Equity Commonwealth Continues to Slim Down

Image source: Equity Commonwealth.

It seems like the more Equity Commonwealth's (EQC 0.68%) management team looks through the company's portfolio, the fewer assets it wants to keep. After initially targeting to sell around $3 billion in assets, it has now jettisoned $4.1 billion in assets and have another dozen more up for sale. As a result, its portfolio is down to a fraction of what it was, which has provided a growing war chest of cash to deploy when the right opportunities come along.

Equity Commonwealth results: The raw numbers

 FFO = Funds from operations. YOY = year over year. Data source: Equity Commonwealth.

What happened with Equity Commonwealth this quarter? 

Equity Commonwealth's earnings are falling along with its asset base:

• The sole driver of the year-over-year decline in normalized FFO was the loss of income from properties sold over the past year. Overall, those sales chipped $0.19 per share from the bottom line. The company counteracted some of that decline by repurchasing its Series E preferred shares and paying down debt, which positively impacted normalized FFO by $0.04 per share and $0.03 per share, respectively.
• During the quarter, the company sold another 11 properties for $663.7 million, bringing its portfolio down to just 38 properties at the end of the quarter. Further, it had one additional property held for sale at the end of the quarter, which closed shortly after that.
• Occupancy in the retained portfolio was 91.2% as of the end of the quarter, which was down from 91.3% in June and 92.5% in the year-ago quarter.
• Equity Commonwealth ended the quarter with $2.4 billion of cash against just $1.6 billion of debt. 

What management had to say 

As Equity Commonwealth's management team wrote in the earnings release:

The company continues to pursue its previously announced plan to reposition its portfolio through active asset management and dispositions. Year-to-date, through November 2, 2016, the company has sold $1.2 billion of properties at a weighted average cap rate in the high 6% range. Since the change in management in 2014, the company has sold $4.1 billion of assets. Proceeds generated from these sales are creating capacity for future opportunities.

One thing worth noting about Equity Commonwealth's divestiture program is that it is selling in a robust market. Real estate partnership Brookfield Property Partners (BPY) pointed out in its second-quarter unitholder letter that it saw "strong pricing in private markets" for stable real estate assets. Because of that, Brookfield Property Partners has been taking advantage of the market to sell assets at attractive prices, which gives it proceeds to redeploy in higher-returning investments. In fact, after initially aiming to sell between $1 billion and $2 billion of assets this year, Brookfield Property Partners is on track to sell $2 billion of assets by year-end, with plans to monetize even more assets in 2017.

Looking forward 

Likewise, Equity Commonwealth has additional asset sales in the pipeline, with 12 properties currently in various stages of the process. Meanwhile, it continues to strengthen its balance sheet with the proceeds from asset sales and recently called for the redemption of its June 2017 6.25% unsecured notes. Furthermore, it is evaluating all options for redeploying capital including acquisitions, share repurchases, debt repayment, and distributions.