EQC - Equity Commonwealth

[CorpRaider]

Back below the $24.50 at which Meister offered to take it out.  BTW it has performed a lot better than ARCP.  haha.  I listened to last quarter, they are still digging into the assets but I like the cut of their jib and the comments about looking to be sellers in this market.  I see some grave dancing down the line.

[thepupil]

yep, sitting here right at GAAP common equity with $1B (1/3 of market cap) of accumulated depreciation, very little asset level and corporate leverage, a big cash pile with which they are retiring any higher cost debt, some additional asset sales likely (Australia) etc; there are lots of things to like.

Overall it's a good way to buy some buildings. The REIT index is up 23% this year and is  made up of fully optimized pure play things with reasonably levered balance sheets that trade at nosebleed valuations.

The hodge podge of randomness known as Equity Commonwealth is up a meager 4%, has an inefficient, spring-loaded and ready to buy if/when shit hits the fan balance sheet, has no strategic focus, a new management team, and all kinds of other things that make it a fish out of water. It's a better place to be.

[CorpRaider]

I wonder if we should start a new thread or if you can rename this one to EQC, pupil? 

Anyhow, I just listened to the CC.  It was pretty interesting.  Sam Zell was on there and was very engaged (I don't remember him being on the prior calls).  They are targeting 2-3 billion in asset dispositions.  Sounds like they're going to try and really build the war chest for future grave dancing.  They're going to keep letting for CBRE handle the property management for the time being.

[thepupil]

http://ir.eqcre.com/Cache/1500072719.PDF?Y=&O=PDF&D=&fid=1500072719&T=&iid=102958

http://www.businesswire.com/news/home/20150608005466/en/Equity-Commonwealth-Completes-Portfolio-Sales-Totaling-793#.VXV_qutH0b0

sold big portfolio of smaller assets in smaller markets, gross book of $794MM, net book of $660MM, sales price of $793MM

So they got 1X gross book for their portfolio of properties in smaller markets. EQQ has net common equity of about $3B and $1B of cumulative depreciation, so gross common equity of $4B, so if you get closer to 1X gross book (where they are selling their lower quality properties you get 20% upside from here on the re-rate + value growth sam zell optionality from there

Also good that the portfolio gets better and easier to understand with these sales. They've cut their building count in half and only reduced square footage  and rent by 20% and 16%.

I'd characterize the portfolio sales as roughly in line with expectations, good, but not great, stock isn't as interesting as it was when it was 15% ago but I'd say you still have well managed low risk optionality here, particularly given the plan to continue to reduce debt and sell more assets.

[thepupil]

http://finance.yahoo.com/news/edited-transcript-eqc-presentation-10-155237388.html

Good Transcript. I like the word "mergable"

People have worked very hard and it's really a unique opportunity for all of us to be a part of something that has a chance to take a pool of assets to reallocate them, create cash with them and then our hope is to find an opportunity to drive long-term value in an opportunistic way going forward with a remake of the entire portfolio to the extent an opportunity presents itself and it's not clear that it will and I think we've been clear with people that if there is no opportunity to deploy capital in a way that we think creates long-term value, we'll continue to sell assets and potentially merge out what is a much smaller more desirable pool of assets so we have been selling assets that are less desirable. We have a very attractive portfolio of assets principally Philly, Chicago, Austin, Denver and Seattle, Bellevue, and really what we do will be dictated by the opportunity.

here are kind of two portfolios within this portfolio, right, there's a core portfolio of 30 or 50 assets that look and smell and taste like the assets that our peers own. We don't think that the REIT community will have a hard time valuing that, right, when we cut away all of the stuff that doesn't belong, then that will be something that's the mergeable portfolio that David described earlier what's hard is everything else, right? And everything else is what's in this $2 to $3 billion of dispositions that we've talked about. It gets a whole heck of a lot less hard when we turn it into cash. Then there's no debate, we know what that's worth and we know what this left-over portfolio is worth.

[CorpRaider]

Just read it.  Sounds good!

[thepupil]

http://finance.yahoo.com/news/equity-commonwealth-agrees-sell-illinois-113500614.html

Selling Illinois Center for $376M. property is the second largest.

the sale price represents 113% of gross book value and 122% of net book value. 111 East wacker has a $142MM loan on it at 6.29% due 7/2016 so $166MM of equity will become $234MM of straight cash homie.

They continue to build a massive war chest and de-lever. Although this was hinted at in earlier press releases, I was/am a bit surprised they sold this one. since it is the type of asset they say they want to own for the long term (big, major city, CBD)

[CorpRaider]

That's exactly what I was going to say:  I thought this was the sort of property they were going to focus the remaining portfolio around.

I sort of hope they don't decide to liquidate the trust and cashier us as 1.3 or 1.4x book.  Although, that would be better than a sharp stick in the eye.

[thepupil]

Given this building is 73% leased, they must have just decided that it was a better proposition to sell it than to try to lease it up. This also gives them a little breathing room in terms of selling other worse assets at disappointing prices.

I'm adding a little bit here as I feel the story keeps getting de-risked with every sale at or above gross book value. The cash is really starting to pile up. They'll now have more than they need to retire all debt that comes due in 2015 and 2016 and they are the least levered company in their space. Once the rest of non-core is sold, they won't have any debt whatsoever. At some point, they'll have to start buying back stock or buying assets. 

The end goal looks to be more and more a sale of the company or to try to get the stock price up to where they can raise more capital and become a scale REIT.

John Bejjani - Green Street Advisors.

Good morning, everyone. David, I know, you said you can’t discuss too much about the properties that are under contract or what’s being marketed, but can you give us a general sense of maybe the market mix or leasing profile or anything even in general terms?
David Helfand - CEO

Well, I think what we can’t say is that we prioritize some of our smaller assets and more tertiary markets, but there is also a mix of other things in there, and given the breadth of the disposition going on, it’s really hard to characterize them in short form.
John Bejjani - Green Street Advisors.

Okay. And then I guess as you guys are thinking about exiting markets and just selling assets, I have seen a report that Illinois Center is being – that Illinois Center is on the market. Theoretically if this is true, does that necessarily suggest an exit from Chicago or would you also even in markets where you have scale look to sell certain assets if they just don’t make sense to put capital into?
David Weinberg - COO

This is David Weinberg. I would not conclude because a certain asset is on the market that we’re necessarily exiting the market. We look at each asset individually taking into account that asset’s profile. So just because there are certain assets that we may or may not sell over time, it does not as I said earlier, lead to any broad conclusions with respect to where – whether we will be in that market long-term.

[CorpRaider]

Ahh, yes.  I forgot about that.  They will probably just say they are continuing to be "opportunistic" and got a nice offer for the property, especially when factoring projected expenses to get it leased back up.  If they work down to a nice bite-sized REIT type portfolio paired with a lot of cash, it seems like they will have the option to sell the portfolio if the market gets really hot or deploy the cash if things/values go south. 

I'm excited by that prospect, but I'm not often invited into real estate deals with Sam Zell and Related.