Equity Commonwealth - Q2 2022

Transcript

Speaker 0

Morning, and thanks for joining this call to discuss Equity Commonwealth's results for Q2 ending June 30, 2022, 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. As a reminder, this conference is being recorded. Please be advised 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 our actual results to materially differ from any forward looking statement. The company assumes no obligations to update or supplement any forward looking statements made today. The company posts important information on its Web site at www.eqcre.com, including information at B. B. Material.

A 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 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 and David Weinberg, COO and Bill Griffiths, CFO. With that, I will turn the call over to David Helfand. Please proceed.

Speaker 1

Good morning. Thank you for joining us. I'll review the company's results for the quarter as well as provide an update on our disposition and investment activities. Funds from operation were $0.05 per share compared to $0.00 per share in the Q2 2021. Normalized FFO was $0.04 per share compared to $0.00 per share a year ago.

The growth in FFO and normalized FFO was largely the result of $0.04 per share increase in interest and other income as well as a $0.01 per share increase And same property cash NOI. Same property NOI was up 8% and same property cash NOI was 12.3% higher compared to the Q2 of 2021. At our properties, leasing activity improved this quarter. We're seeing more inquiries and tours, particularly in Austin. However, many tenants are still challenged to identify their near term space requirements.

There is a greater emphasis on flexibility to increase demand for short term renewals and shorter leases for newly built out space. In the Q2, we signed 34,000 square feet of new and renewal leases. Rents on those leases were up 4.9% on a cash basis and up 9.6% on a GAAP basis. As of June 30, leased occupancy was 84.8% And commenced occupancy was 82.9%. Turning to the balance sheet, we have approximately $2,700,000,000 of cash or $24 per share and no debt.

With respect to share buybacks in the quarter, we repurchased 1,400,000 shares to $37,500,000 at an average price of $25.93 per share. Year to date, we've repurchased 4,300,000 shares for $111,100,000 at an average price of $25.86 per share. Since we began buying back shares in 2015, we've repurchased a total of 20,600,000 shares for $551,000,000 at an average dividend adjusted price of $22.52 We have $164,000,000 remaining on our existing share buyback authorizations. Turning to dispositions. On our last call, we announced that we had 2 properties in the market, 1258th Street in Washington, DC Bridgepoint Square in suburban Austin, and then it was likely that we would soon market Capitol Tower in downtown Austin, which we did.

While there was interest in each of the properties, to date we have not seen pricing in terms sufficient to warrant a sale. Since our last call, the pricing of office properties has been impacted by several factors, including a significant change in the debt markets. Earlier this year, lenders were active and a buyer could have borrowed at a 65% to 70% LTV At an all in rate in the high 3% to low 4% range. Today, the credit markets for value add office properties are essentially frozen. Recently, debt funds have been the primary source for loans with LTVs around 50% and all in rates in the 6 7% range borrowing activity has slowed considerably.

Moreover, given the uncertain headwinds in this remote work environment, Many traditional office buyers hit the pause button. Those that remain active are seeking higher returns with more conservative underwriting. While we may still find a buyer at an acceptable price, these are good properties and we're comfortable holding them longer. On prior calls, we've also discussed our monitoring of the 75% REIT income test. As the Fed raises rates, our interest income is also increasing and interest income on our cash balance is not qualified income for the REIT income test.

To address this issue and ensure compliance with all REIT requirements, we plan to implement an internal restructuring, Transferring 2 of our assets to a wholly owned REIT subsidiary via Section 351 transaction. This will accelerate most of the taxable gain in these assets. GAIN will provide us qualifying income for the read income test And the restructuring will allow us to be efficient from a state tax planning perspective in the event we sell these 2 properties in the future. Restructuring is expected to result in a special distribution for 2022 in the $1 per share range. In terms of investments, we continue to evaluate a wide range of opportunities across different sectors.

We know that shareholders would like more clarity on timing. As we said last call, markets are dynamic. We can't predict the facts and circumstances that will determine how long we continue to pursue investments. As always, we remain mindful of the cost of pursuing opportunity and continue to evaluate the best course of action to maximize value, including returning the cash to shareholders. We tend to remain disciplined and are optimistic that we'll find a compelling investment.

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

Speaker 0

Thank you. A confirmation tone will indicate your line is in the question One moment while we poll for questions. Our first question comes from Craig Mailman with Citi. Please proceed.

Speaker 2

Hi, good morning. This is Seth Berge on for Craig Mailman. I just wanted to know what type of opportunities you're seeing, given the dislocation in the market. And then within that, is there anything on the debt front? Or are you just considering additional asset acquisitions?

Speaker 3

Hey, it's David Weinberg. I'll answer the first part of your question. I wasn't sure I heard the second part. Maybe I will have answered it inadvertently. In terms of the opportunity set, as David said in his remarks, we remain optimistic.

And I'd say today, As you alluded to, we're a little more optimistic than we have been in the past. Public company with $2,700,000,000 of cash, no debt. We've got both equity and OP units we can bring to a transaction, which creates a lot of flexibility, Especially given we're willing to look at different sectors and we've spoken to our thoughts on whether we need to remain in control or not. Given that mindset, we are seeing more opportunities today. In the past, large private owners Perhaps could sell their assets and rotate out of a sector, they could recap their business with equity and very attractive debt or perhaps they could go public.

Today, those groups are now speaking with us, I'd say more seriously. We are a very attractive alternative to them given their limited options in this environment. So we continue to look across sectors And while we remain optimistic, I can't tell you there's a deal that's imminent, but more groups are engaging with us.

Speaker 2

Okay. And that's helpful. The second part of the question was just, is there anything on the debt front or are you just considering Asset Acquisitions.

Speaker 1

If you're asking, would we acquire debt? Yes. We've looked in some cases at debt as a means to accessing assets, but Most of our activities on the direct asset side.

Speaker 2

Okay. Thank

Speaker 0

There are no questions in queue at this time. I will turn the call back over to management for closing comments.

Speaker 1

Well, that was quite a grilling. Thank you for your time. Enjoy the rest of your summer.

Speaker 0

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation and have a great