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Equity Commonwealth Continues Emptying Out Its Portfolio

Equity Commonwealth (NYSE: EQC) continued selling off its income-producing properties, which caused earnings to follow. That trend doesn't show any signs of ceasing since it has several more properties in various stages of the sales process.

Equity Commonwealth results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Normalized FFO

$24.0 million

$28.9 million

-17%

Normalized FFO per share

$0.19

$0.23

-17.4%

Data source: Equity Commonwealth. FFO = funds from operations.

Equity Commonwealth still thinks that now is a better time to sell than to buy. Image source: Getty Images.

What happened with Equity Commonwealth this quarter? 

Earnings fell with the property count:

  • Equity Commonwealth ended the quarter with 20 properties, down from 21 last quarter and 38 in the year-ago period. The 18% property decline over the past year cut $0.16 per share from the company's normalized FFO. It was able to partially offset that lost income by using the cash proceeds to repay debt and generate interest income, which added $0.08 and $0.04 per share, respectively, to the bottom line.
  • The retained portfolio was 88.3% leased during the quarter, which was an improvement from 87.7% at the end of June, but down from 89.6% in last year's third quarter.
  • The company signed leases covering 273,000 square feet during the quarter, including 192,000 square feet of new leases and 81,000 square feet of renewals. Overall, the cash rental rates on those new and renewal leases were 2.3% higher than the prior ones on the same space.
  • The company closed the sale of six properties that it listed as held for sale at the end of last quarter. In addition to that, it closed another sale during the quarter and had seven more properties in various stages of the sale process.
  • The company used the proceeds from these sales to pay down debt, including redeeming $250 million of 6.65% notes that were due to mature next year. As a result, it ended the quarter with $2.2 billion in cash and about $850 million in total debt.

What management had to say 

CEO David Helfand commented on Equity Commonwealth's results during the accompanying conference call, noting that:

Turning to our business, results for EQC during the quarter demonstrated continued progress in the lease up of our portfolio, with new leases beginning to translate into growth in same property NOI. Our portfolio currently comprises 20 properties totaling 11 million square feet with no held for sale properties at the end of the quarter. We have seven properties in the market for sale totaling 4.7 million square feet including 600 West Chicago Avenue and 1600 Market Street in Downtown Philadelphia.

Helfand pointed out that the underlying results of its retained portfolio continue heading in the right direction due to recently signed leases. One evidence of this was the increase in same-property net operating income (NOI), which rose 4.7% versus last year after leasing out existing space at higher rates. These higher-priced leases make those properties more valuable, which should help the company net a higher sales price from buyers. Because of that, it plans to continue selling properties and already has seven more on the market, which would shrink its portfolio another 35% and cut leasable space by 47%. 

Looking forward 

Given the healthy buyer appetite for real estate assets, Equity Commonwealth plans to continue selling properties. That said, its aim isn't to sell the entire company off one by one, but to shrink down to a strong core from which it can grow. That was clear by comments from CFO Adam Markman, who stated on that call: 

We've always articulated [that] our desire is to marry the capital that we've now amassed with the team that we've put together and grow the company. That's what we hope to do. If we are unable to find an opportunity that creates shareholder value, then we'll start exploring what else to do, but that's not our main focus where we sit here today.

Matthew DiLallo owns shares of Equity Commonwealth. The Motley Fool recommends Equity Commonwealth. The Motley Fool has a disclosure policy.