Equity Commonwealth Earnings Fall While the Portfolio Reshuffle Continues

Well-respected real estate mogul Sam Zell and his team continue to gut Equity Commonwealth's (EQC 0.65%) portfolio in an effort to reposition the company around a strong core. To date the company sold $1.9 billion worth of assets, which is having a notable impact on the company's earnings in the interim.

Equity Commonwealth results: The raw numbers

Data source: Equity Commonwealth. (NOTE: FFO is Funds From Operations)

What happened with Equity Commonwealth this quarter? 
Equity Commonwealth's earnings fell after more properties left its portfolio:

• During the quarter the company sold 14 properties totaling 5.5 million square feet, netting gross proceeds of $636.9 million.
• These sales, when combined with other properties sold over the past year, led to a $0.22 per share reduction in Normalized FFO.
• However, some of that reduction was offset by a lower interest expense from repaying debt and lower recurring general and administrative expenses, which added $0.08 and $0.07 per share, respectively, to Normalized FFO.
• The same property portfolio was 91.9% leased. That's up from 91.7% last quarter and 90.6% in the year-ago quarter.
• Cash rental rates on new and renewal leases were 3.2% higher than previous leases on the same space.

What management had to say 
The company's management team wrote in the earnings release that,

The company continues to pursue its previously announced plan to sell up to $3 billion of assets, creating capacity for future opportunities. Year-to-date, the company has sold $1.9 billion of assets at a weighted average cap rate in the low-to-mid 7% range. The company has 5 properties totaling over 2 million square feet in various stages of marketing for sale. The company is in the midst of a significant transition, focused on executing the disposition program and improving the performance of its properties.

Because of this transition, Equity Commonwealth's financial results will continue to be negatively affected by future property sales. The company's plan is to pare its asset base down to a core group of properties and then grow from that core. It's currently about two-thirds of the way through that plan.

One of the things the company is doing to mitigate some of the impact the transition plan is having on its normalized FFO per share is to use some of the cash proceeds from asset sales to buy back stock. In August its Board authorized $100 million for share repurchases and less than a month later authorized an additional $100 million for share repurchases. It didn't let that money sit idly, evidenced by the $87.8 million worth of stock that was repurchased during the quarter. In a sense the company feels that the best properties it can buy right now are its own core properties.

Looking forward 
Subsequent to the end of the quarter Equity Commonwealth closed the sale of seven more properties for $131.2 million and it has five more properties up for sale at the moment. More properties will likely be put up for sale over the next year until the company reaches its goal to unload $3 billion in assets. In other words, asset sales will be the company's primary focus for the foreseeable future.