Equity Commonwealth - Q3 2023

Transcript

Operator (participant)

Good morning, and thank you for joining this call to discuss Equity Commonwealth's results for the quarter ending September 30, 2023, and provide 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 wish 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'd 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 report on Form 10-Q for subsequent quarters for a discussion of factors that could cause the company's actual results to differ materially 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 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...

in the company's results for a reconciliation of non-GAAP measures to the company's GAAP financial measures. On the call today, we have David Helfand, Chair of our Board, President and CEO, David Weinberg, COO, and Bill Griffiths, CFO. With that, I'll turn the call over to David Weinberg.

David Weinberg (EVP & COO)

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 investment activities. For the quarter, same property NOI decreased 6.8%, and same property cash NOI was 6.6% lower compared to last year, both primarily due to a decrease in average commenced occupancy and an increase in pre-leasing demolition costs.

At our properties in the quarter, we signed 54,000 sq ft of new leases and renewals. Rents on those leases were down 1.8% on a cash basis and up 6% on a GAAP basis. As of September thirtieth, leased occupancy was 80.8%, and commenced occupancy was 79.9%.

In terms of leasing, we continue to see a range of deals, with some tenants giving back space, some looking for short-term extensions, and others more comfortable committing to term. Turning to the balance sheet, we have approximately $2.1 billion of cash, or roughly $19.61 per share, and no debt.

The interest rate we earn on our cash has increased as the Fed has moved rates, and we are currently earning roughly 5.5%, compared to 3.2% a year ago. With the Fed's continued rate increases over the past year, our interest income has grown from $15 million in the third quarter of 2022 to $29 million in the third quarter of 2023.

Regarding share buybacks, through the end of last week, we have purchased 3 million shares year to date for $56.7 million at an average price of $18.78. Since we began buying back stock in 2015, we have repurchased a total of 25.4 million shares for an aggregate of $652 million at an average dividend adjusted price of $17.63.

We currently have $93.3 million of remaining capacity. Touching on our REIT status, we expect to qualify as a REIT in 2024. Turning to the capital markets, transaction volumes remain down across all asset classes. Owners do not want to transact at today's pricing, and lenders are often willing to work with their borrowers. Nonetheless, we believe it is different today.

With the 10-year rate around 5% and the credit markets continuing to be challenged, owners are under more pressure and have fewer options. Given these conditions, we are more optimistic that our patience and discipline will be rewarded. While we evaluate a range of asset classes, we still prefer the industrial and residential sectors and continue to work hard to find a compelling investment opportunity. With that, David, Bill, and I are happy to take your questions.

Operator (participant)

Thank you. As a reminder, if you'd 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. Our first question comes from the line of Craig Mailman with Citi. Please proceed with your question.

Seth Bergey (Senior Research Associate, Real Estate & Lodging)

Hi, guys. This is Seth Bergey on for Craig. I just wanted to ask you about your appetite for additional share buybacks at this juncture.

Bill Griffiths (EVP, CFO & Treasurer)

Hey, Seth, it's Bill. Our approach to share buybacks is, we take a prudent approach to it. You know, we look at cash, we say it's $19.60 a share, roughly. Net of the preferreds, it's $18.48. Really, we engage in the buybacks when we feel like there's a compelling discount on the stock.

Seth Bergey (Senior Research Associate, Real Estate & Lodging)

Great. And then I guess just, you mentioned in your prepared remarks, looking at transactions in the industrial and residential space, how are you thinking about return hurdles for those asset classes, just given the movement in rates?

David Weinberg (EVP & COO)

Well, we're mindful of where rates are, and we think it's reflected real time as we look at the public company pricing, which is always informative. As we've said in the past, you know, we look at returns relative to the risk we're taking, and that is informed by rates, as you referenced. So it's difficult to specify a specific rate without knowing the risk. But I'd say we're cognizant of where the Treasury yield is, the impact it's having on pricing, and the impact it's having as we value and underwrite opportunities.

Seth Bergey (Senior Research Associate, Real Estate & Lodging)

Great. Thanks.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press Star One on your telephone keypad. Ladies and gentlemen, I'm seeing no other questions at this time. I'll turn the floor back to Mr. Weinberg for final comments.

David Weinberg (EVP & COO)

Thank you for joining us today.

Operator (participant)

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