The asset exodus at Equity Commonwealth (NYSE:EQC) continued during the second quarter, after the company closed the sale of three more properties while still having six more on the block. That brought the company's retained portfolio down to just 21 during the quarter, which resulted in another earnings decline.

Equity Commonwealth results: The raw numbers


Q2 2017

Q2 2016

Year-Over-Year Change

Normalized FFO

$27.1 million

$53.6 million


Normalized FFO per share




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

The Philadelphia skyline, with green trees in the foreground and a partly cloudy sky in the background.

Image source: Getty Images.

What happened with Equity Commonwealth this quarter? 

Fewer properties meant lower earnings:

  • Equity Commonwealth's FFO dropped because the company continues jettisoning properties from its portfolio, which had 45 in the second quarter of last year. The 50%-plus drop in its property count over the past year knocked $0.31 per share off FFO during the second quarter versus the same period of last year. In addition, the company experienced a $0.03-per-share decrease in earnings because of a 7.5% drop in same-property net operating income as a result of lower same-property occupancy. Overall, occupancy fell from 90.2% in the year-ago quarter to 88.4% in the second quarter, though it's up from 88.2% last quarter.
  • The company partially offset the lost income from its property sales by allocating some of the cash proceeds to pay down debt and redeem its preferred stock. Overall, interest expense savings added $0.05 per share to FFO, while the repurchase of preferred stock added another $0.04 per share. Meanwhile, the nearly $2 billion of cash on its balance sheet generated $0.03 per share in interest income during the quarter.
  • The company leased 448,000 square feet of space in the quarter, including 252,000 square feet of renewals and 196,000 square feet of new leases. The rental rates on these contracts were 10.7% higher on a cash basis than prior rates were on that same space.
  • The company closed three sales during the quarter, totaling 871,000 square feet of leasable space, for $98.5 million. 
  • Meanwhile, after the quarter ended, the company closed the $328 million sale of Centre Square, which is a 91.2% leased office property in Philadelphia. Further, the company redeemed its $250 million 6.65% senior unsecured notes that were due next year. Finally, in addition to the five remaining properties currently held for sale, the company has four more in various stages of the sales process. If it completes all these sales, its retained portfolio will be down to just 17 properties.

What management had to say 

Speaking on the conference call, CEO David Helfand said:

We ended the second quarter with a 21-property, 11.7 million-square-foot portfolio, which excludes six properties held for sale. The success of our disposition efforts has resulted in significantly better portfolio with high-quality assets in good markets. The portfolio today is more concentrated, with our 10 largest properties contributing 74% of revenue. Leasing activity during the quarter was healthy. We signed 196,000 square feet of new leases and 252,000 square feet of renewals. In terms of dispositions, we closed on the sale of three properties in the quarter and one subsequent to quarter end, [and] asset sales totaled $540 million year to date. 

As Hefland notes, the company continues to shape the portfolio around its best properties in the top markets. As part of that process, it still has a few properties in various stages of the sales process. Once it has whittled down its portfolio to a strong core, it will have a more robust platform from which to expand. 

Looking forward 

Helfand provided some color on what to expect from the company in the future: 

Our goal has been to aggressively lease and operate our properties to take advantage of a robust investment sales market that values office assets at record-low cap rates. Our portfolio repositioning is intended to narrow the discount in the trading value of EQC shares and the market value of our assets and position the company with ample liquidity should an opportunity rise where we can invest capital to create long-term value. As we've said, we have no intention of running a subscale business that has no reason to be. That said, there is still much to be done to realize the substantial value in our portfolio and at the same time explore growth opportunities. We are keenly focused on both efforts.

In other words, investors should expect the company to continue its plan to add value by subtracting properties until a compelling acquisition opportunity comes its way.  

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