Equity Commonwealth - Q3 2022

Transcript

Speaker 0

Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the Q3 ending September 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. In

Speaker 1

queue.

Speaker 0

As a reminder, this conference is being recorded. Please be advised that certain matters discussed during this conference call constitutes forward looking statements within the meaning of federal security laws. Please refer to the section titled Forward Looking Statements in the press release issued today 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 statement. 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 On 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 a reconciliation of these non GAAP measures to the company's GAAP financial results. On the call today are David Halsand, President and CEO David Weinberg, COO and Bill Griffith, CFO. And with that, I will turn the call over to David Hilsand. Please go ahead, sir.

Speaker 2

Thank you. Thanks for joining us. This morning, I'll review the company's results for the quarter as well as provide a brief update on the capital markets, our dispositions and investment activities. Funds from operations were $0.13 per share compared to $0.00 per share in the Q3 of 2021. Normalized FFO was also $0.13 per share compared to a loss of $0.01 per share a year ago.

The growth in FFO and normalized FFO was largely a result of a $0.12 per share increase in interest and other income as well as a $0.01 per share increase in same property cash NOI. Same property NOI was up 16.8% and same property cash NOI was 19.1% higher compared to the Q3 2021. At the properties in the Q3, we signed 55,000 square feet of new leases and renewals. Rents on those leases were down 3.3% on a cash basis and up 2.2% on a GAAP basis. As of September 30, leased occupancy was 83.4 percent and commenced occupancy was 80.8%.

Turning to the balance sheet, we have approximately $2,600,000,000 of cash for $23 per share adjusted for the recently paid $1 per share dividend and we have no debt. With respect to share buybacks, in the quarter we repurchased 590,000 shares for $15,000,000 at an average price of $25.40 per share for $24.40 dividend adjusted. Year to date, we've repurchased 6,100,000 shares for $155,000,000 at an average dividend adjusted price of $24.64 Since 2015, we've repurchased A total of 22,400,000 shares for $595,000,000 at an average dividend adjusted price $21.73 And today we have $120,000,000 remaining on our existing share buyback authorization. During the quarter, we completed the 351 transaction that we discussed on last quarter's call. Transaction generated $82,000,000 of taxable gain from 2 of our assets and that gain made up a significant portion of the $1 per share special distribution that we paid on October 18.

In terms of the current environment, today's debt and equity capital markets are markedly changed from earlier this year. The first half of twenty twenty two sellers completed transactions at aggressive pricing driven by significant equity and debt availability. Today, the debt market is experiencing disruption and debt funding costs have more than doubled with certain asset classes facing a significant shortage of capacity. Given the dearth of financing and the tepid buyer interest for value add office, We have decided to hold the 3 properties we were marketing for sale for the time being. With respect to acquisitions, As we've said on past quarter of the call, we are continuing to evaluate a wide range of potential opportunities across a variety of sectors.

As most of you are well aware, we've been looking for a long time. I want to assure you that showing patients has been challenging for us As I know it's been for our investors. While we'd love to be doing deals, we have a responsibility to be thoughtful stewards of our shareholders capital and we take that to heart. We'll continue to work to identify an acquisition opportunity that offers attractive long term fundamentals at a price that reflects the risk we're taking. We're hopeful Challenges in the capital markets will be a catalyst for a compelling transaction that can serve as the foundation for long term growth and outperformance for EQC.

The team at EQC remains focused, disciplined and optimistic. Beth, David, Bill and I are happy to take your questions.

Speaker 0

Thank you. We will now be conducting a question and answer session. Our first question comes from Craig Mailman with Citi. Please proceed with your question.

Speaker 1

Hey, guys. Good morning. I just want to start on the acquisition environment, not surprisingly. Clearly, there's price discovery still going on and Really just a lack of transactions. But as you guys are probably in a much envied position here holding on to so much cash, No Debt.

Can you just talk about what property types in this environment May look more attractive than others. Obviously, you can't sell office here, maybe office is less interesting. But as you kind of Look across the property sectors, if the pricing does come in, where you think you want to deploy the capital today?

Speaker 3

Hey, Craig, it's David Weinberg. Good question. And let me just add to Some of your comments as I answer, not only do we have cash, we also have equity in OP units. So we provide a lot of flexibility in terms of the deal structure. And then in terms of where we're looking, it's across a variety of sectors, as David said, with the key being We want to find a deal that provides long term attractive fundamentals at a price that we think So if you line them up on a spectrum, as you mentioned, on one end maybe office and I'd say hospitality, We're clearly they're more capital intensive, a lot more risk in those businesses.

If we were to find an Attractive deal there. We would have to make sure we're getting priced it's getting priced at a level where we're getting paid for that risk Compared to perhaps other sectors that we think still have strong tailwinds despite some short term headwinds. In those buckets, I'd say, as we've covered before, industrial and single family residential. We like both those businesses. The former, clearly, we took a very good run at recently.

And the latter, as we've discussed, it's just hard to access that in scale. So I can't say we've circled a specific sector. I'd say we continue to look across different Sectors and we're having conversations with owners, brokers and bankers that represent a variety of asset classes as we look.

Speaker 1

I fully understand the private market hasn't moved as much. And so and there's just not as much on the market there. Clearly, the public market has moved more swiftly in repricing, the equity here. I mean, Is that a better place to be looking today versus holding out for a bigger private market transaction?

Speaker 2

I think that's a good question, Craig. It's David Health Fan. Clearly, the public markets reflect what's going on more so than the Private markets where sellers don't have to sort of accept the change in rates and the change in environment, at least not yet. I don't know if it's a better place to look. I think our general judgment is it's early.

Things have changed pretty dramatically in terms of Availability of debt, cost of debt in all sectors. And there's going to take a little time for Sellers to acknowledge that, I think we're well positioned. I think we're going to continue to show patients, but hopefully We'll get a shot here to find a really attractive business that we can both invest in and then build on after the initial transaction.

Speaker 1

Moving to my question is a bit more focused on the equity side, but just looking at the debt side, There's clearly, as you said, a dearth of funding right now. I mean, from a risk adjusted perspective, it would seem like There should be some opportunities there to either lend to people or maybe even You'll find a loan to own situation maybe through some type of debt investment, maybe even in the secondary market. I mean, What's the kind of the landscape there look and clearly that would be less capital out the door, but it should be Very accretive relative to your cost of capital.

Speaker 2

Yes. That's a fair point and we've discussed it on some prior calls. Sometimes a strategy of providing debt capital that turns into equity is the best way to attach And we would be open to that. We're not going to be a lender to be a lender, but we might provide debt capital to pursue the equity. Okay.

Speaker 1

And then just one last one, and this is maybe a little bit Outside the scope here, but Sam shut down his SPAC here back in August Because of the lack of deal opportunities here. And if you just look at EQC, you guys have had control of the company for a while, Haven't been able to make anything work, but clearly, continue to keep chugging along. I mean, From his perspective, what is the nuance there between EQC and the stack, clear that's how they just the stock price of the stack, but Just kind of high level thoughts on that decision versus letting EQC continue to run.

Speaker 2

Yes. Well, You're referring to the stack that was designed to pursue industrial distribution businesses. Sam was the controlling shareholder for almost 30 years of a company called Anixter, which was in the distribution business. When they sold that business, Sam and the CEO decided to raise capital in the spec to try to find an acquisition. They weren't able to find 1.

Of course, you know those facts have a specific timeframe for the use of that capital. EQC is the opposite. We have no specific timeframe for the use of the capital. I think I acknowledged in my opening comments, this has gone longer in the tooth than any of us expected. I think absent what's happened in the capital markets and in the economy, the uncertainty, the volatility, We probably were on a path to return the capital because we haven't found anything.

But we think there's new life here and new opportunity and having the capital now and being patient and looking for an attractive business at a fair price Seems likely or to us today than it was in the past.

Speaker 1

Great. Thank you.

Speaker 2

Joe, thank you for joining us. We appreciate it and be well.

Speaker 0

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