Greetings and welcome to Equity Commonwealth’s First Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the conference over to your host, Sarah Byrnes. Thank you, you may begin..

Thank you, Rob. Good morning and thank you for joining us to discuss Equity Commonwealth’s results for the quarter ended March 31, 2020. On the call today are David Helfand, President and CEO; David Weinberg, COO and Adam Markman CFO.

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

We refer you to the section titled Forward-Looking Statements in yesterday’s press release as well as the section titled Risk Factors in our most recent Annual Report on Form 10-K for a discussion of factors that could cause actual results to materially differ from any forward-looking 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 material. Today’s remarks also includes certain non-GAAP financial measures.

Please refer to yesterday’s press release and supplemental containing our first quarter 2020 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results. With that I will turn the call over to David Helfand..

Thanks, Sarah. Good morning. We appreciate you joining us today. COVID-19 pandemic as created an unprecedented set of challenges for the global economy, markets and society at large. The social cost is enormous and we want to convey our deepest sympathies to those directly impacted. We also want to express our appreciation for those on the front lines.

Our priority at EQC right now is the health and safety of our employees tenants and building staff. Our buildings are open and we’re working with our tenants to ensure their safety as stay at home orders are lifted and they begin to return to the office.

This includes implementing physical distancing protocols in common areas, evaluating options to control building ingress and egress, enhance cleaning and other precautionary measures. We will be following all government-mandated protocols for returning to the office.

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

We continue to communicate with our tenants and are working with those that need our assistance. For the month of April, 98% of contractual rents were paid, 3% of which is from the application of security deposits and letters of credit. Less than 1% of our revenue is from retail tenants and we have no co-working exposure.

Given the uncertainty at this time we are unable to determine the impact COVID-19 will have on our tenants and portfolio. Briefly, turning to our business in the first quarter, we completed the sale of two properties for $672 million.

As mentioned on our call in February, we closed on the sale of our 286,000 square foot property at 109 Brookline in the Longwood Medical District of Boston for a gross sale price of $270 million of $946 a foot. Proceeds after credits primarily for contractual lease costs and transfer taxes $259 million.

In addition, in March, we closed on the sale of Tower 333, a 435,000 square foot office property in Bellevue, Washington that we leased to Amazon in 2018. The gross sale price was $401.5 million or $922 per square foot.

Proceeds after credits primarily for contractual lease costs and transfer taxes $316.7 million, pricing was in the low 4% cap rate range. Taxable gains from these dispositions totaled $419 million and will likely result in the payment of another special dividend this year.

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

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

During the first half of March, we repurchased 711,000 shares of common stock at an average price of $29.31 per share for a total of $20.8 million. Our balance sheet is strong with net cash of $3.3 billion or roughly $27 a share. Despite the challenges created by the pandemic, we are focused on continuing to move forward.

The broader equity organization, which I have been a part of for more than 30 years has experienced multiple periods of severe dislocation, managed risk through cycles and emerged stronger.

As a result of EQC’s execution to date, the strength of our team and our culture and our balance sheet, we are well positioned to weather this storm and to thrive. We are in unique position, we monetize the bulk of the original Commonwealth portfolio in anticipation of an opportunistic environment.

Looking forward as we consider the broad spectrum of opportunities to invest, we will continue to remain patient and disciplined and with that, we’ll open the call to your questions..

Thank you. [Operator Instructions] Our first question comes from Emmanuel Korchman with Citi. Please proceed with your question..

Hey, good morning everyone. David, thanks for the comments in your intro I guess there have been others out there that have spoken about sort of more of a dislocation in the public equity markets in the private or direct real estate markets.

Are you seeing the same? How are you sort of viewing opportunities that right now, especially if there is a pause, sort of, what are you telling your team to focus on or to define that next value acquisition? Thanks..

Yes. Thanks, Manny. Good morning. I think it’s our general view that we’re early in this, we’re sort of six weeks in and it’s still unfolding, and it’s still very difficult to predict what direction it’s going to go.

That being said obviously our investment team is monitoring both public market activity and what’s going on with the REITs as well as private, and we have over time seated relationships and had discussions and his things calm down, we’ll revisit those and begin to think about what the opportunity set really is what is actionable.

But I think our general view is that it’s early that we’re still in the midst of something that is hard to predict and it probably is months if not quarters before real actionable opportunities are available. Now if that changes in something comes our way, we’ll be prepared for that..

And I guess.

Other question is just we’ve seen stresses on the rent collection side and some of those will likely be temporary, but others will be permanent, does that change as approach that sellers might have of getting out of assets that they thought were more bond like and are proving its have some headaches involved?.

David, do you want to take that?.

Well, I think, Manny, it’s a good question. And in this environment I hopefully Sam as kind of advised us, everyone including owners of real estate are reviewing and challenging all other assumptions.

So, if they thought they had a bond like investment, a passive investment and that’s no longer the case, then it may cause them to sell that asset sooner or perhaps sell it when they never intended to do so, because of what’s happening today..

Thanks, guys..

[Operator Instructions] Our next question comes from Jamie Feldman with Bank of America. Please proceed with your question. Jamie, you’re live with our speaker, if you’re muted, please unmute yourself..

Hi, this is Elvis on for Jamie. Glad to hear you’re all well.

Can you talk a little bit about today’s dislocation or potential dislocation versus the great financial crises and just building on to what Manny said, are there any asset classes in particular that you feel today will be at play that we’re not at play last cycle?.

Well, that’s really difficult to make a comparison, given how early we are in this. Obviously, everyone lived through the great financial crisis and it was a pretty dramatic event and people were unprepared.

I think I can make some general comments, which is for the most part, there was less leverage in the system as we entered into this that fundamentals in a number of businesses were decent to strong with the exception of a couple of businesses, obviously retail.

To compare the two, I would have to have a better understanding of what this one is going to look like. And frankly, we don’t have that view. I think David alluded to it, we’ve been spending time with Sam trying to see things through his eyes and understand and he’s told us, this is sort of new territory.

We got to be thoughtful and careful, and evaluate everything as David said, with a fresh set of eyes through the lens of what’s going on and that’s going to change.

We got to realize that how this is going to break, how is the reopening that appears to be beginning going to play out, people are going to need to go back inside or is there going to be a sort of moderate reopening that leads to a greater reopening.

We’re optimistic, but we also are practical and this is essentially science-based and a public health issue. So, it’s hard to predict that outcome and therefore, hard to compare to the GFC..

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

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

Okay. And then maybe, one last one for Adam.

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

Well, I can reiterate a bit of what David mentioned and maybe, provide a little additional detail that I hope it’s helpful. As you may recall, we started the year with a federal net operating loss carry-forward of approximately $25 million.

And as we’ve previously disclosed, we believe that all of our remaining assets will generate taxable gains if they’re sold. David mentioned that the gain from 109 Brookline is about $223 million and Tower 333 add an additional $196 million, the total of which David mentioned in his prepared remarks.

Georgetown, which is in the market for sale and scheduled to close in June, if it does close. We are also generated gain, but that gain will be something like one-tenth the size of the gains generated by each of the other assets. And then of course, we’ll also generate taxable income in the normal course of operating our business.

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

Thank you. That’s all from me..

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

Great. Thanks for the update, guys and gals. Two questions.

One is what’s the earliest you could pay that special and what’s the latest you could pay that special? And then how big is the team now as you go into sort of a long-term period of suspension?.

Well, let me take that Adam you’re correct me. The earliest we could pay would be when we know the size of the gain, and the latest I believe is the end of January of next year. And then I’m blanking on your characterization, but we’re not going into any kind of pause or hiatus, we’re busy at work.

Our team has done an outstanding job sort of refocusing and working to support.

Our tenants coming back to work and then on the investment side, our team is busy monitoring everything trying to look for information reestablished lines of communication, checking on relationships, understand markets and when transaction activity, whether it be leasing or sale activity happens to understand it.

So, we’re busy, we’re focused and we’re going to be patient in terms of deploying the capital until we find something that we think is compelling..

Great, thank you..

Our next question is from Emmanuel Korchman with Citi. Please proceed with your question..

Yes, it’s Michael Bilerman. Good morning. So, I was wondering if you can share a little bit more about the lens that Sam is looking at in terms of investment and how that influences your sort of decision-making process.

And you have been extraordinarily patient during what was the run-up in terms of, you didn’t really like, where our pricing was in the market.

You didn’t find those compelling opportunities and I think you were concerned about sort of the overall economic environment clearly, this event, which was driven by science, not actual real excesses is now provided someone in your capacity that has over $3 billion of cash.

So potentially, find something compelling and so maybe, you can share with us a little bit about how Sam and how you guys are thinking about the world and what has changed from either a property sector perspective, a geographical perspective in terms of where you may go now that this has happened?.

David, do you want to take that?.

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

So that’s what we’ve been doing. We’ve been actively engaged. We’re looking at a variety of opportunities. We can’t predict as Sam would say, what the market will give us. He is pretty certain; it will take some time to find the right opportunities.

So all we really can do is position ourselves and prepare for that moment when the opportunity avails itself. And in the meantime, be patient and disciplined. He has no roadmap, other than the one that got us to this spot.

What happens next is really to be determined, and he's told us not to assume any sectors or “red lined”, just keep looking at everything absorbing as much information as you can, and just be ready when that moment comes..

So we've seen nothing is red line. I remember it feels like last year, may have been the year before and I asked you about retail and retail, couple of years ago were starting to go through that initial stress, I mean is retail now off of the no list.

I think, David, I remember you are responsible, I think I gave a really long intro and I think your response was no.

So is it like a lower case no at this time rather than a upper case?.

It's almost probably not – to answer your question, Michael, I think it's more philosophy and it's in keeping with what David just responded to your previous question, which is while there are significant challenges in retail, in particular in malls and those aren't lost on Sam, we used to own a very large portfolio of malls, when I first started with Sam back in the – hate to say at the late 1980s.

It's a tough business. But given the dislocation that is likely to result from what's going on, given the unpredictability there is just no reason to write anything off right now, there's no percentage in it, because we are about taking thoughtful risk in exchange for attractive return.

And so we've had conversations with many of you on the call and you've asked what returns to your target and I think we give an unsatisfying answer which is, it really depends on the risk that we are taking to earn the return and the same is true with the sectors.

Retail is not our first choice, maybe even our last choice, but there is no reason to red line it or to count it out when things are as uncertain as they are right now..

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

My god, yes that is – that's on the list, Michael..

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

Yes, Adam, do you want to take that?.

Yes. Sam in conversations with him has made the distinction between being a trader and being an investor. And he has had us focus away from making trades and toward making investments.

That doesn't mean that we won't do something with the debt security, but generally the focus is going to be on creating a platform to grow our business and as I mentioned that initial investment may come through the liability side of the balance sheet.

But the focus will be on something that we can grow into in all likelihood that will become a real business and a real platform for our team and for this company..

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

Well, I guess, maybe let me try and answer that two ways. It will almost certainly be real estate. We have been looking and trying to find opportunities given the challenges we had when the market was as stout as it was.

To find other businesses that might not look traditional, but when you look through them have the characteristics fundamentals that are attractive and can be long-term businesses, the example I'd give is in 1983 Sam bought what is now Equity LifeStyle, in 1993 we took it public and no one understood it.

No one understood the fundamentals of the business, but Sam did, and he knew that if we built a long-term – took a long-term focus and built the business, the public markets would understand it.

We'd be open to that, finding the right asset class, something asset intensive operationally intensive which we think is an edge we have, but it will almost certainly have real estate hard asset as its core, and it will almost certainly be real estate, I would never say never, but all of our focus has been on real estate businesses of one sort of another since we started this adventure..

And then just lastly, in terms of buying securities, do you think sort of from an M&A perspective, you've always been viewed as potential M&A candidate of being able to recapitalize an existing real estate company, generally company was public and then also coming in from a management perspective.

So are you seeing an act of this at all in terms of taking fulcrum positions up to a 5% limit or more in trying to ferret out these opportunities in planting some seeds to have conversations, you've seen that at least on the hotel C-corp space, a number of bigger private equity players have taken position in some of the public companies.

So is that an area that is a focus or not?.

It's not a focus and I think it's highly unlikely what we do is activist. The trailer trash investment turned out to be pretty good, right. That one worked out..

Thanks guys, I appreciate it..

Thank you, Michael..

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

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

Be well..

This concludes today’s conference. You may disconnect your lines at this time. And we thank you for your participation..