Equity Commonwealth (EQC +0.00%) has spent the past several years selling off real estate, paring down its portfolio to a strong core from which it can expand in the future. It continued those efforts in the third quarter, dropping its property count to just 11. While this strategy continues to cut into its cash flow, the company has built up a gigantic cash war chest -- some of which it recently sent back to investors -- giving it ample funds to make a deal when the right one comes along.
Equity Commonwealth results: The raw numbers
|
Metric |
Q3 2018 |
Q3 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Normalized FFO |
$21.6 million |
$24.0 million |
(10%) |
|
Normalized FFO per share |
$0.18 |
$0.19 |
(5.3%) |
Data source: Equity Commonwealth. FFO = Funds from operations.
What happened with Equity Commonwealth this quarter?
Equity Commonwealth sold a few more properties during the quarter:
- Equity Commonwealth ended the third quarter with 11 properties consisting of 5.4 million square feet. That's down from 20 in the year-ago period. Those property sales reduced its normalized FFO by $0.15 per share year over year. However, the company was able to offset nearly all of that lost income. It did so by generating $0.06 per share of interest from the cash on its balance sheet, saving $0.05 per share in interest expenses by paying down debt, boosting earnings on its retained properties by $0.02 per share by signing higher-rate leases, and saving $0.01 per share by cutting general and administrative expenses.
- The company's retained portfolio was 94% leased at the end of the quarter, which was up from 91.1% in the year-ago period.
- Equity Commonwealth signed leases totaling 563,000 square feet during the quarter at rates that were 11% higher compared to the prior ones on the same space.
- The company completed two property sales during the quarter for $170.5 million. Meanwhile, it has four more in various stages of the sales process.
- Equity Commonwealth made a one-time cash distribution of $2.50 per share to investors in October. The company had $2.6 billion in cash remaining on its balance sheet against just $280 million in debt after adjusting for that distribution.
Image source: Getty Images.
What management had to say
CEO David Helfand commented on the company's results during the accompanying conference call, stating that,
Overall results were strong in the third quarter. Leasing volume was robust and included a 429,000 square foot lease with Amazon at one of our assets in Bellevue. The lease with Amazon creates significant value while also mitigating risk. We also filled our largest vacancy at 1735 Market in Philadelphia with a 97,000 square foot lease to a financial services firm stabilizing the asset at 91% occupancy. Leased occupancy for the portfolio is up 220 basis points versus last quarter and same property cash NOI (net operating income) grew 9.1%.
One leg of Equity Commonwealth's strategy to maximize the value of its real estate assets has been to secure tenants for the available space in its properties. The company made excellent progress on that initiative during the third quarter by not only signing the lease with Amazon but filling another large vacancy. Those actions will enable the company to boost the income earned at its retained properties.
Another benefit of leasing up its properties is that it increases their value. Helfand noted on the call that the company sold two properties during the quarter, including one that was 96% leased. He further pointed out that, that "the EQC team leased over 400,000 square feet in the 18 months preceding the sale of the asset, creating significant value."
Looking forward
Equity Commonwealth ended the quarter with $2.6 billion in cash that it hopes to eventually redeploy into acquiring new properties. However, while Helfand noted that the company "continue[s] to focus on identifying attractive opportunities to deploy capital. In our view pricing remains elevated and the current pricing environment for high-quality assets does not lend itself to achieving superior returns." Though, he did say that, "In an increasing rate environment, there may be more opportunities. We have a long-term investment perspective and believe that if we are patient, we'll find compelling opportunities to invest."
