Q1 2020 Earnings Call
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First let me help you.
Good morning, I would like to drill for equity Commonwealth earnings call.
Oh, yes, just once it.
What what conference.
Equity common vote.
But yes.
Earnings call first.
Yes.
[laughter] <unk> going to get your first unless they please.
Firstly David.
Last name Brown.
And your company.
IRA.
Hi, genuine thank you.
Thank you at this time will be conducting a question and answer session. If you'd like to ask the questions. Please press star one on your telephone keypad.
Confirmation told when do you get your line is in the question Q. You May proceed start to feel like to remove your question from the Q1 moment. Please why we poll for questions.
Our first question comes from Emmanuel Korchman with Citi. Please proceed with your question.
Hey, good morning, everyone.
David Thanks for the cognizant of intro I guess.
There have been others out there that have spoken about sort of more of a dislocation in the public equity markets and in the private oh or direct real estate markets.
Are you seeing the same how are you sort of viewing opportunity set right now, especially if there's.
A pause or what are you telling your team to focus on are due.
To define that next.
<unk> value acquisition. Thanks.
Yeah. Thanks, Manny good morning.
I think it's our general view that we're early in this we're sort of six weeks in and it's still unfolding at its still very difficult to predict what direction, it's going to go.
That being said, obviously, our investment team is monitoring both public.
Market activity and what's going on with the with the rights as well as private and you know we have.
Overtime ceded relationships and had discussions and and as things calm down we'll revisit those and begin to think about what the opportunities that really is what is actionable, but I think our general view is that it's early that we're still in the midst of something that it's hard to predict and it.
Probably is a month's if not quarters before a real actionable opportunities.
Our available now if that changes in something comes our way we'll be prepared for that.
And I guess other questions just we've seen a stresses on the run collection side and some of those will likely be temporary but others we permanent.
Does that change as approach that that's sellers might have a getting out of assets that they thought were more bombarded can now are proving yeah. Its have some headaches involved.
David you want to take that.
Well I think a many that's a good question and.
In this environment or hopefully as Sam is kind of advised us.
Everyone, including owners of real estate are reviewing and challenging all other assumptions. So if they thought they had a bond like investment a passive investment and that's no longer the case.
Then it may cause them to sell that S. It sooner or perhaps sell that when they never intended to do so because of what's happening to that.
Hi, Chris.
Our next as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad. One moment. Please why we poll for questions.
Our next question comes from Jamie Feldman with Bank of America. Please proceed with your question.
Jamie your life with our speaker if your muted please limit yourself.
Hi, This is all this entre Jamie.
I'm glad to hear your all well.
Can you talk a little bit about today's dislocation or potential dislocation versus the great financial crises and you know just building on to what man. He said are there any asset classes in particular that you feel today will be at play that weren't I play last cycle.
Well, that's really difficult to make a comparison given how early we are in this.
Obviously, everyone live through the great financial crisis. It it was a.
It was a pretty traumatic event and people were unprepared I think I could make some general comments, which is for the most part a there was less leverage in the system as we entered into a this the fundamentals in a number of businesses were decent as strong a with the exception of a couple of businesses obviously retail.
To compare the two I would have to ever better understanding of what this one is gonna look like and frankly, we don't have that view I think David alluded to it we've been a spending time with Sam trying to see things through his.
I can understand and he's told US this is sort of new territory.
We got to be a thoughtful and careful in evaluate everything as David said with a fresh set of eyes through the lens of what's going on and that's going to change.
Got to realize that how this is going to break a you know how is the reopening it appears to be beginning a gun to play out it or people going to need to go back inside or is there going to be a a sort of moderate reopening that leads to a greater reopening.
Stick, but we also a practical and this is that's essentially science based in them and a public health issue. So it's hard to predict that outcome and therefore hard to compare to the GFC.
And then would you say that it a year out you don't find any opportunity what happens to equity Commonwealth that yeah, I think it's premature to speculate about that.
Okay, and then maybe one last one for Adam Adam are you able to share what that special dividend will look like at the end the year or you have any sort of.
Sort of ER.
Number in line.
Well I can I can reiterate a bit of what that David mentioned that maybe provide a little additional detail that I hope. It's helpful. As you may recall, we started the year with federal net operating loss carry forward of approximately $25 million.
Oh I'm as we've previously disclosed we believe that all of our remaining assets will generate taxable gains if they're sold.
David mentioned that the game from one of the nine Brookline, there's about a 223 million on tower 333 added an additional 196 million <unk>, the total of which David mentioned in his prepared remarks.
George town, which is in the market for sale and and scheduled to close in June. It does close well also generated gain but that gain will be something like one can the size of the gains generated by each of the other assets.
And then of course will also generate taxable income in the normal course of operating a business. So yeah. I think those are though the components, but the size and timing of that teacher distribution well also be dependent on our earnings from operations and.
Ultimately will be the decision that was our board of trustees.
Thank you that's all for me.
Our next question comes from John Guinee with Stifel. Please proceed with your question.
Great.
Thanks for the update guys and gals.
Two questions one is.
What's the earliest you could pay that special and what's the laid it pay that special.
And then how big is the team now as you go into sort of a a long term carried out suspension.
Well Oh, let me take that it had a meal correct me the earliest we could pay would be.
When we know the size of the gain.
And the latest I believe is a the end of January.
Next year.
And then I I I'm blanking on your characterization, but we're not going into any kind of pause or hiatus were.
Busy at work our team has done an outstanding job sort of refocusing and working to support our tenants coming back to work and then on the investment side. Our team is busy monitoring everything trying to look for information reestablish lines of communication checking on relationships understand.
Markets and win transaction activity, whether it be leasing or or sale activity happens to understand it. So oh, we're busy we're focused and.
Oh, we're gonna be patient in terms of deploying the capital until we find something that we think is compelling.
Great. Thank you.
Our next question is from Emmanuel Korchman with Citi. Please proceed with your question.
Yeah, Michael Bilerman, a good morning, and so I was wondering if you can share a little bit more about the land that salmon is looking at in terms of investment and how that influences youre sort of decision, making process and you have been extraordinarily a patient.
During what was the run off.
In terms of you didn't really like where pricing wasn't the market you didn't find those compelling opportunities and I think you were concerned about sort of the overall economic environment. Clearly this event, which is driven by science not.
Actual real excesses has now provided someone in your capacity that has over $3 billion, a cash to potentially find something compelling and so maybe you can share with us a little bit about how Sam and how you guys are thinking about the war.
Old and what has changed from either a property sector perspective, a geographical perspective in terms of where you may go now that this would happen.
[noise], David you want to take that.
Sure I'll I'll start then it can kinda supplement Oh my response.
I'm not so sure we have or Sam has a clear lens.
In fact, if anything what he's done is repeatedly cautioned us that this is unprecedented.
And anything we thought going into this everything we see in the past we need to challenge revisit debate discuss.
And look at everything fresh so that's what we've been doing.
We've been actively engage we're looking at a variety of opportunities we can't predict Sam would say what the market will give us.
He's pretty certain it will take some time to find the right opportunities. So all we really can do is positioned ourselves.
ER and prepare for that moment, when the opportunity avails itself and in the meantime be patient and disciplined.
No road map other than the one that got us to this spot.
Happens next is really to be determined and he has told us not to assume any sectors, our quote unquote redlined.
Just keep looking at everything absorbing as much information as you can and just be ready one that moment comps.
So when you say nothing's Red line I remember.
It feels like last year made during the year before and I asked you about retail wouldn't retail a couple of years ago is starting to go through that initial strep a stress.
I mean is retail now off of the no less I think David I remember you're responsible I think I gave a really long intro and I think your response was no [laughter].
So is it like a it lower case no. It does [laughter]. It's a it's a it's almost probably not <unk> no to answer your question, Michael I think it's more philosophy and it's in keeping with what David just a responded to previous question, which is well there are significant challenges in read.
Tell in particular in malls.
And those aren't lost on Sam we used to own a very large portfolio with of malls. When I first started with Sam back in the.
I hate to say at the late eighties, or it's a tough business, but given the dislocation that is likely to result from from what's going on given the unpredictability. There's just no reason to write anything off right now there's no percentage in it because we are about taking a thoughtful.
Risk.
In exchange for for attractive return and so we've had conversations with many of you on the call and you've asked well what returns to your target and I think we given unsatisfying answer which is it really depends on the risk that we are.
Taking to earn the return in the same is true with the sectors. A retail is not our first choice maybe even our last choice, but theres no reason to to a red lion it or two countered out when things are is uncertain as they are right now.
You can just bring concerts back and you can bring the whole band back together and Oh My God, Yes that is that's a that's on the list Michael.
Do you think about yeah, because the scope of what you can do with this cash is pretty wide whether its assets companies.
Debt oriented securities equity security or where are you spending the most timing what is the highest level I mean do you know because a lot of people may need lending do you view that as a short term in this period of time to provide six to 12 month loans to you know or a network.
Turn in park your cash or is it much more on the just direct asset side, where where is the primary focus today, yeah. Adam do you want to take that.
Yeah, you salmon in conversations with him has has made the distinction between being a trader and being an investor.
And he has had us.
Focus away from making trades and towards making investments that doesn't mean that we won't do.
Something what their debt security, but generally the focus is gonna be on creating a platform to grow a business and and and as I mentioned that that initial investment may come through a liability side of the balance sheet, but to focus will be on on something that week.
Can grow into in all likelihood that that will become a real business in a real platform for our team and for this company.
Is it possible that it I'm not real estate and something operational right because there's a lot of corporates that are struggling.
You know is it possible that you know a equity Commonwealth becomes yeah, you'd be read and become the C Corp, and Ah you invest capital and operating business that may have real estate characteristics, but it's just something very different.
Well I guess.
Maybe let me try and answer that two ways.
It will almost certainly be real estate, we have been looking and trying to find opportunities given the challenges we had when the market was as styled as it was to find other businesses that that might not look traditional but then when you look through them have the characteristics fundamentals.
That that are attractive in can be long term businesses. The a example, I'd give is a 1983 Sam bought a what is now equity lifestyle.
And 93, we took a public and no one understood. It no wonder understood the fundamentals of the business, but but Sam did and any new that if we built the long term took a long term focus and built the business the public markets would understand it we'd be open to that finding the right asset class something asset intensive operationally intensive what should we think is an edge.
We have but it will almost certainly have real estate hard asset as its core and it will almost certainly be real estate I would never say never but all of our focus has been on real estate businesses of one sort of another since we started this adventure.
And then just lastly in terms of buying securities because I do think sort of from an M&A perspective.
You've always been viewed as potential M&A candidate of being able to recapitalize an existing real estate company. What you know generally company was public and then also coming in from a management perspective. So are you being an activist at all in terms of taking fulcrum positions up to a 5% limit.
Or more in trying to ferret out these opportunity even planting some seeds to have conversations you've seen that or at least on the hotel C Corp space, a number of bigger private equity players have taken positions and some of the public companies shows that.
Area that is a focus or or not.
It's not a focus and I think it's highly unlikely what we do is is activist.
Well the trailer trash or investment turned out to be pretty good right now that one worked out.
All right. Thanks, guys. Appreciate it thank you Michael.
We have reached the end of the question and answer session. At this time I like to turn the call over to David Helfand for closing comments.
Yes. Thank you all for joining us today.
I just want to recognize the QC team for their focus during these trying times.
To our stake holders were all in this together and we will get through it together and as I tell the team.
Each time, we have a update call on a Microsoft team stay healthy and stay hydrated take care everybody. Thank you be well.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.