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

James Feldman - Bank of America Merrill Lynch John Guinee - Stifel, Nicolaus & Co., Inc. Mitch Germain - JMP Securities LLC Chris Belosic - Green Street Advisors Manny Korchman - Citigroup.

Greetings and welcome to the Equity Commonwealth Third Quarter 2017 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.

Sarah Byrnes, Vice President of Investor Relations. Thank you, Ms. Byrnes. You may begin..

Thank you, Doug. Good morning and thank you for joining us to discuss Equity Commonwealth's results for the quarter ended September 30, 2017. Our speakers’ today are David Helfand, President and CEO; David Weinberg, COO; and Adam Markman, CFO.

Please be advised that certain matters discussed during this call may constitute forward-looking statements within the meaning of Federal Securities Laws.

We refer you to the section titled Forward-Looking Statements in yesterday's press release, as well as to the section titled Risk Factors in the 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 statements.

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 deemed to be material. We encourage investors and others interested in the Company to monitor our website for material disclosures.

Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental containing our third quarter 2017 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’ll begin with some brief comments on market conditions and then provide an update on the Company's progress so far in 2017. Broadly speaking, the economy continues to grow modestly. The rate of economic expansion in the U.S.

ticked up in the second quarter with real GDP growth revised upward from 2% to 3.1%. The unemployment rate fell to 4.2% in September down 20 basis points from August, but to put that number in contest, the labor force participation rate is as low as it's been in 40 years.

Non-farm payrolls declined slightly in September after adding 170,000 reserved jobs per month on average for the past year. The equity market continues to show strength with the NASDAQ up 22%, and the S&P 500 up 17% year-to-date, the Morgan Stanley REIT Index up 3% for the year.

As we've discussed in the past couple of earnings calls, office fundamental remain benign. The National vacancy rate was flat in the third quarter roughly 13%. Deliveries totaled 59 million square feet in the first nine months of 2017 that are on track to reach over 90 million square feet for the full-year.

With respect to real estate capital markets, office transaction volume in the third quarter was down 27% versus the second quarter and 34% in the same period a year ago. Year-to-date transaction volume is down roughly 20% though excluding New York City volume is down less than 10% year-to-date.

Real estate debt capital markets remain strong with significant availability at attractive pricing. CMBS issuance year-to-date is robust $60 billion and we expect total issuance to be approximately $80 billion for the year, up 20% versus 2016.

Turning to our business, results for EQR during the quarter demonstrating continued progress in the lease up of our portfolio with new leases beginning to translate into growth in same property NOI. Our portfolio currently comprises 20 properties totaling 11 million square feet with no held for sale properties at the end of the quarter.

We have seven properties in the market for sale totaling 4.7 million square feet including 600 West Chicago Avenue and 1600 Market Street in Downtown Philadelphia. During the quarter, we closed on the sale of seven properties for $544 million and year-to-date we sold $756 million of assets.

Since 2014, we’ve completed dispositions totaling $4.9 billion. In the third quarter, we closed on the sale of 1500 Market, a 1.8 million square foot, 91% leased office property in Downtown Philadelphia for $328 million. Pricing was in the mid 7% cap rate range.

We also closed on the sale of a five property office and industrial portfolio located in Maryland, Minnesota, and Missouri totaling 1 million square feet for $84 million. Pricing was in the low 10% cap rate range. And finally, we closed on the sale of office depot's headquarters in Boca Raton, Florida for $132 million and $206 a foot.

Turning to operations, our team is focused on execution with respect to both leasing and dispositions. In addition, we are devoting significant resources to evaluating investment opportunities in order to create long-term value.

As we've discussed previously, we have positioned the Company to grow significantly, if we can source an appropriate investment opportunity. If we’re unsuccessful in that pursuit, our plan is to continue to sell assets at prices in excess of the value implied for our trading price. With that, I'll turn the call over to David..

Thank you, David, and good morning, everyone. I will begin by reviewing our third quarter leasing activity we provide an update on our five largest markets. Then I’ll give an overview of our lease roll through 2018. Our 20 property, same-store portfolio was 88.3% leased at the end of the third quarter, up 60 basis points from the second quarter.

We signed 273,000 square feet of leases, two-thirds of which were new leases. Our largest lease was a new 67,000 square foot deal at 1735 Market Street in Philadelphia. For the quarter, rental rates increased 7.8% on a GAAP basis and 2.3% on a cash basis. Turning to our five largest markets, demand for space in Bellevue CBD continues to be strong.

The markets vacancy rate is around 10% and trending lower. Bellevue Corporate Plaza is 97% lease, while we continue to see great activity from smaller tenants. A Tower 333, Expedia will vacant in December 2019, giving us 427,000 square feet quality space in a very strong market.

There have been three recently developed buildings in Bellevue that have always stopped and nothing else is currently under the structure. We believe Tower 333 will have a largest block of available space and as well-positioned to capture demand from bigger tenants. In Austin, it was another strong quarter and the market's vacancy rate is around 9%.

Our Downtown building is 78% leased. Unlike new construction demand for older buildings like our Downtown property has been flat this year. In the Northwest market, Bridgepoint, our Class A suburban office park is 92% leased. They competes more directly in the Loop 360 submarket, where leasing has slowed.

The largest new lease this quarter in this submarket was a 23,000 square foot deal we signed a Bridgepoint. In the Philadelphia CBD, the vacancy rate is 11% and around 8% for trophy properties. You may recall that at the end of 2015, four tenants of 1735 Market Street gave back a total of 500,000 square feet.

Since that time, we have been aggressively engaging the brokerage community and then showing the property as well-positioned. Earlier this month, we opened the properties new amenity floor.

It features an expansive conference center, they can accommodate up to 150 people, collaborative and semi-private work spaces, game and entertainment areas, the kitchen at par and an outdoor terrace overlooking Market Street. The tenants have been enjoying the space. We have received very favorable feedback from the leasing community.

As a result of these efforts, we have signed over 400,000 square feet of new leases at 1735 Market Street, since the second half of 2015. Chicago CBD’s vacancy rate increase for this third straight quarter is now 13.6%. This was primarily due to tenants leaving behind space to occupy new towers.

The market is likely to continue to soften given availability of quality sublease space and over 5 million square feet under construction or redevelopment. The only property we own in the Chicago CBD is 600 West Chicago. This property is 98% leased and is a unique asset located in Chicago's strongest submarket River North.

In the Denver CBD, as we have said on recent calls, leasing is challenging with a vacancy rate around 16%. The market has been impacted by new supply, sublease space and a slowdown in leasing activity. At 17th Street Plaza while we signed 15,000 square feet of leases at this quarter, we still have 121,000 square feet of vacant space.

To help drive the leasing, we have recently completed a lobby renovation and continue to aggressively engage the brokerage community. Finally, I would like to comment on our lease roll through 2018. In total, we have 670,000 square feet rolling or 6.9% of our lease square footage. Of this amount, we expect to get back 400,000 square feet.

The largest space we get back will be 75,000 square feet, from a tenant that is downsizing as part of our lease extension. This will happen in July at 1601 Dry Creek in Longmont, Colorado.

The other larger vacates over the next five quarters are in the 20,000 to 45,000 square foot range and are spread across our portfolio, including at our properties in Austin, 8750 Bryn Mawr in Chicago, and 17th Street Plaza.

We've been averaging 150,000 square feet of new leasing per quarter and compare to the 400,000 square feet in total, we expect to get back over the next five quarters. We believe we are well-positioned to increase occupancy in 2018. With that, I will turn the call over to Adam..

Thanks, David. Good morning. I'll provide a review of our financial results for the quarter. Funds from operations were $0.22 per share, compared to $0.25 per share in the third quarter of 2016. Normalized FFO was $0.19 per share, compared to $0.23 a year-ago.

The decrease in normalized FFO was primarily due to dispositions completed over the comparative period, partially offset by interest expense savings from debt repayments and an increased in interest income due to the combination of higher rates and higher balances of cash and marketable securities.

Same property net operating income was up 4.7% in the third quarter, compared to a year ago. The increase was driven primarily by additional straight line rent from newly commenced leases that are in free rent as well as higher early termination fees.

Growth was partially offset by a large tenant move-out in the first quarter and higher real estate taxes mainly due to Chicago's 9.3% rate increase. Same property cash NOI was 4.4% lower than the third quarter of last year driven by the large tenant move out and higher real estate taxes previously mentioned.

Cash NOI does not include revenue from an additional 1.9 million square feet of leases that were in abatement. In total, free rent in the quarter was $4.8 million or over $19 million annualized. The portfolio was 88.3% leased and 85.5% had commenced by quarter end.

With the difference being approximately 300,000 square feet which did not commenced and therefore was not in cash or GAAP NOI during the quarter. Once this lease is start and get through their free rent periods, they would generate $10 million in annual rent. Moving to dispositions, we have sold $756 million of properties to-date in 2017.

These sales generated a net taxable gain which modestly decreased our existing net operating loss carry-forward. As has been the case for sometime the amount of our full-year taxable income will be highly dependent on which if any assets close before year-end.

Turning to the balance sheet in mid-July we redeemed $250 million, 6.65% bond that was due in early 2018. We also have $175 million of 5.75% bonds that are open at par to maturity in 2042. Given the flexibility of this debt we will continue to evaluate our repayment options.

We have bought authority to buyback up to $150 million of additional shares; we did not buyback any shares during the quarter. Our balance sheet remains strong with over $20 per share of $2.5 billion of cash and marketable securities, significant borrowing capacity and only $850 million of debt.

Liquidity and balance sheet flexibility continue to be a competitive advantage that positions us well for future opportunities. Thank you. And with that, we will open it up to Q&A..

Thank you. [Operator Instructions] Our first question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question..

Great, thank you. Good morning.

I was hoping you could talk more about the marketing process for 1500 Market, just to get a sense of what the CBD Philly market looks like today in terms of transactions? How deep was the bidding pool? What did you think of pricing in a sense of kind of what people are underwriting for growth?.

Sure. Jamie, it’s David. I don't know 1500 Market is indicative of the market overall in Philly just given the size of that asset. That was a very large property in a smaller Downtown market.

So the buyer pool was strong enough to have a meaningful process, but it wouldn't be as strong as I might expect for different assets in Philly or in other markets of similar size where the markets are larger. And then I’d say buyers overall are pricing Philly reasonably aggressively.

They’re underwriting rent growth and they’re expecting I would say reasonable returns for a CBD asset..

Okay. And then just generally, again, I know you gave some color on the transaction market, but maybe comparing it to this time last quarter or this time last year, how would you say the depth of the buyer market overall and underwriting assumptions have changed..

Yes. So we've been saying for several quarters in a row that if the market wasn't driving 75 miles per hour anymore, it was going 60, 65. So we think buyers are still underwriting growth.

They're still bullish on real estate, especially given the amount of equity that's been earmarked for real estate investment and the plentiful debt at low interest rates that is available.

Buyer debt over the better sense of the next couple months given that we've got 77 properties in the market, but as of right now, we don't see much of a change in pricing. If anything it's more of the same, what we've said that it's taking longer to get deals done, but we still think now is a good time to be a seller..

Okay. And then along those lines you are down to 20 assets, you guys have talked for several quarters now about the potential fork in the road.

How do you think about doing just you know – is there appetite for a full portfolio sale once you get down a couple more? Or you think you'll stick with this one-off sale approach?.

Hey Jamie, it’s Adam. As part of that conversation we've always articulated our desire is to marry the capital that we've now amassed with the team that we've put together and grow the company. That's what we hope to do.

If we are unable to find an opportunity that creates shareholder value then we'll start exploring what else to do, but that’s not our main focus where we sit here today..

Okay. And just a last question for me because I'm getting a lot of questions on it.

How do we think about the NOL as it stands today and potential tax liability if you do some more of the assets or even all the assets?.

Well, we have mentioned before that the portfolio as a whole has a built-in tax gain, where we sit so far, we've generated NOL.

So if I think about that in a contacted 2017, we have a number of assets in the market, so some of them have gain, some have losses, and depending on how the dominoes fall will either be in a gain or loss position, again dependent on what closes this year.

In terms of the overall portfolio, we are REIT, so if there is a gain that’s distributed out, but there is no tax liability in the traditional sense or beyond that..

Okay. Great..

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

Great. Okay, guys. I think 13 assets that looked to me like they are worth that are meaningful say worth more than about $70 million, so you've got to be getting some really good visibility on the finish line here. Two questions.

Why aren't you buying back shares at $30 a share if there is meaningful upside to the current trading price? And then second, it looked to me like you've got about $280 million of marketable securities on the books, can you expand on those?.

John, I get the buyback question is something that we've been really addressing from the beginning. We’ve recognized the value of that tool to create shareholder value, but you can’t always be buying back shares. So we continue to evaluate that opportunity and we will utilize it when it's appropriate.

And John, will you repeat the second part of your question please?.

Your balance sheet has I think $200 odd million of marketable securities..

Yes. Primarily short-term treasuries..

Okay.

And then David, turnkey – talk about what it takes to move people into vacant space these days, or are you required or is the market dictating turnkey TIs or are tenants putting dollars, meaningful dollars into the space in this day and age?.

We've been seeing both. It cost a lot more to put a tenant in a vacant space than it did a few years ago.

And then depending on the length of the lease, we’re either committing additional dollars to kind of match that additional term or perhaps the tenant if it's a short lease and still wants the full build out would be putting in their own money to get to the level that they're looking for..

Okay.

And then somebody told me that the two Pittsburgh assets were put to bed, what's the status of those?.

Not put to bed as has been reported, those would be included in the seven properties that are currently in the sales process..

Great. All right. I wish you guy’s great success..

Thanks, John..

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

Good morning, everyone. Just a quick question for David Helfand, it seems like your tone toward putting capital to work changed maybe the way that I interpreted, it seems to a change from quarter-over-quarter.

I mean, I guess I've better way to ask you, are you close to the opportunities, are you just feeling more constructive about putting capital to work, maybe if you could elaborate?.

Sure. Good morning. I didn't intend for my tone to change or maybe reflected as we get smaller and as we're working through dispositions, leasing up and reposition the assets. We're clearly devoting more energy to searching for opportunity.

We have more resources available to us to do that and so it maybe as more top of mind, but I'm not sure our attitude is changed. I think Adam expressed it well. We would love to find something to do. We have confidence in the team. We've put together here.

We have capacity that piece we can't control necessarily is the market and our ability to find a deal. But we are working hard, looking at a number of things and hopeful that we compare a deal that we think, we can create value and drive opportunity and apply the team and the capital to it..

And then when you look at your pipeline of deals that you might be considering, or is it really just portfolio type trades or are you also considering one-off assets?.

We’re really focused on a larger deal. We've come to the conclusion that one-off transaction does not add to what we're trying to do here. So we’re looking for a bigger portfolio type of opportunities..

Great. That’s what I figured.

And last question for me, is this safe to say, Seattle, Denver, Austin is not included in the asset sale that sub assets for sale today?.

No, I wouldn't say it's safe to say that. We've got seven assets in the market that list tend to change periodically. And as we've said in the past, we haven't ring fenced any asset and that wouldn't be sold. So I wouldn’t make any assumptions..

Thank you..

[Operator Instructions] Our next question comes from the line of Chris Belosic from Green Street Advisors. Please proceed with your questions..

Hey. Good morning, guys.

I know you touched a little bit on kind of underwriting the transaction market out there, but maybe for 600 West Chicago as we’re able to given the unique nature of that large size of that assets? Do you have any kind of expectations on what the buyer pool may kind of end up looking like? Or what type of buyers may show up for that?.

Well, it’s a 1.6 million square foot property. So you would expect it would be the better capitalized to larger buyers, who are going to show up. And to the extant, there are operators interested. They’re going to have to team up with some serious institutional capital to acquire it..

Okay, fair enough. And then just one other one for me.

I know you touched a little bit on the upcoming Expedia move out in Bellevue, but just curious if there's anything further you could sound upon in terms of potential definitive activity or negotiations, is there anything that you guys have entered?.

What I said in my prepared remarks, Expedia will be moving out. We think it's a very attractive large block of space in a market they gobbles up space and it's well known. It’s on everyone's radar and we're speaking with the large users..

Okay. Thanks guys..

Our next question comes from the line of Manny Korchman from Citigroup. Please proceed with your question..

Hey, good morning, guys. Just curious you've simply been pretty reticent about talking about specific deals that haven't closed. You had released mid-quarter and you've discussed today 1600 Market and 600 West Chicago.

What’s driving to talk about those assets specifically for sale is it just the size and sort of magnitude within the portfolio are you trying to market them are broader, group of users by bringing up on the call and sort of in your public filings or is it something else?.

Well, there was a lot of press around both of those assets that we saw we wanted to confirm the status of them and that's why we released what we did earlier and referenced on the call today. And towards what we've done that in the past where there's been press about an asset going to the marketplace..

And then just maybe going back to sort of the pace of transaction volume? Has what you're seeing the transaction markets whether it be a slow down or maybe just sort of flatness.

As that inspired you to sort of market assets more quickly or change the way that you're approaching the sell down process more generally?.

I don't think it changes our approach and I'm not sure the market has changed all that much we commented on last year that things were going a little slower people were underwriting and questioning things that maybe a year earlier they had underwritten through and I'm not sure that's changed things have been pretty stable in the transaction market as we see it as David mentioned while the much better sense with the seven assets in the market the kind of a diverse set of assets we might be better positioned answer that question on the next call, but I think things are relatively stable..

Great. That’s it for me. Thank you. End of Q&A.

There are no further questions in the queue. I'd like to hand the call back over to Mr. Helfand for closing comments..

We appreciate your time and think for joining us..

Ladies and gentlemen, this does conclude our conference for today. You may disconnect your lines at this time. And have a wonderful day..