Columbia Property Trust, Inc. (CXP) CEO Nelson Mills on Q3 2018 Results - Earnings Call Transcript

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About: Columbia Property Trust, Inc. (CXP)
by: SA Transcripts

Columbia Property Trust, Inc. (NYSE:CXP) Q3 2018 Results Earnings Conference Call October 25, 2018 5:00 PM ET

Executives

Matt Stover - Director of Finance and Investor Relations

Nelson Mills - President, Chief Executive Officer and Director

Jim Fleming - Executive Vice President and Chief Financial Officer

Analysts

Sheila McGrath - Evercore

John Kim - BMO Capital Markets

Vikram Malhotra - Morgan Stanley

Julien Blouin - Goldman Sachs

Michael Lewis - SunTrust

Operator

Good day and welcome to the Columbia Property Trust third quarter 2018 conference call and webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.

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

Matt Stover

Good afternoon everyone and welcome to the third quarter 2018 Columbia Property Trust investor conference call. On the call with me today are Nelson Mills, President and Chief Executive Officer, Jim Fleming, Executive Vice President and Chief Financial Officer and other members of our senior management team.

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 filed our 10-Q with the SEC this afternoon and we will be providing a copy of today's prepared remarks on our website after the call and an audio replay will be available by this time tomorrow.

Statements made on today's 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 Factors section of our 2017 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 also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP financial measures can be found in our supplemental financial data.

With that, I will turn the call over to Nelson Mills.

Nelson Mills

Thank you Matt and welcome everyone to today's call. Our results this quarter demonstrate the benefits of the transformation we have undergone and the tremendous progress our leasing and operations teams have made in recent quarters. Let's begin with a look at our portfolio, which is one of the best positioned across the entire office sector.

We have about 80% of our assets in the high barrier, coastal gateway markets of New York City, San Francisco and Washington, D.C. Better yet, we have focused our efforts on attractive and growing neighborhoods in these key cities. Within these targeted submarkets, a growing number of dynamic companies are seeking recently renovated, flexible boutique space with attractive amenities and services. These features are hallmarks of the Columbia portfolio. As a result, we have been able to attract some of the world's most exciting companies to our tenant roster such as Twitter, Amazon Web Services, DocuSign, Snap, Gemini and Inspire Brands.

Let's take a look at how this strategic positioning is driving our quarterly results. We generated normalized FFO of $0.40 per share, a 43% increase over the $0.28 delivered in the third quarter of last year. Our same-store NOI growth accelerated to 14.4%, up from 11.7% in the second quarter and 5.5% back in the first quarter. We also raised 2018 guidance for the third time this year.

Though our portfolio has little vacancy and very few near-term expirations, our team continues to generate significant leasing activity. We leased 421,000 square feet during the third quarter, our strongest leasing performance since the fourth quarter of last year. During the quarter, our leased rate climbed another 20 basis points to 97.3%. That's up more than 200 basis points since this time last year.

One of our notable leasing successes during the quarter was with Arby's, a subsidiary of Inspire Brands. We negotiated an expansion of the company's lease at our Three Glenlake property in Atlanta's Central Perimeter submarket to take the entire 355,000 square foot building, which will serve as Inspire's headquarters through at least March of 2033.

We continue to have steady success in Washington, D.C., where we have achieved an 87% leased rate at our Market Square property. This is up from 73% two years ago. We continue to achieve top of the market rates and terms, due in part to substantial renovations we have completed there in recent years as well as our new rooftop deck that will be opening soon. We expect to have this building 90% leased by year end. The D.C. office market continues to be soft, but at Market Square we are capturing an outsized portion of the trophy office market each year and our rates compete with new construction. We have over 30 Fortune 500 companies as tenants. This tenant community has created a center of gravity for government affairs offices and all of our remaining vacancy is now in smaller blocks and specifically geared to these tenants.

Just this week, in New York, we signed WeWork to a 15-year lease for all of the office space at 149 Madison in Midtown South. We acquired this property in late 2017 and have explored various options for renovation and re-leasing. After weighing costs, lease terms and timing, we concluded that a full building lease with WeWork was most compelling. We were able to achieve rent at the equivalent of high-$70's per foot gross, while saving substantial renovation costs. While WeWork is taking all 115,000 square feet of the office space, 6,600 square feet of prime retail space remain. Assuming market rate and terms on the retail space, we expect to achieve approximately 6% stabilized return on cost for this property overall.

Despite having a well-leased portfolio with very little near-term rollover, we continue to create growth opportunities within the portfolio. Earlier this month, we entered into a joint venture agreement with Normandy Real Estate Partners on an exciting project in Manhattan's Midtown South. 799 Broadway is a fully permitted and entitled $300 million ground-up development project. This 12-story, loft-style office building will be located at the convergence of Union Square Park and Greenwich Village. This is a highly desirable live-work-play neighborhood with terrific transportation options and importantly, there is almost no competing new office supply in this submarket. The end result will be a stunning 182,000 square foot boutique office building with floor plates ranging from 3,600 to 22,000 square feet, floor-to-ceiling glass, private terraces and 15 foot high ceilings. We will break ground soon and expect to complete the project by mid to late 2020. We are already seeing significant demand and are highly confident that this will be yet another value creator for our shareholders.

Another opportunity ahead is our remaining vacant space and future lease expirations. While we only have approximately 200,000 feet in vacancy across the portfolio, the vast majority is located in our top submarkets and best performing properties. As always, we will continue to be proactive and creative in addressing both upcoming and longer term expirations.

And across the portfolio, our in-place net rents today are on average 10% below current market rental rates. You can see this playing out in our leasing spreads in the third quarter, which were greater than 8% on a cash basis and just above 19% on a GAAP basis.

In addition, we have significant unrealized growth embedded in our recent leasing activity. Our economic occupancy is at 90.6%, still well below our leased rate of 97.3%. So this gap will close as recent leases commence and as free rent burns off and add to our already accelerating and industry-leading same-store NOI growth, which came in at 14.4% this quarter. Of course, this is just our same store activity. We will have substantial proceeds from the sale of our remaining non-core assets and we are also working hard to find the right opportunities to use these proceeds to advance our strategy. This may include some share buybacks, but we are also looking at selected development opportunities like 799 Broadway as well as other value-add acquisitions, keeping in mind the potential risks in the overall economy.

We may also look to bring in other joint venture partners to spread our capital further, especially if that can be done without requiring more of our own capital. We are not in a position to get into more details today, but want you to understand that we are spending a lot of our energy on finding ways to advance our strategy and create more growth going forward.

I want to thank our team for their drive and hard work that delivered another quarter of strong results. I know they share my excitement about what we have accomplished and what's ahead and I know they will make the most of the many opportunities emerging. We are in a healthy financial position. We have maintained a strong balance sheet that allows for opportunistic share buybacks and we are well-positioned to identify new opportunities that will help us meet our ongoing commitment to create shareholder value.

As most of you know, we have gone through a dramatic transformation over the past five years, selling nearly $4 billion of our legacy properties and reinvesting most of those proceeds in New York, San Francisco and Washington D.C. plus one building in Boston. In doing so, we have created a lot of redevelopment and leasing opportunities, most of which we have now capitalized on. We have three large properties left in non-core markets, Glenlake and Lindbergh in Atlanta and the Westinghouse campus in suburban Pittsburgh. These have not been sold yet because of specific circumstances at each of the properties. However as we discussed, we believe now is a good time to market all of these. As a result, Glenlake and Lindbergh are now both in the market and we plan to do the same with the Westinghouse campus very soon.

Our 710,000 square foot, two-building campus at Glenlake isn't in one of our focus markets, but it's a great success story. A couple of years ago, we added amenities to the ground floor of One Glenlake as well as to the outdoor common spaces shared by both buildings. As a result, we leased all remaining space in Building One at very good rates and shortly thereafter we completely backfilled all of Three Glenlake with a new lease with Arby's. This project is now 100% leased at good lease terms and we are expecting a good price.

Our 950,000 square foot Lindbergh property is at the other end of the investment spectrum. It's only 16 years old and is situated on the second busiest MARTA rail station in Atlanta, between Buckhead and Midtown, with good parking and attractive residential nearby. However it is fully leased to AT&T, who will be leaving in just over two years. We think now is the time to market the property so that the buyer has plenty of time to plan and execute its re-leasing strategy before AT&T expires. This is very much a value-add opportunity and we will try to find the right buyer to take this on. If we get decent pricing, we will sell. If we don't, we will do as we have at many other buildings and re-lease this property ourselves. We will know more about that over the next couple of months.

Finally, there's the three-building Westinghouse headquarters campus in suburban Pittsburgh. We have completed all of the exterior work on these buildings and more importantly, the Westinghouse bankruptcy is now resolved after Brookfield bought the company and received all of the required regulatory approvals. As many of you know, during the bankruptcy process we were able to extend the lease to 15 years. So now we have a fully leased property with a good sponsor and about 14.5 years of remaining lease term. Our plan is to put that property on the market soon.

We expect these non-core asset sales in Atlanta and Pittsburgh will provide about $600 million in proceeds, which we plan to reinvest to advance our strategy in our key markets. These sales will also narrow our investments into just New York, San Francisco and Washington D.C. plus one building each in Boston and Los Angeles. At that point, we will be only in high barrier markets with cash flows that are very high quality and growing. These remaining non-core dispositions will pull back our earnings a bit temporarily and Jim will provide more color on that in a minute, but we are looking forward to creating solid future growth as we reinvest the proceeds. We will keep you posted on our progress with these dispositions.

With that, I will turn it over to Jim to discuss our results in more detail and provide our updated outlook.

Jim Fleming

Thank you Nelson and it's a pleasure to speak with everyone today and bring you up to date on our progress. Similar to last quarter, we are again reporting strong results and again raising our full-year guidance ranges for our year-end lease percentage, our same-store NOI growth and our normalized FFO.

For the quarter, we reported normalized FFO of $0.40, up from $0.39 last quarter and same-store NOI growth of 14.4%. Our portfolio is now 97.3% leased, up another 20 basis points as Nelson mentioned and with limited rollover through the end of year 2020, of just 545,000 square feet. Our economic occupancy at 90.6% is now 6.7% below our leased rate. That spread is down from eight percentage points in June and 13 percentage points in March. The continued narrowing of this spread will further drive top and bottom line growth.

Our balance sheet continues to be a source of strength. Back in the second quarter, you will recall we sold 222 East 4first Street and used most of the proceeds to pay down debt. We ended the third quarter with a debt-to-EBITDA ratio of 5.7 times. In October, we paid off the One Glenlake mortgage loan, leaving only one property with mortgage debt, Market Square in Washington, D.C. We now have more than $4 billion of unencumbered properties and our net debt is now less than 30% of gross assets. This solid balance sheet, along with the sale of our Atlanta and Pittsburgh assets, will allow us to opportunistically find new growth assets to invest in and continue to execute on our share buyback program. Year to date, we have repurchased $42 million of shares and we have $153 million still available under our current authorization with 118 million shares outstanding.

Now that we are nearing the end of the year, we have more certainty about our results and we are able to narrow the guidance ranges for most of our metrics. We have had very good performance throughout the year and we have already moved our guidance up for most of our metrics. We are now able to move the lower end of our ranges up for leased percentage and same store NOI, with a projected year-end leased percentage of 96% to 97% and full-year same-store NOI growth of 12% to 13%. FFO is being driven by both solid same-store performance and transaction timing and for that, we have moved up both the bottom and top ends of the guidance to a new range of $1.51 to $1.54.

In summary, we are having a very strong year at Columbia Property Trust and you can see it in our industry-leading metrics and our increased guidance. We are in a strong position, given our earnings and cash flow growth and we are benefiting from a high-quality portfolio and a solid balance sheet. We continue to believe our valuation is not fully appreciated and at these levels represents a great value. We are pleased with our results this year and our properties are performing very well. But there is also a timing element to our 2018 FFO.

When we first provided FFO guidance for 2018 of $1.41 to $1.46, we expected some down time after the sale of our Atlanta assets. Both Glenlake and Lindbergh are now in the market, but we started this process later in the year than we originally expected and it's now unlikely that we will close the sale of either property much before year-end. As a result, we expect to have down time in 2019 instead of 2018, resulting in higher FFO in 2018 and lower FFO in 2019.

The growth in our core portfolio should continue to be strong in 2019, with double-digit same store NOI growth for the second year in a row. And this will minimize the dilution and down time, but FFO should be a bit lower next year than this year. Timing of transactions will be important, but in rough terms we think next year's FFO will be in the same general range as we originally projected for 2018, assuming we sell both of our Atlanta properties as well as the Westinghouse campus in Pittsburgh. Of course, selling all three of these will leave us with investments only in high barrier markets and very high quality cash flows going forward. And as long as we are able to achieve good pricing, we believe it's the right thing to do for the business.

We are going to be patient reinvesting the proceeds. We will look for additional value-add opportunities and potentially some share buybacks, but we expect that all of our reinvestments will allow us to increase cash flow and FFO per share and we will have a strong balance sheet as we look for the right opportunities. I hope this gives you a general indication of what we are expecting, but more to come when we provide guidance on our next call.

Before we take your questions, Nelson would like to address a question that we have received a number of times recently from analysts and investors.

Nelson Mills

Thank you Jim. As many of you know, there were articles in the Wall Street Journal and Bloomberg last month that speculated we might have received an unsolicited offer to buy the company and that we are running a process to evaluate our options. I have three comments on this topic. First, we can't and won't comment specifically on these market rumors. Second, you should rest assured that our Board is focused on its fiduciary duty to provide the best result for our shareholders and our management team is on the same page. And third, all of us at Columbia are excited about our business plan and we are working hard to add to our track record and to create value for our shareholders.

With that, Jim and I will now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today will come from Sheila McGrath of Evercore. Please go ahead.

Sheila McGrath

Yes. Good evening. Nelson, I was wondering if you could give us a little bit more detail on the Madison Avenue WeWork, just the decision process? And also the press release says that the lease commenced in October. So are you starting to receive rent right away? Just a little more detail on how we should think about that?

Nelson Mills

Okay. Hi Sheila. Thank you. So as we mentioned, we acquired the property, acquired the land under the property back in last fall. The ground lease expired. So we took possession of the building back earlier this spring. And we have been evaluating options including multi-tenant spec leasing. WeWork approached us several months ago, had a keen interest in the property and we have continued negotiations with them throughout the summer and it became pretty compelling to us that that was the way to go for a few reasons.

First of all, the rate we achieved is equivalent of very high-$70, $70-ish, $80-ish, in that range. It's a modified gross or net rate, but when you count operating expenses that they will cover, that was the equivalent rate. So that was a great target rate for us. The downtime, the concessions, free rent and downtime to build the building was about the same or maybe even slightly less than it would have been have we gone the multi-tenant route. And we felt good about the terms overall.

The other big piece of it was, this was a 100-plus year old building that had not any significant improvements in years and it was going to require pretty substantial capital improvements as we need it when we bought it. When we weighed the cost of building that base building out to make it on marketable and lease-able, compared to what the terms under which WeWork was willing to accept it, they would take much of the cost on themselves, that also made it pretty compelling.

And then finally, I would say, credit enhancement was a key part of this deal. And as we have done with our many of our leases including our WeWork leases, we were able to obtain some attractive credit enhancements, both in terms of corporate parent guarantee as well as letter of credit. So in weighing all of that, we felt like it was a very compelling deal.

So as far as free rent, we got a construction period for several summer months and then we have another year of lease term on that. I think, Jim, the number is 23 months total from now, from commencement. I think that's right.

Jim Fleming

Yes.

Nelson Mills

Anyway, so it will be while before cash flow starts. And as far as GAAP earnings, that won't commence until the building is ready to be occupied.

Jim Fleming

Yes. Sheila, this is a normal lease. We have got controls over what they build. So we haven't just turned the space over entirely to them. They do have the base building work to do. And then they have got the tenant improvement work to do. But the way this will work, the clock's starting now and their lease will start at the end of that free rent period. So that overlaps obviously pretty much with all the construction period. We would have really that with our own construction as well as free rent, we would need to give them in a multi-tenant scenario. So we feel very good about that. The FFO contribution won't happen until we get to the end of that but just so you know, this is a development project for us, a re-development and so we will be capitalizing interest on all of our dollars up until that point. So there will be an FFO benefit just like there would be really at our average cost of consolidated corporate GAAP.

Sheila McGrath

And so from this point forward, do you have to put any capital in? And when it stabilize, what kind of return on costs should we think about?

Jim Fleming

Yes. Sheila, so we are contributing to the base building as well as the tenant improvements. And Nelson, I think it's a little over $200 a foot total?

Nelson Mills

Yes.

Jim Fleming

And it probably really didn't matter for the math, but a little bit over half that of that is base building and then the rest is tenant improvement dollars. And I think we will be at around a 6% yield on total dollars once this property commences paying rent.

Nelson Mills

Yes. The TI buildout was the same we had budgeted for multi-tenant spec. And the base building cost was substantially less than we had budgeted to build out for a couple reasons. WeWork does a lot, builds a lot of space, so they can do it for less cost and they can also build it to their requirements. We do have quality control rights, approval rights and our money does not get funded until it's been approved by us. So we have all those controls in place. So it's a good outcome. It's a great location for WeWork. It's a great outcome for us. We are very excited about it.

Sheila McGrath

And last one, do you control the grade level retail or do they?

Nelson Mills

We still control the retail. It's 6,600 feet. We are getting a lot of interest already from furniture stores and others. That stretch of Nomad is pretty nice retail. So we do expect to take care of that in short order.

Sheila McGrath

Okay. Great. Thank you.

Jim Fleming

Thanks Sheila.

Operator

Our next question will come from John Kim of BMO Capital Markets. Please go ahead.

John Kim

Thanks. I just wanted to ask you on the press articles. The Wall Street Journal and Bloomberg are very credible sources, yet your stock is down, I would say, about 10% since the article came out which is unusual. Is the message you are conveying that the articles are incorrect or have components that are incorrect?

Jim Fleming

Nelson will comment, but let me just, we can't really say much about this, John. As we said, I will say note that the articles, both indicated that they didn't think anything was likely. So who knows maybe that's having an effect.

Nelson Mills

Yes. That's right, John. That's all we can say about that.

John Kim

Can I just ask specifically if you have hired Morgan Stanley as an advisor?

Nelson Mills

Morgan Stanley has been our advisor on a number of fronts as has JPMorgan and others since we know launched the company years ago. So we are in regular contact with them on a number of things. But that's all, we really can't comment on the specific rumors. It wouldn't be in our shareholders' best interest to do so.

John Kim

On your use of proceeds from dispositions, you have been active acquiring in New York and D.C. How active are you looking in San Francisco? Your joint venture partner recently acquired the Ferry Building with another REIT. And I am wondering if you can pressed out of that market? Or you have been actively looking?

Nelson Mills

We have been very actively looking. All of our markets we have chosen are very competitive, as you know, but San Francisco is at top of the list in that regard. We have gone well into the bidding process on a number of properties in the last year. We did take a look at the Ferry Building and 201 California and 44 Montgomery and several others. But as always, we are being disciplined. Those are great properties. But we are being disciplined in our underwriting and being patient. So great properties. They didn't trade at the price we needed.

John Kim

Okay. And then just to follow-up on 149 Madison, I apologize if I missed this, but was there any profit share or like a variable rate component to the lease that you with WeWork?

Nelson Mills

No, not at all. There is no profit sharing, no sharing on resale, no venture, pretty standard lease with bumps, good market rate and as I said, it was a pretty straightforward deal.

John Kim

Do you know if they plan to use this for enterprise clients? Or is it for the traditional WeWork?

Nelson Mills

I believe that's the intent. They have got some time to market that figure that out but I believe enterprise tenants are their -- that corridor is, that whole Midtown South, in particular, but that corridor is having a lot of strong interest right now. The story today, Facebook signing up for leases just up the street at 63 Madison. Lot of good activity there. So I think that was the lot of the driver. We feel very good about the terms we negotiated with WeWork. I think they feel good about the location for all those reasons. So I think it's a good win-win for everybody.

John Kim

Great. Thank you.

Nelson Mills

Thank you.

Operator

The next question will come from Vikram Malhotra of Morgan Stanley. Please go ahead.

Vikram Malhotra

Thanks. Just to clarify the last question on 149, you mentioned the interest at grade. Can you just give us a sense of what are you baking in or what you are expecting for value of that grade, in terms of rental value?

Nelson Mills

For 149 Madison value creation, well, so as Jim mentioned, we are expecting to deliver a stabilized yield of about 6% on all-in cost on that project. And so the question there would be, what would that trade at? And there has been some speculation, some question about what would a full building we were to lease trade for? There have been some pretty compelling trades out there and we don't necessarily have an intent to sell it right away. But that's always an option. I think the credit enhancements that we have in place. We got 28 months worth rent in place. It's a credit enhancement and part of that is letter of credit. So we feel very good about that. We think that would mitigate any credit risk concerns that a buyer might have. So I guess what I am saying is, we feel very confident that the building would trade well inside the 6% cap. So there is definitely profit there. We well see, if and when, we sell it, what we can deliver there. But we feel good about the value creation.

Vikram Malhotra

Okay. And then just going back to your comments around whatever the article mentioned. I guess just stepping back, you have done a lot of things to change the portfolio. You have got something from the work. But just sort of from here on, if assuming the market doesn't recognize the value, what else are you contemplating? Can you do a bigger buyback? You obviously have proceeds? What else are you contemplating at this point?

Nelson Mills

Well, this is something that the Board is extremely focused on but that's nothing new. Our Board and our management team has been focused on this since the beginning. As we reposition the portfolio, we are doing what we think is compelling for public investors but all demand is good demand and the more attractive and desirable our portfolio is, the more options we will have regardless of the path we chose down the road. And we do realize that like our peers, our shares traded at a discount NAV, so therefore share buybacks will continue to be part of the picture. But we do feel good about what we are able to accomplish in terms of value creation at the portfolio level. As we mentioned, we are over 97% leased. That didn't just happen. A lot of the properties we bought, most of the properties we bought over the last several years had substantial lease expirations and rent rollover and we were able to not only get all that leased but we rolled it up. And so we are looking for opportunities to do more of the same. It's very difficult in our markets to find value-add acquisitions, but we dint stray. We have got a capable team to capitalize on those, if and when we do. So we will continue to stay and keep and keep an active pipeline. We will continue to look for opportunities and continue to grow value, cash flows and values from here. But share buybacks are part of it and we think the market will reward that. Certainly, we are doing everything we can to drive a higher performance, higher share price. But it's worth noting that on a relative basis, relative to the office set and gateway office set in particular, in both 2017 and 2018, we have been near the top of the pack, at or near the top of the pack in terms of relative performance. So we are not satisfied with that but it's worth noting that because we do think the market is gradually rewarding the strategy and we are going to continue to push that. All that said, the Board is determined and focused on doing whatever we need to do to create value, max value per shareholder. And so we are going to be mindful of all opportunities to achieve that end.

Vikram Malhotra

Okay. Great. Thanks.

Nelson Mills

Thank Vikram.

Operator

The next question will come from Julien Blouin of Goldman Sachs. Please go ahead.

Julien Blouin

Hi. Thanks for taking my question: So following the 149 Madison lease brings WeWork well into your top 10 tenants. I was wondering sort of longer term, how big could that exposure get? How comfortable are you with it? And yes, just updated views on how you view them as a tenant?

Nelson Mills

Hi Julien. Good question. So I think this brings us to, it is a substantial tenant, but it is still under 4% of the total. It's in three different buildings in three of our markets. And again, we mentioned the credit enhancement, which we think is an important element. In all three cases, we were able to achieve what we felt was pretty compelling credit enhancement. But that said, WeWork and co-working doesn't work everywhere and we are mindful of the overall exposure as well as, in some places, some are building that's a good fit, in other places it's not. And so we are thoughtful about where and when to plug them in. And I would say, they are somewhat reluctant at most of our properties. But yes, so far so good. We feel like it's a right fir for these properties and we feel like our shareholders are going to benefit from it. So I guess that just under 4% and we are not at all concerned about the overall from a risk standpoint at this point.

Julien Blouin

Awesome. Thank you.

Nelson Mills

Thank you.

Operator

[Operator Instructions]. Our next question will come from Michael Lewis of SunTrust. Please go ahead.

Michael Lewis

Great. Thank you. My first question is for Jim. In terms of the guidance increase for 2018, was that all really entirely taking those asset sales from Pittsburgh and Atlanta out of the equation? Or was there anything else in 3Q that surprised you? Or that expectations for 4Q that changed at all?

Jim Fleming

Hi Mike. Good question and really you need to go back to the beginning of the year to analyze that. And the answer is, a lot of the increase from the beginning of the year, that $1.41 to $1.46 to where we are now, a lot of that is transaction timing. Our assumption at the beginning of the year or really are model at the beginning of the year assumed that we would sell the Atlanta assets this year. We didn't really think we would sell the Pittsburgh asset this year but the Atlanta assets we would sell and that there would be some downtime from that. And we didn't really narrow the guidance range until now.

We kept the $0.06 range because we just didn't know about the transaction timing and now that that's become clear, we now know a lot more than we did to begin with. So that's moved us up, I would say, most of the way, most of what you see. But we have had some things throughout the year. We have gotten about 97% leased and we think we will wind up in that general range. We have had some tax abatements. We have had some various other things that have happened, generally all positive.

And so I haven't broken it down to know exactly how many cents is one and how many cents is the other, but they are both contributing. So the portfolio is doing very well but everybody should keep in mind that there is timing and we think that when we will sell these assets, we are going to sell them because it's the right thing to do. We are not going to be rushed to go to reinvest the money. We may do some share buybacks, but we won't be rushed in terms of trying to find other assets to buy. So we are expecting some downtime now in 2019 where we original expected in 2018.

Michael Lewis

Okay. Great. And then in terms of property sales, is there anything else, what do you think of the possibility that you will put something else on the market in 2019, whether it's Jersey City or West LA or maybe even 149 Madison? And then have you made a decision, whether you want to grow or exit Boston?

Nelson Mills

Yes. So Michael, I would say it's unlikely. There is nothing in the plans right now to exit any of the properties you mentioned. Aside from Atlanta and Pittsburgh, it will depend on the overall picture of uses for the capital and so forth. There is no urgency to exit those others. We have still got a bit of work to do on renewing the Jersey City lease which we are hopeful of. It's just unlikely, I would say.

Michael Lewis

Okay.

Nelson Mills

Yes.

Michael Lewis

And then my last question. You are one of the few office companies, I think, that doesn't have internal leasing costs that need to be expensed under the new accounting rules. So I want to ask you about that. But I was wondering, maybe it's too early to ask about this, but have you heard of any tenants that might consider shorter lease terms because they don't want to put a lease asset and liability on their balance sheet? Or is that not something that's come up?

Nelson Mills

Michael, two good questions and I won't pass it over, even though you didn't ask it, I won't pass over the softball question which is that we really have not been capitalizing any significant internal leasing cost. So that's not going to be a burden on us in terms of reduction to FFO next year. Really for us, what this mean and we will still be able to capitalize brokerage commissions, all we will have to do is not capitalize legal fees. And that's not a very big number for us. So this change in the rules is really not going to have much effect on us as we go into 2019 that we think. I can't speak for other companies but it will have more of an effect on others.

Okay, now to the question you actually did ask. This may be having an effect because as you know users of office or users of any real estate space are going to have to put the lease obligation on their balance sheet as a liability and then they will have a corresponding asset on the balance sheet that's kind of messy. I don't know that it's really affecting their debt covenants. But it's just a little bit messier. So I guess it might be the case that some users are looking at shorter term leases rather than having a big liability on their balance sheet. But we really haven't seen it. I would say, we haven't really seen any reduction, any desire by any tenants to reduce lease term as a result of that. So it's just not showing up for us at least yet.

Michael Lewis

Got it. All right. Thanks a lot guys.

Nelson Mills

Thank you Michael.

Jim Fleming

Thanks Michael.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back ever to Nelson Mills for any closing remarks.

A -Nelson Mills

Well, thank you all for joining us today and especially for the questions today, great questions. We look forward to seeing you next month, several of you next month for our property tour in San Francisco in advance of the NAREIT meeting and/or elsewhere around the quarter. But otherwise, we look forward to updating you on our progress later in the year and report the guidance for next year in the next quarter. So thanks again for your time and I will talk to you soon.

Operator

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