No. of Recommendations: 12
CHICAGO--(BUSINESS WIRE)-- 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 23, 2019 to shareholders of record on October 7, 2019.

The new management at EQC also paid a special dividend of $2.50 in 4Q18. The 1099-DIV classified it as 100% ordinary income.

Hmmmmmm.

I pulled up CF data for EQC going back to 1Q14 when new managment wrested control from RMR. One of the more interesting REIT CF SpreadSheets I've ever done.

Since the takeover in 2014, Zell and Helfand have been systematically selling off properties. From 3Q14 through 2Q19, they've sold $5.2B out of $5.9B in properties, or about 89% of their holdings. The 1099-DIVs have looked interesting for the preferred dividend and 2018 special dividend:

2018: 100% ordinary income
2017: 100% Return of Capital (ROC)
2016: 100% Unrecaptured Sec 1250 (capital gains that represent recaptured depreciation)
2015: 100% ROC
2014: 100% Long Term Capital Gain

Just a guess, but the Oct Sp. dividend will likely be ordinary income and perhaps LTCG.

The chart of Revenue per share shows a steady decline beginning in 2015 as should be expected as rent paying properties are sold off. But CFFO/share over the past 4Q periods, net of preferred dividends, has shown a steady improvement going from $.14/share to $.20/share over past 4Q.

But the huge change is the interest expense. At the end of 3Q15, it was $25.1MM. For 2Q19 it had dropped to $4.1MM, which works out to be an interest to CFFO + Interest ratio of 14.7%, which is very low for a REIT. Clearly, asset sales have been going to debt retirement.

What kind of surprises me is the special dividend announcement looks like it was made after the market close yesterday, and I expected a sharp jump up in the opening share price today, but alas, this has not happened. Current price is about $33.90, up about $.45 or so. I'd guess the market was expecting this special dividend and so already priced it in.

Not sure if a quarterly dividend will be reinstated or they will continue with annual special dividends for the time being. But the trends here look favorable, so I just added 500 shares.

But with this REIT declining to annualized sales of $133.6MM, its quickly becoming a micro-stock. The C&CE at end of 2Q19 was about $3.1B, with about $427MM of that going out as a special dividend next month still leaves this REIT with around $2.7B in cash. Do they plan on redeploying this cash into income producing properties? From the most recent earnings call transcript, Helfand said...

Our strategy will continue to be informed by market conditions, and we will be patient and disciplined in our evaluation of a broad range of investment opportunities including non office asset classes. With $3.2 billion of cash, we’re well positioned to create long-term value for shareholders.

By my back-of-the-napkin calc, EQC has a net of $3,229MM in liquid net assets (net of debt and preferred stock) and with 122MM common shares, that pencils out to $26.44/share. The $7.60 premium, I'd imagine, is the managerial skills of Helfand and Zell, along with the ability to add income assets without issuing more dilutive stock and without adding debt. The current CF metrics certainly look much better and are trending in the right direction.

BruceM
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No. of Recommendations: 8
EQC is increasingly looking like a money market fund to me.

Looking only at the five year/five quarter financial data on Schwab and not the actual more detailed and on rare occasion more accurate SEC data, they are liquidating properties, paying down debt and stacking up cash all at a VERY rapid cash.

In other terms Zell is going to cash.

Looking at Schwab 5 year data, at the end of 2014; EQC had $365 million in cash, $5.7 Billion in properties (gross before accumulated depreciation, $2.2 Billion in debt, and 130 million shares. By the end of 2018 those numbers were $2.4 Billion, $1.1 Billion, $275 million and 122 million shares respectively. By 2Q2019, those numbers were $3.2 Billion, $657 million, $26 million, and 122 million shares.

With $3.2 Billion in cash and $657 in property (gross before depreciation) it seems that investing in EQC is a lot like investing in a money market fund, albeit one with Sam Zell at the helm.

Of course one should expect deleveraging, when done in good times, to dilute earnings, cash flows, FFO/AFFO - take your pick. When they are building up significant cash the effects are generally worse.

To me deleveraging or building up significant cash is a form of market timing. Especially when the deleveraging is done relatively quickly instead of reducing debt instead of paying more ROC in the dividends.

One problem usually is the overhead being supported by less and less properties and rental income. In 2Q2019, EQC's G&A expense was $10 million versus $33 million in rents - that's high. If you add the net interest of $17 million ($4m exp with $21 mil inc.) to the $33 million in rents you get $50 million and reduces the G&A % down a little to 20%, still high and VERY high for what is basically a MMMF. I will have to give them credit though as in 2014 G&A was $113 million and they got it down to $44 million for 2018.

Zell has an excellent reputation as a bargain hunter/buyer at the bottom. I see no need for me to hold EQC waiting for the bottom. I guess it is possible that it could actually rise during the next period of market/economic turmoil, but I think it will more likely drop like everything else. Just probably drop less that is. I will add it to my watch list and wait for the next crash.
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No. of Recommendations: 2
By my back-of-the-napkin calc, EQC has a net of $3,229MM in liquid net assets (net of debt and preferred stock) and with 122MM common shares, that pencils out to $26.44/share. The $7.60 premium, I'd imagine, is the managerial skills of Helfand and Zell, along with the ability to add income assets without issuing more dilutive stock and without adding debt.

Nice analysis, Bruce.

But, the $7.60 premium evaporates if management decides to liquidate, correct?
The liquidation alternative has been a subject that's been mentioned in
previous conference calls.

David
No position
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No. of Recommendations: 1
Liquidation event is a serious concern on this name, especially the management cost basis vs what they were able to harvest so far.
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It does not appear to me that management has decided to liquidate. Could they change their mind later and liquidate? Unlikely based on their statements and Zell's reputation as a buyer during periods of stress in the economy or markets.

I would be more concerned with low returns on the cash coupled with the G&A expense and Pref dividends. The opportunity costs of sitting on that much cash is huge in my opinion.

In 2014, they paid $32 million in preferred dividends, but that was down to $8 million in 2018 and they are on track to pay $8 million in 2019.

Anyone know when they could call those last preferreds?
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No. of Recommendations: 0
It does not appear to me that management has decided to liquidate

IF you are an individual investor, sitting with your cash on sideline waiting for the period of distress may be an acceptable strategy for a given individuals position. However, as an organization, liquidating your assets and sitting on Billions of cash waiting for the market to get into distress doesn't seem like a viable strategy for the company.

At their current rate of liquidation, they will end up with no earning assets and only cash. So does it makes sense to buy $1 for $1.1 or $1.2 because of the name Zell?

Given the recent trend in interest rates, the asset prices are not going to get cheap unless we have a some other external events.
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No. of Recommendations: 1
Anyone know when they could call those last preferreds?

I don't think EQC-D shares are redeemable. However, they are convertible. From the prospectus...

The preferred shares are convertible any time at the holder's option into 1.9231 common shares of HRPT Properties Trust (NYSE: HRP), an initial conversion price of $13.00 per common share (0.4808 shares @$52.00 per share after the 1 for 4 reverse stock split on 7/1/2010). On or after 11/20/2011, if the price of the common stock exceeds 100% of the conversion price for 20 of any 30 consecutive trading days, the company may, at their option, force the preferred shares to be converted into common shares at the then prevailing conversion price.

In 2014, due to the change in management, EQC-D shareholders were given the option of converting their preferred shares into common shares (I kept the preferreds). They also skipped the 2Q14 dividend (alarm bells!!) but then added it to the 3Q14 normal dividend, and its been paid on time every since.

BruceM
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No. of Recommendations: 2
Sam Zell talks about EQC in this youtube video.

https://www.youtube.com/watch?v=ByXdRtIXJbg&t=245s

The discussion about EQC starts about 50 seconds in.
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No. of Recommendations: 0
I picked a small position in my IRA and I will be selling this tomorrow. I thought a bit more, waiting for distress to buy properties may work for individuals but for organizations there is significant leakage in terms of administrative overhead, etc. The income from 6 properties are not going to be able to support the overhead, and the liquidation risk is non-trivial.

Luckily, I could exit the position with 2% gain on my entry price, assuming the price holds on Monday morning :).
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All the reasons you listed are valid reasons, but I would add one more. Its trading at a premium to NAV.

If you like Zell, and I do, there will probably be time to buy EQC at a lower price during the next economic/market downturn.
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No. of Recommendations: 2
I wonder why the convertible preferred is selling above par, given the risk of liquidation.

If Zell is waiting for property prices to come down before he invests the company's capital, it is likely to be a very long wait. I could be wrong, of course, but that's not a bet I would like to make.

Conversion price jumped to $52 after the 1 for 4 stock split. I imagine the special dividends have affected the conversion price in the opposite direction, but not by a huge amount. So, this is a very busted convertible.

prospectus:
https://www.sec.gov/Archives/edgar/data/803649/0001047469060...
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No. of Recommendations: 2
I talked to the EQC investor services person. She said after the most recent common dividend the conversion ratio on EQC-D has been adjusted to 0.5813. Up a bit, but still too low to add value. The conversion value is around $18.49 -- no help to holders of the convertible if the company is liquidated. You'll get just the $25 par value.

I sold. Happy with my years of safe income and my capital gain on this position.
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No. of Recommendations: 0
The EQC-D pricing seems irrational. It essentially is a cash equivalent and I could see it deserves to yield maybe 2% with the 20% Section 199A tax exclusion. It yielding about 5.5% and selling with a 14% premium to par(liquidation value). If you take the 3.5% yield premium that says Mr Market is betting this won't be liquidated for at least 4 years. On the website the property count looks to be 7 left.
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