EQC - Equity Commonwealth

[CorpRaider]

Hey man.  My bad, it looks like its a different one than the one I was talking about (July 8 was the one I referenced).  I was mistaken it wasn't via Stern was some post grad leadership seminar thing. 

 

Sorry, I tweeted out the link, so I forgot to come back here and post it.  Here it is:

 

https://youtu.be/120xupZUHGE 

 

He probably said much the same thing in the Stern talk. He repeatedly a lot of the same stuff when he was on Bloomberg the last few (during covid) times. 

 

Basically:  Highly uncertain what this will do to CRE classes, but fading the "savants" most extreme takes about new reality (sounded like he was referring to that Land and Buildings guy to me); unlikely he would do retail; still likes cities; buys deals not sectors; CRE market kind of frozen, sellers often anchor on prior prices and delay reckoning as much as possible; thinks banks will start forcing some transactions in fall/winter; but this question about REITs was a little new.  Said cheaper than private RE; kind of attractive, but didn't sound like he was ready to start dancing.  Oh yeah I think he said he thought they would likely deploy EQC capital in fall-winter when prices thaw/reflect more reality.

[thepupil]

Re-opening this (in parents IRA*) as it drifts to $30 and below. Will get 10-12% back in special divvy before YE. Think the crisis may serve up a deal, or it may drift back into high $20’s in which case it’s just a super safe 85-90 cent dollar.

 

*value destructive to own in taxable given large taxable distribution coming

[CorpRaider]

Haha, that's exactly where I have most of it:  "grandma's" IRA.  I've convinced myself it is a bit of a hedge for some of my other office REITs, in that the option value of the cash + platform increase as the cap rates for likely acquisitions rise.  Got a very lil bit in my HSA too. 

[oscarazocar]

Re-opening this (in parents IRA*) as it drifts to $30 and below. Will get 10-12% back in special divvy before YE. Think the crisis may serve up a deal, or it may drift back into high $20’s in which case it’s just a super safe 85-90 cent dollar.

 

*value destructive to own in taxable given large taxable distribution coming

 

Why is it value destructive to own this before a large taxable distribution?

[KJP]

Re-opening this (in parents IRA*) as it drifts to $30 and below. Will get 10-12% back in special divvy before YE. Think the crisis may serve up a deal, or it may drift back into high $20’s in which case it’s just a super safe 85-90 cent dollar.

 

*value destructive to own in taxable given large taxable distribution coming

 

Why is it value destructive to own this before a large taxable distribution?

 

What percentage of the NAV discount at your purchase price will be taken by the tax man as a result of taxes owed on the taxable distribution? 

[thepupil]

they are distributing a $440mm taxable gain (less whatever they can offset it with), let's just call it $3.00 / share.

 

if you hold in an IRA, that's worth $3.00 / share.

 

if you hold it in a taxable account that's worth $3.00*(1-tax rate on dividends*). there's no "return of captital" or decrease in basis component to this, at least there wasn't on last year's big divvy.

 

EQC is worth more to a tax exempt owner, than a taxable owner (as with any pass through entity that distributes taxable income), but particularly so given the big distributions and that they are return of NAV rather than a return on NAV.

 

if you manage a portfolio with different types of taxable and tax deferred accounts, you put the short duration special situations and things with big distro's in the tax deferred accounts.

 

*even worse if you pay state income tax!

 

KJP: this isn't so much a discount to NAV story (though I am more comfy owning it at discounts). it is a "buy a pile of cash at / slightly below NAV in order to get long the Zell deal option" story. Or a "sell 5-10% higher on sentiment in a month or less since this is oddly volatile for a cash pile" story.

[oscarazocar]

Isn't the $3 taxable dividend offset by a capital loss of the same amount, all else equal?  I realize there is a time-shifting issue there for LT holders, but it seems to me no net value destruction.

[bizaro86]

It just has a branding problem. What would they trade at if it was a Sam Zell SPAC and they distributed a 1/2 warrant to every common share?

[CorpRaider]

Isn't the $3 taxable dividend offset by a capital loss of the same amount, all else equal?  I realize there is a time-shifting issue there for LT holders, but it seems to me no net value destruction.

 

You're right, it's not destroyed, a portion is transmuted into F-35s and riot gear.

 

LOL Bizarro.  I was a little put off by the new SPAC, but saw it's focused outside RE (and finance?).  I don't think he has done so well outside of RE...has he? 

[thepupil]

Isn't the $3 taxable dividend offset by a capital loss of the same amount, all else equal?  I realize there is a time-shifting issue there for LT holders, but it seems to me no net value destruction.

 

I had not thought about it like this.

 

i think my overall point stands (short duration / capital return / potential flips/trades go in the IRA), but I admit the tI hadn't thought about it like that.

 

you are saying the dividend reduces the overall value of the REIT and hence your eventual sale price, so you'll get $3 less in stock px when you sell and that will reduce your gain/increase your loss by $3, right?

 

[oscarazocar]

Correct.

 

There is an obvious arbitrage here where if the capital gains rate is higher than the dividend rate, one captures a spread by receiving the dividend and then selling the stock to lock in the short-term capital loss.  The qualified dividends rules exist to close that loophole, and mandate that to receive the qualified dividends tax rate, one has to hold the stock for 61 days in a 121 day period around the ex-dividend date.

[thepupil]

 

 

Equity Commonwealth Declares Special Cash Distribution of $3.50 Per Common Share

Business Wire

CHICAGO -- September 16, 2020

Equity Commonwealth (NYSE: EQC) announced today that its Board of Trustees has declared a special, one-time cash distribution of $3.50 per common share which will be paid on October 20, 2020 to shareholders of record on October 1, 2020.

The company currently expects the tax character of the 2020 special cash distribution to be largely capital gain. The company cannot provide any assurances that its current expectations will prove to be accurate. The actual tax characterization will be based on the company’s results of operations for the full year 2020. The company currently expects to announce the tax characterization of the 2020 distribution with its normal tax reporting in January 2021.

[thepupil]

down 4% since re-entering (maybe people don't like the new chairwoman or think it signals a deal isn't near?).

 

as recent VIC pitch notes, $29 = cash + remaining real estate at a 10 cap, $30 = cash + remaining at an 8.5 cap.

 

since it sold off by 4% and we now know that $3.50 (11.5% of market cap) will be returned, I would say downside has decreased.

 

Zell SPAC w/ no warrant dilution/founder's shares, with a multi-billion pile of cash.

 

downsides: not a SPAC in that no deal approval required, downside is not truly floored at NAV. unlimited time/will just sit and pay G&A unless they do a deal.

 

if you think there will be interesting opportunities in real estate, but want to outsource to Sam and Equity Group, this seems like very low downside optionality.

 

buying more.

 

[BG2008]

down 4% since re-entering (maybe people don't like the new chairwoman or think it signals a deal isn't near?).

 

as recent VIC pitch notes, $29 = cash + remaining real estate at a 10 cap, $30 = cash + remaining at an 8.5 cap.

 

since it sold off by 4% and we now know that $3.50 (11.5% of market cap) will be returned, I would say downside has decreased.

 

Zell SPAC w/ no warrant dilution/founder's shares, with a multi-billion pile of cash.

 

downsides: not a SPAC in that no deal approval required, downside is not truly floored at NAV. unlimited time/will just sit and pay G&A unless they do a deal.

 

if you think there will be interesting opportunities in real estate, but want to outsource to Sam and Equity Group, this seems like very low downside optionality.

 

buying more.

 

Equity Commonwealth Should be renamed "Zell Special Purpose Acquisition Corporation" and buy JGB Smith and rename it the "Amazon Real Asset Growth Hacking Vehicle (technically not lying and more sincere than towing a truck prototype up a hill)" 

 

70% pop guaranteed!

 

 

[merkhet]

down 4% since re-entering (maybe people don't like the new chairwoman or think it signals a deal isn't near?).

 

as recent VIC pitch notes, $29 = cash + remaining real estate at a 10 cap, $30 = cash + remaining at an 8.5 cap.

 

since it sold off by 4% and we now know that $3.50 (11.5% of market cap) will be returned, I would say downside has decreased.

 

Zell SPAC w/ no warrant dilution/founder's shares, with a multi-billion pile of cash.

 

downsides: not a SPAC in that no deal approval required, downside is not truly floored at NAV. unlimited time/will just sit and pay G&A unless they do a deal.

 

if you think there will be interesting opportunities in real estate, but want to outsource to Sam and Equity Group, this seems like very low downside optionality.

 

buying more.

 

Equity Commonwealth Should be renamed "Zell Special Purpose Acquisition Corporation" and buy JGB Smith and rename it the "Amazon Real Asset Growth Hacking Vehicle (technically not lying and more sincere than towing a truck prototype up a hill)" 

 

70% pop guaranteed!

 

LOL

[CorpRaider]

~$24.66 in cash per diluted share OS after distribution.

[shamelesscloner]

Here is a gem-packed interview with Sam Zell recorded on December 7, 2020 and he speaks briefly about EQC: https://www.realvision.com/the-great-wisdom-of-sam-zell

[unics]

Here is a gem-packed interview with Sam Zell recorded on December 7, 2020 and he speaks briefly about EQC: https://www.realvision.com/the-great-wisdom-of-sam-zell

 

Thanks for sharing this - for those wondering he specifically talks about EQC starting from 20:28 (recommended to start at 18:00 for context).

It's blatantly obvious that when someone buys a share - they are betting on Sam Zell snapping up delicious deals with his war chest of ~3 billion in cash.

 

A 30,000ft view of his view on office space / corporate travel is that he believes that face-to-face human interaction cannot be replaced with technology, or Zoom and phone calls specifically. For example, he mentions that people are going to have an easier time doing business in person, whether that is closing deals or judging the value of employees, than over Zoom.

 

Really great talk and as shamelesscloner mentions - packed with good insights.

[CorpRaider]

I liked this one a lot because even moreso than in many other talks he was really like "hey look bro, I buy under managed real estate well below replacement cost and try to sell it if it gets way above that, but we can talk about my views on reserve currency, or inflation, or EVs or whatever."

[Viking]

Here is a gem-packed interview with Sam Zell recorded on December 7, 2020 and he speaks briefly about EQC: https://www.realvision.com/the-great-wisdom-of-sam-zell

 

Yes, that is a rock star interview. Thanks for posting. So many great investing and life lessons:

- explaining of how and why his family got out of Poland just before Nazi invasion

- also explaining why other Jewish families did not (including in his immediate family despite the urging of his father)

- the importance of looking and planning ahead

- the importance of failure to success

- big fan of immigration and value it brings US

- the most money is made when everyone else disagrees with you (but you better make sure you are right)

- his success early was because he did not know he could not do the things he actually did (absence of ‘you can’t do this’ and ‘you can’t do that’). As a young guy he just went out and did it (Nike poster boy :-)

[shamelesscloner]

I'm confused about why there's not more "SuperInvestor" interest in EQC... none of the investors covered by Dataroma own it. Thoughts?

[valueinvestor]

Seems like the American real estate version of Knight Therapeutics - when clients require year-over-year performance, it's hard for anyone to purchase. Additionally, it's not the large investors can purchase $1B of these shares, as $1B barely moves the needle.

[thepupil]

there's a gajillion dollars of dry powder looking to buy distressed real estate. easy bear case to contemplate that he doesn't get a deal done and this is just a cash pile w/ some g&A, and it doesn't have the same duration limits of a SPAC so you don't know how long you gotta wait.

 

it's an IRR/relative performance killer.

[valueinvestor]

That's true - and that's how "time" arbitragers win versus money managers. However, when a company issues a special dividend - they are not looking to make a deal in the near future. Also I think they're are not going to buy a $3B property but rather a portfolio, hence there's time to purchase after the news. Especially with Sam Zell, the properties he purchased seem to have oil/gold underneath them which rerates the property.

 

EDIT: Oil/Gold refers to Value-Add. Comes with the network he built with the scale of Equity Office Properties.

[Broeb22]

Is there not some time after he starts purchasing real estate to get involved in this?