Equity Commonwealth - Q1 2024
May 2, 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
Operator (participant)
Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the quarter ending March 31, 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 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. 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 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 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 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.
David Helfand (President and CEO)
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 operations were $0.26 per share, compared to $0.22 per share in the first quarter of 2023. Normalized FFO was $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 $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%, 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, 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% on our cash, resulting in $29.5 million in interest and other income for the quarter. We've not repurchased any shares year 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. Since assuming responsibility for the company, the EQC team has been focused in its efforts and has executed a disciplined strategy. We've completed $7.6 billion of dispositions, including the sale of 164 properties. We've 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. 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. The investment sale market's 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 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'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 two assets in Austin and the one in Washington, D.C., in the market later this month. Our fourth asset, 1225 Seventeenth 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. 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-$0.50 per share, and that it will take approximately 6 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, David, Bill, and I are happy to take your questions.
Bill Griffiths (CFO)
Thank you. We will now be conducting a question-and-answer session. One moment please, while we poll for questions. Our first question comes from Craig Mailman from Citi. Please proceed.
Craig Mailman (Analyst)
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, your commentary from? And 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.
David Helfand (President and CEO)
Yeah. Well, thanks, Craig. I'm not sure about the wording. The intention was to convey to investors that we're gonna do both. That we're gonna 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.
Craig Mailman (Analyst)
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 pathing it, but there's nothing imminent right now? Just trying to get a sense of, you know, probability weighting the outcome there.
David Weinberg (Chairman of the Board)
Hey, it's David. I think it's hard to say what yard line we're on, 'cause 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.
Craig Mailman (Analyst)
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?
Bill Griffiths (CFO)
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, you know, total shares. So we could deploy the cash, assuming no stock above that amount, without shareholder approval.
Craig Mailman (Analyst)
And then, 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.
David Weinberg (Chairman of the Board)
Yeah, it's just a thing in our charter that we need to get shareholder approval to sell.
Craig Mailman (Analyst)
Okay. And then, assuming you guys do find an acquir- Oh, go ahead.
David Helfand (President and CEO)
No, no, go ahead.
Craig Mailman (Analyst)
Oh, sorry. Okay, I was, I was saying, assuming you guys do find an acquisition in either resi or industrial, 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, with big portfolios. Looking at their G&A loads, they're somewhere in the, you know, low end of $20 million for each group, to closer to, you know, high 30s-$40 million for a Terreno or an FR. I'm just trying to, trying to get a sense of how scalable your current platform is today, just 'cause 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, arguably much smaller size than some of those companies today.
David Weinberg (Chairman of the Board)
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 at the properties. So when thinking about G&A, I don't think, depending on the investment, there should be that much of an impact.
David Helfand (President and CEO)
Right. We also managed $7 billion of assets with not much more G&A when we started this thing.
Craig Mailman (Analyst)
Okay. All right. No, that's fair. And then just lastly, the $0.40-$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-$0.50?
David Helfand (President and CEO)
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-$0.50 a share.
Craig Mailman (Analyst)
Okay, perfect. Do you have a breakout of what the biggest pieces of that would be?
David Helfand (President and CEO)
No, we don't.
Craig Mailman (Analyst)
Okay. I mean, is there any chance you guys would forgo the Change of Control payments just to, from a shareholder friendliness perspective, since it's a wind down rather than a, an M&A merger?
David Helfand (President and CEO)
I don't think so.
Craig Mailman (Analyst)
Okay, great. Appreciate the time.
David Helfand (President and CEO)
Okay, thank you very much. Appreciate your interest.
Operator (participant)
This concludes our question and answer session. I would like to turn the call back over to David Helfand for closing remarks.
David Helfand (President and CEO)
Thank you very much. Have a good day.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.