Equity Commonwealth
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Greetings, and welcome to Equity Commonwealth's Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Sarah Byrnes, Senior Vice President of Investor Relations. Thank you. You may begin.

[Sarah Byrnes:]

Thank you, Rob. Good morning and thank you for joining us to discuss Equity Commonwealth's results for the quarter and year ending December 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 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 the section titled risk factors in our annual report on Form 10-K for a discussion of factors that could cause actual results to materially differ from any forward-looking statement, including any statements regarding the overall impact of COVID-19.

[David Helfand:]

Thanks, Sarah. Senior Vice President, that has a nice ring to it, and we congratulate you, Sarah, on your well-deserved promotion. Good morning, everyone. Appreciate you joining us. I'll begin with brief comments on market conditions and provide an update on the company's current activities. Story of 2020 was, of course, the pandemic and its impact on everyone and everything. While vaccines give hope for better days ahead, consequences for the economy are still uncertain. The stock market has attracted a lot of attention of late. And at its low last March, the S&P was down 31% versus the start of the year. Since that time, the markets rallied 75%, driven by expansion of the Fed's balance sheet and stimulative fiscal policy. Despite these market gains, there is real stress across the country, particularly amongst lower wage workers who have borne a disproportionate share of job losses. In some ways, the real estate industry mirrors this divide with the data infrastructure, industrial and life sciences, among others, significantly outperforming out-of-favor sectors, including retail, lodging and office. For 2020, the Morgan Stanley REIT Index declined 7.6%, its worst performance since 2008. At EQC, with the portfolio down to 4 assets, we are focused on evaluating opportunities to deploy our capital. As we've discussed with many of you, we're targeting a variety of asset classes, particularly but not exclusively those that have been hit hard by investor sentiment relating to post-COVID demand expectations. We've been consistent in our investment approach, targeting portfolios, platforms and companies rather than individual assets. Given the optionality we've earned through the successful execution of our $7.6 billion of dispositions, we believe it's prudent to focus on transactions that will help define our future rather than one-off deals that would create friction if we were to determine later that selling our remaining assets and returning capital to our shareholders is the right path.

[David Weinberg:]

Thank you, David, and good morning, everyone. As David discussed, we are spending a considerable amount of time sourcing and underwriting investments. While we have yet to sign a deal, we remain persistent. This is an extremely competitive environment where the demand for real estate investments exceed supply.

[Adam Markman:]

Thank you, David. I'll briefly cover financial and operating results for the quarter and year-end. Detailed FFO, NFFO and NOI walks are in the press release. I won't reiterate that information, but rather, we'll highlight a few key points which emphasize the unique position that we've created by monetizing the undervalued portfolio that we took control of over six years ago. Following $7.6 billion of dispositions, the largest asset on our balance sheet is cash, and the most important factor that contributed to the decrease in earnings in 2020 was lower interest income earned on our cash deposits. In 2019, we had an average cash balance of $3 billion earning 2.4%. Despite our average balance being more than $200 million higher in 2020, we earned nearly $50 million less in interest income due to the average interest rate earned on these deposits falling to below 70 basis points. The trend has continued with our current average rate below 30 basis points. The other major factor impacting earnings was dispositions with $1.57 billion of assets sold over the past two years. A portion of the proceeds from these asset sales were used to pay down our remaining debt, generating an interest expense savings of over $8 million for the year. The order of magnitude of these changes stand in contrast to lower parking revenue and occupancy declines in the same-store portfolio, which contributed to a same-store cash NOI decline of $2 million, of which parking is the real driver.

[Operator:]

Our first question comes from Emmanuel Korchman with Citi. Please proceed with your question.

[Emmanuel Korchman:]

Thank you for that deeper look into sort of your opportunity set. As you sit there underwriting deals, I feel like you're probably more aligned with the investors on this call than other landlords when thinking about the future of office. So was just hoping to get your views on where the office space goes, especially on topics like working from home and that impact on ultimate office usage and how you think about that when you're underwriting office deals.

[David Helfand:]

Yes. Thanks, Manny. Obviously, a lot of opinions and thought. Obviously, Salesforce's announcement is an interesting one. We've done a lot of business with them on the leasing side over the years. I think clearly, work from home is going to be a part of the landscape looking forward. And I think for the next few years, companies are going to experiment with how to manage their team and their people. I think Sam has been pretty outspoken, and I tend to agree with them that longer term, when it's safe to do so, people will still want to be at the office, to inculcate culture and to make sure people understand what the company is about and what it's trying to achieve. So I would probably number us, and we have said this in the past, among the more relatively bullish about high-quality office in high-quality markets. And having said that, it may be a few years before the fundamentals reflect an upward trend, even the dislocation that's gone on so far.

[Emmanuel Korchman:]

And then I don't remember which David said this but I think you reiterated that you're not looking at single deals and you really want a platform or a portfolio. Does that mean you're not looking at single deals and not underwriting those deals? Or is your desire just to act in a bigger way once you do act?

[David Helfand:]

David, do you want to take that?

[David Weinberg:]

Well, actually, Manny, you're right on both points. Well, we are looking at single deals but not with really a focus on execution or the actual acquisition of those one-offs, more just to understand pricing and what's going on real-time in the markets. But as David said in his prepared remarks, rather than create friction by buying a couple of one-off assets, we are looking for larger transformative type investments to set the future.

[Operator:]

There are no further questions. At this time, I'd like to turn the call back over to David Helfand for closing comments.

[David Helfand:]

Thanks for joining us today. We appreciate your interest. Be well. Thanks.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.