After the failed Monmouth buyout, is it time for Sam Zell to wind up Equity Commonwealth?
The billionaire financier has taken the Chicago-based real estate investment trust on a long and unusual journey since taking over the business in 2014, but it’s unclear where he takes it from here. After spending several years selling office buildings, Equity Commonwealth now has $ 3 billion in cash, money she planned to use for a big acquisition.
He made a deal with Monmouth, but another real estate mogul, Barry Sternlicht of Starwood Capital Group, got in the way, sparking a bidding war for Monmouth that ultimately soured his shareholders over the Equity Commonwealth buyout offer. Yesterday, after a special meeting of Monmouth shareholders to consider the sale to Equity Commonwealth, Monmouth said it did not get enough votes to approve the deal. Equity Commonwealth then terminated its acquisition agreement.
Now Zell and the company’s board must determine their next move. They could buy another big deal, or they could just sell the remaining Equity Commonwealth properties – it only owns four office buildings, in Washington, Denver and Austin, Texas – dissolve the company and distribute all of its money to shareholders. .
A liquidation would represent a sort of defeat – a recognition that even a legendary dealmaker like Zell can’t find a multi-billion dollar company or portfolio to buy in a market that is heating up again. But resuming the search for another big deal could test the patience of Equity Commonwealth shareholders who may lose confidence in its ability to find one.
“I don’t see a valid argument” for pursuing another major acquisition, said Luis Sanchez, senior vice president of Adelante Capital Management, a fund manager based in Alameda, Calif., Specializing in real estate stocks but not not owning Commonwealth Equity. actions. “I just don’t see this dragging on for a number of years. I think it’s been a while.
Zell spearheaded a management takeover of Equity Commonwealth, then known as Commonwealth REIT, in 2014, quickly renaming the company and moving its headquarters to Chicago from Newton, Massachusetts. The move marked Zell’s return to the office market, a sector he largely left in 2007 with the successful $ 39 billion sale of Equity Office Properties Trust, of which he was also chairman.
Equity Commonwealth quickly began selling its office buildings by the dozen, including a large one at 600 W. Chicago Ave., and two in the Illinois Center complex in downtown Chicago. In 2017, President and CEO David Helfand spoke openly about using all the money raised through property sales for a very large real estate transaction, even outside of the office market.
“Everyone was obviously wondering what they were going to do with the money,” Sanchez said.
Equity Commonwealth finally answered the question on May 4, revealing its agreement to buy out Monmouth.
The company faced a lot of skepticism about the choice. Some observers wondered why Zell wanted to buy a company that has warehouses, one of the hottest real estate sectors in the country. To many, this seemed out of character for Zell, known as a contrarian investor who doesn’t run with the herd. But Zell and Helfand said they would increase the value of Equity Commonwealth by expanding its industrial portfolio through acquisitions.
Equity Commonwealth shareholders did not seem to accept their story. Shares of the company fell 9.3% between the day before the disclosure of the Monmouth acquisition and August 30, the day before it was terminated. A Bloomberg Office REIT Index rose 1.6% over the same period.
“The market was signaling that this may not be the best use of (Equity Commonwealth) dry powder,” wrote Reagan Pratt, principal at Twende Advisors, a Chicago-based investment advisory firm, in a report. E-mail.
But the Equity Commonwealth stock has performed better over the long term. Dividends included, the stock has returned 39.4% since May 2014, when Zell and Helfand took the lead, compared to 27.5% for the Bloomberg office index.
Where Equity Commonwealth shares go will depend on what the company says about its next move. It’s not very talkative at the moment: A representative for the company declined to comment, and the REIT yesterday issued a brief statement that said nothing about its future plans.
“While we are disappointed with the results of the Monmouth shareholder vote, we are proud of the efforts of the EQC team throughout the process,” Helfand said in the statement.
With Monmouth out of sight, the REIT is set to face “a more impatient shareholder base,” according to a report from Green Street, a California-based research firm.
Green Street doesn’t predict an imminent liquidation, although it believes it is the right thing to do.
One reason: The company always pays its executives and other employees even if it doesn’t have a lot of portfolio to manage. Its general and administrative costs are about $ 35 million per year, or about 1% of its current asset base, and its “low return on cash makes it a costly effort for EQC to continue to seek new opportunities. Green Street writes.
Further, Green Street is not convinced that Equity Commonwealth will be able to find another large portfolio or other real estate company to buy at a reasonable price in the current market.
“With a lack of troubled opportunities in commercial real estate, a likely outcome of today’s news should be a higher likelihood of a liquidation,” the report said.
Although humiliating, a liquidation would be the most financially disciplined decision in the eyes of many observers. It could also maintain Zell’s reputation for not letting emotions cloud his judgment when it comes to transactions.
Plus, Zell, 79, still has plenty of investments to manage, including two other REITs: apartment owner Equity Residential and Equity LifeStyle Properties, a mobile home park owner. With a fortune estimated by Forbes at $ 5.6 billion, Zell can do without a hefty salary from Equity Commonwealth.