Equity Commonwealth (EQC +0.00%) reported its second-quarter results after the closing bell on Wednesday. The office REIT's results were significantly affected by property sales as the company's new management team continues to clean out the portfolio. So far they've sold $1.5 billion in properties, which is roughly halfway to management's goal to sell $2 billion to $3 billion in assets through 2017.
A look at the numbers
Equity Commonwealth reported funds from operations, or FFO, of $77.2 million, or $0.59 per share. That was much less than last year's second quarter when the company's FFO tallied $87.1 million or $0.70 per share.
That being said, the company also likes to report normalized FFO, which strips out certain items that aren't comparable from period to period, giving a more apples-to-apples comparison. For the second quarter Normalized FFO was $67.8 million, or $0.52 per share, which was still below the year-ago period of $81.3 million, or $0.66 per share.
While Normalized FFO didn't do the company any favors this quarter, its results in the second quarter were also affected by the following four items:
- Negative $0.13 per share from properties sold.
- Negative $0.11 per share from the sale of its entire interest in Select Income REIT.
- Positive $0.08 per share from lower interest expense.
- Positive $0.06 per share from lower sales and administrative expenses.
Further, the per share numbers were hurt by a higher share count as the company has almost seven million more shares outstanding year-over-year. Still, no matter how one slices or dices the numbers, the results are down year-over-year as the new management team is shrinking the company so that it can grow from a stronger core.
At the moment that core consists of 86 properties, comprising 29.4 million square feet of space, excluding properties currently held for sale. Those properties are showing some signs of improvement as same property net operating income is up 6.3% from the year-ago quarter. Some of that improvement is coming from better occupancy as the portfolio is 90.6% leased, which is just a tick better than the 90.5% occupancy in the year-ago quarter. The other driver of improving same property net operating income are higher lease rates as GAAP rental rates for new and renewal lease are 5.4% higher than the prior rates for the same space.
A look at the outlook
As mentioned, Equity Commonwealth's strategic plan is to sell $2 to $3 billion in assets though the end of 2017, which will give the company ample capacity to invest in better opportunities. During the second quarter, Equity made very good progress on the plan as it unloaded 65 properties encompassing 10.3 million square feet for a gross sales price of $1.1 billion. In addition to that, the company closed the sale of another property for $376 million after the quarter ended. This brings its total sales up to $1.5 billion.
Looking ahead, the company currently has 22 more properties in various stages of marketing for sale, totaling another 5.5 million square feet. There will more than likely be additional sales after these properties close as Equity continues to whittle down its portfolio to hold only its best performing properties.
Investor takeaway
Equity Commonwealth is still a company very much in transition. This is pulling the company's results down in the short-term as it focuses on trimming down its portfolio and strengthening its core. That said, it made solid progress towards its disposition goal during the quarter as it sold a big chunk of its portfolio.
