Equity Commonwealth

Greetings and welcome to Equity Commonwealth Third 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. At that time, if you'd like to ask a question, the command is star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sarah Burns. 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 ending September 30, 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 most recent 10-K and then our most recent 10-Q 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. 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 also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental containing our third quarter 2020 results for 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. I'll begin with brief comments on market conditions, review our third quarter results, and provide an update on the company's current activities. First off, I'd like to again recognize our onsite people for their commitment, as well as the broader EQC team who have risen to address the challenges created by the pandemic. Our buildings are open, and while many tenants continue to be cautious about their return, we've implemented precautionary measures to promote safety or when they are ready to come back. Tenant utilization at our four properties is currently averaging around 10% a day. Office market activity in general was slow in the third quarter, with lower leasing and sales volumes, reflective of a market that remains frozen. The limited number of deals that are getting done are typically those with credit and terms. Delivery of new supplies push vacancy higher, and an increase in sublease space availability will add pressure on lease economics. Turning to EQC, our four property portfolio, totaling 1.5 million square feet, was 87.7% leased at the end of the third quarter, down 230 basis points from the last quarter. The decline was largely the result of a buyout of a 23,000 square foot lease at Bridge Point Square. Commenced occupancy increased 120 basis points to 85.1%, largely due to leases at 17th Street, Plaza, and Denver, including Salesforce. Leasing activity continues to be slow, and we're actively engaged with our tenants to address their space needs, with most showing a preference for short-term extensions at this point. In the third quarter, we collected 98% of contractual rents. including 3% from the application of security deposits and letters of credit. In October, we've collected 97% of contractual rents, including 1% from security deposits and LCs. Stained property NOI was up 11.8% compared to the third quarter last year, largely due to a $1.3 million lease termination fee. Stained property cash NOI decreased 7.1% due to lower parking revenue. Funds from operations of $0.03 per share for the quarter were significantly impacted by the decline in interest rates on our cash balances, which reduced FFO by $0.13 per share. Turning to the balance sheet, in July we prepaid at par the outstanding $25.1 million, 5.7% mortgage loan on Capital Tower in downtown Austin. As a result, EQC has no debt and $123 million convertible preferred outstanding. The disposition of three properties in the first half of 2020 generated $757 million of gross proceeds. During the third quarter, we declared a $3.50 per share special common distribution that was paid on October 20th. We do not have any properties in the market for sale at this time. Since taking responsibility for EQC, we've sold 164 assets for $7.6 billion. and use the proceeds to repay $3.3 billion of debt in preferred, pay $1.2 billion of common distributions to our shareholders, repurchase $266 million of common stock, and have a current cash balance of $3 billion or $24 a share. Of course, we can't predict how the pandemic will play out, but it's likely to have profound consequences. In these dynamic and uncertain times, we will continue to be patient and evaluate a wide range of potential opportunities. As we look forward, we believe the strength of our team, our culture, and our balance sheet will be competitive advantages. And with that, I'd like to open the call to your questions.