Q2 2021 Equity Commonwealth Earnings Call
[music].
Greetings and welcome to the equity Commonwealth Second quarter 2021 earnings Conference call.
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I will now turn the conference over to your host Sarah Byrnes you may begin.
Thank you Alex good morning.
And thanks for joining us to discuss the equity Commonwealth results for the quarter ending June 30th 2021, and an update on the merger between equity Commonwealth and Monmouth Real estate investment Corporation.
On the call today are David Helfand, President and CEO, David Weinberg, COO and Bill Griffith CFO.
Please be advised that certain matters.
As 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 in the press release issued yesterday as well as the section titled Risk factors in our annual report on form 10-K and quarterly report.
Matters on form 10-Q for subsequent quarters for a discussion of factors that could cause actual results to materially differ from any forward looking statements.
The company assumes no obligation to update or supplement any forward looking statements made today, we have made important filings with the SEC in 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 before making any voting or investment decisions. We also post important information on our website at www Dot EQ CRE dot com, including information that may be material the portion of today's remarks.
<unk> 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 to our GAAP financial results with that I will turn the call over to David Helfand.
Thanks sure.
Morning, We appreciate your joining.
I'll begin with an update on today on the company's current activities as we prepare to complete the merger with model.
Since we announced the deal with momentum May we've been focused on the successful completion of the transaction and integration of the assets and team.
As we spent more time with the Monmouth.
Team toward more of the real estate, our conviction and excitement for the deal is growth.
We continue to view the merger as a compelling opportunity for both the equity Commonwealth and mountain the shareholders to participate in the opportunity.
To build the leading business in the industrial sector.
We believe the tail.
Propelling the business will continue with strong demand driven by ecommerce expansion as well as re shoring by U S manufacturers and retailers increasing inventory levels to mitigate supply chain challenges.
Combination of mamas portfolio of high quality assets with cash.
Cash flows from credit worthy customers.
Coupled with approximately $5 billion of balance sheet capacity per.
The combined entity with the ability to grow without the need to raise equity.
As the market for industrial product remains highly competitive cap rates continue to compress we're looking at a broad range of opportunities.
These including M&A large portfolios and working closely with merchant builders to source investment opportunities are.
Our investment philosophy is less focused on targeting specific markets and instead is guided by identifying opportunities to achieve attractive risk adjusted returns.
With respect.
<unk> shareholder meeting to vote on the transaction.
This morning, we filed an amendment to the proxy.
Changing the date of the shareholder meeting to August 24th to comply with notice requirements.
As we approach the vote, we look forward to engaging with investors on this transformational opportunity.
With that I'll turn the call over to David.
Thank you David and good morning, everyone I'm going to cover where we're spending our time and then I will give an update on our office portfolio <unk>.
First and foremost we are digging into monmouth's real estate, our investments team as traveling every week touring the properties and markets.
Back to the meeting with tenants on local brokers most of the portfolios of value has been well located newer state of the art buildings for.
For example, the <unk>.
Average property age of 10 years and 80% of the revenue is from properties that were built the last 15 years.
90% of the revenues from.
The properties was clear heights of 24 feet or higher.
And with an overall coverage ratio of just 21% many properties have land to accommodate today's higher parking requirements and provide future expansion opportunities.
The properties are well maintained brokers are giving us positive.
Net of feedback and the tenants are fully utilizing their buildings and.
In many cases tenants have made substantial investments in their spaces that should increase the stickiness.
The investments team has also underwriting new acquisitions and with the help of Michael Landy meeting with the merchant builders, we are introducing ourselves.
And letting them know that we're looking at a broader range of investments.
Rather than buy only single tenant net leased assets, we are willing to take on leasing and development risk.
While this is a single tenant net lease portfolio. There is still work to be done.
There are 6 acquisitions totaling 1.8 million square feet under.
Sales contract for $238 million.
These properties have a weighted average lease term of $13 of half years and are expected to generate $13.7 million in annual rent.
There are also several parking lot of expansions in progress and more under discussion.
These expansions are expected to cost of around $30 million and have historically.
Been structured at Unlevered yields of around 10%.
And with any portfolio of this size there are leases rolling that need to be addressed.
In all cases, our team is working side by side with the <unk> team to identify ways.
To maximize the value.
Turning to our office portfolio in the quarter, we signed 20000 square feet of leases consisting of 8000 square feet of new leases and 21000 square feet of renewals rents.
The rental rates for renewals increased 20% on a GAAP basis, and 13% out of cash base.
Yeah.
Our 4 property $1.5 million square foot portfolio ended the quarter 83, 1% leased down 250 basis points from the first quarter.
For the remainder of the year, we had 51000 square feet rolling almost all of which we expect to get back in.
Inquiries and tours haptics.
<unk> picked up and we're hopeful of this will lead to more signed leases later this year.
We continue to work our office properties, while we focus on closing the <unk> transaction and are excited for the next chapter of the QC with that I will turn the call over to Bill.
Thanks, David Good morning, everyone I'll briefly.
Briefly review our financial results for the quarter, and then address our progress to date on accounting and tax integration on the Monmouth transaction.
Funds from operations were $24 million of this quarter compared to $3.8 million in the second quarter of 2020.
Normalized <unk> was a negative <unk> 1 million compared.
2 of positive $3.7 million a year ago.
The changes to both <unk> and normalized <unk> were primarily due to lower interest income and a decrease in income from property sold partially offset by a decrease in G&A.
The same property net operating income was down 1.9% or <unk> 2.
For the quarter.
The decrease was largely due to occupancy decreases at $12.50, H Street, and Capitol tower, lower parking revenue and modest increases in operating expenses. These decreases were partially offset by increases in the straight line rent as well as an increase in commenced occupancy at $12.
25% to 17th Street <unk>.
Excluding straight line rents same property cash NOI was $7.7 million.
A decrease of 12, 8% or $1.1 million compared to last year.
General and administrative expense was 7.4 million for the quarter, an improvement of <unk> 9 million.
<unk> or 11% compared to last year.
Separately $4.2 million of costs related to the monarch transaction have been incurred through June 30.
We have significant balance sheet capacity with no debt and $3 billion of cash or over $24 per share, earning an average.
Interest rate of roughly 22 basis points. Finally, we have $150 million available on our share repurchase authorization, which expires in June of 2022.
Turning to the Monmouth transaction, our accounting and tax teams have been working in full transition mode for the last couple of months.
Average and we are coming up to speed on monmouth's processes and procedures and a diverse and have developed strong working relationships with our counterparts there.
Our systems integration plan is in place and ready to execute at closing.
And with that we'll open it up to Q&A.
Thank you.
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Hi, Keith.
Our first question comes from Manny Korchman with Citi. Please proceed with your question.
Hey, good morning, everyone.
David you spoke about meeting going out there meeting with the merchant builders to sort.
The build out the pipeline of better understand the pipeline.
Are there relationships in place.
The store was sort of the contractual or otherwise set.
But these particular builders, so everything to demand that the or something along those lines or if not what's sort of your competitive advantage other than pain.
The highest dollar ticket those of oil.
Thanks.
Well the answer your first question the only.
The contractual relationships they have or the.
6 acquisitions I referenced in my prepared remarks, nothing beyond that.
And then in terms of the competitive advantage.
I'm not sure I can point to any specific 1 but I would say, we've got $5 billion of buying capacity and these merchant builders have pipelines.
Place, which larger than they've ever had in the past.
So they are looking to further these relationships with preferred buyers to make their lives easier and we hope we're 1 of the few that are selected.
And I would add the introduction from Mike and his team has been a warm introduction.
Non.
Since much of the history of performing with these merchant developers they know what to expect and.
And we've assured then they can count on us when we commit that we will close late Monmouth has in the past.
And David again for 1 of the David.
Yes, there is.
Obviously, the competing bid from Starwood out there.
The monetize.
Chosen your deal.
What is the likelihood or how much of you think about having.
Having to change your deal to get this quarter is 1 of the vote comes around on the 24th.
Well.
I don't.
Don't know the answer the question what I know is that there are competing bid out there, but but I don't believe we don't believe that anyone offers the same combination that non methane equity Commonwealth shareholders can can.
Avail themselves of which is the foundation of the moment the assets of <unk>.
Stock deal that is tax deferred and capacity to grow the business from where it is I think that's what makes our deal unique.
And 1 last 1 from me in terms of the office sales.
Put out of plan to sell down the remaining assets do you need leasing to accelerate are you willing.
To the.
The exit those per the plan, you've set out and make yourselves of pure play industrial no matter, where the leasing or other kinds of loans.
Yeah, I don't want to add.
Answer your question given 2 of the assets are in Austin, and there's a lot of capital looking to find the home in Austin, We've got a great asset in Denver.
<unk>, which is 92% leased with sales force logo at the top.
Nice sized asset in D C, but not too big which is a highly liquid market I wouldn't say, we need to stabilize any of those assets were in an environment, especially given the Austin assets, where we may find buyers are so bullish on lease up in market.
The dynamics that we'll look at the whole cell analysis of conclude it's better to sell it as is and hold it but I wouldnt interpret that Sami and we're going to cut and run we're going to be thoughtful about it and see what's the best way to maximize value given those dynamics.
Okay. Thank you all.
Thank you. Our next question comes from Daniel Ismail with Green Street. Please proceed with your question.
Great. Thank you.
The answer none of them on the portfolio in the industrial sector, but better has there been any changes to the perspective strategy that you can envision this portfolio shaping up to be some of.
The deal closes.
No I think our strategy at least what we've articulated the date in terms of the existing portfolio as we recognize the concentration.
With respect to Fedex is too high and we're going to either have to grow our way out of it <unk> sell down some of that position.
As David referenced the industrial market cap rates continue to compress rent growth is still accelerating and it may be easier to sell some of those fedex assets and non traditional institutional markets given this environment.
But that would be the only impact on the existing.
Our strategy today than otherwise as David said in terms of acquisitions, we're keeping our eyes open looking at many different types of deals on the risk spectrum and will continue to do so.
Great. Thanks.
Yes.
Thank you as a reminder.
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<unk>.
Ladies and gentlemen, there are no further questions at this time I would now like to turn the call over to David Helfand for closing remarks.
Thank you guys very much for joining us. This morning, I just wanted to take a minute to acknowledge the momentum EQT teams that have been working extremely hard.
To create a smooth transition and merger of the 2 companies. We're excited about the deal we are optimistic about the.
Opportunity and we believe that the combination is unique and the option for mountain the shareholders to participate going forward with what we're going to all create together so we.
The forward to talking with you as we move this deal towards closure. Thank you very much.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Sure.