Equity Commonwealth (EQC) 2021 Q4 法說會逐字稿

Greetings, and welcome to Equity Commonwealth's Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Sarah Byrnes, Senior Vice President, Investor Relations and Capital Markets. Thank you. You may begin.

Thank you, Doug. Good morning, and thanks for joining us to discuss Equity Commonwealth's results for the quarter and full year ending December 31, 2021. On the call today are David Helfand, President and CEO; David Weinberg, COO; and Bill Griffiths, CFO.

Please be advised certain matters discussed during the conference call may constitute forward-looking statements within the meaning of federal securities laws. We refer you to the section titled Forward-Looking Statements in the press release issued yesterday as well as the section titled Risk Factors in our annual report on Form 10-K and quarterly reports on Form 10-Q for subsequent quarters for a discussion of factors that could cause 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. We post important information on our website at eqcre.com, including information that may be material.

The portion of today's remarks on our quarterly earnings also include certain non-GAAP financial measures. Please refer to yesterday's press release and our supplemental containing our results for a reconciliation of these non-GAAP measures to our GAAP financial results.

With that, I will turn the call over to David Helfand.

Thanks, Sarah. Good morning, everyone. Thanks for joining us. I'll provide an update on the company's results for the quarter and full year as well as comment on our plans for '22.

Net loss, FFO and NFFO were roughly flat in the fourth quarter compared to the fourth quarter of 2020. We've seen leasing activity pick up in the fourth quarter with 51,000 square feet of new and renewal leases signed and greater tour activity. Rents on new and renewal leases were flat on a cash basis and up 2.8% on a GAAP basis versus expiring leases. Leased occupancy was 82.3%, and commenced occupancy was 79.2% at 2021 year-end.

For the full year 2021, net loss was $0.20 per share compared to $3.56 per share of net income in 2020. The decline was primarily the result of a decrease from gains on property sales and a decrease in interest income. The $0.19 per share decline in FFO for the full year 2021 compared to 2020 was largely the result of a decrease in interest income, an increase in G&A expense and a decrease in NOI from properties sold and a decrease in same-property NOI. The $0.16 per share decline in NFFO for the full year 2021 compared to 2020 was largely the result of a decrease in interest and other income, a decrease in same-property cash NOI and lease termination fees and a decline in NOI from properties sold, which was offset by a decrease in G&A expense, excluding executive severance.

General and administrative expense for the year totaled $37.4 million and included $7.1 million of executive severance expense and a $1.4 million tax related to a 2020 disposition. Excluding those 2 items, G&A in 2021 was $30.3 million compared to $31.8 million in 2020. We expect G&A to be approximately $30 million this year.

Same-property NOI increased 5.2% in the fourth quarter 2021 compared to the fourth quarter 2020. The increase was largely due to an increase in NOI at 1225 Seventeenth Street in Denver as the property experienced an increase in parking revenues and tenant reimbursements. Same-property cash NOI was up 0.8% during the quarter due to improved parking revenues, lower real estate tax expense, an expiration of free rent at 1225 Seventeenth Street, which was offset by an increase in free rent and occupancy decreases at 1250 H Street in Washington, D.C. and 206 East 9th Street in Austin.

Same-property NOI decreased 7.2% for the full year 2021 compared to the full year 2020. The decrease was largely due to decreases in occupancy at 1250 H Street in Washington, D.C. and 206 East 9th in Austin as well as decrease in early termination income and lower parking revenue for the full year. This was offset by increased occupancy at 1225 Seventeenth and higher tenant reimbursements. Same-property cash NOI decreased 8.8% during the full year of 2021 due to lower occupancy, an increase in free rent and a decrease in parking revenue for the year, offset by free rent expiration at 1225 Seventeenth Street.

We have approximately $2.8 billion of cash or over $24 per share. In 2021, we repurchased 6.7 million of our common shares for $174 million or $25.85 per share. This year through February 8, we've repurchased an additional 2.2 million shares for $57 million at an average price of $25.78 per share. With more than $23 a share in net cash, we view the share repurchases as a low-risk means of investing EQC's capital. In total, since we began buying back shares in 2015, we have repurchased 18.5 million shares for just under $500 million at an average dividend-adjusted price of $22.13. We currently have $69 million remaining on our existing share buyback authorization.

Turning to the current market environment. Leasing activity in our portfolio accelerated noticeably with more tours and generally more activity in the fourth quarter. 2021 saw sales volumes recover for U.S. office properties. The $110 billion of sales marked a significant increase from 2020's level of $66 billion that was on par with sales volumes in 2018 and 2019. Clearly, there remains abundant equity capital targeting real estate assets. Debt capital remains readily available as well. And despite the recent move in base rates and spreads, debt remains priced at historically attractive levels.

Against this backdrop, we continue to evaluate a wide range of investment opportunities, including portfolio purchases and corporate transactions, both public and private. As we've mentioned in the past, we are evaluating opportunities where the EQC team would steward the go-forward business as well as opportunities where the management team of the acquired business would lead the company going forward. For 2022, our focus remains capital allocation, leasing and asset management. In addition, we expect to market 1 or more of our 4 properties for sale.

Finally, we know that shareholders would like more clarity on timing. It's reasonable to ask how much longer we'll continue the effort to find the right opportunity. While I don't have a clear answer, what I can say is that we're mindful of cost of pursuing opportunity and continue to evaluate the best course of action to maximize shareholder value.

Before we go to questions, I want to take a minute and acknowledge Jeff Brown's many contributions over the past 8 years. As Chief Accounting Officer, Jeff has been a meaningful part of EQC's success. All of us at EQC wish you the best, appreciate your leadership and thank you for your mentoring of our outstanding accounting team.

I'd also like to congratulate Andrew Levy on his promotion to Chief Accounting Officer. Andrew has worked with us since we took over EQC in 2014 and is well prepared for this new opportunity.

With that, David, Bill and I are happy to take your questions.

(Operator Instructions) Our first question comes from the line of Manny Korchman with Citigroup.

David, thanks for leading with what, I guess, investors are asking about. Maybe if we dive in, you talked about increasing leasing in the few office assets that you continue to own. How does that maybe newfound momentum in leasing and office change your views on that asset class overall and especially contrasting that to the fact that you're still talking about selling at least one of those assets?

Manny, it's David. That's a great question. I would say what we're seeing is consistent with the headlines regarding office in general. There's clearly been a flight to quality. If you dig into the lease economics with respect to the better assets, better markets, better locations, you can kind of see rents holding and higher concession packages overall, just given the competitive environment and the cost of construction. So we still remain bullish on better assets and better markets.

And then I would say in the next tier of assets, overall, it's still very competitive, and there's still some sublease space that is a nice alternative for tenants looking at that price point. We're fortunate in that our portfolio, we've got assets in Denver; 2 in Austin, which are clearly winners coming out of COVID; and our D.C. asset is a nice asset but in a very competitive market. So I think we remain bullish on office relative to perhaps many of our peers, but I'd also say we're cautious at the same time because we recognize there's a clear distinction between "the good" office properties and those that may be challenged for some time.

And maybe it may seem obvious, but is that clear in the capital markets if you wanted to buy the better office buildings, are they pricing appropriately in your view?

Well, I would say if you go back to our comments on office, those still hold. So if by better office buildings, you mean those trophy assets in growth markets with term and credit, they are pricing at pre-COVID levels, low 4 caps, above replacement cost. So the other office is that in the secondary nongrowth markets, commodity buildings, vacancy [enroll] where it's a little murkier in terms of how the capital markets are pricing it. And I would describe that as more hand-to-hand combat, and it's very deal-specific and to be determined how that plays out.

Great. And then I think you guys gave a view on what G&A would be, if I caught this correctly, for 2022 at $30 million. What's -- if you can, what's specifically driving those G&A savings?

I don't see -- I don't think savings. I think if you adjust our '21 number, we're flat to -- roughly flat to '21 with that $30 million estimate.

(Operator Instructions) There are no other questions at this time. I'd like to hand the call back over to David Helfand for closing remarks.

Well, thank you, everyone, for joining us, and thank you to Manny for asking a question. Side note, we are definitely here for the donuts, but that's not all. Appreciate everyone's time and look forward to catching up with you and be well.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.