Q4 2022 Equity Commonwealth Earnings Call

Speaker 2: 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.

Speaker 3: 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 handset before pressing the star key. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.

Speaker 4: 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 .

Speaker 5: and quarterly reports on Form 10Q 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.cpe.rutgers.edu.

Speaker 6: www.eqcre.com, including information that may be material. The portion of today's remarks on the company's quarterly and 2022 earnings also include certain non-GAAP financial measures.

Speaker 7: Please refer to the Estaries Press release and supplement supplement will contain the company's results for reconciliation of these non- GAAP measures to the company's GAAP financial results. On the call today are David Healthand, President and CEO , David Weinberg, COO, and Bill Greggis, the FO.

Speaker 8: So that I will turn the call over to David Healthand. Our review of the company's results for the quarter in the full year, as well as providing an update on the capital markets and our investment activities.

Speaker 9: The quarter funds from operations were 21 cents per share compared to one cent per share in the fourth quarter 2021.

Speaker 10: The normalized FFB was also 21 cents per share, compared to less than a penny per share a year ago.

Speaker 11: 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 and a lie.

Speaker 12: St. Property NOI was up 14.5% St. Property Cash NOI.

Speaker 13: was 14.9% higher compared to the fourth quarter 2021.

Speaker 14: For the full year 2022, funds from operations were 41 cents per share compared to a six-cent per share loss for the full year 2021.

Speaker 15: Normalized FFLO was 42 cents per share compared to one cent per share lost a year ago.

Speaker 16: Growth in FF4 was largely the result of a 35-cent per share increase in interest in other income.

Speaker 17: A 6 cent per share decrease in GNA expense.

Speaker 18: and a five-cent per share increase in same property NOI.

Speaker 19: The growth in normalized FFO was largely driven by a 36 cent per share increase in interest in other income.

Speaker 20: and a six cent per share increase in same property cash NOI.

Speaker 21: Same property N O I was up 17% same property cash in O I was 19.1% higher compared to the full year 2021.

Speaker 22: At our properties leasing activity increased in the fourth quarter. We signed 76,000 square feet of new and renewal leases. The gains on those leases were flat on a cash basis and up 3.6% on a GAAP basis.

Speaker 23: For the year we signed 25,000 square feet of new leases and renewals.

Speaker 24: Rents on those leases were flat on a cash basis and up 3.8% on a GAAP basis.

Speaker 25: As of December 31st, leaf documents he was 82.8% and commenced occupancy was 78.7%.

Speaker 26: Turning to the balance sheet, we have approximately $2.6 billion to cash for $23 per share and no doubt.

Speaker 27: 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 are sure by that activity.

Speaker 28: Interest rate on our cash increased substantially during the year. From 22 basis points year end 2021.

Speaker 29: to 4.5% at year-end 2022.

Speaker 30: Currently we're earning roughly 4.75% on our cash balance.

Speaker 31: In October , we paid a distribution of common shareholders totaling $111 million or $1 share.

Speaker 32: With 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 have repurchased a total of 22.4 million shares or roughly 17% of our flow rate as of 2014.

For an aggregate of $595 million.

For an average dividend adjusted price of $21.73.

We currently have $120 million remaining capacity under our resisting.

that activity? Share Byebag?

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.

Investments 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 AQC 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, just plain and optimistic, and with that I'll turn this over to questions for myself bill and date.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask the question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question key. You may press star two if you'd like to remove your question from the queue. For participants using streetour equipment, it may be necessary to pick up your hand step before pressing the star key. One moment please, while we pull for questions.

maybe at the time of the last call.

you know at this point, you know where your return hurdles are and

you know, whether, you know.

You think things are gonna play out over the next couple months here? To where you guys can find something that the political capital of do I try to get saw David Weinberg

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 it.

a difference, especially 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, etc. 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-or-ranked communities.

And we just like those given our history with the manufacturer housing parks and the ability to work the real estate.

With the long-term strong fundamentals in those sectors, we view those absent specific historic, perhaps to be less risky and more of the 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.

I know there's been some news in the market about one big NTR in particular. We got a cash infusion and I've seen them sell some assets here as they've bought some recent portfolios. I mean, there's already discussion with...

a seller like that where you guys can offer, you know, surety of clothes, immediate liquidity and, you know,

I get that price and the stuff fluid here, but for the proper types of you guys are really interesting.

I don't know that cap rates are going to gap out, given the capital chasing them in the long term fundamentals. I mean, I'm just trying to figure out that 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 and I'm just trying to figure out that 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

jingles and doubles and then hopefully as you know 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 you'll get the ball rolling, get the market knowing that you are serious about putting the cap on out the door.

I think that's well said. I this is David help in Craig.

What I would say is we are not expecting or waiting for cap rates to gap out.

is we are not expecting we're waiting for coverage to gap out and I think David

I mentioned it, but I'll elaborate. We haven't been an 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 came 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 the 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.

22

I see you guys are down to almost a scouting purpose point.

Couldn't quite hear that.

I would just say you guys are kind of kind of to almost a skeleton group so there's not.

No, no, no, no, there's still plenty of muscle here. I say, our head count 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, um, the, the rationale here that keep doing the buybacks when most of the value in the portfolio is sort of a cash balance. 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 how you feel about that?

you know, deploying it.

It's a fair comment. I think it's easy to look back and retrospect. We're constantly evaluating the use of Sherrler Capital for a number of things, one of which is a buyback. And when we bought the shockback, we thought we believed we're buying back at a discount to value and creating a creation.

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.

Great, thank you guys. Thank you.

As a reminder, if you would like to ask you a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question case. If you would like to ask a question, please press star one on your telephone keypad.

As a reminder, if you would like to ask you a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question. Yes.

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.