CommonWealth REIT (CWH)

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CommonWealth REIT (CWH)

Q4 2011 Earnings Call

February 23, 2012 01:00 pm ET

Executives

Tim Bonang - VP, IR

Adam Portnoy - President & Managing Trustee

John Popeo - Treasurer & CFO

Analysts

John Guinee - Stifel, Nicolaus & Company

Michael Bilerman - Citigroup

Presentation

Operator

Good day and welcome to the CommonWealth REIT Fourth Quarter and Year-End 2011 Financial Results Conference Call. This conference 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.

Tim Bonang

Thank you and good afternoon. Joining on today’s call are Adam Portnoy, President and Managing Trustee and John Popeo, 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 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, February 23, 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-K which we expect to file in a few days with the SEC and in our Q4 supplemental operating and financial data package found on our website at www.cwhreit.com.

Investors are cautioned not to place undue reliance upon any forward-looking statements.

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

Adam Portnoy

Thank you, Tim and good afternoon and thank you to everyone for joining us on today’s call. For the fourth quarter of 2011, we are reporting fully diluted normalized FFO of $0.76 per share compared to $0.88 per share during the same period last year.

Fourth quarter 2011 normalized FFO includes approximately $4 million or about $0.04 per share of non-recurring items which John Popeo will discuss in more detail in a few minutes. Excluding these non-recurring items, normalized FFO for the fourth quarter would have been about $0.80 per share. Remaining decline in normalized FFO per share primarily relates to weakness in our suburban office portfolio.

Although, our normalized FFO was less than anticipated, we are starting to see some positive signs in our operating metrics and especially in our CBD office and industrial portfolios.

As of December 31st, our consolidated occupancy rate was 84.6% which is about a 0.5 percentage point higher than our occupancy rate on September 30th, which was 84.1%. It’s important to note that historical occupancy rates have been adjusted to include 27 properties which were previously included in discontinued operations.

Also during the quarter, we saw an uptick in leasing activity signing leasing for over 2.2 million square feet; 43% of our fourth quarter leasing activity were renewals and 57% were new leases. Leasing activity this quarter resulted in flat rents and $19.15 per square foot in capital commitments. The average lease term was 6.9 years and the average capital commitment per lease year was $2.78.

Our CBD office portfolio which represents our largest operating segment with about 45% of our consolidated NOI continues to perform well. Occupancy in our CBD office portfolio increased 20 basis points from 87.8% to 88% during the quarter and continues to track above the national average occupancy for CBD office buildings as measured by most independent third-parties.

During the fourth quarter, we signed leases for almost 500,000 square feet on our CBD office portfolio and about half were renewals and half were new deals.

Leasing activity in our CBD office portfolio resulted in an 8% rollup in rents and about $25 per square foot in capital commitments.

Our industrial and other properties portfolio also continued to perform well, with strong performance from properties in Oahu, Hawaii and Australia. Occupancy in our industrial properties increased 40 basis points from 86.6% to 87% during the quarter. In the fourth quarter, we signed leases for 740,000 square feet in our industrial portfolio and about one-third was renewals and two-thirds were new deals.

Leasing activity in the industrial portfolio resulted in an 8% rollup in rents and a very low $1 per square foot in capital commitments. Of note during the quarter, we signed a large industrial lease renewal and expansion in Australia for 300,000 square feet and about flat rents and we signed one new lease deal in Hawaii industrial land holdings for 35,000 square feet that resulted in 66% rollup in rents.

Our suburban office portfolio continues to struggle, although leasing velocity has clearly started to improve. Occupancy in our suburban office portfolio increased 80 basis points from 77.5% to 78.3% during the quarter.

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