Q1 2022 Equity Commonwealth Earnings Call

Good morning, and thanks for joining this call to discuss equity Commonwealth's results for the quarter ending March 31, 2022, and an update on the company.

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Be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal Securities laws. Please refer to the section.

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 actual results to materially to materially differ from any forward looking.

<unk> statements.

The company assumes no obligation to update or supplement any forward looking statements made today the company post important information on its website at Www Dot E. Q T. R E dot com, including information that may be material.

A 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 supplemental containing the Companys 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 .

CEO David Weinberg.

Oh.

CFO with that I will turn the call over to David Health App.

Thanks, Good morning, I appreciate you joining us.

Review, the Companys results for the quarter as well as provide an update on our disposition and investment activities.

Funds from operations were <unk> <unk> per share compared to a loss of six cents per share in the first quarter of 2021.

Normalized <unk> was also <unk> <unk> per share.

To a loss of $1 seven per share a year ago.

Growth in SSO and normalized Stephane, Paul was largely the result of a decrease in G&A expense due to lower severance the collection of a previously reserved receivable and a real estate tax refund related to our sold properties.

Same property net operating income was up 29% in the first quarter compared to a year ago and cash NOI was 30% higher.

Excluding the collection of the receivable same property NOI was up five 4% and cash NOI increased five 5% compared to the first quarter of 2021.

At the properties leasing activity has picked up we are seeing more inquiries and tours today that we have since COVID-19 outbreak began in March of 2020.

First quarter, we signed 40000 square feet of new leases renewals and <unk>.

And so those leases were up two 8% on a cash basis.

And up 5% on a GAAP basis.

As of March 31 leased occupancy was 83, 3% commenced occupancy was 79, 5%.

Turning to the balance sheet, we have approximately $2 $7 billion of cash more than $24 per share and no debt.

With respect to share buybacks year to date, we've repurchased 3 million shares for $77 $7 million.

And an average price of $25 83 per share.

Since we began buying back shares in 2015, we have repurchased a total of $19 3 million shares for $517 million at an average dividend Jessica price of approximately $22 30.

We have $198 million remaining on our existing share buyback authorization.

Turning to dispositions. We currently have two properties in the market 12, 50, H, Washington D C.

Quite square suburban office.

Both are attractive assets are well positioned in their competitive set.

Marketing these assets commenced a few weeks ago.

Closings, if any are likely to occur by late summer early fall.

In addition, slightly rural market Capitol tower in downtown Austin in the near term.

Each of the assets sold are expected to generate taxable gains.

We will monitor the progress of dispositions with the really contested.

Given the small size of our real estate portfolio significant cash balances and rising interest rates, we may need to generate additional qualified income under the <unk>.

Assets being marketed Christy how close this year.

In terms of investments, we continue to pursue a wide range of opportunities, including portfolio purchases in corporate transactions, both private and public.

As we said in the past, we're evaluating opportunities in a number of different sectors, including single family residential industrial office retail and hospitality.

Every deal has a different risk profile and we remain mindful of needing to get paid for the risk we're taking.

Some of the opportunities involve substantial real estate companies.

Right.

It would mean.

See you soon.

The way they go public.

Certain cases, <unk> with Stewart the go forward business.

In other cases, the management team of the target business could lead the company going forward.

Our analysis of these opportunities against the fundamental questions should the business be public what is this growth potential and what value for <unk>.

If we are satisfied with the answers and we will take some time to dig further into the business to better understand the risks and warranty returns.

We know that shareholders would like more clarity on timing and <unk>.

Minimum distributions will keep us busy in the next few quarters.

During that time, we will continue management dialogue with our board about.

Makes most sense for shareholders.

Markets are dynamic and we can't predict the facts and circumstances.

Such a decision at that time.

For example, the 10 year treasuries currently trading yielding around 3%.

From one 5% roughly four months ago spreads of 30 to 50 basis points slide.

Resulting in substantially higher borrowing costs for leveraged buyers.

Rates continue to rise that might be a catalyst for future investment opportunities.

As always we remain mindful of the cost of pursuing opportunity.

To evaluate best course of action to maximize value, including returning to cash to shareholders.

Intend to remain disciplined and are optimistic that we will find a compelling investment.

Before we go to questions I'd like to acknowledge sure Burns less DTC earlier this year to pursue new opportunities.

<unk> contribution to UTC was significant and we wish you the very best.

That bill and I are happy to take your questions.

Okay.

Thank you we will now be conducting a question and answer session.

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I think historically.

One moment, please while we poll for questions.

Okay.

Thank you. Our first question is from Manny Korchman with Citi. Please proceed with your question.

Hey, good morning, everyone, hopefully I'm not a lot of asking questions with that.

David you spoke about.

It sounds like Youre going down a path of pursuing some private companies that could use EPC.

Wave lifting.

That's in sharp contrast, with MSR deal, which was already public.

Change is it just a matter of the opportunity set that you realize that.

Pursuing public companies just wasn't.

Yeah.

We have an opportunity or are you just telling us kind of what youre looking at right now.

Yes, Thanks Manny.

I don't think anything's changed I think it's more a matter of emphasis we have from the beginning evaluated opportunities that are public and evaluating opportunities that are private and we have.

In cases, where we're looking at large private real estate holdings.

In some cases in the past and in some cases in our current pipeline.

The existing team that owns that would take over EQT essentially back yet.

And we're trying to make is that we're open to whatever structure makes the most sense and creates the most value in other words, it does not need to be the EQT management team that stewards for our business.

Thanks for that and then in terms of the asset sales.

Am I right to believe that the next two assets are right behind this and at some point you could just be cash waiting for an opportunity or.

Do you need to hold onto a couple of assets just to be a real estate company.

Hey, Manny it's David to answer your question I can tell you as we sit here today and as David referenced we've got two in the market.

And it's likely we're going to be taking our third in downtown Austin to the market and Thats kind of where we are in terms of the fourth asset downtown Denver to great asset great location and there are some moving parts. There. So we're continuing to work that asset. So we haven't discussed or made up any determination in terms of what's next or kind of what youre.

Question is getting too.

I guess, David just from a structural or.

A legal perspective is there any need to maintain assets could you just be cash.

I think in David's comments, you kind of referenced the one hurdle, which is the REIT income test.

And thats the one that we're keeping our eyes on that is we've got smaller with our asset base and our cash balance has increased combined with the rise in interest rates. The makeup of our income is now shifting more towards I'd say non good REIT income and Thats, what we have to focus on I think I would just add to that.

It's not our intention to operate with just cash looking for opportunity.

I think we're we have been trying to move forward so that whatever direction. We go whether it's returning capital or.

Finding the right investment opportunity.

We can do so.

Reasonable speed and so we think it's a good time to sell.

Two assets, we've put in the market are good assets, we think will generate a lot of interest.

But it's not really our intention to operate with just cash.

Right.

And maybe I'll ask one of Bill just as we think about modeling interest income from here.

How much of the change in the 10 year do you actually benefit from and maybe you could just remind us where the cash what instruments are cash is sitting in and how they generate income.

Yes today, the cash sits in a variety of banks bank accounts.

We are for the quarter earned about 23 basis points on average across all of the cash that's obviously going up from this point forward our banks generally.

Follow the fed maybe not point for point, but they follow the fed in terms of raising our deposit rates.

And in the past you would own some treasury notes is that no longer. The case are you no longer interested in us.

Yes, we do not own any treasury as we did that a few years ago.

But we do not own any today.

Okay. Thanks, everyone.

Okay.

As a reminder, we would 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.

Our next question comes from Jamie Feldman with Bank of America. Please proceed with your question.

Great. Thank you good morning.

Maybe from your vantage point, what do you what property types, what investment markets, you think you've changed the most over the last several months with I mean, we saw like the Lexington deal fall out of bed.

We still saw ACC getting done.

I mean, it seems like there is still.

Some property types that have a good bad and some property types that might be a little I think the market has changed so I'm just curious from your seat what would you say has changed the most.

Jamie It's a fair question I don't think we have a great answer for you other than to say that things are really as everyone knows.

Difficult to sort out right now you've got the fed raising you've got the horrible where you've got inflation fears you've got a lot of different things Colby still affecting supply chain internationally. So what we're trying to do is.

Sure.

Use our time thoughtfully investigate opportunities where there is a.

A real chance to get something done obviously, we've gotten busier.

And.

The dislocation hopefully generates an opportunity for us to do what we've been trying to do which is buy a good business at a fair price.

Okay.

And it.

It sounded like there is just more out there today than there was a couple of months ago, obviously, given potential dislocation that makes a lot of sense.

Your comment that you just have a couple more quarters of poking around I mean, I would've thought that had things not changed you probably wouldn't even have a couple more quarters left so is that a fair assessment that suddenly there's just more on your plate than a couple of months ago.

We've had a lot on our plate, but things are more dynamic right now I think in our discussion with different market participants. There is still a lot of activity. There is still a lot of people talking about getting things done, but there are more questions about the ability to source.

Answering source attractive financing.

People's willingness to take risks, so I would say the quality of the opportunity maybe it's a little better but it's hard to tell until you get further down the road and really determine whats actionable and what's not.

And do you have a different view on any property types. I mean, you look at the Amazon News from last week, whether Thats news or not.

Would you would you be looking at Monmouth again today or do you feel like something would have shifted in that market.

Well, Hey, Jamie its David I don't know if we have a different view on property types. It's obviously things are evolving real time.

Hi.

If you go back we were always a little skeptical of pricing in the past it may be the market is coming to us now, which will create opportunities going forward. So I'm not so sure that our view has changed and just may be the circumstances in today's world is allowing us to look at more interesting.

Opportunities that perhaps find something that we couldnt have seen in the prior few years. An example, Jamie would be.

Yes.

As a REIT, we're going to be low lever.

When rates were where they were someone who is borrowing twice as much of the purchase price and we were at an advantage that advantage has been eroded by both spreads and base rates.

Okay that makes a lot of sense and how much leverage are you willing to take on.

If you think about let's say you do take the company public or or just as you think about running our business what's your target.

Yes, I think we've consistently said that we intend to operate.

This is <unk>.

That is a traditional REIT with call it triple b leverage metrics and our balance sheet.

<unk> also said we have in this building done deals where we go a little beyond that when we have a plan to get there.

So I would say.

Modest to reasonable leverage from with a REIT definition.

So what would that mean for the magnitude of a deal you can do.

Of the total size.

It depends if we use equity.

But without equity.

Yes, $4 billion to $5 billion.

Sure.

Okay.

And then I guess last for me just how would you say the appetite of sellers has changed.

I think it's going to be a function of property type right. There's still a lot of equity and debt looking for a home and real estate.

We talk about the divergence, it's even more pronounced now.

Theres still a lot of money looking for industrial multifamily life science et cetera pricing may be impacted especially the more leverage you are but from a seller's perspective interest rates are still low by historical standards. So it could still be a very good time to sell.

But at the same time for our low levered buyer like us, especially with larger transactions. We may just find ourselves to be more competitive than we've been in the past.

Okay, sorry, one more just on the office market cycle when companies are coming back to the office.

Are you feeling any more positive less positive on that property type.

We are in this.

I'd say I'd say, it's both Jamie.

Activity is clearly up.

David referenced in terms of tours inquiries, but tenants have more options today than they've ever had in the past. We've also seen some false starts in our portfolio where tenants have called their employees back to the office indicated they'll need more space, but then it turns out the employees have all the leverage and theyre not coming back to the office. So I wish I could tell you.

I've got an answer to your question I, just think we're going to be struggling with this for some time.

Okay alright, thank you.

Okay.

Thank you.

No further questions at this time I would like to turn the floor back to Jean David Helfand for any closing comments.

Thank you everyone for joining us we appreciate it.

Yes.

Sure.

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

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Okay.

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