Equity Commonwealth (EQC) 2020 Q2 法說會逐字稿

Greetings, and welcome to Equity Commonwealth's Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to your host today, Sarah Byrnes, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Latania. Good morning, and thank you for joining us to discuss Equity Commonwealth's results for the quarter ending June 30, 2020. On the call today are David Helfand, President and CEO; David Weinberg, COO; and Adam Markman, 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 yesterday's press release as well as to the section titled 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 COVID-19. The company assumes no obligation to update or supplement any forward-looking statements made today. We also post information on our website at eqcre.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 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

With that, I will turn the call over to David Helfand.

Thanks, Sarah. Good morning. We appreciate you joining us today. I'll begin with brief comments on market conditions, review 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. We have a cross-functional team focused on ensuring open lines of communication with our tenants. Our buildings are open. While many tenants continue to be tentative about their return, we've implemented precautionary measures for when they are ready to come back. Office market activity was slow in the second quarter with leasing and sales volumes reflective of a 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 will likely push vacancy higher over the coming quarters.

Turning to EQC. Our 4 property portfolio totaling 1.5 million square feet was 90.1% leased at the end of the second quarter, down 70 basis points from the prior quarter. In the second quarter, we collected 99% of contractual rents, including 5% from the application of security deposits and letters of credit. In July, we collected 97% of contractual rents, including 4% from security deposits and letters of credit.

Same property cash NOI was up 1.5% compared to the second quarter last year. Same property NOI decreased 24% or $2.7 million, largely due to lease termination fees received in 2019 and, to a lesser degree, lower parking revenue. Funds from operations during the quarter were significantly impacted by the decline in interest rates on our cash balances, reducing FFO by $0.13 per share.

During the quarter, we completed the sale of the Green and Harris Buildings in Georgetown for $85 million. The property was held for sale at the end of the quarter, and pricing was in the low 7% cap rate range. Gross proceeds from dispositions year-to-date of $757 million have generated taxable gains of approximately $445 million and will likely result in 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 prepaid at par the outstanding $25.1 million, 5.7% mortgage loan on Capitol Tower in Downtown Austin. Following this repayment, we have no debt and $123 million of convertible preferred. Our balance sheet is strong with $3.4 billion or more than $27.50 per share.

These have been trying times, and our team's response has been impressive. I want to acknowledge the efforts of the CBRE on-site personnel and the EQC 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 to have profound consequences. In these dynamic and uncertain times, we will continue to be patient and work diligently pursuing new opportunities across sectors. Looking forward, we believe the strength of our team, our culture and our balance sheet will be competitive advantages.

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

(Operator Instructions) Our first question comes from James Feldman with Bank of America.

This is Elvis on for Jamie. David, just a quick question. Are you thinking about -- has anything changed over the last 3 months that makes you think about go-forward investments differently, or makes you put up even a harder pause than what you've had in, call it, in recent months?

Thanks, Elvis. No, I don't think anything has changed the approach that we're taking to evaluating opportunity. I think we mentioned on the previous call that given the profound effect of the virus that we were going to take a step back and try and rethink all the assumptions we've made in the past, not take previous judgments for granted and sort of take a fresh approach to everything, keep a broad aperture and investigate all sorts of opportunity. That hasn't changed. Obviously, it's been an up and down as people have opened back up, cities have opened back up and then paused and rethought. We're learning more about the effects on the economy, effects on employment and behavior. But I wouldn't say it's changed our approach to the investment process.

So would you say you're closer to making an investment today or nowhere near?

Than when?

Than when we spoke last quarter.

I think our general view is that it's early in terms of the effects being felt and the consequences of the virus being sort of filtered through the investment opportunities, and it's hard to say whether we're closer or further, but I think we continue to believe it will take time and patience 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 known as traditional office layouts and office spaces? Anything you could share there would be really helpful.

David, do you want to take that?

Yes. So I don't think most tenants right now are 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 whether perhaps it's a little too dense in how are they going to work in that environment going forward. And then we have a retail tenant who is now rethinking kind of the self-serve coffee bar in some of those areas and what they're going to 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.

(Operator Instructions) Our next question comes from Manny Korchman with Citi.

David, maybe you could comment on sort of what's going on in the public markets and what valuations are being implied there versus any shifts or potential shift that you're seeing in the private markets. And how that impacts both your underwriting and your point earlier that you're going to revisit the way that you've looked at everything in the past.

Sure. Thanks, Manny. It's really -- I think you asked an interesting question, and we are obviously monitoring public companies, understanding the trading values, in particular. As you well know, there are haves and have-nots across sectors. Certainly, the data centers and cell towers, industrial and SFR and residential are the haves, and then there's a number of others that have been hit pretty hard, whether the market's got it right or not. That's a judgment people make for themselves. With respect to the office side, values have been hit pretty hard, and it's hard to reconcile them whether the market's right because there's so little transaction activity in the private market. There have been some deals that have gotten done. We got one deal done. A number of the deals that have got done were started pre-COVID. So I think it's just hard to see any read-through from the private market as an indicator of what -- where things are going to settle. I think we're waiting to see both lease transactions as well as sale transactions. And as it relates to the public market, I mean, you know better than me whether things are cheap or not, but certainly, it appears. Plus, if you look at some of the office companies that the price per pound implied by the equity price is a pretty compelling number, the question is how much of the company can you buy at those kind of prices.

And then in terms of you guys not having anything in the market right now, I guess your sales program was sort of slowing pre-COVID and then COVID hit. I know 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 time to sell, things are just too volatile from a fundamental perspective, something else?

Yes, those are all factors. But mostly, it has been our intention to sort of hit pause with these 4 assets. We like the assets. They're in markets that are traditionally liquid. They're good institutional assets. We felt comfortable owning them. So the reasons you mentioned are all 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 off as we transition to another business. To the extent we stay in the office business, we would make a determination whether we want to own these assets long term. But they're all high-quality assets that we're comfortable owning.

And then I think Michael has one for you guys as well.

David, it's Michael Bilerman. So just going back to Manny's question about public versus private and you talking a little bit about the office stocks trading wide. I guess, have you or are you interested in sort of making -- taking some positions either to just earn some income more than you're getting, given how low interest rates are, but also potential to have conversations? I guess, 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?

Yes. Thanks for the question, Michael. We -- so let's take it in 2 parts. First, just the pure investment side. Obviously, the yield on our cash has come down substantially. We have from the beginning taken a very conservative approach to managing that cash. We are discussing with our Board and internally as we monitor not just office companies but other companies, whether we might want to consider investing a small portion of our cash if the values were such that we really felt they were compelling and we could earn attractive risk-adjusted returns in the 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 latter and maybe a little bit of consideration at the Board level with the investment team on the former.

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 a transaction but obviously a fully loaded management team that knows a thing or 2 about real estate? I guess, are you getting inquiries from financial players that are looking at the public markets and saying that, "I can get that stock. We're able to take that portfolio over. I'm a buyer. I just need a management team to help me get there." Is any of that happening at all?

Yes. We've had a little bit of inbound inquiry in terms of -- if things get really sloppy, if things get really tough, people expressing interest in partnering with EQC to provide capital for transactions. We've had a few of those discussions. I think our -- we always want to be responsive, and we always want to be engaged with capital. We have our own capital. We want to deploy, and we don't want to start partnering and have that get in the way. But if a partnership can lead to something that we can't achieve on our own, I think we've had relations -- we built relationships in the past and the execution over the past couple of years has brought some pretty interesting institutional interest in, could we partner with you to do some type of fix of 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 the market is making it out to be, taking some of Sam's comments, and I think some of the comments you made on the call, but it feels like you are a little bit more optimistic than the general sense of what's going to happen to office relative to, say, something like retail?

Well, I think to say what you said slightly differently, Michael, if you believe there's a future for office, you're relatively bullish these days, right?

Well, I got to find out what your view is, right? There's certainly a lot of people that believe the office is dead, right? People believe that the office is going to go the way of bricks-and-mortar retail. It sounds as though that's an equity house view that retail is not a place that Sam wants to deploy money even at depressed valuations, whereas office, the view may be a little bit different than what consensus is.

That's probably fair with respect to retail that Sam has expressed and we have expressed that there is almost certainly not what we'll be doing. We never want to say never. But with respect to office, I was just teasing. There is a lot of really negative sentiments, and we share the view that there will be difficult times ahead for the office building business as we deal with COVID and finding therapeutics, finding a vaccine that could be effective, but we would be in the camp of believing that there is a future for the business that people don't want to live where they work, which is the situation today that people want to engage with others, that collaboration is productive and desirable. And we -- with the right tolerances for risk and the right underwriting, we'd be willing to make that bet long term.

Ladies and gentlemen, at this time, I would like to turn the call back over to Mr. David Helfand for closing comments.

Well, we appreciate your interest, and 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 have a great day.