Sarah Byrnes - Investor Relations Samuel Zell - Chairman David A. Helfand - President, Chief Executive Officer & Trustee David S. Weinberg - Chief Operating Officer & Executive Vice President Adam Scott Markman - Chief Financial Officer, Treasurer & Executive VP.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker) John Bejjani - Green Street Advisors, Inc. John W. Guinee - Stifel, Nicolaus & Co., Inc. Jamie C. Feldman - Merrill Lynch, Pierce, Fenner & Smith, Inc. Richard C. Moore - RBC Capital Markets Mitch B. Germain - JMP Securities LLC.

Greetings and welcome to the Equity Commonwealth Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Sarah Byrnes, Vice President of Investor Relations for Equity Commonwealth. Thank you, Ms. Brynes. You may begin..

Thank you, Devin. Good morning and thank you for joining us to discuss Equity Commonwealth's results for the quarter and year ended December 31, 2014. Our speakers today are Sam Zell, our Chairman; David Helfand, our President and CEO; David Weinberg, EVP and COO; and Adam Markman, EVP, CFO, and Treasurer.

Please be advised that certain matters discussed during the conference call may constitute forward-looking statements within the meaning of federal securities laws.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results of the company to differ materially from historical results or from any results expressed or implied by these forward-looking statements.

We refer you to the documents that we file time to time with the SEC, which refer to these and other factors that could adversely affect the company's results. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. Today's remarks also include certain non-GAAP financial measures.

Please refer to yesterday's press release announcing our fourth quarter and year end 2014 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results which is available on our website. With that, I will turn the call over to Sam..

Good morning, everybody. Thank you, Sarah. Let me start with a brief overview of the results of 2014. Performance for 2014 was consistent with our expectations. Revenues were up, driven by a number of one-time items, expense savings were meaningful, and we maintained occupancy in the fourth quarter. Overall, we would rate our business as stable.

About a year ago we were asked to take a look at what then commonwealth REIT. During our initial diligence, it became apparent that an opportunity existed to take responsibility for a significant pool of assets that we believe were undervalued and undermanaged.

Based on this thesis, we committed our time and our capital and began the process of taking control of the company. One, we replaced the Board with 11 individuals with a range of relevant experiences, all of whom are committed like EQC team to creating value for shareholders. Two, we've overhauled corporate governance to make it best-in-class.

Three, we built a team to run the company. We started with a group of hand-picked proven people, many of whom were already members of the broader equity family. These people are compelled by the opportunity to do something new and challenging. Importantly, they understand that our unique culture has been a key to our success.

Four, we began the process of separating from the prior external advisor, including selling our entire interest in SIR. Five, we repaid approximately $800 million in debt, creating strength and flexibility in our capital structure. Since we have assumed responsibility for operations on October 1, we are now focused on ownership of the real estate.

Taking ownership of the properties began with an asset review that ultimately confirmed our original thesis that the portfolio was undermanaged and undervalued.

We're now focused both on selling $2 billion to $3 billion of assets that we don't believe belong in a public company's portfolio and then operating and leasing what remains with entrepreneurial focus. Throughout this process, we will remain opportunistic. Now is a good time to be a seller.

Traditional gateway markets have benefited first, but with continued low interest rate, strong pricing has begun to spread more broadly. We're also working with our property management leasing teams to improve tenant relationships. We expect these efforts will improve tenant retention and occupancy.

The process will play out over the next couple of years, and of course we'll be expanding (04:59) economic conditions in capital markets. We'll also be opportunistic in how we view growth. We will likely become a smaller, more nimble company with abundant capacity. Our goal was to use these strengths to connect to create net asset value over time.

While we're in the midst of this portfolio rationalization, we intend to defer a decision on our own dividend until we assess our taxable gains and losses at the end of each year, and if required or prudent will declare a dividend at that time.

We understand that this isn't a traditional approach; it's an unconventional approach to an unconventional situation. Our dividend policy has to ultimately be a function of our strategy, not the other way around. We've worked hard and accomplished a lot, but there is more work to do.

We believe that our team with the current status at real estate markets is in a strong position to opportunely increase the firm's value. With that I'll turn it over to David Helfand, EQC President and CEO to make a few remarks..

Thanks, Sam and good morning, everyone. Thanks for joining us. I'd like to spend a few moments addressing the current operating environment as well as our capital strategy and efforts to rationalize our portfolio.

Then I'll turn it over to David Weinberg, who will provide an update on operations and leasing for the quarter, an additional detail on the asset-by-asset review that Sam mentioned. Adam Markman will wrap up our prepared remarks with a review of our financial results and capital structure.

Let me first take a minute to frame the current environment in contrast to a year ago. The beginning of 2014, the Ten Year Treasury was at 3%, crude oil prices were above $90 a barrel and the RMZ index was at 900. Today the Ten Year stands below 2.1%, crude trades below $60 a barrel and the RMZ is up 30%, near the all-time high achieved in early 2007.

We've seen significant volatility in segments of the market against the backdrop of a U.S. economy that is in the sixth year of a subdued recovery. Unemployment is below 6%, though many remain underemployed, and GDP growth, though below long-term trend, is in the 2% to 3% range.

With respect to real estate fundamentals, we're benefiting from lower supply growth than in previous cycles with less than a 1% addition to supply in 2014 versus a 15-year average of 1.4%, coupled with modest growth in demand for space as evidenced by declining vacancy rates across most of the country.

Investor demand for commercial property remains robust with prices moving higher, driven by lower interest rates and a dearth of attractive yield-generating alternatives. Real estate sales volumes for deals greater than $25 million rose in 2014 to $277 billion, a 13% increase over the prior year according to Real Capital Analytics.

Turning to our priorities at EQC, we've largely completed the transition from the prior external manager and have taken complete responsibility for the company. We've implemented a compensation plan that directly ties the interest of the EQC team with our shareholders and have completed a deep dive, asset by asset review of our portfolio.

Consistent with our previous comments, we are now embarking on a program to sell a significant portion of the portfolio. Over the next 24 months to 36 months, we hope to sell $2 billion to $3 billion of assets depending on market conditions.

We currently have 17 properties totaling more than 2.2 million square feet in the market for sale, including our Australian portfolio. We expect to sell assets on a one-off basis as well as in portfolio transactions where appropriate. We will of course keep you apprised of the progress of the disposition program going forward.

The portfolio rationalization is in the early stages. Our success will be measured by our ability to sell assets and exit markets at attractive prices. Completing a portfolio repositioning of this scale will require time, patience, and discipline.

Finally, I want to express my gratitude to the EQC team as well as our partners at CBRE for the tremendous energy and enthusiasm they bring to the pursuit of this opportunity at EQC. Now, I'd like to turn the call over to David Weinberg, our COO, for a further discussion of our operating performance..

Thank you, David, and good morning, everyone. As David mentioned, I will update you on our asset reviews and operations and summarize the fourth quarter's leasing activity. With respect to asset reviews, the fourth quarter was our first meaningful opportunity to dig into this portfolio.

The transition of property management to CBRE on October 1 gave our asset managers a direct line of sight into each asset, and we now have a better sense for the strengths and weaknesses of our properties. This includes a better understanding of the markets, lease economics, operating expenses, capital cost and deferred maintenance.

In general, the properties have been reasonably maintained despite some maintenance projects that were deferred in 2014. In terms of performance in our markets, our portfolio was disparate, and what we're experiencing varies.

On one end are stronger markets like Austin and Bellevue; leasing activity is very strong in Austin with many tenants expanding, and sometimes we are seeing multiple prospects who buy for a single vacancy.

On the other end of the spectrum are many of our secondary and tertiary markets, where it feels like a game of musical chairs while fighting headwinds from tenants' rightsizing. In the middle are two of our largest markets, Chicago and Philadelphia.

Statistically, both cities had strong years in terms of absorption and rental rate growth, and we're seeing more activity. As we get smarter on the markets and real estate, we have been identifying value creation opportunities. There are incremental ways we can improve, which we believe will be meaningful.

It starts with our asset managers whom we have empowered to be creative in addressing challenges, finding opportunities to win tenants, and leasing vacant suites. Our initial emphasis was on establishing healthier and productive relationships with brokers and our tenants, who we consider to be partners.

It is imperative that they know we do what we say. We believe in these relationships. Combined with a focus on responsiveness and execution, we've established the proper framework to maximize leasing results.

To-date we have received favorable feedback from the leasing community who have been appreciative of our efforts to streamline the leasing process in terms of both responsiveness and our deal-making mindset. We've also been engaging with our tenants. We recently sent a survey to all tenants to get their feedback.

We are evaluating our amenity packages at a number of assets and doing little things that we believe will make a difference. In other words, we're acting like an owner. For example, one of our office buildings, an asset manager took it upon himself to put a ping-pong table in a vacant suite and schedule taco trucks every Tuesday.

Tenants responded immediately, thanking us for the table and asking us to schedule food trucks more often. While small, we believe these types of initiatives will improve our tenants' overall experience and translate to higher retention rates.

Other opportunities are as simple as focusing on our vacant inventory, making sure it's priced properly and lease-ready. We're also examining our parking garages and looking into equipment upgrades and other changes that we believe will increase the performance of our garages.

With respect to operations, we continue to work very closely with CBRE and are interacting directly with the property level employees. We have frequent contact with these employees, which is important for many reasons including that they are interacting with our customers daily, and we want to hear that feedback.

We also want them to feel a part of the EQC team and be comfortable speaking up, which is part of our culture. It is early to draw conclusions about opportunities for expense savings. Comparisons will be difficult, because we may introduce different standards and amenities at some properties to be more competitive.

We're also going to be proactive in preparing vacant suites for leasing. And like us, the CBRE team is getting smarter every day, including beginning its process of reviewing contracts to identify potential cost savings. Now let me turn to leasing. Overall occupancy declined 10 basis points during the quarter to 85.8%.

We executed 1,448,000 square feet of leases with average cash rents up 1.2% and GAAP rents up 8.1%. This included a 210,000 square foot one year lease extension. Excluding this deal, average cash rents declined 1.2% and GAAP rents increased 3.5%. This leasing activity was compromised of 130 deals in 47 cities.

The 10 largest leases represented approximately 53% of the total. We signed 120 leases totaling 700,000 square feet on average of just 5,800 square feet per lease. This is a lot of activity and a reflection of the current makeup of our portfolio.

Recently Staples announced its plans to acquire Office Depot who leases 640,000 square feet for their headquarters in Boca Raton, Florida. The lease has over eight years of term remaining with no early termination rights. We have reached out to Office Depot to discuss their plans, but at this time we do not have any further information.

With that, I will turn it over to Adam Markman, our CFO..

Thanks David. Good morning. I'm going to cover results for the quarter and year, discuss progress to-date on the balance sheet and then spend a few minutes touching on our financial objectives for 2015. I'll start off talking about same-property cash NOI for the quarter.

Given our planned asset sales and portfolio repositioning, same-property NOI continues to be the right metric. In the fourth quarter, same property cash NOI increased 5.9%, which includes the impact of a non-recurring mitigation settlement. Without this one-time item, same-property cash NOI increased 3.5%.

The increase in same property cash NOI was driven by the burn-off of free rent and lower operating expenses that primarily stemmed from lower property taxes. FFO for the quarter was $0.47 per share. Normalized FFO, as defined in our earnings release, was $0.53 per share, compared to normalized FFO in the fourth quarter of 2013 of $0.61 per share.

The decline in normalized FFO for the quarter was primarily due to the SIR sale as well as the sale of other assets, which together were the cause of $0.14 per share of the decline. The election of Series D preferred shareholders to convert to common in the second quarter added $0.02 per share of net dilution.

The decline in normalized FFO was partially offset by $0.10 per share of higher same-store cash NOI and lower interest expense. G&A expense for the quarter included approximately $4.7 million of shareholder litigation and non-recurring costs that included $3.6 million to RMR for transition services.

For the full year, these one-time costs totaled approximately $56.6 million, which includes $15.3 million of incentive fee paid to RMR under the now terminated business management agreement. The company anticipates total G&A costs will be approximately $61.5 million to $71.7 million in 2015.

This estimate anticipates recurring G&A expenses of $55 million, an additional $6.5 million of expected non-recurring shareholder litigation and transition expenses, and up to $10.2 million of expense reimbursements to Related/Corvex. Now I'd like to move to the asset impairment that occurred in the fourth quarter.

Following our asset-by-asset review, we came up with a significant pool of our properties that may be marketed for sale over the next two to three years.

Pursuant to our accounting policy, we periodically evaluate the recoverability of the carrying values of all our real estate assets and in the fourth quarter we determined that due to the shortening of the expected periods of ownership for assets that don't fit with our long-term strategy, we recorded an impairment of $167.1 million for 34 properties whose net book value exceeded estimated fair value.

Turning to the balance sheet, the company has made significant improvements to its capital structure over the quarter. After repaying $234 million of debt in Q4, cash and cash equivalents were $379 million at the end of the year.

As a result of debt repayments, net debt to annualized adjusted EBITDA has improved to 4.3 times from 4.6 times at the end of the third quarter of 2014 and 5.5 times at the end of 2013.

Beyond delevering, we've additional progress with our balance sheet by extending duration and reducing rate when we recast our credit facility and term loan last month.

We will continue to use cash to delever the balance sheet when it makes sense and have identified $255 million of debt with a weighted average interest rate of 5.5% that either matures or is prepayable at par in 2015. We continue to evaluate the benefits of repaying longer-dated maturities.

And as has been evident these past seven months, we are committed to improving our capital structure and extending term on our debt to ensure we're nimble and financially flexible as we move forward with our repositioning plans. As we've discussed previously and as you can see from our balance sheet strategy, we are focused on maximizing optionality.

In particular as we embark on what we expect will be a very active disposition program, our asset base will be fluid. Throughout this period of our evolution, the board has regularly reviewed our dividend policy and will continue to do so at least annually.

The board will evaluate the company's taxable income, including gains or losses from asset sales at the end of each year. If required or prudent at that time, a dividend declaration will be made. Our priorities are on getting the balance sheet right and repositioning the portfolio.

Our ability to generate higher shareholder returns will result from the successful execution of this plan. So thank you for joining us today. And operator, we'll now open up the call to questions..

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Emmanuel Korchman with Citi. Please proceed with your question..

Hey, good morning. It's Michael Bilerman here with Manny.

I was wondering, either for Sam or for David, as you went through this process asset by asset and you talked about knowing going into it that there was a certain amount of undervaluation and a certain amount of assets being undermanaged, and you come up with a $2 billion to $3 billion sales bucket.

Did it also I guess in some evaluation say, you know what, it makes sense, we should just liquidate everything and sell all the assets because that will result in higher value relative to selling, call it 40%, 45% of the asset base and recycling that capital?.

This is Sam. Thank you for your question. I think the answer to your question at the moment is unknown. What we are doing is prioritizing what we are planning to do. And this represents the first step.

The $2 billion to $3 billion of sales that we intend to execute as soon as possible and hopefully within the next two years represents assets that we don't think belong in a public company.

Many of them are assets that have been held by Commonwealth for a long time and unfortunately or whatever, the incentives for the manager did not encourage liquidation, it only encouraged acquisition. So, a lot of these assets that are in our first tranche here reflect assets that we think should have been disposed of in the past.

So I think our goal here is to, in a very cautious and careful and planned out manner assess every element of this company with the goal of producing and delivering superior returns. We think that the base upon which we began here gives us the opportunity to achieve those objectives..

Thank you for that.

And maybe just going deeper in terms of the sale bucket versus the hold bucket, is there some sort of top-line or characteristics that you can share with us about what does the – if you were to split the portfolio in two, the stuff that you want to hold, what are the characteristics of those buildings with certain markets, a certain size? And then on the sale bucket provide maybe a little bit more detail as to the length of time.

Is it because you got to lease them up? Is it because there are secure debt issues? Is it more suburban relative to CBD?.

Now, it's mostly our fear of giving you a timeframe that you will come back and "do us". So the answer is, we think that two years to three years is more than enough time to get this done. And if we get lucky – and we're trying real hard to get lucky, we're going to get it done a lot faster..

And to address the question, maybe it's better to address it from point of view of what's in the sale bucket. It's important that as this process unfolds and markets move, what might be a sale item today we think might not be.

But generally speaking, we've laid out previously smaller assets, assets smaller than 150,000 feet, assets not in the U.S., non-office assets, and in general assets where we don't think we can create some value.

There are some smaller assets that we have in terms of the priority Sam referenced, but later in the queue, because there are specific issues at that property where we think we can create value, lease space, do a little bit of value add to create additional value.

But in general, smaller assets first, more desperate markets, places where we don't have an edge outside of the U.S., and non-office assets..

And I'm not asking you to come up and tell me what the cap rates are, but is there a way to least highlight as the base of NOI today how much NOI is effectively in that sale bucket? And then we can do our own math – or how much square footage, just a – and I don't know if you have a presentation you're going to come out with, but just a little bit more sort of granularity as to what's effectively, if we're going to think about Equity Commonwealth....

I think in order to be fair I think your question is a very valid question. I think it maybe pre-mature by a quarter or two. If you take some sense of what we have been through over the last four months or five months, we've taken on a $7 billion portfolio of very disparate assets in very disparate locations.

We're in the middle of doing exactly what you've asked for. And part of our reticence at this point to give you an answer is that we need to see what the response of the market will be to what we've determined to be our highest priorities.

And once we have a sense of how the market is going to respond to us, I think we will be able to much better answer your question..

And last one just from me. Did you, I guess, evaluate whether you split the company into two.

One is a liquidating trust that eventually pays out to shareholders and then other being EQC and being able to focus on, and was that an option that you guys explored?.

I don't think that we have eliminated any options, I think that the structure you are suggesting would include the assumption that everything we didn't sell we wanted to keep. And I don't think we have reached that conclusion at this point.

So you wouldn't attempt to split this company up until you really had maybe long-term determination of what we wanted to own and what we didn't and where the scale opportunities were available to us and where they weren't..

Got it. Thank you..

Thank you. Our next question comes from the line of John Bejjani with Green Street Advisors. Please proceed with your question..

Hey, guys. Good morning. Just wanted to follow-up on Michael's question on the asset sales and how you are thinking about the portfolio moving forward? $2 billion to $3 billion of assets is a lot.

I guess what kind of markets are you – do you have a better sense of what markets you would like to keep going forward unless you get a pretty compelling offer? And just where you see this portfolio down the road, concentrated in what markets, just any additional color on longer term strategy?.

Yeah. I think that I would give you almost the same answer that I gave the last gentleman, and that is that we're really trying to figure out the answer to that question. There are obviously some markets that we think are really terrific long-term like Austin and Bellevue, but there is a lot of other issues that we need to understand.

I mean we have a big position in Philadelphia. Should we own that long-term compared to allocating capital to other markets where we think there's more growth? Depending on what's available and what's not and how badly somebody else wants to buy it. I mean we are for sure as opportunistic as you can imagine.

And whatever positions we have today, we're more than willing to change tomorrow for a higher price..

That's fair.

So I don't know how familiar you guys are with the Duke office portfolio that Starwood is buying?.

Yeah..

How does a deal like that – or how did a deal like that influence your thinking as far as pace of dispositions and just the market out there for your assets?.

I don't think the Duke portfolio represents very much in the way of similarity to this one..

Yeah, and then I think John, maybe the way to address it is, it's clear that there is a bid for lots of different assets. And as Sam referenced, we think capital is spreading out. We're seeing enquiry about property.

We're in the market talking to brokers about the disposition market in those secondary and tertiary markets and things seem a little bit better.

But as Sam said, once we're into it a quarter or two, we'll be back with you and talking to you about the experience we're having whether things are more robust than we thought or slower than we thought, and I think we'll have a better sense then..

I think that our strategy is, we basically told the world that we've spread our legs and aligned – and delivered our entire portfolio for inspection. And I think we will be – I predict we will be surprised when we find that some of our assets are much more attractive than we thought they were.

And maybe some we think are very attractive may not turn out to be the case. We're really on the cusp.

I mean the reality here is, our first challenge was to successfully complete the transition, which I would tell you was extraordinarily difficult and whatever opinion I had of the people sitting around the table before has increased dramatically as a result of everything they went through in that process.

At this point, we now have to basically start making the sausage. And that's what our goal is. We're being very careful not to start with pre-judgments, because we really are dealing with almost a Pandora's box that we hope to find out the answers to as we now go into the market and ask for both opinions and bids..

Yeah. That makes sense.

I guess related to the transition, do you guys have any new thoughts on whether you'd like to ultimately bring property management and leasing in-house?.

Every REIT that has been created since the modern REIT era has been created with management internal unless they were externally managed. And we believe that the key ingredients for successful operation of this business is to create an environment of flexibility.

When we ran EOP, we talked at that time about what it would be like if we didn't "run the management company on a daily basis." We don't know which is the best model yet. We're satisfied that the deal we have is providing us with the support we need. It would be very interesting if we could maintain this structure longer-term.

There are obviously some benefits to that, particularly eliminating management's focus on an awful lot of people and focus instead on assets. And that's really what we're getting paid for and what our stock represents.

So, I don't think this is a seminal decision, but I think that it's an asset we have because we have the flexibility to go the other way in the future if we think that's the appropriate direction..

And just to add to that, John, I think as Sam said we're figuring out as we go. It'll probably be a clearer decision once we have a better sense of what the portfolio looks like 12 months or 18 months forward..

Right. Great. Thanks, guys..

Thanks, John..

Thank you. Our next question comes from the line of John Guinee with Stifel. Please proceed with your question..

Okay. John Guinee here. Thank you.

As I think everyone on the call thinks is incredibly balanced remarks, aggressive action, long timeline, end game flexibility, a lot of optionality, is it safe to say that you fast forward a year-and-a-half, two, two-and-a-half years down the road, you're trading at a premium to NAV low cost of capital, you've got a viable operation, it becomes a long-term operating REIT, but two years down the road you're trading at a discount to NAV, high cost of capital, you start thinking about plan B?.

I think that – since I'm the chairman of the board here, I think that my previous track record probably has some relevance to your question and particularly considering that a significant portion of the employees of this company previously worked for Equity Office.

From the day we went public we recognized that we had a fiduciary responsibility to our shareholders to optimize our position.

As you saw in the Equity Office case, somebody makes a godfather offer, it's my responsibility to consider that offer even though "selling the company might not be in my own personal interest." That's not the governing factor here.

As we evolve in this adventure at Equity Commonwealth, we are constantly looking at the question of how do we maximize value. We're not in the business of maximizing the number of companies we control; we're in the business of maximizing value.

And I can assure you that going forward, that will never be far from the most important thing in our agenda..

Okay. And then two quick follow-ups probably for Adam – maybe not. Building on the theme of fiduciary to shareholders, if I look at other companies of your size and scope, I think of the G&A and more of the $25 million to $30 million range versus $55 million.

Can you address that and see if there is some unusual things we're missing in your core G&A run rate? And then second, can you address the NOLs on the books right now and how that plays out in the overall execution of the strategy?.

Yeah. Well, let me first start with the G&A. The G&A, we started with a zero-based budget. We built from the ground up. And as with any professional services firms, the biggest component of that expense is related to compensation. And we have market compensation packages.

And I think the rest of it really just sort of falls out from a big and desperate portfolio. I can't really comment on what other companies are doing in terms of overheads being capitalized or pushed down to property level, that's not what we do here.

And I think the run rate is an appropriate number that makes sense reflecting the folks that we have here and what market compensation is..

And the NOLs?.

The NOLs, we had a very significant gain from our sale of SIR, and as you know from the dividend discussion, we're not paying a dividend. So the answer to that is a lot of NOLs. And going forward, really, it's going to be very dependent on the gains or losses that are generated by this disposition program..

So you could defer a dividend for a long period of time, given the NOLs in place?.

A) Results of the company and the taxable income generated from our ongoing operations, and the bigger delta coming from dispositions and acquisitions and the gains or losses that are generated there..

Obviously we have no intention or desire to report ordinary income to our shareholders without a cash dividend accordingly..

And then going back to G&A versus the CBRE relationship where they do both property management and leasing and accounting, how are you – how much of the $55 million of G&A is related (38:45) to that relationship and how much is just – or the twice what is average out there?.

Yes. So the CBRE property management and property level accounting, I do distinguish property level accounting from corporate, because their responsive – responsibility ends at the property level, is included in our property operating expenses. It's not a G&A line item..

Wow. Thank you..

Which is the same of course with any internally managed company as well..

So $55 million to run this company. Wow! Okay, got it. Thank you..

Thank you. Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question..

Great. Thank you. Good morning.

Can you focus a little bit more on what you – what we would call the low hanging fruit in terms of leasing in the portfolio? How should we think about as a going concern just where occupancy can head? Is there a lot of upsize just based on the reviews you've done of the assets? And then as you think about the expiration schedule for 2015 and 2016 is that – would it be moving higher or lower in terms of occupancy?.

This is David Weinberg. Let me try to address some of those questions. In terms of the "low hanging fruit" with respect to leasing and occupancy, I think it's best that we just describe it as, 'we are going to be very proactive and aggressively search out value creation opportunities'.

As I alluded to earlier in my comments, we are going to be more proactive in preparing vacant space and putting that inventory into production. Making our job a little easier is the fact that out of our 6 million square feet of vacant space about 70% of this total resides in just 23 properties.

So it really allows us to roll up our sleeves and focus on those assets that will have the most meaningful impact on occupancy growth opportunities. Then I think you're asking for a little insight into where occupancy maybe headed going forward. It's difficult to answer that question.

We're only a little into 2015 and we've got a tremendous amount of energy and effort spread across a lot of the assets, but just give you a sense for what's been happening. If you go back to our third quarter numbers, I think at that time we reported 5.1 million square feet of leases expiring from that point through the end of 2015.

We're now reporting 4.1 million square feet expiring during 2015. That 1 million square foot delta, about 700,000 square foot renewed, 300,000 square foot moved out, leaves about 4 million square feet as I said for this year.

As we sit here today, and to give you a sense for where we were starting, out of that 4 million square feet, we already know 25% will vacate.

We're currently negotiating – we have signed leases about 500,000 square feet and then just the balance on a lot of small tenants, which is just a lot of hand-to-hand combat trying to get those tenants to renew..

Okay.

And when you guys took over management and thought about the credit risk list or credit watch list, how large is that piece of the portfolio?.

I didn't understand the question..

This tenants you're concerned about their credit that maybe RMR view] differently than you guys would view?.

We believe it's insignificant..

Okay.

And then the $167 million impairment does that cover the entire $2 billion to $3 billion or is that just an additional chunk of assets?.

It represents those assets within the broader subset where our book value is below market..

Okay. And then in terms of initial....

Yeah, pardon me. Just to clarify, book value was above market, so we had to make this adjustment to bring down book value in line with what we felt was fair market value..

Okay, so I guess how many – I know you said 34 assets, but is that mean you reviewed everything and this is – these are the only ones above?.

That's right. We reviewed all of the assets in our portfolio..

Okay, so we shouldn't expect another impartment of that – or...?.

Yeah. The question is sort of two parts; if we froze the world today with where valuations are, I think that's a true statement, but we can't freeze the world and depending on what happens at specific assets and specific markets or with specific tenants, it may be that there are future impairments..

Got it, okay.

And then how should we think about make it catch up maintenance CapEx to get assets into the kind of shape that you guys want them in? What should we think that spend will be?.

Yeah, it's hard to quantify that. Because of the tremendous emphasis on dispositions the next two to three years, we're being very strategic on where we spend our money. So for some assets, we're going to put a little more money into it because these are assets where there are value creation opportunities.

And we think we can do some work to perhaps raise rents or lease them up, and there are lot of assets that we're planning to sell and we may be better off just pushing that expense on to the buyers..

Okay.

And then finally, what are your thoughts on share buybacks as a use of capital?.

This is Sam. I think at this point, share buybacks are not on our agenda. That's not a reflection of – we've used share buybacks in all of our companies in the past, I envision that we will in the future here, particularly if you guys underprice the value of our company.

But at the moment, our focus is much more on resolving these issues, getting rid of these properties and continuing to improve our balance sheet. And that include buybacks at this point..

Okay. Thanks.

Is there a point at which leverage becomes so low that you have to think about something different than just porting cash?.

I think that we don't know the answer to that question yet. If you do, I'll give you my private number..

All right. Well, thank you. Appreciate your answers..

Thank you. Our next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed with your question..

Hi. Good morning guys. I just want to make sure I understand.

The asset-by-asset review, is that complete at this point, so you've been through everything and there's no additional sort of due diligence you have to do on the portfolio?.

Well, we're always in due diligence in the ownership of the portfolio. But to answer your question, we've completed the review of the assets and made determinations, general determinations about what assets we want to sell for now..

Okay. And so you pretty much know what you're having. I'm wondering, the 34 assets that – and Jamie was kind of getting at this – to the 34 assets that you identified that are specifically below book value which had to take an impairment, and usually you do that in conjunction with the potential to sell those. So those 34 assets I assume are for sale.

Are there additional assets beyond that are in this $2 billion to $3 billion bucket that you're thinking?.

First of all, let me correct you and say that our responsibility to our stake and shareholders is to produce a realistic value of our company at all times. So, the impairments are a reflection of an attempt to better deliver to you our assessment in valuation of where we are.

I think that's what we're saying, and we would expect to continually do this so that we, in effect, give everybody a current state. So I think that we would expect in the future to always share our views of values, not necessarily in conjunction with a sale..

Okay.

So those 34 assets Sam, are for sale, is that correct?.

The impairment rules are very complicated. What they start with, is there a difference between estimated fair market value and book value? And in those situations, where fair market value was below book then it's a potential impairment.

In the old – under the old regime, that impairment wasn't booked because you were able to, per the accounting rules, add on to your fair market value estimate the undiscounted future cash flows, but since our hold period has been shortened, right, the value of undiscounted cash flows is significantly lower than it had previously been, and that's the impairment..

And I just want to add. We assume that's the reason why the impairments weren't done. Could be that they had different view of value than we do..

Okay.

And just by the way out of curiosity, when you say 34, do you mean out of the 156 properties or the 266 – 262 buildings that you have?.

Out of the 156..

Okay. Okay, great. Thanks.

And then on CBRE, is that a two-year commitment no matter what, or as you guys exit a particular market, do you get a reduction in your costs which you pay them since you've left those assets?.

The answer to the first question is that it's not a two-year commitment, no matter what. We can terminate at any time and pay a nominal fee. And the agreement is structured where the property management fees are property-specific. So as we exit assets or markets, then those fees go down accordingly..

Okay. Good. Thanks. And then I'm curious why – I guess I read this correctly, I'm not sure, but why does Corvex get an $8 million payment if the stock is above $26? I mean it seems to me they were arguing for a $40 NAV when I saw one of their presentations.

So why suddenly did they get upside at $26 plus?.

This is something that the shareholders agreed to in July of last year. So, it was put to shareholder vote, and the shareholders agreed to the repayment of the related Corvex obligation..

And that $26...?.

(50:21)..

The answer is, yeah..

And so did you guys propose that or was that a shareholder proposal?.

We – I think that's a difficult thing to answer. We put it in the proxy. We disclosed it. We were not making a recommendation but – that we wanted to give shareholders an opportunity to voice their opinion.

Shareholders reasonably, overwhelmingly determined to reimburse those expenses half up front, and a quarter each year for the following two years dependent on the average stock price being above 26%..

$26..

$26..

Okay. I think I got you. And then I'm a little curious too, guys on the dividend. I'm not sure I understand your thought process here, because as you guys of all people know extremely well, when a public company has operating cash flows, not necessarily taxable net income.

I mean that's usually what the dividend is paid off of and I realize, technically you don't have to pay it unless you have taxable net income, but if you have a big gain, you pay a one-time dividend and if you have losses you continue to pay your operating dividend.

So you know what your operations are going to look like, why not pay that dividend?.

There's a little bit of a presumption about what the operating portfolio is going to look like. We've talked a lot today. You've heard it from Sam and David about the transformation of this portfolio.

We certainly have the ability to pay a recurring dividend, but what we've also emphasized is the importance of flexibility and the importance of optionality. And the way that we maximize those things is by retaining capital.

So the board will make a decision at the end of the year, given the transformation and the change that we're anticipating will occur throughout the year. And with all that information, which will be much more than we have sitting here today, they'll come up with a prudent decision..

Okay. So you – I mean you have a good balance sheet and I think your line of credit is empty at the moment, right, your $750 million line of credit, so you have capacity there.

What would you need the capital for exactly? Are you going to do acquisitions for example; is that part of the plan?.

I think the answer is – and I was going to end this conference call with a quote from one of my favorite people, namely Steve Ross. And yesterday on the Boranado (53:03) call he said, "Our sense is that this is the time in the cycle when smart guys build cash." I have a lot of respect for Steve. I think he's hit it right on the head.

I think that our job here was not to take over an existing company that was running well an asset and allocated its assets. We took over a company that was not created with any logic behind it. And we are not going to take any risk in taking action prematurely until we feel comfortable that we have a full understanding of the situation.

In the meantime, we view creating additional cash on the balance sheet as very positive, as we think in the next year or two we expect to see some very interesting changes in the real estate market, and therefore opportunity..

Okay, great. Thank you guys..

Thank you. Our next question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question..

Good morning. I was just curious; you've got a $2 billion to $3 billion disposition target.

What – it's a pretty wide margin, so what gets you to the high end of the range?.

Good buyers. I mean I am giving you the straight answer, you know. The answer is, we're going to go out into the marketplace and we think the market right now is extremely attractive.

There's a shortage of investible opportunities and if we get lucky, we're going to hit the high end of the range and if we don't get lucky, we'll hit the low end of the range..

Got you. Are you going to....

I mean I know that, that sounds very simple, but it really ain't much more complicated than that..

No, understood. I didn't know if there was a bunch of leasing that needs to be executed on some assets or (55:10) CapEx....

Now, we are drilling for oil underneath most of the buildings, so we will report if that changes the value..

Got you.

And will you be reporting these sales quarterly or as they occur?.

Quarterly..

Quarterly, okay.

And then I might have missed, David, I think in your remarks you might have said it, but how much is being marketed today?.

I didn't give a value, but what I said was 17 properties and 2.2 million feet..

And that include Australia, right?.

That includes Australia..

Great. And then last question maybe for Sam, I appreciate your commentary throughout the call. It seems like you are really involved in this process.

How much time are you spending with EQC these days?.

Too much. These fuckers keep coming in my office all day long..

Well, best of luck there. I appreciate it..

Thank you..

Thank you. Our final question is a follow-up question from the line of Emmanuel Korchman with Citi. Please proceed with your question..

Yeah. It's Bilerman again. Sam, that's what happens when you have an open door policy..

Absolutely..

Just in terms of – just going back in impairment, what was the gross undepreciated book and the net book of that pool of assets that you took as $167 million, just that we can isolate that piece?.

Yeah. Let me see what I can pull up for you here and then we can go offline and I can get you more detail. But as we mentioned, it's $167 million of an impairment and that brought net book debt value down from $582.7 million to $414.7 million..

And then just to make sure I understand. The $2 billion to $3 billion, are we saying that is one bucket of assets or was there some flexibility within that $2 billion to $3 billion that you had? If it's 40 assets or 60 assets or – just want to make sure I understand what the $2 billion to $3 billion represents (57:21)..

I think Noah Webster describe 'opportunistic' as lots and lots of optionality. We clearly have a goal to begin with, but our goal is the long-term goal of creating value. And we're more than happy to alter whatever plans we have today, if we think tomorrow, by changing them, we'll have greater value..

Okay. And then just Sam, you referenced the market underpricing the value of our company. Stock is at about $26.

What do you think the right value is as an entity as you went through your portfolio?.

I was thinking about 200. How the hell do I know? Okay? I mean....

But (58:14)..

I didn't say that it was undervalued. I think that there are savants out there who have done their own work and have said it's undervalued. And in fact, we're going to try and prove that to be the case.

But we haven't taken any position, including when we agreed to take on this job, we specifically did not endorse anybody else's valuations of the company, and going forward, we think that's the case. Now, the word 'undervalued' maybe needs to be expanded here, because clearly we're – as an example, we've just been working on a very major lease.

The lease is for 650 or almost 650,000 feet and we value that building before and said it was undervalued if we could renew the lease and if we could make improvements that would make the tenant a longer-term play there. It looks like we've succeeded in doing that.

So, what was an undervalued asset – what we thought might be an undervalue asset, if we get this deal done, it will become significantly higher-valued and that's an example of "undervalue" and where there is opportunity to specifically improve the situation either by lease expansions, capital expenditures and negotiations with our tenants..

And just last one, I got the sense at least going back into November that you guys had looked at a lot of deals that have to come to market to buy, but we're willing to pay the prices that were ultimately the deals transacted at.

And I'm just curious, as you look at assets that are coming to market, where is your mindset? I know you want to build cash and you referenced Steve's comments yesterday on his call, but could we see the company execute any acquisitions, is there certain – I mean what are you looking for? And I know you want to grow NAV and you want to create value, but is there certain markets or....

I think Noah Webster defined an opportunist as someone who takes advantage of all opportunities that come their way. I assure you, we are very opportunistic and we look at every asset that's in the market. If assets come available that we think fit our objectives, we wouldn't hesitate to go forward..

Okay. If you ever need a use for your cash, you have EQRDLS (60:53)..

Exactly..

All right my friend. Take care..

Thank you. I would like to turn the floor over to Sam for closing comments..

First, I'd like to thank you for being part of this phone call this morning. We think that this is a incredible challenge, but we also think it has incredible opportunity. We appreciate you joining us. We have a lot of work ahead of ourselves in 2015. We think we have the people and the aptitude to do so.

We look forward to continuing a dialogue and will provide regular updates on our progress. We very much appreciate your interest in Equity Commonwealth. Thank you..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..