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Equity Commonwealth Continues to Slowly Empty Out Its Portfolio

Matthew DiLallo, The Motley Fool

Equity Commonwealth (NYSE: EQC) maintained its multiyear strategy of monetizing its commercial real estate portfolio during the first quarter. The REIT closed the sale of another property and made progress on two more sales. If those close, the company will be down to just seven properties.

While the company continued its hunt for value-enhancing opportunities, it's allocating the cash from real estate sales to bolster shareholder value as it waits for the right one to emerge.

Equity Commonwealth results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Normalized FFO

$23.1 million

$17.5 million

32%

Normalized FFO per share

$0.19

$0.14

35.7%

Data source: Equity Commonwealth. FFO = Funds from operations.

What happened with Equity Commonwealth this quarter?

Smart capital allocation is boosting results:

  • Equity Commonwealth sold another property during the first quarter, bringing its retained portfolio to nine, which had 3.8 million square feet of rentable space. That's down from 13 in the year-ago period. Those sales reduced the company's normalized FFO by $0.07 per share compared to the prior-year period. However, Equity Commonwealth more than offset that lost income by putting its cash to work. The company paid off debt, which saved it $0.05 per share in interest expenses. In addition to that, it invested some of the proceeds into income-generating assets, which provided an additional $0.06 per share of interest income.
  • The company's nine retained properties performed well during the quarter. They were 94.4% leased, which was an improvement from 92.3% in the year-ago period. The company not only increased occupancy, but also signed new and renewal leases for rates 8% higher than the previous leases on the same space. Those two factors helped boost the net operating income (NOI) from these properties by 9.7% year over year.
  • The company signed leases totaling 108,000 square feet during the quarter, including 95,000 square feet of new agreements and 13,000 square feet of renewals.
  • Equity Commonwealth completed one property sale during the quarter, for $435.4 million of total proceeds. The company sold another building shortly after the quarter ended for $195 million. It had one more up for sale, which had 1.1 million square feet of rentable space.
  • The company is planning to return more of the cash proceeds from asset sales to investors by authorizing a $150 million share-repurchase program.
Two people shaking hands with a skyline of office building in the background.

Image source: Getty Images.

What management had to say

CEO David Helfand commented on the quarter during the accompanying conference call:

We had a solid first quarter. The same-property cash NOI was up 9.7%. We also completed the sale of our last asset in downtown Philadelphia, 1735 Market Street, for a gross sales price of $451.6 million. Pricing was in the 6% cap rate range. Subsequent to quarter-end, we closed on the sale of Bellevue Corporate Plaza, a 97%-leased 255,000 square foot office building, as well as additional development rights, for a gross sale price of $195 million. In addition, we continue to work on the sale of Research Park in Austin, a 1.1 million-square-foot flex property on 188 acres of land. As mentioned previously, we are evaluating the sale of Tower 333 in Bellevue, Washington, and the Green [and] Harris buildings in Washington, D.C. Since we took responsibility [for] the company, we sold 160 assets for $6.7 billion in 66 transactions. In doing so, we've created optionality due to the conversion of an undervalued portfolio of assets to cash.

Equity Commonwealth continued its strategy of working to maximize the value of its real estate portfolio. It has taken a two-pronged approach by leasing up available space to increase the income generated by its assets, and then unlocking the value created by selling the properties.

Looking forward

Equity Commonwealth is still waiting for the right opportunity to put its financial flexibility to work. Helfand noted on the conference call: "Our strategy will continue to be informed by market conditions, and we'll be patient and disciplined in our evaluation of a broad range of investment opportunities, including non-office asset classes. With $3.3 billion of cash, we're uniquely positioned to combine our capacity and talent to create long-term value for shareholders."

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Matthew DiLallo owns shares of Equity Commonwealth. The Motley Fool recommends Equity Commonwealth. The Motley Fool has a disclosure policy.