Equity Commonwealth (EQC) is a Chicago-based, internally managed and self-advised real estate investment trust (REIT) that has undergone a remarkable transformation over the past decade. Originally founded in 1986, the company has a storied history of navigating the complex real estate landscape, creating substantial value for its shareholders along the way.
Company Background
Equity Commonwealth was formed in 1986 under the laws of the State of Maryland, with its primary business focused on the ownership and operation of office properties in the United States. The company operates as an umbrella partnership REIT (UPREIT) and conducts substantially all of its activities through EQC Operating Trust, a Maryland real estate investment trust. Throughout its history, Equity Commonwealth has faced various challenges and market disruptions, demonstrating its ability to adapt and maintain financial stability.
In 2020, the company achieved a significant milestone by recording a $446.9 million gain on the sale of investment properties. However, this success was quickly followed by the onset of the COVID-19 pandemic, which had a profound impact on Equity Commonwealth’s operations. As many of its tenants’ employees began working remotely, the demand for office space decreased significantly, forcing the company to reassess its strategy and portfolio management approach.
COVID-19 Impact
To navigate the challenges posed by the pandemic, Equity Commonwealth implemented a series of measures aimed at maintaining its financial stability. These included repurchasing shares and reducing dividend payments to conserve cash. The company also focused on optimizing its portfolio by selling underperforming properties and reinvesting the proceeds into its core assets. This strategic approach helped Equity Commonwealth weather the storms of the past few years and maintain its position as a leading office REIT.
However, the company’s fortunes took a turn in the aftermath of the COVID-19 pandemic, which significantly impacted the demand for office space. Like many of its peers, Equity Commonwealth found itself grappling with the challenges posed by remote and hybrid work arrangements, as well as a slowdown in leasing activity and tenant demand. As a result, the company’s portfolio occupancy rate declined from a high of 91.5% in 2019 to just 69.7% as of September 30, 2024.
Strategic Decisions
Faced with these market headwinds, Equity Commonwealth’s Board of Trustees made the strategic decision to wind down the company’s operations and liquidate its remaining assets. On October 2, 2024, the company filed a definitive proxy statement with the U.S. Securities and Exchange Commission, seeking shareholder approval for its Plan of Sale and Dissolution. The plan authorizes Equity Commonwealth to sell its four remaining properties, distribute the net proceeds to shareholders, and ultimately dissolve the company.
Portfolio and Asset Sales
As of September 30, 2024, Equity Commonwealth’s portfolio consisted of four commercial office properties totaling 1.5 million square feet, located in Denver, Austin, and Washington, D.C. The company has already entered into contracts to sell three of these properties, with the Austin and D.C. assets expected to close in early November 2024. The remaining Denver property is currently being marketed for sale, with the company anticipating that all dispositions will be completed by the end of the first quarter of 2025.
Financials
Equity Commonwealth’s financial position remains strong, with a cash balance of approximately $2.2 billion as of September 30, 2024, or nearly $20 per share. This robust cash position, coupled with the expected proceeds from the pending asset sales, has enabled the company to estimate an aggregate shareholder liquidating distribution range of $20.00 to $21.00 per common share.
The company’s transition to a liquidation phase has not been without its challenges. In the third quarter of 2024, Equity Commonwealth recognized a $50.2 million non-cash impairment charge related to its properties held for sale, reflecting the realities of the current office market environment. However, the company’s management team remains focused on executing the wind-down process prudently and efficiently, with the goal of maximizing value for its shareholders.
For the most recent fiscal year (2023), Equity Commonwealth reported revenue of $60.52 million, net income of $91.16 million, operating cash flow of $122.27 million, and free cash flow of $122.27 million. In the most recent quarter (Q3 2024), the company’s revenue was $13.99 million, with a net loss of $26.19 million. Operating cash flow for the quarter was $33.11 million, and free cash flow was $44.03 million.
Year-over-year, revenue decreased by 8.2%, while net income decreased by 200%. The significant decrease in net income was primarily due to the $50.23 million loss on asset impairment recorded in the third quarter of 2024. This impairment charge was related to the company’s decision to classify three properties (1250 H Street, NW, 206 East 9th Street, and Bridgepoint Square) as held for sale, and the resulting write-down of their carrying values to their estimated fair values less costs to sell.
Despite the challenges, Equity Commonwealth’s operating cash flow increased by 11.8%, and free cash flow increased by 53.5% year-over-year. For the nine months ended September 30, 2024, the company’s total revenues were $43.29 million, consisting of $39.49 million in rental revenue and $3.80 million in other revenue. Rental revenue decreased by 4.9% compared to the same period in 2023, primarily due to decreases in base rent, escalations, and real estate tax recoveries.
Operating expenses for the nine-month period were $20.12 million, down 3.8% year-over-year, driven by decreases in pre-leasing demolition costs and real estate taxes, partially offset by increases in maintenance, utilities, and expenses related to preparing the properties for sale. Net operating income (NOI), a non-GAAP metric used by the company to evaluate property-level performance, was $23.17 million for the nine-month period, down 5.3% compared to the prior year.
Liquidity
Equity Commonwealth’s journey from a diversified REIT to a company nearing liquidation is a testament to the dynamic and ever-evolving nature of the real estate industry. The company’s ability to adapt to changing market conditions, make tough decisions, and prioritize shareholder interests has been a hallmark of its leadership over the years.
As of September 30, 2024, Equity Commonwealth’s financial position remains strong. The company has a cash balance of $2.23 billion and no debt, resulting in a debt-to-equity ratio of 0. The current ratio and quick ratio both stand at 83.01, indicating a highly liquid position. Notably, the company does not disclose having a credit facility, further emphasizing its reliance on cash reserves.
In terms of future guidance, Equity Commonwealth expects the total distributions resulting from the Plan of Sale to be in the range of $19.50 to $21 per share. Assuming shareholders approve the Plan of Sale, the company plans to pay off the Series D preferred shares and declare a common distribution of $18 to $19 per share, with payments to be made in early December. After all remaining assets are sold, which is currently estimated to be by the end of the first quarter of 2025, Equity Commonwealth will distribute substantially all of its remaining cash, net of a reserve for any remaining liabilities.
The company’s previous guidance from the last quarter, which estimated total proceeds of $234 million from the sale of their Austin, DC, and Denver properties, appears to have been accurate. The CEO confirmed that the pricing for the three sales, plus their expectation for Denver, remains consistent with this estimate.
As Equity Commonwealth embarks on the final chapter of its corporate lifecycle, investors will be closely watching the successful completion of the asset sales and the distribution of the remaining cash to shareholders. This transition marks the end of an era for a company that has left an indelible mark on the commercial real estate landscape.
It’s worth noting that Equity Commonwealth’s experience reflects broader trends in the office real estate market. The sector has faced significant challenges in recent years due to the COVID-19 pandemic and the shift towards remote and hybrid work arrangements. Transaction volume in the office sector has dropped to the lowest levels since 2010, down approximately 75% from pre-COVID levels. Additionally, debt availability for office assets has become scarce, with financing priced at double-digit coupons.
Despite these industry-wide challenges, Equity Commonwealth has maintained a strong financial position and is progressing with its liquidation plans. The company expects to qualify as a REIT in 2024 and 2025, providing potential tax benefits for shareholders during the wind-down process.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.