EQC - Equity Commonwealth

[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. 

[thepupil]

seeing reports sale of Aussie assets. They have $220MM USD gross book value and $206MM USD net book value. It looks like they will get about $230MM USD ($300MM AUD).  This will get rid of 8 buildings and 1.7MM square feet and get rid of the oddball australia exposure in the portfolio. They are wasting no time in dispensing of the non-core

 

 

http://www.fairfieldchampion.com.au/story/3178337/propertlylink-snaps-up-303-millon-in-assets/?cs=9

 

[thepupil]

As of end of Q1, EQC had $2.597B of debt & preferred and $421MM of cash.

 

They paid down $138MM of unsecured bonds so that gets you to $2.459 and $283MM cash.

 

They then sold the two big portfolios which added $376MM of cash and $320MM of cash and got rid of $88MM of asset level debt so that gets you to $979MM of cash and $2.371 of debt + preferred.

 

They then sold Illinois center for $376MM and it had a $142MM loan on it so cash goes to $1.213B and debt goes to $2.229B.

 

They then just sold the australia portfolio for $230MM so cash should now be around $1.4B.

 

I may have missed something, but I think EQC now only $829MM of net debt and about 40% of its market cap in cash and about 10% of its market cap in un drawn credit revolver.

 

[thepupil]

http://online.barrons.com/articles/sam-zells-equity-commonwealth-is-a-bargain-1436596025?mod=BOL_hp_mag

 

Barron's article; nothing new.

[thepupil]

Updated for Illinois Center Sale and info from earnings

 

Capital Structure

 

http://ir.eqcre.com/Cache/1500074572.PDF?Y=&O=PDF&D=&fid=1500074572&T=&iid=102958

 

0 Drawn / $750MM Revolver

$400MM of Term Loans due 2020 and 2022 @ L +140 and L+180

$1,064MM Unsecured @ 6.17%, pretty much $250MM matures / year from 2016 on

$365MM of mortgage debt @ around 5%

$400MM of preferred @ 6.5% and 7.25%

 

$2,229 Debt and preferred

$3,536 Market Cap

 

$5,765 Total Capitalization

 

So for $5.7B you get $1.5B of cash in the hands of Sam Zell and crew and $4.2B of gross book value of properties.

 

The most recent supplemental shows that the remaining properties (after Illinois Center sale) throw off $590MM of annualized revenue. At a 56% cash NOI margin (what they did last q) that's $330MM of NOI which at an 8% cap is $4.1B and at a 6% cap is $5.5B.

 

So the current stock price implies that the remaining buildings are closer to an 8% cap, which considering that EQC has been unloading their low quality stuff in the mid 7's seems off.

 

It's not incredibly cheap, but it's easy to conclude the assets very nicely cover the stock price, the leverage is basically gone, and there's lots of opportunities to refi or simply pay down higher cost (6+%) debt, and optionality in the event they could make a distressed acquisition or merge or sell the company entirely.

 

I hope they address why there is no repurchase authorization on the call tomorrow.

 

EDIT:

Of course, another way to look at it is the existing estate of properties likely satisfies all covenants and fully supports the debt so that you are really buying $2B of equity ($4.2B-$2.2B debt and preferred) in real estate and $1.5B in cash for $3.5B and any upside / downside from delta in sales below / above the implied 7.8% cap rate goes to the $2B in real estate equity.

 

It's really saying the same thing a different way, but it shows that 40% of what you are buying is cash in arguably good hands and the other 60% is moderately levered (52% levered even if you think the properties are worth only $4.2B) decent RE at a 7.8% cap rate.

 

Really not much more to say than that.

 

It's a pretty simple story.

 

 

[thepupil]

TOO SMALL!!!

 

 

 

Equity Commonwealth Announces $100 Million Share Repurchase Program

Mon August 24, 2015 7:11 PM|Business Wire  | About: EQC   

CHICAGO--(BUSINESS WIRE)-- Equity Commonwealth (EQC) announced today that its Board of Trustees has authorized the repurchase of up to $100 million of its outstanding common shares over the next 12 months.

 

Purchases made pursuant to the program will be made from time to time in the open market, in privately negotiated transactions or in other manners as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by the company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.

[CorpRaider]

Yeah I was going mock the impressive size.  I mean its just an authorization, put a big number in there.

[thepupil]

http://seekingalpha.com/pr/14670096-equity-commonwealth-completes-three-additional-sales-for-261-million-total-dispositions-of-1_7-billion-year-to-date

 

Nice....love how they authorized a small buyback and executed almost all of it in less than a month, buying back 2.6% of shares.

 

The sales look good.

 

The upstate NY portfolio are small assets (numbered 90-99 in the supplemental). These have gross book of $119MM and net book of $112MM. They are selling for $105MM. 88% of gross and 93% of net book. Will reduce their building count by another 10 buildings. -$14MM hit to gross book

 

185 Asylum street getting sold for $113.3MM compared to gross of $78MM and net of $73MM, 144% of  gross book and 154% of net book! +$35MM increase to gross book

 

16th and Race getting sold for $43MM compared to $36MM gross and $43MM net, +$7MM

 

All in all we have another $233MM of gross book converted into $261MM of cash (minus broker commissions and other cost of selling).

 

The building count keeps dropping and the portfolio is getting cleaned up. Sales of the lower quality buildings have been executed in an orderly fashion and they appear to be receiving decent prices.

They are now buying back stock at a rapid rate and there is virtually no net debt. So far so good. 

 

EDIT: new presentation attached

 

EDIT: The one concerning thing is the very low print of $72/foot for the vacant One Franklin Plaza (16th and Race), former GlaxoSmithKline offices in Philly. They've been trying to sell this forever. EQC's largest concentration is in Philly (3.9MM square feet between 1500 market,1735 Market, and 1600 Market,1525 Locust). These have gross book of $551MM ($141 / sq. foot). They are nicely occupied and not vacant, but it shows you what can happen when shit hits the fan.

 

EDIT: If you update my basic calculation for share repo's and asset sales to cash and resulting decrease in annualized revenue, it's $5.53B EV for $1.6B of cash and buildings throwing off $302MM NOI ($542MM @ 56% NOI margin), implying a 7.7% cap rate.

 

 

http://www.bizjournals.com/philadelphia/blog/real-estate/2013/11/a-vacant-one-franklin-plaza-comes-up.html

 

1500075898.PDF

[thepupil]

http://finance.yahoo.com/news/equity-commonwealth-reports-third-quarter-211500409.html

 

They are not kidding around with the asset sales. Looks like they got decent, but not spectacular prices for the buildings they sold in October, 15% below gross book.

 

Cleaning up the portfolio nicely and VERY cash rich. Same story as before.

[Peregrino]

I would argue that the risk/reward balance has shifted unfavorably post this most recent set of asset sales. 

 

Pre-Q3 call, I had agreed with you that the portfolio was trading at too wide a discount ie, you could buy a portfolio worth between a 5.7 and a 6.5% cap rate for over 8%, or put differently you paid fair value for the properties and got the cash for free. 

 

But now - unless they paid off some debt along with the sales - you are getting a portfolio worth between a 5.7 and a 6.7% cap rate for ~7.5% net of cash, so the spread between the two values has narrowed considerably. 

 

Looked at differently, the remaining properties are worth about $20/share at a 6.25% cap rate and 56% NOI margin on $519MM of revenues and you're getting $14/share of cash.  So at a price of $27/share, your ratio of up/downside is about equal (downside PT of $20/share from $27 today if the cash is squandered or cap rates start to back up, and PT of $34 of on the upside).

 

To get to a minimum ratio of upside to downside of 3x, you need to believe that the remaining properties should trade lower than a 5.75% cap rate and I just don't see that being realistic.

[thepupil]

Welcome Peregrino and thank you for your thoughts.

 

I have trimmed recently at prices between $27-29 and mid $30's is kind of where I'd think about exiting completely. My first shares were purchased below $23 and average cost is $24. I'm basically a "size back up"  at $25, a trim at $28-$29 and a seller in the mid $30's.

 

I don't disagree with anything you are saying about fair value except for maybe your downside feels a touch too punitive. $20 / share would be $2.5B. they have no net debt and $3.9B of gross book in real estate. I don't think they'll squander the cash. They will pay off the high cost debt and have been pretty deliberate about not overpaying for acquisitions... I'm not saying it isn't possible but  just not consistent with what we know of Zell and team and not consistent with what's happening so far.

 

As for  requiring 3:1 upside to downside...I agree it does not fit that criteria if your downside case is $20. I don't agree with $20, but that's what make a market.

 

I personally just think about the investment like this "in today's  real estate market this is probably worth low to mid $30's and there is no net debt so if the real estate market takes a turn I'm not going to lose my shirt" (and have excess capital and low leverage in the hands of a good team/dealmaker). There are sexier and more complex stories out there but this works for me. Could it be cheaper? yes.

 

I trust the capital allocators at the helm to issue stock or converts if the stock gets too expensive and I trust them to buy back stock if it gets too cheap (which they've demonstrated they are willing  and capable of doing), so I'll probably be less enthusiastic about selling as it approaches fair value than I normally would be.

[thepupil]

Equity Commonwealth has decided to put Centre Square up for sale in what could be one of the largest deals to hit the downtown office market this year.

 

The 1.8-million-square-foot office complex could sell for as much as $350 million to $400 million, according to sources familiar with the matter.

 

Centre Square is comprised of an east and west office tower.

 

Centre Square is comprised of an east and west office tower.

   

Transactions at the upper echelon seldom happen in Philadelphia though they aren’t unheard of. For example, Brandywine Realty Trust in 2013 bought One and Two Commerce Square in Center City for $331.8 million, or $175 a square foot. In another Brandywine deal, the real estate investment trust is set to sell the former and redeveloped Post Office building across from 30th Street Station for $354 million. In 2014, Comcast Corp. reportedly paid upwards of $600 million for a significant interest in its 58-story, 1.25 million-square-foot headquarters.

 

This is one of four office properties Equity Commonwealth owns in Center City. The Chicago real estate company also owns 1525 Locust, which it put up for sale in November, as well as Mellon Bank Center and 1600 Market St. It's expected once Mellon Bank is fully leased up, it, too, will be put up for sale.

 

The Chicago company has launched a program to sell assets it owns across the country and is targeting $2 billion to $3 billion in sales over the next couple of years.

 

Centre Square is fully leased to a bevy of tenants including the University of Pennsylvania Health System, Radian Group Inc., Public Health Management Corp. and Obermayer Rebman Maxwell & Hippel, among others. It has a parking garage, has direct access to the subway concourse and is in the heart of the Central Business District. It is being marketed by Robert Fahey of CBRE Inc.

 

1500 Market reportedly up far sale; this is one of EQC's most important  buildings; the largest by square feet, 7.5% of gross book value, 2nd to 600 West Chicago in terms of annualized rental revenue. $290MM of gross book, $350-$400MM would be great. At $375MM that would be 1.3X gross book.

 

Since the 19% Philly concentration has been a minor concern for me, I view this positively.

 

 

[CorpRaider]

Under K on leasehold interest in 111 River Street in Hoboken for $235MM.  Were they carrying that at $114MM net (136MM gross)?  Like $12MM in annual rents. 

 

http://ir.eqcre.com/file.aspx?IID=102958&FID=34022175

 

[thepupil]

correct on the carrying amounts.

 

annual rents are $23MM, estimated $13MM of NOI at the company wide NOI margin, which would make this about a 5% cap rate (maybe NOI is actually higher and it is a higher cap rate, but whatever it is, this feels like a very nice price at 172% of gross book. 

 

Sell at > gross book and low cap rates, retire higher cost debt and buy back stock at about 1X gross book, upgrade portfolio quality over time, be ready for distress w/ a war chest of cash and no net debt. Simple formula. Surprised stock isn't a little higher, though the corporate s,g,and a is a little high.

 

 

[CorpRaider]

Positive hit from Englander on Barrons website today as well (basically just quoting an analyst who says the NAV is $33). 

 

You know I think I would pay some premium to book even if they reduced this to 100% cash if they maintained the equity legacy management team and the infrastructure to scale back up again when the graves are ripe for dancing.

[thepupil]

http://seekingalpha.com/pr/16588838-equity-commonwealth-completes-416_9-million-midwest-portfolio-sale

 

Sold another ~$400mm proceeds of buildings. The properties had $484mm of gross book value so this will gross equity (before depreciation).

 

As of now you have about $2.4B of essentially unencumbered cash and ~$1.4B of equity (using gross book) in 50% levered properties and a $3.9B market cap.

 

It's no longer discounted significantly, and is becoming more and more of a cash box for future distressed opportunities.

 

I've trimmed back and hold a small position.

 

 

[thepupil]

New presentation out showing all the progress they've made over the years and how much excess capital they have.

 

http://ir.eqcre.com/Cache/1500091187.PDF?Y=&O=PDF&D=&fid=1500091187&T=&iid=102958

[thepupil]

quick update on EQC. EQC continues to liquidate and build a war chest.

 

Q2 cash was $1.967B + $0.278B of marketable securities* = $2.24b of liquid as of Q2 end

 

+ they sold 1500 market (their 2nd biggest building) for $326mm after quarter end

- $250mm of debt pay off after quarter end

 

$2.3B of cash and securities

 

123mm shares @ 31.5 = $3.8+$0.1B preferred

 

so for $3.9B you get $2.3B of cash/securities  and $1.45B of 37% LTV levered real estate ($2.3B gross book - $850mm remaining of debt).

 

In per share terms it's

$18.8 per share of cash

$11.8 per share of levered real estate

$30.6 per share

 

the $11.8 per share of levered real estate generates 0.88 per share in annualized FFO = 7.4% FFO yield. However, due to heightened re-investment and re-leasing costs in the properties there is not much free cash being generated.

 

this is an incredibly boring stock that is more or less fairly valued that is likely to underperform to the upside given the cash anchor, but should be on people's radar for the following reasons

 

1) absolute fortress balance sheet / cash in Zell/Equity's hands optionality

2) see number 1, makes it super easy to buy on the dips because a small move in stock price really cheapens the implied price paid for the real estate.

 

*this is interesting, it could be nothing and just cash plus stuff or it could be stock of a potential acquiree

[CorpRaider]

Thanks for sharing your thoughts, I was right at $30 when I was assing around with the figures post release.  Also noted zero buybacks during quarter despite upped authorization and obviously cash lying around.  Seems like they have been buyers around $28 if memory serves.  I was trying to look at the EV per remaining 11.5MM S.F. just as a sort of touchstone in case they decide to liquidate, which it sounds like they might.  Seemed kind of high to me, but the I realized I have no idea what is reasonable for the remaining properties, which seem to be getting fairly high grade/trophy-ish.

 

I did like the 10-K which I read a month or so back.  The discussion of buying good assets in good markets below replacement value seemed really logical, especially if you know you are good at managing/leasing.

[TBW]

I took a closer look at this.  Really interesting situation.  I just read the book about Sam Zell 'Am I being too Subtle'.  Its a decent read.  EQC is doing exactly what Zell preaches in the book and what he did in the 80s.  Sell and wait to buy below replacement costs.

 

I, like thepupil, don't know what price you are suppose to pay for something like this.  Management costs are 37.5mil per year, roughly 1%.  Combine that with a time value of money discount and it's hard to see the value here.  If we hit a risk off mkt I would think this goes lower given those two factors.

 

At some point this could be a fantastic buy, but not sure I would pay more than mid to low 20s for it now.  Interesting one to follow.

[thepupil]

All of our marketable securities are classified as available-for-sale and consist of United States Treasury notes, which mature in 2019, and common stock.

 

That's the most interesting part of the q. There were no repurchases this q so that means EQC bought another company's stock...I think.