Q1 2024 Equity Commonwealth Earnings Call
Good morning, and thanks for joining this call to discuss equity Commonwealth's results for the quarter ending March 31st 2024, and an update on the company at this time all participants are in a listen only mode.
Operator: Good morning and thanks for joining this call to discuss Equity Commonwealth's results for the quarter ending March 31st, 2024 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. 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.
Operator: Question and answer session will follow the formal presentation if.
Operator: 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 for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. 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 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.
Operator: 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.
Operator: 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.
Operator: 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.
Operator: 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.eqcre.com, including information that may be material. The portion of today's remarks regarding the company's quarterly earnings also includes certain non-GAAP financial measures. Please refer to yesterday's press release and the accompanying materials 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 Helfand, President and CEO, David Weinberg, COO, and Bill Griffiths, CFO. With that, I will turn the call over to David Helfand.
Operator: 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 Dot EQ P. R E dot com, including information that may be may be material.
Operator: The portion of todays remarks regarding the Companys 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.
Operator: On the call today are David Helfand, President and CEO, David Weinberg, COO and Bill Griffith CFO with that I will turn the call over to David Helfand.
David A. Helfand: Thank you and good morning everyone. Thanks for joining us. I'll review the company's results for the quarter as well as provide an update on our business. Funds from operations for the quarter were $0.26 per share compared to $0.22 per share in the first quarter of 2023. Normalized FFO is $0.25 per share compared to $0.23 per share a year ago. The growth in FFO and normalized FFO was largely the result of a one cent per share increase in interest and other income and a one cent per share decrease in income tax expense. Same property NOI increased 4.3% compared to last year due to a decrease in pre-leasing demolition costs and an increase in lease termination fees, partially offset by a decrease in average commenced occupancy.
David A. Helfand: Thank you and good morning, everyone. Thanks for joining us.
David A. Helfand: Same property cash NOI was 6.9% lower, primarily due to the decrease in average commenced occupancy, partially offset by the decrease in pre-lease, pre-leasing demolition costs, and as of March 31st, lease occupancy was 75.4%, and commenced occupancy was 75.4, and Commenced Occupancy was 74.6. Turning to the balance sheet, we have approximately $2.2 billion in cash for nearly $20 per share and no debt. And that of our preferred stock, our cash balance is just under $19 per share, and we continue to earn 5.5% of our cash, resulting in $29.5 million in interest and other income for the quarter. We've not repurchased any shares here to date, and we currently have $93 million remaining on our share buyback authorization. I thought I'd offer a few thoughts on what we've accomplished and where we go from here.
David A. Helfand: Ill review the Companys results for the quarter as well as provide an update on our business.
David A. Helfand: In the quarter funds from operation was <unk> 26 per share compared to <unk> <unk> per share in the first quarter 2023.
David A. Helfand: Normalized <unk> was 25 per share compared to 23 per share a year ago.
David A. Helfand: The growth in <unk> and normalized <unk> was largely the result of a <unk> <unk> per share increase in interest and other income and <unk> per share decrease in income tax expense.
David A. Helfand: Same property NOI increased four 3% compared to last year.
David A. Helfand: Due to a decrease in pre leasing demolition costs.
David A. Helfand: And an increase in lease termination fees, partially offset by a decrease in average commenced occupancy.
David A. Helfand: Same property cash NOI grew six 9% lower primarily due to the decrease in average commenced occupancy.
David A. Helfand: Partially offset with a decrease in pre leased pre leasing demolition costs.
David A. Helfand: And as of March 31 leased occupancy was 75, 4% and commenced occupancy was.
David A. Helfand: $75 four and commenced occupancy was $74 six turning to the balance sheet, we have approximately $2 2 billion in cash or nearly $20 per share and no debt net of our preferred stock or cash balances just under $19 per share.
David A. Helfand: We continue to earn five 5% on a cash resulting in $29 $5 million in interest and other income for the quarter.
David A. Helfand: We've not repurchased any shares year to date and we currently have $93 million remaining on our share buyback authorization.
David A. Helfand: I thought I'd offer a few thoughts of what we've accomplished and where we go from here.
David A. Helfand: Since assuming responsibility for the company, the EQC team has been focused on its efforts and has executed a disciplined strategy. We've completed $7.6 billion of dispositions, including the sale of 164 properties. Distributed $1.8 billion, or $14.75 per share, to our common shareholders. We've repurchased $652 million of our common shares at a dividend-adjusted price of $17.63 per share.
David A. Helfand: Since assuming responsibility for the company. The EQT team has been focusing its efforts and has executed a disciplined strategy.
David A. Helfand: We've completed seven $6 billion of dispositions, including the sale of 164 properties.
David A. Helfand: We distributed $1 8 billion or $14 75 per share to our common shareholders.
David A. Helfand: We purchased $652 million of our common shares at a dividend adjusted price of $17 63 per share.
David A. Helfand: We've repaid debt and preferred equity of $3.3 billion, and we've generated a cash balance of $2.2 billion. With respect to capital allocation, we've tried to be responsive to market conditions. For the first six years, that was straightforward. Valuations were at or near all-time highs, and we concluded that it was in the company's interest to sell assets. We sold all but four of our office properties between 2015 and 2020. When the pandemic hit, the office market froze.
David A. Helfand: We've repaid debt and preferred equity of $3 $3 billion, and we generated a cash balance of $2 2 billion.
David A. Helfand: With respect to capital allocation, we've tried to be responsive to market conditions.
David A. Helfand: For the first six years that was straightforward valuations were at or near all time highs and we concluded that it was in the company's interest to sell assets.
David A. Helfand: All but four of our office properties between 2015 and 2020.
David A. Helfand: When the pandemic hit the office market froze.
David A. Helfand: The investment sale market's continued weakness coming out of COVID and the spike in interest rates in early 22 have stalled the office market recovery. Throughout this time, we've evaluated numerous investment opportunities across sectors, with a recent focus on industrial and residential. We have been seeking to acquire a business with strong fundamentals and a compelling risk-reward profile that creates long-term value for our shareholders. To date, we have not found the right investment
David A. Helfand: <unk> shale markets continued weakness coming out of Covid and the spike in interest rates and really 'twenty two installed the office market recovery.
David A. Helfand: Throughout this time, we've evaluated numerous investment opportunities across sectors with a recent focus on industrial and residential.
David A. Helfand: We have been seeking to acquire a business with strong fundamentals and a compelling risk reward profile that creates long term value for our shareholders.
David A. Helfand: To date, we've not found the right investment.
David A. Helfand: So while we're actively working on potential transactions in our pipeline. We're also preparing to sell our remaining properties.
David A. Helfand: So while we're actively working on potential transactions in our pipeline, we're also preparing to sell our remaining property. We expect to have the two assets in Austin and the one in Washington, D.C. on the market later this month. Our fourth asset, 1225 17th Street in Denver, is our largest, and given that it will likely be the last to sell, will require shareholder approval. If, after working through our pipeline, we're unable to identify a compelling transaction, we intend, by the end of the year, to seek shareholder approval for the wind-down of our business and the return of our shareholders' capital.
David A. Helfand: We expect that the two assets in Austin and one in Washington D. C. In the market later this month.
David A. Helfand: Our fourth asset 12 to $25 17th Street in Denver is our largest and given that it will likely be the last to sell will require shareholder approval.
David A. Helfand: Yes, after working through our pipeline, we're unable to identify compelling transaction, we intend by the end of the year to seek shareholder approval for the wind down of our business and the return of our shareholders' capital.
David A. Helfand: Following shareholder approval, we expect to distribute most of our cash with subsequent distributions following the sale of any remaining assets. We estimate the cost of the wind-down to be $0.40 to $0.50 per share and that it will take approximately six months from the sale of the last asset to complete the wind-down. Looking ahead, we will continue to communicate openly with shareholders regarding the progress of our investment activities, as well as the sale of our remaining office assets. The EQC team will continue to endeavor to create value for shareholders and to be responsible stewards of our investors' capital. With that said, David, Bill, and I are happy to take your questions.
David A. Helfand: Following shareholder approval, we expect to distribute most of our cash with subsequent distributions following the sale of any remaining assets.
David A. Helfand: We estimate the first wind down to be 40% to 50 per share and then it will take approximately six months from the sale of the last asset to complete the wind down.
David A. Helfand: Looking ahead, we will continue to communicate openly with shareholders regarding the progress of our investment activities as well as the sale of our remaining office assets.
David A. Helfand: The EQT team will continue to endeavor to create value for shareholders and to be responsible stewards of our investors' capital.
Speaker Change: With that David Bill and I are happy to take your questions.
David A. Helfand: Okay.
David A. Helfand: Yes.
Operator: Thank you. We will now be conducting a question and answer session. One moment, please, while we pull for questions. Our first question comes from Craig Mailman from Citi. Please proceed.
Speaker Change: Thank you we will now be conducting a question and answer session one.
Craig Allen Mailman: One moment, please while we poll for questions.
Craig Allen Mailman: Our first question comes from Craig Melman from Citigroup. Please proceed.
Craig Allen Mailman: Hey, good morning. David, I guess it sounds like the press release sounded more like you guys are still in the wait-and-see. Your commentary sounds like the wind-down is the highest probability. Is that sort of the way to take it, take your commentary from? The reason you guys gave for a year end is because you want to sell the assets first rather than redistribute the cash and then kind of sell them down as they come. I'm just trying to figure out the difference in the meaning of the kind of the word.
Craig Allen Mailman: Hey, good morning.
Craig Allen Mailman: David I guess it sounds.
Craig Allen Mailman: Yes, really sounded more like you guys are still in a wait and see your commentary it sounds like the wind down as is the highest probability is that sort of a way to take it take your commentary problem. The reason you guys gave till year end is because you want to sell the assets first rather than redistribute the cash and then kind of.
Craig Allen Mailman: Sell them down as they come.
Craig Allen Mailman: Just trying to figure out the difference in the kind of the wording.
Speaker Change: Yeah well.
David A. Helfand: Yeah, well, thanks, Craig. The intention was to convey to investors that we're going to do both, that we're going to continue to pursue some interesting opportunities we have in our pipeline and work those to see if they come to fruition, while at the same time moving towards resolution by putting the remaining assets into the market.
David: Greg I'm not sure about the wording the intention was.
David A. Helfand: To convey to investors that we're going to do both they were going to continue to pursue some interesting opportunities we have in our pipeline and work those to see if they come to fruition, while at the same time moving towards resolution by putting the remaining assets into the market.
Speaker Change: So I mean.
David A. Helfand: So, I mean, for you guys, the opportunities in the pipeline, is there anything that's, you know, even on the 50-yard line at this point, or is it, you know, you're still dual-passing it? But there's nothing imminent right now. Just trying to get a sense of, you know, probability weighting the outcome.
David A. Helfand: Are you guys in the opportunities in the pipeline.
David A. Helfand: Is there anything that's you know even on the 50 yard lines at this point or is it you know you're still dual passing it.
David A. Helfand: But theres nothing imminent right now I'm, just trying to get a sense of you know.
David A. Helfand: Probability waiting the outcome there.
David A. Helfand: Hey, it's David I think it's hard to say what yard line. We're on because we don't have perfect visibility into the Counterparties perspective, but I would reiterate what David said, we're working on some transactions that we think could be a great fit. These are good businesses and they have stories as to why we're up.
David S. Weinberg: Hey, it's David. I think it's hard to say what yard line we're on because we don't have perfect visibility into the counterparty's perspective, but I would reiterate what David said. We're working on some transactions that we think would be a great fit. These are good businesses, and they have stories as to why we're a better buyer than maybe an all-cash transaction.
David S. Weinberg: Better buyer that may be an all cash buyer.
David S. Weinberg:
Craig Allen Mailman: Okay, I mean, from a shareholder approval point of view, you guys would need to get shareholder approval to sell the last office asset. Would you need shareholder approval to... to put a significant amount of capital to work as well, or is that? You only need it for one way, not the other.
Speaker Change: Okay I mean.
David S. Weinberg: I'm, a you guys would need to get shareholder approval to sell the last office asset would you need shareholder approval to.
Craig Allen Mailman: To put a.
Craig Allen Mailman: A significant amount of capital to work as well or is that.
Craig Allen Mailman: You only need it for one way not the other.
Craig Allen Mailman: Okay.
William H. Griffiths: Hey Craig, it's Bill. It depends.
Bill: Hey, Craig its bill.
Craig: It depends we really only would need shareholder approval in a situation, where we'd be issuing stock in excess of about 20% of our.
William H. Griffiths: We really only would need shareholder approval in a situation where we'd be issuing stock in excess of about 20% of our total shares, so we could deploy the cash, assuming no stock, above that amount without shareholder approval.
Bill: Total shares.
Craig: We could deploy the cash assuming no stock above that amount without shareholder approval.
Bill: And then and I apologize for getting into the technicals, but why do you need approval to sell Denver.
Craig Allen Mailman: And I apologize for getting into the technicals, but why do you need approval to sell Denver? Is it just because that would effectively give you no assets? and trigger something? I'm just trying to understand. Yeah, it's just a thing.
Speaker Change: Is it just because that would effectively give you no assets.
Craig Allen Mailman: And trigger something I'm, just trying to understand.
William H. Griffiths: Yeah, it's just a thing in our charter that we need to get shareholder approval for this cell.
Craig Allen Mailman: Yeah, It's just a thing in our charter.
William H. Griffiths: That we need to get shareholder approval to sell.
William H. Griffiths: Okay and then.
Craig Allen Mailman: Assuming you guys do find it accurate. Oh, go ahead. No, no, go ahead. Oh, sorry. Okay.
William H. Griffiths: I'm, assuming you guys do you find exactly.
Speaker Change: Go ahead.
Speaker Change: No no go ahead sorry.
Speaker Change: Okay I was I was saying assuming you guys do find it.
Craig Allen Mailman: I was saying, assuming you guys do find and acquisition in either the residential or industrial space. I'm just kind of curious, you know. I just pulled up, for instance, some potential peers in the industrial space that are, you know, mature companies with big portfolios. Looking at their G&A loads, they're somewhere in the, you know, low end of $20 million for East Group to closer to, you know, the high 30s to $40 million for a Terreno or an FR.
Craig Allen Mailman: At acquisition in either Reza or industrial I'm, just kind of curious yeah, I just pulled up for instance, somebody potential peers in the industrial space.
Craig Allen Mailman: That are mature companies with big portfolios looking at their G&A load there somewhere in the low end of $20 million for <unk>.
Craig Allen Mailman: <unk> group to closer to the high 30% to $40 million for terrain or and that far I'm, just kind of trying to get a sense of how scalable. Your current platform is today, just because you guys would already be in the middle of that range with a pretty high G&A load for you know a portfolio that would be at a you know.
Craig Allen Mailman: I'm just trying to get a sense of how scalable your current platform is today, just because you guys would already be in the middle of that range with a pretty high G&A load for a portfolio that would be at an, you know, arguably much smaller size than some of those companies today.
Craig Allen Mailman: Arguably much smaller size and some of those companies today.
Craig Allen Mailman: Well I would think depending on the nature of the business. We're highly scalable if it were industrial depending on how management intensive. It is I think we already have.
David A. Helfand: Well, I would think, depending on the nature of the business, we're highly scalable. If it were industrial, depending on how management-intensive it is, I think we already have a Fully Staffed Corporate Office, other than maybe adding some accountants and some other people to supplement the team. But most of the lifting would be at the property level, and those costs, I imagine, would be carried by the properties. So when thinking about GNA, I don't think, depending on the investment, there should be that much of a difference. Right, we also do
David A. Helfand: Fully staffed corporate office other than may be adding some accountants.
David A. Helfand: Some other.
David A. Helfand: People are supplement the team, but most of the lifting would be at the property level and those costs I imagine it would be carried at the properties. So when I'm thinking about G&A I don't think depending on the investment there should be that much of an impact, but we also manage <unk>.
David A. Helfand: Right, we also manage... $7 billion of assets with not much more GNA when we started this.
David A. Helfand: $7 billion of assets with not much more G&A when we started this thing.
Speaker Change: Okay, All right no. That's fair and then just lastly, the 40 to 50 cents to wind down the portfolio.
Craig Allen Mailman: Okay. All right. No, that's fair. And then, just lastly, the $0.40 to $0.50 to wind down the portfolio, what would that largely include? And just one last technical question, is there any change of control payments to the management team that would be triggered and would be included in that $0.40 to $0.50?
Craig Allen Mailman: What would that largely.
Craig Allen Mailman: Include and just one last technical one also is there any change of control payments.
Craig Allen Mailman: To the management team that would be triggered and it would be included in that 40 to 50 sites.
William H. Griffiths: The answer is yes. Change and control severance payments would be a part of that number. Professional service fees, legal accounting, and other costs to wind down the business are included in the 40 to 50 cents a share.
Speaker Change: Yeah. The answer is yes, a change in control severance payments would be a part of that number professional service fees legal accounting.
William H. Griffiths: Other costs to wind down the business are included in the 40 to 50 cents a share.
William H. Griffiths: Okay, perfect and do you have a breakout of what the.
Craig Allen Mailman: Okay, perfect.
Craig Allen Mailman: Okay, perfect. Do you have a breakdown of what the... the biggest pieces of that would be?
Speaker Change: The biggest pieces of that would be.
Craig Allen Mailman: No, we don't. Is there any chance you guys would forego the change of control payments? Just from a shareholder friendliness perspective, since it's a wind down rather than a...
Speaker Change: No we don't.
Craig Allen Mailman: Okay. I mean is there any chance you guys will forego the change of control payments.
Craig Allen Mailman: Just to put the shareholder friendliness perspective, since it's a wind down rather than a.
Craig Allen Mailman:
Craig Allen Mailman: And M&A merger.
Craig Allen Mailman: Yeah.
David A. Helfand: I don't think so.
Speaker Change: I don't think so.
Speaker Change: Okay, Great I appreciate the time.
Craig Allen Mailman: Okay. Great.
Speaker Change: Okay. Thank you very much appreciate your interest.
Craig Allen Mailman: Okay, thank you very much. I appreciate your interest.
Craig Allen Mailman: Okay.
Craig Allen Mailman: This concludes our question and answer session I would like to turn the call back over to David Hoffman for closing remarks.
Operator: This concludes our question and answer session. I would like to turn the call back over to David Helfand for closing remarks.
David A. Helfand: Thank you very much have a good day.
David A. Helfand: Thank you very much. Have a good day.
David A. Helfand: Yeah.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. This is a production of the U.S. Department of State.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time.
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David A. Helfand: Thank you for your participation.
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