Equity Commonwealth (EQC 0.32%) has built an enormous cash war chest over several years by steadily selling off its office portfolio. The Sam Zell-led real estate investment trust (REIT) has been searching for the right acquisition opportunity to put that money to work. While the company finally found a target last year, the deal fell apart when that REIT's shareholders voted against the transaction.
The office REIT hasn't given up on its hunt for a deal. That's clear from comments by the management team on the recent first-quarter conference call.
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Sitting on a pile of cash
CEO David Helfand discussed the company's status on the call. He noted that "we have approximately $2.7 billion of cash or more than $24 per share and no debt." It's been returning some of its cash pile to investors over the years.
Helfand noted that Equity Commonwealth repurchased 3 million shares for $77.7 million in the first quarter. That brought its total since 2015 to $517 million. Meanwhile, it has another $198 million on its existing authorization. Equity Commonwealth has also returned cash to investors through special dividends.
More cash could be coming in the door. Helfand noted that the company currently has two properties on the market that could close later this year. It also has another property it could sell in the near term. That would leave it with one remaining property.
That shrinking real estate portfolio is about to become a problem. To continue qualifying as a REIT, it must get 75% of its gross income from real estate-related sources. Helfand stated on the call: "Given the small size of our real estate portfolio, significant cash balance, and rising interest rates, we may need to generate additional qualified income if none of the assets being marketed for sale close this year."
Casting a wide net
One way for the company to address this potential problem is to put its cash to work by acquiring real estate. Helfand stated on the call that, "[W]e continue to pursue a wide range of opportunities, including portfolio purchases and corporate transactions, both private and public." He also noted that, "[W]e're evaluating opportunities in a number of different sectors, including single-family residential, industrial, office, retail, and hospitality."
Helfand further said:
Every deal has a different risk profile, and we remain mindful of needing to get paid for the risk we're taking. Some of the opportunities involve substantial real estate companies that are private, and a deal would mean that EQC is the way they go public. In certain cases, the EQC team would steward the go-forward business. In other cases, the management team of the target business could lead the company going forward.
The differing risk profiles of the property types the company is considering are worth noting. The single-family rental and industrial sectors are currently booming. Rents are surging due to strong demand, which accelerated during the pandemic.
Meanwhile, office, retail, and hospitality are still recovering from the pandemic's impact. Both avenues represent long-term upside plays for Equity Commonwealth if it can find the right deal at the right price.
It's also interesting to note that the company is looking at both public and private portfolios and companies. It had a deal in place to acquire a publicly traded industrial REIT, but its shareholders rejected that $3.4 billion cash and stock deal. Equity Commonwealth is open to going down that path again or wading into the private real estate market.
Given its pristine balance sheet, Equity could make a sizable deal. Helfand stated that without issuing any stock in a transaction, it could buy $4 billion to $5 billion in real estate by using its cash on hand and some modest leverage. That certainly opens the doors for it to make a needle-moving deal, given its current $2.9 billion market cap.
Cash could give it a competitive advantage
Equity Commonwealth has been looking to put its cash to work for quite a while. It's casting a wide net that, along with changing market conditions, might help it find a deal.
Given the recent rise in interest rates, buyers with little debt like Equity Commonwealth will face less competition, especially for larger transactions, than they faced in the past. That could finally enable it to make a deal that gives investors clarity about its long-term direction.
