Equity Commonwealth

Q1 2023 Earnings Conference Call


spk04: 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 the 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 statements. 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 earnings also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplement containing the company's results. for a 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 Griffith, CFO. With that, I'll turn the call over to David Helfand. Please go ahead, sir.
spk03: Thank you. Good morning, everyone. Appreciate you joining us. I'll review the company's results for the quarter. as well as provide an update on capital markets and our investment activities. For the quarter, funds from operations were 22 cents per share compared to 3 cents per share in the first quarter of 2022. Normalized FFO was 23 cents per share compared to 3 cents per share a year ago. The growth in FFO and normalized FFO was largely the result of a 24 cent per share increase in interest and other income. partially offset by a $0.02 per share decrease in same property NOI and a $0.02 per share decrease in NOI from properties sold. Same property NOI decreased 20.5% and same property cash NOI was 17% lower compared to last year, both primarily due to the collection of a $1.9 million previously reserved receivable in the first quarter 2022. Excluding the collection of this receivable, same property NOI decreased 2.7% and same property cash NOI increased 2.3% compared to the first quarter 2022. At our properties in the first quarter 2023, we signed 60,000 square feet of new leases and renewals. Rents on those leases were up 3.6% on a cash basis and up 13.8% on a gap basis. As of March 31st, leased occupancy was 81.6%, commenced occupancy was 77%. And while tour and leasing activity has picked up a bit, we continue to see tenants looking to give back space as well. Turning to the balance sheet, we have approximately $2.1 billion of cash, or $19 per share and no debt. The change in our cash balance since year end is primarily due to the $4.25 per share common distribution that was paid on March 9th. The interest rate we earn on our cash has increased as the Fed has moved rates, and we're currently earning roughly 5% compared to 37 basis points a year ago. Our conservative approach to managing our cash has been consistent over the years. We work with a dozen or so large banks where we actively manage the balances among them to minimize risk and maximize yield, while maintaining daily liquidity. We are not invested in any securities. With the Fed's continued rate increases over the past year, our interest income has grown from $1.6 million in the first quarter of 2022 to $28.4 million in the first quarter of 2023. As we've discussed on previous calls, interest income on cash is not qualified income for the 75% REIT income tax. Last year, we completed an internal restructuring to provide the qualifying income we needed for 2022. A similar option is available to us again in 2023. We also expect we will have options available to us to meet the requirements for requalification in 2024. Turning to share buybacks, we have not repurchased any shares year to date. Since we began buying back stock in 2015, We've repurchased a total of 22.4 million shares for an aggregate of $595 million at an average dividend adjusted price of $17.48. We currently have 120 million remaining on our share back authorization. Turning to the commercial real estate market, I think it's fair to say that determining value is as difficult as it's been in quite a while. The twin forces of war in Europe and inflation have had a significant impact on market fundamentals and values. The Fed's massive tightening over the past 12 months has more than doubled borrowing costs and left owners with debt maturities in a difficult place. For some asset classes, like industrial and residential, operating conditions remain relatively strong, though decelerating. For others, fundamentals are challenging, and the lack of debt availability is a significant issue. Predictably, sales volumes, are down across all asset classes. First quarter 23 total investment sale volume was approximately $47 billion, roughly half of the fourth quarter total in 22, and down 60% year over year. Based on discussion with market participants, second quarter 23 volumes will likely be similarly depressed. Against this backdrop, it's difficult to know where we might find an opportunity to invest. We continue to evaluate a wide range of investments across asset classes. We remain hopeful that the challenges in the real estate credit markets might be a catalyst for a compelling transaction. In the meantime, the EQC team continues to demonstrate patience, optimism, and focus, and I'd like to take a moment and recognize their efforts. Patience is often a virtue, but that doesn't mean it's easy. This is a busy time of the year for our team with the 10K annual report proxy and preparations for our annual meeting. So here's a shout out to the EQC team for your continued commitment, discipline, and excellence. With that, I'll turn the call over to the operator for questions.
spk01: Thank you. Ladies and gentlemen, we will be conducting a question and answer session.
spk04: If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
spk01: To ask question, please press star one now. Take our first question from the line of Craig Melman with Citi.
spk04: Please go ahead.
spk00: Thanks. It's actually Nick Joseph here with Craig. You know, maybe just starting on kind of what you're currently evaluating, you know, if you can talk about kind of the current pipeline, maybe the volume of deals you're looking at, recognize it's pretty slow out there, and then touch on how you're thinking about underwriting and different hurdles for different asset classes.
spk01: David Weinberg Hey, Nick. It's David Weinberg.
spk02: To begin with, what you said is correct. It's still quiet. We'd say it's still early. As David said in his prepared remarks, we're evaluating a wide range of investments across asset classes. So, in the past, we've talked about as a public rate, we think it's important to find a good business that has long-term sustainable growth. and we've been spending a lot of time and continue to do so with industrial and SFR, more specifically built to rent as of late. Having said that, given the challenges in the credit markets today, we're revisiting other sectors such as office under the belief that you just never know where the opportunity may come from. Then to more specifically address your question, In this environment, I'd say we're having more discussions than we have in the past. It doesn't mean the catalyst exists, but a lot of large private owners recognize we're a public company with $2.1 billion of cash and no debt. There's a lot of flexibility in what we can do in terms of structure across sectors, potentially even control. And while that may not be a viable option or preferred option today, it may be their best option soon should they have to execute on something. So those discussions are taking place, planting seeds, and we'll just have to see what becomes of it.
spk00: Thanks. As you think about kind of underwriting industrial or built to rent single family or I guess even office now, how much of the IRR's return hurdles changed for you when you underwrite it today versus if you were looking at it, you know, 12 to 18 months ago?
spk02: Well, 12, 18 months ago, obviously we just couldn't make sense of the pricing, both on basis yield and all in type returns. I'd say today, you know, we recognize where the cost of debt is, where the public REITs are trading. So that factors into our evaluations. So I'd say hurdles have raised accordingly, but it's difficult to quantify it because, as always, it varies based on where we perceive the risk to be and the growth.
spk00: Thanks. You talked about the cash management and balance sheet management that you've been doing. and that there's no marketable securities there. But as you look at the disconnect or potential disconnect between private market pricing and public security pricing on the REIT side, would marketable securities or would making investments into equities make sense at any point?
spk01: Well, you know, in the past,
spk02: We've talked about, you know, that's not really of interest to us because I don't know what we do with that. Obviously, our shareholders, if they want to take a small position in another public company, they can do so. So I'll never say never, but it has to be pretty compelling for it to make sense to us, especially as we try to maintain a liquid position without taking any risk on our cash so that should that deal materialize, we could execute.
spk01: and execute quickly. Hey guys, it's Craig here.
spk00: Just David, I know you talked about the internal restructuring and you can do another one in 23. So should we assume a similar kind of special dividend or would it need to be bigger given the kind of growth and interest income relative to the NOI coming off the four remaining assets?
spk03: I think the answer is the 425 that we already distributed was an estimate of what we would need to distribute. There are still some variables, some choices we have about how we go about qualifying, depending on whether certain events happen. So it's hard to predict, but I wouldn't expect a large special dividend. There may be a topping up of the 425 if it's necessary based on taxable income.
spk01: Great, thank you. Thank you. A reminder to participants, if you wish to ask a question, please press star 1 on your touch-tone phone now.
spk04: Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to hand the conference back over to David Halfon for closing remarks. Over to you, sir.
spk01: Thanks for joining us today.

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