Q1 2021 Equity Commonwealth Earnings and Acquisition of Monmouth Real Estate Investment Corp Call
Greetings and welcome to equity Communist Commonwealth first quarter 2021 earnings conference call. At this time, all participants are on a listen only mode.
A question and 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 I would now like to turn the conference over to your host Sarah Byrnes Senior Vice President Investor Relations and capital markets. Thank you you may begin.
Thanks, Rob Good morning, and thank you for joining US today, we will be discussing the recently announced merger between equity Commonwealth and Monmouth Real estate investment Corporation on.
On the call today from equity Commonwealth or Sam Zell, Our chairman, David Helfand, President and CEO, David Weinberg C O L and Bill Griffith CFO. Please be advised that certain matters discussed during this conference call, including relating to the pending merger may constitute forward looking statements within the meaning of federal Securities laws.
We refer you to the section titled forward looking statements and the press releases issued yesterday as well as the section titled Risk factors and our annual report on form 10-K, and quarterly reports on form 10-Q for subsequent quarters for a discussion of factors that could cause actual results to materially differ from any four.
Looking statements, including any statements regarding the overall impact of COVID-19.
The company assumes no obligation to update or supplement any forward looking statements made today.
We will make important filings with the SEC and connection with the pending merger today's call is not intended to be and is not a substitute for those filings. We urge you to read those materials carefully when they become available before making any voting or investment decision. We also post important information on our website, including information that may be.
And material.
And the portion of today's remarks on our quarterly earnings also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental containing our results for a reconciliation of these non-GAAP measures.
With that I will turn the call over to Sam Zell.
Morning, everybody. Thank you for joining US we were thrilled to announce the signing of a definitive merger agreement to acquire Monmouth Real estate investment Corporation, and an all stock tax free transaction.
Those of you who follow the QC and for the past seven years know that we have evaluated a broad range of sectors and businesses.
We have pursued contrarian opportunities as well as search for differentiated ways to enter more favorite sector or perspective back to reviewing a significant number of potential deals is that the current environment he's missed pricing risk.
And therefore.
What would otherwise be.
Opportunistic scenarios, our price does though.
Opportunity was understood and as Dan and.
In response, we are focused on.
And the sector is the strong fundamentals and tailwind and businesses with high quality cash flow from credit worthy customers.
Obviously, the industrial sector.
And that's that test and the mind mitts portfolio and in particular reflect that opportunity.
Moreover, using EQ start EQT stock.
It was a very important part of this transaction because it meant that subsequent to the merger we will have a very powerful company with an enormous amount of dry powder able to take advantage of.
What is.
We believe for the next four or five years.
And maybe the number one growth area and real estate. So we're very excited about the process and we believe that we can convert equity Commonwealth and into the kind of successful public companies that we've previously sponsored in terms of AQR and E O S.
And our culture, and historically reflected open communication rigorous risk management and shared commitment to superior performance.
Before I turn it over to David and I also want to acknowledge Jim Randy and his team for their efforts the past 53 years.
Guys and we'll take it from here.
Thanks, Sam <unk>.
<unk> do you see the industrial business and Monmouth's portfolio are an ideal fit the industrial real estate sector has been propelled by dramatic growth and e-commerce over the past decade, and has accelerated and as a result of the pandemic.
Demand for quality last mile distribution facilities is robust.
On the modern single tenant net lease portfolio offers outstanding credit quality and long dated leases that provide stable cash flow.
Going forward, we expect EQ sees earnings to be driven by the strong and most of the industrial sector and the growth of E Commerce.
With respect to the deal, we're acquiring Mama and an all stock transaction valued at $3 $4 billion, including the assumption of debt.
We expect to repay him on this $550 million of series C preferred stock at closing.
The combined company is expected to have a pro forma equity market capitalization of $5 $5 billion.
And the shareholders will receive <unk> six seven shares of equity Commonwealth for each share of common stock and mom and baby.
And on our closing price yesterday of 28 95. This represents $19 40 from.
<unk> share. In addition, mindless next quarterly dividend of <unk> 18 cents will be declared in July and paid in September.
Taking the dividend and do a cow the total consideration to be received by mindless shareholders.
19, and 58 per share based on yesterday's closing price.
With our demonstrated ability to execute.
Inefficient cash and balance sheet capacity.
<unk> is uniquely positioned to grow from this strong foundation with that I'll turn the call over to David Weinberg.
Thank you David and good morning, everyone.
Monmouth owns and 99, 7% leased 120 property portfolio of single tenant net leased industrial buildings that totals $24 5 million square feet.
It is located across 31 states with a focus on the eastern United States.
The average remaining lease term of seven four years and 83% of the rent is from investment grade tenants.
Most of the properties were recently built with an average age of 10 years.
Over 80% of the properties have clear heights of 24 feet or higher and the App.
Average coverage ratio was 21% with many properties, having extensive parking areas for both trucks and employees and providing future expansion opportunities.
We believe these types of buildings that serve today's distribution tenants and are well positioned to capture future demand from the growth and e-commerce.
<unk> has strong relationships with numerous investment grade tenants and particular, Fedex, who leases 63 properties, representing 55% of mom and threat.
Many of these leases have flat rents, which limits growth we.
And we took this into accounts and pricing the deal the NOI yield on the real estate is four 7% or four 6% including transaction costs.
And as I described this is a newer portfolio with long dated leases. Accordingly. These properties should have below average capital requirements and there will be a smaller spread between your NOI and cash yields to.
To say it differently compared to other portfolios of light quality and credit when accounting for the difference and lease role and capital. We believe this deals on average eight to 10 year cash yield is similar to a higher growth of deals priced and the low to mid four cap rates.
Finally, I would like to reiterate Sams comment that this deal is the foundation from which we intend to build a first class industrial business.
This portfolio of high quality real estate properties with long term leases to investment grade tenants will generate stable cash flows combined with our balance sheet. We look forward to growing the platform and creating long term value for shareholders with that we will now open it up to questions.
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 and.
Confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the 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.
Yeah.
Our first question comes from Manny Korchman with Citi. Please proceed with your question.
Hey, it's Michael Bilerman here with Manny.
Sam and David Thank you for the opening comment.
And I want to know sort of when you step back from it sounds like you have and but as we've talked about for years evaluated a lot of different opportunities.
And I guess coming out and seeing accompanied by and using their currency to buy another REIT debt shareholders could have access to and a sector, where everybody and their mother is tripping over each other to deploy capital.
Hum.
Not necessarily the type of transaction and I think the market was anticipating.
Given how much time had been spent talking about trying to find something.
Opportunistic value, creating maybe somewhere that someone can leverage the cash on your balance sheet.
On the management that you have involved and the different property sectors.
And so how does this sort of line up with the ability to maybe just do nothing and return capital to shareholders and I guess why why do this versus the third alternative which is do nothing and give them call. It a success on taking out Commonwealth and driving a lot of value from where you originally purchased it.
Hi, This is Sam I'll try and give you my perspective on that.
I think we obviously.
Took into consideration and all of the factors that you and maybe you laid out.
We felt that the opportunity to acquire this portfolio and match it up with.
With the cash and we have available to us.
And frankly, a pretty superior real estate related management team.
We really felt that with the base that this portfolio provided we will have the flexibility.
Transaction by transaction basis.
And significant value going forward.
And I assure you we've looked at all kinds of different opportunities, including.
Including our.
The disposition of the cash balance and calling it a day and EQ C and adds a significant shareholder.
And I looked at those two alternatives and I said I'd much rather have a stable base and and.
And opportunity to take advantage of the skill set that's evolved and.
And to find myself.
Now on distributor of a recipient of cash and then it can be and to find another area for investment.
I believe that yes, the industrial space is very crowded and at the moment.
I don't think it's crowded with to leave people with $5 billion and buying capability and cash on the balance sheet and it's kind of on the up to us to find ways to take advantage of that set of circumstances.
And then when you talk about some of the sectors that we're contrarian plays and I was.
Lodging retail and office.
Maybe it and senior housing yeah, everything Ive been reopening you talked to them about people mispricing risk.
I think and in many ways given what you know about those sectors. The fact that youre not doubling down and those potentially on or re entering those sectors could you talk a little bit about the framework of not.
And those because one would argue with Samsung came around and put a stake and the ground on retail or returning into office.
That may have more meaningful than being arguably a little bit late to the industrial party at least and the U S from a platform perspective.
I don't think we're too late.
I think that the industrial sector has a very significant amount of room, yet to growth as did the other areas and involvement.
I've made reference and and both publicly and privately.
To the to the effect that I thought that that real estate was a falling knife.
Last I checked and ninth was still falling.
And I May think I'm, smart and I may and think I'm surrounded by a very talented team.
But I don't know that they are very good and catching knives, nor do I know anybody you is is that on retail that you referred to and I'm trying to reach out.
As far as that is concerned.
You're obviously is going to be and opportunity and reach out I. Just don't think it's it's there yet as far as the hotel space is concerned Ah.
Again.
I don't think the hotel business is growing on a business, but I think if I look at the pricing on hotels, and the pricing and hotel Reits and I.
Can't I can't relate that pricing to the way I see the opportunity. So that's kind of a lemon and that area as far as office space is concerned.
And I've also said frequently and this is a very interesting or unique scenario because the office space market was oversupplied before the pandemic.
The pandemic and certainly not generated and your belief on my part that demand is increasing.
And yeah, I think the oversupply and.
And and impact that area very significantly over the next few years, plus I think debt.
On the Capex requirements, and the office market and our.
And just another way of reducing price and and we felt that at this particular point and at this cost of entry.
That area it didn't make sense I assure you that we've considered all of those possibilities, including the distributions of capital and we believe this is the most opportune result, we could come up with.
Okay. Thanks for the color will requeue.
Okay.
Yeah.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question. Thanks, Good morning I just.
And wanted to follow up on the commentary that Youre seeing.
Cap rates and the mid to low four cap rate range for computing product was that for single tenant net lease industrial assets.
And also are you seeing portfolio premiums and the market today for industrial.
I'd say.
Yes, and yes.
And so we've been tracking and looking at industrial now for a couple of years and.
There are many comps around the country, where you're saying and single tenant net leased assets trade and the low to mid four caps.
And it varies by credit and market.
And given the amount of capital chasing industrial there is a sweet spot, where you know depending on the portfolio size.
It's no secret that debt is trading at a premium and fact that are quote unquote aggregators out there who are trying to consolidate portfolios. So that they can take advantage of the arb and.
Sell it as such.
I'm not sure if Michael and he's on the phone are available for questions but.
Why was this the offered on an all stock and you know and why was Monmouth willing to accept and all stock offering rather than some cash component given there has been a competing bid that is all cash.
Yeah, Mike is not on the call and you'll have to direct debt Tonight.
Okay, maybe you can comment that from the EQT point of view than like what why not offer Monmouth shareholders, some kind of cash component.
I think to repeat what I said before.
A very important part of this transaction was the creation of a significant and powerful industrial company.
And there are lots of industrial companies. There is a couple that are very large and very powerful and then and then size drops off significantly.
And we felt that the opportunity to create that kind of an entity and I was going to translate into better results going forward and provide our investors with a much better option.
And then just on an all cash deal.
I appreciate it thank you.
Yeah.
Our next question comes from Daniel Ismail with Green Street Advisors. Please proceed with your question.
Great. Thank you can you speak a bit more to the long term goals of this new combined entity in terms of new acquisitions and a geographic concentration.
Solid and opportunities et cetera.
Yeah. Thanks, Dan.
I think looking forward.
And we love the space broadly.
Depend on pricing.
In terms of what markets, we're going to grow and initially.
Sam said the long term play here is to build a fully integrated value add industrial business capabilities across the board and where exactly we focus will be a function of where the opportunity is there is lots of industrial and lots of places that will complement the existing monmouth's portfolio.
And our capacity on the balance sheet will allow us to access those opportunities I would add that the existence of our balance sheet.
This is a very very conservative base.
Gives us the ability going forward to take more risk and to take on a.
Perhaps some more unique situations that we otherwise wouldn't do because then it would be too impactful to our company. So from our perspective, what we've done is we've created a vehicle that allows us to cover all the different possibilities knowing.
And that our underlying base.
Was well protected.
And therefore, we could do things that aren't on one off basis.
And might be too risky or not benefited enough for us.
So.
And to follow up on that I guess, what the the largest concentration to Fedex and the balance sheets I guess it would be.
Fair to say that potentially this new vehicle would have more value add or development exposure then.
And what else without this the financial backing and D C.
I think there's very little doubt debt got we're highly sensitive to.
The Fedex exposure are when you look at what.
What we're paying for this company against what Fedex debt trades for and we're getting a significant premium.
And our owning the buildings rather than owning the debt, but clearly our goal going forward would be to diversify away from that kind of concentration and also do things that are the opposite of purely net lease scenarios.
To a highly credit and.
Great and just a last one from me or able to disclose the break fee.
I'm sorry.
We're able to sort of disclose the breakup fee if any for this potential deal.
No that's not publicly disclosed.
Yeah.
Our next question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.
Hi, good morning, guys.
EQT Hasnt paid a regular dividend quite a while for mom and shareholders. How are you thinking about reoccur.
Reoccurring quarterly dividend and any potential timing for that.
Obviously the dividend question is one that the board will have to answer but given the cash flow dynamics of this portfolio and we do expect to be commencing a dividend.
Shortly after closing the amount to be determined.
Okay.
And is there a floor on the deal price, depending on where you see trades and other words, if EQT trades down to 25 and the deal price of 16, and 75 sort of re re pricing mechanism.
There is not.
Okay, and then last one from me.
Sorry.
I was just saying fixed exchange ratio, okay and.
And then.
When youre thinking about it.
And how scalable do you think monde must build to suit businesses or are you basically going to be out there and the market you guys thinking about development as well.
Yeah, I think as Sam said, we're looking at all different ways to add value using Monmouth is the foundation.
Okay, and thanks, Chris on things.
And.
Some of the questions that were previously asked.
I think there are elements of the real estate and industry today.
And where you might match up a couple of different things so.
Just like a Google took over a major shopping center in California and turned it into an office Park.
I think there may be other retail and other parts of the country that very much lend itself towards industrial and redevelopment. So we wouldn't be sensitive too.
Or are averse to taking on and those kinds of responsibilities, particularly with the kind of economic base, we have and is it.
Point of where is the point of starting.
Okay. Thanks, guys appreciate the time.
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.
Our next question comes from Manny Korchman with Citi. Please proceed with your question.
Good morning, everyone now it's moving.
You guys I think a few times on the call have talked about buying this foundation within walnuts.
And talking about things like retail conversion and is talking about ground up development build to suits.
On running an integrated industrial platform and that's all stuff that bond and that didn't really do it was more buying.
Merchant built and stay there.
And at least standing industrial assets newer ones from others.
They didn't develop in house.
And every time a building all that out so kind of what does the platform provide from that perspective, and then how many people from both organizations are going to stick around.
As you embark on this journey.
Yeah.
Thanks Manny.
Accurate and I must hasnt in the past on that they've had a specific strategies and executed on and we're gonna have a broader strategy to your question and the team.
What we've disclosed is if there's a year transition so that we can smoothly hand off as we grow we would expect to to get to know them on the team and determine whether.
And there'll be part of our team going forward. We're hopeful that we can build off that talent, but we have the industrial expertise and our shop experience across our team and we own six and a half million feet and Commonwealth we've owned.
Industrial on the past.
So we feel confident and our capability.
And what sort of take the best of both teams and put them together.
And maybe this question doesn't need to be asked but I'll ask it anyway, but.
It's sort of a search for other opportunities over or is there a chance that given that the acquisition team and still being in place and he can see that you guys are actually looking beyond this to put the capital to work beyond just single asset or portfolio deals and industrial.
I think the bottom line is never say never I don't think that we.
We currently have any specific plans to do anything other than to build out.
Off of the portfolio that mom and represent a but I certainly would not.
I would not preclude any other diversions depending on circumstances.
Okay and the last one from maybe David Weinberg, given the Fedex exposure and sort of the single tenant.
Whether it be the rest of our opportunities is.
Is that a funding source.
Near term or longer term or some other structure, where you unlock some of that Fedex on it.
Exposure on credit and and eliminate that not just for growth, but through a net.
Net sales of delusion.
What was the last phrase, but the punch line and not through growth, but through what.
What sort of sales or for yes.
And when you sell on selling it off rather than growing out of it.
Yeah. So.
And the short term, we're going to wrap our arms around this portfolio figure out where there are opportunities to create value. We're not walking in with this deal looking to flip a bunch of assets.
Medium term long term, perhaps but it's not a question, we're trying to ask or answer today.
And what about securitization of those leases.
I don't think we I don't think we plan to do that either.
It's another form of exit.
Thank you everyone.
Okay.
Our next question comes from John Kim with BMO Capital markets. Please proceed with your question.
Thanks, I just wanted to clarify the four seven cap rate that you quoted.
Was that net of the Securities book and the development assets.
So that is a real estate cap rate and I'll take a moment and just kind of walk through the math. So there's no misunderstanding.
And you look at there are enormous earnings release March 'twenty, 'twenty, one and they reported a GAAP NOI of 38.7 million.
If you walk that two of cash NOI and you look at historical debt will be around 38 million.
Annualized that's 152 million.
And then they've got those eight Fedex ground parking and expansions and progress.
And which will be costing them about $31 4 million.
Historically, they've earned about a 10% yield on those types of investments so $3 million plus 152 million.
155 million and that's our numerator and when.
Our denominator as a walk starting with the stock price and making balance sheet adjustments.
To get to the real estate value.
Okay.
And the the non answer on the breakup fee would that be disclosed at some point.
That will be disclosed.
Today, and an 8-K filing.
Okay great.
Thank you.
Our next question comes from Daniel Ismail with Green Street Advisors. Please proceed with your question.
Great on members.
Sure.
Exposure or are those assets already being marketed and I'm curious are the type of reception and those those assets are being received.
No our office properties are not currently being marketed.
Continue to work them and we will look for opportunities when they make sense.
Our next question comes from Rick Smith with Smiths Capital. Please proceed with your question.
Hey, good morning.
Before I start and I'm Gonna butter, you ups and you allege and default you my entire career.
Look lack wells.
Put a statement out and statement says you know the industrial REIT space has made materially related since our 18 bid and.
The company and engage with black wells.
And not excluded it from the process they went on.
Net.
And would have been prepared to potentially increase the all cash offer so.
Were they part of the process and if not why not.
We can't comment on that I appreciate the question, but we can't comment on and on that matter.
Okay.
Okay.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to David Helfand for closing comments.
Thank you for your time today and your interest we look forward to working with you on the future. Thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
The conference has ended please disconnect your lines at this time.