Columbia Property Trust Inc (CXP) Q2 2021 Earnings Call Transcript

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Columbia Property Trust Inc (CXP)
Q2 2021 Earnings Call
Jul 29, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Columbia Property Trust Second Quarter 2021 Conference Call. [Operator Instructions] 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 18. Columbia 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.

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 information discussed on this conference call. During this call, the company will also discuss certain non-GAAP financial measures and its 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 tomorrow.

With that, I would now like to turn the call over to Nelson Mills, President and Chief Executive Officer. You may go ahead, sir.

Nelson Mills -- President, Chief Executive Officer and Director

Thank you, operator, and thank you, everyone, for being with us today. I'm joined by our CFO, Jim Fleming; CIO, Jeff Gronning; and Paul Teti, our Head of 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 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 two 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% lease 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 undergirded by an average remaining lease term of close to six 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. Portfoliowide, 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. A significant portion of this quarter's leasing occurred at 116 Huntington in Boston. As we announced earlier this week, our team secured a series of lease extensions and expansions totaling 27,000 square feet, which together bring this terrific Back Bay property to nearly 90% leased, and we've signed another 6,000 square feet with a new tenant this month. 116 Huntington boasts an impressive collection of diverse tenants spanning financial services, healthcare and technology. We also expect to announce a new restaurant operator in the near future, further amenitizing 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're conducting an increasing number of property tours across most of our available space, including our ground-up 799 Broadway property and our full building renovation of 149 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, construction is on schedule to be substantially complete next month, and we're 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 innovative project will add three additional floors to 80 M with a total of 105,000 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 90,000 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 at one of the Silicon Valley's premier addresses 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 173,000 square feet from Pershing. This property is conveniently located just across the Hudson River from Manhattan with spectacular views of New York and unparalleled transit access. Our assertive marketing and 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's strong appeal for tenants seeking high in space, service and amenities in this desirable Jersey City location. While these recent expirations 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 is the prime space available at our iconic Market Square property centered on Pennsylvania Avenue in our nation's capital, with our partner, Blackstone, we're pursuing amenity enhancements to the lobby and the Albur Plaza and repositioning the ground level retail and restaurant space. We're seeing strong and steady leasing activity and expect to continue this unique properties 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, DocuSign, Oracle, PitchBook, Snap, Amazon, Gemini 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 in 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's shareholders. For example, our team is investing substantial time and energy in developing, implementing and marketing a full-service flex option in a few select locations across the portfolio. We expect this offering to capture the growing demand for prebuilt, amenitized 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 terms, 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 historic 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 $1.25 billion construction loan 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, growth-oriented companies that already dominate Columbia's 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 at 799 Broadway, this is another project where 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 in our ability to grow shareholder value over the long term as we serve and support our communities. We have continued to advance our protocols and programming to address climate change, promote diversity, equity and inclusion, provide for the health and well-being 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. Columbia 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 one of Fortune Magazine's Best Workplaces in New York. Lastly, I'll note that our strategic review process continues actively 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 that 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 are in the enviable position of having an incredibly stable portfolio with numerous near- and longer-term opportunities to unlock NOI growth and drive value creation, including nearly two 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. I am confident our talented and motivated team will get the job done to deliver on these opportunities. In fact, although our FFO has recently pulled back due to a few lease expirations, we believe that we can generate more than $40 million per year of additional NOI over the next several quarters just by leasing our existing availabilities. That's approximately $0.34 per share just from our existing portfolio. We are 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.

James A. Fleming -- Executive Vice President, Chief Financial Officer

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're 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've continued to produce solid results despite the pandemic. What we're 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'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 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 FFO to $1.23 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're reaffirming our prior range of negative 3% to negative 5% for same-store 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 of the past year and our opportunities around the corner suggest 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 in all of our markets.

With that, operator, if you could, please open the lines we're ready for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Sheila McGrath.

Sheila McGrath -- Evercore ISI -- Analyst

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, D.C.

Nelson Mills -- President, Chief Executive Officer and Director

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's best to answer both those questions. Speaker three.

Paul Teti -- Executive Vice President National Real Estate Operations

Sure. Thanks, Nelson. 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, D.C. 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 -- President, Chief Executive Officer and Director

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 -- Executive Vice President National Real Estate Operations

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 -- President, Chief Executive Officer and Director

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.

Operator

Our next question comes from the line of John Kim from BMO Capital Markets.

John Kim -- BMO Capital Markets -- Analyst

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.

James A. Fleming -- Executive Vice President, Chief Financial Officer

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 -- President, Chief Executive Officer and Director

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'll 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 -- BMO Capital Markets -- Analyst

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...

James A. Fleming -- Executive Vice President, Chief Financial Officer

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 -- BMO Capital Markets -- Analyst

Okay. But as far as the timing, it's been almost four 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 -- President, Chief Executive Officer and Director

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's 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 -- BMO Capital Markets -- Analyst

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's any retail as part of the building?

Nelson Mills -- President, Chief Executive Officer and Director

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 every day, 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're delaying extending that by month here in or two 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 -- BMO Capital Markets -- Analyst

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 [Indecipherable].

Nelson Mills -- President, Chief Executive Officer and Director

No, we certainly did talk to -- we had a relationship with WeWork. They're still in two of our buildings. They seem to have been doing quite well, and they've 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's 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'll report next quarter and the one after that on how that's going. But we think there's 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.

Operator

There are no further questions at this time, please continue. I'm now turning the call over back to Nelson Mills.

Nelson Mills -- President, Chief Executive Officer and Director

All right. 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's 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'll 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

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Nelson Mills -- President, Chief Executive Officer and Director

James A. Fleming -- Executive Vice President, Chief Financial Officer

Paul Teti -- Executive Vice President National Real Estate Operations

Sheila McGrath -- Evercore ISI -- Analyst

John Kim -- BMO Capital Markets -- Analyst

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