New Opportunity to Monitor: Equity Commonwealth (EQC)

Dear Landlords,

I want to extend a warm welcome to all our new members! We recommend that you start by reading our Welcome Letter by clicking here. It explains why we invest in real estate through REITs and how to get started.  

As a reminder, our most recent "Portfolio Review" was shared with the members of High Yield Landlord on July 3rd, 2024, and you can read it by clicking here.

You can also access our three portfolios via Google Sheets by clicking here.

New members can start researching positions marked as Strong Buy and Buy while taking into account the corresponding risk ratings.

If you have any questions or need assistance, please let us know.

==============================

New Opportunity to Monitor: Equity Commonwealth (EQC)

Summary: 

• The REIT activist firm, Land & Buildings, recently initiated a position in Equity Commonwealth and it is pushing for a liquidation. 

• The shares trade at a discount to the value of its cash.

• We are very interested in investing but will wait for a slightly bigger discount. If it drops another 5-10%, we will likely initiate a position.

• We will closely monitor the REIT going forward. Here is our research on this unique opportunity:

-------------------------------------------------------------------------

Equity Commonwealth (EQC) is a very interesting and unique investment opportunity.

Once a mid-cap office REIT part of Sam Zell's "Equity"-branded stable of investment vehicles, EQC is now a directionless shadow of its former self.

Most of the current management team came in 10 years ago when Sam Zell became the Chairman of the Board and rebranded the company from CommonWealth REIT to Equity Commonwealth.

EQR's CEO, David Helfand, worked with Zell for many years at Zell's investment company, Equity Group Investments, and served as the CIO of Equity Office Properties before that REIT was sold at a very opportunistic time in 2007.

Helfand continued his record of smart seller of assets for the first 6 years of his tenure as CEO of EQC. Here's Helfand from the Q1 2024 conference call:

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.

The pandemic and following interest rate surge caused EQC's remaining office properties to plunge in value, which in turn caused its stock price to plunge.

Since taking over in May 2014, the current management team has overseen a ~25% decline in EQC's stock price, all of which occurred after COVID-19:

Data by YCharts

After paying off 100% of EQC's debt, the REIT is now left with 4 downtown office properties and a big pile of cash.

What has management been doing with this cash? In short, they have been looking for a "transformative" acquisition opportunity in a non-office segment of commercial real estate.

While EQC came close to securing the acquisition of industrial REIT Monmouth Real Estate in 2021, another bidder (Industrial Logistics Property Trust (ILPT)) ultimately swooped in with a higher bid and won the deal.

After years now of unsuccessfully seeking a transformative acquisition, investors (including activist Jonathan Litt's Land And Buildings, which has taken a big position in EQC) have been asking what happens if management never finds a suitable investment opportunity.

Here's Helfand again from the Q1 conference call:

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.

... 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.

Re-read that second paragraph if you missed it.

Management has already listed three of its four remaining properties for sale during the second quarter. If management cannot find a suitable investment opportunity to put its >$2 billion in cash to work by the end of this year, they intend to liquidate the entire business and return the remaining cash to shareholders (minus $0.40 to $0.50 per share in wind-down costs).

No transformative acquisition has been announced to date.

Therefore, investors need to figure out the liquidation value of EQC.