Equity Commonwealth

Good morning, and thanks for joining this call to discuss equity commonwealth results for the quarter ending June 3rd, 2023, and provide an update on the company. At this time, all participants are in a listen-only mode. The 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the key. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. Please be advised that certain matters discussed during this conference call may be constituted forward-looking statements within the meaning of federal security laws. Please refer to the session's pilot forward-looking statements in the press release issued yesterday as well as the session's pilot risk factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q or subsequent quarters for a discussion of factors that could cause the company's actual results to maturely 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 and maybe material. The portion of today's remarks on the company's partly earnings also includes certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental contain the company's results for a reconciliation of these non-GAAP measures so the companies get financial results. On the call today are David Huffman, chair of a board, president and CEO, Dave Weinberg, COO and Bill Griffin CFO. With that, I'll return the call over to David Weinberg. Please go ahead.

Good morning, everyone. Thanks for joining us. Today, I'll review the company's results for the quarter, as well as provide an update on the capital markets and our investment activities. For the quarter, funds from operations were $0.16 per share compared to $0.05 per share in the second quarter of 2022. The growth in FFO was largely the result of a $0.19 per share increase in interest and other income, partially offset by a $0.05 per share increase in G&A related to compensation expense due to SAMZEL's passing, and $0.01 per share each from a decrease in same property NOI and an increase in income tax expense. Normalized FFO was 22 cents per share compared to 4 cents per share a year ago. The growth in normalized FFO was largely the result of a 19 cents per share increase in interest in other income, partially offset by a 1 cent per share decrease in same property NOI and a 1 cent per share increase in income tax expense. Same property NOI decreased 14.8% and same property cash NOI was 9.4% lower compared to last year, both primarily due to an increase in pre-leasing demolition costs and a decrease in average commenced occupancy for this quarter. At our properties in the quarter, we signed 68,000 square feet of new leases and renewals. Rents on those leases were down 0.7% on a cash basis and up 15.3% on a gap basis. As of June 30th, lease occupancy was 82% and commenced occupancy was 78.2%. In terms of leasing, we continue to see a range of deals with some tenants giving back space, some looking for short-term extensions, and others more comfortable committing to term. leasing environment, and we are more actively preparing spaces for lease in addition to being more aggressive on terms. Turning to the balance sheet, we have approximately $2.2 billion of cash, or $19 per share, and no debt. The interest rate we earn on our cash has increased as the Fed has moved rates, and we are currently earning roughly 5.25% compared to 1.6% a year ago. We continue to actively manage our cash balances among our banks to minimize risk and maximize yield in daily liquidity. With the Fed's continued rate increases over the past year, our interest income has grown from $6 million in the second quarter of 2022 to $27.4 million in the second quarter of 2023. Regarding 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 and an average dividend adjusted price of $17.48. We renewed our authorization as of June 30th and currently have $150 million of capacity. Turning to the capital markets, things continue to be slow and our pipeline is modest. Transaction volumes are down across all asset classes. with just $35 billion in total investment sales for the second quarter, nearly 70% lower on an annualized basis. With so little trading, there has been limited price discovery, and assets are difficult to value. To date, there has not been a catalyst creating actionable investment opportunities. Owners do not want to transact at today's pricing, and lenders are often willing to work with their borrowers. In terms of potential investments, we continue to evaluate a wide range of asset classes. We still like industrial and residential, with operating conditions remaining relatively strong, though decelerating. For other asset classes, fundamentals range from decent to challenging, and the lack of debt availability is a significant issue. Against this backdrop, it's difficult to know where we might find a compelling opportunity to invest. A prolonged period of this challenging credit environment may create such an opportunity. or perhaps it's a large private real estate company that believes a deal with us is the best way to access the public markets. It could also be a business with a broken balance sheet or one that needs meaningful growth capital. We remain hopeful that such scenarios or others will be a catalyst for a transaction. In the meantime, we will continue to be patient. If we do not find an opportunity during this cycle, however long that might last, we will likely sell the remaining properties and return the capital. With that, David, Bill, and I are happy to take your questions.

Thank you. We will now be conducting a question and answer session. 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 would like to remove yourself from the queue. For participants using the speaker equipment, it may be necessary to pick up your headset before pressing the key.