Real estate mogul Sam Zell took control of Equity Commonwealth (NYSE: EQC) in 2014. It was one of the largest commercial office real estate investment trusts (REITs), with more than 40 million square feet of space in 30 states and Australia. However, Zell and his team wanted to rebuild the office REIT from the ground up. That led them to steadily sell off most of the office properties.
Those sales have given Zell and his team an enormous amount of financial flexibility to reshape the company. Here's a look at where the REIT seems headed over the next three years.
Where Equity Commonwealth is today
Equity Commonwealth entered 2021 with four remaining office properties consisting of 1.5 million square feet of space. It also had nearly $3 billion of cash on its balance sheet and no debt. That gives it tremendous financial flexibility to pursue acquisitions in the office sector or pivot Equity Commonwealth to another property type.
Where Equity Commonwealth is heading over the next three years
After years of speculation, Equity Commonwealth finally unveiled how it intended to rebuild its portfolio this May. It agreed to acquire Monmouth Real Estate Investment (NYSE: MNR) in an all-stock deal valuing the REIT at $3.4 billion. Monmouth owns 120 single-tenant net leased logistics properties. That transaction marked Equity Commonwealth's decision to transition into the industrial real estate sector. The deal structure also allowed the company to preserve its cash to make additional investments in the space.
However, it hasn't been smooth sailing. A rival bidder, Starwood Capital, made a last-ditch effort to scuttle that deal by increasing its all-cash offer. That forced Equity Commonwealth and Monmouth to amend their merger agreement in August. Equity Commonwealth increased the stock portion of its proposal by 6.4% while providing Monmouth investors with a cash option.
There's no certainty that Equity Commonwealth will close the Monmouth acquisition since Starwood could continue raising its cash bid until Equity walks away. However, what seems clear is that Equity Commonwealth intends on transitioning to an industrial REIT. The company is already working on selling its remaining office assets. Meanwhile, it's exploring additional opportunities to invest in the industrial sector.
Equity Commonwealth's CEO David Helfand stated on the company's second-quarter conference call that "we're looking at a broad range of opportunities, including M&A, large portfolios, and working closely with merchant builders to source investment opportunities." Meanwhile, Equity's chief operating officer, David Weinberg, stated: "We are looking at a broader range of investments. Rather than buy only single-tenant net leased assets, we are willing to take on leasing and development risk."
In other words, the company fully intends on transitioning to the industrial sector. Further, it plans to expand on Monmouth's strategy, which focuses on purchasing single-tenant net leased logistics properties. That means it's open to buying and building multi-tenant properties secured by other lease structures. The strategy expansion will leverage Equity's experience in operating multi-tenant properties and in development.
Equity Commonwealth has ample financial capacity to fund this expansion, no matter the outcome of the Monmouth deal. The company estimates it will have about $4 billion of balance sheet capacity to finance future industrial investments if it closes the Monmouth merger following the recent amendment to their deal. Meanwhile, if that transaction falls through, it will have more than $3 billion of cash, along with ample debt capacity, to put to work on other opportunities in the industrial sector.
Equity Commonwealth clearly intends to exit the office sector and expand into industrial real estate. While it hopes to merge with Monmouth and accelerate this transition, the company is exploring various other opportunities to grow in this space. It has the financial resources to make this transition happen. Because of that, it seems likely that Equity Commonwealth will have a sizable portfolio of logistics properties three years from now.