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Edited Transcript of CXP earnings conference call or presentation 27-Jul-17 9:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Columbia Property Trust Inc Earnings Call

Atlanta Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Columbia Property Trust Inc earnings conference call or presentation Thursday, July 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* E. Nelson Mills

Columbia Property Trust, Inc. - CEO, President and Executive Director

* James A. Fleming

Columbia Property Trust, Inc. - CFO and EVP

* Matt Stover

Columbia Property Trust, Inc. - Director of Finance & IR

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Conference Call Participants

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* John P. Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Sheila Kathleen McGrath

Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Columbia Property Trust Second Quarter 2017 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Matt Stover, Director of Investor Relations. Please go ahead.

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Matt Stover, Columbia Property Trust, Inc. - Director of Finance & IR [2]

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Thank you. Good afternoon. Welcome to the Second Quarter 2017 Columbia Property Trust Investor Conference Call. On the call today will be Nelson Mills, President and Chief Executive Officer; and Jim Fleming, Executive Vice President and Chief Financial Officer. Our results were released this afternoon in our quarterly supplemental package, which can be found on the Investor Relations section of our website and on file with the SEC on Form 8-K. We've also filed our 10-Q with the SEC this afternoon.

Statements made on this call regarding 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 in the Risk Factor section of our 2016 Form 10-K.

Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to us at this time. Columbia undertakes no obligation to update any information discussed on this conference call. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP financial measures can be found in our supplemental financial data. I will now turn the call over to Nelson Mills.

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [3]

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Thank you, Matt. Thank you for joining us today. We've had a productive year thus far and have much more plans for the balance of this year and the next. We've had a clear and consistent vision for the future of Columbia. We've taken a disciplined approach to capital allocation decisions as we continue to build an exceptional portfolio in key gateway markets.

We've established qualified and motivated local teams to manage that portfolio and that continues to bear fruit as demonstrated by our leasing and operational success.

We also now have a terrific like-minded investment partner, which enhances our ability to add scale in our markets, compete for opportunities and talent, create value and grow earnings.

The quality of our portfolio and the strength of our team are evidenced by the leasing we've accomplished this year. Let's look at a couple of examples.

At 650 California Street in San Francisco, we began the year with 150,000 square feet of vacancy with another 80,000 square feet expiring in the first half of the year. We've now leased 188,000 square feet of that space, bringing the building to 90% leased. We are in discussions with several other tenant prospects and expect to increase that percentage substantially during the second half of the year.

At One Glenlake in Atlanta, we entered 2017 with 25% vacancy. Our recent investments in the lobby and amenities, combined with the focus and determination of our team, resulted in signed leases for all vacant space in the building. We're now 100% leased for all of our Atlanta properties.

Our leasing in the first half of the year has moved our overall lease percentage from 90.6% up to 95.3% today. In addition, we've achieved substantial rate increases on signed leases for the quarter, 62% on a cash basis and 85% on a GAAP basis. With substantial embedded rent growth across the portfolio, there's more of this to come, as Jim will outline in a few minutes.

Not withstanding our high overall lease percentage, we have some work to do at a few key properties. At Market Square in Washington, D.C, we have about 160,000 square feet available. That's approximately 22% of the property. We've maintained a respectable leasing pace at rolled-up rents and attractive terms. Much of our leasing success has been with the government affairs offices of Fortune 500 companies, whose space requirements tend to be small, averaging less than 10,000 square feet. We're currently exploring with our partner Blackstone, opportunities to be more aggressive in capturing larger prospects. We've completed substantial improvements to this asset and it is competing well with the newest trophy buildings in the city, in terms of rate and leasing pace. We're highly focused on driving occupancy in this still challenging market.

We also have 137,000 square feet of vacancy at 315 Park Avenue South in Manhattan, mostly from the recent Crédit Suisse expiration. 116 Huntington in Boston has 63,000 square feet available. We're seeing significant demand at both properties and expect to lease most, if not all, of this vacancy this year.

As many of you know, we have generated substantial positive leasing spreads across our portfolio over the last two years. We believe the rents across our portfolio are about 10% below market on average and we expect positive leasing spreads to continue for some time.

Our largest expiration over the next couple of years is the 119,000 square foot DLA Piper lease at University Circle in Palo Alto. That lease expires next June. We are in discussions with them about a possible extension. Whether they stay or not, this space should lease at a significant premium to in place rent.

As Jim will outline, we believe our increased occupancy and rent roll-ups over the next several quarters will drive significant earnings growth, beginning late this year and continuing for some time thereafter.

Our focus markets are New York, San Francisco and D.C. All three are healthy, with strong capital inflows but are in various stages in terms of leasing demand, supply and rental rate growth.

In New York, we're concentrated in pockets of Midtown, where we've seen positive net absorption in Class-A space and modest rent growth.

In San Francisco, the CBD has been one of the best-performing markets in the U.S. for some time for rent growth and occupancy gains. Demand has cooled a bit among the venture capital community there and some sublease space has come on the market. But new supply is steadily being absorbed and we are still optimistic about our ability to lease vacancy at attractive terms. As in New York, we have modest vacancy in the near term and are expecting substantial demand for what we do have.

In D.C., demand has improved over the last 12 months as evidenced by significant positive absorption, trophy rental rates are holding up but tenant concessions are still elevated. Overall, we're more positive on D.C. than we've been in several years and we're encouraged by its modest but steady improvement in fundamentals.

We continue to build presence in these 3 key markets. We're a top 10 office landlord in CBD San Francisco, with an experienced team and are very well known to the major brokers, tenants and owners. We have significant presence in Midtown Manhattan, where we are developing a solid reputation that is leading to more and more leasing prospects and investment opportunities. And we are relatively smaller but very visible in D.C., with our 2 key assets there.

Future acquisitions will help us build scale in all 3 markets. And we have a strong pipeline of opportunities. We'll continue to be very patient and disciplined, but we are confident that we'll get some acquisitions done this year that fit within our underwriting criteria and contribute significantly to the earnings targets we are projecting for later in the year and into 2018.

Finally, we're very excited about our joint venture with Allianz real estate. This venture will enable us to increase our scale and market presence without the need to issue equity or increase debt. And Allianz's long-term approach to real estate investing mirrors ours. And their initial contribution to the partnership, 114 Fifth Avenue, is a perfect fit with our other Midtown properties.

The staging of the venture allowed us to minimize idle cash, but we expect to ramp up this joint venture from a current size of over $1 billion to around $2 billion with new acquisitions in a relatively short period of time. We are actively sourcing and reviewing new opportunities together but our investment decisions will always be based on maximizing value for our shareholders. The value of this joint venture goes well beyond these immediate benefits. We now have a partner that is active in our markets, has a long-term investment focus and has a shared vision for what our strategy can deliver.

With that, Jim, I'll hand it over to you.

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [4]

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Thank you, Nelson. And thanks, everyone, for joining us this evening. On our last call, we provided a cash flow bridge to a full year pro forma net operating income of more than $280 million, together with our modeling assumptions about future acquisitions.

We're right where we expected we would be for the second quarter at about the low point for the year with a substantial pickup in FFO and NOI expected in the fourth quarter and into 2018.

This was a good quarter for us and on track with our expectations. Our earnings are at a low point in the second quarter, as we completed our programmatic asset sales in the first quarter and they had some large lease expirations at 315 Park Avenue South and 650 California at the end of April. We believe our earnings for the third quarter will be roughly in line with the second quarter, as the earnings increase from lease commencements is offset by some additional cash that resulted from our joint venture from Allianz.

But we expect our earnings will turn up beginning in the fourth quarter, and will increase substantially next year.

We've updated our guidance to reflect the narrower and slightly lower range for FFO this year, the 2 key reasons are the timing of acquisition and the details of our recent leasing. So far this year, we've not made any acquisitions except for the interest in 114 Fifth Avenue we purchased from Allianz as part of our joint venture. Our original model was based on the assumption that we would acquire $500 million of properties throughout the year, with the timing midpoint of July 1. Our revised guidance reflects the fact that we still anticipate making acquisitions in the same dollar range, but weighted much more toward the end of the year when they will have less impact on our 2017 earnings.

Our leasing is ahead of plan this year. And we've raised our guidance for our year-end lease percentage. But a number of leases we've signed have been larger than anticipated and with longer lease terms, which has resulted in more time between signing and lease commencement. Because new leases don't contribute to FFO until their commencement, our leasing activity in 2017 will boost our earnings in future years, but will not generate quite as much FFO in 2017 as we originally expected.

Because of these two factors, the timing of acquisitions and the timing of lease commencements, we've changed our FFO guidance for this year. But the leasing we've accomplished already in 2017, combined with our share repurchases and expected acquisitions should contribute to even stronger growth in 2018.

I want to spend some time focusing on the earnings impact from all of our leasing, the narrowing of the GAAP between our high leased percentage and economic occupancy, and the new joint venture with Allianz. But before I do that I'd like to highlight several changes we made in the supplemental this quarter, that we hope will be of benefit.

We added an executive summary on Page 3, in lieu of a separate earnings release; changed some of the key metrics summarized on Pages 14 and 18; emphasized leasing volume and rental rates; provided more detail on leasing expirations by market; and reorganized some of the pages by subject matter.

Matt and I will be glad to follow-up after the call if anyone has questions about specifics on these changes or anything on the quarter that we don't cover today.

We began 2017 with 603,000 square feet of vacancy, and 330,000 square feet of lease expirations, bringing us to a total of 933,000 square feet to work with. Our goal this year has been to lease 547,000 square feet of this amount, which would take us to 95% leased overall, and we're already there at 95.3% leased at quarter end and 605,000 square feet of leases signed through the first half of the year.

But because many of these leases have not yet commenced, or are in free rent, economic occupancy is only at 83.1%. Over the next 12 months, the large gap between our lease percentage and our economic occupancy will narrow, which will result in same-store NOI growth, higher cash flows and increased FFO.

As Nelson mentioned, we're very well positioned for organic earnings growth, with signed leases on over 5% of our portfolio that have not yet commenced, another 7% of our portfolio in pre-rent and the balance of our existing leases have rates we believe are about 10% below market. We believe that the third quarter will be relatively comparable to the second quarter, and then our leasing will lead to strong earnings growth in the fourth quarter and continuing into 2018.

The amount of leasing we've accomplished has caused our future cash flows to be much more stable and predictable. Absent the DLA Piper lease at University Circle expiring next year, which we expect to be a significant roll-up, we don't have any other leases over 20,000 square feet that are expiring in 2017 or 2018. And for those 2 years, we only have 370,000 square feet expiring in total.

As a result, as our cash flows increase over the next several quarters there should be very little downside risk.

The Allianz joint venture provides an important source of new capital for us with a well-known partner who shares our disciplined long-term approach. Nelson covered the rationale and our future plans, but I'd like to highlight one other point worth noting, related to the price discovery on our 2 San Francisco assets. University Circle was valued at $540 million in the joint venture and our gross book value at June 30 was slightly over $292 million. 333 Market was valued at $500 million and our gross book value was approximately $409 million. Although it wasn't a reason for the venture, it's nice to see this confirmation of value in our portfolio.

Our balance sheet is in the best shape it's been since our listing in 2013, which puts us in position to execute on new opportunities to deploy capital. We expect acquisitions will be the biggest part of that and we're working hard to make those come to fruition at the right price and in the right markets.

We also elected to make $27.5 million of stock repurchases during the quarter at an average price of $21.95 per share.

We're working to improve our debt structure wherever possible, and there were 2 recent developments. First, we were able to modify our $150 million term loan this past week to lower the interest rate by 45 basis points. This was possible because the loan originally had a 7-year term, but could now be repriced as a 5-year debt and we were able to retain all the same banks in this loan. And second, we are in the process of paying off the $125 million loan on 650 California next month, which will leave us with only 2 mortgage loans, the $325 million loan on Market Square, which is in our joint venture with Blackstone, and a $25 million loan on One Glenlake that we expect to pay off next year.

All of our other assets are now unencumbered. With that, we're ready to take any questions and I'll turn it back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Sheila McGrath with Evercore.

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Sheila Kathleen McGrath, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [2]

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Nelson, I was wondering if you could talk about the acquisition environment and with shares at current levels, if you'll be considering both new acquisitions and additional share buyback?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [3]

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Sheila. Yes, so the -- our pipeline, we do have quite a few prospects in the pipeline. But the environment, the market continues to be tight in New York, San Francisco, D.C., where we're focused. But we are seeing some opportunities that we think are compelling and have the potential of fitting our underwriting. So we're hopeful that we can get a deal or 2 done this year. And maybe more so than in the past couple quarters. So we're hopeful there. And we do have -- we do intend to do a couple things this year. In terms of share buybacks, we have bought shares the last couple quarters as you know. That's always an option, it's something that's on the board. So we take that quarter-by-quarter based on alternative uses for the capital, acquisitions, availability of capital, which we have plenty of today, and the pricing. So the answer is yes and yes.

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Sheila Kathleen McGrath, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [4]

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Okay, great. And then a follow-up. Jim, you have previously like in your investor deck provided the burn off of free rent adjustment and also leases not commenced. And there is such a big gap between economic occupancy and what you have under contract. Could you provide those cash numbers to kind of help us bridge from in place cash NOI to what's already signed?

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [5]

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Yes, Sheila. And that's a great point. As I mentioned just a little while ago, we've got 5% of our portfolio in leases that have been signed but haven't yet commenced. That's 390,000 square feet. Our previous investor presentation showed that at $20 million. That's still about the right number it's still right at $20 million. There's been some movement, 1 or 2 leases that have moved out of that and then 1 or 2 that have moved in as we've signed some new leases. And we'll update that when we redo our investor presentation but that number's still about right. Also mentioned, 7% of the portfolio that's in rent abatement and free rent, that's 540,000 square feet. That number's a little lower than before because the Equinox lease commenced in the second quarter, but it's still between $23 million and $24 million. And I'll say this. Just as a comment, Sheila, we've got -- the past several quarters now we've been doing a bridge and provided a valuation based on leasing that had already been done. Our view on that has not changed, it's really just -- we're just seeing it start to play out as we move forward.

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Operator [6]

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The next question comes from John Kim with BMO Capital Markets.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [7]

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So on the asset sales to the joint venture, you realized a nice cash gain and it sort of reinforced your NAV, but in the near term it has caused some earnings dilution, so I'm wondering when does the earnings growth really become a focus for your company?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [8]

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Well, that's right, so we've done what we can to mitigate that, John. It was a great transaction, the venture we're very excited about for all the reasons we said. And being able to realize some of those gains on those properties was key. But you're right. It does add a little bit more to -- we already have plenty of capital to deploy, new investments, that adds a little bit more to it. As we mentioned, I think we've mentioned before, we mentioned in the materials, we have staged the venture such that our new partner, Allianz, comes in, in part today and they take a bigger percentage in the contributed asset as we have the need for capital, so we've somewhat mitigated that. We can release those -- that capital, that new capital as we need it, so that's helps somewhat. In terms of -- we've been saying for some time that the middle of this year, the second or third quarter, mid this year was the low point of our cash flows. That's still the case. It's -- we've got a lot of leases in place that are in concessionary period. If we do no more leasing at all -- we do plan to do a lot more leasing, as we've said, and we've got a lot of near-term leasing activity that we'll be excited to report on later this year. But even if we did no more and just had the concessions burn off, we have substantial lifts in our cash flows somewhat later this year but especially, first, second quarter, third quarter next year, it really start to ramp up on a quarter-after-quarter basis. So it's coming, the work's been done, and we're very excited about the leases we've done, but they -- these are -- a lot of these are large leases and they do have a fairly lengthy free rent periods.

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [9]

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And, John, let me just add a little bit to that in terms of a few details, the -- because it's a good question about where we're headed from an earnings standpoint. And we're not -- we have not in the past and we're not now going to give earnings guidance but just to give you a little color on it. What we said a little earlier is that we think the third quarter earnings will be about the same as the second. And really the reason for that is we do have a couple of leases, the 2 New York leases, again, right at the beginning of the third quarter, so those will be a positive. And -- but as you point out, we've got a couple of things going on. One is the JV, the fact that there's some additional idle cash right now, and then we also have this -- the fact that a lot of leases that have been signed aren't going to commence until next year. And those pretty much offset, we believe for the third quarter. And then we think there will be a lift in the fourth quarter as a number of other leases begin, and also next year as some more leases commence. So really the pick up we expect will be in the fourth quarter and then will continue and be much more significant as we get into 2018. I will say that the biggest -- we put out earnings guidance in February, did not update it last quarter because we really just didn't know quite enough. But now that we're halfway through the year, we felt that we of course should. So this is the first change we've made. Really by far the biggest reason for the change was that we had modeled in our assumptions the acquisitions centered around a midpoint of the year and, of course, we didn't make any acquisitions in the first half of the year and so all the acquisition will be later. We're counting on the fact that we're still trying to make acquisitions but we just -- the timing is going to affect the earnings for this year.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [10]

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So I suppose the stage sale of the joint venture assets, I mean it's going to create further dilution next year over the next 12 months, when you exercise the sale.

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [11]

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Well, the question there, John, I think in both cases, we think it'll be a positive. But the -- what that requires is that we find something else to invest in, in the venture. We think that will happen and that's the reason we did the venture. But you're right, if we find nothing else to invest in, either inside or outside the venture, then it does throw more cash on the balance sheet.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [12]

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So I'm not necessarily saying that a buyback is the panacea of capital allocation but absent of acquisition opportunities now, why not just load up on the buyback?

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [13]

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Well we, again, we have made -- we have been doing some share buybacks, that's a part of -- certainly one capital allocation tool. It's not the business we're in, it's not strategic, but we do believe it's a great value. The question is, are we going to be able to find other acquisition opportunities in our target markets that could add some value by adding to our platform, adding to our momentum in those markets. We do think it has mattered, the things that we bought today and we think we could add some scale and that would provide some strategic benefit. So it's really just a trade off between those 2. Clearly, the stock in our mind is a very good value right now.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [14]

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Okay. And then going forward, how are you going to decide between acquisitions done on balance sheet versus through the joint venture?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [15]

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Well, the joint venture -- we'll certainly look at most opportunities through the venture. Our partner, Allianz, may or may not. There's certainly no exclusive on either -- for either party. May or may not participate. It's likely that I'd say the majority of things we look at would be of interest to our partner. We believe that venture is going to be more core, stabilized property focused. And to the extent we do something with a little more lift, upside risk in it, which we don't expect to add much of that. But to the extent we did something like that, that could very likely be outside the venture. So those are some of the criteria that we'd consider, but I would expect for the next couple of acquisitions it's likely most of that would be in the venture.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [16]

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So in your market for core product do they have right of first offer?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [17]

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No. They do not, there's no obligation on either party, no obligation for them to only partner with us or vice versa, and we can certainly buy things outside the venture without permission. Certainly not our intent. We plan to be in regular dialogue and show them opportunities we're looking at. But there's no obligation per the agreement.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [18]

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Okay. And then last question for me. The assets you contributed were done at around a 5% cash cap rate on our numbers. And I was wondering what about the assets that Allianz contributed, what cap rate was that done at?

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [19]

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Yes, so the 2 -- you're right, John. The 2 that we put in were just a little bit under a 5% cap rate, high 4s, based on the first quarter net operating income. And then, the one that came in as a little higher than a 5%, it does -- it is on a ground lease, so that's a little bit different structure. But it is also a very high-quality building, Midtown South, fully leased. So that's the math on that. Low 5s for the one that -- for 114 Fifth.

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Operator [20]

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The next question come from Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [21]

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Just sticking with the venture. So is it fair to say since you're seeing most of the product that you're looking at will be of interest, are you primarily now looking at core stabilized product as opposed to maybe value add?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [22]

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Well, the last deal we announced was a heavy lift value add, the 149 Madison, which we should close later this year, so it's small. With or without the venture, the vast majority of our portfolio is always going to be fairly stabilized and core. We don't have a lot of heavy lift value add in the portfolio, that's not really our strategy at this time. So I'd say that was all -- it's always been true, that most of what we look at is fairly stabilized. And in our portfolio right now, and on the last several acquisitions, while they haven't been heavy lift value add, we've taken on some leasing risk, and as we've explained, we're taking care of that. We're getting that leased up and realizing that value. So let me put this way, it hasn't reshaped or changed our strategy. I do think, in the normal course of how we would look at deals anyway, there's a fair amount of it that would fit the venture. That's our expectation, which is why we chose this partner and structured the partnership the way we did because it fit very well with what we plan to do anyway.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [23]

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Okay. And then just on the guidance adjustment, can you just maybe break out just so we get a sense of like what you're modeling in for timing of acquisitions and cap rates? Can you just break out the guidance adjustment between, like you mentioned, timing of leases signed and commenced and then the acquisition timing? Can you just break out the guidance shift between those 2?

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [24]

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Yes, Vikram, and this is -- I think this would be -- you could probably do the math on a lot of this. We had previously modeled $500 million of acquisitions, really the placeholder midyear. And if we were not to do any of that at all, depends on what you assume we could -- interest we could earn on our cash, but that would be a negative of somewhere around $0.10. So if you really took the $1.22 that was the high end of the range before and just took that off, you'd be down to $1.12 and our high end of our range now is higher than that. So that just sort of gives a little perspective on it. I would say that the dilution from the JV is somewhere around $0.03, if we don't buy anything. And then the leasing pace is another $0.03 but then there's some positives. We've gotten more leasing done than we had originally anticipated, we've done some share buybacks that have helped, and so that kind of got us into the range. If you do all that math, I think you'll wind up on the low-end of the range. And the reason we've given a range from $1.09 to $1.14, is we do expect we'll do some acquisitions this year, either that or some more share buybacks, either one would help. The acquisitions would have more effect, because it'd be a chance to put more cash at work. We haven't really given any timing but we do expect that we'll be able to get in this range of $400 million to $700 million. If you do the math on what we've announced so far, we've talked -- as you know, we've bought a share of 114 Fifth, so I think that's $109 million at our share. And then we also have talked -- have announced that we have under contract 149 Madison, that's $88 million. That only gets you to $197 million, so the low end of the range, $400 million, does require some more acquisitions and we think we'll get there. We just haven't put a stake in the ground about the timing, it could [be late] in the year. We're really not doing this to try to drive earnings this year, we're doing it to try to find the right acquisitions that are going to be good long-term. And so we're leaving ourself some flexible in terms of timing.

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [25]

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And let me just add to that. We don't announce deals until they're done and there are no deals done. But we realize it's mid-year and we're adjusting guidance and we would adjust it further, if we weren't fairly confident we'll get an acquisition or 2 done. So that should be an indication that we feel very good about our prospects. That there are things out there that we're working on, and we're confident we'll deliver on a couple of them. So we'll leave it at that, but we think that range is [all].

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Vikram Malhotra, Morgan Stanley, Research Division - VP [26]

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And just to quickly clarify, have you changed your cap rate assumption at all for those acquisitions?

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [27]

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No. Now we did at one point provide a very simplistic model where we said, just assume we can invest our capital at a 4% going in cap rate. That was just a simplistic model, it really wasn't our goal. Our goal is going to be to get properties that we think provide good value. Obviously, that underwriting is a little different for core than it is for value add. But in any case, I think we'd try to do better than that. And so that was just a placeholder.

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Operator [28]

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The next question come from Mitch Germain with JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [29]

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So, Nelson, I want to circle back with the whole value add core, if I look at many of your more recent acquisitions. Whether you want to characterize it as a value add or it just had really a leasing element to it, right? Either it's a lot of roll or some vacancy that you acquired. So is it a function that you're really cautious on the fundamental environment that you want to potentially lighten up acquiring something with some near-term vacancy? I know you did the one asset in New York, but is that really kind of what you're trying to say in essence here?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [30]

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That's fair, Mitch. So we're more cautious. I wouldn't categorize us as extremely cautious, but we're more cautious versus 2014, 2015 in San Francisco and New York. Of course, we're more cautious. We all know that in both those markets, our key markets, that in our underwriting the rental growth isn't there, leasing pace would be slower. And we're just a little more conservative on our underwriting, which makes it -- until sellers adjust their expectations, it makes it harder to do deals. But core we would -- I think it's fair to say we would favor a core profile much more today than over -- than in the last couple years, when we bought those others. So yes, that's fair. Not completely turning off that aspect of the pipeline, but there's definitely a stronger leaning toward more stabilized properties than taking on a lot of value added risk at this time in the cycle.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [31]

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Great. And if I look 350 -- sorry, 650 Cal, 315 Park, 221 Main, I think were your more high-profile, value add, we'll call it, transactions. How is performance relative to the original underwriting?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [32]

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Well, in terms of rate and terms, it's actually above in varying degrees. Our pace isn't quite matching our underwriting at 315 Park, but in terms of -- but -- in pace of leasing, but a lot of that, we just got back a few months ago and we're working on that. We're getting a lot of activity there, we think we'll get 315 leased this year. That is -- but at rates and terms better than the underwriting. 650 Cal is about right on the underwriting, that pace has been good, I think. As we said, we leased 180,000 of the 230,000 feet or so available there this year. So at about the same, maybe slightly ahead of pro forma, and that's at 650 Cal. So we're going to perform on those. We've had to spend a little more capital in some cases, and like I said, the pace has been a little bit -- a quarter or 2 slower than we originally underwrote. But other than that, we're right on.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [33]

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Great. I know you've had some discussions with the Pittsburgh -- at the Pittsburgh asset for a blend extend. Anything to update on there?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [34]

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Well, we have reached agreement with Westinghouse management to extend that lease from the 8 or so years remaining out of 15. That is subject to -- but it's signed, it's a delivered lease, but it's subject to bankruptcy court approval. It's not binding on either party unless we get that approval and we hope and expect that's going to happen in the next few months. But we'll see. If we do, we think we have a -- we think we're in a pretty good situation there. So that's the next step on that one, and we'll keep you posted as that develops.

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [35]

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Mitch, just so there's no confusion, even though that lease is signed it's really not effective yet. So when you look at our leasing statistics about new leases and renewals, and all that sort of thing, it's not in those numbers yet. We just treat it as pending for our calculations until it gets bankruptcy court approval.

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Operator [36]

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(Operator Instructions) The next question is a follow-up from Sheila McGrath with Evercore.

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Sheila Kathleen McGrath, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [37]

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Yes. Nelson or Jim, it seems like you're at a good point in terms of cash NOI, ramping higher, I guess, starting significantly in fourth quarter. And at the same time, capital expenditures, the profile looks to be going lower. Is there any way you could give us some insight on how CapEx might look this year? And then directionally, is it -- could it be significantly lower, just kind of CapEx trends?

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James A. Fleming, Columbia Property Trust, Inc. - CFO and EVP [38]

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Sheila, there is a big component of that. It's about $70 million that -- related to the NYU lease that we booked in the fourth quarter of last year because we needed to under the GAAP rules. And that cash is now starting to go out and it'll go out potentially over this year. It could extend into next year. It won't hit our CapEx numbers because it's already been booked, but it will come off of our -- come out of our bank account, so however you account for that, you should think about that. On top of that, we do have some CapEx from leases that have been signed. As you know and as we've talked about, we signed a lot of leases lately. And a number of them are long-term leases. And so there are some CapEx requirements that are really this year and will going into next year. We really haven't given guidance about the timing of all of that. But after we get through next year, we expect the CapEx to be significantly lower. We think it'll stay up through probably second quarter of next year, maybe second or third quarter of next year, and then drop off pretty substantially after that. And that really reflects the fact that we don't have a lot of lease expirations coming up after that. And we've really stabilized the portfolio with a really high lease percentage.

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [39]

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And, Jim, you spoke to leasing -- cash flow leasing, TIs and so forth. In addition to that, we have a few building CapEx improvement projects. A lobby here, a roof top deck there, those are all really this year items. They're -- some of that expenditure could roll over into next year, but the vast majority of that gets done this year. So in that category too, our expectation would be that next year would be significantly lighter in terms of capital outflow.

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Sheila Kathleen McGrath, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [40]

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Okay, and then just on -- quickly on the Atlanta, you said, those are 100% occupied. You have a lot of cash now, so I don't think there's a need to sell them right now, but just if you could comment on your long-term plans for Atlanta?

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [41]

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Okay. So we have 2 properties, 3 buildings but 2 -- we look it as 2 properties here in Atlanta. One is almost 1 million square feet with AT&T at Lindbergh south of Buckhead. And that is fully leased to AT&T, but there's about less than 4 years, 3.5 years remaining now. We're in discussions with them about an extension, renewal, we'll see how that goes. They have a renewal right, a year from now. So they don't have a lot of incentive to negotiate early, but we'll see how that goes. If that were to get released and extended or when it does, that could be an excellent candidate to sell. As you know we're exiting the single tenant properties and that would be a great time to do that, so we'll keep you posted on that one. There other property in Atlanta is 2 buildings, 1 is fully leased to Newell Rubbermaid. They in all likelihood -- their lease expires less than 3 years from now. Pretty good chance, they'll be leaving and we've got prospects to backfill some of that already. The neighbor building, the twin building to that where our offices is, it's multi-tenant, it's fully leased. Depending on how the Newell or their replacement works out, if we can get something done on that early, that might be a good candidate to sell. It's in our backyard, both of them are and there's no immediate need to do anything. But we want to take those off the table at optimum value. So nothing this year, I'm sure, but it's, well, not likely but we won't hold those forever.

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Operator [42]

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This concludes our question-and-answer session. I would like to turn the conference back over to Nelson Mills for any closing remarks.

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E. Nelson Mills, Columbia Property Trust, Inc. - CEO, President and Executive Director [43]

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Okay, well, thank you all so much for joining us today. And we really appreciate the opportunity. We're always available for questions at your convenience. Have a good evening.

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Operator [44]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.