Equity Commonwealth Q1 2023 Earnings Call

Good morning, and thanks for joining in this call to discuss equity Commonwealth's.

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For the quarter ending March 31st 2023, and an update on the company.

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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 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 supplement 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 .

David Weinberg, COO and they'll Griffith CFO .

With that I'll turn the call over to David Helfand. Please go ahead Sir.

Thank you and good morning, everyone.

I appreciate you joining us I will review the company's results for the quarter.

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

For the quarter funds from operations were 22 per share compared to <unk> <unk> per share in the first quarter 2022.

Normalized <unk> was 23 per share compared to <unk> <unk> per share a year ago.

The growth in <unk> and normalized <unk> was largely the result of a 24 cent per share increase in interest and other income.

Partially offset by a <unk> <unk> per share decrease in same property NOI and.

And a <unk> <unk> per share decrease in NOI from properties sold.

Same property NOI decreased 25% and same property cash NOI was 17% lower compared to last year.

<unk>, 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 two 7% and same property cash NOI increased two 3% compared to the first quarter 2022.

At our properties in the first quarter 2023, we signed 60000 square feet of new leases and renewals.

Rents on those leases were up three 6% on a cash basis.

Up 13, 8% on a GAAP basis.

As of March 31 leased occupancy was 81, 6% commenced occupancy was 77%.

While tour and leasing activity has picked up a bit we continue to see tenants looking to get back space as well.

Turning to the balance sheet, we have approximately $2 $1 billion of cash were $19 per share and no debt.

<unk>, our cash balance since year end is primarily due to the $4 25 per share common distribution that was paid on March nine.

The interest rate we earned on our cash has increased as if that has moved rates and were 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 worked 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 defense continued rate increases over the past year. Our interest income has grown from $1 $6 million in the first quarter 2022 to $28 4 million in the first quarter 2023.

As we've discussed in 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.

Similar option is available to us again in 2023.

We also expect we will have options available to us to meet the requirements for qualification in 2024.

Turning to share buybacks, we have not repurchased any shares year to date.

Since we began buying back stock in 2015, we have 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 its been in quite a while the twin forces a war in Europe and inflation have had a significant impact on market fundamentals and values.

If there's massive tightening over the past 12 months is more than double borrowing cost.

And left owners with debt maturities in a difficult place.

For some asset classes like industrial and residential operation operating conditions remain relatively strong though decelerated.

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 sales volume was approximately $47 billion.

Roughly half of the quarter total in 'twenty, two and down 60% year over year.

Based on discussion with market participants.

<unk> quarter, 23 volumes will be likely 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 EQT team continues to demonstrate patients optimism and focus.

I'd like to take a moment and recognize their efforts.

Patients is often a virtue, but that doesn't mean, it's easy.

This is a busy time of the year for our team.

With 10-K annual report proxy and preparations for our annual meeting.

So here's a shadow to the EQT team for your continued commitment discipline and excellence.

With that I'll turn the call over to the operator for questions.

Yeah.

Okay.

Thank you.

Ladies and gentlemen, we will be conducting a question and answer session.

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One moment. Please why we pause for questions to ask question. Please press star one now.

Take our first question from the line of Craig Melman with Citi. Please go ahead.

Thanks, It's actually Nick Joseph here with Craig.

Maybe just starting on kind of what Youre currently evaluating.

So if you could talk about kind of the current pipeline, maybe the volume of deals Youre looking at recognizing it's pretty slow out there and I can touch on how you're thinking about underwriting and different hurdles for different asset awful.

Yeah, Hey, Nick it's David Weinberg.

To begin with what you said is correct that's still quite quiet, we'd say it's still early.

And 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 REIT, we think its support to find a good business.

Yes.

Long term sustainable growth.

And we've been spending a lot of time and continue to do so.

Industrial and <unk> 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.

And then to more specifically address your question.

In this environment I'd say, we're having more discussions than we have in the past.

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 and potentially you can control.

And while that may not be a viable option our preferred option today.

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.

As you think about kind of underwriting industrial or build to rent single family or I guess, even office now how much of the IRR is.

Our return hurdles changed for you when you underwrite it today versus if you were looking at 12 to 18 months ago.

Well 12 to 18 months ago, obviously, we just couldnt make sense of the pricing.

Both on basis yields and all <unk> type returns.

We recognize where the cost of debt is where the public Reits are trading.

So that factors into our evaluations.

I would say hurdles have raised accordingly, but it's difficult to quantify it because as always it varies based on where we perceive the risks to be and the growth.

Thanks, and then you talked about the cash.

Cash manage branded balance sheet management that you've been doing.

And that Theres 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 with marketable securities.

Investments into equities makes sense at any point.

Well.

In the past.

We've talked about 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 that 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 that we could execute.

Execute quickly.

Yes.

Hey, guys, it's Craig here.

David I know you talked about the internal restructuring and you can do another one in 'twenty three so should we assume a similar kind of a special dividend.

Or would it need to be bigger given the kind of growth in interest income relative to the.

NOI coming off the four remaining assets.

Yeah.

I think the answer is the $4 25 that we already distributed was.

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 or there may be topping up the 425, if it's necessary based on taxable income.

Great. Thank you.

Okay.

Thank you.

A reminder to participants if you wish to ask a question. Please press star one on your thoughts for now.

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 Helfand for closing remarks over to you Sir.

Thanks for joining us today.

Thank you ladies and gentlemen. This concludes today's conference call. You may disconnect. Your lines at this time, thank you for participation.

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