Columbia Property Trust, Inc. (CXP) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to the Columbia Property Trust Second Quarter 2021 Conference Call. The company released its results this afternoon and its quarterly supplemental package, which can be found in the Investor Relations section of the company’s website and on file with the SEC on Form 8-K. Columbia has also filed its 10-Q with the SEC this afternoon. Statements made on today’s call regarding expected operating results and other future events, are forward-looking statements that involves risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated, including those discussed in the Risk Factors section of Columbia’s Form 10-K, which includes specific risks pertaining to COVID-19.
Nelson Mills: Thank you, operator and thank you everyone for being with us today. I am joined by our CFO, Jim Fleming; CIO, Jeff Gronning; and Paul Teti, our Head of Real Estate Operations. I will begin with a quick review of our second quarter performance and then discuss some of our recent accomplishments. I will then describe 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 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 online. 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 FFO of $0.31 per diluted share and ended June with a 93.5% leased rate. We continue to collect more than 98% of our contracted rent each month. Only 0.2% of rents were deferred during the quarter and fewer than 0.3% 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% of annual lease revenues expiring in the second half of this year and only slightly over 6% next year. Portfolio-wide, our vacancy remains relatively limited, yet our team was able to turn in our strongest leasing performance in the year. We leased 75,000 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’s differentiated, amenity-rich properties strategically located in some of the most sought-after neighborhoods.
Jim Fleming: Thank you, Nelson and thank you everyone for joining us today. Once again, our quarterly results were solid. We generated second quarter normalized FFO of $0.31 per diluted share and adjusted FFO of $0.23 above the level of our $0.21 quarterly dividend. As I mentioned last quarter, we are including a line in our income statement for strategic review costs, which are being added back to calculate normalized FFO, but not for adjusted FFO. 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 will be in 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, this offers compelling near-term growth opportunities, more on this in a moment. Our rent collections have remained strong at 98% overall and nearly 99% for our office tenants. Our write-offs and deferrals remain 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, consistent with our expectations. Our leasing activity has begun to pick up. As Nelson mentioned, our team leased 75,000 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, 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. While we have continued to produce solid results despite the pandemic, what we are most excited about are the near-term opportunities to grow our NOI and FFO 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. 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 are 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.
Operator: Our first question comes from the line of Sheila McGrath. Your line is now open.
Sheila McGrath: Yes. Hi, good afternoon. Nelson I was wondering if you could give us an update on leasing interest, the level at 799 Broadway and also on your expansion at 80 M Street in Washington DC?
Nelson Mills: 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 I think he is best to answer both those questions.
Paul Teti: Sure. Thanks, Nelson. Hi, Sheila. 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 and not surprisingly, it’s where it’s one of the few new products that have some vacancy, existing vacancy, given that it’s just delivering now. We have three leases out in legal at that property right now. Overall, we have about 100,000 square feet, a little over 100,000 square feet of leases out in legal, meaning we’ve agreed to terms via a negotiated LOI process and issued leases to tenants. A little more than half of that is spread between the two properties you mentioned, 80 M Street in Washington DC and 799 Broadway in Manhattan with the remainder spread across the portfolio. Market Square as always, an active property, mostly smaller deals, sub 10,000 square feet. But in general, the activity has been good, and those two properties have been a real highlight, both in terms of moving through the process from tour to proposal to 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 physical space in the market.
Nelson Mills: Yes, Sheila, in the case of 799, as Paul said, and 80 M Street, and we mentioned earlier, we feel very – we feel like we’ve got a really good shot at even at least meeting or maybe even exceeding even pre-pandemic pricing on that. Just as the properties have been delivered, the tours have opened up competition has been created. We’re very encouraged by the economics. And so we’re looking forward to reporting some leases on that. I’m highly confident in the next quarter. Just a little – Paul, just a bit more on the dynamic of the leasing, fair to say a bit – quite a bit more in base rate on those properties, but at the same time, a bit more in concessions as well. Is that fair?
Paul Teti: Yes. I think that’s right, Nelson. In general, I think this is consistent across all markets, but particularly in New York. The flight to quality has been real, and so tenants are most attracted to the highest end of the market and seem to be willing to pay the appropriate premium for a 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. And like Nelson said, there should meet or exceed expectations. But together with the increased rents there are some increased concessions.
Nelson Mills: And to remind everybody, though the rent ranges on those properties, as we’ve been talking about for the last couple of years is sort of mid-100s or above in terms of gross rental rate for 10-year deals, not quite that at the 80 M Street property in D.C. We pre-leased a little over half of that space. But we do – we are expecting – we’re seeing – have leases out on a significant premium to the original pre-lease. So anyway, looking forward to reporting more detail on that, Sheila. Thanks for the question, but that’s all very positive. And then as Paul said, elsewhere across the portfolio, we’re seeing some very encouraging signs as well. We do have significant roll-up in various other places as well.
Sheila McGrath: Okay, great. Thank you.
Nelson Mills: Thanks, Sheila.
Operator: Our next question comes from the line of John Kim from BMO Capital Markets. Your line is now open.
John Kim: Thanks. Good evening. In your guidance for the year, you reduced the cost of the strategic review by $0.02 to $0.08 per share. And so far, you’ve already spent about $0.075. So it indicates that you’re pretty much at the conclusion of the review. I just wanted to clarify that with you.
Jim Fleming: John, this is Jim. Thank you. Sorry if we created any confusion. We’re not providing guidance about the cost of the strategic review. We’re just – we are excluding that from the normalized FFO calculation. We are including those costs in the AFFO calculation. But we’re only really giving guidance on normalized FFO, so it really doesn’t factor in. You are 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 numbers there.
Nelson Mills: That’s a very clever question, though, John. I like the approach. But I would say generally, the process continues. It’s been a very thorough active process. We can’t really speak to the outcome or when the outcome is or all that. But I will say, we will do that in time, and we will get more – obviously give more color on ultimate decision and why and a little bit more about the process in due time, but we look forward to that. So...
John Kim: Maybe follow-on, your last guidance, the first quarter was adding back $0.10 for the review costs and now you’re adding back to $0.08. So are you just changing the way you...
Jim Fleming: No. We’re not. And maybe I’m confused, John, but I don’t remember adding back $0.10. We’ve got about $2 million, I think, in the first quarter and another $6.5 million or so this quarter, which we are – whatever it is, we’re adding it back for normalized FFO, but not adding it back for AFFO. So I don’t know about the $0.10, maybe there was some comment that I don’t recall, but I apologize if there was confusion.
John Kim: Okay. But as far as the timing, it’s been almost 4 months, I know now than you said in the past, you don’t mind to drag this on too much longer. Is that still the case? Or do you anticipate this may continue?
Nelson Mills: Yes, definitely true. Fortunately, it has not caused much distraction in the most important part of our business, operations of the business, taking care of our buildings, leasing activity. We’ve spent 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 the senior team. But fortunately, it’s not distracting us from the operations. That was – that’s all there to be concerned, but that’s going very well. But you’re right. I mean and we reiterate that. So we don’t want that to continue on forever. We have a great business plan here, and we’re continuing to execute that. And if this ends up resulting in transaction, that’s great. Sooner would be better than later, but we want to get it right. Obviously, and it takes time and effort to do that. So that’s – we’re continuing. The other thing to remember in terms of you can’t read too much into the pace of the cost expenses and so forth. Because as you know, banker advisory and even legal fees are often tied to a transaction or whatever. So it’s not like we’re – the clock is ticking on an hourly basis on those advisory efforts that so there is not a direct correlation between the pace of expenses and the progress of the process. But like I said, it continues, hopefully, sooner rather than later, we can – we will reach conclusion and come back and share that with everybody.
John Kim: Okay. Yesterday, Twitter announced that they were closing the New York and San Francisco offices. They had leased spaces with you 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 as part of the building?
Nelson Mills: There is some unrelated – there is some – Room & Board is there, that’s 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 that 50% were there everyday, but up to 50%, where we had started the process of reentry in the building or were allowed to come back to building. So that has started. And then I think with the recent concern of the Delta variant, they and others have pulled back. It won’t affect revenues and really not expenses either in any meaningful way. You may have seen the news today that DC now has restated a mask mandate. Again, not a direct impact, but all these things, 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 are delaying extending that by month here in or 2 months there. So we’re all like everybody else, we’re watching it to see what happens. We’re not too concerned about it at this point, but it is something we’re keeping tabs on, and we’re communicating with our tenants about...
John Kim: 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 Industrious, or WeWork, it sounds like you’ve just don’t ?
Nelson Mills: No, we certainly did talk to – we had a relationship with WeWork. They are still in two of our buildings. They seem to have been doing quite well, and they have gotten their system rolling again, and that’s good. Industrious, Hana others, operators we’ve had conversations with. We haven’t completely ruled that out. But our view on this is, for the time being, we just identified three buildings relative – two or three floors per building, space that’s available, and we’re going to give this a shot. It will be – by the way, it’s just one more step out the spectrum. We already do a lot of prebuilt spec suites. This is just one step further out than that. Now it would probably also have a shorter lease term would be a feature. And may be services, maybe concierge for part of it. So – we’re – at the same time, we’re designing the space and designing the plan. We’re also doing some pre-marketing and getting feedback from prospective tenants, customers. We do think there is plenty of demand for this very thing out there. So we’re going to take it slow, relatively small percentage of our portfolio, less than 2%. And you will see how it goes, and we will report next quarter and the one after that on how that’s going. But we think there is definitely that segment of demand. And we think given the location and quality of our properties, we’re well suited to capture it. But again, we’re fully aware it costs more, shorter lease terms carry more risk, we’ve got to make sure the premiums are there on the rents. And we’ve got to make sure that we can recycle the spend on build-outs. So, all those factors are in consideration. But anyway, long answer, yes, we have to talk to other operators. We haven’t completely ruled out partnering or doing management agreements with some of them. But for the time being, our internal team is focused on delivering, delivering that offering.
John Kim: That’s very helpful. Thank you.
Nelson Mills: Thank you, John.
Jim Fleming: Thanks, John.
Operator: There are no further questions at this time, please continue. I’m now turning the call over back to Nelson Mills.
Nelson Mills: Alright. Thank you very much and thank you all 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 – there is a bit of a road bump here with the Delta variant that we’re all together 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 few quarters to really report on some meaningful advances in that area. So we will also, to John’s question, we will be back to you all on the strategic review when that process is complete. And we look forward to sharing that outcome and explaining more about the process at that time. But anyway, thank you again, and we will talk to you soon.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
