Equity Commonwealth (NYSE:EQC) has reported its earnings for the fourth quarter and full year ending December 31, 2023. The company saw an increase in funds from operations (FFO) per share, with a significant rise attributed to higher interest and other income. However, same property net operating income (NOI) and same property cash NOI both experienced a decline. The real estate investment trust (REIT) also highlighted its strong balance sheet, with approximately $2.2 billion in cash and no debt, and its ongoing share buyback program. During the earnings call, the company provided an update on its investment activities and expressed a focus on identifying industrial and residential investment opportunities, including workforce housing.
Key Takeaways
- Fourth-quarter FFO per share increased to $0.27 from $0.21 in the same quarter of the previous year.
- Full-year FFO per share for 2023 rose to $0.91 from $0.41 in 2022.
- Same property NOI and same property cash NOI both declined compared to the previous year.
- The company has a strong balance sheet with $2.2 billion in cash and no debt.
- Equity Commonwealth repurchased 3 million shares at an average price of $18.78 during 2023.
- Leasing activity remained slow, with 32,000 square feet of new leases and renewals in Q4.
- The company is focused on industrial and residential investments, particularly workforce housing.
Company Outlook
- Equity Commonwealth expects to qualify as a REIT in 2024.
- The company is actively seeking large transformative investments, with a current focus on industrial and residential sectors.
Bearish Highlights
- Same property NOI saw a decrease of 11.5% for the full year.
- Same property cash NOI declined by 11.4% for the full year.
- Excluding a one-time collection, the declines were 6.7% for same property NOI and 6.5% for same property cash NOI.
Bullish Highlights
- Interest and other income significantly contributed to the growth in FFO and normalized FFO.
- Rents on new leases and renewals signed during the year were up on both a cash and GAAP basis.
- The company's cash balance benefits from an increased interest rate, rising from an average of 3.75% in 2022 to 5.5% in 2023.
Misses
- Leasing activity in Q4 was slow, with only 32,000 square feet of new leases and renewals signed.
- The company has not yet identified a large transformative investment opportunity.
Q&A Highlights
- The volume of opportunities being evaluated has not significantly changed quarter to quarter.
- The window for investment opportunities remains open due to changing credit markets and liquidity pressures on private companies.
- Equity Commonwealth is considered an attractive option for large owners looking for liquidity or partnership.
Equity Commonwealth's earnings call underscored the company's financial strength and strategic focus on future growth through selective investments. While the company's leasing activity has been slow, its robust balance sheet and disciplined approach to acquisitions position it as a notable player in the evolving real estate market.
InvestingPro Insights
Equity Commonwealth (EQC) has demonstrated a prudent financial approach, as evidenced by the company's strong balance sheet and strategic share repurchase program. Here are some insights drawn from the latest data and InvestingPro Tips:
- The company's market capitalization stands at approximately $2.01 billion, reflecting its significant presence in the real estate investment trust (REIT) sector.
- EQC currently trades at a price-to-earnings (P/E) ratio of 24.57, which adjusts to 24.12 when looking at the last twelve months as of Q4 2023. This P/E ratio is considered low relative to the company's near-term earnings growth, indicating potential value for investors.
- With a PEG ratio of just 0.13 for the same period, EQC is trading at a discount to its earnings growth, suggesting that the stock may be undervalued in the context of its future earnings trajectory.
InvestingPro Tips highlight that Equity Commonwealth is actively managing its capital, as management has been aggressively buying back shares. This aligns with the company's reported repurchase of 3 million shares at an average price of $18.78 during 2023. Additionally, EQC holds more cash than debt on its balance sheet, which is consistent with the company's reported $2.2 billion in cash and no debt.
For investors seeking further insights and analysis, there are 9 additional InvestingPro Tips available for Equity Commonwealth. These tips can provide a deeper understanding of the company's valuation, profitability, and market position. To access these valuable insights, visit https://www.investing.com/pro/EQC and use the coupon code PRONEWS24 for an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - CommonWealth REIT (EQC) Q4 2023:
Operator: Good morning, and thanks for joining this call to discuss Equity Commonwealth Results for the Fourth Quarter and Full Year ending December 31, 2023, 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 statement. 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 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 to David Weinberg. Please go ahead sir.
David Weinberg: 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 $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 $0.05 share increase in interest and other income. Same property NOI was down 2.3% and the same property cash NOI was 12% lower, compared to the fourth quarter 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 a year ago. The growth in FFO was largely the result of a $0.61 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 property -- 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 the same property cash NOI was 11.4% lower, compared to the full year 2022. Excluding a one-time 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. Rents 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 four 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 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: [Operator Instructions] Our first question is from the line of Craig Mailman with Citi. Please go ahead.
Seth Bergey: Hi, good morning. This is Seth Bergey on for Craig. I guess my first question would be, you know, 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?
David Weinberg: Hey, 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.
Seth Bergey: 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, 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 timeframe you're looking at?
David Weinberg: I'd say the windows open. It's hard to predict if and when it shuts, but for the reasons we've just discussed before, given the changing credit markets, proceeds down, interest rates up, harder for private companies to get public, pressure on private realtor 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 four remaining properties and liquidating the company.
Seth Bergey: Great. Thank you.
Operator: Thank you. As there are no further questions, I will now hand the conference over to David. David, please go ahead.
David Weinberg: Well, thank you again and we appreciate your time.
Operator: Thank you. The conference of Equity Commonwealth has now concluded. Thank you for your participation. You may now disconnect your lines.
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