Summary:
- Equity Common Wealth (EQC) is a REIT with a current market value of approximately 2 billion dollars. Equity Common Wealth has current cash and cash equivalents of 2.16 billion dollars. EQC also has a portfolio of 4 office buildings which generated NOI of 33 million dollars in 2023. The market currently values Equity Common Wealth less than the current value of its cash indicating that the value of these office buildings provide 20% in excess value for potential investors.
- Furthermore activist investor Jonathan Litt of Land and Buildings voiced his opinion in an open letter to management about returning capital to shareholders via liquidation which may be a catalyst for near term outperformance.
Business Summary:
EQC is a former office REIT which has been looking to pivot into the industrial REIT space. In its pursuit, it has reduced its portfolio of 168 office properties to just 4. The disposition of a majority of its portfolio allowed it to pay off all outstanding debt and preferred shares.
EQC’s portfolio is currently 81.2% leased. EQC currently has 15.7% of annualized rental revenue expiring in the next year, however 2022 had 10.7% of annualized revenue expiring in 2023 and only saw 1.6% decrease in total leased space. (expiring leases where almost offset by new leases)
High cash balance allows EQC to generate excess interest income which has mitigated value destruction from managements excessive compensation (relative to managed assets).
Interest Income Offsetting Value Destruction By Current Management:
Valuation: Investors Undervalue EQC
The book value of cash alone is greater than EQC’s market cap. The value of the four office buildings based on a 10% cap rate and current NOI Indicate that the stock’s intrinsic value is closer to $22.59. Indicating a roughly 20% undervaluation.
Current management is destroying shareholder value, however current interest income due to tighter credit conditions is offsetting this impact.
