When famed real estate investor Sam Zell and his team took over management of Equity Commonwealth (NYSE:EQC) last year, they promised to shake things up. That shake-up is beginning to take shape, as details of the progress were evident in the company's first-quarter results, which were delivered after the closing bell on Wednesday. The REIT not only grew its cash flow but also provided details on the progress being made on its plan to unload assets that just don't fit within its portfolio.
A look at the numbers
Equity Commonwealth reported funds from operations, which is REIT-speak for earnings, of $65.4 million, or $0.50 per share. That was about $5 million higher than last year; however, it was a penny less per share as there are more shares outstanding this year. That said, Equity Commonwealth had a few items that weren't comparable with last year, which it believes obscures its operating performance. By normalizing its FFO, Equity Commonwealth's year-over-year showing was a bit stronger. Its normalized FFO was $72 million, or $0.56 per share, which was well above the $61 million, or $0.51 per share, in normalized FFO its produced in the year ago quarter.
Driving this growth was a 2.5% increase in same property cash net operating income, which rose because of lower operating expenses resulting from property tax refunds. This helped overcome a bit of weakness in same property occupancy, which dropped from 86.9% leased to 85.9% leased.
The more important news in the quarter was the progress the company is making as part of its portfolio transformation. During the quarter it sold three buildings, which consisted of 167,000 square feet. The sale brought in $21.2 million in gross proceeds, which resulted in a gain on the sale of $5.9 million. These sales, however, are only the beginning.
The transformation continues
As of the end of the first quarter, Equity Commonwealth's portfolio consisted of 154 properties across 42.8 million square feet. However, subsequent to the quarter's end it entered into a series of transactions to sell 52 properties representing 8 million square feet. It anticipates that these sales will bring in $750 million in gross proceeds when the deals close over the next two quarters. In addition to these sales, the company has another 32 properties on the market, representing over 9 million square feet. These dispositions are part of the company's plans to sell $2 billion to $3 billion of assets through 2017. Given the progress so far, the company appears to be well on its way to meeting this goal.
With that cash, Equity plans to strengthen its balance sheet so that it can take advantage of opportunities within the marketplace to acquire compelling assets. To that end, the company plans to redeem $138.9 million of unsecured notes that were due this coming November. It also entered into a $1.15 billion credit agreement, which reduced the interest rate and extended the term of its credit facility and term loan. By firming up its credit, Equity has plenty of dry powder to acquire properties that would fit within its core portfolio.
As far as quarterly results go, Equity Commonwealth's were fine. It's starting to make some progress on improving the performance of its properties. However, the real story here is the turnaround plan, as the company appears to be making solid progress toward its goal of selling several billion dollars' worth of assets over the next few years. That plan is intended to divest the least compelling properties and replace those over time with properties that offer more potential for income growth, while also bolstering its balance sheet and improving the operations of its core properties. It's a plan the new management team expects will create shareholder value over the long term.