Equity Commonwealth - Q1 2024

Executive Summary

• Q1 2024 diluted EPS was $0.22, up from $0.19 YoY and flat vs Q3 2023, driven by higher interest income; total revenues were $15.19M vs $15.58M YoY as office occupancy declined.
• FFO per diluted share rose to $0.26 vs $0.22 YoY; Normalized FFO was $0.25 vs $0.23, reflecting stronger interest and other income and lower income tax expense.
• Same property NOI increased 4.3% YoY, but same property cash NOI fell 6.9% YoY, with percent leased dropping to 75.4% from 81.6% a year ago; leasing activity was 18K sq ft with negative cash rent spreads (-2.8%).
• Strategic catalyst: Management said “before the end of this year, we expect to either announce a transaction or move forward with a plan to wind down our business,” sharpening the timeline for capital deployment or liquidation—potentially stock-moving.
• Cash & equivalents stood at $2.17B and no debt; the press release quantifies cash at $19.95 per share, underscoring optionality amid weak office fundamentals.

What Went Well and What Went Wrong

What Went Well

• Interest and other income increased ($29.5M in Q1), supporting EPS/FFO despite lower property revenues; management cited higher average interest rates driving the YoY uplift.
• Same property NOI rose 4.3% YoY on lower pre‑leasing demolition costs and higher lease termination fees, partially offsetting occupancy pressure.
• Clear strategic messaging: “Before the end of this year, we expect to either announce a transaction or move forward with a plan to wind down our business,” reinforcing discipline and timeline certainty.

What Went Wrong

• Occupancy deterioration: percent leased fell to 75.4% (from 81.2% at 12/31/23 and 81.6% YoY); percent commenced dropped to 74.6% (from 80.0% and 77.0% YoY).
• Cash NOI declined 6.9% YoY as lower commenced occupancy more than offset reduced demolition costs; GAAP/cash rent spreads on new/renewals were negative on cash (-2.8%).
• Smaller leasing volume (18K sq ft) and rising capital intensity (TI+LC $58.93 per sq ft) could weigh on near‑term cash yields and extend the path to stabilizing occupancy.

Transcript

Speaker 0

Good morning and thank you for joining this call to discuss Equity Commonwealth's results for the quarter ending March 31, 2024 and an update on the company. 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 ks 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 posts important information on its website at www.eqcre.com, including information that may be material. A portion of today's remarks regarding the company's quarterly earnings also include certain non GAAP financial measures. Please refer to yesterday's press release and supplemental 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.

Speaker 1

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. The quarter funds from operation were $0.26 per share compared to $0.22 per share in the Q1 2023. Normalized FFO was $0.25 per share compared to $0.23 per share a year ago.

Growth in FFO and normalized FFO was largely the result of a $0.01 per share increase in interest and other income and a $0.01 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. Same property cash NOI was 6.9% lower, primarily due to the decrease in average commenced occupancy, partially offset by the decrease in pre leasing demolition costs. And as of March 31, leased occupancy was 75.4%, the commenced occupancy was 75.4 percent and commenced occupancy was 74.6 approximately $2,200,000,000 in cash or nearly $20 per share and no debt. Net of our preferred stock, our cash balance is just under $19 per share.

We continue to earn 5.5 percent in our cash, resulting in $29,500,000 in interest and other income for the quarter. We've not repurchased any shares year to date and we currently have $93,000,000 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. Since assuming responsibility for the company, the EQC team has been focused in its efforts and has executed a disciplined strategy. We've completed $7,600,000,000 of dispositions, including the sale of 164 properties.

We've distributed $1,800,000,000 or $14.75 per share to our common shareholders. We've repurchased $652,000,000 of our common shares at a dividend adjusted price of $17.63 per share. We've repaid debt and preferred equity of $3,300,000,000 and we've generated a cash balance of $2,200,000,000 With respect to capital allocation, we've tried to be responsive to market conditions. For the 1st 6 years that was straightforward. Valuations were at or near all time highs and we concluded that was in the company's interest to sell assets.

We sold all but 4 of our office properties between 2015 2020. When the pandemic hit, the office market froze. The investment sale markets continued weakness coming out of COVID and the spike in interest rates in early 2022 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've 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've not found the right investment. So while we're actively working on potential transactions in our pipeline, we're also preparing to sell our remaining properties. We expect to have the 2 assets in Austin and the one in Washington DC in the market later this month. Our 4th asset, 122517 Street in Denver is our largest. And given that it will likely be the last to sell, we'll 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. 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 to wind down to be $0.40 to $0.50 per share and that it will take approximately 6 months from the sale of the last asset 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.

And with that, David, Bill and I are happy to take your questions.

Speaker 0

Thank you. Our first question comes from Craig Mailman from Citi. Please proceed.

Speaker 2

Hey, good morning. David, I guess it sounds 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 your commentary from? 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 sell them down as they come?

Just trying to figure out the difference in the kind of the wording.

Speaker 1

Yes. Well, thanks, Greg. I'm not sure about the wording. The intention was to convey to investors that we're going to do both. So 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.

Speaker 2

So I mean, where you guys have opportunities in the pipeline. Is there anything that's even on the 50 yard line at this point? Or is it you're still dual passing it, but there's nothing imminent right now? Just trying to get a sense of probability weighting the outcome there.

Speaker 3

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 buyer.

Speaker 2

Okay. I mean, from a you guys would need to get shareholder approval to sell the last office asset. Would you need shareholder approval 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 3

Hey, Craig, it's Bill. 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 total shares. So we could deploy the cash assuming no stock above that amount without shareholder approval.

Speaker 2

And then and I apologize for getting into 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.

Speaker 3

Yes. It's just a thing in our charter that we need to get shareholder approval to sell.

Speaker 2

Okay. And then, assuming you guys do find an accurate go ahead.

Speaker 1

No, no, go ahead.

Speaker 2

Okay. I was saying assuming you guys do find an acquisition in either resi or industrial, I'm just kind of curious, I just pulled up for instance some potential peers in the industrial space that are mature companies with big portfolios. Looking at their G and A loads, they're somewhere in the low end of $20,000,000 for EastGroup to closer to high-30s to $40,000,000 for a Terreno or an FR. 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 and A load for a portfolio that would be at a arguably much smaller size in some of those companies today?

Speaker 3

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 that supplement the team. But most of the lifting would be at the property level. And those costs, I imagine, would be carried at the properties. So when thinking about G and A, I don't think depending on the investment, there should be that much of an impact.

Speaker 1

Right. We also manage $7,000,000,000 of assets with not much more G and A when we started this thing.

Speaker 2

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 one also, 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

Speaker 1

The answer is, yes. Change of control severance payments would be a part of that number. Professional service fees, legal accounting, other costs to wind down the business are included in the $0.40 to $0.50 this year.

Speaker 2

Okay, perfect. Do you have a breakout of what the biggest pieces of that would be?

Speaker 1

No, we don't.

Speaker 2

Okay. I mean, is there any chance you guys would forego the change of control payments just to public shareholder friendliness perspective since it's a wind down rather than an M and A merger?

Speaker 1

I don't think so.

Speaker 2

Okay, great. I appreciate the time.

Speaker 1

Okay. Thank you very much. Appreciate your interest.

Speaker 0

This concludes our question and answer session. I would like to turn the call back over to David Helfen for closing remarks.

Speaker 1

Thank you very much. Have a good day.

Speaker 0

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for