CommonWealth REIT Management Discusses Q2 2012 Results - Earnings Call Transcript

CommonWealth REIT (CWH)

Q2 2012 Earnings Call

August 8, 2012 1:00 PM ET


Tim Bonang – VP, IR

Adam Portnoy – President and Managing Trustee

John Popeo – CFO


John Guinee – Stifel Nicolaus

Michael Bilerman – Citigroup

Josh Attie – Citigroup



Good day and welcome to the CommonWealth REIT Second Quarter 2012 Financial Results Conference Call. This call is being recorded.

At this time, for opening remarks and introductions, I would now like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you and good afternoon. Joining me on today’s call are Adam Portnoy, President and Managing Trustee; and John Popeo, our Chief Financial Officer.

The agenda for today’s call includes a presentation by management, followed by a question-and-answer session. I would also note that the recording and retransmission of today’s conference call is strictly prohibited without prior written consent of CommonWealth.

Before we begin today’s call, I would like to read our Safe Harbor statement. Today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on CommonWealth’s present beliefs and expectations as of today, August 8, 2012.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call other than through filings with the Securities and Exchange Commission or SEC regarding this reporting period. In addition, this call may contain non-GAAP numbers, including funds from operations, or FFO, normalized FFO and cash available for distribution, or CAD.

A reconciliation of FFO, normalized FFO and CAD to net income is available in our supplemental package found in the Investor Relations section of the company’s website. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-Q, which we expect to file tomorrow with the SEC, and in our Q2 supplemental operating and financial data package found on our website at Investors are cautioned not to place undue reliance upon any forward-looking statements.

And now, I’d like to turn the call over to Adam Portnoy.

Adam Portnoy

Thank you, Tim. Good afternoon and thank you for joining us on today’s call.

For the second quarter of 2012, we are reporting fully diluted normalized FFO of $0.83 per share, compared to $0.91 per share during the same period last year. During the quarter, we signed 146 individual leases for 1.6 million square feet with 65% representing renewals and 35% representing new leases. The average term for leases entered this quarter were 10 years and the weighted average rental rates were 2% above prior rent for the same space.

Capital cost commitments associated with leasing activity this quarter was $28.22 per square foot, or about $2.82 per lease year. Although we had a lot of success leasing space this quarter, we still had almost 2 million square feet expire, which produced a 30 basis point decline in consolidated occupancy to 84.5% as of June 30 compared to 84.8% as of – on March 31. Our occupancy rate for wholly-owned properties, which excludes results from a majority-owned subsidiary, Select Income REIT, or SIR, was 79.9% as of June 30.

Generally, our CBD office properties, which represent 54% of our wholly-owned portfolio NOI continues to perform better than our suburban office properties. Also it’s important to note that the Metro Chicago market now represents the company’s largest market area with 12% of our consolidated NOI followed by the Metro Philadelphia market, which represents 11.1% of our consolidated NOI. And these two markets combined almost 90% of the NOI comes from downtown office properties.

Within our other market segment, the stronger leasing areas are Australia, Austin, Seattle, Pittsburg, Boston, and Northern California. These six market areas represent a combined almost 16% of our consolidated NOI. On a consolidated same-store basis, our occupancy declined 50 basis points to 83.9% and NOI declined by 1.4%.

The decline in same-store NOI primarily reflects the decline in occupancy in our suburban office portfolio as well as some expected declines in occupancy in our downtown Chicago, and Denver portfolios. Even through almost all of our Oahu, Hawaii holdings are owned by SIR, we own almost 70% of this company and we continue to share in growth from rents in the Oahu market.

During the quarter, we signed leases for 184,000 square feet in Oahu and the weighted average rental rates were 52% above prior rents for the same locations. Looking forward to the rest of 2012, we have 3.4 million square feet scheduled to expire. About two-thirds of this expiring square feet is located in our CBD office portfolio or our industrial and other portfolio, including our industrial lands in Oahu.

We feel confident that we can renew or lease the space in these properties at rental rates that are equal to or higher than the current employees rents. In July 2012, we declared a dividend of $0.50 per share, which represents 60% of our second quarter normalized FFO. During the quarter, we spent $27.5 million on recurring capital expenditures, which included tenant improvements, leasing costs and recurring building improvements. We generate $37.5 million of cash available for distribution or CAD during the second quarter, resulting in a rolling four quarter CAD payout ratio of about 108%.

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