <unk>.
The $1.
Q3 to $1.27.
Given the limited impact the third and fourth quarter leasing can have on current year earnings.
However, we're seeing significant momentum in new leasing now.
Which should create strong growth into next year.
We are reaffirming our prior range of negative 3 to negative 5% force.
Cash NOI growth and 90% to 95% for year end occupancy.
This outlook assumes a continuation of current macro conditions.
We also still expect full year corporate G&A in the range of $33 million to $35 million.
In summary, we've continued to perform well despite the challenges in the past.
Same store and our opportunities around the corner suggests significant upside to the 2021 outlook I just provided beginning next year.
We have compelling leasing opportunities to drive cash flow that our team is set to take advantage of.
And we're already seeing increased activity that we believe will lead to much higher levels of leasing and all of our markets.
Passenger you with that operator, if you could please open the lines, we're ready for Q&A.
As a reminder to ask a question. Please press star 1 on your telephone keypad until we got a question. Please press the pound key.
Yeah, and as a reminder to ask a question. Please press star 1 on your telephone keypad.
Hey, John a question for you <unk> Nathan line will be compiled the Q&A roster.
Our first question comes from the line of Sheila Mcgrath.
Your line is now open.
Oh, yes, good afternoon Nelson.
Nelson I was wondering if you could give us a update on leasing.
Andrew.
The level at 799 Broadway and also on your expansion at ADM Street in Washington D C.
Absolutely Sheila Thank you for the thank you for joining thank you for the question.
As I mentioned, Paul Teti, who heads our real estate operations is here.
And Turkey is best answer both those questions sure. Thanks, Nelson how sure.
As Jim mentioned, we've been really encouraged with the continued activity.
At both of those properties as well as around the portfolio I would say 799 is probably our most active.
Building in the portfolio net.
Not surprisingly, it's where it's 1 of the few new products that have some vacancy existing vacancy given that it's just delivering now we have 3.
3 leases out in legal at that property right. Now overall, we have about 100000 square feet, a little over 100000 square feet of leases out.
And I think legal meaning we've agreed to terms via negotiated LOI process and issued leases to tenants.
A little more than half of that is spread between the 2 property as you mentioned 80 M Street in Washington, D C and 799 Broadway.
In Manhattan with the remainder spread.
And across the portfolio market square.
Always inactive property, mostly smaller deals sub 10000 square feet.
But in general the activity has been good in those 2 properties have been a real highlight both in terms of moving through the process from tour to proposal 2 lease and hopefully.
Those will be signed leases in the near future.
But also in terms of the economics associated with those deals we've been encouraged that the market seems to be appreciating what we think is some of the best fit.
Physical space in the market.
Yeah, Sheila in the case of 79, non as Paul said and 80 M Street.
Pete.
We mentioned I mentioned earlier we.
We feel very we feel like we've got a really good shot at even at least meeting or even exceeding even pre pandemic pricing on that just as the property has had been delivered.
The tours have opened up.
Competition has been created.
We're very encouraged by the by the economics and so we're looking forward to reporting some leases on that highly.
<unk> confident in the next quarter.
Paul just a bit more on the dynamic of the leasing and fair to say.
A bit quite a bit more in face rate on those properties, but at the same time.
A bit more in concessions as well is that fair.
Yes, I think that's right Nelson in general and I think this is consistent across across all markets, but particularly in New York.
The flight to quality.
<unk> has been real and so tenants are most attractive to the highest end of the market and seem to be willing to pay the appropriate.
Premium for our premium space that said, it's with some additional concessions in the form of both free rent and tenant improvements from a net effective perspective, we're still happy with the results in like Nelson said, there should meet or exceed expectations.
But together with the increased rents are some.
As concessions.
And to remind everybody the rent ranges on those properties as we have been talking about for last couple of years is sort of mid 1 hundreds or above in terms of gross rental rate for 10 years 10 year deals not quite that at the ADM Street property.
In DC, we we pre leased a.
Some increase half of that space.
But we do we are expecting we're seeing have leases out on a.
On a.
A significant premium to the original.
On like pre lease so anyway looking forward to reporting more detail on that Sheila. Thanks for the thanks for the question, but that's all very positive and then as Paul said.
A little over square across the portfolio, we're seeing some very encouraging signs as well, we do have significant roll up in various other places as well.
Okay, great. Thank you.
Thanks Shannon.
Our next question comes from the line of John Kim from BMO capital markets. Your.
Your line is now open.
Thanks, Good evening.
Guidance for the year you.
Reduce the cost of this strategic review by 2 cents to <unk> <unk> per share and so far you've already spent about 75 cents.
And it indicates that you're pretty much at the conclusion of the review just wanted to clarify that with you.
John Hey, this is Jim.
Elsewhere.
Sorry, if we created any confusion, we're not providing guidance about the cost of the strategic review. We are just we are excluding that from the normalized <unk> calculation, we are including those costs in the AR.
<unk> calculation, but we're only really giving guidance on normalized.
Jim Thanks, I would say it really doesn't factor in.
You're correct. We spent about I think it's about $8 million so far on that.
As reported in our second quarter numbers, but really no.
I would just caution you not to read anything into the into the numbers there.
That's very.
Clever question no Jon I like the approach, but I would say generally.
Generally it is the process continues its been a very thorough active process.
We can't really speak to it.
You know the outcome or win the outcome is all that but I would say.
We'll do that in time, and we'll give more obviously give more color on an ultimate decision in the 1 and a little bit more about the process and.
In due time, but we look we look forward to that so.
And can I just follow up on that.
Your last guidance it first quarter was adding back 10 cents.
For the review costs and now you're adding back 8.
So are you just changing the way you.
No.
Maybe I'm confused Jon but.
I don't remember, adding back to <unk> since we had about $2 million I think in the first quarter and another $6.5 or so this quarter.
Which we or whatever it is we're adding it back for.
<unk>, but not adding it back for <unk>.
So I don't know about that.
10 cents, maybe there was some comment that I don't recall, but.
Apologize if there was confusion.
Okay.
The timing its been almost 4 months I don't know if when you said in the past you don't want to track this on.
Normal how much too much longer.
Is that still the case or do you anticipate this yet.
It's definitely true. Unfortunately, Fortunately it has not caused much distraction and the most important part of our business.
Operations of the business, taking care of our buildings leasing activity.
We.
<unk> been a fair amount of time talking about it with investors and analysts of course.
And of course, the board is very focused on it as us as at the senior team, but Fortunately not distracting us from an operation that was that's always a concern, but thats gone very well.
But youre right I mean.
We reiterate that so we don't want that to continue on forever we have.
A great business plan here and.
We're.
Moving to execute that and if if if this ends up resulting in a transaction. That's that's that's great.
Sooner would be better than later, but we want to get it right, obviously and it takes it takes time and effort to do that so that's.
We are.
We're continuing.
Thing.
To remember in terms of.
You can't read too much into the pace of the cost expenses and so forth because it.
As you know.
Banker advisory and even the legal fees are often tied to.
Transaction or whatever so it's not like it's.
It's not like the clock is ticking away on an hourly basis on those.
Advisory efforts, so there's not a there's not a direct correlation between the pace of expenses and the progress of the.
Of the process, but like I said it continues.
Hopefully sooner rather than later, we can we will reach a conclusion and come back and share that with everybody.
Yeah.
Okay.
Yesterday, Twitter announced that they were closing day, New York and San Francisco offices day lease space with you here in New York is there any impact to earnings I guess not from a rent side, but maybe.
From an expense side and remind us if there is any retail part of the building.
There is some unrelated.
Some room and board is there.
And the only other tenant in that building, where Twitter is Twitter had begun their reentry into the building I think they were up to 50% that's not to say.
Percent, we're there every day, but up to 50%.
<unk> had started the process of renal building, we're allowed to come back to the billings. So that had started and then I think with with the recent concern about the Delta variant.
They and others have pullback it won't affect revenues and really not expenses.
Either.
Is it 50 any meaningful way.
You may have seen the news today that D. C. Now has is reinstated the mask mandate.
Again, not a direct impact, but all of these things.
We're all we're all obviously disappointed in the rise in the Delta variant and it's bound to have some impact.
The biggest impact is on those tenants that haven't returned yet.
We're all we're hearing that they're delaying extending that by month here in a month or 2 months there.
So we're all like everybody else, we're watching we're watching it to see what happens.
Where we're not too concerned about it.
At this point, but it is something we're keeping tabs on them are communicating.
With our tenants about.
Okay and then my final question Nelson you mentioned.
Doing some more flexible lease space and I'm wondering if you had contemplated doing this with a partner either industrial answered we work it sounds like you've just done.
Yes.
No we certainly did talk too.
We have a relationship with we work they're still in 2 of our buildings they seem to.
<unk> seen it seem to be doing doing quite well and they've gotten there.
Their system Rolling again, that's good industrious.
Uh huh, others operators, we've had conversations with we haven't completely rule that out.
But our.
Our view on this is for the time being we just identified a 3.
3 buildings relative you know 2 or 3 force per building.
Space that's available.
And.
Yes.
We're going to we're going to give this a shot.
It will be by the way. It's just it's just a 1 more step at the spectrum, we already do a lot of prebuilt.
Spec suites.
This is just 1 step further out than that now it would probably also have shorter lease term would.
It would be it would be a feature in.
It may be services, maybe concierge for part of it so.
At the same time, we're designing the space in designing the plan. We're also doing some pre marketing and getting feedback from from perspective.
Customers. We do think there is plenty of demand for this very thing.
And Ah out there so we're going to take a slow relatively small percentage of our portfolio.
Less than 2%.
And.
And you will see how it goes and we'll report report next quarter and the 1 after that on how that's going but we think there's definitely that segment of demand and we think given.
<unk> patient and quality of our properties, we're well suited to capture it but again, we are fully aware it cost more.
Shorter lease terms carry more risk.
We've got to make sure that premiums are there on the rents.
And we've got to make sure that we can recycle the spend on.
On build outs. So all those factors are under consideration, but anyway long answer yes, we have to talk to other operators, we haven't completely ruled out.
<unk> are doing the management agreements for some of them, but for the time being.
Our internal team is focused on delivering.
<unk>.
Delivering that.
That offering.
That's very helpful. Thank you.
Thank you John Thanks, John.
There are no further questions at this time please continue.
I'll now turn the call back to and ask them now.
Alright, Thank you very.
Thank you all for.
For joining us today, Thank you for your interest and your attention.
Sheila and John Thank you for your great questions.
As we've said we're very optimistic.
About how.
Things are opening back up.
We.
We there's a bit of a road bump here with a delta variant.
All together, we're going to work through.
But we know our tenants are ready to get back to the buildings, we're ready for them to come back.
We've been prepared for them to come back.
We're focused on that and as we mentioned leasing activity.
Is really improving.
And we expect over the next.
A few quarters to really.
On some meaningful <unk>.
Advances in that area. So we will also.
To Johns question, we will be back to you all on the strategic review.
When that process is complete and we look forward to.
2 sharing that outcome and explaining more about the process at that time.
But anyway. Thank you again.
And we will talk to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Moving on.
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