Equity Commonwealth
NYSE:EQC
Earnings Call Analysis
Q4-2023 Analysis
Equity Commonwealth
Equity Commonwealth reported an increased Funds From Operations (FFO) at $0.27 per share in Q4 2023, rising from $0.21 in the same quarter the previous year, indicative of a growing bottom line. This mirrored a yearly increase, with FFO reaching $0.91 per share for 2023 compared to $0.41 for the full year 2022, largely attributed to a $0.61 per share growth in interest and other income. Despite broader market uncertainties and a drop in Same-Property Net Operating Income (NOI), which fell by 11.5% yearly, the company's strategic financial management has resulted in profitability improvements.
The company’s leasing activities have witnessed a downturn, attributed to office tenants reassessing space needs — a likely reflection of evolving workplace norms post-pandemic. New leases and renewals have suffered, causing a 2.3% quarterly and an 11.4% annual reduction in same-property cash NOI. The silver lining lies in the rise of rent prices for new leases and renewals, increasing 7.9% on a cash basis and 26.4% on a GAAP basis for the quarter, suggesting that while the leasing volume is low, the value of each lease signed is higher.
The balance sheet paints a picture of robust liquidity and fiscal prudence. Equity Commonwealth boasts a cash reserve of about $2.2 billion, equivalating to nearly $20 per share, and maintains a no-debt position — an enviable stance that positions the company well for navigating any market ebbs and flows. The company's strategic cash management has led to a notable increase in the rate of return on cash holdings, jumping from an average rate of 3.75% in 2022 to 5.5% in 2023.
Maintaining a commitment to returning value to shareholders, Equity Commonwealth has pursued an active share buyback strategy, repurchasing 3 million shares at an average price of $18.78 throughout 2023. This pattern of investor-focused actions, backed by the remaining $93 million authorization for further buybacks, signals the management’s confidence in the intrinsic value of the company.
The company's streamlined focus on investment opportunities, particularly within the industrial and residential sectors, showcases a tactical pivot towards areas exhibiting strong long-term growth prospects. Although the investment sales volumes are generally down, signaling market reluctance, Equity Commonwealth is methodically scanning for transformative deals that balance the risk-reward equation to its shareholders' benefit.
The discourse from management transmits cautious optimism about the future of investment possibilities, embracing the current economic landscape as a potential catalyst for opportunity. The window for tapping into such ventures remains open, though how long this will last is uncertain. A commitment to vigilance and agility in identifying strategic investments is expressed, as is a readiness to consider liquidation if the market conditions stagnate.
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Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the fourth quarter and full year ending December 31, 2023, and 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 law. 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 on the company's quarterly and 2023 earnings also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplement 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; David Weinberg, COO; and Bill Griffiths, CFO. With that, I'll turn the call to David Weinberg. Please go ahead, sir.
Good morning, everyone. Thanks for joining us. I'll review the company's results for the quarter and the full year as well as provide an update on our investment activities. For the quarter, funds from operations were $0.27 per share compared to $0.21 per share in the fourth quarter 2022. Normalized FFO was $0.26 per share compared to $0.21 per share a year ago. The growth in FFO and normalized FFO was largely the result of a $0.05 per share increase in interest and other income. Same-property NOI was down 2.3%, and same-property cash NOI was 12% lower compared to the fourth quarter of 2022. For the full year 2023, funds from operations were $0.91 per share compared to $0.41 per share for the full year 2022. Normalized FFO was $0.97 per share compared to $0.42 per share a year ago. The growth in FFO was largely the result of a $0.61 per share increase in interest and other income, a $0.06 per share increase in G&A expense and a $0.04 per share decrease in same-property NOI. The growth in normalized FFO was largely driven by the $0.61 per share increase in interest and other income and the $0.04 per share decrease in same-property cash NOI. Same-property NOI was down 11.5%, and same-property cash NOI was 11.4% lower compared to the full year 2022. Excluding a onetime collection in early 2022, same-property NOI and same-property cash NOI declined 6.7% and 6.5%, respectively. At our properties, leasing activity remained slow in the fourth quarter as office tenants continued to work through their space requirements. For the quarter, we signed 32,000 square feet of new leases and renewals. Rents on those leases were up 7.9% on a cash basis and up 26.4% on a GAAP basis. For the year, we signed 214,000 square feet of new leases and renewals. Rent on those leases were up 1.6% on a cash basis and up 13.7% on a GAAP basis. As of December 31, leased occupancy was 81.2% and commenced occupancy was 80%. Turning to the balance sheet. We have approximately $2.2 billion of cash or roughly $20 per share and no debt. Net of our preferred stock, our cash balance is just under $19 per share. The change in our cash balance during 2023 was primarily caused by the interest income on our cash, net of the $4.25 per share common distribution in March and share buybacks. The interest rate on our cash increased during the year from an average of 3.75% during 2022 to an average of 5.5% during 2023. With respect to share buybacks, during 2023, we repurchased 3 million shares at a cost of $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 million remaining on our existing share buyback authorization. Earlier this month, we completed a contribution of cash to a subsidiary REIT, which makes the interest income from that cash qualified income for the 75% REIT income test for the next 12 months. With that, we expect to qualify as a REIT in 2024. With respect to the capital markets, investment sales volumes remain down across all asset classes as buyers and sellers sort through the impact of the changing credit markets and try to gauge the strength of different sectors. At EQC, we continue to work to identify an investment opportunity and to create value at our 4 office assets. As we have said previously, we believe a compelling investment opportunity is one where we are getting paid for the risk we are taking. We also believe that investments with strong long-term growth prospects are good businesses for a public REIT. Accordingly, while we look across sectors, we are spending more time on industrial and residential investments, including workforce housing. We remain hopeful that we will find a deal. In the meantime, the team remains focused and disciplined. With that, David, Bill, and I are happy to take your questions.
[Operator Instructions] Our first question is from the line of Craig Mailman with Citi.
This is Seth Bergey on for Craig. I guess my first question would be, how do you see the number of opportunities you're evaluating today? Like how does that volume compare to the opportunity set that you've been looking at over the prior quarters? Has it increased or decreased?
It's David Weinberg. I'd say just from quarter to quarter, I'm not sure there's that much of a difference. While there's a lot more chatter in the market and you're seeing more references to one-off sales, please keep in mind we're looking for larger transformative investments. And maybe there's an uptick on those, but from my perspective, we saw opportunities last year and we're continuing to look at opportunities early into this year.
Okay, great. And then just another one. In the past, you've kind of mentioned catalysts for a transaction would be COVID, which didn't turn out to be a catalyst, and then kind of the dislocation in the capital markets. Kind of alluding to some of that chatter you've talked about increasing, kind of how do you view that window of opportunity? Do you see that still plenty of opportunity or do you kind of see that window narrowing just in terms of the time frame you're looking at?
I'd say the window is open. It's hard to predict if and when it shuts. But for the reasons we've discussed before, given the change in credit markets, proceeds down, interest rates up, harder for private companies to get public, pressure on private real companies to create some liquidity and things we can do in addition to just providing cash, we think we are an attractive option for lots of large owners. And in this environment in general, we think there are conversations that are being had and will continue to be had. But to specifically address your question, I can't predict if and when that window will shut. And we need to look longer and harder at perhaps selling the 4 remaining properties and liquidating the company.
As there are no further questions, I will now hand the conference over to David. David, please go ahead.
All right. Well, thank you again, and we appreciate your time.
Thank you. The conference of Equity Commonwealth has now concluded. Thank you for your participation. You may now disconnect your lines.