Equity Commonwealth

NYSE:EQC

Earnings Call Analysis

Strategic Asset Sales and Liquidation Plan

In the latest earnings call, CEO David Helfand announced that the company is in the process of executing a plan to sell several real estate assets, specifically two properties in Austin and one in D.C., which are currently under contract. This strategic move aims to liquidate the company's holdings as part of a broader effort to streamline operations. The total expected revenue from these sales, along with another asset in Denver, is approximately $234 million. The sales are anticipated to close beginning in early November, and the buyers have shown commitment by posting nonrefundable deposits.

Financial Adjustments and Impairment Charges

The company recognized a noncash impairment charge of $50 million on its financial statements for this quarter, reflecting adjustments necessary in light of current market conditions. Despite these challenges, the outlook remains focused on a planned wind-down process that aims to maximize shareholder value by returning capital.

Upcoming Shareholder Meeting and Voting Details

An important shareholder meeting is scheduled for November 12, where shareholders will vote on the proposed Plan of Sale. For the plan to pass, it will require the approval of at least two-thirds of the outstanding common shares. The company estimates that this plan will allow for total distributions ranging from $19.50 to $21 per share, providing a tangible benefit for investors should the plan be approved.

Distribution Guidance After Shareholder Approval

Assuming the approval from shareholders, the company plans to implement liquidation basis accounting for their 2024 financial reporting. This means that assets will be recorded at expected realizable values, and all estimated wind-down costs will be accounted for by the end of this fiscal year. The Series D preferred shares are expected to be paid off first, followed by a common distribution between $18 to $19 per share, likely occurring shortly after the vote in early December.

Future Financial Outlook and Market Conditions

While the company navigates the asset sales, CEO Helfand has emphasized the importance of executing this process prudently, given the current difficulties in the office building market. Although the company feels positive about the sale process so far, it acknowledges the risks involved that could affect timing, especially if any of the sales do not close as planned. There are also longer-term plans for delisting from the NYSE and SEC deregistration, aiming for completion by the second quarter of 2025.

Cash Position and Remaining Liabilities

As of the last reported figures, the company has approximately $20.20 cash per share, not including anticipated proceeds from the ongoing sales. When factoring in the Denver property, estimates suggest potential total cash availability could rise to $22.60 per share after accounting for associated costs. Importantly, the company aims to reserve a portion of cash for any impending liabilities as it transitions into its final stages of winding down operations.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the quarter ending September 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 the 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, quarterly reports on Form 10-Q for subsequent quarters and in our definitive proxy statement on Schedule 14A filed on October 2, 2024, for a 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 a 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. I'd like to provide some key updates on our progress since our last call at the end of July. Our 2 Austin properties and our DC property are now under contract. These assets are held for sale on our September 30 balance sheet, and we recognized a $50 million noncash impairment charge in this quarter's financials. The closing of these sales are expected to begin in early November, and the buyers have posted nonrefundable deposits.

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. The marketing of 1225 Seventeenth Street in Denver commenced in September, so it's too early to provide an update on that process. We will provide more information on all of the dispositions as they progress.

With respect to our upcoming special shareholder meeting, we've set a meeting date of November 12 for shareholders of record as of the close of business on October 1 to vote to approve the Plan of Sale as well as the related advisory vote on the Say of Pay. Plan of Sale requires the affirmative vote of 2/3 of our outstanding common shares to be approved. We continue to estimate the total distributions resulting from the Plan of Sale will be in the $19.50 to $21 per share range.

Assuming shareholders approve the plan of Sale, we will adopt liquidation basis accounting for our 2024 10-K. Under this method, assets are recognized at the amount expected to be collected and our estimated expenses, including wind-down costs, will be accrued in full as of December 31, 2024. The year-end and future quarters' financials will outline any changes to the estimates and the statement of changes in net assets.

Following shareholder approval of the Plan of Sale and subject to Board approval, we will pay off the Series D preferred and declare a common distribution of $18 to $19 per share with the payments made in early December. The exact amount of the common distribution will depend on the status of the dispositions at that time.

After all the remaining assets are sold, which we currently estimate to be by the end of the first quarter of 2025, we will distribute substantially all of our remaining cash, net of a reserve for any remaining liabilities. Then sometime in the second quarter of next year, we expect to commence the NYSE delisting and SEC deregistration processes, transfer the remaining assets and liabilities to a liquidating trust, and complete other administrative tasks with the goal of substantially winding down by the end of the second quarter. We continue to expect to qualify as a REIT in 2024 and 2025.

So far, the disposition process has gone reasonably smoothly, but it remains a challenging time to sell office buildings. The inability to close one or more of our dispositions will affect the timing for the overall wind-down. We are focused to EQC on executing the wind-down process prudently and efficiently. We'll continue to communicate our progress. We appreciate the support we've received from our shareholders and want to acknowledge the continued hard work and dedication of the EQC team.

With that, David and Bill and I are happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Craig Mailman with Citi.

[Craig Mailman, analyst]

Just some clarifying questions to start. So David, you said the Series D pref, is that going to be paid the same day as the initial distribution? Or is there -- could there be a difference there? I just got some questions about when the exact timing of that would be assuming the vote goes through on the planned date you guys have in the proxy.

[William Griffiths, executive]

Craig, it's Bill. The Series D preferred will be paid first, and then we expect to do the common distribution a few days later.

[Craig Mailman, analyst]

Okay. So the Series D will be within that 30-day window after the vote?

[William Griffiths, executive]

Correct.

[Craig Mailman, analyst]

Okay. Perfect. And then on the asset sales you guys have. How much of the deposit is hard at this point of the total? Like is it really difficult for the buyers to walk away? Or is it an amount that if they can't get financing, they'd be willing to kind of eat at this point?

[David Weinberg, executive]

Well, it's David. I guess it's in the buyer's perspective. Obviously, they can always walk regardless of the size of the deposit. The deposits range from 1% to 5% of the purchase prices, and 2 of the buyers are all cash. So it's just 1 that is subject to financing risk.

[Craig Mailman, analyst]

Okay. Perfect. And I know you guys said these could start to close in November, but everything could be sold kind of by the end of first quarter, especially for the 2 buyers that are all cash. Is there an expected kind of close on those as of now? Just trying to get a sense of the timing of these 3 assets relative to the timing of kind of the initial payment and whether that initial payment could be closer to the $19 a share or the $18 a share, just a pretty wide window.

[David Weinberg, executive]

It's hard to say because closings are subject to certain conditions such as the Staples, et cetera, and buyers have extension rights. So as David alluded to specifically in his opening remarks, we expect them to begin in early November and then just kind of continue thereafter, and we'll be providing updates accordingly.

[Craig Mailman, analyst]

Okay. And as of now, just from a distribution perspective, you guys are sitting on close to $20.20 of cash. And then assuming these 3 assets close with another $0.80 or so, so you're at the full $21 from just these 3 assets. And then assuming back into it, it feels like Denver is about another, call it, $1.60 of value there, so you're getting $22.60. So are the wind-down costs coming in higher than the $50 million that you guys had talked about originally? Or is that kind of still a good place to think about it?

[William Griffiths, executive]

Well, to answer your second question first, the wind-out costs have not changed. So no, they're not coming in higher. And I'm just wondering in your math whether you've deducted the preferred in the cash?

[Craig Mailman, analyst]

Yes, that's a good point. I forgot that.

[Operator]

We have no further questions at this time. Mr. Helfand, I would now like to turn the floor back over to you for closing comments.

[David Helfand, executive]

Thank you, and thanks for your time this morning. As we said, we'll continue to provide updates on our progress as we execute our Plan Of Sale. Thank you.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.