Q1 2023 Equity Commonwealth Earnings Call

Participants

David A. Helfand; President, CEO & Trustee; Equity Commonwealth

David S. Weinberg; Executive VP & COO; Equity Commonwealth

Craig Allen Mailman; Research Analyst; Citigroup Inc., Research Division

Nicholas Gregory Joseph; Research Analyst; Citigroup Inc. Exchange Research

Presentation

Operator

Good morning, and thanks for joining this call to discuss Equity Commonwealth's first results for the quarter ending March 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 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 on the company's quarterly 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 over to David Helfand. Please go ahead, sir.

David A. Helfand

Thank you. Good morning, everyone. Appreciate you joining us. I'll review the company's results for the quarter as well as provide an update on capital markets and our investment activities.
For the quarter, funds from operations were $0.22 per share compared to $0.03 per share in the first quarter 2022. Normalized FFO was $0.23 per share compared to $0.03 per share a year ago. The growth in FFO and normalized FFO was largely the result of a $0.24 per share increase in interest and other income, partially offset by a $0.02 per share decrease in same-property NOI and a $0.02 per share decrease in NOI from properties sold.
Same-property NOI decreased 20.5%, and same-property cash NOI was 17% lower compared to last year, both primarily due to the collection of a $1.9 million previously reserved receivable in the first quarter 2022. Excluding the collection of this receivable, same-property NOI decreased 2.7% and same-property cash NOI increased 2.3% compared to the first quarter 2022.
At our properties in the first quarter 2023, we signed 60,000 square feet of new leases and renewals. Rents on those leases were up 3.6% on a cash basis and up 13.8% on a GAAP basis. As of March 31, leased occupancy was 81.6%, commenced occupancy was 77%. While tour and leasing activity has picked up a bit, we continue to see tenants looking to give back space as well.
Turning to the balance sheet. We have approximately $2.1 billion of cash or $19 per share and no; debt. The change in our cash balance since year-end is primarily due to the $4.25 per share common distribution that was paid on March 9.
The interest rate we earn on our cash has increased as the Fed has moved rates, and we're currently earning roughly 5% compared to 37 basis points a year ago. Our conservative approach to managing our cash has been consistent over the years. We work with a dozen or so large banks where we actively manage the balances among them to minimize risk and maximize yield while maintaining daily liquidity. We are not invested in any securities.
With the Fed's continued rate increases over the past year, our interest income has grown from $1.6 million in the first quarter of 2022 to $28.4 million in the first quarter 2023. As we've discussed on previous calls, interest income on cash is not qualified income for the 75% REIT income tax.
Last year, we completed an internal restructuring to provide the qualifying income we needed for 2022. A similar option is available to us again in 2023. We also expect we will have options available to us to meet the requirements for REIT qualification in 2024.
Turning to share buybacks. We have not repurchased any shares year-to-date. Since we began buying back stock in 2015, we have repurchased a total of 22.4 million shares for an aggregate of $595 million at an average dividend-adjusted price of $17.48. We currently have $120 million remaining on our share back authorization.
Turning to the commercial real estate market, I think it's fair to say that determining value is as difficult as it's been in quite a while. The twin forces of war in Europe and inflation have had a significant impact on market fundamentals and values. The Fed's massive tightening over the past 12 months has more than doubled borrowing costs and left owners with debt maturities in a difficult place. For some asset classes like industrial and residential, operation -- operating conditions remain relatively strong though decelerating. For others, fundamentals are challenging, and the lack of debt availability is a significant issue. Predictably, sales volumes are down across all asset classes.
First quarter '23 total investment sale volume was approximately $47 billion, roughly half of the fourth quarter total in '22 and down 60% year-over-year. Based on discussion with market participants, second quarter '23 volumes will be likely -- will likely be similarly depressed.
Against this backdrop, it's difficult to know where we might find an opportunity to invest. We continue to evaluate a wide range of investments across asset classes. We remain hopeful that the challenges in the real estate credit markets might be a catalyst for a compelling transaction.
In the meantime, the EQC team continues to demonstrate patience, optimism and focus, and I'd like to take a moment and recognize their efforts. Patience is often a virtue, but that doesn't mean it's easy. This is a busy time of the year for our team with 10-K annual report, proxy and preparations for our annual meeting. So here's a shout-out to the EQC team for your continued commitment, discipline and excellence.
With that, I'll turn the call over to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) We'll take our first question from the line of Craig Mailman with Citi.

Nicholas Gregory Joseph

It's actually Nick Joseph here with Craig. Maybe just starting on kind of what you're currently evaluating. If you can talk about kind of the current pipeline, maybe the volume of deals you're looking at, recognize it's pretty slow out there. And then touch on how you're thinking about underwriting in different hurdles for different asset classes.

David S. Weinberg

Nick, it's David Weinberg. To begin with, what you said is correct. It's still quiet. I would say it's still early. As David said in his prepared remarks, we're evaluating a wide range of investments across asset classes. So in the past, we've talked about, as a public REIT, we think it's important to find a good business that has long-term sustainable growth, and we've been spending a lot of time and continue to do so with industrial and SFR, more specifically build-to-rent as of late. Having said that, given the challenges in the credit markets today, we're revisiting other sectors such as office under the belief that you just never know where the opportunity may come from.
Then to more specifically address your question, in this environment, I'd say we're having more discussions than we have in the past. It doesn't mean the catalysts exist, but a lot of large private owners recognize we're a public company with $2.1 billion of cash and no debt. There's a lot of flexibility in what we can do in terms of structure across sectors, potentially even control. And while that may not be a viable option or deferred option today, it may be the best option soon should they have to execute on something. So those discussions are taking place, planting seeds, and we'll just have to see what becomes of it.

Nicholas Gregory Joseph

As you think about kind of underwriting industrial or build-to-rent single-family or, I guess, even office now, how much of the IRRs return hurdles changed for you when you underwrite it today versus if you were looking at it 12 to 18 months ago?

David S. Weinberg

Well, 12, 18 months ago, obviously, we just couldn't make sense of the pricing, both on basis, yield and all-in-type returns. I should say we recognize where the cost of debt is, where the public REITs are trading, so that factors into our valuations. So I'd say hurdles have raised accordingly, but it's difficult to quantify because, as always, it varies based on where we perceive the risks to be and the growth.

Nicholas Gregory Joseph

Then you talked about the cash management and balance sheet management that you've been doing and that there's no marketable securities there. But as you look at the disconnect or potential disconnect between private market pricing and public security pricing on the REIT side, would marketable securities or would making investments into equities make sense at any point?

David S. Weinberg

Well, in the past, we've talked about that's not really of interest to us because I don't know what we do with that. Obviously, our shareholders, if they want to take a small position in another public company, they can do so. So I'll never say never. But it have to be pretty compelling for it to make sense to us, especially as we try to maintain a liquid position without taking any risk on our cash. So that should that deal materialize, we could execute and execute quickly.

Craig Allen Mailman

Guys, it's Craig here. Just, David, I know you talked about the internal restructuring and you can do another one in '23. So should we assume a similar kind of special dividend? Or would it need to be bigger given the kind of growth in interest income relative to the NOI coming off the 4 remaining assets?

David A. Helfand

I think the answer is the $4.25 that we already distributed was an estimate of what we would need to distribute. There are still some variables, some choices we have about how we go about qualifying, depending on whether certain events happen. So it's hard to predict, but I wouldn't expect a large special dividend. There may be topping up of the $4.25 if it's necessary based on taxable income.

Operator

(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to hand the conference back over to David Helfand for closing remarks. Over to you, sir.

David A. Helfand

Thanks for joining us today.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.