Equity Commonwealth

NYSE:EQC

Earnings Call Analysis

Board Decides to Wind Down Operations Amid Challenging Market Conditions

Due to challenging market conditions and unsuccessful transaction attempts, the Board of Trustees has decided to wind down operations and liquidate assets to maximize shareholder value. The sale of the last four properties, including three already in the market and a Denver asset to be listed, is critical. The company hopes to sell the assets above their $234 million net book value. A preliminary proxy for liquidation will be filed by mid-September, with a shareholder vote expected by December. Final wind-down tasks should complete by mid-2025, including delisting from NYSE and SEC deregistration.

Navigating a Complex Market Landscape

In the latest earnings call, Equity Commonwealth (EQC) emphasized a challenging environment for liquidating their assets as they navigate through their wind-down process. The company has decided to liquidate its operations after failing to find compelling investment opportunities, deeming it essential for maximizing shareholder value.

Asset Disposition Strategy

The company is currently focused on selling four properties, with three of them—1250 H in Washington, D.C., and two assets in Austin—actively marketed since May. They expressed optimism that these sales could generate proceeds exceeding their net book value of $234 million. However, the overall market for selling office assets is sluggish, with transaction volumes down 75% compared to pre-COVID levels. This has introduced uncertainty regarding timelines and potential proceeds from sales.

Upcoming Sale of Denver Asset

EQC plans to begin marketing its Denver asset, 1225 Seventeenth Street, in early September. This property, which is leased in the mid-80% range and classified as Class A, is anticipated to attract more traditional buyers, although it measures 700,000 square feet, limiting comparables within the current market. Sales of all properties depend on shareholders approving the liquidation plan, which will require a two-thirds affirmative vote.

Timeline for Liquidation and Shareholder Expectations

The company's timeline for the wind-down includes filing a preliminary proxy by mid-September and expecting shareholder voting no later than December. After asset sales are complete, shareholders will receive distributions shortly thereafter, likely representing the final material distributions. The entire winding down process aims for completion by the end of the second quarter of 2025.

Cost Considerations During Wind Down

In terms of costs associated with the liquidation, the company has estimated a wind-down cost ranging from $0.40 to $0.50 per share. This figure remains consistent as they proceed with their plans, illustrating their commitment to maintaining transparency while navigating this transition.

Market Conditions Impact on Future Operations

The current landscape also poses challenges in securing debt availability for office assets, which is often priced at double-digit interest rates. This has significantly affected bidding interest and the profile of potential buyers, making it imperative for EQC to remain adaptive during this difficult market environment.

Final Thoughts and Future Outlook

Overall, the management team underscored their resolve to wind down operations efficiently while keeping shareholders informed of any developments. Though the journey to closure could prove challenging given the external pressures, the guidance and communication of EQC’s leadership indicate that they are preparing for gradual and structured progress through this liquidation phase.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the quarter ending June 30, 2024, and an update on the company. [Operator Instructions]. As a reminder, this conference is being recorded.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities laws. Please refer to the section titled Forward-Looking Statements in the press release issued yesterday as well as the section titled Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q for subsequent quarters. For discussion of factors that could cause the company's actual results to materially differ from any forward-looking statements. The company assumes no obligation to update or supplement any forward-looking statements made today. The company posts important information on its website at www.eqcre.com, including information that may be material. The portion of today's remarks regarding the company's quarterly earnings also include certain non-GAAP financial measures.

Please refer to yesterday's press release and supplemental containing the company's results for reconciliation of these non-GAAP measures to the company's GAAP financial results. On the call today are David Helfand, President and CEO; David Weinberg, COO; and Bill Griffiths, CFO. With that, I will turn the call over to David Helfand.

[David Helfand, executive]

Thank you. Good morning, everyone. Thanks for joining us. Rather than spend time on the company's results for the quarter, the details of which are covered in our earnings release and other filings, I'd like to provide a general update on our business. As we discussed on last quarter's call, we have been evaluating potential investment opportunities in an effort to create long-term value for shareholders. After working through our pipeline, we have been unable to consummate a compelling transaction. As a result, our Board of Trustees has determined that it's advisable and in the best interest of our shareholders to proceed with the wind down of our operations and liquidation of our assets in order to maximize value for shareholders.

The key gating factor in the wind down will be the timing of the sale of our 4 remaining properties. We disclosed last quarter that we had initiated the process to sell 3 of our 4 assets. Those properties, 1250 H in Washington, D.C. and our 2 assets in Austin are currently being marketed for sale. While our team is focused on achieving the best execution, it is important to understand that current market conditions for selling office assets are uniquely challenging. Transaction volume for the first 6 months of the year was the lowest since 2010 and down 75% from pre-COVID levels. Moreover, debt availability for office assets is scarce and when available is priced at double-digit coupons.

Given the market environment, it's difficult to estimate both the timing and the proceeds from these sales. We're hopeful that the dispositions will generate proceeds in excess of our $234 million net book value for the assets. As it relates to the timing for the wind down, we expect to file a preliminary proxy by mid-September, recommending that our shareholders approve a plan of sale and liquidation. The proxy will be subject to review by the SEC and depending on the length of that process, we anticipate holding the shareholder vote no later than December. We also expect to begin marketing for sale our Denver asset, 1225 Seventeenth Street in early September with closing contingent on shareholder approval of the plan of sale.

The plan of sale require the affirmative vote of 2/3 of our outstanding common shares to be approved. Assuming the plan of sale is approved by our shareholders, the next steps will be the redemption of the Series D preferred and distribution to shareholders of substantially all of our cash. Then once the remaining assets are sold, we expect to distribute the remaining proceeds shortly thereafter. This will likely be the last distribution of material value. We will then commence the NYSE delisting and SEC deregistration processes and various other administrative tasks with the goal of substantially winding down the company by the end of the second quarter of 2025. We continue to expect to qualify as a REIT in 2024 and 2025. While we don't have all the answers today and timing is uncertain, we are focused on executing the wind down process as efficiently as possible and we will continue to communicate with shareholders regarding our progress.

We appreciate the support we have received from our shareholders and want to acknowledge the hard work and dedication of the EQC team. With that, David, Bill and I are happy to take your questions.

[Operator]

[Operator Instructions] Our first question is from Craig Mailman from Citi.

[Nicholas Joseph, analyst]

It's Nick Joseph here with Craig. So appreciate the new news and the update on the process. So maybe just starting with the 3 assets being marketing. Can you just talk through where those are in the process? I know the timing is uncertain, and I appreciate your comments on the debt capital markets, but just kind of buyer interest, pricing expectations and where each of those 3 stand right now?

[David Weinberg, executive]

Nick, it's David. I'll take that one. So the sales of those 3 assets commenced in May. And unlike in the past, given the current market conditions that David described, it's just taking longer. So I'd say we're at the point now we're trying to gauge buyer interest. However, given the makeup of bidders and interested parties in the current environment as opposed into the past, it's harder to predict the timing and execution, so we're learning as we go, and we'll know more later.

[Nicholas Joseph, analyst]

And then just for the Denver asset. Is there anything unique about that asset that maybe will have a trade sooner rather than later? How do you think about it versus the 3 that are being marketed right now?

[David Weinberg, executive]

Well, it has a different profile. So the 3 that are being marketed now are at least kind of in the 55% to 70% are B to B plus properties. So they're going to attract one set of buyers. The Denver asset currently is leased in the mid-80s. That's a great asset. It's Class A, so it should attract more interest from more traditional larger buyers. The wildcard there is in this environment, it is 700,000 square feet. And there are just a few comps for assets of that size for me to kind of have a feel for how that's going to play out.

[Nicholas Joseph, analyst]

And then just as you think about the liquidation costs, is there an estimate -- what the wind down will cost all in?

[William Griffiths, executive]

Nick, it's Bill. We disclosed last quarter of $0.40 to $0.50 per share range. We're still comfortable with that, and I think there'll be more information forthcoming on that in the proxy.

[Nicholas Joseph, 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?

[David Helfand, executive]

We don't expect it to be.

[Nicholas Joseph, analyst]

So is the 2Q run rate, a good run rate for the next 2 quarters, at least?

[David Helfand, executive]

Sounds about right.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the floor back over to David Helfand for closing comments.

[David Helfand, executive]

Thank you for your time today. We look forward to speaking to you and giving you more information as we gain it. Thank you.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.