Equity Commonwealth (NYSE:EQC) reported its first-quarter results for 2024, showcasing a rise in funds from operations (FFO) and normalized FFO. The company announced an increase in same-property net operating income (NOI) by 4.3% compared to the previous year, attributed to lower pre-leasing demolition costs and higher lease termination fees.
However, same-property cash NOI saw a 6.9% decrease due to a drop in average commenced occupancy. Equity Commonwealth also highlighted its strong balance sheet with approximately $2.2 billion in cash, equating to nearly $20 per share, and no debt. The company's cash balance, net of preferred stock, stands just under $19 per share, earning a 5.5% return, resulting in $29.5 million in interest and other income for the quarter.
During the earnings call, President and CEO David Helfand discussed the potential wind down of the company's business if suitable investments are not identified by the end of the year. The company is preparing to sell its remaining properties and, following shareholder approval, plans to distribute most of its cash with subsequent distributions after the sale of any remaining assets. The estimated cost for the wind down is $0.40 to $0.50 per share and is expected to take about six months from the sale of the last asset.
Key Takeaways
- FFO per share increased to $0.26, up from $0.22 in Q1 2023.
- Normalized FFO per share rose to $0.25 from $0.23 a year ago.
- Same-property NOI grew by 4.3% year-over-year.
- Same-property cash NOI decreased by 6.9%, mainly due to lower average commenced occupancy.
- The company has a strong liquidity position with $2.2 billion in cash and no debt.
- Equity Commonwealth is considering a wind down of the business if no compelling investment opportunities arise by year-end.
Company Outlook
- The company is actively working on potential transactions in its pipeline.
- Plans to market two assets in Austin and one in Washington, D.C., with the fourth asset in Denver requiring shareholder approval for sale.
- If no suitable investments are found, the company will seek shareholder approval for the wind down of the business.
Bearish Highlights
- The decrease in same-property cash NOI due to lower average commenced occupancy.
- Uncertainty around finding the right investment opportunities for capital allocation.
Bullish Highlights
- The increase in interest and other income contributing to FFO growth.
- The company's disciplined strategy has led to $7.6 billion of dispositions and $1.8 billion distributed to shareholders.
Misses
- No share repurchases have been made year-to-date, with $93 million remaining on the buyback authorization.
Q&A Highlights
- CEO David Helfand emphasized pursuing potential opportunities while moving towards a potential wind down.
- COO David Weinberg indicated that the company is scalable and could add to its team depending on the nature of future investments.
- CFO Bill Griffiths clarified that shareholder approval would only be necessary for the sale of certain assets or if issuing stock exceeded 20% of total shares.
- The cost of winding down the business is estimated to be $0.40 to $0.50 per share, including change of control severance payments and other professional service fees.
InvestingPro Insights
Equity Commonwealth (EQC) has been making headlines with its strong balance sheet and strategic financial maneuvers. A deep dive into the company's metrics through InvestingPro provides a nuanced understanding of its current market position. With a market capitalization of approximately $2.01 billion and a P/E ratio of 24.02, the company stands out in the real estate sector. Notably, EQC's adjusted P/E ratio for the last twelve months as of Q1 2024 is slightly lower at 23.38, indicating a potentially more favorable valuation when considering the company's earnings.
An InvestingPro Tip that stands out for EQC is its aggressive share buyback strategy, which reflects management's confidence in the value of the company. This is a key consideration for investors, as share repurchases can often signal undervaluation. Additionally, the company holds more cash than debt on its balance sheet, which is a testament to its financial stability and may provide a cushion against market volatility.
Investors may also find the company's low PEG ratio of 0.33 intriguing, as it suggests that EQC's stock is trading at a discount relative to its near-term earnings growth potential. This, coupled with the fact that the company does not pay a dividend, may appeal to those looking for capital appreciation rather than income.
For those seeking further insights, InvestingPro offers a range of additional tips for Equity Commonwealth—there are 9 more InvestingPro Tips available that could provide a deeper understanding of the company's financial health and stock performance. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription to access these valuable insights.
Full transcript - CommonWealth REIT (EQC) Q1 2024:
Operator: Good morning, and thank you for joining this call to discuss Equity Commonwealth's Results for the Quarter Ending March 31, 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. [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 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 include 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 Helfand, President and CEO; David Weinberg, COO; and Bill Griffiths, CFO. With that, I will turn the call over to David Helfand.
David Helfand: Thank you, and 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 business. The quarter funds from operations were $0.26 per share compared to $0.22 per share in the first quarter 2023. Normalized FFO was $0.25 per share compared to $0.23 per share a year ago. The growth in FFO and normalized FFO was largely the result of a $0.01 per share increase in interest and other income and a $0.01 per share decrease in income tax expense. Same-property NOI increased 4.3% compared to last year due to a decrease in pre-leasing demolition costs and an increase in lease termination fees, partially offset by a decrease in average commenced occupancy. Same-property cash NOI was 6.9% lower primarily due to the decrease in average commenced occupancy, partially offset by the decrease in pre-leasing demolition costs. And as of March 31, leased occupancy was 75.4% and commenced occupancy was 74.6%. Turning to the balance sheet. We have approximately $2.2 billion in cash or nearly $20 per share and no debt. Net of our preferred stock, our cash balance is just under $19 per share. We continue to earn 5.5% on our cash, resulting in $29.5 million in interest and other income for the quarter. We've not repurchased any shares year-to-date, and we currently have $93 million remaining on our share buyback authorization. I thought I'd offer a few thoughts on what we've accomplished and where we go from here. Since assuming responsibility for the Company, the EQC team has been focused in its efforts and has executed a disciplined strategy. We've completed $7.6 billion of dispositions, including the sale of 164 properties. Distributed $1.8 billion or $14.75 per share to our common shareholders. We've repurchased $652 million of our common shares at a dividend-adjusted price of $17.63 per share. We've repaid debt and preferred equity of $3.3 billion, and we've generated a cash balance of $2.2 billion. With respect to capital allocation, we've tried to be responsive to market conditions. For the first 6 years, that was straightforward. Valuations were at or near all-time highs and we concluded that it was in the Company's interest to sell assets. We sold all but four of our office properties between 2015 and 2020. When the pandemic hit, the office market froze, investment sale markets continued weakness coming out of COVID and the spike in interest rates in early '22 stalled the office market recovery. Throughout this time, we've evaluated numerous investment opportunities across sectors with a recent focus on industrial and residential. We have been seeking to acquire a business with strong fundamentals and a compelling risk/reward profile that creates long-term value for our shareholders. To date, we've not found the right investment. So while we're actively working on potential transactions in our pipeline, we're also preparing to sell our remaining properties. We expect to have the two assets in Austin and the one in Washington, D.C. in the market later this month. Our fourth asset, 1225 Seventeenth Street in Denver is our largest and given that it will likely be the last to sell, will require shareholder approval. If after working through our pipeline, we're unable to identify compelling transaction, we intend by the end of the year to seek shareholder approval for the wind down of our business and the return of our shareholders' capital. Following shareholder approval, we expect to distribute most of our cash with subsequent distributions following the sale of any remaining assets. We estimate the cost to wind down to be $0.40 to $0.50 per share and that it will take approximately six months from the sale of the last asset to complete the wind down. Looking ahead, we will continue to communicate openly with shareholders regarding the progress of our investment activities as well as the sale of our remaining office assets. The EQC team will continue to endeavor to create value for shareholders and to be responsible stewards of our investors' capital. And with that, David, Bill and I are happy to take your questions.
Operator: [Operator Instructions] Our first question comes from Craig Mailman from Citi.
Craig Mailman: David, I guess it sounds -- the press release sounded more like you guys are still in the wait and see. Your commentary sounds like the wind down is the highest probability. Is that sort of the way to take your commentary from and the reason you guys gave till the year-end is because you want to sell the assets first rather than redistribute the cash and then kind of sell them down as they come? Just trying to figure out the difference in the kind of the wording.
David Helfand: Yes. Well, thanks, Greg. I'm not sure about the wording. The intention was to convey to investors that we're going to do both. That we're going to continue to pursue some interesting opportunities we have in our pipeline and work those to see if they come to fruition, while at the same time moving towards resolution by putting the remaining assets into the market.
Craig Mailman: So, I mean, for you guys the opportunities in the pipeline -- is there anything that's even on the 50-yard line at this point? Or is it you're still dual pathing it, but there's nothing imminent right now? Just trying to get a sense of probability weighting the outcome there.
David Weinberg: It's David. I think it's hard to say what yard line we're on because we don't have perfect visibility into the counterparty's perspective, but I would reiterate what David said, we're working on some transactions that we think would be a great fit. These are good businesses, and they have stories as to why we're a better buyer than maybe an all-cash buyer.
Craig Mailman: Okay, I mean, from a -- you guys would need to get shareholder approval to sell the last office asset, would you need shareholder approval to put a significant amount of capital to work as well? Or is that you only need it for one way not the other?
Bill Griffiths: Craig, it's Bill. It depends. We really only would need shareholder approval in a situation where we'd be issuing stock in excess of about 20% of our total shares. So we can deploy the cash, assuming no stock above that amount without shareholder approval.
Craig Mailman: And then -- and I apologize for getting into technicalities, but why do you need approval to sell Denver? Is it just because that would effectively give you no assets and trigger something? I'm just trying to understand.
Bill Griffiths: Yes. It's just a thing in our charter that we need to get shareholder approval to sell.
Craig Mailman: Okay. And then assuming you guys do find a -- go ahead.
David Helfand: No, no, go ahead.
Craig Mailman: Okay. I was saying assuming you guys do find an acquisition in either resi or industrial. I'm just kind of curious, I just pulled up, for instance, some potential peers in the industrial space that are mature companies with big portfolios. Looking at their G&A loads, they're somewhere in the low end of $20 million for EastGroup to closer to high 30s to $40 million for Terreno or [NFR]. I'm just trying to get a sense of how scalable your current platform is today just because you guys would already be in the middle of that range with a pretty high G&A load for a portfolio that would be at a arguably much smaller size in some of those companies today.
David Weinberg: Well, I would think, depending on the nature of the business, we're highly scalable. If it were industrial, depending on how management-intensive it is, I think, we already have a fully staffed corporate office, other than maybe adding some accountants and some other people to supplement the team. But most of the lifting would be at the property level and those costs, I imagine, will be carried at the properties. So when thinking about G&A, I don't think depending on the investment, there should be that much of an impact.
David Helfand: Right. We also managed $7 billion of assets with not much more G&A when we started this thing.
Craig Mailman: Okay. All right. No, that's fair. And then just lastly, the $0.40 to $0.50 to wind down the portfolio, what would that largely include? And just one last technical one also. Is there any change of control payments to the management team that would be triggered and it would be included in that $0.40 to $0.50?
David Helfand: The answer is, yes. Change in control severance payments would be a part of that number. Professional service fees, legal, accounting, other costs to wind down the business are included in the $0.40 to $0.50 a share.
Craig Mailman: Okay. Perfect. Do you have a breakout of what the biggest pieces of that would be?
David Helfand: No, we don't.
Craig Mailman: Okay. I mean is there any chance that you guys would forego the change of control payments just to -- from a shareholder friendliness perspective since it's a wind down rather than an M&A merger?
David Helfand: I don't think so.
Craig Mailman: Okay. Great. Appreciate the time.
David Helfand: Okay. Thank you very much. Appreciate your interest.
Operator: This concludes the question-and-answer session. I would like to turn the call back over to David Helfand for closing remarks.
David Helfand: Thank you very much. Have a good day.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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