Equity Commonwealth (EQC) 2020 Q1 法說會逐字稿

Greetings and welcome to Equity Commonwealth's First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this conference call is being recorded.

It is now my pleasure to turn the conference over to your host, Sarah Byrnes. Thank you. You may begin.

Thank you, Rob. Good morning, and thank you for joining us to discuss Equity Commonwealth's results for the quarter ended March 31, 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 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 most recent annual report on Form 10-K for a discussion of factors that could cause actual results to materially differ from any forward-looking statement. The company assumes no obligation to update or supplement any forward-looking statements made today. We also post important information on our website at www.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 first 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. COVID-19 pandemic has created an unprecedented set of challenges for the global economy, markets and society at large. The social cost is enormous, and we want to convey our deepest sympathies to those directly impacted. We also want to express our appreciation for those on the front lines.

Our priority at EQC right now is the health and safety of our employees, tenants and building staff. Our buildings are open, and we're working with our tenants to ensure their safety as stay-at-home orders are lifted and they begin to return to the office. This includes implementing physical distancing protocols in common areas, evaluating options to control building ingress and egress, enhanced cleaning and other precautionary measures. We will be following all government-mandated protocols for returning to the office.

The near total shutdown of the economy has created massive unemployment, with 30 million Americans filing initial claims since mid-March. There's significant dislocation in the capital markets. In the real estate industry, specifically office, we've seen leasing and investment sales activity ground to a halt.

We continue to communicate with our tenants and are working with those that need our assistance. For the month of April, 98% of contractual rents were paid, 3% of which is from the application of security deposits and letters of credit. Less than 1% of our revenue is from retail tenants, and we have no co-working exposure. Given the uncertainty, at this time, we're unable to determine the impact COVID-19 will have on our tenants and portfolio.

Briefly turning to our business. In the first quarter, we completed the sale of 2 properties for $672 million. As mentioned on our call in February, we closed on the sale of our 286,000 square foot property at 109 Brookline in the Longwood Medical District of Boston for a gross sale price of $270 million or $946 a foot. Proceeds after credits, primarily for contractual lease costs and transfer taxes, were $259 million.

In addition, in March, we closed on the sale of Tower 333, a 435,000 square foot office property in Bellevue, Washington that we leased to Amazon in 2018. The gross sale price was $401.5 million or $922 per square foot. Proceeds after credits, primarily for contractual lease costs and transfer taxes, were $316.7 million. Pricing was in the low 4% cap rate range. Taxable gains from these dispositions totaled $419 million and will likely result in the payment of another special dividend this year.

In addition, we signed a contract for the sale of the Green and Harris Buildings in Georgetown, with closing scheduled for June. The property was classified as held for sale at the end of the first quarter. We do not have any other properties in the market for sale at this time.

Our same-property portfolio of 4 properties totaling 1.5 million square feet was 90.8% leased at the end of the first quarter, a decrease of 70 basis points from the fourth quarter 2019. Same-property cash NOI was up 1%.

During the first half of March, we repurchased 711,000 shares of common stock at an average price of $29.31 per share for a total of $20.8 million. Our balance sheet is strong with net cash of $3.3 billion or roughly $27 a share.

Despite the challenges created by the pandemic, we are focused on continuing to move forward. The broader equity organization, which I have been a part of for more than 30 years, has experienced multiple periods of severe dislocation, managed risk through cycles and emerged stronger. As a result of EQC's execution to date, the strength of our team and our culture and our balance sheet, we are well positioned to weather this storm and to thrive.

We're in a unique position. We've monetized the bulk of the original Commonwealth portfolio in anticipation of an opportunistic environment. Looking forward, as we consider the broad spectrum of opportunities to invest, we will continue to remain patient and disciplined.

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

(Operator Instructions) Our first question comes from Emmanuel Korchman with Citi.

I guess there have been others out there that have spoken about sort of more of a dislocation in the public equity markets and the private or direct real estate markets. Are you seeing the same? How are you sort of viewing the opportunity set right now, especially if there's a pause? Sort of what are you telling your team to focus on or do to find that next value acquisition?

Yes. Thanks, Manny. I think it's our general view that we're early in this. We're sort of 6 weeks in and it's still unfolding, and it's still very difficult to predict what direction it's going to go. That being said, obviously, our investment team is monitoring both public market activity and what's going on with the REITs as well as private. And we have, over time, seeded relationships and had discussions. And as things calm down, we'll revisit those and begin to think about what the opportunity set really is, what is actionable. But I think our general view is that it's early, that we're still in the midst of something that is hard to predict and it probably is months, if not quarters, before real actionable opportunities are available. Now if that changes and something comes our way, we'll be prepared for that.

And I guess the other question is just we've seen stresses on the rent collection side. And some of those will likely be temporary, but others will be permanent. Does that change the approach that sellers might have of getting out of assets that they thought were more bond-like and now are proving to have some headaches involved?

David, do you want to take that?

Well, I think, Manny, it's a good question. And in this environment, hopefully, as Sam has kind of advised us, everyone, including owners of real estate, are reviewing and challenging all their assumptions. So if they thought they had a bond-like investment, a passive investment, and that's no longer the case, then it may cause them to sell that asset sooner or perhaps sell it when they never intended to do so because of what's happening today.

(Operator Instructions) Our next question comes from Jamie Feldman with Bank of America.

This is Elvis on for Jamie. Glad to hear you're all well. Can you talk a little bit about today's dislocation or potential dislocation versus the Great Financial Crisis? And just building on to what Manny said, are there any asset classes in particular that you feel today will be at play that weren't at play last cycle?

Well, that's really difficult to make a comparison given how early we are in this. Obviously, everyone lived through the Great Financial Crisis, and it was a pretty traumatic event and people were unprepared. I think I can make some general comments, which is, for the most part, there was less leverage in the system as we entered into this. The fundamentals in a number of businesses were decent to strong with the exception of a couple of businesses, obviously, retail.

To compare the 2, I would have to have a better understanding of what this one is going to look like. And frankly, we don't have that view. I think David alluded to it. We've been spending time with Sam trying to see things through his eyes and understand, and he's told us this is sort of new territory. We got to be thoughtful and careful and evaluate everything, as David said, with a fresh set of eyes through the lens of what's going on, and that's going to change. Got to realize that how this is going to break, how is the reopening that appears to be beginning going to play out. Are people going to need to go back inside? Or is there going to be a sort of moderate reopening that leads to a greater reopening? We're optimistic, but we also are practical, and this is essentially science-based and a public health issue. So it's hard to predict that outcome and therefore, hard to compare to the GFC.

And then would you say that if a year out you don't find any opportunity, what happens to Equity Commonwealth then?

Yes. I think it's premature to speculate about that.

Okay. And then maybe one last one for Adam. Adam, are you able to share what that special dividend will look like at the end of the year? Or you have any sort of number in mind?

Well, I can reiterate a bit of what David mentioned and maybe provide a little additional detail that I hope is helpful. As you may recall, we started the year with a federal net operating loss carryforward of approximately $25 million. And as we've previously disclosed, we believe that all of our remaining assets will generate taxable gains if they're sold. David mentioned that the gain from 109 Brookline is about $223 million and Tower 333 adding an additional $196 million, the total of which David mentioned in his prepared remarks.

Georgetown, which is in the market for sale and scheduled to close in June, if it does close, will also generate a gain. But that gain will be something like 1/10 the size of the gains generated by each of the other assets. And then, of course, we'll also generate taxable income in the normal course of operating our business.

So I think those are the components, but the size and timing of that future distribution will also be dependent on our earnings from operations and ultimately, will be the decision of our Board of Trustees.

Our next question comes from John Guinee with Stifel.

Great. Thanks for the update, guys and gals. Two questions. One is what's the earliest you could pay that special and what's the latest you could pay that special? And then how big is the team now as you go into sort of a long-term period of suspension?

Well, let me take that and, Adam, you'll correct me. The earliest we could pay would be when we know the size of the gain. And the latest, I believe, is the end of January of next year. And then I'm blanking on your characterization, but we're not going into any kind of pause or hiatus. We're busy at work. Our team has done an outstanding job sort of refocusing and working to support our tenants coming back to work. And then on the investment side, our team is busy monitoring everything, trying to look for information, reestablish lines of communication, check in on relationships, understand markets and when transaction activity, whether it be leasing or sale activity, happens, to understand it. So we're busy, we're focused, and we're going to be patient in terms of deploying the capital until we find something that we think is compelling.

Our next question is from Emmanuel Korchman with Citi.

It's Michael Bilerman. So I was wondering if you can share a little bit more about the lens that Sam is looking at in terms of investment and how that influences your sort of decision-making process. And you have been extraordinarily patient during what was the run-up in terms of you didn't really like where pricing was in the market, you didn't find those compelling opportunities.

And I think you were concerned about sort of the overall economic environment. Clearly this event, which was driven by science, not actual real excesses, has now provided someone in your capacity that has over $3 billion of cash to potentially find something compelling. And so maybe you can share with us a little bit about how Sam and how you guys are thinking about the world and what has changed from either a property sector perspective, a geographical perspective in terms of where you may go now that this is happening.

David, do you want to take that?

Sure. I'll start, then you can kind of supplement my response. I'm not so sure we have or Sam has a clear lens. In fact, if anything, what he's done is repeatedly cautioned us that this is unprecedented and anything we thought going into this, anything we've seen in the past, we need to challenge, revisit, debate, discuss and look at everything fresh. So that's what we've been doing.

We've been actively engaged. We're looking at a variety of opportunities. We can't predict, as Sam would say, what the market will give us. He's pretty certain it will take some time to find the right opportunities. So all we really can do is position ourselves and prepare for that moment when the opportunity avails itself and in the meantime, be patient and disciplined. He has no road map other than the one that got us to this spot. What happens next is really to be determined, and he's told us not to assume any sectors are "redlined." Just keep looking at everything, absorbing as much information as you can and just be ready when that moment comes.

So when you say nothing is redlined, I remember -- it feels like last year, may have been the year before -- and I asked you about retail. And retail a couple of years ago was starting to go through that initial stress. I mean is retail now off of the no list? I think, David, I remember your response. I think I gave a really long intro, and I think your response was no. That was it. So is it like a lower case no at this point rather than an upper case?

It's almost probably not. No. To answer your question, Michael, I think it's more philosophy, and it's in keeping with what David just responded to a previous question, which is while there are significant challenges in retail, in particular in malls -- and those aren't lost on Sam. We used to own a very large portfolio of malls when I first started with Sam back in the, I hate to say it, the late '80s. It's a tough business. But given the dislocation that is likely to result from what's going on, given the unpredictability, there's just no reason to write anything off right now. There's no percentage in it because we are about taking thoughtful risk in exchange for attractive return. And so we've had conversations with many of you on the call, and you've asked, well, what returns to your target, and I think we give an unsatisfying answer, which is it really depends on the risk that we are taking to earn the return. And the same is true with the sectors. Retail is not our first choice, maybe even our last choice, but there's no reason to redline it or to count it out when things are as uncertain as they are right now.

You can just bring Contis back and you can bring the whole band back together and...

Oh my God, yes. That's on the list, Michael.

Do you think about -- because the scope of what you can do with this cash is pretty wide, whether it's assets, companies, debt-oriented securities, equity securities. Where are you spending the most time? And what is the highest level? I mean do you -- because a lot of people may need lending. Do you view that as a short term in this period of time to provide 6- to 12-month loans to earn that return and park your cash? Or is it much more on the just direct asset side? Where is the primary focus today?

Yes. Adam, do you want to take that?

Yes. Sam, in conversations with him, has made the distinction between being a trader and being an investor. And he has had us focus away from making trades and towards making investments. That doesn't mean that we won't do something with a debt security. But generally, the focus is going to be on creating a platform to grow our business. And as I mentioned, that initial investment may come through the liability side of the balance sheet, but the focus will be on something that we can grow into. In all likelihood, that will become a real business and a real platform for our team and for this company.

Is it possible that it's not real estate and something operational, right? Because there is a lot of corporates that are struggling. Is it possible that Equity Commonwealth becomes -- you de-REIT and become a C-corp and you invest this capital in an operating business that may have real estate characteristics but is just something very different?

Well, I guess, maybe let me try and answer that 2 ways. It will almost certainly be real estate. We have been looking and trying to find opportunities, given the challenges we had when the market was as stout as it was, to find other businesses that might not look traditional, but then when you look through them, have the characteristics, fundamentals that are attractive and can be long-term businesses.

The example I'd give is in 1983, Sam bought what is now Equity LifeStyle. In '93, we took it public and no one understood it. No one understood the fundamentals of the business. But Sam did, and he knew that if we built a long term -- took a long-term focus and built the business, the public markets would understand it. We'd be open to that, finding the right asset class, something asset-intensive, operationally intensive, which we think is an edge we have. But it will almost certainly have real estate hard asset as its core, and it will almost certainly be real estate. I would never say never, but all of our focus has been on real estate businesses of one sort of another since we started this adventure.

And then just lastly, in terms of buying securities, because I do think sort of from an M&A perspective you've always been viewed as potential M&A candidate of being able to recapitalize an existing real estate company, generally, if that company was public and then also coming in from a management perspective. So are you being an activist at all in terms of taking fulcrum positions up to a 5% limit, or more, in trying to ferret out these opportunities and planting some seeds to have conversations? You've seen that, at least on the hotel C-corp space, a number of bigger private equity players have taken positions in some of the public companies. So is that an area that is a focus or not?

It's not a focus, and I think it's highly unlikely what we do is activist.

Well, the trailer trash investment turned out to be pretty good, right?

Yes, that one worked out.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call over to David Helfand for closing comments.

Yes, thank you all for joining us today. And I just want to recognize the EQC team for their focus during these trying times. To our stakeholders, we're all in this together, and we will get through it together. And as I tell the team each time we have an update call on Microsoft Teams, stay healthy and stay hydrated. Take care, everybody. Thank you. Be well.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.