Chambers Street Properties' CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Chambers Street (CSG)

Start Time: 08:37

End Time: 09:06

Chambers Street Properties (NYSE:CSG)

Q1 2014 Earnings Conference Call

May 2, 2014 08:30 AM ET

Executives

Jack A. Cuneo - President and CEO

Philip L. Kianka - EVP and COO

Martin A. Reid - EVP and CFO

Christopher B. Allen - EVP of Capital Markets and Finance

Kara Smith - ICR, LLC

Analysts

Mitch Germain - JMP Securities

Peter Martin - JMP Securities

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Christopher Lucas - Capital One Securities, Inc.

Operator

Greetings and welcome to the Chambers Street Properties First Quarter 2014 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host Kara Smith of ICR. Thank you. You may begin.

Kara Smith

Good morning. We’d like to thank you for joining us today for Chambers Street Properties first quarter 2014 financial results Webcast and conference call. In addition to the press release distributed earlier this morning, we’ve provided our first quarter 2014 supplemental information with additional detail regarding our financial results in the Investor Relations section on our Web site at www.chamberstreet.com.

On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to revenue, operating income, financial guidance, as well as non-GAAP financial measures such as NOI, FFO, and core FFO.

As a reminder, forward-looking statements represent management’s current estimates. Chambers Street Properties assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the Company’s filings with the SEC and the definitions and reconciliations of non-GAAP financial measures contained in the Company’s financial results press release and supplemental information, both available under the Investor Relations section on the Company’s Web site.

On this mornings conference call, we’re joined by Chambers Street Properties President and Chief Executive Officer, Jack Cuneo; Chief Operating Officer, Phil Kianka; Chief Financial Officer, Marty Reid; and EVP of Capital Markets and Finance, Chris Allen.

Jack and Marty will provide an overview of Chambers Street Properties first quarter 2014 financial results. After which we will open up the call to your questions. And now, I’ll turn the call over to Jack.

Jack A. Cuneo

Thank you and welcome to our first quarter 2014 earnings conference call. I’ll begin by saying that I’m extremely pleased by our progress through the first quarter of 2014. Our high quality stable portfolio of 129 properties is well diversified by geography and tenant industry. We ended the quarter with 96.1% occupancy, demonstrating the quality of our assets as well as the focus of our leasing and management teams. And we continue to maintain a strong conservative balance sheet that supports our monthly dividends as well as our ongoing growth strategies.

Additionally, during the quarter we executed several significant leases at strong positive spreads, according to modern Class A industrial property and continue to reduce our investment in non core assets.

With all these accomplishments, I would be remiss if I didn’t acknowledge the hard work and dedication of the entire Chambers Street team for their contribution and helping us achieve these objectives. Thank you all.

Moving on, I’d like to provide a quick overview on the broader leasing environment. In short, we continue to see demand for industrial warehouse space, especially for our modern well located properties. In the industrial sector it’s pretty simple. There is a need for e-commerce tenants and consumer goods distributors to operate efficiently and economically and we remain focused on these growing sectors.

In Spartanburg, South Carolina where we have a major concentration of industrial assets. BMW has announced a $1 billion expansion of its plant. This will make it their largest in the world. With that announcement, we’re seeing increased interest for expansions by our existing tenants.

In Europe, our logistics properties are full and we’ve enjoyed success with tenant renewals. As the global economy continues to grow, the overall distribution of goods to continue to strengthen supporting sustained demand for our buildings.

In the office market, steady job growth is indicative of improvement in this sector with coastal markets and energy markets generally demonstrating the strongest growth. Pricing remains an important factor for office tenants, with our well located properties and a strong balance sheet; we’re well positioned to compete to capture market demand.

More importantly, new construction remains at historic lows and replacement costs are well above market pricing. So we should continue to see steady improvement in the fundamentals before the majority of our leases begin to roll.

Turning to leasing. During the first quarter, our asset management teams remained extremely busy with the execution of 15 leases for approximately 827,000 square feet. This was comprised of approximately 520,000 square feet of renewals and 300,000 square feet of new leases. Importantly, we drove a strong positive spreads on renewals that were signed during the quarter.

Let me provide some greater detail on a few of our larger lease transactions. At 90 Hudson, in Jersey City we executed a 97,000 square foot expansion with Lord Abbett. This space was previously leased to another tenant who was scheduled to expire at 2015 and the new leases at a higher rent in the expiring rates. At Norman Pointe II in Minneapolis, we executed an extension with the GSA for approximately 58,000 square feet with a new 10-year term.

Subsequent to the quarter end, in our industrial portfolio, we signed a new 316,000 square foot lease with a food products company. This was at our Union Cross II property in Winston-Salem, North Carolina. The term of this lease is for 63 months at a significantly higher rent over the prior tenant.

Also we’re already expanding our recently acquired Amazon warehouse facility in Lille, France. We have commenced construction of this 126,000 square foot expansion which will bring the total property to nearly 1 million square feet. We continue to believe that expanding assets with their current tenants represents a low risk and efficient driver of internal growth for us.

As always, we will continue to be proactive in addressing our vacancy and upcoming lease expirations. However, given our recent activity we’ve just only -- we’ve only 1.5% of our total base front expiring in the remainder of 2014, and only 2.9% in 2015.

Turning to acquisition activity. We continue to focus on the industrial market and our pipeline remains robust with both individual and portfolio transactions, as we continue to expand our portfolio. This industrial market has been extremely competitive and will remain disciplined at our acquisition strategy.

To that end, during the quarter, Chambers Street acquired a 622,000 square foot property in Indianapolis, Indiana for a purchase price of $30.2 million. This property located near the airport, rail transportation and several high ways has additional land for potential future expansion. It really is a bull’s-eye acquisition for Chambers Street. This facility is a 100% leased to a pet supply company. Note that we have additional acquisitions in various stages of due diligence and we’re extremely excited about our pipeline as we move forward in 2014.

The key strategy in continuing to upgrade the quality of our portfolio and improve our long-term growth rate and valuation. These are effort to recycle capital and during the quarter we sold one Conway, a multi-tenant office property in suburban Chicago, Illinois. The gross selling price was $13.5 million. Additionally, we have listed Maskew Retail Park, in Peterborough, England for sale. This would represent a complete exit from retail properties.

In summary, we continue to execute our internal and external growth strategies in order to maximize the cash flows from our high quality portfolio. Our leasing activity this quarter was at a strong positive impact on our lease expiration schedule and our attractive pipeline should drive further growth.

We believe the quality of our portfolio as demonstrated by our high occupancy rate would be a significant advantage for Chambers Street over time. Supporting stable and growing cash flow to support our monthly dividend.

And now, I’m going to turn the call over to Marty. Marty?

Martin A. Reid

Thank you, Jack. Good morning, everyone and thank you for joining us. I will first review our first quarter operating results, and then I’ll review our balance sheet and liquidity position and update you on our 2014 guidance.

This morning Chambers Street reported Core Funds from Operations of $39.6 million or $0.17 per diluted share compared to $39.5 million or $0.16 per diluted share for the same quarter in the prior year. As noted in our disclosures, we believe core FFO is the most relevant comparable measure adding back non-recurring items such as acquisition related expenses from our wholly owned portfolio and our pro rata share of joint venture investments as well as losses associated with the early extinguishment of the debt.

Year-over-year increases in core FFO are primarily attributable to higher property net operating income resulting from property acquisitions we’ve completed since 2013 and were partially offset by higher interest expense from additional borrowings and higher general and administrative expenses.

Funds from operations, FFO, were $39.2 million or $0.17 per diluted share as compared to $39.3 million or $0.16 per diluted share for the first quarter of 2013. Additionally, we have expanded our disclosure and have included a schedule of our same property net operating income in our quarterly supplemental. Year-over-year we realized 1% growth in NOI on a GAAP basis and 6% on a cash basis during the quarter.

Turning to the balance sheet, in January we received an investment grade credit rating from Standard & Poor’s of BBB-. S&P also gave the Company a stable outlook. Their rating reflects the Company’s high quality real estate portfolio and our selective acquisition strategy.

This investment credit rating along with the rating we received from Moody’s in December is reflective of the strength of our portfolio and balance sheet and it is an important step in our progress toward our goal of increasing our financial flexibility.

As of March 31, 2014 we had total debt outstanding of approximately $1.6 billion, including our pro rata share of an unconsolidated entities. This debt in a weighted average interest of 3.9%, weighted average term from maturity is 4.9 years.

Our net debt to enterprise value was approximately 45.3% and our net debt to EBITDA was approximately 6.9 times, which is well within our desired parameters. Looking ahead, we had just $47.6 million in debt maturities and scheduled amortization in 2014 and our unencumbered asset base represents approximately 50% of our total portfolio at cost.

At March 31, 2014 we had $44.6 million of cash on hand and $170 million outstanding on our $850 million revolving line of credit, giving us plenty of capacity to pursue our strategic growth objectives. We’re yet to utilize our ATM to issue equity; rather we utilized cash on hand and proceeds from sales to fund acquisition.

Turning to our guidance for 2014, this morning we reaffirmed guidance for core FFO per diluted share of year ending December 31, 2014 within the range of $0.65 to $0.69. I will remind you that this guidance range assumes the G&A expense will be between $25.5 million and $27.5 million and that it does not take into account the potential impact from additional property acquisitions, dispositions or capital transactions, beyond those that has been previously announced.

Now, I’ll turn the call back to the operator to open up for your questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conduction a question-and-answer session. (Operator Instructions) Our first question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question.

Mitch Germain - JMP Securities

Good morning, everyone.

Jack A. Cuneo

Hi, Mitch. How are you?

Martin A. Reid

Good morning, Mitch.

Mitch Germain - JMP Securities

I’m great. So, Jack you said the, the deal pipeline was robust and what I’d love to get from you is maybe just some characteristics of what you guys are underwriting today?

Jack A. Cuneo

Well, what we’re seeing in terms of pipeline right now is a combination of nice one-off acquisitions, plus there have been a number of large portfolios that have been around. So we’ve been pretty busy looking at them. Pricing has been pretty aggressive. There’s been a lot of competition, sovereign wealth funds have come in fairly strong in the industrial space and we’re continuing to see cap rates that are ranging anywhere from 6.75 and occasionally something a little bit higher.

Mitch Germain - JMP Securities

Are you still seeing aggressive pricing for those larger portfolios or has it gotten a bit more disciplined?

Jack A. Cuneo

There is still -- there is actually a portfolio premium right now. So those price -- the pricing on some of those larger portfolios has gotten very aggressive.

Mitch Germain - JMP Securities

You noted that there is an retail asset for sale. I know that one of the goals was increasing your industrial exposures. I mean, do you foresee that happening through acquisitions or where you guys maybe look to queue up some office assets for sale as well?

Jack A. Cuneo

Well, we have office assets that we're queuing up for sale and we're going to continue to buy industrial.

Mitch Germain - JMP Securities

Great. I think Peter has one.

Peter Martin - JMP Securities

Hi, guys just real quick. Any significant planned move outs for the remainder of 2014?

Jack A. Cuneo

No, we have actually -- typically we approach our lease expirations by starting the market or at least negotiating sometimes two years in advance. For the rest of 2014, we don’t anticipate any move outs.

Peter Martin - JMP Securities

Okay, great. And then is the $7 million 1Q G&A is that a good run rate going forward?

Jack A. Cuneo

We’re sticking with our guidance of $25.5 million to $27.5 million. The first quarter was a little on the heavy side.

Peter Martin - JMP Securities

Okay, great. Thanks.

Mitch Germain - JMP Securities

Thanks, guys.

Jack A. Cuneo

Thank you.

Operator

Thank you. Our next question comes from the line of Dan Donlan with Ladenburg Thalmann. Please proceed with your question.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Thank you and good morning.

Jack A. Cuneo

Good morning, Dan.

Martin A. Reid

Good morning.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Jack, I appreciate the comment in the pipeline. I was kind of curious if we might be able to dig a little bit further. In terms of asset size, is there a certain size that you guys are not looking at, is something less than $10 million is that just not worth your time or maybe talk about if you’re going to increase your industrial exposure what type of asset sizes you’re looking at?

Jack A. Cuneo

Right now we are probably -- our average square footage is probably in the 300,000 square foot range. We are probably and a lot of that is larger assets. We are also seeing -- we’re seeing a lot of activity in our smaller assets and we’re looking at both. I mean we’re looking at some of the big [ph] [bombers] and we’re also looking at a number of deals that are in the 100,000 square foot range. And in some cases where they’re concentrated in one location or one part, we might buy a grouping of 50,000 or 60,000 foot individual buildings that totally bring up 100 to a 100,000 cheap. So, I would say that we’re expanding our parameters in terms of what we’re looking at.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Okay. And then I guess Marty, as far as financing this acquisition growth, could you maybe give us your thought on, debt, equity, dispositions, kind of what you’re thinking. I think you guys have highlighted in the past that your typical volume can be anywhere from $350 million to $400 million and you have done essentially $30 million not net of the dispositions. Just kind of curious how we should think about acquisitions this year and how they’re going to be financed?

Martin A. Reid

We like our balance sheet, we like our debt metrics. We’ve got plenty of capacity and I think as we said last quarter we’ve got with the investment grade rating, we will be able to add a bond offering at some point to broaden our debt base. The ATM is in place, we haven't used it yet. We do have some recycling of assets. We announced that we’re selling Maskew, so we do have proceeds to fund some of the acquisitions. And we’ll -- at the time of the acquisition we’ll look at the balance sheet and use our judgment to use the best source of capital to fund the acquisitions.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Okay. And then as far as the operating results, the same-store cash NOI came up nicely quarter-over-quarter. The gap was more needed. Did you just see some type of large step up in a couple of leases that you guys have, because I think the occupancy on a same store base has actually declined a little bit.

Jack A. Cuneo

As we’ve always said, it's hard because things are lumpy in our space. But yes, we did see some renewals that stepped up very nicely.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Was it just lease renewals or was there contractual bumps as well that help drive that number or more so on the renewal side than on the bumps?

Jack A. Cuneo

Combination of the two. I mean renewals have been strong.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Okay. And then what did the loss in occupancy, what caused that and how do you feel about [ph] [baffling] those places?

Jack A. Cuneo

We have -- the occupancy loss is attributable to one property in Massachusetts that was under a corporate guarantee for up and sold just recently. And that guarantee came off and we’re now in a position where we are entertaining interest in that property.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

(Indiscernible) what kind of property, is it an industrial or office or …?

Martin A. Reid

It's an industrial building.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Okay. And then as far as we -- or in terms of looking at your portfolio on a going forward basis, you put the cap rate on the acquisition you made in the quarter which I pretty much appreciate. But it was kind of a low six cash, high six on a GAAP basis, but when I look at your net asset value your implied cap rate is kind of closer to seven. Now how you think about continuing to move into industrial when you imply cap rates significantly higher than that, is it just -- we should expect your portfolio probably should improve, so therefore the implied cap rate should continue to come down or, now how do you look at kind of your NAV, your implied cap rate relative to what you’re buying.

Jack A. Cuneo

I’ll let Marty address some of that, but what I would say is that some of the acquisitions we make are for strategic reasons. And we think that where we can build concentrations in certain markets and where we can really establish a presence in certain places, that means for example the Indianapolis property is extremely well located. We know the area. We have other property there, and it was a logical buy for us.

Martin A. Reid

And the only thing I think Dan is that, when you look at the implied cap rate in portfolio you’re looking at a portfolio that today its 60% office roughly, 40% industrial by value and the industry -- the implied cap rate for the industrial in the blend is obviously lower than the implied cap rate for office. So we view the acquisition as accretive overall and I think contributing to NAV.

Dan Donlan - Ladenburg Thalmann & Co., Inc.

Okay. Yes, I mean I guess one of the advantages to be -- one of the advantages to being that net lease REIT, as a lot of your competitors they imply cap rates so significantly below where they’re acquiring. So, I was just kind of curious as to how you get into that position. That’s it for me. Thank you.

Jack A. Cuneo

Thank you, Dan.

Martin A. Reid

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.

Christopher Lucas - Capital One Securities, Inc.

Good morning, guys. Thanks for taking my questions.

Jack A. Cuneo

Good morning, Chris. Welcome to the call.

Christopher Lucas - Capital One Securities, Inc.

Sure. Jack maybe kind of taking a step back, on the stuff you’re looking at, it seems like the one issue that is creeping in generally into the REIT space right now is product availability in terms of acquisitions. Where are you seeing sort of the most volume and the most under writable product opportunity and where is it the most challenging?

Jack A. Cuneo

I would say it's most challenging right now where there are large portfolios. That seems to be attracting some offshore capital and the bids have been -- I think you’ve got situations where they’re just being bid up to crazy prices. What we are seeing is some good opportunities in secondary markets. We are seeing -- we continue to look at places that have good infrastructure and good distribution locations with Port Access, Highway Access and Intramodal. So, we’re finding that -- we’re still continuing to find those deals, they’re more one off; they are more quietly marketed. We had the advantage of being invited into a number of situations that have been off-market and we’re pretty satisfied with what we’re seeing.

Christopher Lucas - Capital One Securities, Inc.

Okay. And then on the -- you mentioned that you’ve got an expansion underway in France. I guess just trying to generally understand, when you have an opportunity like that, how does the pricing or the yield come out relative to, is that price relative to the existing lease? Is that price just on capital markets basis? How is that return determined?

Jack A. Cuneo

I mean that’s basically, it's done on cost and the rent is based on the rent of the existing building. And typically when we’ve done that we’ve either done an extension of the lease or some other concessions out of the tenant. So, I’m not at liberty to discuss the specifics of that one, but for us it's great business, we love it.

Christopher Lucas - Capital One Securities, Inc.

Okay. And then just a couple of housekeeping items, Marty there was -- and forgive me if has been explained elsewhere. But the other income, the $1.1 million that was in this quarters results. What does that constitute?

Martin A. Reid

We did pick up some lease termination income in the quarter.

Christopher Lucas - Capital One Securities, Inc.

Was that the majority of the $1.1 million or is that something, how much of that $1.1 million is sort of recurring other income, that’s probably the question I am asking.

Martin A. Reid

Well again there is a lease termination penalty, and I think if you want to go deeper we’ll give you a call back and provide more detail.

Christopher Lucas - Capital One Securities, Inc.

Okay. And then the other question, you had mentioned that the G&A for the quarter was heavy. Is that a timing issue or was that just high relative to your plan? Can I get a little bit more color on that?

Jack A. Cuneo

Sure, it was just a little high relative to plan. Some audit coming in a little more expensive I think than we had first anticipated. But again we’re sticking to our guidance for the year.

Christopher Lucas - Capital One Securities, Inc.

Okay. And then, as it relates to the cash same store number relative to the GAAP number, is there free rent burn off and I guess more generally is free rent a component of the kinds of transactions you end up doing or are they mostly clean or free of free rent as part of sort of new lease initiations?

Jack A. Cuneo

There is often free rent’s and in this quarter we’re -- and going from core FFO to AFFO we actually had a flip in terms of it being an addition rather than a deduction from FFO. So, we burned off some free rent.

Christopher Lucas - Capital One Securities, Inc.

Okay, great. That’s all I have. Thanks a lot guys.

Martin A. Reid

Thank you.

Jack A. Cuneo

Thank you.

Operator

Thank you. Mr. Cuneo, there are no further questions at this time. I’d like to turn the floor back to you for any closing comments.

Jack A. Cuneo

All right. Well again, thank you for joining us today for our First Quarter Earnings Conference Call. As we approach the one year anniversary of our listing, we’re pleased with the progress we have made to enhance our balance sheet and grow our portfolio. We look forward to seeing many of you at NAREIT, New York next month, and thank you and we look forward to speaking to you again next quarter.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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