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Earnings call: Equity Commonwealth reports on Q3 2024 and asset sales

EditorLina Guerrero
Published 10/25/2024, 04:54 PM
© Reuters.
EQC
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Equity Commonwealth (NYSE: NYSE:EQC) has announced key updates in its third-quarter earnings call, including progress on asset sales and details regarding its upcoming special shareholder meeting. The company reported a non-cash impairment charge of $50 million for the quarter ending September 30, 2024, and confirmed that its Austin and DC properties are under contract, with sales expected to begin in early November.

The total pricing for the asset sales, including the expected sale of a Denver property, is consistent with the previous estimate of $234 million. Equity Commonwealth also outlined its Plan of Sale, which requires shareholder approval and could result in distributions of $19.50 to $21 per share.

Key Takeaways

  • Equity Commonwealth's Austin and DC properties are under contract, with sales starting in early November.
  • A non-cash impairment charge of $50 million was recognized in the third-quarter financials.
  • Total pricing for the asset sales, including a property in Denver, remains at the estimated $234 million.
  • The special shareholder meeting is set for November 12 to vote on the Plan of Sale and Say on Pay.
  • The Plan of Sale requires a two-thirds affirmative vote from common shareholders.
  • Post-approval, liquidation basis accounting will be adopted for the 2024 10-K.
  • Following asset sales and board approval, a common distribution of $18 to $19 per share is planned for early December.
  • The company aims to wind down operations by the end of the second quarter of 2025, including delisting from NYSE and SEC deregistration.

Company Outlook

  • Equity Commonwealth is focused on executing the wind-down process prudently and efficiently.
  • The company expects to qualify as a REIT for both 2024 and 2025.

Bearish Highlights

  • The disposition process has been smooth but selling office buildings remains challenging.
  • The inability to close on one or more dispositions could affect the timing of the overall wind-down.

Bullish Highlights

  • Non-refundable deposits have been posted by buyers, indicating a commitment to the sales.
  • Two of the buyers are purchasing with all cash, reducing financing risk.

Misses

  • There was a significant non-cash impairment charge in the third quarter.

Q&A Highlights

  • The Series D preferred will be paid off before the common distribution, which is expected a few days later.
  • Deposits for the asset sales range from 1% to 5% of the purchase prices, with two all-cash buyers.
  • The wind-down costs have not changed and are not coming in higher than the previously discussed $50 million.

Equity Commonwealth's progress towards its asset sales and wind-down plan remains on track, with shareholder approval being the next critical step. The company has maintained its financial estimates for the sales and distributions, and despite the challenges in the office building market, the commitment from buyers suggests confidence in the transactions. Equity Commonwealth continues to communicate its progress and maintains a focus on efficient execution.

InvestingPro Insights

As Equity Commonwealth (NYSE: EQC) progresses with its asset sales and wind-down plan, InvestingPro data and tips provide additional context to the company's financial position and market performance.

According to InvestingPro data, EQC's market capitalization stands at $2.13 billion, reflecting its current market value as the company moves through its liquidation process. The stock's price-to-book ratio of 0.93, based on the last twelve months as of Q3 2024, suggests that the market is valuing the company slightly below its book value. This could be significant for investors considering the planned distributions of $19.50 to $21 per share mentioned in the company's update.

An InvestingPro Tip highlights that EQC holds more cash than debt on its balance sheet. This strong liquidity position aligns well with the company's plan to distribute substantial funds to shareholders and supports its ability to execute the wind-down process efficiently.

Another relevant InvestingPro Tip notes that EQC's stock generally trades with low price volatility. This characteristic may provide some stability for investors during the liquidation process, which is expected to conclude by the end of the second quarter of 2025.

It's worth noting that InvestingPro offers 8 additional tips for EQC, which could provide further insights into the company's financial health and market position during this critical transition period.

Full transcript - Equity Commonwealth (EQC) Q3 2024:

Operator: Good morning and thanks for joining this call to discuss Equity Commonwealth's Results for the Quarter Ending September 30, 2024, in an update on the Company. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (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 from subsequent quarters, and in our definitive proxy statement on Schedule 14A filed on October 2, 2024, 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 includes 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 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 two Austin properties and our DC property are now under contract. These assets are held for sale on our September 30th balance sheet and we recognized a $50 million non-cash impairment charge in this quarter's financials. The closing of these sales are expected to begin in early November and the buyers have posted non-refundable deposits. Pricing for the three 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 12th for shareholders of record as of the close of business on October 1st to vote to approve the Plan of Sale as well as the related advisory vote on Say on Pay. Plan of Sale requires the affirmative vote of two-thirds 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 quarter's financials will outline any changes to the estimates and a 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 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 ability to close one or more -- the inability to close one or more of our dispositions will affect the timing for the overall wind down. We are focused at 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, Bill and I are happy to take your questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Craig Mailman with Citi. Please proceed with your question.

Craig Mailman: Hey, good morning, guys. Just some clarifying questions to start. So, David, you said the Series B 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 that you guys have in the proxy?

William Griffiths: Hey, 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: Okay. So the Series B will be within that 30-day window after the vote?

William Griffiths: Correct.

Craig Mailman: Okay. Perfect. And then on the asset sales, you guys have how much of a 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: 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 two of the buyers are all cash. So it's just one that is subject to financing risk.

Craig Mailman: 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, is -- especially for the two buyers that are all cash. Is there an expected kind of close on those as of now? Or just trying to get a sense of the timing of these three 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: It's hard to say because closings are subject to certain conditions such as estoppels, et cetera, and buyers have extension rights. So, as David alluded to and said 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: 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 three assets close, it's, what, another $0.80 or so, so you're at the full $21 from just these three assets. And then, assuming you back into it, feels like Denver's about another, call it, $1.60 of value there. So you're getting to $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: Well, to answer your second question first, the wind-down 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: Yes, that's a good point. I forgot that. Okay. Perfect. Thank you for that clarification. All right. Awesome. Thank you, guys. And congrats on getting these done. Thanks.

William Griffiths: Thanks, Craig.

Operator: Thank you. 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: 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.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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