Q3 2021 Equity Commonwealth Earnings Call

Greetings and welcome to the equity Commonwealth Third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If he would like to ask a question you May press star one on your telephone keypad, if anyone should require operator.

Assistance during the phone are 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 introduce your host Ms. Sarah Byrnes of Investor Relations. Thank you. Please go ahead.

Thank you Dana good morning, and thanks for joining us to discuss equity Commonwealth's results for the quarter ending September 32021 on the call today are David Helfand, President and CEO, David Weinberg, COO and Bill Griffith CFO. 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 the press release issued yesterday as well as the section titled Risk factor in our annual in our annual report on Form 10-K, and quarterly reports on Form 10-Q 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.

So post important information on our website at EQ CRE dot com, including information that may be material.

Thanks, Sara good morning, everyone. Thanks for joining us.

This morning, I'll begin with an update on the company's results for the quarter comment briefly on the Monmouth deal and then provide some thoughts on our future plans.

Net loss <unk>.

<unk> declined in the third quarter 'twenty, one compared to the third quarter of 2000.

Due to a decrease in same property lease termination income.

And a decrease in interest income.

Leased occupancy was 82, 5%.

And commenced occupancy was 78, 6% in the third quarter 2021.

Same property NOI declined 27% in the third quarter of <unk> 21, compared to the third quarter of 'twenty.

The decline was largely due to a decrease in lease termination fee income and occupancy decreases.

Same property cash NOI declined nine 6% during the quarter due to occupancy decreases and an increase in free rent.

We have approximately $3 billion of cash on our balance sheet were $24 a share.

Third quarter, we repurchased $11 $1 million of our common stock.

We purchased an additional $15 7 million subsequent to quarter end for a total year to date of approximately 1 million shares at an average price of $25 83 a share.

Total investment of $26 8 million.

We have $123 million remaining under our existing share buyback authorization.

With regard to the Monmouth transaction, obviously, we were disappointed.

<unk> shareholders did not support the deal.

We believe the combination of the two companies was a classic one plus one equals three.

Offer both companies' shareholders significant upside potential.

We've been asked why we didn't raise our offer for MSR.

Our answers that we made what we felt was a full and fair offer.

Were determined to remain disciplined.

I do want to acknowledge the strong effort of the EQT team working on the transaction.

He did a fantastic job of preparing us if we had been successful.

In connection with the termination of the transaction, we were reimbursed for approximately $10 million of our expenses.

So where does that leave things.

We spent the last few weeks talking with shareholders, Our board Sam and the team at EQT to determine next steps.

There are compelling arguments, we believe for both continuing to look for investment opportunities.

As well as for winding down EQT and returning capital to shareholders.

We readily acknowledged the highly competitive environment that we're operating in.

Cap rates for most asset classes have never been lower debt and equity capital.

Scalable.

And we're likely to face significant competition for new investment opportunities.

That said, we just arent ready to go quietly into the night.

We have tremendous confidence in our team we have a track record of execution and outperformance and we remain optimistic and engaged.

So our best judgment at this time is to continue to pursue investment opportunities.

Some shareholders have asked if our unsuccessful transaction with model.

It means that future investments will be in the industrial sector.

Our answer is not necessarily.

We evaluated numerous opportunities before we engage with Monmouth.

We made that deal because we felt the risks associated with the merger where appropriate and manageable given the upside.

As we look for new opportunities, we're open new investments in a variety of sectors, both in and out of favor.

If the sector and the specific opportunity offer appropriate upside considering the associated risks.

Finally, we know that shareholders would like more clarity on timing it's <unk>.

Reasonable ask how much longer we will continue the effort to find the right opportunity.

While I don't have a clear answer what I can say is that we're mindful of the cost of pursuing opportunity and we'll continue to evaluate the best course of action to maximize shareholder value.

With that we're happy to answer your questions.

Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.

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Our first question is coming from Elvis Rodriguez of Bank of America. Please go ahead.

Good morning, David and team.

For taking the question.

And on the on the Monmouth deal you mentioned that you looked at other potential sectors and transaction any sort of industries, you can shed light on or.

Things that you may be more focused on today versus call. It six months ago. When you were working on Monmouth.

Okay.

Hey al.

David Weinberg, let me try to respond to your question.

As you know we looked at a variety of sectors and some of the feedback we have given in the past.

It was based on where those sectors were getting priced at that time for example, we spoke about.

Hi, Donald.

Are you getting price based on 19 numbers at 19 multiples, regardless of where those assets were performing today and the risk going forward.

We spoke about office perhaps.

Going into the pandemic us being relatively bearish compared to the market now maybe we're a little more bullish and believe in the long term strength and viability of good office in good markets. However, we haven't seen.

Deals with risk priced appropriately.

Retail was a wildcard some of the class C malls trading or really redevelopment opportunities and we haven't seen pricing reflect the risk perhaps in grocery anchored centers et cetera.

As we have been spending the last few weeks, if not months kind of re engaging in those different sectors I would say, it's still a little early to tell transaction volumes have increased which perhaps provides greater clarity on some of the pricing.

Uh huh.

Questions that we had previously.

So I'd say, we're still looking far and wide trying to find is what David said previously where we think we're going to get paid for the risk we're taking.

And as we see more transactions close and more larger deals become available we're hopeful we'll find that opportunity.

We continue to look.

Thanks, David I appreciate that and what type of portfolio Dave.

David had mentioned debt capital is plentiful what type of portfolio premiums are you seeing across those sectors that you're looking at today.

I'd say, it's difficult to quantify but I think intuitively, what you're saying makes sense and it's following where the capital is most aggressively flowing.

So.

I think industrial and multifamily nice cash flowing assets, where there's a lot of capital trying to be placed.

Seeing premiums for those types of portfolios.

Conversely, youre not really seeing office portfolios trade and I think thats, because those owners that want to rotate out of office.

So far has concluded its better to sell those one off then as a portfolio, which suggests there may be a portfolio discount and the office space.

And just lastly, any opportunities sort of to ramp up perhaps and maybe like the net lease space you have to see we have a law.

Great relationships and.

There might be like a big portfolio or a big tenant thats looking to do like a sale leaseback any opportunities there.

Well, it's something we're considering as we look across the spectrum.

It has to be pretty compelling for us to do that.

And depending on the credit profile of the asset the market <unk>.

Hey, just conclude.

The return isn't there so I'd say, it's to be determined whether a deal of that type.

The interest.

I guess I would add.

Yes.

Go ahead, Dave.

I was just going to add that.

There are interesting and creative credit type of plays that had been done obviously the casino space.

We haven't explored some others.

And we're hopeful we can find something where risk is mispriced and yields are higher than the low yields available from the major food groups and if we could find that we might consider a credit based opportunity more likely we are looking for an operating and an equity based opportunity.

So did you have any other questions.

I'm all set thank you.

Thank you. Our next question is coming from Emmanuel Korchman of Citi. Please go ahead.

Hey, it's Michael Bilerman here with Manny.

David I appreciate your comments.

Trying to figure out.

Whether to sort of wrap up or to go ahead and.

Go on.

Don't want to go quietly in the night.

And to pursue things.

Given the fact that interest rates are so low you have all this cash you're not earning that much income your G&A base is running at call it $35 million.

In that construct to view discussed at all at the board level sort of changing maybe management compensation plans.

The leader running a public private equity fund at this point, so does it make sense to tie compensation to potential deal flow.

Overall, because effectively you are running a negative.

The negative cash flow at this point I recognize you have a lot of cash on the balance sheet, but from an income perspective.

You are running a negative.

Given the fact that Kim very much yield on all that cash that's sitting there.

Just thanks for the question Michael just out of curiosity is that what youre recommending.

Just a question on whether thats the scottsboro extremely sad.

In the boardroom thinking about whether we should continue or wrap up and to continue phase I would've thought there would've been some discussion about well.

What does the REIT structure here what are we how are we being compensated to four transactions or is there a different way.

Yeah, absolutely so.

We are for sure had those discussions may be just to pull back the lens a little bit.

Our G&A, which is running closer to 30% and 35.

<unk>.

Is basically less than a point on the cash and as you alluded to in our private equity model. That's what investors are paying so we think from a sort of pure market standpoint.

Cost to having people come to work there is a cost of pursuing opportunity and we are for sure mindful of it but I don't think our cost is out of line in any way.

What you are suggesting is that we take less current and take more equity risk and have more equity upside I would say that's unusual in.

Maybe that's the right structure I don't know.

I don't think we're talking about such a long period of time of continued pursuit that it's meaningful in the context of either we're going to return the capital that we're going to find an opportunity I would say that that the.

That incremental G&A is a pretty small part of of either of the past that happens probably in the relative short term.

Well I guess thats the timing right.

You and the team.

Admirable job having stepped in.

<unk> liquidating, what the old QC portfolio was at the speed at which you did it.

Over that time, one would have hoped.

You were extraordinarily hopeful that something would have come up without two year, even before Monmouth REIT before that there would've been many opportunities.

During COVID-19 that would have allowed you to pellets on a value add opportunity consistent with how equity and some things in the past.

And so it's not.

More of a comment that that's been going at a long time and I just wasn't sure because you hadn't put something out there in terms of timing or are we talking three months is it 12 months or is it something greater than that.

Yes, that's completely fair I think we debate and wrestle with a lot trying to identify a specific time period against trying to be opportunistic and take things as they come and make judgments based on the situation we're in.

What we've done today, we have decided to go forward I think we're trying to telegraph, it's not for years and years. It's in the hope that we can find an opportunity or we have a plan that we have largely already lined up which is liquidate without a lot of friction and return to shareholders.

Which have done over the short term.

Will result in.

Good returns for shareholders over the life.

And then thinking about <unk>, obviously, the cash we can value that pretty good on that one.

The asset sales.

Many assets.

Those values have shifted around a little bit obviously, the fundamentals are not helping you at all on office assets.

Whats the process on the remaining four.

Are you thinking about extracting value and turning those into cash or maybe even leveraging them and taking the debt proceeds.

How should we think about those.

And the go forward plan.

Hey, it's David while in terms of the go forward plan. Fortunately as I think I've said before two assets in Austin, one in Denver highly sought after so to maximize those values I am not sure we need necessarily to do much in the way of incremental leasing a lot of money trying to get in those markets.

So I think they're going to be well positioned regardless and then D. C. We on a smaller asset highly liquid market.

So I think the real question is part of the analysis, David referenced which is really as we firm up kind of a go forward plan part of that will be which assets should we sell and win.

We're just not there today.

So none of those are on the market today in terms of.

Correct and we don't have we don't have anything in the market today.

Okay, and then I guess.

David.

You said you don't want this to be years and years.

Hey, how are you going to give us at least a reasonable timeframe. This is at 12 months.

Sort of next day value next step in the evaluation or could it be.

18 months 24 months I'm, just trying to get a sense of how we should think about I don't want to keep on asking every quarter right.

At least give us some sense of.

Right now what Youre thinking about in terms of the next decision point.

I wish I had an answer.

I think we're trying to telegraph, it's a little while longer that's not measured in years and years.

I don't want to say six months and I don't want to say 12, because I don't want to have to go back on my word as circumstances change, but we recognize we've been at this a long time.

We want to continue because we are optimistic but theres a limit and there is another way to reward shareholders. If we don't find something reasonable near term.

And then just the last one is there anything being worked on right now in any serious form.

Yeah, I don't know what Youre defining series, we have multiple things that we'd be there work done before or are beginning work on that we're excited about obviously you don't get.

A sense of what the challenges are till you get a little deeper in but in multiple sectors. Some deals. We've previously put effort into others that are new we're finding intriguing opportunities whether they can come to fruition. That's another question.

Okay, alright, thanks for the time guys. Thank.

Thank you very much guys. Thanks.

Thanks, everyone for joining us. This morning, we look forward to talking with you at NAREIT and.

Thanks for the time.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast at this time and have a wonderful day.

Yes.

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Okay.

Mhm.

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