Columbia Property Trust, Inc. (CXP) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by and welcome to the Columbia Property Trust First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I'd now like to hand the conference over to your speaker for today, Mr. Matt Stover. Thank you, sir. Please go ahead.
Matt Stover: Thank you, operator and thank you, everyone for joining us on our first quarter 2021 Columbia Property Trust investor conference call. On the call with me today are; Nelson Mills, President and Chief Executive Officer; Jim Fleming, Executive Vice President and Chief Financial Officer; Jeff Gronning, Executive Vice President and Chief Investment Officer; and other members of our senior management team.
Nelson Mills: Thank you, Matt and thank you all for joining today's call. I'll begin with a review of our first quarter performance, discuss the value creation opportunities we have at hand, talk about our commitment to corporate responsibility and conclude with an update on our strategic review process. Columbia is off to a great start in 2021, following a year that none of us will ever forget. A year that challenged us all, but ultimately demonstrated the resiliency of our portfolio, the strength of our platform and the quality and commitment of our team. With one quarter of the New Year already behind us, that same winning spirit and keen focus are continuing to carry us forward and drive our success. Now, as green shoots begin to emerge within the office sector and within our markets, we're better equipped to serve our existing tenants and to attract new ones than ever before. We now have enhanced health and safety protocols in place, cutting-edge technology deployed across our portfolio and enhanced levels of service and flexibility to meet increasingly discerning demand. For the first quarter of 2021, our key performance metrics reflected the stability of our portfolio and tenant roster. We generated normalized FFO of $0.35 per share and positive same-store cash NOI growth of 4.8%. We ended the quarter with a 94% leased rate. Our rent collections have also remained strong, consistent with our experience throughout 2020. 98% of our first quarter rents are in the bank. Paper collections are trending in the same direction, and we're confident that this pace can continue.
Jim Fleming: Thank you, Nelson and thanks, everyone for joining us on today's call. We started the year with another solid quarter, despite continued challenging conditions. During the first quarter, we produced normalized FFO of $0.35 and our adjusted FFO, $0.31 was up sequentially and year-over-year and well in excess of our $0.21 quarterly dividend. And we once again grew quarterly same-store cash NOI, which was up 4.8%. Our numbers this quarter benefited from a $0.04 tax abatement that we had anticipated, but they also reflected some increased operating expenses due to seasonality and timing. All in all, we believe we are on track for a good year and we're pleased with these results. Our rent collections were also strong during the quarter at nearly 98% overall, and just over 98% for our office tenants. As Nelson mentioned, we had very few deferrals or write-offs during the first quarter. And so far, April rents have come in at a similar pace to what we've seen over the past several months. At the end of March, our lease percentage stood at 94%, down slightly as expected, but consistent with the outlook we provided last quarter. However, we are pleased to see activity picking up on the leasing front with increased tour traffic and interest across our available opportunities. Our team leased another 69,000 square feet during the first quarter, our highest level since the second quarter of last year. 47,000 square feet of our first quarter leasing was in San Francisco at double-digit positive cash re-leasing spreads. In fact, due to the below market nature of our portfolio, our leasing spreads remain robust overall, up 13.2% on a cash basis and 17% on a GAAP basis. We are also pleased to see a solid start to our leasing activity in the second quarter. Summarizing our financial and operational performance, we remain proud of the resiliency we have demonstrated last year, which is clearly carried into 2021. As Nelson mentioned, this not only reflects the quality of our portfolio and tenant roster, but also the ongoing efforts of our team. We have a solid balance sheet and strong liquidity, which enables us to take a thoughtful approach to creating long-term shareholder value.
Operator: Yes, sir. Your first question comes from the line of Sheila McGrath with Evercore.
Nelson Mills: Hi, Sheila -
Sheila McGrath: Hi, Nelson. I wondered if you could comment on leasing activity. You did have a pretty active comparatively quarter and first quarter and also, you have some things in the pipeline. Are there any trends that you could point us to in terms of how the rents are coming in versus your expectation? Are concessions more elevated and also on length of lease term?
Nelson Mills: Sure. And you know, as we said, Sheila in the prepared comments, activity tours interests really in all three markets has picked up dramatically. You know, these are meaningful discussions, tours, even swapping paper. Not a lot of leases executed just yet, but we think we're making good progress and which some are getting close. But I'd say New York, first and foremost, followed by D.C., and then even in San Francisco, we're seeing a lot of activity. In terms of the rents, you know, so far so good for the really high-quality space, which, again, is most of our space. It's either new build or renovated or well-located Midtown South stuff. We're really not seeing - we're not having to pull back that much. It's you know from pre-COVID pricing. It's obviously - obviously there's some of that, a little more in terms of concession or free rent, but you know certainly inside 10% on most of our properties in terms of reduction. Some of the space that we have around the portfolio, you know we may have to pull back a bit more than that just to get leases done. But I will tell you, we're feeling very optimistic over these last couple of months about the pace, absorption rate pace as well as the terms. I think we'll actually going to come out okay on that. I don't want to overstate it. I mean there clearly is pressure in the system. There's clearly excess demand out there. There's sublease activity is still substantial. So there is - it is still a tough road out there. But we feel good about delivering certainly on the expectations that are embedded in our guidance for the year, and we think even better than that. So Paul Teti, who heads our Real Estate Operations Group is actually here. Paul, anything to add to that?
Paul Teti: No, I think that's right, Nelson. Really encouraged by the activity this quarter. And I think regarding your question, most of the movement that we've seen in terms of has been in the form of concessions, free rent timing, that sort of thing. We haven't seen as much pullback in face rate. As Nelson pointed out, we're hoping to see more transactions across the Board in the market close, and I think that will give us a better sense when those comps start to hit.
Sheila McGrath: Okay, thank you -
Nelson Mills: You know we're quite optimistic, Sheila, relative to where we were a couple of months ago.
Sheila McGrath: Okay, great. Thank you.
Nelson Mills: Thank you.
Operator: Your next question comes from the line of John Kim with BMO Capital Markets.
John Kim: Good evening -
Nelson Mills: Hi, John.
John Kim: Hey, Nelson. I know you're limited on what you could say on the strategic review. I just have a very simple question. You - or can you give us an indication on how long you think this process may take? I think the last time you went through a review, it was never really formally announced or concluded and I was just wondering at this time it will be different?
Nelson Mills: You know, John, that's difficult to say. And we certainly can't commit to a particular timeline. I will tell you the process has started in earnest. It's very active. We're really focused on it as are our advisors, Morgan Stanley and our advisory team. So we're - it's moving along and we're giving it full attention. A lot of the timing will depend on how you know where this takes us. The level of interest, the nature of the interest. But we certainly don't want to drag it out for months and months, right. It's - I'd say a best guess would be a few months. But it's really - we really don't want to - we really can't nail down to any particular specific timeline at this point.
John Kim: Okay. And the announcement that you made this morning with Arkhouse withdrawing a slate of directors. Is that indicating that you're - you know you have a more friendly relationship with them and you're opening up the due diligence process to them?
Nelson Mills: Yeah.
John Kim: Okay.
Nelson Mills: No, sure, John. So we've always had a friendly dialogue, open dialogue with Arkhouse Group, and they are very much part of this process. As you know, there - they were our, the first experts expressed interest. They're very much involved in the process. They have access to the data room and access to us and our advisors. So it's always been a friendly open dialogue. I think you know they made the decision as we announced this morning. We're really just updating the proxy with Annual Meeting coming up, but they made the decision to withdraw the slate, and I think that's in connection with you know with us all working together to see if there is a transaction here.
John Kim: Okay. You mentioned in San Francisco, you're anticipating office employees coming back to the office in the second and third quarter. Are you anticipating higher leasing activity ahead of that?
Nelson Mills: Well, the third and fourth quarter, I think we said, and you know a lot of those - we have specific dates for several of our larger tenants there, who they've announced to their teams and to us, you know their reentry. In a lot of cases, it will be a phased reentry. But you know all of our - almost all of our major - larger tenants are at least in the active planning stages that's coming back, some are taking steps to actually physically come back already. In terms of leasing, in most cases, there's term left on the lease, there's not any expansion or contraction you know plans on the Board. It's just a matter of - reentering in their existing space. Although we are having several discussions across the San Fran portfolio, as we are in other markets, about renewals, extensions and even expansions in a couple of cases. So a lot of discussion is with within the - with us and the tenant has to do with, but how is it going to be different when they come back? The reconfiguration of their space, you know their work schedules, possibly converting some of their space to more collaborative conference room space, less density, those sorts of things. That's more of a tenant or a company determination, but we're certainly engaged and involved with those discussions. So yes, I think we'll see more leasing. Paul, is that fair? I think we'll see more leasing as we get later in the year.
Paul Teti: Yeah, for sure. And I think the dynamic that Nelson pointed out is particularly relevant for smaller tenants, call it, less than 50,000 feet, where they can come back a little bit quicker. And I think we've heard some of the activity that we've spoken about here today is a result of coming back and realizing that they want - they might want a little bit more space. So, early indications there.
Jim Fleming: John, this is Jim. Just to note, we barely have had some leases in San Francisco. I sure expect that those will increase as people actually come back to the office. But as we noted in our remarks, we had - we actually had two renewal leases and two new leases in our San Francisco properties in the first quarter add really good leasing spreads. So, hope that's a leading indicator.
Nelson Mills: Yeah. And John, as we all know, as anybody would expect, the better the property, the better located property, the better the space, the better design, you know the lessor less will be impacted, right. So as you know, we work very hard over the years to really be very discerning on not only selection of properties, but spending capital in properties. And even on you know assembling tenant rosters, right, we've been pretty selective on that. And that's really - again, we're not immune to the pressures in the system, but that's paying off for us. We've got some really good quality space out there. And I think we're going to - you know that's why I think that's a lot of the reason why we're seeing this early demand as companies reenter.
John Kim: My follow-up question is on the DC market. You had a dip in occupancy this quarter, which you know partially due to the Market Square renovation. But one of your office REIT peers have described the D.C. CBD market is one of the slowest in their portfolio. And I'm wondering if that's a fair characterization for you guys?
Nelson Mills: Yes, I'd say that's definitely fair. D.C. for several years has been the - I guess that you said the weakest of our three markets, and it's primarily because of the influx of high quality you know new trophy supply. The reason even pre-COVID and that we think now we'll hold our own there, because again, we have some pretty unique buildings there. Market Square is its location, its reputation for being one of the main most attractive homes for government affairs, it does quite well. And we do think some enhancements to some of the commoners and these are in order. We've put a beautiful rooftop in place. But we think there's opportunity on the ground floor retail and some conference space to really enhance it even further. So we think we'll do okay there. But - and then 80 M Street, where we're doing overbuild, that is really getting a lot of market attention and interest from some strong tenant prospects. So we're fortunate to have some really unique properties there. But I agree with your other company's sentiment that it's not the strongest office market right now in terms of the just space of broad fundamentals.
John Kim: Great, thank you.
Nelson Mills: Thank you.
Operator: Your next question comes from the line of Vikram Malhotra from Morgan Stanley.
Vikram Malhotra: Thanks for taking -
Nelson Mills: Hi, Vik.
Vikram Malhotra: Thanks for taking the question. Good evening. Hey, how are you doing?
Nelson Mills: Great.
Vikram Malhotra: Maybe just first question on specifically the development you know projects as we kind of emerge out of you know COVID you referenced a return to work and the pickup in leasing. Can you maybe just give us a bit more color on how you're thinking about lease-up? You know maybe any incentives you're offering just to get some of those leased up you know where price points are now shaking out versus pre-COVID?
Nelson Mills: Yes, we'll certainly do that. I'll start and I'll let Paul to weigh in as well. So as we've said before, Vikram, you know the better the property, the newer the property, the better located, the more unique it is, the easier time you will have of it. That's true for all of us in this business. So at 799 Broadway, of course, we will experience you know lighter economics, somewhat lighter economics than we would have pre-COVID, but we really don't think we'll have to give up that much from pre-COVID pricing. Paul can talk about more of the dynamics of how that you know does that take the form of increased concessions or whatever. But even on 149 Madison, which is a 100-year-old property that we took back you know we had it leased to WeWork, we unwound that. We got a termination payment and took that property back. Even an older property like that, it shows really nicely. We've cleaned it out, cleaned it up, and we're showing some floors there, and we're getting interest there. It's - in that case, the economics will be a little tougher to entice tenants. We're going to be a little higher on concessions than we might have been before. But again, great location relative to transportation, really floor place play out well, high ceilings, great windows. It's going to do okay, too. We're fortunate not to have much in the way of just basic commodity, mid-block, mid-building-type space. We think that struggles a little more. But Paul, we're doing a lot - as we mentioned, Vikram, we're having a lot of discussions right now with real live prospects, and we've done some leasing. We're getting close on some other leasing. So we have a pretty good finger on the pulse of what it's been taken to get deals done, but it does vary by property. Paul, a little bit of color on that?
Paul Teti: Yeah. Thanks, Nelson. I think that's right. And the other thing I would say, you know in the form, when you talk about concessions or things that you might utilize to incentivize folks to make decision, I think the other thing that comes into play is flexibility. And so those concessions you know could take the form of perhaps a phase in, if it's a multi-floor tenant or even our willingness to break a certain block of space in order to get some growth, so those are the types of things we're talking about when we think about either concessions or flexibility to help tenants as they reenter, make those decisions a little bit more swiftly, and we're employing that tactic across some of the buildings that Nelson mentioned.
Nelson Mills: You know, Vikram, one of the things I think we are going to see - we are seeing, given all the uncertainty in the market, uncertainty within - with the tenants about exactly how fast and how far they want to go with office space, right. So one of the things we are seeing is a desire for shorter lease term, pretty dramatically so in some cases. But those tenants would be wanting to pay a premium or give up some other you know part of the terms. So that's going to be a pretty common recurring thing. You're going to see with us and other landlords, I think. Now, for 799 Broadway, where you have a high quality, unique space like that, we're not - we're still going to get lease term. We're still going to get you know reasonable concessions in decent rate. But for some of this other space like 149 Madison, we may look at you know shorter lease terms, something inside five years. Now to do that, we're going to have - we need to get paid for that in terms of face rate, and we can't give up as much in concessions. But you know we - a lot of these tenants as they're trying to figure out their comeback and post-COVID, they're willing to pay those premiums to have that flexibility. So, that's something we'll see surface over the next few quarters.
Vikram Malhotra: That makes sense. Yeah, I mean, I guess, you said in some cases under five years. So I guess if you look at your pipeline, you talked a lot about tour - well tour activity proposals being traded in San Francisco, even New York. I guess if you were to bucket it, like roughly what proportion of the pipeline would you say is looking for that shorter five-year type lease? And can you also comment on you know how termination kind of clauses might - may or may not change going forward?
Paul Teti: Sure. With respect to the pipeline relative to the overall activity, I'd say it's probably less than 20%. So it's significant enough that I think it's worth mentioning, and it's a tool that we think we can utilize to get both activity and premium like Nelson mentioned in some cases. But that's probably right - somewhere in the 20% range of the overall activity is looking for some form of more flexible terms.
Nelson Mills: Yeah. In terms of the termination, that's an old trick that we're all very accustomed to the probably a 10-year term, but I'd like an out after 4. That's not a 10-year lease, right. So, you know obviously, when you're talking about term, it's - what's the real term, right. So yes, those are in the discussions. But like Paul said, it's a minority of the cases will go for the shorter lease term. But again, to get that, they're going to need to pay a premium. And we've got to make sure we can reuse the TIs and all those sorts of things and evaluating what - how much premium we have to have. The other thing that's important to keep in mind though, Vikram, in addition, you know it's expensive and time-consuming and disruptive for companies to choose a home, build out that home, establish their business operations and their culture in that home and doing that every few years is disruptive to their business. So aside from the economics, all things held equal, tenants would like to have longer lease terms, right. But again, because of some of the uncertainty that we're dealing with right now, we think we will see a significant portion of our negotiations will include at least a discussion about shorter lease terms.
Vikram Malhotra: That makes sense. And then I remember, you know obviously, last call, you talked about known move out you know over the next, call it, 12 months or so. And I'm wondering if you can just give us an update if there's any changes in that schedule or the movement and anything incremental would be helpful.
Nelson Mills: Okay. Well, nothing really surprising or incremental, but Jim can give us some of the headline numbers. If you recall, our guidance for the year, we're at about 94%, just over 94% leased today. Our guidance for the year is 90% to 95%, right. So, what that - but you know midyear, we may dip below that. And you've got Pershing termination coming up, June 30. You've got Amazon Web Services 90,000 feet coming at June 30. We also hope to have some leases signed in the next quarter or two. But you know it's possible that our low point is in the high 80s. But then we expect certainly by - and this is consistent with our guidance, we expect certainly by the end of the year to be back up in that low to mid 90s range. But anyway, Jim, if there is some - there's nothing new really, but what are some of the headlines there.
Jim Fleming: That's right, Nelson. And the other one to mention is, there's an offer at Market Square that's - and we only own 51% of the building, but 54,000 square feet. That's the end of July. So those are the big ones this year. Those are all leading. And as Nelson said, we've taken all that into account. We - both in terms of the year-end leasing expectations, percentage leased and in terms of the revenue expectations for the year. And I will say we feel that we're on track for the year to you know in terms of our guidance, we think that things are moving in the right direction. I know we may sound a little more optimistic than some other companies that have had their conference calls, but we're telling what we're seeing in our properties, and we feel that we're on track. So, really no update, but I guess we're reaffirming what we said in our last call.
Vikram Malhotra: Great, thanks so much.
Nelson Mills: Thanks, Vikram. Good talking to you.
Operator: Your last question comes from the line of Michael Lewis with Truist Securities.
Michael Lewis: Thank you. Hi. Nelson, you already answered this question, and I'm going to ask it kind of more bluntly, even though I realize you may not - there may not be anything else to add to it. But why did Arkhouse withdraw their slate?
Nelson Mills: You know that's a question for them. I think as we don't feel comfortable speculating on that. As I mentioned on John's question, we've been in regular dialogue with them. Their focus has been clearly their interest in the acquisition and as indicated by their offer. And you know I think this is consistent with that. And you know we're very engaged with them. They're fully plugged into the process and to our advisors and our team. And so you know I don't - I couldn't speculate beyond that. But I think you know just an indication that the interest is you know they're in the process in that, and I think that was their - that seems to be their primary focus.
Michael Lewis: Okay, got it. And then, Jim, you know one on the guidance. You know you did $0.35 a share normalized in 1Q. If I look at your range for the full year, that implies less than $0.31 a quarter at the midpoint for the rest of the year. Is that a function of, you know again, leaving some conservatism for you know leasing volume and what's going to happen in the rest of the year? Or was there anything you know incremental in 1Q that doesn't really carry through to the rest of the year?
Jim Fleming: Yeah. Michael, there are really two things to know. One is, that midway through the year as we've talked about, we've got three significant leases that are expiring. And we do think we'll get those leases replaced. We actually think we're going to want to put blow ups in rent on average for those three leases. But we think just given the timing that it's awfully hard to get a new space built out and get new rent coming in the door without some real - you know there are significant sized spaces. And so there will require some - even if we get the leases done, right, we'll require some build out. And so it will take some time before those leases come in. So there'll be some slippage there. So I just translate that. The income in the second half of the year ought to be lower than the first half. The other thing to note is that, the $0.35, there were a couple of one-time things going on in the first quarter. By the way, that happens all the time. That happened last year. It will happen next year, I'm sure, may happen next quarter, but we had a tax abatement that hit in the first quarter that helped us. We also had - and if you look at our management fee income, it appears to be low in the second quarter, and that's really a function of timing of some expenses. We still think that's on budget and on track to deliver essentially the same result this year as last year. So those two things will even out a little bit. But on the whole, is a little bit beneficial to the first quarter. So a little bit of lumpiness and a little bit of you know probably some slippage in the back half. By the way, a temporary slippage in the back half essentially because space is re-leased, and especially after we get some leases done at 799 and 149, we should be headed in the other direction.
Nelson Mills: Yeah. And as Jim said earlier, we're effectively reiterating our guidance from earlier. We still feel good about all those ranges so.
Jim Fleming: Yeah.
Michael Lewis: Okay, that's helpful. Thanks. And then just lastly, I'm going to ask kind of a bigger picture question. You know it's very early in the return to work, maybe ahead of most of the return to work. But as you're talking to tenants and maybe even in your own portfolio, are there any tangible signs yet of you know tenants reconfiguring space, using it differently, you know committing to hybrid models and whatever that means for the way that they utilize the space or is it still too early to kind of tell what's going to happen on that front?
Nelson Mills: So Michael, a quarter ago, I would have said it's a bit early. But in this quarter, and based on the conversation we were having with various tenants, those plans, those are in process. And what you just mentioned that's happening. Now, very few tenants have moved back in and actually implemented those changes. But there's definitely a lot of thought effort going into work schedules, reconfiguration of space, making sure that the space is, you know it fits a different - you know it's less density, more collaboration, all the rest. And some of our larger tenants have had quite advanced thoughts planning about that. Others are just, you know we're spending a lot of time talking with tenants about the options. So Paul, what are some things you're seeing?
Paul Teti: Yeah. I think the more tangible adjustments that we've seen over the last quarter have been from some of the smaller tenants, as I mentioned, call it, below 25,000 to 55,000 feet that you know don't have the luxury of every other person, every other day. You know they don't have large departments. Some of these either smaller tech and financial users around our portfolio that have come back. And that's where we've seen the more immediate either reconfiguration or some of that organic demand that I had mentioned earlier on the call. I think for the larger tenants, it's been more in the planning and discussion phase. And then the last thing I'd say is, the most encouraging thing, obviously, in the comeback that has been the vaccinations, right. So for the larger tenants, I think now that vaccinations are widely available. What we've actually started to see in the form of the new tenants coming to market in the buildings that Nelson mentioned is, that some of those plans are more normal than you might think, because I think the plan is really, let's reenter when it's safe and that safety picture seems to be getting better every day.
Nelson Mills: And not to go too far with this example, but 315 Park Avenue South, where our office is located here, we have 7 tenants and 20 stories - 7 or 8 tenants and 20 stories here. It's all tech and media-type tenants. Some great tenant roster. Six months ago, if you were to speculate about what this building might look like a year later, you could have made the argument, I wouldn't have, but you could have made the argument that, well, you know maybe this group sublease, maybe they don't come back, maybe they don't expand, you know whatever. Just based on the discussions and these tenants trying to figure out when and how and whether they come back and how much and do they need all their space. Today - and again, these are tenants we know well. Today, based on those same discussions with same tenants, we'd say, no concern about having this building 100% occupied. You know, those who were considering sublease may be still, but not to the same degree they were, there are even some considering expansion needs. That's just a microcosm, and that's just one building, and we have the same story at other buildings at other locations. But I mentioned this building just because it's - to me, it's reflective of the major shift we're seeing in the last few months of just the attitude, the intentions, the optimism. We'll see. I mean over the remaining quarters, we'll be reporting on leasing activity, and we'll give you more details. But we feel we're not declaring a full recovery just yet by any means. But we do see a lot of positive movement in our portfolio.
Michael Lewis: Yeah, that's really interesting. Thanks for that.
Nelson Mills: Thanks, Michael.
Paul Teti: Thank you, Michael.
Operator: And there are no further questions at this time.
Nelson Mills: Okay. Well, thank you all for your - spending your time with us today. And we appreciate your interest and the opportunity to share with you. We'll certainly be in touch over the next few months and coming quarters on our activity, our operational activity and financial performance and also the strategic process. Again, we can't commit to a specific timeline or certainly not an outcome. But we know this is important. The Board is taking it very seriously. We're giving it our all to make sure we're in a good process to get the best result to shareholders. And so we look forward to reporting back to you on that at some point in the near future. But thank you again, and we look forward to speaking to you again soon.
Operator: Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect.
