Equity Commonwealth

Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the fourth quarter and full year ending December 31, 2022, and an update on the company. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities laws. Please refer to the section titled Forward-Looking Statements in the press release issued yesterday as well as a section titled Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q for subsequent quarters for a discussion of factors that could cause the company's actual results to materially differ from any forward-looking statement. The company assumes no obligation to update or supplement any forward-looking statements made today. The company posts important information on its website at www.eqcre.com. including information that may be material. The portion of today's remarks on the company's quarterly and 2022 earnings also includes certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental containing the company's results for reconciliation of these non-GAAP measures to the company's GAAP financial results. On the call today are David Helfand, President and CEO, David Weinberg, COO, and Bill Gredis, CFO, With that, I will turn the call over to David Helfand.

Thank you. Good morning, everyone. Thanks for joining us. I'll review the company's results for the quarter and the full year, as well as provide an update on the capital markets and our investment activities. For the quarter, funds from operations were 21 cents per share, compared to one cent per share in the fourth quarter of 2021. Normalized FFO was also 21 cents per share, compared to less than a penny per share a year ago. Growth in FFO and normalized FFO was largely the result of a 20 cent per share increase in interest and other income, as well as a one cent per share increase in same property cash NOI. Same property NOI was up 14.5% and same property cash NOI was 14.9% higher compared to the fourth quarter of 2021. For the full year 2022, funds from operations were $0.41 per share compared to a $0.06 per share loss for the full year 2021. Normalized FFO was $0.42 per share compared to $0.01 per share loss a year ago. Growth in FFO was largely the result of a $0.35 per share increase in interest and other income, a $0.06 per share decrease in G&A expense, and a $0.05 per share increase and same property NOI. The growth in normalized FFO was largely driven by a $0.36 per share increase in interest and other income and a $0.06 per share increase in same property cash NOI. Same property NOI was up 17% and same property cash NOI was 19.1% higher compared to the full year 2021. At our properties, leasing activity increased in the fourth quarter. We signed 76,000 square feet of new and renewal leases. Rents on those leases were flat on a cash basis and up 3.6% on a gap basis. For the year, we signed 205,000 square feet of new leases and renewals. Rents on those leases were flat on a cash basis and up 3.8% on a gap basis. As of December 31st, leased occupancy was 82.8% and commenced occupancy was 78.7%. Turning to the balance sheet, we have approximately $2.6 billion of cash, or $23 per share, and no debt. Change in our cash balance during 2022 was driven by the Fed's rapid pace of interest rate increases, our common distribution in October, and our share buyback activity. The interest rate on our cash increased substantially during the year, from 22 basis points at year end 2021 to 4.5% at year end 2022. Currently, we're earning roughly 4.75% on our cash balances. In October, we paid a distribution of common shareholders totaling $111 million, or a dollar a share. respect to share buybacks during 2022, we repurchased 6.1 million shares at a cost of $155 million at an average dividend adjusted price of $24.64. Since we began buying back stock in 2015, we've repurchased a total of 22.4 million shares or roughly 17% of our float as of 2014 for an aggregate of $595 million or an average dividend adjusted price of $21.73. We currently have $120 million of remaining capacity under our existing share buyback authorization. Commercial real estate is in flux and is currently trying to find a bottom in terms of value. In certain sectors, property level performance remains strong. Other sectors have weakening near-term fundamentals. Investment sales volumes are down across all asset classes as buyers and sellers sort out the impact of the rapid change in the cost of debt capital. Since spring, the cost of floating rate debt nearly tripled, while the cost of fixed rate financing more than doubled. At EQC, we continue to work to identify a compelling investment opportunity and to create value in our existing assets. We remain hopeful that the challenges in the real estate credit markets might be a catalyst for a large deal. The team remains focused, disciplined, and optimistic. And with that, I'll turn this over to questions for myself, Bill, and David.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question is from Craig Mailman with Citi. Please proceed with your question. Good morning, guys.

Just maybe an update here on how the the opportunity pipeline looks today versus, you know, maybe at the time of the last call and, um, you know, at this point, um, you know, where your return hurdles are and, um, you know, whether, you know, you think things are going to play out over the next couple of months here, um, to where you guys can find something to deploy the capital to.

Hi Craig, it's David Weinberg, uh, Good questions. In terms of how it's changed since our last call, I'd say not much. Three months or so isn't enough to see much of a difference, especially at this time of year if you're thinking about things slowing down end of 2022 and taking some time to ramp up in 2023, which is the normal rhythm in the investment market. In terms of kind of the opportunity set overall, hurdles, et cetera, you know, as we've discussed many times, it's really about the risk we're taking. As we focus harder on two sectors, which we've discussed previously, industrial and single-family residential, even more so built-to-rent communities, and we just like those given our history with manufacturer housing parks and the ability to work the real estate. With the long-term strong fundamentals in those sectors, we view those, absent a specific story, perhaps to be less risky and warrant a lower return as we invest. Compared to, while we don't redline anything, it'd be a higher hurdle for us to invest in something like office, just given the challenges in that space and the uncertainty going forward. And then over the next few months, hard to know. We are having conversations with large real estate owners People are struggling with pricing, and we also are looking to whether there is a specific catalyst in any given opportunity that might give rise to a transaction. Once again, we're not looking to steal real estate or for a distressed seller. We just want to get good real estate at a fair price, but unless there is some motivation, it may be difficult to find that deal in this environment.

Okay. You know, I know there's been some news in the market about, you know, one big NTR in particular who got a cash infusion. I mean, we've seen them sell some assets here as they've bought some recent portfolios. I mean, is there any discussion with a seller like that where you guys can offer, you know, surety of close, immediate liquidity, and, you know, I get that pricing is still fluid here, but for the property types that you guys are really interested in, I don't know that cap rates are going to gap out given the capital chasing them in the long-term fundamentals. I'm just trying to figure out if this is a waiting for the best pitch down the middle that you guys can slam out of the stadium or if it makes sense to start getting some singles and doubles and then hopefully as you have some momentum on capital deployment, some of those down-the-middle pitches come where you can put it out there, but at least get the ball rolling, get the market knowing that you are serious about putting the capital out the door.

I think that's well said. This is David Helfand, Craig. What I would say is, We are not expecting or waiting for cap rates to gap out. And I think David mentioned it, but I'll elaborate. We haven't been and aren't looking for some screamer of a deal that we can drive out of the park. What we've been looking for is the foundation for a long-term business with attractive fundamentals that can grow consistently, where we can grow the business to provide liquidity, to provide opportunity for our team. We don't need to buy that at a cap rate way wide. We just need a catalyst, most likely the debt capital markets, to provide a catalyst to a seller who can't refinance, doesn't have the equity to refinance, needs someone to come in and help them solve a problem. So we're hopeful that happens. It may not happen. And of course, we're always weighing that against what the alternative is, which is returning the capital.

How many employees do you guys have at this point? I'm kind of just curious.

Twenty-two.

You guys are down to almost a skeleton crew at this point. Couldn't quite hear that. I would just say you guys are kind of cutting to almost a skeleton crew, so there's not a... Oh, no, there's still plenty of muscle here.

I'd say... Our headcount has followed our assets base for the most part, but the investments team is pretty much intact from the beginning because that's where our energy has been devoted and has continued to be focused.

And then just one last one for me. The rationale here to keep doing the buybacks when most of the value in the portfolio is sort of a cash bounce, it's kind of like you're using cash to – the cash back. I mean, should we just, why not just hold the cash at this point until you guys decide, you know, what the ultimate decision is here in terms of winding it down or, you know, deploying it?

That's a, it's a fair comment. I think it's It's easy to look back in retrospect. We're constantly evaluating the use of shareholder capital for a number of things, one of which is a buyback. And when we bought the stock back, we thought we believe we're buying back at a discount to value and creating accretion. The buybacks have not been a main focus of ours. They've been a tool we can use when there's an opportunity to create a little bit of value. In general, we're not here to buy back the stock. We're here to find a deal and create a long-term business for shareholders.

Great. Thank you, guys.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. There are no further questions at this time. I would like to turn the floor back over to David Helfand for any closing comments.

Appreciate you joining us today. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.