Since 2014 Equity Commonwealth (EQC -0.05%) has been in the long process of starting anew. The company, which originally went public in the late 1980s as CommonWealth REIT, specialized in the ownership and management of commercial office space. However, in 2014 the company was taken over by billionaire Sam Zell, CEO of several other REITs, which ushered in a new era for the company, rebranding the company to Equity Commonwealth and transitioning it into the industrial real estate space.
Some investors see this transitory period as an opportunity to invest before the company takes off in the future, but personally, I see it as a major risk. Here's why I don't plan to ever own shares of Equity Commonwealth REIT.
The future of Equity Commonwealth is on the rocks
A cornerstone of the company's operations over the past several years has been the extinguishment of its existing office portfolio, having sold $7.6 billion worth of assets since 2014. Today, its portfolio comprises just four office buildings in Austin, Texas; Washington D.C.; and Denver. The sale of its assets helped the company amass a sizable sum of cash, roughly $3 billion and zero debt, which it's using to help rebuild its future as an industrial operator.
Image source: Getty Images.
In May 2021, Equity Commonwealth announced its plan to acquire Monmouth Industrial REIT, which would have kick-started the company's entry into the industrial sector, adding 120 existing properties to its portfolio for just over $3.4 billion. However, the deal went south after Starwood Real Estate Income Trust Inc. increased its offer to acquire the company as well, forcing Equity Commonwealth to amend its agreement in an attempt to compete. In August 2021, the deal officially fell through after the acquisition was rejected by Monmouth shareholders, leaving Equity Commonwealth back at square one.
How will Equity grow?
Sam Zell wholeheartedly believes the future of Equity Commonwealth is as an industrial REIT. Long-term drivers including the growth of e-commerce and supply chain issues have created unprecedented demand for the sector. This has been great for existing industrial operators, but it's far more challenging for an operator like Equity Commonwealth to try to enter the industrial space.
After the failed acquisition of Monmouth, Sam is now being tasked with finding a new way to expand into this space. Given his historic management as a distressed investor, it's likely he'll target existing industrial space that would benefit from adding value, although the company could also target vacant land for ground-up development as well. Both of which will be time and cost-intensive, meaning shareholders will have a long run before they can expect to see growth again.
As of the start of 2022, no guidance on the company's plan for expansion into industrial real estate has been released; however, it's likely more guidance will be given in its full-year earnings report, which is set to release February 9, 2022.
Image source: Getty Images.
Long road ahead
Some analysts have compared investing in Equity Commonwealth today to investing in a company at IPO. But I don't think you can compare the two as apples to apples. A company at IPO has a business plan, an existing portfolio, and a model for growth moving forward. Equity Commonwealth has virtually none of those. It has no solid plan as such, just with a huge pile of cash to back its pipedream of owning industrial real estate.
The other companies Sam Zell owns and or manages, including Equity Residential, one of the largest residential REITs today, are doing notably well thanks to his visionary leadership. He very well could make Equity Commonwealth a prominent operator in the industrial space ten to fifteen years from now as hoped, but it's going to be a long and challenging run to get there.
The acquisition of another company is definitely the fastest way to growth, something the company is prioritizing given it's currently operating at a net loss and funds from operations (FFO) was $0.00 as of the third quarter of 2021. But I think growth will take a lot longer than the company and its investors may realize and is precisely why I don't think I'll ever own Equity Commonwealth -- at least not how the company sits today.
