Q2 2020 Equity Commonwealth Earnings Call

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Greetings and welcome to equity Commonwealth Second quarter 2020 earnings Conference call.

That's fine all participants already listen only mode. A question answer session will follow the former presentation.

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Like the tend to called which we hope to de Silva Byrnes, Vice President Investor Relations. Thank you you may begin.

Thank you with hernia good morning, and thank you for joining us could discuss the equity Commonwealth result for the quarter ending June Thirtyth 2020 on the call today, or David Helfand, President and CEO, David Weinberg, CLL and Adam Markman Fiasco.

Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of federal Securities laws. We refer you to the section titled forward looking statements in yesterday's press release.

Well, it's to the section entitled Risk factors in our most recent annual report on form 10-K and in our most recent quarterly report on form 10-Q for a discussion of factors that could cause actual results to materially differ from any forward looking statements, including any statements regarding the overall impact of Cobot night.

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The company assumes no obligation to update or supplement any forward looking statements made today. We also post information on our website at <unk> Dot com, including information that may be material. Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental containing our second quarter.

2020 result for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

That I will turn the call over to David healthy.

Thanks, Eric Good morning, we appreciate you joining us today.

Beginning with brief comments on market conditions.

We do our second quarter results and provide an update on the company's current activities.

We continue to address the impact the virus is having on our business and our tenants businesses.

Cross functional team focused on ensuring open lines of communication with our tenants.

Our buildings are open well many tenants continue to be tentative about the returns we've implemented cautionary measures when they are ready to come back.

Office market activity was slow in the second quarter.

Leasing and sales volumes.

Reflected what market that is largely frozen as owners and lenders try to understand market dynamics going forward.

Delivery of new supply and an increase in sublease space, well likely push vacancy higher over the coming quarters.

Turning to make you see.

For property portfolio totaling 1.5 million square feet was 90.1% leased at the end of the second quarter.

Down 70 basis points in the prior quarter.

The second quarter, we collected 99% of contractual rents, including 5% for the application security deposits and letters of credit.

In July we collected 97% of contractual rents, including 4% security deposits letters of credit.

Same property cash NOI was up 1.5% compared to the second quarter last year.

She brought the N.Y. decreased 24% $2.7 million.

Largely due to lease termination fees received in 2019.

To a lesser degree lower parking revenue.

Funds from operation during the quarter were significantly impacted.

But the decline in interest rates ever cash balances, reducing ethical by 13 cents per share.

During the quarter, we completed the sale with Green Harris buildings in Georgetown Reighty $5 million.

Property was held for sale the ended the quarter pricing was in the low 7% cap rate range.

Gross proceeds from dispositions year to date $757 million generated taxable gains of approximately $445 million.

And will likely result, the payment of another special dividend this year.

We do not have any properties in the market for sale at this time.

In July we repaid at par.

Outstanding $25.1 million, 5.7% mortgage loans and capital tower in downtown Austin.

Following this repayment we have no debt at $123 million convertible preferred.

Our balance sheet is strong the $3.4 billion.

For more than 27 50 per share.

These have been trying times and our teams response has been impressive I want to acknowledge the efforts of the CBR. He onsite personnel and do you see team for your continued focus commitment and collaboration as we navigate these challenges together.

We don't know how this crisis will play out, but it's bound outperform consequences.

This dynamic in uncertain times, we'll continue to be patient and worked diligently pursuing new opportunities across sectors.

Looking forward, we believe the strength of our team our culture in our balance sheet will be competitive advantages.

And with that we'll open the call to your question.

Thank you.

At this time, we will conduct a question answer session.

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One moment, while we pull my first question.

Our first question comes from James Feldman with Bank of America. Please proceed with your question.

Good morning, guys. This is all this on for Jamie.

David just a quick question are you thinking about you know has anything changed over the last three months. It makes you think about you know go forward investments differently or.

Makes you put up you know even harder paused and then what you pattern and it's called in recent months.

I think all this no I don't think anything has has changed the approach that we're taking to evaluating opportunity I think we mentioned on the previous called it.

Given the.

Profound effect.

The virus that we were gonna take a step back and try and we think all these assumptions we've made in the past not take a previous judgment for granted it sort of take a fresh approach to everything keep up brought out mature and investing in all sorts of opportunity that hasn't changed obviously.

It's been it's been up and down its as people have open back up cities of open back up and then paused and re bought a we're learning more about.

The effects on the economy it sucks unemployment.

Behavior.

But I wouldn't say, it's changed our approach to the investment process.

So would you say you're closer to make an investment today or you know eat nowhere near.

But then when.

Then you know going and then when we spoke last quarter.

I think our general.

View is that it's early in.

In terms of the effects being felt at the consequences of the virus being sort of the filter through the investment opportunities and and.

It's hard to say, whether we're closer or further but I think we continue to believe it will take time in patients to find the right opportunity.

Okay, and then maybe just shifting over to conversations with tenants.

Have you had any discussions of call. It the office of the future and perhaps what that looks like relative to what we've done that traditional office layouts and office spaces.

You can share there would be really helpful.

David you want to take that yeah. So I don't think most tenants right now we're thinking about the office of the future, they're thinking about what to do with their employees today and in the near term.

And being very cautious in terms of bringing people back.

I can give you a couple of real time examples we've had one tenant who recently completed its build out.

Very happy with it but now rethinking weather or perhaps it's a little too dense and how are they going to work in that environment going forward.

When we have a retail tenant who is now rethinking comedy self serve coffee bar and some of those are areas and what they're gonna do and how they're going to operate going forward.

But across the board, we haven't really heard anything from our tenants at this point.

Great. Thank Scott.

Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from Manny Korchman with Citi. Please proceed with your question.

Hey, good morning, everyone.

David maybe you could comment on.

Sort of what's going on in the public markets and evaluations for implied there versus any shifts or potential shifts that you're seeing in the private markets.

And how that impacts both your underwriting and your point earlier that you're gonna be visit the way that you've looked at everything.

Sure. Thanks Manny.

Good morning.

It's really I think you asking interesting question and we are obviously monitoring public companies understanding the trading values and in particular you know there is you will know there, perhaps you'd have nots across sectors, certainly the data centers and cell towers.

Industrial that's up our residential I have said that there's a number of others that are been hit pretty hard whether that markets got it right or not that's a judgment you know people make for themselves with respect to the office side values have been hit pretty hard and it's hard to.

Reconciled and whether the markets right.

Because there's so little transaction activity in the private market.

There have been some deals that have gotten done, but we got one deal done a number of the deals. We've got done work started pretty cold bid.

So I think it's just hard to see any read through from the private market as the indicator of what where things are going to settle I think we're waiting to see both you know.

Lease transactions as well as sale transactions.

And as it relates to the public market I mean, I, you know better than me, whether things are cheap or not but certainly.

It appears.

Lots if you look at some of the office companies that meet.

Price per pound implied by the equity crisis is up a pretty compelling number. The question is how much of the company can you buy it those kind of pricing.

And then in terms of are you guys not having anything in the market right now I guess your sales program was sort of slowing pretty cold period, then called it had no you don't have anything on the market is that because you're waiting for sort of price discovery you just don't feel it's the right onto the.

No.

Things are just too volatile.

On the metal perspective somebody else.

Well those are all factors are but mostly it has been our intention just sort of hit pause with these four assets. We like the assets are in markets that are traditionally like with their good institutional assets, we felt comfortable owning them.

Oh. So the reason you mentioned are all or part of the consideration, but really it was our intention to hold with this portfolio until we determine.

How we were going to go forward, whether we're going to remain in the office building business. If not then we would continue to sell those office transition to another business to the extent we stay in the office business, we would make a determination whether we want all these assets long term, but they're all high quality assets, we are comfortable already.

And I think Michael has one free goods as well.

Hey, David It's Michael Bilerman shoot just going back to many question about public versus private and you talking little bit about.

Office stocks trading wide.

I guess have you or are you interested in sort of making taking some conditions either Q just aren't from income more than you're getting a given how low interest rates are up but also potential to have conversations I guess or would you deploy a certain amount of capital.

Perhaps up to a 5% limit from a disclosure perspective.

To start.

Having those conversations either from an M&A perspective or for just a value perspective.

Yeah. Thanks, a question.

Michael.

We so that's taken in two parts first just a pure investment side obviously.

The yield on our cash has come down substantially we have from the beginning taking a very conservative approach to managing that cash we are discussing with our board and internally as we monitor or not just office companies, but other companies, whether we might want to consider investing a small portion.

Our cash if the values were such that we really felt they were compelling and we could or.

Attractive risk adjusted returns in it in any interim.

As it relates to sort of a strategic investment I don't think we really subscribe to that idea too much. It's we have no intention of doing anything other than.

On a negotiated friendly basis. So we can always start conversations without owning stock in a potential.

Company that we might have interest in so probably less of the ladder and maybe a little bit of consideration at the board level with the investment team.

On the form.

And can you talk a little bit about I guess have you been approached by others, who are seeking let's say office expertise, where you can not only bring capital for transaction.

Obviously, a fully loaded management team that knows I think are to about a real estate I guess are you getting the inquiries from financial players that are looking at the public markets in saying that I can get that stock and if were able to take that portfolio over I'm a buyer I just need a a management team to help me get there.

Is it any that happening at all.

Yeah, we've got a little bit of inbound inquiry in terms of and if things get really sloppy if things get really tough.

People expressing interest in partnering with do you see to to provide capital for transactions. We've had a few of those discussions I think art, we always want to be responsive and we always want to be engaged with capital.

We have our own capital we want to deploy it we don't want to start partnering and have they get the way, but if a partnership can lead to something that we can achieve on her own a I think we that relations we built relationships in the past and the execution over the past couple of years has brought some some pretty interesting.

Institutional interest in could we partner with you to do you know some type of a fix up something broken and we continue to have those discussions.

And it definitely sounds as though the house view from an office perspective is less worse than a market is making it out to be taking it from a fans common turning some of the comment you made on the call, but it feels like you are little bit more optimistic than the general sense.

What's going to happen to office relative to say something like retail.

Well I think two to just say what you said slightly different me Michael If you believe there's a future for office you're relatively bullish these days right.

Well.

Hi, I used to Bob I Kinda find out what your view is right. There's certainly a lot of people that I believe the opposite the dead right people believed that the office is going to go the way of bricks and mortar retail and it it sounds as though that.

Yeah, that's an equity house view that retail not a place that Sam wants to deploy money even at depressed.

Valuations, whereas office the view, maybe a little bit different than what consensus.

Oh, that's that's probably fair with respect to retail, but that's the Sam has expressed in we've expressed that does almost certainly not what will be doing we'd ever want to see never but let up with respect to office I was just teasing there's a lot of weary negative sentiment and we share the view that there will be.

Difficult times ahead for the office building business as we as we deal with.

Oh via the and finally therapeutics finding vaccine that can be effective, but we would be in the capital believing that there is a future for the business that that people don't want to.

Live where they work, which is the situation today that people want to engage with others that they collaboration is a productive and desirable and we you know with it for with with the right. So tolerance for risk to the right underwriting we'd be willing to make that that long term.

Okay I appreciate the color in time.

Thanks, Michael.

Thank you, ladies and gentlemen at the time I'd like to turn call back over to Mr., David Helfand for closing comments.

Well, we appreciate your interest then we hope that you're safe and sound and we look forward to talking to you again soon thank you for your time.

Thank you. This concludes today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and every day.

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