Q2 2022 Equity Commonwealth Earnings Call

Good morning, and thanks for joining this call to discuss equity Commonwealth's results for the second quarter ending June 30th 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 one on your.

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

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

Company assumes no obligations to update or supplement any forward looking statements made today.

The company post important information on its website at Www Dot EQ C. R E dot 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 supplemental containing the companys views.

For a reconciliation of these non-GAAP measures to the company's GAAP financial results.

Call today are David Helfand, President and CEO , and David Weinberg, COO and Bill Griffith CFO with that I will turn the call over to David Helfand. Please proceed.

Good morning, Thank you for joining us.

I'll review the company's results for the quarter.

As well as provide an update on our disposition and investment activities.

Funds from operation or <unk> per share compared to zero cents per share in the second quarter 2021.

Normalized <unk> per share compared to zero cents per share a year ago.

The growth in SFO and a normalized <unk> was largely the result of <unk>.

<unk> per share increase in interest and other income.

As well as the <unk> per share increase in same property cash NOI.

Same property NOI was up 8% same property cash NOI.

Was 12, 3% higher compared to the second quarter 2021.

At our properties leasing activity improved this quarter.

We're seeing more inquiries and tours, particularly in Austin.

However, many tenants are still challenged to identify their near term space requirements.

So there is a greater emphasis on flexibility through increased demand for short term renewals shorter leases for newly built out space.

In the second quarter, we signed 34000 square feet of new and renewal leases, whereas some of those leases were up four 9% on a cash basis and up nine 6% on a GAAP basis.

As of June 30th leased occupancy was 84, 8%.

Commenced occupancy relates to two 9%.

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

With respect to share buybacks in the quarter, we repurchased one four and shares.

$37 5 million at an average price of $25 92 per share.

Year to date, we've repurchased four 3 million shares for $111 1 million at an average price of $25 86 per share.

Since we began buying back shares in 2015, we've repurchased a total of $20 6 million shares.

$551 million at an average dividends adjusted price of $22 52.

We have $164 million remaining on our existing share buyback authorization.

Turning to dispositions.

On our last call, we announced that we had two properties in the market $12 50, H Street in Washington, D C and Bridgepoint square in suburban Austin.

And then it was likely that we would soon market Capitol tower in downtown Austin, which we did.

While there was interest in each of the properties to date, we have not seen pricing and term sufficient to warrant a sale.

Since our last call the pricing of office properties has been impacted by several factors, including a significant change in the debt markets.

Earlier this year lenders are active and a buyer for the borrower and a 65% to 70% LTV.

And an all in rate in the high three to low 4% range.

Today the credit marks.

Markets for value add office properties are essentially frozen.

Recently debt funds and the primary source for loans.

Ltvs are up 50% and all in rates in the 6% to 7% range.

Activity has slowed considerably.

Moreover, given the uncertain headwinds in this remote work environment, many traditional office virus hit the pause button.

Those that remain.

Yes, they were seeking higher returns with more conservative underwriting.

While we may still find a buyer at an acceptable price. These are good properties and we're comfortable holding them longer.

On prior calls we've also discussed our monitoring of the 75% REIT income test.

As the fed raises rates our interest income is also increasing.

Interest income on our cash balance is not qualified income for the REIT income test.

To address this issue and ensure compliance with all requirements.

We plan to implement an internal restructuring.

Transferring two of our assets to our wholly owned reached sit here.

Section $3 51 transaction.

This will accelerate most of the taxable gain in these assets.

<unk> will provide us qualifying income for reading contest.

Restructuring will allow us to be efficient from a state tax planning perspective in the event. We saw these two properties in the future.

Restructuring is expected to result in a special distributions for 2022 and the one dollar per share range.

In terms of investments, we continue to evaluate a wide range of opportunities across different sectors.

We know that shareholders would like more clarity on timing.

As we said last call markets are dynamic, we can't predict the facts and circumstances.

That will determine how long we continue to pursue investments.

As always we remain mindful of the cost of pursuing opportunity and continue to evaluate the best course of action to maximize value, including returning cash to shareholders.

Tend to remain disciplined.

And are optimistic we will find a compelling investment.

With that David Bill and I are happy to take your questions.

Yeah.

Thank you at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

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Once again, that's star one to ask a question.

One moment, while we poll for questions.

Our first question comes from Craig Mailman with Citi. Please proceed.

Hi, Good morning. This is Scott Berg on for Craig Mailman.

Just wanted to know what type of opportunities youre seeing given the dislocation.

Dislocation in the market and then.

Within that is there anything on that front or are you just considering additional asset acquisitions.

Hey, it's David Weinberg I'll answer the first part of your question I wasn't sure I heard the second part maybe that will help.

Answered inadvertently.

In terms of the opportunity set as David said in his remarks, we remain optimistic and I would say today.

You alluded to we're a little more often optimistic than we have been in the past.

Public company with $2 $7 billion of cash no debt, we've got both equity and <unk> units, we can bring to a transaction, which creates a lot of flexibility.

Especially given we're willing to look at different sectors and we've spoken to our.

Thoughts on whether we need to remain in control or not.

Given that mindset, we are seeing more opportunities today in.

In the past large private owners, perhaps could sell their assets and rotate out of the sector that could recap their business with equity and very attractive debt or perhaps that could go public.

Today those groups are now speaking with us.

I'd say more seriously we are a very attractive alternative to them given their limited options in this environment.

So we continue to look across sectors and while we remain optimistic I can't tell you. There is a deal that's imminent, but more groups are engaging with us.

Okay and that's helpful. The second part of the question was just is there anything on that front or are you just considering I felt acquisition.

Right.

If you're asking would we acquired debt.

Okay.

Yeah.

We've looked in some cases that debt as it means to accessing assets, but.

Most of our activities on the direct asset side.

Okay. Thank you.

Once again, ladies and gentlemen to ask a question at this time. Please press star one on your telephone keypad, one moment, while we poll for questions.

Okay.

Yeah.

There are no questions in queue at this time I will turn the call back over to management for closing comments.

Well that was quite a grilling.

Thank you for your time.

Sure the rest of your summer.

Yes.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.