Select Income REIT (NYSE:SIR) Q2 2018 Earnings Conference Call - Final Transcript

Jul 31, 2018 • 10:00 am ET

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Select Income REIT (NYSE:SIR) Q2 2018 Earnings Conference Call - Final Transcript

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Presentation
Operator
Operator

Good morning, and welcome to Select Income REIT's Second Quarter 2018 Financial Results Conference Call. Please note, this event is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Olivia Snyder, Manager of IR.

Executive
Olivia Snyder

Thank you, and good morning, everyone. Thanks for joining us today.

With me on the call are President and CEO, David Blackman; and CFO and Treasurer, John Popeo.

In just a moment, they will provide details about our business and our performance for the second quarter of 2018. We will then open the call for your questions.

(Forward-Looking Cautionary Statements)

And now I will turn the call over to David.

Executive
David Blackman

Thank you, Olivia, and good morning. During the second quarter of 2018, Select Income REIT had minimal leasing activity, renewing only one tenant in Topeka, Kansas for a 14.9% rollup in rent, a lease term of 5.7 years and a leasing capital commitment of $0.18 per square foot per lease year.

While we continue to stay abreast of the acquisition market, we do not expect to complete any acquisitions for the remainder of 2018. Instead, we are focused on managing through vacant space either with aggressive leasing campaigns or potential dispositions.

For example, we have an agreement to sell a 418,000 square foot vacant land parcel in Hawaii for $10.3 million and are actively negotiating a lease for another 417,000 square foot vacant land parcel in Hawaii. These two land parcels represent approximately 40% of SIR's vacant space at quarter-end.

We also have three buildings SIR is considering for disposition. If these buildings are sold and Hawaii transactions are completed, a material percentage of SIR's current vacant space could be eliminated by year-end 2018.

Unfortunately, the headline for SIR's 2018 second quarter is a tenant default and a write-off of $10.6 million in noncash straight-line rent. This is related to a tenant in Naperville, Illinois that leases a Class A plus 820,000 square-foot office building. During the past month or so, we have been negotiating a restructure of the lease while the company has been marketing its business for sale.

Under the terms of the restructure, 468,000 square feet of subtenants will become direct tenants to SIR. The defaulted tenant will lease approximately 147,000 square feet for 2.5 years and SIR will take over leasing and management of the property. The tenant will also pay to SIR all delinquent rents.

The primary condition precedent to the restructure becoming effective is the closing of the sale of the tenant's business, which the tenant announced on July 23, along with closing expectations of the 2018 third quarter. The net financial impact to SIR from this lease restructure is estimated to be a reduction of approximately $4.6 million in annual NOI or an impact of about $0.05 per share.

However, we will have an opportunity to lessen that financial impact by leasing approximately 200,000 square feet of new vacant space in the building. Our expectation is to stabilize leasing this