Equity Commonwealth Continues to Slowly Liquidate Its Portfolio

Equity Commonwealth (NYSE:EQC) continued the steady pare-down of its property portfolio during the fourth quarter, ending the year with only 10 remaining real estate assets. However, for the first time in years, the company's funds from operations increased as it was able to more than offset the lost income with gains elsewhere. But it's not yet clear whether the company's earnings growth will continue, since it has several more property sales in the works, which could weigh on its results until it starts making acquisitions.

Equity Commonwealth results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Growth

Normalized FFO	$25.5 million	$22.6 million	12.8%
Normalized FFO per share	$0.21	$0.18	16.7%

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

What happened with Equity Commonwealth this quarter? 

Several factors enabled the company to offset the lost income from property sales:

Equity Commonwealth ended 2018 with 10 properties, down from 16 at the end of 2017. Those property sales reduced FFO by $0.12 per share. However, the company more than offset this lost income by generating an incremental $0.06 per share in interest income from its large cash position, saving $0.05 per share in interest expenses by paying down debt, cutting general and administrative costs by $0.02 per share, and generating an extra $0.02 per share of FFO from its existing properties by signing new leases. Overall, same-property net operating income increased by 3.4% versus the fourth quarter of 2017. The company signed leases totaling 976,000 square feet during the quarter, including 757,000 square feet of new agreements and 219,000 of renewals. On average, the cash rental rates on these leases were 3.4% higher than the previous rates on the same space. For the full year, Equity Commonwealth generated $85.4 million ($0.69 per share) of FFO, which was down from $103 million, or $0.83 per share, in 2017. Driving the decline was the lost income from the properties it sold; it was only partly able to offset this through increases in interest income and operating income from the remaining properties, as well as with savings on interest and general and administrative expenses. Equity Commonwealth sold one property during the quarter for $7.1 million. For the full year, it generated $1 billion from property sales, which it used to repay debt, buy back shares, and pay a special dividend to shareholders. The company signed an agreement to sell one more property in January of this year, which should bring in $451.6 million in gross proceeds. Meanwhile, it had two more properties on the market.

Image source: Getty Images.

What management had to say 

CEO David Helfand commented on the company's progress during the accompanying conference call:

Our team did an outstanding job in 2018 executing on our business plan on all fronts, including dispositions, leasing, and asset management. Our operating metrics were strong, and our financial results continue to reflect the success achieved on the leasing front over the past few years. In 2018, we executed 976,000 square feet of leasing in our same-property portfolio, bringing year-end leased occupancy to 94.8%. Same-property cash [net operating income] was up 11.8% for the year, and up 8.4% for the quarter.

While much of the focus has been on the properties that have left Equity Commonwealth's portfolio, the company hasn't forgotten about those it retains. It has been busy leasing available space to both new and existing tenants, which has improved the occupancy and earnings of those properties. As a result, the company generated more FFO on fewer properties during this year's fourth quarter than it did during the year-ago period. 

Looking forward 

Helfand also noted that after selling $6.1 billion of assets in more than 70 transactions, the company has a tremendous amount of financial capacity, which has it "well positioned for growth." He also reminded investors that:

We remain keenly focused on opportunities to invest capital where we can earn superior risk-adjusted returns. Our team has demonstrated its capability to execute and create value for shareholders. Our strategy will continue to be informed by market conditions, and we continue to believe that the pricing environment today for high-quality acquisition opportunities does not lend itself to achieving superior returns. Our objective is to be disciplined stewards of shareholder capital. To do so, we need to remain patient as we work aggressively to identify the right path forward.