Q4 2020 Equity Commonwealth Earnings Call
Greetings and welcome to equity Commonwealth fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
Cash and to answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to turn the conference over to your host Sarah Byrnes Senior Vice President of Investor Relations. Thank you you may begin.
Thank you Brad good morning, and thank you for joining us to discuss equity Commonwealth's results for the quarter and year ending December 31, 2020 on the call today are David Helfand, President and CEO, David Weinberg C O L and Adam Markman CFO. Please be advised that certain matters discussed during this conference call.
Paul 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 as well as the section titled Risk factors in our annual report on form 10-K 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.
19.
The company assumes no obligation to update or supplement any forward looking statements made today.
We also post important information on our website at EQ CRE dot com, including information that may be material today.
Today's remarks also include certain non-GAAP financial measures.
Please refer to yesterday's press release and supplemental.
Painting a result.
For a reconciliation of these non-GAAP measures to our GAAP financial results with that I will turn the call over to David Helfand.
Thanks Sarah.
Senior Vice President that has a nice ring to it and we congratulate you share on your well deserved promotion.
Good morning, everyone. Appreciate you joining us.
I'll begin with brief comments on market conditions and provide an update on the company's current activities.
Story of 2020 was of course, the pandemic and its impact on everyone and everything well.
That's genes get hope for better days ahead.
Consequences from the economy are still uncertain.
The stock market has attracted a lot of attention of late.
And then it's low last March the S&P was down 31% versus the start of the year.
Since that time, the market has rallied 75% driven by expansion of the fed's balance sheet.
This school policy.
Despite these market gains there was real stress across the country, particularly amongst lower wage workers, who were born a disproportionate share of job losses.
In some ways the real estate industry mirrors, this dubai with the hedge data infrastructure industrial and life Sciences, among others significantly outperforming out of favor sectors, including retail lodging and office.
For 2020, the Morgan Stanley read Index declined seven 6%.
Worst performance since 2008.
Did he do you see the portfolio down to four assets, we are focused on evaluating opportunities to deploy our capital.
As we've discussed it.
Many of you were targeting a variety of asset classes, particularly but not exclusively those that have been hit hard by investor sentiment relating to post COVID-19 demand expectations.
We've been consistent in our investment approach targeting portfolios platforms and companies rather than individual assets.
Given the Optionality, we've earned through the successful execution.
From our seven $6 billion of dispositions.
We believe it's prudent to focus on transactions that will help define our future.
Rather than one off deals that create friction if we were to church chairman later.
Net selling our remaining assets and returning capital to our shareholders is the right path.
In the past we've avoided discussing even in general terms the types of transactions we've been reviewing.
Given the importance of potential new investments to EUR story.
Since now try and share more about our approach to capital allocation.
As we work to evaluate opportunities, we're mindful of the equity group formula be patient disciplined and rigorous about risk management.
First question, we asked about every deal and the last is are we being paid for the risk we're taking.
Moreover, we tried to be contrarian in our thinking is growing with her generally doesn't yield superior results.
That has led us to evaluate out of favor sectors.
Such as lodging retail and office as I mentioned before.
We prefer operationally intensive challenges in complex situations all other things equal as we believe our experience and demonstrated execution capability gives us an edge in those types of transactions.
In addition to looking for the right platform and the REIT asset class, we're looking to identify other levers for value creation beyond asset management and operational enhancements.
In the case of the original Commonwealth transaction, we underwrote not just a collection of assets trading at a discount.
But also a unique tax position that has allowed us to sell assets and routine capital to pursue new opportunities.
As we go about the day to day process from underwriting deals you should know that we have an outstanding investments team with experience across a wide range of real estate sectors diligently looking for the right opportunity.
We work collaboratively and strive to bring to bear everyone's perspective, and experience to better bet opportunities and assess risk.
As we sit today, we have 28 employees down from almost 75 years ago.
We have endeavored to reduce costs as appropriate across the company without impairing our ability to effectively pursue our investments.
Despite not being available.
Despite not being together for the past year low.
<unk> team has risen to the challenge.
Work from home.
We continue to work collaboratively to identify the right opportunity to create long term value.
With that I'll turn the call over to David.
Thank you David and good morning, everyone.
As David discussed we are spending a considerable amount of time sourcing and underwriting investments.
While we have yet to find a day a deal we remain persistent.
This is an extremely competitive environment or the demand for real estate investments exceeds supply.
On the demand side, there was a global search for yield.
Some estimates there was a record amount of dry powder around $300 billion of equity looking for real estate.
Interest rates are near historical lows and attractive financing is available for better assets and businesses.
Other words, while our $3 billion of cash is a competitive advantage in today's world. It does not guarantee success.
With respect to supply in 'twenty 'twenty deal volumes were down 35 per cent across the board just $60 billion of office traded hands compared to the $100 billion to $110 billion of deals each of the prior four years, while industrial volumes were flat apartment sales were down 27.
Per cent retail volumes were down 60 per cent and hospitality was down 70 per cent.
Risk off deals, which check all the boxes are getting done.
<unk> is a little for buyers and sellers to disagree on pricing is easier.
The same however cannot be said for deals with the risk.
Up in repositioning are difficult to underwrite when there was limited leasing activity and demand is challenging to forecast with buyers cautiously looking forward and sellers optimistically looking backward pricing gaps are large and rarely overcome.
In most cases, there is no catalyst, forcing an owner to sell.
Where there is distress such as in hospitality and retail there are some one off trades, but fewer larger deals for the most part owners and lenders have been working together and there is yet to be a day of reckoning.
And the stronger growth sectors, such as single family residential and industrial day.
<unk> continues to be robust and pricing has held from might even be higher today.
Against this backdrop, we continue to focus on two themes. We believe one group of investments such as retail hospitality and office is susceptible to price and resets Keith.
Keep in mind, we are not limiting ourselves to substantially distressed investments where assets may trade for pennies on the dollar instead, we are hopeful that we will find ways to access these deals where we are getting paid for the risk that we're taking.
We do not need perfect visibility into the future. We believe a deal of this type can make sense with the right basis and story the.
The other group of investments such as single family residential life Sciences, and industrial are appealing due to their growth profiles. While these deals are unlikely to display elements of distress. We continue to seek them out we believe the right deal which includes a story in the appropriate scale can generate attractive.
The risk adjusted returns.
In all cases, we are open to and have explored a variety of means of execution.
We have looked at buying portfolios businesses and entities, including whole impartial purchases.
We have proposed a variety of structures with a different operators, including folding them into your QC, we're providing them growth capital with a path to an EQT owned business.
We have examined rescue and recapitalization opportunities, including different structures and investing in different parts of the capital stack.
We have explored the use of our balance sheet stock and O P units to solve problems, such as leverage investor liquidity or tax issues.
We've approached larger private real estate businesses with the concept of them utilizing E QC entity to access the public markets.
To date, we have looked at a variety of opportunities. Many times, we have chosen to pass sometimes the other side he liked it to not transact.
Access to alternative capital.
Nonetheless, we remain hopeful and continue to devote our time and resources to finding that first deal.
With that I will turn it over to Adam to give an update on our financial results.
Thank you David I'll briefly cover financial and operating results for the quarter and year end.
Detailed F F O N F F O N N O Y walks or in the press release, I won't reiterate that information, but rather will highlight a few key points, which emphasize the unique position that we've created by.
By monetizing the undervalued portfolio that we took control of over six years ago.
Following $7.6 billion of dispositions the largest asset on our balance sheet as cash and the most important factor that contributed to the decrease in earnings in 2020 was lower interest income earned on our cash deposits.
In 2019, we had an average cash balance of $3 billion, earning two quite four per cent.
Despite our average balance being more than $200 million higher in 2020.
Earned nearly $50 million less in interest income due to the average interest rates earned on these deposits falling to below 70 basis points.
The trend has continued with our current average rate below 30 basis points.
The other major factor impacting earnings was dispositions with $1.57 billion of assets sold over the past two years.
A portion of the proceeds from these asset sales were used to pay down our remaining debt generating an interest expense savings of over $8 million per the year.
The order of magnitude of these changes stand in contrast to lower parking revenue and occupancy declines in our same store portfolio, which contributed to our same store cash NOI decline of $2 million of which parking as a real driver.
Our four property portfolio portfolio totaling one 5 million square feet was 85.7% leased at the end of the fourth quarter down 200 basis points from last quarter.
The decline was largely the result of a 24000 square foot tenant who defaulted on their lease at Capitol tower in Austin.
We're currently mitigating this dispute note that given the very small size of our remaining portfolio there will be more volatility around the occupancy and other operating metrics.
Leasing activity continues to be slow, although we saw a modest pick up from the third quarter, We signed 39000 square feet of new leases in Q4, including 10000 square feet.
New leases in the fourth quarter, we collected 97 per cent of contractual rents and in January we collected 96 per cent.
February collections are consistent with our recent experience.
In terms of balance sheet activity in July we prepaid the last day that we had outstanding the only debt by component in our capital stack is $123 million of convertible preferred.
The disposition of three properties in the first half of 2020 generated $757 million of gross proceeds and significant taxable income.
As a result, we declared a $3 50 per share special common distribution that was paid in October.
We do not have any properties in the market per se. What this time and do not expect to be required to pay a special distribution this year.
In March prior to the $3 50 per share special distributions, we repurchased 710 to 11000 common shares at a weighted average price of $29.31 or a total of $28 million.
Since taking responsibility for EQT six years ago, we have sold 164 assets for seven $6 billion, we have repaid $3 $3 billion of debt and preferred paid $1.2 billion of common distributions to our shareholders repurchased $266 million of common stock.
We have a current cash balance of $3 billion or $24 per share.
Thank you and we will now open the call to your questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad income.
Confirmation tone will indicate your line is in the question queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Emmanuel Korchman with Citi. Please proceed with your question.
Hey, good morning, everyone.
For that deep look into sort of your opportunity set.
As you sit there underwriting deals.
I feel like you are probably more in the more aligned with the investors on this call than other landlords when thinking about the future of office. So I was just hoping to get your views on where.
The office space goes, especially on topics like working from home on a net impact on ultimate office usage and how you think about that when you're underwriting office sales.
Yeah.
Yes. Thanks.
Danny.
Obviously, a lot of Uh huh.
Opinions and thoughts obviously sales forces announcement is an interesting one we've done a lot of business with them on the leasing side over the years.
Think clearly work from home is.
Gonna be a part of the landscape looking forward and I think for the next few years.
Companies, you're going to experiment with how to manage.
Their team and their people.
I think Sam has been pretty outspoken and I tend to agree with him that longer term.
When when it's safe to do so people will still want to.
At the office.
Sure Inculcate culture and to make sure people understand what the company is about and what it's trying to achieve so I would probably number I suddenly have said this in the past among the more of a relative.
Relatively bullish about high quality office in high quality markets.
<unk> said that it may be a few years before the fundamentals reflect you know an upward trend given the dislocation that's gone on so far.
And then I don't remember, which which David said this but I think you've reiterated.
The rate of that you're not looking at single deals and you really want a platform or portfolio does that mean, you're not looking at single deals are not underwriting those deals or is your desire just to act in a bigger way once you do that.
David you want to take that one.
Actually Manny you're right on both points a wealth we are looking at single deals, but not with really a focus on execution are the actual acquisition of those one offs.
Or just to understand pricing and what's going on in real time in the markets, but as David said in his prepared remarks.
Rather than create free friction.
By buying a couple one off assets, we are looking for larger transformative type investments.
To set the future.
Thanks, everyone.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Yeah.
There are no further questions at this time I'd like to turn the call back over to David Helfand for closing comments.
Thanks for joining us today, we appreciate your interest.
Well thanks.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.