EQC - Equity Commonwealth

[thepupil]

It is up to one to decide which risk one prefers to avoid: the risk of missing a “deal pop” or the risk of holding this and it doing nothing.

 

For someone like my parents retirement portfolio which is <70% stocks and <100% gross, a slug of this in place of cash/bonds doesn’t detract too much from the safety of the portfolio and offers som optionality.

 

For me, I just fund it with a touch of margin and don’t worry about it (it’s also 100% of my HSA right now, which maybe I don’t want in stocks right now).

 

I don’t mean to say that this is riskless, but this fell 15% from its absolute peak to absolute trough in the first part of 2020. It is a low risk instrument; arguably its value increases in bad times (though people will sell it for liquidity)

[valueinvestor]

It is up to one to decide which risk one prefers to avoid: the risk of missing a “deal pop” or the risk of holding this and it doing nothing.

 

For someone like my parents retirement portfolio which is <70% stocks and <100% gross, a slug of this in place of cash/bonds doesn’t detract too much from the safety of the portfolio and offers som optionality.

 

For me, I just fund it with a touch of margin and don’t worry about it (it’s also 100% of my HSA right now, which maybe I don’t want in stocks right now).

 

I don’t mean to say that this is riskless, but this fell 15% from its absolute peak to absolute trough in the first part of 2020. It is a low risk instrument; arguably its value increases in bad times (though people will sell it for liquidity)

 

Hey, I get it - but many are purchasing because the thesis is simple, safe, and/or because of Sam, and yet there's a huge key-man risk. He's not young and in a worldwide pandemic - I do not wish for it but he could get ill and possibly worse. What would the value of the stock be then?

 

It's the same with Tesla but with a lot more downside risk. Doesn't seem that he's doing much succession planning, like Elon.

 

It's not a stock in my view that's inherently safe as cash, hence not that great of an instrument.

[thepupil]

Equity Group is more than Sam Zell. The CEO of EQC (Helfand) was Equity Office Properties CIO, CEO of ELS, and has worked with Mr Z for 28 years, so I imagine he’s not dumb.

 

https://www.egizell.com/people/

 

It’s definitely not cash in the purest form; cash didn’t fall 15% in March and cash can’t go up 20 % when it merges with Mack Cali in a deleveraging transaction (I don’t think that will happen, but it’s been speculated)

 

It has net cash of about $23.5/share and $2.9-$4.8/ share of building depending on your cap rate (6-10%), so it’s anywhere from a 4% discount to NAV (6 cap) and a 3% premium (10 cap) and then you have the sentiment swings that will lead to minor trading gains/losses before deal/liquidation, and like I said you don’t have the 18-24m shot clock like a SPAC.

 

I think if Zell got hit by a bus one would not impair capital in this. Maybe a one day 5-10% down followed by a recovery. Just my 2 cents. IIRC there have been some CC’s where Zell doesn’t even go on.

.

[valueinvestor]

I agree with you - just think the market may not for a very long time. There's no way of knowing - secondly as an alternative to cash I would rather put into income-producing assets or hold straight cash. As you mentioned - it went down 15% during the Coronavirus when it didn't affect the business in any way. The same can go for Sam's inevitable but unwelcome passing. Will there be a pop? Maybe. But I think there's plenty of time to purchase the stock after the acquisition, especially during the digestion/integration of the acquisition.

 

By and large, I agree with your thesis, I wanted to provide an alternative view on the stock. The bears are not thinking the stock will go down, it just may be flat for a long time.

[thepupil]

Ya I think we agree here.

[CorpRaider]

I'm getting bored/annoyed with it, so it's probably due for a rip. 

 

I will say Zell often notes how he's the "ideas guy" who keeps his door open to his office. 

 

It seems to me his main idea is buy under managed real estate below replacement cost (and maybe stick to not fourth tier markets) and then sell same if it vastly exceeds replacement cost and a bunch of supply is obviously coming.  I also think he's honest and a straight shooter.  I would bet his people have picked up most of these ideas.

[Broeb22]

Equity Group is more than Sam Zell. The CEO of EQC (Helfand) was Equity Office Properties CIO, CEO of ELS, and has worked with Mr Z for 28 years, so I imagine he’s not dumb.

 

https://www.egizell.com/people/

 

It’s definitely not cash in the purest form; cash didn’t fall 15% in March and cash can’t go up 20 % when it merges with Mack Cali in a deleveraging transaction (I don’t think that will happen, but it’s been speculated)

 

It has net cash of about $23.5/share and $2.9-$4.8/ share of building depending on your cap rate (6-10%), so it’s anywhere from a 4% discount to NAV (6 cap) and a 3% premium (10 cap) and then you have the sentiment swings that will lead to minor trading gains/losses before deal/liquidation, and like I said you don’t have the 18-24m shot clock like a SPAC.

 

I think if Zell got hit by a bus one would not impair capital in this. Maybe a one day 5-10% down followed by a recovery. Just my 2 cents. IIRC there have been some CC’s where Zell doesn’t even go on.

.

 

Equity is more Sam Zell? Ok, who? Who’s going to own selling everything you own and sitting on cash for years while Bruce Flatt and Blackstone are buying tens of billions annually? Liberty has Greg Maffei, IAC has Joey Levin, WEB has Ted, Todd, Ajit, and Greg. Who’s going to take the heat for the entire organization when they’re doing very little?

[thepupil]

they have an experienced management team that costs a pretty penny.

 

Part of the bear case is that EQC exists to take care of Zell's trusted consiglieri so I don't fully understand the pushback on key man risk being particularly high here.

 

they have overbuilt the company. it's just as developed/experienced as, if not more so than many SPACs and opportunistic PE funds (the relevant comps) or some dude buying portfolios for a distressed credit fund / multistrat fund.

 

the same DNA that built EQR, ELS, and top ticked EOP, is there and I'd argue it's more than Sam Zell, but i guess that's what makes a market. I doubt Zell is the one actually doing all the work, and probably hasn't been doing the nitty gritty for decades. Do I like EQC with his wisdom more than without. yes, absolutely.

 

i think this management team deserves trust. since they've taken over, they've done nothing but sell assets at or above NAV, return capital to shareholders, and patiently wait for something. They were rumored buyers of FCE (and in fact bought the stock on the open market), but BAM beat them out. We know with hindsight that would have been a home run because BAM has since exited FCE's life science portfolio at a ginormous markup. They have been a seller of assets since 2014 and the office REIT index has returned 0-2% since then depending on when you start generally, again depending on where you start EQC has returned mid single digits, in line with REIT index, all while going from levered to a cash pile. did i expect better, surely! but anyone who's just bought and held EQC since 2013 (without trading around or having realistic expectations*) would deserve their mid single digit return and hasn't been paying enough attention. they never set a timeline and have been pretty transparent throughout.

 

the opportunity cost of carrying this in a zero interest rate environment is quite low (unless you have an absolute no margin policy or something like that). it's a publicly traded real estate opportunity fund where you have to pay the commitment upfront; in exchange for that, there's better economics (vs paying on committed capital + incentive fee etc) and one click liquidity.

 

feel free to peruse the proxy

https://www.bamsec.com/filing/114036120009688?cik=803649

 

or read the bios

https://www.egizell.com/people/

 

or read about their other investments

https://www.egizell.com/portfolio/

 

*read the progression of the thread, many opportunities to size up/down or get in/out entirely along the way.

[thepupil]

EQC is up about 10% over the past 2-3 months and is trading on a 5-10% premium to NAV. IF SPACs didn't exist, I'd say that this is too high and worth trimming, but it seems downright cheap compared to pre-deal SPACs, particularly given the superior economics/lack of a promote.

 

Last call they seemed to really emphasize that they're trying to get a deal done, but it's hard with all the dry powder out there.

 

nothing more to add to that, just alerting for the 3 of you in the stock, that it's a little more dear than it has been, adjusted for divvies it's very close to ATH hit in April 2020 and the opportunity set (at least in public RE) is certainly worse today than it was then.

 

i vacillate as to how aggressive one should be in trading around this as it ebbs and flows.

[fareastwarriors]

EQC is up about 10% over the past 2-3 months and is trading on a 5-10% premium to NAV. IF SPACs didn't exist, I'd say that this is too high and worth trimming, but it seems downright cheap compared to pre-deal SPACs, particularly given the superior economics/lack of a promote.

 

Last call they seemed to really emphasize that they're trying to get a deal done, but it's hard with all the dry powder out there.

 

nothing more to add to that, just alerting for the 3 of you in the stock, that it's a little more dear than it has been, adjusted for divvies it's very close to ATH hit in April 2020 and the opportunity set (at least in public RE) is certainly worse today than it was then.

 

i vacillate as to how aggressive one should be in trading around this as it ebbs and flows.

 

Lol, 3 of us. Probably true.

 

Thanks for your insights, as always.

[Broeb22]

https://www.broyhillasset.com/wp-content/uploads/2021/02/The-Broyhill-Letter-2020.Q4.pdf

 

Make that 4.

[DooDiligence]

"Adam Markman, the Company’s Executive Vice President, Chief Financial Officer and Treasurer since July 2014, has resigned, effective March 31, 2021. Mr. Markman is leaving to pursue other professional opportunities. Bill Griffiths has been appointed Senior Vice President, Chief Financial Officer and Treasurer, effective April 1, 2021. Mr. Griffiths has served as Senior Vice President of Capital Markets for the Company since 2014."

 

"In addition, Edward Glickman, James Lozier, and Kenneth Shea, members of the Board of Trustees since taking over responsibility for the Company in 2014, notified the Company that they have chosen not to stand for re-election when their current terms expire at the next annual shareholder meeting, expected to be in June 2021."

 

https://ir.eqcre.com/press-releases/news-details/2021/Equity-Commonwealth-Announces-Changes-to-Management-Team-and-Board-of-Trustees/default.aspx

[DooDiligence]

Do these recent departures mean anything? Were these guys bored or are they simply leaving because they accomplished what they set out to do in liquidating EQC's office space?

 

I watched a recent video on EQC by one of our members, which laid out most of what's been discussed here on CoBF.

 

 

In the video, they speculate briefly about EQC partnering with someone like SRG.

 

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What are the chances that Zell shifts focus from office space to retail, hospitality or warehouse? He's expressed pessimism on these areas.

 

https://riazcapital.com/sam-zell

 

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Then there's this

 

Property and the pandemic: the great reckoning that never seems to arrive

 

www.ft.com/content/084f94e8-84a8-4966-a38b-fcb0b5e6171e

 

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I'm viewing EQC as exactly what it is ATM; a cash box with limited upside/downside, and will continue holding it until something better presents itself (if I'm out of cash at the time).

 

 

On another note, ELS sure has taken off.

[DooDiligence]

Here’s to hoping that on the 5th we’ll hear about what management has done (or is going to do) with a wad of cash besides paying out dividends on D prefs. I wouldn’t be surprised if nothing happened besides the recent management departures.

—-

(Recent quotes from the NYU conference.)

Office sector: Getting people back to the office “very, very important;” Zell himself has continued to work at the office throughout the pandemic. The most painful stretch for the office sector, he predicts, will be “between the time people start coming back to the office and when it becomes a (full-fledged) movement.”

Flexible work schedules and other adjustments may be ahead for many office properties, but Zell doubts that the changes will amount to a wholesale change in the work environment.

(Sticking to his guns)

COVID-19’s investment impacts: A lack of price discovery and a reduced number of transactions. “You wouldn’t want to put a hotel on the market right now.” To this point, banks haven’t pursued taking steps to take control of properties that are having problems.

(Looking at hospitality?)

Sectors at a glance: Industrial probably still offers upside; “Multifamily and mobile homes probably will be fine.” The recent wave of retail bankruptcies will be followed by liquidation, probably starting in the next six to eight months.

(Whatever)

SPACs: Zell said he has one of the special purpose acquisition companies, quipping, “Usually, when everyone has one, it’s too many.” The vehicle “is not what I thought it would be when we first started it,” but, he added, “Maybe this is just a re-sowing of the seeds.”

(“You can’t win ‘em all” - Farmer Zell)

[thepupil]

Wouldn’t be surprised to see this sell off a fair bit. Buying Monmouth REIT (there’s a thread) at more or less full value. they are using stock, so they are going to still have a bunch of cash and net leases industrial building and it will be a $5B REIT so instant scale with opportunity for more acquisitions. Just don’t think this is the deal people envisioned. 
 

https://ir.eqcre.com/press-releases/news-details/2021/Equity-Commonwealth-to-Acquire-Monmouth-Real-Estate-for-3.4-Billion/default.aspx

Edited May 5, 2021 by thepupil

[realassetsvalue]

Monmouth always had a good-quality portfolio with the issue really being capital allocation so the assets are more valuable in the hands of the EQC team in my opinion but they are definitely paying a full price and it doesn't look like a deal that could be a Equity Lifestyle 2.0 - something emerging and not yet institutional.

On valuation, industrial is so hot there is a case to be made that they didn't WAY overpay - looks to me like a 4.75% cap rate and $130 PSF - but not a bargain by any stretch of the imagination.

Speaks to how strong Zell and Co think demand is in industrial RE over the next couple years. We will see if they are right or wrong. I'll hold what I own to see what their strategy / focus is going to be and put the cash to work. If it does sell off, probably starts to look cheap in the mid-5% cap rate range?

 

 

[Gregmal]

Its hard not to laugh at how bullish the read through of this is for RE in general. My god. 

[CorpRaider]

Meh.  I don't see how they add a ton of value in the hottest sector on the planet where they hate development. 

Seems maybe like they didn't want to pull the trigger on really doing something, but also didn't want to liquidate...lots of "platform" talk. 

Should have just bot more BRK or Wells.  Deal break fee is $62MM.

Edited May 5, 2021 by CorpRaider

[DooDiligence]

Here's a pretty good summary of the latest move.

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Cons: concentrated tenant risk (FedEx); industrial cap rates could move in the wrong direction, interest rate hikes & increased cost of commercial refinancing.

Pros: concentrated in class A tenants, retail shift to online = more industrial / warehouse, inflation driving up replacement costs.

Not a contentious deal like Corvex vs the Portnoy's. Maybe EQC 2.0, with a slow liquidation of properties as inflation hits, and a similar pattern of capital returns as before? Still kind of cash boxish with options depending on rates & economic activity.

[RetroRanger]

I am also curious about Equity Distribution Acquisition , his spac and what he find's for that!

[CorpRaider]

He hasn't been all that spiffy outside real estate to the best of my disinterested recollection.

[Broeb22]

37 minutes ago, CorpRaider said:

He hasn't been all that spiffy outside real estate to the best of my disinterested recollection.

I would agree with this. Real Industry and Tribune Company were awful, Anixter has been meh, and Covanta has been a home run, though done nothing of late.