Description

Equity Commonwealth (“EQC”) is a US listed REIT trading slightly below its PF net cash balance despite generating free cash flow and owning four class A office properties.  We believe EQC is worth $22.01 per share, 14.9% above the current price.  We find this modest upside compelling as downside is limited given net cash of $19.17 per share.  What makes EQC actionable today, despite being a relatively sleepy REIT the last few years, is the recent public announcement from activist Land & Buildings calling for a complete liquidation of the company, which we (and likely other shareholders) fully support.  And that management acknowledged the probability of winding down the company by year-end with this specific language in their earnings release today – they’ve never publicly drawn a line in the sand and committed to timing of a wind down before.

Today, we are continuing our efforts to maximize shareholder value. We remain focused on opportunities in our pipeline where we can create long-term value for our shareholders, while concurrently taking steps to facilitate the potential wind down of our business. Before the end of this year, we expect to either announce a transaction or move forward with a plan to wind down our business.

History:

To briefly recap a well-documented history of EQC (see prior VIC writeups), EQC was formerly Commonwealth REIT – an externally managed office REIT poorly run by VIC fan favorite RMR.  Activist firm Corvex teamed up with real estate developer Related and ousted RMR as external manager in 2013 – a significant victory at the time.  Along with the ousting of RMR, Sam Zell joined as Chairman and installed his team to run the office portfolio in late 2013.  Over the next several years, Zell & Co wisely disposed of 164 properties for an aggregate gross sales price of $7.6 billion.  Over that time, Zell & Co used those proceeds to retire $3.3 billion of debt and preferred shares, repurchase $652.1 million of common stock, and pay $1.8 billion in distributions to common shareholders.  What is left today is a pile of cash, no debt except for the small amount of preferred remaining, and full ownership of four office buildings.

The goal of Zell & Co was to deploy most of the cash proceeds into an opportunistic acquisition of a real estate portfolio that the company could optimize/turn around.  Unfortunately, EQC has not made any such acquisitions and has had plenty of capital sitting on the sidelines waiting for distressed real estate sales.  Additionally, several publicly traded REITs focus on the sectors that EQC has been evaluating over the years, primarily multi-family and industrial portfolios, making EQC scooping up an attractive asset less likely. 

Why Now?

While searching for acquisitions over several years to no avail, EQC has gradually decreased the size of its internal team and is now close to bare bones, but still carries an absurd run-rate G&A of $30 million!  Sadly, Sam Zell passed away in May 2023 and his number two, David Helfand, has taken the reigns.  No one thinks Helfand can create the same value that Sam Zell would have and calls with prior members of the EQC team have noted that EQC hasn’t received the same “looks” it did when Zell was alive.

A new activist, Land & Buildings has recently taken a 3% ownership stake in the company and – with the legendary Sam Zell gone, a big pile of cash, and the likelihood of finding a good deal the lowest it has ever been – is calling for a complete liquidation: https://www.businesswire.com/news/home/20240313833721/en/Land-Buildings-Calls-on-Equity-Commonwealth-to-Take-Long-Overdue-Step-of-Liquidating-Remaining-Assets-and-Returning-Capital-to-Shareholders

We believe this will prompt the company to finally liquidate as EQC has never faced public pressure to do so.  It is worth noting that after sitting on the sidelines during C19, EQC did list three of the remaining office buildings in the spring of 2022, only to pull them as the Fed began its rate raising campaign and real estate markets froze.  We think this was a sign that EQC was open to liquidating the portfolio.  And today on its conference call EQC noted they’ll imminently list 3 of the 4 office buildings for sale, with the 4th coming soon after.

In calls with management, we believe they are listening to shareholders’ call for a prompt liquidation.  But, they likely still need to hear from shareholders, so we encourage anyone following to reach out to Peter Linneman, lead independent director, at [email protected] if you support a liquidation.

Liquidation Value:

We believe after taking the next quarter to wrap review of deals already in the pipeline, the value of EQC in a liquidation scenario would be $22.01 per share.  Our valuation bridge:

We acknowledge that the office properties have the widest range of possible values and it’s hard to know specifically what they are worth until they are sold, but we are taking an office REIT average cap rate of 9.6% and applying it to the LTM NOI of $33.4 million to arrive at a valuation of $357.3 million.  With 1,520,944 total square feet in the portfolio, this equates to a little over ~$230 per square foot, roughly in-line with Colliers latest market report that average office property sales occurred at ~$220 per square foot, despite our checks indicating these are better than average properties.  Our valuation is below the $411.9 million total cost of the properties (acquired in 1997, 1998, 2009, and 2012) and the $750 million estimated value that EQC assigned to the properties in 2022 while bidding on the MNR portfolio (https://www.sec.gov/Archives/edgar/data/67625/000114036121025517/nt10026422x6_defm14a.htm). 

We assume that the income from the office properties continues to offset G&A – the reason we believe EQC has continued to keep the four office properties.

Summary Financials:

Office Properties

Of the four office properties that remain, three are class A buildings (one in Denver, one in Austin, and one in DC) and one is essentially a parking garage with offices on top located in the CBD of Austin. Our calls support the view that these are pretty good assets, but like all office properties today, there is oversupply in each market weighing on the fundamentals.  We think our valuation is relatively conservative given the recent tax appraisals on Denver and the two Austin properties support a $387 million valuation – we couldn’t find one on DC, but it’s certainly not worth negative value per our checks.  Recent stats for the portfolio:

Catalyst

Earning 14.9% in an EQC liquidation is an attractive investment opportunity.  The company has committed to returning the vast majority of the cash upon a successful dissolution vote, which should occur in early fall.  This would make for an attractive IRR on what should be an uncorrelated investment with strong downside protection given the cash.

We encourage anyone following to reach out to Peter Linneman, lead independent director, at [email protected] if you support a liquidation.