Greetings, and welcome to the Equity Commonwealth Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Sarah Byrnes of Investor Relations. Thank you. Please go ahead..

Thank you, Donna. Good morning, and thanks for joining us to discuss Equity Commonwealth's results for the quarter ending September 30, 2021. On the call today are David Helfand, President and CEO; David Weinberg, COO; and Bill Griffiths, CFO.

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

We refer you to the section titled Forward-Looking Statements in the press release issued yesterday as well as the section titled Risk Factors in our annual report on Form 10-K and quarterly reports on Form 10-Q for a discussion of factors that could cause actual results to materially differ from any forward-looking 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 eqcre.com, including information that may be material. Today's remarks include certain non-GAAP financial measures.

Please refer to yesterday's press release and supplemental containing our results for a reconciliation of these non-GAAP measures to our GAAP financial results. With that, I will turn the call over to David Helfand..

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

Net loss, FFO and NFFO declined in the third quarter '21 compared to the third quarter of '20 due to a decrease in the same-property lease termination income and a decrease in interest income. Leased occupancy was 82.5%, and commenced occupancy was 78.6% in the third quarter 2021.

Same property NOI declined 20.7% in the third quarter of '21 compared to the third quarter of '20. The decline was largely due to a decrease in lease termination fee income and occupancy decreases. Same property cash NOI declined 9.6% during the quarter due to occupancy decreases and an increase in free rent.

We have approximately $3 billion of cash on our balance sheet or $24 a share. In the third quarter, we repurchased $11.1 million of our common stock. We purchased an additional $15.7 million subsequent to quarter end for a total year-to-date of approximately 1 million shares at an average price of $25.83 a share, total investment of $26.8 million.

We have $123 million remaining on our existing share buyback authorization. With regard to the Monmouth transaction, obviously, we were disappointed that Monmouth shareholders did not support the deal. We believe the combination of the 2 companies was a classic 1 plus 1 equals 3 and offer both company shareholders significant upside potential.

We've been asked why we didn't raise our offer for MNR. Our answer is that we made what we felt was a full and fair offer, and we were determined to remain disciplined. I do want to acknowledge strong effort of the EQC team working on the transaction. They did a fantastic job in preparing us, if we have been successful.

In connection with the termination of the transaction, we were reimbursed for approximately $10 million of our expenses. So where does that leave things? We spent the last few weeks talking with shareholders, our Board, Sam, and the team at EQC to determine next steps.

There are compelling arguments, we believe, for both continuing to look for investment opportunities as well as for winding down EQC and returning the capital to shareholders. We readily acknowledge the highly competitive environment that we're operating in. Cap rates for most asset classes have never been lower.

Debt and equity capital are available, and we're likely to face significant competition for new investment opportunities. That said, we just aren't ready to go quietly into the night. We have tremendous confidence in our team. We have a track record of execution and outperformance, and we remain optimistic and engaged.

So our best judgment at this time is to continue to pursue investment opportunities. Some shareholders have asked if our unsuccessful transaction with Monmouth means that future investments will be in the industrial sector. Our answer is not necessarily. We evaluated numerous opportunities before we engaged with Monmouth.

We made that deal because we felt the risks associated with the merger were appropriate and manageable given the upside. As we look for new opportunities, we're open to investments in a variety of sectors, both in and out of favor, if the sector and the specific opportunity offer appropriate upside considering the associated risks.

Finally, we notice shareholders would like more clarity on timing. It's reasonable to ask how much longer we will continue the effort to find the right opportunity.

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

[Operator Instructions] Our first question is coming from Elvis Rodriguez of Bank of America..

On the Monmouth deal, you mentioned that you looked at other potential sectors and transaction.

Any sort of industries you can shed light on or things that you may be more focused on today versus, call it, 6 months ago when you were working on Monmouth?.

Elvis, it's David Weinberg. Let me try to respond to your question. As you know, we looked at a variety of sectors, and some of the feedback we've given in the past was based on where those sectors were getting priced at that time.

For example, we spoke about hospitality getting priced based on '19 numbers and '19 multiples, regardless of where those assets were performing today and the risk going forward. We spoke about office, perhaps, going into the pandemic, us being relatively bearish compared to the market.

Now maybe we're a little more bullish and believe in the long-term strength and viability of good office and good markets, however, we hadn't seen deals with risk priced appropriately. Retail was a wildcard.

Some of the Class C malls trading are really redevelopment opportunities, and we haven't seen pricing reflect the risk perhaps in grocery-anchored centers, et cetera. As we've been spending the last few weeks, if not months, kind of reengaging in those different sectors, I'd say it's still a little early to tell.

Transaction volumes have increased which perhaps provides greater clarity on some of the pricing questions we had previously. So I'd say we're still looking far and wide, trying to find, as what David said previously, where we think we're going to get paid for the risk we're taking.

And as we see more transactions close, the more larger deals become available, we're hopeful we'll find that opportunity as we continue to look..

David, I appreciate that. And what type of -- David had mentioned that capital is plentiful.

What type of portfolio premiums are you seeing across those sectors that you're looking at today?.

I'd say it's difficult to quantify, but I think, intuitively, what you're seeing makes sense, and it's following where the capital is most aggressively flowing. So I think industrial and multifamily, nice cash flowing assets where there's a lot of capital trying to be placed. You're seeing premiums for those types of portfolios.

Conversely, you're not really seeing office portfolios trade, and I think that's because those owners that want to rotate out of office so far have concluded it's better to sell those one-off than as a portfolio which suggests there may be a portfolio discount in the office space..

And just lastly, any opportunities sort of to ramp up perhaps? And maybe like the net lease space, you obviously have a lot of great relationships, and there might be like a big portfolio or a big tenant that's looking to do like a sale leaseback.

Any opportunities there?.

Well, it's something we're considering as we look across the spectrum. It has to be pretty compelling for us to do that. And depending on the credit profile, the asset, the market, we may just conclude the return isn't there. So I'd say it's to be determined whether a deal of that type is of interest..

I guess I would add....

Yes. Go ahead, Dave..

I was just going to add that there are interesting and creative credit type of plays that have been done, obviously the casino space. We have explored some others, and we're hopeful we can find something where risk is mispriced and yields are higher than the low yields available from the major food groups.

And if we could find that, we might consider a credit-based opportunity. More likely, we're looking for an operating and an equity-based opportunity..

Our next question is coming from Emmanuel Korchman of Citi..

It's Michael Bilerman here with Manny. David, I appreciate your comments of trying to figure out whether to sort of wrap up or to go ahead and saying don't want to go quietly in the night and continue to pursue things.

Given the fact that interest rates are so low, you have all this cash, you're not earning that much income, your G&A base is running, call it, $35 million, within that construct, have you discussed at all at the Board level sort of changing maybe management compensation plans? Effectively, you're running a public private equity fund at this point.

So does it make sense to tie compensation to potential deal flow overall because, effectively, you're running a negative -- you're negative cash flow at this point, right? I recognize you have a lot of cash on the balance sheet.

But from an income perspective, you are running a negative, just given the fact that you can't earn much yield on all that cash that's sitting there..

Just -- thanks for the question, Mike.

But just out of curiosity, is that what you're recommending?.

No. It was just a question on whether that's discussed, right? I assume you sat in the boardroom thinking about whether we should continue or wrap up.

In the continue phase, I would have thought there would have been some discussion about, well, what is the right structure here? What are we -- how are we being compensated to -- for transactions? And is there a different way?.

Yes, absolutely. So we have, for sure, had those discussions maybe just to pull back the lens a little bit. Our G&A, which is running closer to $30 million than $35 million, is basically less than 1 point on the cash. And as you alluded to, in a private equity model, that's what investors are paying.

So we think from a sort of pure market standpoint, there's a cost having people come to work. There's a cost of pursuing opportunity. And we're, for sure, mindful of it, but I don't think our cost is out of line in any way. What you're suggesting is that we take less current and take more equity risk and have more equity upside.

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

I would say that the incremental G&A is a pretty small part of either of the [PAS] that happens probably in the relative short term..

Well, I guess that's the timing part, right? I think you and the team have done an admirable job, having stepped in and liquidating what the old EQC portfolio was at the speed at which you did it.

Over that time, one would have hoped, and I know you were extraordinarily hopeful that something would have come about sooner, even before Monmouth, right, before that there would have been many opportunities during COVID that would have allowed you to pounce on a value-add opportunity, consistent with how equity has done things in the past.

And so it's not -- it was more of a comment that that's been going on a long time, and I just wasn't sure because you hadn't put something out there in terms of timing.

Are we talking 3 months? Is it 12 months? Or is it something greater than that?.

Yes. That's completely fair. I think we debate and wrestle with a lot, trying to identify a specific time period against trying to be opportunistic and take things as they come and make judgments based on the situation we're in. That's what we've done today. We've decided to go forward. I think we're trying to telegraph it's not for years and years.

It's in the hope that we can find an opportunity or we have a plan that we've largely already lined up, which is liquidate without a lot of friction and return shareholders NAV, which, if done over the short term, will result in good returns for shareholders over the life..

And then thinking about NAV, obviously, the cash, we can value that. Pretty good on that one. On the remaining asset sales -- on remaining assets, those values have shifted around a little bit. Obviously, the fundamentals are not helping you at all on office assets.

What's the process on the remaining 4? How are you thinking about extracting value and turning those into cash or maybe even leveraging them and taking the debt proceeds? How should we think about those and the go-forward plan?.

It's David. Well, in terms of the go-forward plan, fortunately, as I think I've said before, 2 assets in Austin, 1 in Denver, highly sought after. So to maximize those values, I'm not sure we need necessarily to do much in the way of incremental leasing a lot of money trying to get in those markets.

So I think they're going to be well positioned regardless. And then D.C., we own a smaller asset, highly liquid market. So I think the real question is, part of the analysis David referenced, which is really as we firm up kind of a go-forward plan, part of that will be which assets should we sell and when. We're just not there today..

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

Correct. We don't have anything in the market today..

Okay. And then I just -- David Helfand, you said you don't want this to be years and years.

So are you going to give us at least a reasonable time frame that this is a 12-month sort of next step of evaluation? Or could it be 18 months to 24 months? I'm just trying to get a sense of how we should think about -- I don't want to keep on asking every quarter, right? So at least give us some sense of, right now, what you're thinking about in terms of the next decision point..

I wish I had an answer. I think we're trying to telegraph it's a little while longer. That's not measured in years and years. That's -- I don't want to say 6 months, and I don't want to say 12, because I don't want to have to go back on my word if circumstances change, but we recognize we've been at this a long time.

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

And then just last one.

Is there anything being worked on right now in any serious form?.

Yes. I don't know what you define as serious. We have multiple things that we've either worked on before or are beginning work on that we're excited about. Obviously, you don't get a sense of what the challenges are until you get a little deeper in. But in multiple sectors, some deals we previously put effort into, others that are new.

We're finding intriguing opportunities. Whether they can come to fruition, that's another question..

Thank you. I would now like to turn it back to Mr. Helfand for closing comments..

Thanks, everyone, for joining us this morning. We look forward to talking with you at NAREIT, and thanks for the time..

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