Liquidation – 40%-60% Upside (on the stub)
This is a late-stage liquidation that has already been approved by shareholders and is expected to be finalized over the coming few months. Equity Commonwealth, a previous REIT, is now essentially a cash shell with only one relatively small RE asset left to sell. EQC has already announced $19/share dividend that will be paid out on the Dec 6. Pro-forma for this distribution the stub trades at $1.18/share. The remaining distribution for this stub is uncertain, but based on management’s guidance it will be in the range of $1-$2/share and is expected to be paid out during Q1’25 (total liquidation value of $20-$21/share less the already-announced $19/share dividend). The company has recently improved the lower end of the liquidation estimate by $0.5/share – I take is as management’s ‘guarantee’ that the stub will pay out at least $1/share. So the downside is at 15%. However, there’s a fairly good chance the final distribution will land closer to $2/share, creating a compelling risk-reward opportunity on the stub.
Management did not share their calculation for the liquidating distributions, however, the indicated range for the stub liquidation value ties in well with the reported numbers and appears to leave sufficient buffer for contingency reserves and any other expenses.
G&A and operating expenses until the wind-down is completed should be fully covered by the accrued cash interest and rental income from the remaining asset.
The largest uncertainty seems to be the price at which the final RE asset gets sold. However, the margin of safety ($87m for contingency reserves and any other expenses in the $1/share scenario) seems to be large enough to compensate for any deviations from management’s estimate. In this context, I do not think investors are risking any loss of capital by buying the stub at $1.2/share.
Real estate asset sales
Liquidation process was officially launched at the end of July, together with Q2 results. At the time, EQC owned four real estate assets: two offices in Austin, one in Washington, D.C., and one in Denver. Austin and D.C. assets were substantially smaller and lower quality (Class B), compared to Denver’s (Class A). Management projected the total gross proceeds from all four properties to be over $234m:
We’re hopeful that the dispositions will generate proceeds in excess of our $234 million net book value for the assets.
At the end of October, during Q3 results, management reaffirmed the target of $234m in total real estate sale proceeds:
Pricing for the 3 sales, plus our expectation for Denver, in total remains consistent with the $234 million estimate we discussed on last quarter’s call.
Sales of the Austin properties were then closed on November 1, and D.C. transaction closed on November 26. Total gross proceeds from the 3 assets came at $92m, slightly below the carrying values of the assets. No taxes are expected, so net proceeds shouldn’t be far off the sale prices (I have deducted 5% of the sale value in the table above).
Based on management’s commentary (i.e. $234m total proceeds from disposal of the four asset), Denver property is expected to fetch $142m. Given the recent reaffirmation of the $234m disposal proceeds target and the subsequently improved liquidation value estimate, I think the risk of the Denver property sale falling substantially below $142m is low.
The Denver asset is 17th Street Plaza, a Class A office skyscraper built in 1982, located at the city center. The building spans 708,000 sq. ft. Management has not shared any standalone valuation estimates for the 17th Street Plaza, citing limited comparables. The asset was put on the market in September. The sale is expected to conclude in Q1 2025.
The implied $142m price would represent a valuation of $200 per sq. ft. I’ve looked at the currently listed office properties in Denver and it’s hard to find any that are priced below $300 per sq. ft. That said, factors like the Plaza’s size and age, combined with the challenging credit environment for office properties could justify some discount. At the same time $142m would would represent 28% premium to BV. The first three assets of EQC went for 20-25% below their carrying values. However, these assets are of a completely different caliber, and are not really directly comparable.
There is a risk that the Denver property sale will be delayed beyond Q1 2025. Management has repeatedly highlighted the challenges in the current CRE market, which could make selling a large asset like the 17th Street Plaza more difficult. Notably, it took six months to complete the sale of the first three smaller assets (they were put on the market in May). With the Plaza only going on the market in September, the Q1’25 sale guidance may prove optimistic. Any delays might lead to additional cash burn that may no longer be offset by the accrued cash interest and rent. Management has made it clear that they are unwilling to reduce G&A costs during the liquidation process. From Q2 call:
Analyst
Perfect. And then maybe just finally, just on G&A costs as the wind down occurs, will there be any change to comp and overhead through the liquidation date?
CEO/Chairman
We don’t expect there to be.
Wind-down expenses and contingency reserve
In the last 3 conf. calls management has repeatedly guided for wind-down expenses to range between $0.40-$0.50/share, c. $50m. These expenses would cover executive severance, legal and professional services, accounting fees, and other associated costs. While the estimate may seem very high at first glance, most of it will actually go to executive compensation and change-in-control payments (about $33m). Yes, management has been siphoning huge compensation from EQC for a very long time and are eager to have one last bite at it. Take a look at this lovely exchange during Q1 conf. call:
Analyst
I mean is there any chance that you guys would forego the change of control payments just to — from a shareholder friendliness perspective since it’s a wind down rather than an M&A merger?CEO
I don’t think so.Analyst
Okay. Great. Appreciate the time.
The other part of guided wind-down costs (ex. management’s comp) looks somewhat reasonable and I don’t think it will deviate much from the estimate.
Before the final dividend in Q1’25, EQC will also set aside a portion of cash to cover potential contingency liabilities. While management hasn’t provided specific estimates, I do not expect this figure to be above $10m. $1m change in the contingency reserve would adjust the liquidation value by a bit less than $0.01/share.
Quick Background
For more detailed background on EQC’s history I will refer you to numerous EQC pitches on VIC – you can find the latest one here. In a nutshell, EQC was a REIT externally managed by the notorious value destructors Portnoy family. In 2013/2014, an activist ousted Portnoys, and Sam Zell (the legendary real estate investor) took over the reins. Zell oversaw the divestiture of most of the portfolio and began scouting for opportunistic acquisitions but didn’t close any deals before passing away last year. Earlier this year, activist Land & Buildings started pressuring the company to liquidate. On July 30, management officially announced the wind-down. The liquidation has been progressing quite smoothly so far.
How will these distributions/dividends be taxed?
good point, is it possible to buy the stub once dividends are paid?
It looks like there is no tax arbitrage available
https://www.sec.gov/Archives/edgar/data/803649/000080364924000073/eqcdefinitiveproxy-special.htm
In connection with the Plan of Sale, U.S. holders may receive one or more liquidating distributions. The amount of a liquidating distribution will be applied first to reduce a U.S. holder’s tax basis in its common shares, but not below zero. A U.S. holder’s tax basis in its common shares will generally be equal to the U.S. holder’s cost of its shares, reduced by any prior distributions that were treated as reductions in basis rather than taxable dividends.
My understanding is that these will be liquidating distributions and therefore not taxed as dividends.
Some info from the proxy filling:
https://www.bamsec.com/filing/80364924000073?cik=803649
It seems Interactive Brokers screwed up and treat this a “bonus dividend”. Anyone else had same issue?
Well I’m a bit confused as well.
Because I got paid out USD 18.0041 per share.
Sorry if I’m missing something obvious here but I can’t seem to find why 1 USD is missing.
(my base currency is EUR and I’m from Germany but even if they charged withholding tax it would be more than that)
Under transactions it says “dividend”.
Where did you get the “bonus dividend”-info from?
In Interactive Brokers’ corporate action report, they marked payments as “EQC Cash Dividend $19 per share (Bonus Dividend)”.
Yes found it. Same for me.
“Bonus Dividend” and 15% withholding tax charged.
(I messed up with the USD and EUR conversions in my earlier comment.
Sorry for the confusion)
Interactive Brokers often classifies distributions incorrectly and this gets adjusted later (a week or two usually). Just flag this in a ticket indicating that $19/share was a liquidating distribution rather than ‘bonus dividend’.
Lol at the CEO getting his tens of millions. I would do the same but the question and answer was great.
Could selling calls be a good strategy? Looks like you could sell a $20 call, December expiry, for $30. After the dividend, it should be adjusted to a $1 call. If the stock drops below $1, you get assigned and hold shares obtained at a discount (paid $100 – $30 = $70 for 100 shares). If the stock stays above $1, could count the premium as profit, or use it to buy in at the new stock price. Any thoughts?
Sorry, I meant put, not call, and it looks like there isn’t really a market for it. And I guess adjusted options require the dividend to be paid instead of adjusting the strike price (although it’s almost the same difference). So basically I’m wrong about everything. LOL
Can you play this via calls as well? Buy the $20s
So the call would get adjusted and you would receive the 100 shares plus $1900 on exercising for $2000? Is that correct?
The options market for EQC seems to be pretty much illiquid, no?
The strike price will get adjusted following the ex-distribution date. A call option with strike price of USD20 will be adjusted to USD1 in this instance. The terms of the adjustments are determined by the Options Clearing Corporation (OCC) and they will make an announcement once the adjustment is determined.
and the number of shares per contract can be adjusted as well?
No, the announcement was made November 15, 2024 and here it is directly from the OCC:
https://infomemo.theocc.com/infomemos?number=55561
The deliverables per contract will be:
1) 100 Equity Commonwealth (EQC) Common Shares
2) $1,900.00 Cash ($19.00 x 100)
The Denver downtown office market is among the worst hit, with current availability rate of 40%.
I don’t think there’s currently a market for large Denver downtown offices like 17th Street Plaza.
There were several loan extensions since late 2023, but no sales.
Several blocks away, 1801 California St. (1.3m sqft, built in 1983) extended a $280m loan in Dec 2023.
Republic Plaza (1.2m sqft, built in 1984) by the same owner, and Colorado’s tallest building, was appraised for $298m in 2023 (vs $535m in 2012).
Wells Fargo Center (1.2m sqft, built, built in 1983), surrendered to the lender by this same owner, was appraised for $287m (vs. $475m in 2019).
These three are iconic buildings in Denver downtown and are much better managed/maintained.
I don’t think the fair market price for 17th Street Plaza can be more than $200/sqf, and in this market it’s hard to find a buyer within half a year without marketing it at around $150/sqf (close to the carrying value).
snowball, thanks for additional color.
My optimism mainly stems from two points:
– management reiterated expected sale proceeds of $234m;
– management improved lower end of the liquidation guidance.
I take both of these as a sign that management is quite confident in the sale price and timeline for the 17th Street Plaza property. If this management can be trusted, is another question. But what incentives are there to improve guidance after shareholders have already approved the liquidation? Management can only lose from this, if this change is just a guess estimate.
I actually believe that they will pay at least $1/share at liquidation.
The problem is that the stub is already trading at $1.2/share.
Let’s say a minimum 20% return is required for me to take part in this trade, so I need $1.44/share in liquidation value, which require 17th Street Plaza to be sold at $113m (which is a very good outcome) .
Note that the property’s carrying value is $111m.
So they are trying to complete a sale within the next four months (including a holidays season), above carrying value, and which is going to set a record (in terms of deal size) of the Denver office market for the past three years (as far as I can recall).
I don’t think 20% is enough to compensate for the risk.
I think the other real estate idea on SSI, US Masters Residential Property Fund (URF.AX), is much more attractive. And URF management is way more shareholder friendly (in terms of active buyback, communication and execution of asset sales plan)
doesn’t sound like you’re factoring in the buffer for contingency which seems like the premise of the play
For contingency buffer, I already use dt’s $10m number instead of $87m.
Core of the thesis is the management guide. So the questions becomes do you trust management? Isn’t that a fairly doubtful proposition? They have shown themselves to be perfectly happy to enrich themselves at the expense of shareholders; technically legal, but clearly immoral. It would seem pretty easy for management extend the liquidation and by extension their paychecks by citing the difficult market conditions. At some point they will want their severance payments, but the risk of a delay does not seem all that low to me.
Yes, that’s a risk. But in my view $1 return on the stub is the absolute minimum – if management intended just to siphon the funds by extending liquidation, it would have been much easier if liquidation guidance remained at $19.5-$21/share (vs the $20-$21 new one). Management had zero incentives to improve this guidance – they have just made their lives harder if this updated liquidation range is not reached.
Also, if management intended to extract as much value for themselves as possible they would never liquidate in the first place.
“activist Land & Buildings started pressuring the company to liquidate”
Based on this statement, they appear to have been reluctant liquidators.
FWIW I agree with DT and MUT; I think they key will be position sizing (small, if at all, as bad actors find creative ways to screw you even when seemingly there is little benefit in doing so), and price (obviously closer to 1) in light of Snowball’s commentary and analysis.
Beyond salary, bonuses, change in control comp, is there anyway management can increase their compensation? I don’t know what mechanisms exist for that to occur post proxy establishment, but based on the write up, if it is possible they seem almost certain to do it.
I do not think compensation per se will be increased – for top execs any changes would have to be filed with regulators, which would look pretty bad. But management can simply prolong the liquidation process and in turn increase their total take-home pay from this process.
Agree with DT that the set-up is very interesting. Given that management sold those 3 assets at a ~20-25% discount to the carrying value and subsequently increased their guidance (whilst announcing dividend at the top-end of the range), this tells us something may be brewing behind the scenes. You don’t sell off assets at ~20-25% discount and raise your conviction about the last sale at ~28% premium (even if it is materially higher quality) unless you already have some interest close to the expected price, I think.
How about interest income during Q4? They had about $30m in Q3. This could be about $30/108=$0.28/share.
That cash will largely be burned in 2025. The company has been cash-flow positive so far, mainly due to interest income. However, most of the cash balance will now be paid out (and therefore no longer accrue interest). Three assets have been sold as well, resulting in lower rental income.
I think all of this was implied in this line in the write-up:
“G&A and operating expenses until the wind-down is completed should be fully covered by the accrued cash interest and rental income from the remaining asset.”
G&A is about $35m/year (annualized based on Q3 number), and management doesn’t intend to reduce it.
The preferred stocks have been repaid early this week, so there is only $41m cash left, generating interest income of <$2m/year at 5% interest rate.
I assume the remaining Denver property generates an NOI (net operating income) of $15m/year, by applying an NOI margin of 54% to annualized rental revenue of $28m (as disclosed in Q3 Supplemental Operating and Financial Information).
35-2-15=18. So we still have an annual cash burn of $18m (or $0.16/share) going forward, and I don't see how G&A and operating expenses can be fully covered by interest incomes and rental income.
By the way, I notice that the the Denver property's in-place rent (at $47/sqft for rented out area) is way above market ($39/sqft for Class A office) and any buyer will take this into account when valuing it.
The previous cash pile should’ve generated around $21m in interest from Q3 to early December. I guess that should offset all G&A until the end of Q1. After that, yes, the company will start burning cash.
Price history: at write-up 20.20. one to two days before ex-div rose to 20.40 or 1.40 ex-div equivalent. today ex-div rose from 1.40 to 1.50 now at 9:45am.
If 1.70 expected per write-up, IRR >50%, if buy at 1.50 (estimated range of management = 1-2).
On hindsight, “easy money” buying at 20.20, 1.5% gain in a few days. Now, at 1.50, more like a gamble.
Agree. The stub now trades right in the middle of management’s liquidation range. As you suggest, the remaining upside is a bit of a guess work. The easy money is in the pocket. It can either be looked as +1.5% in a week or +25% in a week on a stub price as the $19/share dividend was riskless. I prefer the latter ;)
Both 1.5% and 25% are true, and good! ha-ha.
Just a week after the dividend, it’s now trading at $1.69, very close to the $1.71 estimate per write-up.
Always happy to see my valuation guess-estimates vindicated.
Hi there, nice work flagging this. I see you’re including $19mm of remaining net liabilities from the Q3 balance sheet. Any reason you’re not including the $9.8mm of “Other assets, net” from the Q3 balance sheet?
The estimated last liquidating distribution range has been updated to between $1.55 and $1.70.
EQC currently trades at $1.62, right in the middle of the range.
The net proceeds of $124m is $18m less than previous guidance.
Plugging $124m into @dt’s model, liquidation value is lower from $1.70 to $1.55, right at the lower bound of the range.
Equity Commonwealth (NYSE: EQC) (the “Company”) announced today that it closed on the sale of its last remaining property, 1225 Seventeenth Street, a 709,402 square foot office property in Denver, Colorado, for a gross sale price of $132.5 million, on February 25, 2025. The net purchase price was approximately $124.4 million after credits primarily for contractual lease costs.
With this sale of its last remaining property, the Company is also updating the estimated aggregate shareholder liquidating distribution range from an estimated aggregate shareholder liquidating distribution range of $20.00 to $21.00 per common share previously announced on November 15, 2024, to an estimated aggregate shareholder liquidating distribution range of $20.55 to $20.70 per common share, inclusive of the initial liquidating distribution of $19.00 per common share paid by the Company on December 6, 2024.