Sarah Byrnes - Vice President of Investor Relations David Helfand - President and Chief Executive Officer David Weinberg - Chief Operating Officer Adam Markman - Chief Financial Officer.

Manny Korchman - Citi Chris Belosic - Green Street Advisors John Guinee - Stifel Scott Wright - Bank of America.

Greetings and welcome to the Equity Commonwealth Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Sarah Byrnes, Vice President of Investor Relations. Thank you, Ms. Byrnes, please go-ahead..

Thank you, Chris. Good morning and thank you for joining us to discuss Equity Commonwealth's results for the quarter ended September 30, 2016. Our speakers today are David Helfand, our 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 documents that we filed from time-to-time with the SEC, which refer to risk factors that could adversely affect the company's operating results and financial condition.

The company assumes no obligation to update or supplement any statements made today that become untrue because of subsequent events, the Cubs winning World Series or otherwise. Today's remarks also include certain non-GAAP financial measures.

Please refer to yesterday's press release announcing our third quarter 2016 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 David Helfand..

Thanks, Sarah. Good morning and thank you for joining us. I will begin with some comments on market conditions and then provide a brief business update. In the third quarter, U.S. economic activity rebounded with 2.9% GDP growth. Despite this growth, the post-recession recovery has been subdued by historical standards.

Nationally, office market fundamentals continue to improve. Net absorption was positive for the first nine months of 2016 though slightly below last year’s level. New construction remains in check at levels below long-term averages in most markets.

With respect to the real estate capital markets, office transaction volume is down 5% to 10% compared to 2015. Discussions with brokers throughout the country suggest less appetite for risk among buyers and transactions are taking longer to complete, consistent with our recent experience.

While volumes are down from 2015 levels, this year's activity still rank us second best since 2007. Despite lower CMBS issuance, debt capital continues to be readily available from a variety of sources and attractively priced.

Turning to the EQC portfolio, leasing for the quarter was like compared to prior quarters but not necessarily indicative of the strength of our pipeline which is reasonably healthy.

At the operating level, we are focused on a number of initiatives to create value including repositioning properties, getting out of some of our larger lease explorations and implementing targeted leasing efforts to address vacancy in our portfolio.

With respect to dispositions in the third quarter, we closed on the sale of 11 properties for $729 million.

Third quarter dispositions included 111 River Street in Hoboken, a 566,000 square foot ground leased office building on the Jersey Waterfront for $235 million with pricing in the mid to 6% cap rate range, a three property portfolio of industrial assets totaling 804,000 square feet in South Carolina for $30 million with pricing in the mid 8% cap rate range.

We sold Sky Park Centre, a two-building 63,000 square foot office property in San Diego for $13.7 million with pricing in the mid 8% cap rate range. We sold Raintree Industrial Park, a 12 building property encompassing 563,000 square feet for $11.5 million with pricing in the low 10% cap rate range.

In addition, we sold 8701 North Mopac, a 79% leased suburban office building in Austin for $21.5 million with pricing in the low 6% cap rate range and a portfolio for office properties in the Midwest for $417 million. The properties total 3.1 million square feet and we are 87% leased pricing was in the low 8% cap rate range.

Since quarter-end, we closed on the sale of 7800 Show Creek Boulevard, fully release office building in suburban Austin for $29.2 million. Pricing was in the low 8% cap rate range. 7800 Shoal Creek Boulevard was held for sale at the end of the third quarter.

Year-to-date dispositions have totaled $1.2 billion and we currently have 12 properties totaling 5 million square feet in the market. As result of our disposition activity, which has reduced our footprint from 156 assets to 37 currently, we have adjusted staffing levels in Chicago to reflect the workload associated with a smaller portfolio.

The EQC team has accomplished a great deal in a short time. We have generated sales proceeds of $4.1 billion, retired $1.7 billion of debt in preferred and have $2.4 billion of cash on our balance sheet. These efforts have reshaped the company and generated significant capital that provides us with a capacity to pursue opportunities.

We continue to actively evaluate a wide range of opportunities and to that end, we are in the final stages of converting equity to an umbrella partnership or UPREIT which will give us the ability to acquire assets in a tax efficient manner. In the meantime, we remain focused on managing our assets and creating value in the portfolio.

With that, I'll turn the call over to David..

Thank you, David, and good morning everyone. I will begin my reviewing our third quarter leasing activities and provide an update on our five largest markets. I’ll give an overview of our lease till 2018. Our same property portfolio was 91.2% leased at the end of the third quarter, down 10 basis points from the second quarter.

During the third quarter, we signed 237,000 square feet of leases including 191,000 square feet of new leases and 46,000 square feet of renewals. On the same property portfolio basis year-to-date we have signed 1.75 million square feet of leases including 643,000 square feet of new leases and 1.1 million square feet of renewals.

Our largest lease this quarter was a new 117,000 square-foot release from 111 marketplace in Baltimore where we build certainly a portion of excellent space. During the quarter, rental rates increased 9% on a GAAP basis and declined 5.8% on a cash basis.

Year-to-date, rental rates on site leases have increased 7.8% on a GAAP basis and declined 2.2% on a cash basis. Switching topics, our five largest markets continue to exhibit signs of strength. Austin’s year-to-date net absorption is 1.2 million square feet despite those apply, the vacancy rate is 9.3% which is 160 basis points lower than a year ago.

The vacancy rates of Belgium, Chicago and Philadelphia are around 11%. Since our last call, the outlook on Belgium has improved. Recently a tech company reported to up least all 354,000 square feet of a new building delivered later this year.

As a result, Belgium’s 1.5 million square feet of new supply is now over 65% leased with most of this leasing represented in new demand. The Chicago CBD continues to perform well with year-to-date net absorption of 1.4 million square feet.

Looking ahead, there is some concern the Chicago could soften given the growing availability of quality sublease space and over 3 million square feet of new construction delivered in the next two years. In Philadelphia, while leasing activity in the market was slow compared to last year, the vacancy rate for trophy properties is under 9%.

As we have discussed with 429,000 square feet of vacant space, 29% of our total portfolio vacancy that 1735 Market Street in Philadelphia, this is one of the city’s best buildings and has a good recent pipeline. Denver’s year-to-date absorption has been flat and its vacancy rate is around 15%.

As we have previously discussed, this market has been impacted by new supply and downturn in the energy sector. By early next year, 17 straight plaza, our office tower in Denver will have about 136,000 square feet of space to lease. This property is one of the top buildings and the competitive market and we will be aggressive to get deals done.

Finally, I would like to comment on our lease related to 2017 to no move outs in 2018. From the this year, we have 221,000 square feet expiring of which we expect to get 161,000 square feet back including 104,000 square feet of 625 Marquette and the industrial building 30 miles West of Chicago.

Given its current condition, we plan to demolish the building and expect to taken out of service next quarter. Looking ahead to 2017, we have 974,000 square feet and expect to get back about 475,000 square feet versus 3% of our leased square footage.

As previously discussed, our largest expiration of 2017 is Truven health analytics, a 179,000 square foot tenant in Ann Arbor that will vacate in February. In 2018, you have 1.1 million of square feet goal or 73% of our square footage.

Of this two items, 394,000 square feet located in our properties in Baltimore, we will vacate when their leases expire. Amity Bank will at vacate 211,000 square feet of 25,000 Charles, and Exelon will vacate its remaining 180,000 square feet on 111 marketplace, both of these tenets are moving to new infrastructure.

We also that 127,000 square foot tenant at 8750 Bryn Mawr in Chicago submarket. This tenant is moving downtown. The balance of the 2018 will consist of tenants less than 40,000 square feet. In terms of leasing, while this quarter was slower then prior quarters, our pipeline is reasonably healthy.

We continue to review the market condition of our assets, the condition of our vacancy and the pricing of our inventory. With that, I will turn the call over to Adam..

Thanks, David, good morning. I’ll review our financial results for the quarter. Diluted FFO was $0.25 per share compared to $0.19 a year ago. Normalized FFO was $0.23 per share compared to $0.36 last year. This decrease was primarily due to property sales over the year and an increase in G&A expense.

G&A was higher due to costs associated with the previously mentioned staff reductions and UPREIT conversion, and the inclusion of an additional year of share-based compensation expense.

This was partially offset by lower preferred distributions following the series the redemption, interest expense, savings from debt repayment and an increase in interest income resulting from our higher cash balance. Same property NOI was up 3.5% from a year ago. Results in 2015 included $2.8 million of one-time charges.

Adjusting for these items, same property NOI decreased 1.5% in the third quarter of 2016. The decline was largely the result of lower termination income, higher real estate taxes and higher repair and maintenance costs.

Straight-line rents were up $1.9 million this quarter compared to the third quarter 2015 due to free rent from new leasing and expansions. Same property cash NOI was about flat when compared with the third quarter of last year. The year ago period included a $1.7 million one-time charge.

Adjusting for this item, same property cash NOI decreased 3.1% primarily due to higher real estate taxes and repair and maintenance cost. Cash NOI does not yet include revenue from approximately 640,000 square feet of leases in free rent periods during the quarter.

Furthermore, neither cash nor GAAP NOI currently reflects an additional 500,000 square feet of new leases which have not yet commenced. Some of this new released square footage will take occupancy in the fourth quarter with the balance in 2017. Through October, we have sold $1.2 billion of property this year.

These dispositions generated a substantial taxable gain which was offset by the net operating loss carry forward from prior years. As we discussed on our last call, whether 2016 common distribution will be required, will depend on which dispositions close before the end of year and the amount of gains or losses from these sales.

We continue to focus on financial flexibility. At the quarter-end, we called our 6.25% 2017 unsecured notes for redemption. There are $250 million of these bonds outstanding, and they will be redeemed at par on December 15. We also have a $169 million 5.7% mortgage loan on 1735 Market Street that we intend to prepay at par in December.

Additionally, we continue to evaluate the $41 million 5.7% mortgage loan on Parkshore Plaza in California that is also pre-payable in December. Looking ahead, we have $425 million of senior notes that are pre-payable at par in summer of 2017. These notes have a weighted average interest rate of 6.3%.

Our current cash balance is approximately $2.4 billion or $19 per share. We continue to evaluate various uses of our cash including new investment opportunities, debt repayment, share buyback and special distributions.

We are well positioned for future opportunities, our balance sheet remains very strong and we have significant liquidity between our cash balance and undrawn revolver. Thank you and with that, we will open it up to Q&A..

Good morning. Adam, maybe a question for you on the timing of the UPREIT conversion, does it have to do with any deals that you won’t able to complete because you didn’t have tax flexibility or is this something you guys wanted to do and just felt like timing was part of right..

Thanks, Manny. It’s more the latter. The UPREIT conversion is really just part of our philosophy of having as many as aeros in our equipment as we possibly can for growth in acquisitions. We felt that it was important that we have the same tax effective currency as our peers do when we are thinking about growth in the future..

Thanks. And then thanks for the details on the upcoming vacancies or aspirations.

If we think about that from a capital perspective, how much CapEx are you going to have to put into either tenants or do something more radical with that space?.

It’s a good question. I think if you look at the information we provided in our supplement, you'll see our leasing costs have traditionally run between 21% and 23% of our starting rents. And I wouldn’t expect much variance going forward in terms of the leasing capital.

In addition, we may have to invest in some of these assets where we have some vacant space just to make sure they are competitive. As we have discussed previously, we are already doing that at 1735 Market Street in Philadelphia building on a very nice tentative amenity center.

We have to look at similar opportunities in the short-term for example at our property in Ann Arbor, which would cause a slight increase in the capital expense there..

Thanks guys..

And our next question comes from the line of Chris Belosic from Green Street Advisors, please go ahead..

Hey guys, good morning. Just one quick one from me.

Wanted to see if you guys can provide a little update on the pricing dynamics in any markets in terms of how did things line up for your 3Q sales and then for the remainder of – what you have in the market right now, how is the demand looking there? And how much of that may close year end?.

Yes, that's a good question. This is David Weinberg. It's difficult to paint with a broad brush. I would say in echo of David commented on earlier, in general, conditions have changed from last year, transaction volume is down and is just the function out there is less appetite for risk.

So it's been reflected initially in fewer bidders taking longer to get deals done, and more conserved underwriting. That's all going to vary by market. So in Austin, we are still seeing very good buyer interest and strong pricing.

In our other top markets, I imagine that it is true as well, you’re start going to the secondary and tertiary markets, looking to sell commodity product depending on the profile that have to bet deal size, pricing could be negatively impacted. Having said that, we still think his store – compared to historical matters hundred.

Now is good time to sell real estate, and overall we've been very pleased with the disposition activity. In terms of looking ahead at the 12 properties 5 million square feet, we currently have at various stages of sales process.

I think I can say safely that our batting average won't be as high as it was the last year and half it's just hard to get deals done and get buyers to cross the finish line. So we're still going to keep working in the dispositions but I think you'll see fewer dispose going forward..

Okay, thanks that's helpful.

And maybe just one more quick one, I know in the last call you guys mentioned there is maybe some potential disruption coming up in the CMBS, just wondering if you saw come to fruition or if any buyers are having difficulty line that up money matter or other balance sheet lenders are stepping and perhaps?.

No, I don't think it has deteriorated further.

I think people are targeting CMBS issuance for the year for about $60 billion plus or minus, there are some deals that got done in the past couple of weeks, what's notable is other lenders have filled the gap and debt capital doesn't – at least our perspective -- seem to be the issue as David said, it's for an issue on the buy side and the willingness to commit and take risk..

Okay. Great. That's all from me guys..

Our next question comes from the line of John Guinee with Stifel, please go-ahead sir..

Great. Okay. Thank you very much.

Of the $5 million you mentioned a lot of upcoming vacancy, you have a lot of that in the market for sale or you're just going to sell the vacancy and take the hit now rather than try to spend the next couple of years releasing the speed boxes space?.

I would say we have some vacancy in the market, I would not call it a lot. As we evaluate our portfolio and identify the best way create value, especially where we are in the cycle, I think it's more likely we will trying to lease it up given pricing dynamics than perhaps should sell it off to the next buyer.

But ultimately it will come down to pricing and how that buyer is underwriting that risk..

Okay, and then the next question, it looks like by the end of the year you will pretty much stabilize the portfolio somewhere in the 11 million to 30 million square foot.

If I look at the other office reads recover, that implies a G&A of 15,000,000 to 22,000,000 and you provide any guidance as to 2017 G& A as everyone sort of weights for the opportunity fund to execute?.

Yes. John, you and I and the group have talked about this quite a bit, not a whole lot that we can add there, our G&A is to support the infrastructure that we believe will combine with our capital structure to allow us to do something bigger and better in the future that's what we are set up to do.

There are some things in G&A this quarter that we mentioned in my prepared remarks related to severance costs for staff reduction and for the UPREIT, but we don't give guidance, and I think that's kind of probably all there is to say on the topic..

The exact answer I expected. Thank you very much..

These were consistent..

And our next question comes from the line of Jamie Feldman from Bank of America, please go head..

This is Scott Wright, Jamie, good morning.

Can you please provide some more color on where you see the most opportunity to increase operating margins and rents in your portfolio?.

Well, I will speak to, this is David, I will speak to rent, if you look at what we’ve been doing historically by markets, Bellevue, Boston have shown great rent roll up.

Denver has in the past when of and we will survey going forward and even Chicago with the face we're getting back with property some market should be a good opportunity of over and I guess I would do for that to Adam in terms of how he is looking at margins..

Yes. So part of the margin question is going to be answered by converting what is currently free rent into cash rent, and then additionally converting recently signed but not commenced leases into first GAAP rent and then later 8, 23 when the free rent period burns off. So that just has going to take time.

We talked about 640,000 square feet of leases currently in the portfolio that are in a free rent period, and an additional 0.5 square feet, while we have a lease commitments aside lease, put the tenant isn’t yet in the property. So the revenue isn’t heating our financial statements either GAAP or cash..

Okay. Thanks.

And we think about the potential acquisitions that your team looks at, can help bring us which markets your teams looking in and if it's possible to quantify the size of that potential pipeline?.

Well, we are looking at everything from one-off assets to portfolios of assets to entities both public and private. We are primarily focused as we really have been, Chicago facing West in markets where we are either currently having success and have a presence or in other markets where we have historically done well.

So I think Seattle, Bellevue, Austin, Denver, the Southern California markets, Bay area at large, really the same markets that we have been talking about. And some of those opportunities are very large, some of them are a building at a time.

The pricing that we have been looking at still isn't at a level that obviously has caused us to pull the trigger..

Okay, great. Congrats on the quarter..

Thank you..

[Operator Instructions] There appear to be no further questions at this time. I'll turn the call back over to you David for any further closing remarks..

We want to thank you for joining us on this historic day in Chicago sports. We will be celebrating the balance of the day but we'll be happy to take your calls if you're interested. Thanks for joining us..

Ladies and gentlemen this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of your day..