Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Timothy A. Bonang - Vice President of Investor Relations

Adam David Portnoy - Principal Executive Officer, President and Managing Trustee

John Christopher Popeo - Chief Financial Officer, Principal Accounting Officer, Assistant Secretary and Treasurer

Analysts

Mitchell B. Germain - JMP Securities LLC, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Richard C. Moore - RBC Capital Markets, LLC, Research Division

CommonWealth REIT (CWH) Q1 2013 Earnings Call May 8, 2013 1:00 PM ET

Operator

Good day, and welcome to the CommonWealth REIT First Quarter Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Timothy A. Bonang

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

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 REIT's present beliefs and expectations as of today, May 8, 2013.

Forward-looking statements are not guaranteed to occur. Actual results may differ materially from those projected or implied by any forward-looking statements. Information concerning factors that could cause those differences is contained in our annual report on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission or SEC; our first quarter quarterly report on Form 10-Q, which we expect to file with the SEC later this week; and in our Q1 supplemental operating and financial data package, which can be found in the Investor Relations section of our website at www.cwhreit.com.

Any matters described in forward-looking statements are not guaranteed to occur. The company undertakes no obligation to revise or publicly release the results of any revisions of the forward-looking statements made in today's conference call as a result of new information, future events or otherwise. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO; normalized FFO; cash available for distribution or CAD; earnings before interest, taxes, depreciation and amortization or EBITDA; property net operating income or NOI; and cash basis property net operating income or cash NOI. The definition of each of these non-GAAP measures and a reconciliation of each of them to net income, and a reconciliation of normalized FFO to FFO, are available on our Q1 supplemental operating and financial data package.

I would also note that the transcription, recording and retransmission of today's conference call are strictly prohibited without the prior written consent of CommonWealth REIT.

And now I would like to turn the call over to Adam Portnoy.

Adam David Portnoy

Thank you, Tim. Before I review first quarter results, I want to remind everyone that the company, its manager and its trustees are currently involved in various lawsuits, including litigation, concerning the ability of certain shareholders to undertake a written consent solicitation to remove our Board of Trustees.

During today's call, we will only be discussing matters relating to the company's results of operations, and we will not be commenting on or answering questions regarding pending litigation, the alleged consent solicitation or any purported offer to acquire the company. The purpose of today's call is to discuss the company's first quarter results. We open the call up for Q&A. I ask that you please focus your questions on the company's results of operations.

Also, I wanted to let you know that in response to shareholder request, we have made some changes to our supplemental operating and financial data package. In order to report statistics comparable to some of our competitors, we have included the calculation of same property cash NOI, as well as calculated the percentage change in cash rents for leases signed during the quarter. Historically, both of these metrics were only reported on a GAAP basis. We hope this additional information will help investors to analyze and compare the performance of CommonWealth REIT.

Turning now to our first quarter results. For the quarter ended March 31, 2013, we're reporting fully diluted normalized FFO of $0.78 per share compared to $0.90 per share during the same period last year. During the quarter, we continue to implement our business plan of focusing on the ownership and operation, high-quality central business district or CBD office properties, selling suburban properties and other assets and paying down debt. We also made good progress in executing our business plan during the quarter, having increased the portfolio's concentration of CBD office properties to 60.4% of wholly-owned property NOI and by reducing our debt load by approximately $830 million.

On a consolidated basis, during the quarter, we signed over 120 individual leases for 1.7 million square feet, with 70% of this square feet representing renewals and 30% representing new leases. The average term for the leases entered into or renewed during the quarter was 5.9 years and the weighted average cash rental rates were 1% below prior rents for the same space. Capital cost commitments associated with leasing activity this quarter were $11.86 per square foot or about $2.01 per square foot per lease year.

Of the 1.7 million square feet of leasing activity during the first quarter, 25% of the square feet involves CBD office properties, which had a 4% roll-up in cash rents, and 38% involved industrial properties, which had a 6% roll-up in cash rents. The remaining 37% of our square feet leased during the quarter involved our suburban office properties, which had an 8% roll down in cash rents.

As of March 31, our consolidated occupancy from continuing operations was 90%, which was unchanged from the year-end 2012 occupancy rate. Our occupancy from continuing operations for our wholly-owned properties, which excludes properties from our majority-owned consolidated subsidiary, Select Income REIT, was 86.9% as of March 31. On a consolidated same property basis, excluding properties held for sale, our occupancy declined by a modest 50 basis points to 89.4% and cash NOI declined by 1.2%.

In line with our business plan, our CBD office properties outperformed our suburban office properties in terms of leasing activity and occupancy rates during the quarter. However, due to about 240,000 square feet of net move-outs since March 31, 2012, and increases in real estate taxes and utility costs in the first quarter of 2013, our same property CBD office portfolio occupancy and NOI, declined by 1.3 percentage points and 3.5%, respectively, during the quarter.

The Oahu, Hawaii, market represents the company's largest market area, with 10.1% of our consolidated NOI, followed by our Chicago and Philadelphia markets, which each represent about 9.7% of our consolidated NOI. Almost 90% of the NOI from our Chicago and Philadelphia markets comes from CBD office properties.

Within our other market segment, the stronger leasing areas for our portfolio are Australia; Austin, Texas; Seattle, Washington; Pittsburgh, Pennsylvania; Boston, Massachusetts; the San Francisco, Bay Area; and Southern California. About 20.4% of our wholly-owned property NOI in the first quarter was generated from these 7 market areas.

To year-end 2013, we have 4.5 million square feet scheduled to expire continuing operations, which represents about 7% of our annualized rental income as of March 31. Also, as of March 31, we had about 7.3 million square feet of vacant space in our continuing operations. We currently estimate that in the remaining 3 quarters of 2013, we will lease about 5 million to 5.5 million square feet, and we estimate that the majority of these leasing activity will be renewals. About 71% of our 2013 expiring square feet from continuing operations is located in our CBD office portfolio or our industrial and other portfolio. We feel confident that we will be able to renew or lease a space in these CBD and industrial properties, and rental rates are equal to or higher than current rents.

The most significant lease expiration in 2013 is the 607,000 square feet located at One Franklin Plaza in Philadelphia, which was vacated by GlaxoSmithKline when its lease expired on March 31. As of today, we are continuing to negotiate with a new tenant to possibly lease this entire building, but these new negotiations are still ongoing, and we may not be able to reach agreement on acceptable terms. If we do not lease this entire building to this tenant, we may multi-tenant the property or list it for sale. This property accounted for roughly $2.8 million of consolidated NOI during the first quarter.

Our current expectation is that consolidated occupancy will remain largely unchanged between March 31 and year-end 2013 at about 90%. In order to achieve this, we continue to expect the decline in same property cash NOI, similar to what we experienced in the first quarter of around 1% to 3% per quarter through the end of the year, which is largely driven by expected continued rent roll downs in our suburban office portfolio, partially offset by expected rent roll-ups in our CBD and industrial properties.

As mentioned earlier, for the last several years, we have been executing on our business plan to reposition CommonWealth REIT's portfolio into high-value office properties located in CBD locations. Since January 1, 2008, we've acquired $3.7 billion worth of property. And the majority of these acquisitions have been high-quality CBD office buildings. During the same period, we have sold $1.5 billion worth of properties, largely consisting of suburban office buildings.

Since year-end 2012, and excluding transactions at Select Income REIT, CommonWealth REIT has not acquired or entered into any agreements to purchase properties. As previously disclosed, during the quarter ended March 31, CommonWealth REIT sold 18 properties with a combined 1.1 million square feet for a total of $10.3 million.

In addition, during the first quarter, the company received imminent domain taking proceeds of $1.8 million for a land parcel adjacent to one of its CBD office buildings located in Boston. As of March 31, we had 76 properties with a combined 5.6 million square feet located throughout the United States listed for sale with third-party brokers and classified as held for sale.

In April, we sold one vacant industrial building with 618,000 square feet for $830,000. As of today, 5 of the remaining 75 properties with a combined 1.2 million square feet are under agreement to sell for a total of $39.5 million. We expect to sell these 5 properties currently under agreements and the remaining 70 properties listed for sale before year-end 2013. However, no assurance can be given that any of these properties will be sold in that time period or at all.

In March, CommonWealth REIT issued 34.5 million common shares in a public offering at $19 per share, for net proceeds of approximately $628 million. Also in March, CommonWealth REIT sold all 9.95 million common shares that it owned of Government Properties Income Trust in a public offering at $25.20 per share for net proceeds of approximately $240 million. We used the combined net proceeds from these offerings to repay amounts outstanding under our revolving credit facility, which amounts were borrowed to fund, in part, the purchase of approximately $670 million worth of senior notes due between 2014 and 2016 pursuant to a previously announced debt tender offer. In total, CommonWealth REIT reduced its debt load by approximately $830 million during the quarter.

CommonWealth REIT made these equity sales to repay its debt and improve its balance sheet and debt service coverage ratios in order to maintain what we believe to be investment-grade rating standards. More specifically, CommonWealth REIT determined that the best way to improve the company's fixed charge coverage ratio, which was 2.2x at the end of 2012, was to raise equity and use the proceeds to repay debt. In other words, selling assets and using the proceeds to repay debt would not have improve the company's fixed charge coverage ratio, which the ratio, we believe, the rating agencies are most focused upon.

Before turning the call over to John Popeo, I want to point out that CommonWealth REIT has made substantial progress in implementing its business plan in the last few years. Today, 60.4% of the company's NOI from wholly-owned properties comes from CBD office buildings, which is more than double the percentage of NOI it received from wholly-owned CBD office properties just over 5 years ago.

We continue to be focused on executing the company's business plan. We are making good progress selling non-core assets and simplifying the company's operations. As the market conditions for the purchase and sale of office properties has evolved during the past year, CommonWealth REIT has shifted its focus from buying CBD office buildings to selling our remaining suburban properties. But both of these activities are intended to further our business plan to become a nationwide owner of high-quality CBD office buildings. Also, as a result of our recent capital raising activities, the company's balance sheet is much stronger than it was at year-end 2012.

I would now turn the call over to John Popeo, our CFO.

John Christopher Popeo

Thank you, Adam. Net income available for CommonWealth REIT common shareholders for the first quarter of 2013 was $14.5 million, compared to net income of $9.9 million for the first quarter of 2012. The increase primarily reflects new properties acquired for an aggregate purchase price of $1.2 billion since January 1, 2012, and gains from the sale of GOV shares in March, offset by debt tendered offer premiums paid in March, and the impact from service IPO in March 2012.

Rental income increased during the first quarter by 13%, primarily reflecting property acquisitions since January 2012. Operating expenses increased by 12.8%, primarily due to property acquisitions and increases in utility and snow removal cost in 2013, reflecting the relatively mild winter in 2012 and increases in real estate taxes.

Current quarter adjusted EBITDA increased by 7.6% compared to the prior year. Interest expense increased by 6.6%, primarily reflecting acquisitions that took place over the past year, including interest on assumed mortgage debt, offset by interest on $670.3 million of unsecured senior notes repaid pursuant to the tender offer completed during March 2013. The $60 million loss on early extinguishment of debt recognized during the first quarter of 2013 reflects the tender offer premium paid to purchase the $670.3 million of unsecured senior notes, plus transaction costs.

Our share of Government Properties Income Trust, or GOV, net income and normalized FFO for the first quarter totaled $4.1 million and $4.6 million, respectively. We received over $4 million in dividends from GOV during the first quarter of 2013. On March 15, 2013, we sold all 9,950,000 of our common shares of GOV for approximately $240 million net of commissions and expenses, and we recognize gains totaling $66.3 million.

Loss from discontinued operations totaling $1.9 million for the first quarter includes NOI of negative $1.2 million, plus G&A expense related to the 94 properties classified as held for sale at the beginning of the year, including 19 properties sold since December 2012. Loss on asset impairment from discontinued operations of $3.9 million reflects a write-down to estimated fair value of 7 of the remaining 75 properties that are currently being marketed for sale based on recent purchase offers.

Net income and normalized FFO attributable to the noncontrolling interest in Select Income REIT, or SIR, totaled $10 million and $13.1 million, respectively, during the first quarter. CommonWealth REIT continues to own $22 million or 56% of SIR common shares. So long as our retained interest in SIR continues to exceed 50%, we will continue to consolidate SIR's financial position and results into our consolidated financial statements, and reflects SIR's income attributable to the noncontrolling ownership interest as a deduction from CommonWealth REIT's income.

Normalized FFO available for CommonWealth REIT common shareholders was $0.78 per share for the first quarter of 2013, compared to $0.90 per share for the first quarter of 2012. Year-over-year per share results primarily reflect a decline in same-store occupancy and lease termination fees, the increase in same-store utility and snow removal costs in 2013 compared to last year. The SIR IPO in March 2012 and the issuance of new common shares in March 2013, partially offset by property acquisitions during 2012 and '13. If the common equity offering, debt tender and sale of GOV shares had all occurred at the beginning of the quarter, we estimate that FFO would have been closer to $0.67 per share.

During the first quarter, we spent $21.9 million on recurring capital expenditures, which includes tenant improvements, leasing costs and recurring building improvements. However, we expect the amount of capital expenditures per quarter to increase through the end of 2013 in order to achieve our leasing plans for the year.

We generated $46.9 million of cash available for distribution, or CAD, during the first quarter, resulting in a rolling fourth quarter CAD payout ratio of about 94.2% based on the former dividend rate of $0.50 per share per quarter, paid through the third quarter of 2012 and our new dividend rate of $0.25 per share.

Turning to the balance sheet. On March 31, 2013, we held $48.7 million of unrestricted cash. Much of this cash will be used later this month to pay the dividends we previously declared on our preferred and common shares outstanding. Rents receivable includes approximately $237 million of accumulated straight line rent accruals as of March 31, 2013.

Other assets include approximately $155 million of capitalized leasing and financing costs. The $159.5 million worth of properties held for sale represents the net book value of 76 properties held for sale as of March 31, 2013, plus related property level rents receivable and prepaid operating expenses and other assets. On March 31, 2013, we had $1.2 billion of floating rate debt, including the $350 million SIR term loan and $238 million outstanding on SIR's revolving credit facility.

At the end of the first quarter, we had $949 million of mortgage debt and $1.5 billion of fixed rate senior unsecured notes outstanding. The weighted average contractual interest rate on all of our debt was around 4.5% at the end of the quarter, and the weighted average maturity was around 6 years. At the end of the first quarter, our ratio of debt to book capitalization was 47%. Our adjusted EBITDA to interest in our fixed charge coverage ratios were 2.9x and 2.4x, respectively. Also, our debt-to-adjusted-EBITDA ratio was 6x.

These improved credit metrics primarily reflect the repayment of approximately $670 million of our unsecured senior notes with proceeds from our equity offering and the sale of all of our common shares of GOV in March 2013.

In conclusion, we believe CommonWealth REIT is well positioned to benefit from a slow recovery in the office market during the next couple of years, despite the fact that the company is undergoing a transition from an owner of suburban properties to a nationwide owner of CBD office properties.

Before we turn to the Q&A portion of today's call, I want to reiterate that the purpose of today's call is to discuss our first quarter financial and operating results. We will not be answering any questions related to the pending litigation, the alleged consent solicitation or any purported offers to acquire the company, and I ask and appreciate your cooperation in this regard. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from the line of Mitch Germain from JMP Securities.

Mitchell B. Germain - JMP Securities LLC, Research Division

Adam, just to get this straight. The rationale for the equity offering and not the sale of properties or shares and SIR and GOV was to improve the fixed coverage ratio. Is that the way to look at it?

Adam David Portnoy

In simple terms, yes. And that's exactly correct.

Mitchell B. Germain - JMP Securities LLC, Research Division

And the sale of GOV or SIR, that wouldn't have improved that ratio because the -- at least, in the case of SIR, the cash -- the operations are rolled up into CommonWealth, correct?

Adam David Portnoy

That's correct.

Mitchell B. Germain - JMP Securities LLC, Research Division

And is the way to look at that ratio today 2.4x versus 2.2x? Or is it proved even much more so because of...

Adam David Portnoy

It is likely to get modestly better than that because you only had -- the core to that ratio was only calculated off of a -- we did the equity offering at the beginning of March and we repaid the debt at the beginning of March. So we only had 1 month out of 3 where you really have the effect, that positive effect on that. So it's probably close to 2.5, 2.6 today.

Mitchell B. Germain - JMP Securities LLC, Research Division

And the target to maintain the investment grade, where is that in the mind of the rating indices?

Adam David Portnoy

I don't know where it is in the mind of the rating agencies. In our view, it's probably -- we think it's somewhere in the mid-2s.

Mitchell B. Germain - JMP Securities LLC, Research Division

Okay. And your plan for -- I know you've done a pretty good job paying down the debt. What's your plan for the remaining 2014 and 2016 notes that are coming due?

Adam David Portnoy

The remaining debt will largely just be taken in on our revolver and then likely refinanced with long-term debt, senior notes.

Mitchell B. Germain - JMP Securities LLC, Research Division

Got you. And my last question, and I'll go back in the queue. What's the total portfolio occupancy, including the assets that are held for sale?

Adam David Portnoy

It's got to be 6...

John Christopher Popeo

The assets held for sale are probably 25%, 26% occupied.

Adam David Portnoy

Yes. It's 25% -- they're about 25% occupied. I can't -- you can do the math. It's got to be...

Mitchell B. Germain - JMP Securities LLC, Research Division

So yes, low-80s, right? That's probably the way to look at it?

Adam David Portnoy

Yes, yes.

Operator

[Operator Instructions] And we do have a question from the line of Josh Attie with Citi.

Michael Bilerman - Citigroup Inc, Research Division

It's Michael Bilerman here with Josh. The G&A, the $17.3 million, how does that -- I guess, what caused that relative to what had been $13.7 million in the fourth quarter?

John Christopher Popeo

Yes. Michael, this is John. The increase is around $6 million. I'm just going to reference the prior year change for now. The components that make up that change are fees and expenses related to property acquisitions since January 2012 on a combined basis between SIR and CommonWealth. And as you know, SIR is consolidated. Combined portfolio-wise, we acquired $1.2 billion of properties. In addition, what's contributing to that increase is around $1.3 million, $1.4 million of additional G&A due to the fact that additional cost related to SIR operating as a separate public company. And then the last component is around $3 million of professional fees related to litigation activity during the first quarter of 2013. I mean, as far as the run rate goes, which I'm assuming might be everyone's next question, the increase in professional fees paid during the quarter related to activities that took place during the quarter. And fees that are incurred in the future will depend entirely on litigation and other activities that take place in the future, and we just don't have a firm handle on that at this point.

Michael Bilerman - Citigroup Inc, Research Division

I guess, I'm just trying to understand, because it is an externally managed entity, why those costs are being borne by CommonWealth shareholders rather than RMR, which appears to be the brunt of the litigations. Why is it running through CommonWealth?

Adam David Portnoy

All the litigation has been brought -- some of the litigation has been brought against RMR, but all the litigations has been brought against CommonWealth, its trustees and its managers, the officers and the trustees of the company.

Michael Bilerman - Citigroup Inc, Research Division

And so you feel like all those costs -- is there anything cost that are being borne by RMR at all in terms of litigation in addition to what's being borne by CommonWealth?

Adam David Portnoy

Yes. In addition to what you see there, there are cost being borne by RMR and its separate defense, yes.

Michael Bilerman - Citigroup Inc, Research Division

And how much should we be thinking about, at least on the CommonWealth side, in terms of shareholders' money that will be used in this litigation?

Adam David Portnoy

As John said, it's hard for us to estimate. We think it was about -- what did you say, John, $3 million in the first quarter. It's really hard to say what its going to be going forward, it depends on what happens with the litigation.

Mitchell B. Germain - JMP Securities LLC, Research Division

I guess, thinking about the equity offering that occurred earlier this year in February, which we didn't have the opportunity to have a conference call to discuss it, given the fact that it was an equity offering and it was done the same day as results. I guess, what changed, in your thinking at that point, it's not like -- we've been on this calls for many years where we've talked about selling assets and the leverage moving up and all these things. And I'm just curious, what sort of prompted in February to wake up and say, "Yes, you know what, I think it's time that we took leverage down", where you probably could have instituted sales of GOV or SIR or assets well before that rather than the massive dilution the shareholders had to suffer.

Adam David Portnoy

Yes. Again, this gets back to -- it's not just leverage, but our fixed charge coverage ratio. And specifically, whether or not we wanted to maintain our investment-grade rating. It was our belief that in order to maintain the company's investment-grade rating, we had to make -- we had to fix -- we had to basically improve our fixed charge coverage ratio in order to get into a better place. And the only, really, way you can achieve that was to do an equity offering and to repay -- use the proceeds to repay debt. Again, the math just doesn't work. If you sell properties that are generating income, you lose the income. Even though you're losing the debt and you reduced and used -- let's say you sell properties and used the proceeds to repay debt, but you've lost the income from the properties. Yes, you've lost the -- you don't have to pay the interest expense, either. But the ratio sort of doesn't change, it doesn't move. So the other way to address that ratio was to basically go out and do an equity offering and use the proceeds to repay debt. It was something that we were hoping that we may not have to do. It was something that would have been -- we were thinking about for some time. But basically, the recovery in the office sector took -- is taking much longer than we thought. And we weren't getting the increases in cash flow at the company that maybe we had hoped for. And absent the increases in the cash flow for the company, that was the only way to fix the ratio.

Michael Bilerman - Citigroup Inc, Research Division

And then from an investment-grade rating perspective, even though with the reduction of the dividend, you were free cash flow positive and you've made a commitment not to buy any assets. So ideally, you wouldn't need any capital. Why was an investment-grade rating that important? It wasn't going to trigger any sort of bond buybacks or sort of puts. So I'm just curious, why not have just gone through it, implemented the strategy, sell assets, wait for recovery and when you -- then in time, hopefully, the share price would have gone up and you would have been able to raise equity on a much more opportune price. Granted, Corvex and related did help you a little bit raising money, that 19 versus where it could have gone. But I'm just curious, why not have just let the rating go if you didn't need the money versus the equity?

Adam David Portnoy

There are whole host of reasons. The board spent an enormous amount of time debating the pros and cons of whether or not to maintain the investment-grade rating. It can tell you, it was discussed at length at the board level, over a lengthy period of time. And for a variety of reasons, some of which are that we have existing bondholders that have bought bonds based on that investment-grade rating. And typically, investment-grade rated companies, historically, have traded at, not always, but often traded better multiples than non-investment-grade rated agencies. Those are some of the reasons, not all of them. Also, for the reason that when dealing with tenants and trying to lease the portfolio, one of our biggest competitive advantages is that we are able to go into the market and tell tenants that, look, you're dealing with an investment-grade rated landlord. You don't have to worry about our ability to follow-through on our commitments. It's an incredibly difficult and competitive leasing market, and every advantage that you can possibly use in retaining, in keeping, in getting tenants, we wanted to make sure we had. And one of those things was we lead with -- when we go out and lease space that we have a large company, big balance sheet, are investment-grade rated. You can count on us to follow through on our -- the landlord obligations. And in a very difficult office market environment, especially in a difficult suburban office of market environment. That was something, again, the board and the management thought was important. Those are some of the reasons. But I can tell you the decision was not taken lightly. It was thoroughly discussed and we came to the conclusion that for a variety of reasons, some of which I have outlined, the investment-grade rating was important.

Michael Bilerman - Citigroup Inc, Research Division

And just the last question just on the NOI in the quarter. If we back out SIR completely, NOI was about $129 million. It was $119.6 million in the fourth quarter. It looks like revenues went up by about just under $5 million and expenses went down by just under $5 million causing about a $9.5 million increase in NOI sequentially. John, just I'm trying to understand the occupancy was flat, rents were down. I don't know how you get such a big change sequentially in NOI. Can you sort of walk through what's happening in revenues and expenses?

John Christopher Popeo

Sure. Revenue and expenses are both impacted by an acquisition that took place in the fourth quarter. In addition though, during the fourth quarter 2012, we had a nonrecurring real estate expense, a retroactive real estate tax expense hit based on a reassessment at one of our properties in Chicago. And that resulted in a $3.5 million nonrecurring spike in expenses. So those 2 components combined is what's causing that difference.

Michael Bilerman - Citigroup Inc, Research Division

So you view the current -- the $129 million you view as a good run rate going into the year?

John Christopher Popeo

Yes. That's a better run rate than Q4 for sure.

Michael Bilerman - Citigroup Inc, Research Division

And so $3.5 million of the $5 million is due to the expense in the fourth quarter. And then the revenues would have gone up -- if the acquisition was done in October, how would it have caused such a $5 million increase in NOI?

Adam David Portnoy

It's just -- it's a part of it. I meant to say its part of the change. I mean, there's a few other things that are taking place during the quarter. You have -- during the first quarter of 2013, and the first quarter of pretty much every year, have a chewing up of your escalation expenses. We had a little bit of an uptick in the first quarter -- uptick in revenues in the first quarter related to that adjustment, maybe $600,000 or $700,000, and a handful of other adjustments.

Operator

And we do have a question from the line of Rich Moore with RBC.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Adam, what is your plan for the SIR shares? I mean, you've registered those and you took the step to do that. What are you thinking at this point, about that investment?

Adam David Portnoy

Yes. Unfortunately, I can't comment much other than to say that shares are in registration, we haven't cleared the SEC. Any asset sales we make at the company, future asset sales will be used to initially repay debt and then, eventually, hopefully, recycled into additional CBD office buildings. But other than that, we have no comment on the SIR shares.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And then on the dispositions, I mean, you guys have done a good job, you got rid of 19 assets so far. You have another 70 teed up. And I remember you said a couple of quarters ago, you had 275 assets altogether that you had a plan for, I think, you had 20% you're going to sell right away, and then you have some plans for the others. First of all, before we get to the 70, I mean, what are you thinking beyond the group that you have listed? I mean, is there more of this 275 group that you plan to put up for sale or what's the -- what happens to the rest of those, I guess?

Adam David Portnoy

No. It's a good question, Richard. What's going to -- what's happening is, we're well into the process of trying to sell these remaining 70 properties. I mean, we -- I can tell you that we've gotten -- every one of those properties has a bid for them. And we're in the process -- we're in multiple stages of negotiation regarding those properties. And I think we are likely to sell, if not, all of them, almost all of them, definitely in 2013 and, hopefully, by the end of -- not second quarter, but maybe by the time we announce second quarter results or at very worst, end of third quarter. I think we want to get -- become a little more educated based on what happens with these sales. We want to get through a little -- we want to get a little further down the road and see how these sales really come to the fruition and what type of prices we're getting. I think there is likely to be more asset sales. But I can't tell you when exactly it might be if the -- I guess, what I'm saying is that these asset sales or these remaining 70 go well, which I think they will. If they go well, then it's likely we'd be more inclined to sell some more stuff maybe in 2013. If it goes not as well as we think it's going to, then maybe we wait a little bit for the market to get even a little bit better to sell additional properties. But no matter what, we will likely be a net seller in 2013. And as far as from where I sit today, likely into 2014.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. So the other 200 assets, you would still consider non-core and ones you want to get rid of most likely?

Adam David Portnoy

Yes. And again, that number changes -- sometimes the buildings get leased up or we feel better or different about it. I'd say it's not 200 assets. It's maybe about another 150 or so that represent maybe $800 million of net book value, round numbers. And those assets are somewhere 70%, 75% leased. They're sort of the -- they're assets that are performing, meaning, they're generating cash flow, but they're just challenged. They're all suburban properties and they are just in difficult markets, some in real tertiary markets. We're working hard to keep them full. But at the same time, we're not trying to over invest in the property. If it doesn't make sense -- if it doesn't make sense to over invest in a property if we think we can maybe sell it. So it's, right now, sort of a balancing act and a way to get a little bit more educated on these first round of sales, which again, I think are going reasonably well. And then that might -- as we get educated from that, it might dictate a little bit more as what we do to second half of the year in terms of more asset sales.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And on the 70 or so, is this a broad group of potential buyers and buyers for the 19 or is it kind of the same guys or the same type of guys, pension funds whatever is looking at it?

Adam David Portnoy

Yes, everybody. I'll give you a sense. On these 70, we have upwards of 40 different offers that we have received and some sort of combination or individual properties or portfolios. I mean, we've had a lot of different -- we've had a lot of interest from a whole host of buyers. I mean, there's buyers that have made bids for the entire portfolio. They're more value add, let's say, private equity funds. And then we've seen local sharpshooters come in for individual properties, we've had institutional buyers. I mean, it's -- I've been impressed by the amount of interest, let me put it that way. There's interest out there.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. I got you. And then on the acquisition side, did I understand, basically, that you're not even looking at acquisitions at this point and you have no interest in the acquisition side of the equation?

Adam David Portnoy

At CommonWealth, we are currently not looking at any acquisitions. I can't -- it also -- given the market, because of the RMR affiliation, we have a pretty good feel for what the market is like. And I'm not sure today is the best time to be buying CBD office buildings. There probably are a few -- there are probably still some opportunities out there, but pricing has gotten more competitive. It feels, right now, like it's about time to be selling properties than maybe buying.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. So you're not even reviewing acquisitions, basically?

Adam David Portnoy

Today, no.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And then the last thing, guys, is the line of credit, I think, has about $135 million on it. Is that something you have to clean up right away or do you wait to put more mortgages on that and then do something bigger?

Adam David Portnoy

No. I think the proceeds from asset sales would largely pay that off.

Operator

We do have a question from the line of Mitch Germain with JMP Securities.

Mitchell B. Germain - JMP Securities LLC, Research Division

Adam, you sold one property in the quarter. Obviously, it was a pretty low price per pound. Is there any rationale behind -- is there anything funky with that deal?

Adam David Portnoy

It was a vacant property at a tertiary market. And again, remember, this first group of 70 or so, we call the 94 properties at the end of the year we characterize. These are the sort of the worst of the worst within the portfolio, the toughest stuff. This is not a representation of any other piece of the portfolio in the company. So these are tough sales. We were -- we're looking forward to the day we get them behind us because they are tough, but we think it's right thing to do for the company long term.

Mitchell B. Germain - JMP Securities LLC, Research Division

And looking at, at least 2 quarters ago, your commentary, you felt pretty strong about getting deals done. And we sit at almost the halfway point of the year. We've done 19 of the 80 or so that you've got keyed up. I'm just curious, what gives you confidence or how do we give investors confidence that next time we reconvene for a call, we will see an acceleration and progress?

Adam David Portnoy

What I was saying to Richard before, every one of the properties has received a bid. And we've had over close to 40 different offers received for those properties. So obviously, if there's 70 properties and 40 offers, and many of the offers are for portfolios. And we are in the different stages of negotiation with multiple parties regarding that. Real estate transactions, I wish -- we're trying to get the best price. Obviously, that's one of our goals. And when you're trying to get the best price, doesn't necessarily mean you try to do it as fast as you can, either. So we're trying to do both. I think we'll be able to get -- I think we're going to sell all of them. If not, almost all of them. And a realistic time frame, I think, is by the end of the summer, but that could slip for some of the properties. But I certainly feel that we'll get them all done by -- in 2013. It's just -- it's a process. Real estate transactions, it's not like buy and sell in stock everyday, the trade. It takes time.

Operator

And we do have a question from the line of Josh Attie with Citi.

Michael Bilerman - Citigroup Inc, Research Division

It's Michael Bilerman again. It looks like you shifted the 3 suburban assets to the CBD pool, about 800,000 square feet. What is that and why did that happen?

Adam David Portnoy

Sure. There is -- we had -- I was waiting for someone to catch that, Michael. We had 3 buildings in Bellevue, Washington. These are downtown properties, multiple story, 15-story office buildings and right in the heart of Bellevue. I think by anyone's view, they were mischaracterized as suburban, they really are urban or in-fill location properties. And that's why we reclassified them to CBD.

Michael Bilerman - Citigroup Inc, Research Division

Okay. You put out a presentation, well you've put out a lot of presentation,s, but in April, you put out a presentation in part of your defense, where you listed 5 or 6 assets that had been bought over the last couple of years and what your historical investment is and where you estimate value. I assume if you've undertaken a large equity raise that, at some point, the board would have to have a view towards what value of the stock is and in making that determination it couldn't have only been about repaying debt and maintaining the investment-grade ratings there. I assume there was some discussion about what we believe the value of where it's trading and raising that equity. And so I'm just curious, what were those discussions and how did you think about selling equity relative to where you sort of thought NAV was?

Adam David Portnoy

Unfortunately, Michael, I can't really comment on valuations. I don't think it's appropriate for us to really say what we think the value of the company is today. I can tell you that we do look at it internally. We discussed -- it was discussed at the board level, it's been discussed by management, too. But I really can't comment beyond that.

Michael Bilerman - Citigroup Inc, Research Division

I guess, from a disclosure perspective, putting out this information in terms of what you believe your historical investment is and the square footage and then asset name and addresses, opens the kimono a little bit about what you actually own. I think, if you were to pull out your 10-K, you don't have an asset list that's done by market. You're the only REIT that I can think of that actually does that. I guess, you've started to open up a little bit with some selective disclosure of information. Why don't you just do that for everything? Put out an individual property list, by asset, what your historical investment is, what the rent per square foot is, what the NOI is, many REITs do that. What the square footage, occupancy, rent, historical book value of underappreciated and appreciated. Why wouldn't you do something like that?

Adam David Portnoy

Well, one, I think, we do make a lot of disclosures. I mean, I -- in fact, this quarter, we went through our supplemental and compared it to many of the others because I was just trying to get a feel for where we stack up. And I think it's fair to say, across many metrics, in almost all metrics, we provide a tremendous amount of information to investors. Now what you're asking about is individual property level information. I suppose that's something we can continue to think about providing more information to help, I guess, investors and analysts, I guess, arrive at their own net asset value for the company. That's something I think we'll take under advisement and maybe we can do something more in the future.

Michael Bilerman - Citigroup Inc, Research Division

The Schedule 3, no REIT that we follow or that I can find doesn't actually give individual addresses and asset names. So you can correspond what the investment is and I would say, even the historical investment you had listed in this presentation. Those numbers don't reconcile back perfectly to the 10-K either, which was a little bit concerning. So I just don't know why that -- it's public information, it should be public information. It's not any disclosure that none of your peers would not be putting out. Many of the REITs, almost all of them, have a property list with square footage and occupancy and rent. It's just your analyzing a real estate company, you want to analyze real estate assets. And clearly, there's a lot of debate in the marketplace regarding value. To me, it seem like an obvious thing that you would want to put out there, especially now that you've started to trickle out information regarding at least 6 assets in terms of where you perceive value to be.

Adam David Portnoy

Yes. Michael, we hear you. I think you also have to keep in mind, we are talking for the wholly-owned portfolio, it's 345 different assets, so it'll be a lot of data. I'm not sure -- maybe unprecedented at that level, but I'm sure -- look, we're always open to giving investors and analysts more information if they request it to help them better analyze the company. And I assure you we will take your comments under advisement and we'll think about it. And if more investors and analysts agree with you, which I suspect many do, we will try to accommodate it in some way in the future. I can't promise anything, but every -- even this quarter, we've added more disclosure in our supplemental, we're giving cash basis NOI and changes in rental rates on a cash basis. I think that's something investors have asked for, we put it. I think we can try to help you and others get some of that information, and we will think about it.

Michael Bilerman - Citigroup Inc, Research Division

I do think when you say 354 assets, clearly, that's individual buildings not sort of what I would view as sort of complexes or parks. And the reality is there's, call it 50 [ph] and under real -- CBD office assets that are making up the majority of the value and the majority of your NOI. So while you have to throw some big numbers, the reality is it's much smaller when you cut through all of it. And I think that also would be helpful for people to understand of what you own and where you own it. But I think you get the point. And I know a lot of investors would appreciate that information. Certainly, information that we would like. The other question I have is just as you've -- you clearly have gone through the disclosure and you've made some adjustments. Have you rethought a little bit about the company's externally managed about what the external management owns of these entities in terms of shares, right? So have you rethought the structure a little bit? You look at other external managed entities, the GP, where the manager tends to own or have more skin in the game to align their interests more? So I guess, have you given -- put the proxy and all that stuff aside, right? There's no bearing. Have you rethought some of that aspect of the business?

Adam David Portnoy

Michael, I'll answer the question this way. I'll say there's currently no plan to change the management agreements with RMR. I can tell you that the management and the board is incredibly focused on maximizing value for all stakeholders in the business.

Michael Bilerman - Citigroup Inc, Research Division

Did RMR, any of the employees buy in the offering in February, like shares?

Adam David Portnoy

No. There was no insider buying in the offering, no.

Operator

And for closing remarks, I'd now like to turn the conference back over to Adam Portnoy. Please go ahead, sir.

Adam David Portnoy

That concludes our presentation. We look forward to seeing some of you at the NAREIT Conference in Chicago in June. Thank you, everyone, for joining us today.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive TeleConference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CommonWealth REIT Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts