Q4 2023 Equity Commonwealth Earnings Call

Operator: Good morning and thanks for joining this call to discuss Equity Commonwealth results for the fourth quarter and full year ending December 31st, 2023, and an update on the company. At this time, all participants are in a listen-only mode.

Good morning, and thanks for joining us this call is to discuss equity Commonwealth's results for the fourth quarter and full year ending December 31st 2023.

And then 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.

Operator: 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. 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.

If you 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.

You May press Star two if you would like to remove your question from the queue.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call 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 law. 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 statement. The company assumes no obligation to update or supplement any forward-looking statements made today.

All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stocky.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

Please be advised that certain matters discussed during this conference call.

Forward looking statements within the meaning of federal Securities Law.

Please refer to the section titled forward looking statements in the press release issued yesterday as well have the section titled risk factors in the company's annual report on Form 10-K, and quarterly reports on Form 10-Q, plus up 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.

Operator: The company posts important information on its website at www.eqcre.com, including information that may be material. The portion of today's remarks on the company's quarterly and 2023 earnings also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplement containing the company's results for a reconciliation of these non-GAAP measures to the company's GAAP financial results. On the call today are David Helfen, President and CEO, David Weinberg, COO, and Bill Griffiths, CFO. With that, I will turn the call over to David Weinberg. Please go ahead, sir.

The company posts important information on its website at www Dot EQ CRE Dot com.

Including information that may be material.

The portion of today's remark on the company's quarterly and 2023 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 Bell Griffith CFO.

With that I will turn the call to David Weinberg. Please.

Please go ahead Sir.

David Weinberg: Good morning, everyone. Thanks for joining us. I'll review the company's results for the quarter and the full year, as well as provide an update on our investment activities. For the quarter, funds from operations were $0.27 per share, compared to $0.21 per share in the fourth quarter of 2022. Normalized FFO was $0.26 per share compared to $0.21 per share a year ago. The growth in FFO and normalized FFO was largely the result of a $0.05 per share increase in interest and other income. Same property NOI was down 2.3%, and same property cash NOI was 12% lower compared to the fourth quarter of 2022. For the full year 2023, funds from operations were $0.91 per share, compared to $0.41 per share for the full year 2022.

Good morning, everyone.

Thanks for joining us I'll review, the company's results for the quarter and the full year as well as provide an update on our investment activities for.

For the quarter funds from operations were <unk> 27 per share compared to <unk> 21 per share in the fourth quarter 2022.

Normalized <unk> was <unk> 26 per share compared to <unk> 21 per share a year ago.

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

Same property NOI was down two 3% and same property cash NOI was 12% lower compared to the fourth quarter 2022.

For the full year of 2023 funds from operations were 91 per share compared to 41 per share for the full year 2022 <unk>.

David Weinberg: Normalized FFO was $0.97 per share, compared to $0.42 per share a year ago. The growth in FFO was largely the result of a $0.61 per share increase in interest and other income, a $0.06 per share increase in G&A, and a $0.04 per share decrease in property, same property NOI. The growth in normalized FFO is largely driven by the $0.61 per share increase in interest and other income and the $0.04 per share decrease in same property cash annuals. Same property NOI was down 11.5%, and same property cash NOI was 11.4%, compared to the full year of 2022. Excluding a one-time collection in early 2022, same property NOI and same property cash NOI declined 6.7% and 6.5%, respectively.

Normalized <unk> was <unk> 97 per share compared to <unk> 42 per share a year ago.

The growth in <unk> was largely the result of a 61 per share increase in interest and other income.

<unk> per share increase in G&A expense and a <unk> <unk> per share decrease in property same property NOI.

The growth in normalized <unk> was largely driven by the <unk> 61 per share increase in interest and other income and the <unk> per share decrease in same property cash NOI.

Same property NOI was down 11, 5% and same property cash NOI was 11, 4% lower compared to the full year 2022.

Excluding a onetime collection in early 2022 same property NOI and same property cash NOI declined six 7% and six 5% respectively.

David Weinberg: At our properties, leasing activity remains slow in the fourth quarter, as office tenants continue to work through their space requirements. For the quarter, we signed 32,000 square feet of new leases and renewals. Rents on those leases were up 7.9% on a cash basis and up 26.4% on a gap basis. For the year, we signed 214,000 square feet of new leases and renewable energy. Rents on those leases were up 1.6% on a cash basis and up 13.7% on a GAAP basis. As of December 31st, leased occupancy was 81.2%, and commencement occupancy was 80%.

At our properties leasing activity remains slow in the fourth quarter.

Office tenants continue to work through their space requirements.

For the quarter, we signed 32000 square feet of new leases and renewals rents on those leases were up seven 9% on a cash basis and up 26, 4% on a GAAP basis.

For the year, we signed 214000 square feet of new leases and renewals rents.

Rents on those leases were up one 6% on a cash basis and up 13, 7% on a GAAP basis as.

As of December 31 leased occupancy was 81, 2% and commenced occupancy was 80%.

David Weinberg: Turning to the balance sheet, we have approximately $2.2 billion of cash, or roughly $20 per share, and no debt. With none of our preferred stock, our cash balance is just under $19 per share. The change in our cash balance during 2023 was primarily caused by the interest income on our cash, net of the $4.25 per share, common distribution in March, and share buyback. The interest rate on our cash increased during the year from an average of 3.75% during 2022 to an average of 5.5% during 2023. With respect to share buybacks, during 2023, we repurchased 3 million shares at a cost of $56.7 million, at an average price of $18.78. Since we began buying back stock in 2015, we have repurchased a total of 25.4 million shares for an aggregate of $652 million at an average dividend adjusted price of $17.63. We currently have $93 million remaining on our existing share buyback authorization.

Turning to the balance sheet, we have approximately $2 2 billion of cash or roughly $20 per share and no debt.

Net of our preferred stock or cash balances just under $19 per share.

The change in our cash balance during 2023 was primarily caused by the interest income on our cash net of the $4 25 per share a common distribution in March and share buybacks.

The interest rate on our cash increased during the year from an average of 375% during 2022 to an average of five 5% during 2023.

With respect to share buybacks during 2023, we repurchased 3 million shares at a cost of $56 $7 million at an average price of $18 78.

Since we began buying back stock in 2015, we have repurchased a total of $25 4 million shares for an aggregate of $652 million at an average dividend adjusted price of $17 63.

We currently have $93 million remaining on our existing share buyback authorization.

David Weinberg: Earlier this month, we completed a contribution of cash to a subsidiary REIT, which makes the interest income from that cash qualified income for the 75% REIT income test for the next 12 months. With that, we expect to qualify as a REIT in 2024. With respect to the capital markets, investment sales volumes remain down across all asset classes as buyers and sellers sort through the impact of the changing credit markets and try to gauge the strength of different sectors.

Earlier this month, we completed a contribution of cash to a subsidiary REIT, which makes the interest income from that cash qualified income for the 75% REIT income test for the next 12 months with that we expect to qualify as a REIT in 2024.

With respect to the capital markets investment sales volumes remained down across all asset classes as buyers and sellers sort through the impact of the change in credit markets and try to gauge the strength of different sectors.

David Weinberg: At EQC, we continue to work to identify an investment opportunity and to create value at our four office assets. As we have said previously, we believe a compelling investment opportunity is one where we are getting paid for the risk we are taking. We also believe that investments with strong long-term growth prospects are good businesses for public relief. Accordingly, while we look across sectors, we are spending more time on industrial and residential investments, including workforce housing. We remain hopeful that we will find a deal. In the meantime, the team remains focused and disciplined.

<unk>, we continue to work to identify an investment opportunity and to create value at our four office assets. As we have said previously we believe a compelling investment opportunity is one where we are getting paid for the risk we're taking.

We also believe that investments with strong long term growth prospects are good businesses for public REIT.

Accordingly, while we look across sectors, we are spending more time on the industrial and residential investments, including workforce housing.

We remain hopeful that we will find to do in the meantime, the team remains focused and disciplined with that David Bill and I are happy to take your questions.

Operator: With that, David, Bill, and I are happy to take your questions. Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Okay.

Thank you.

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

I would like to ask a question. Please press star and one on your telephone keypad.

Information tone will indicate your line is in the question queue.

Craig Millman: Our first question is from the line of Craig Millman with Citi; please go ahead. Hi, good morning. This is Seth Berge on behalf of Craig.

Our first question is from the line of Craig Mailman with Citi. Please go ahead.

Hi, Good morning. This is Scott Berg on for Craig I guess my first question would be you know.

David Weinberg: I guess my first question would be, you know, how do you see the number of opportunities you're evaluating today, like how does that volume compare to the opportunity set that you've been looking at over the prior quarter? Has it increased or decreased? Um, Hey, it's David Weinberg. I'd say just from quarter to quarter, I'm not sure there's that much of a difference.

How do you see the number of opt.

Opportunities you're evaluating today like how does that volume compared to Q.

The opportunities that that you've been looking out over the prior quarter because of that increase or decrease.

Hum.

Hey, it's David Weinberg, I'd say just from quarter to quarter I am not sure there is that much of a difference.

David Weinberg: While there's a lot more chatter in the market, and you're seeing more... references to one-off sales, please keep in mind we're looking for larger transformative investments. And maybe there's an uptick in those. But from my perspective, we saw opportunities last year, and we're continuing to look at opportunities early into this. Okay, great. And then just another one.

While there is a lot more chatter in the market and Youre seeing more.

References to one off sales. Please keep in mind, we're looking for larger transformative investments.

Maybe there is an uptick on those.

But from my perspective, we saw opportunities last year, and we're continuing to look at opportunities early into this year.

Okay, Great and then just another one in the past you've kind of mentioned catalysts for transaction would be.

David Weinberg: In the past, you've kind of mentioned, you know, a catalyst for a transaction would be COVID, which didn't turn out to be a catalyst, and then kind of the dislocation in the capital markets, kind of alluding to some of that chatter you've talked about, you know, increasing. You know, kind of how do you view that window of opportunity? Do you see that, you know, still plenty of opportunity? Or do you kind of see that window narrowing just in terms of the timeframe you're looking at? I'd say the window's open, but it's harder to predict if and when it shuts.

Which didn't turn out to be a catalyst and then kind of the dislocation in the capital markets kind of alluding to some of that chatter you've talked about and.

Increasing.

You know kind of how do you view that window of opportunity do you see that you know still plenty of opportunity or do you kind of see that window narrowing just in terms of the timeframe you are looking at.

I'd say the Windows open it's harder to predict if and when its shots.

David Weinberg: But for the reasons we've just discussed before, given the changing credit markets, proceeds down, interest rates up, harder for private companies to go public, pressure on private real estate companies to create some liquidity, and things we can do in addition to just providing cash, we think we are an attractive option for lots of large owners. And in this environment, in general, we think there are conversations that are being had and will continue to be had. But to specifically address your question, I can't predict, you know, if and when that window will shut, and we need to look longer and harder at perhaps selling the four remaining properties and liquidating the company.

But for the reasons, we've just discussed before given the change in credit markets proceeds down interest rates up harder for private companies to get public pressure on private really companies to create some liquidity and things. We can do in addition to just providing cash we think we are an attractive option for us.

Lots of large owners and in this environment in general we think there are conversations are being had and will continue to be had.

But to specifically address your question I can't predict.

If and when that window will shot and we need to look longer and harder it perhaps selling the four remaining properties.

<unk>.

And liquidating the company.

David Weinberg: Great, thank you. Thank you. As there are no further questions, I will now hand the conference over to David. David, please go ahead.

Great. Thank you.

Thank you.

As there are no further questions I will now hand, the conference over to David.

David Please go ahead.

David Weinberg: All right. Well, thank you again, and we appreciate your time. Thank you. The Conference of Equity Commonwealth has now concluded. Thank you for your participation. You may now disconnect your lines. www.equicommonwealth.org, State Supreme Court Edict

Well. Thank you again and we appreciate your time.

Yeah.

Yeah.

Thank you.

Suffolk Commonwealth has now concluded. Thank you for your participation you may now disconnect your lines.

[music].

Yeah.

Yeah.

[music].