Equity Commonwealth
NYSE:EQC
Earnings Call Analysis
Q3-2023 Analysis
Equity Commonwealth
Equity Commonwealth detailed a quarter that faced some headwinds with same-property NOI declining significantly by 68% and same-property cash NOI decreasing by 6.6% year-over-year. This was primarily driven by a decrease in average commenced occupancy and an uptick in costs related to pre-leasing demolition. Occupancy rates seem to be a point of concern, with only 80.8% of lease occupancy and 79.9% of commenced occupancy as of September 30. The rental situation wasn't entirely bleak, however, as 54,000 square feet of new leases and renewals were signed during the quarter, which saw a slight decrease of 1.8% in cash rents but a 6% rise on a GAAP basis.
The company has maintained a healthy balance sheet establised by approximately $2.1 billion in cash reserves, equating to $19.61 per share, and maintains a debt-free status. These strong cash positions grow even more beneficial with the increase in interest rate earnings, from 3.2% last year to 5.5% currently, thanks to the Federal Reserve rate hikes. This translates to an income growth from $15 million in Q3 2022 to $29 million in Q3 2023. Share buybacks have been consistent with 3 million shares repurchased in the year-to-date for $56.7 million, signaling management's confidence in the value of the company's stock.
Equity Commonwealth projects to qualify as a REIT by 2024, which could potentially offer tax efficiencies and signal a strong focus on real estate investments. Share buybacks have been executed judiciously, with the company leveraging situations where the stock is perceived to be at a substantial discount. With $93.3 million of capacity remaining, this strategy is likely to continue.
The company's executives addressed current market conditions noting that transaction volumes are down across asset classes as owners are hesitant to sell at lower valuations and lenders are flexible with borrowers. However, with increased pressure from high interest rates and challenging credit markets, Equity Commonwealth is optimistic that their patient and disciplined approach to acquisitions will be beneficial. Specifically, industrial and residential sectors are preferred targets for potential investments given these cautious yet potentially rewarding market dynamics.
In discussion of return hurdles for new acquisitions, particularly in the industrial and residential spaces, and in light of recent rate movements, the company reiterated a focus on returns relative to the risk undertaken. While no specific target rate of return was provided, the importance of treasury yield and public company pricing in evaluating and underwriting opportunities was emphasized.
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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. [Operator Instructions] 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 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. 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 -- 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.
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 68% and same-property cash NOI was 6.6% lower compared to last year, both primarily due to a decrease in average commenced occupancy and increase in pre-leasing demolition costs.
At our properties in the quarter, we signed 54,000 square feet 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 30, 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 2022 to $29 million in the third quarter 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 Instructions] Our first question comes from the line of Craig Mailman with Citi.
This is Seth Bergey on for Craig. I just wanted to ask you about your appetite for additional share buybacks at this juncture.
Seth, it's Bill. Our approach to share buybacks is that we just -- we take a prudent approach to it. We look at cash. We say it's $19.60 a share roughly. Net of the preferreds, it's $18.48. And really, we engage in the buybacks when we feel like there's a compelling discount on the stock.
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?
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, 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.
[Operator Instructions] Ladies and gentlemen, I'm seeing no other questions at this time. I'll turn the floor back to Mr. Weinberg for final comments.
Thank you for joining us today.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.