Image source: Equity Commonwealth.

When Equity Commonwealth's (NYSE:EQC) management team took over the company in 2014, they unveiled a bold plan to shrink the asset base so they could grow the company upon that stronger foundation. The initial plan was to sell around $3 billion in assets; however, after selling $704 million of properties so far this year, the company is well past that goal, with its asset sale total now up to $3.6 billion. Reaching that goal does not mean the company is about to open its checkbook and go on a buying binge. Not only does it still have a few more properties on the market, but management plans to remain disciplined in how it allocates capital to future opportunities.

Equity Commonwealth results: The raw numbers


Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Normalized FFO

$53.6 million

$67.8 million


Normalized FFO Per Share




YOY = year over year. Data source: Equity Commonwealth.

What happened with Equity Commonwealth this quarter? 

Equity Commonwealth's cash flow continues to depart, along with assets:

  • During the quarter, the company sold 13 properties for $291.2 million. Overall, property sales reduced normalized FFO per share by $0.28 from last year's second quarter. Meanwhile, same property net operating income slumped 5.7%, or $0.03 per share, because of a drop in occupancy and rental rates. That said, the company did receive a $0.12 per share benefit from a lease termination fee. Finally, lower interest expenses boosted net operating income by $0.05 per share.
  • Occupancy across the company's 45 remaining properties fell to 90.3% in the quarter, which was down from 90.6% last quarter and 91.3% in the year-ago quarter. Meanwhile, cash rental rates on new and renewal leases were down 3.7% from the previous rates on the same space.
  • The company used recent proceeds from assets sales to redeem all $275 million of its outstanding 7.25% Series E Cumulative Redeemable Preferred Shares.

What management had to say 

The company's management team wrote the following in the earnings release:

[It] continues to pursue its previously announced plan to reposition its portfolio through active asset management and dispositions. Year-to-date, through July 28, 2016, the company has sold $704 million of properties at a weighted average cap rate in the low 6% range. Since the change in management in 2014, the company has sold $3.6 billion of assets. Proceeds generated from these sales are creating capacity for future opportunities. The company currently has 12 properties totaling over 6 million square feet in various stages of the sale process.

As a result of the company's disposition plan, it now has $1.8 billion in cash against just $1.3 billion of senior unsecured debt and $245 million of mortgages. That is less than half the debt the company had on the books when the current management took over -- a veritable war chest of cash. However, that money is not burning a hole in the company's pocket. Instead, management plans to stay disciplined in the near term, evaluating all options for its capital, including acquisitions, share repurchases, debt repayment, and distributions. That said, when the company does start making purchases, it plans to be opportunistic and to do so where it has a track record of success.

Looking forward 

In the meantime, leases representing 23% of annualized rental revenue on its remaining properties are set to expire through 2018. While that is down from 30% at the end of the year, the company needs to continue to work hard to sign new leases to keep its properties occupied. Furthermore, it still has quite a few properties on the market and several additional capital allocation decisions to make, including the option to repay up to $460 million in debt at par this December. Suffice it to say that the company has plenty to do, even as it winds down its disposition program.

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