Equity Commonwealth - Q2 2024

Executive Summary

• Q2 2024 diluted EPS was $0.20 on total revenues of $14.1M, with net income attributable to common shareholders of $22.2M; EPS rose year over year from $0.12 despite lower revenue, driven by lower G&A (lapping accelerated compensation in 2023) and higher interest income.
• Same property operations weakened: leased percentage fell to 71.4% (from 75.4% in Q1 and 82.0% in Q2 2023), and same property NOI declined 3.3% YoY; cash NOI fell 10.4% YoY on lower commenced occupancy.
• Leasing spreads were modestly positive: GAAP rent +6.8% and cash rent +0.7% on new/renewal leases, with total TI+LC $21.17/sqft, down from $58.93/sqft in Q1, suggesting easing concessions in Q2.
• Strategic optionality remains intact with $2.2B cash; management reiterated in Q1 their plan to either announce a transaction or move toward winding down before year-end, though no Q2 update was provided in the press release.
• Wall Street consensus estimates (S&P Global) were unavailable for EQC this quarter; comparisons to estimates cannot be made. Values retrieved from S&P Global were unavailable.

What Went Well and What Went Wrong

What Went Well

• Interest income tailwind and normalized G&A supported YoY EPS growth despite revenue softness: “The increase in net income was primarily due to a decrease in general and administrative expenses … and an increase in interest income from higher average interest rates.”
• Positive leasing economics on executed deals: GAAP rent +6.8% and cash rent +0.7% on new/renewals in Q2, a constructive sign amid weak office demand.
• Capital strength maintained: cash and equivalents were $2.196B at quarter end, providing significant flexibility for M&A or a potential wind-down plan.

What Went Wrong

• Occupancy deterioration: leased fell to 71.4% and commenced to 70.7% (vs 75.4%/74.6% in Q1), driving same property cash NOI down 10.4% YoY, with lower average commenced occupancy cited as the primary driver.
• Sequential revenue decline: total revenues decreased to $14.1M from $15.2M in Q1, reflecting pressure from lower occupancy and lower lease termination fees.
• Limited leasing velocity: only ~24k sqft signed (20k renewals, 4k new), below recent periods, keeping the path to re-stabilization gradual.

Transcript

Operator (participant)

Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the quarter ending June 30th, 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.

Bill Griffiths (CFO)

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 includes certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental containing the company's results for 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. Good morning, everyone. Thanks for joining us. Rather than spend time on the company's results for the quarter, the details of which are covered in our earnings release and other filings, I'd like to provide a general update on our business. As we discussed on last quarter's call, we have been evaluating potential investment opportunities in an effort to create long-term value for shareholders. After working through our pipeline, we have been unable to consummate a compelling transaction. As a result, our Board of Trustees has determined that it's advisable and in the best interest of our shareholders to proceed with the wind-down of our operations and the liquidation of our assets in order to maximize value for shareholders. A key gating factor in the wind-down will be the timing of the sale of our four remaining properties.

Bill Griffiths (CFO)

We disclosed last quarter that we had initiated the process to sell three of our four assets. Those properties, 1250 H in Washington, D.C., and our two assets in Austin, are currently being marketed for sale. While our team is focused on achieving the BECS execution, it is important to understand that current market conditions for selling office assets are uniquely challenging. Transaction volume for the first six months of the year was the lowest since 2010 and down 75% from pre-COVID levels. Moreover, debt availability for office assets is scarce, and when available, is priced at double-digit coupons. Given the market environment, it's difficult to estimate both the timing and the proceeds from these sales. We're hopeful that the dispositions will generate proceeds in excess of our $234 million net book value for the assets.

As it relates to the timing for the wind-down, we expect to file a preliminary proxy by mid-September, recommending that our shareholders approve a plan of sale and liquidation. The proxy will be subject to review by the SEC, and depending on the length of that process, we anticipate holding the shareholder vote no later than December. We also expect to begin marketing for sale our Denver asset, 1225 17th Street, in early September, with closing contingent on shareholder approval of the plan of sale. The plan of sale will require the affirmative vote of 2/3 of our outstanding common shares to be approved. Assuming the plan of sale is approved by our shareholders, the next steps will be the redemption of the Series D preferred and a distribution to shareholders of substantially all of our cash.

Then, once the remaining assets are sold, we expect to distribute the remaining proceeds shortly thereafter. This will likely be the last distribution of material value. We will then commence the NYSE delisting and SEC deregistration processes and various other administrative tasks with the goal of substantially winding down the company by the end of the second quarter of 2025. We continue to expect to qualify as a REIT in 2024 and 2025. While we don't have all the answers today and timing is uncertain, we are focused on executing the wind-down process as efficiently as possible, and we will continue to communicate with shareholders regarding our progress. We appreciate the support we have received from our shareholders and want to acknowledge the hard work and dedication of the EQC team. With that, David, Bill, and I are happy to take your questions.

Operator (participant)

As a reminder, if you would like to join the question queue, please press one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. One moment, please, while we pull for questions. Thank you. Our first question is from Craig Mailman from Citi. Please proceed.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Thanks. It's Nick Joseph here with Craig. So I appreciate the new news and the update on the process. So maybe just starting with the three assets being marketed, can you just walk through where those are in the process? I know the timing's uncertain and appreciate your comments on the debt capital markets, but just kind of buyer interest, pricing expectations, and where each of those three stand right now.

David Weinberg (COO)

Hi, Nick. It's David. I'll take that one. So the sales of those three assets commenced in May, and unlike in the past, given the current market conditions that David described, it's just taking longer. So I'd say we're at the point now where we're trying to gauge buyer interest. However, given the makeup of bidders and interested parties in the current environment as opposed to in the past, it's harder to predict the timing and execution. So we're learning as we go, and we'll know more later.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Thanks. And then just for the Denver asset, is there anything unique about that asset that maybe will have it trade sooner rather than later? How do you think about it versus the three that are being marketed right now?

David Weinberg (COO)

Well, it has a different profile. So the three that are being marketed now are at least kind of in the 55%-70% are B to B plus properties. So they're going to attract one set of buyers. The Denver asset currently is leased in the mid-80s. That's a great asset. It's Class A. So it should attract more interest from more traditional and larger buyers. The wild card there is, in this environment, it is 700,000 sq ft, and there are just few comps for assets of that size for me to kind of have a feel for how that's going to play out.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Thanks. And then just as you think about the liquidation costs, is there an estimate of what the wind-down will cost all in?

Bill Griffiths (CFO)

Hey, Nick. It's Bill. We disclosed last quarter a $0.40-$0.50 per share range. We're still comfortable with that, and I think there'll be more information forthcoming on that in the proxy.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Perfect. And then maybe just finally, just on G&A costs, if the wind-down occurs, will there be any change to comp and overhead through the liquidation date?

David Weinberg (COO)

We don't expect it to be.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Is the 2Q run rate a good run rate for the next two quarters at least?

David Weinberg (COO)

Sounds about right.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Great. Well, appreciate the time and all the color. Thank you.

Operator (participant)

Once again, if anyone would like to join the question queue, please press one on your telephone keypad. This concludes our question and answer session. I would like to turn the floor back over to David Helfand for closing comments.

David Helfand (President and CEO)

Thank you for your time today. We look forward to speaking to you and giving you more information as we gain it. Thank you.