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CommonWealth REIT (CWH)

Q4 2012 Earnings Call

February 25, 2013 10:00 am ET

Executives

Timothy A. Bonang - Vice President of Investor Relations

Adam David Portnoy - President and Managing Trustee

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

Presentation

Operator

Good day, and welcome to the CommonWealth REIT Fourth Quarter and Year End 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 the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Timothy A. Bonang

Thank you, and good morning, everyone. 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, February 25, 2013. Forward-looking statements are not guaranteed to occur. Actual results may differ materially from those projected or implied in any forward-looking statements. Information concerning factors that could cause differences is contained in our Form 10-K, which we filed with the Securities and Exchange Commission or SEC earlier today, and in our Q4 supplemental operating and financial data package found on our website at www.cwhreit.com.

Forward-looking statements are not guaranteed to occur. The company undertakes no obligation to revise or publicly release the results of any revisions of any 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 and cash available for distribution, or CAD; earnings before interest, taxes, depreciation and amortization, or EBITDA; and property net operating income, or NOI. The definition of each of these non-GAAP measures and reconciliation of each of them to net income and reconciliation of normalized FFO to FFO are available on our Q4 supplemental operating and financial data package found in the Investor Relations section of the company's website.

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

Finally, we will not be conducting a question-and-answer session during this call and after the presentation by the management. Now, I would like to turn the call over to Adam Portnoy.

Adam David Portnoy

Thank you, Tim. For the fourth quarter of 2012, we are reporting fully diluted normalized FFO of $0.82 per share compared to $0.76 per share during the same period last year. During the quarter, on a consolidated basis, we signed 181 individual leases for 3 million square feet, with 74% of the square feet representing renewals and 26% representing new leases. During the year ended December 31, 2012, on a consolidated basis, we signed 554 individual leases for 7.4 million square feet, with 65% of the square feet representing renewals and 35% representing new leases. The average term for the leases entered into or renewed during the quarter was 7 years and the weighted average GAAP rental rates were 5% above prior rent for the same space.

Capital cost commitments associated with leasing activity this quarter were $13.59 per square foot or about $1.94 per square foot per lease year. Of the 3 million consolidated square feet of leasing activity during the fourth quarter, 13% of the square feet involved CBD office properties, which had an 8% rollup in GAAP rents, and 59% involved industrial and other properties, which had a 22% rollup in GAAP rents. The remaining 28% of our consolidated square feet leased during the quarter involved our suburban office properties, which had an 8% roll down in GAAP rents.

Some of the leasing highlights during the quarter include 1.1 million square feet of industrial leases executed during the quarter in Austin, Texas, which had a 22% rollup in GAAP rents. Also, we had about 434,000 square feet of leasing activity at our industrial properties located in Oahu, Hawaii during the quarter, which had a 35% rollup in rents.

As of December 31, 2012, our consolidated occupancy from continuing operations was 90%, compared to 89.6% as of December 31, 2011 and 89.5% as of September 30, 2012. Our occupancy from continuing operations for our wholly owned properties, which excludes results from our majority-owned consolidated subsidiary, Select Income REIT, was 87.2% as of December 31, 2012.

On a consolidated same-store basis, excluding properties held for sale, our occupancy declined by a modest 10 basis points to 89.5% and NOI declined by 1.4%. The primary reason for these declines was a decrease in occupancy and an increase in operating expenses at our CBD office properties located at our Chicago market. More specifically, real estate tax expenses increased by $3.5 million, or about $0.04 per share, during the fourth quarter at our CBD office buildings located in Chicago. This real estate tax increase will be largely reimbursed by tenants in later periods because real estate taxes are typically paid and collected from tenants on a cash basis in downtown Chicago, but we are required to record the GAAP expense as soon as the tax increases are known.

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