Real estate investment trusts (REITs) tend to be very methodical. They usually don't undertake drastic strategy changes overnight. Instead, they'll often make small moves to test the waters in a new market or property type.
Equity Commonwealth (NYSE: EQC) had been the epitome of a slow-moving REIT, as it systematically sold off properties over several years to reposition its balance sheet for the right opportunity. However, instead of slowly shifting in a new direction, the REIT is doing a complete 180 on its strategy in one fell swoop. Here's a closer look at why it believes this pivot will pay off for its shareholders.
Equity Commonwealth company profile
Equity Commonwealth entered 2021 as an office REIT. The company had four office properties in Denver; Washington, D.C.; and Austin, Texas, with 1.5 million square feet. However, it announced plans to transition to the industrial real estate sector in early May by agreeing to acquire industrial REIT Monmouth Real Estate Investment Corp. (NYSE: MNR).
Monmouth brings a portfolio of 120 logistics properties with 24.5 million square feet of space across 31 states. In addition, Monmouth had agreed to purchase six more properties with 1.8 million square feet of space. The company focuses on owning modern single-tenant logistics properties near major seaports, intermodal ports, and airports. It leases these properties primarily to investment-grade tenants.
While Monmouth leases space to several high-quality tenants, it's worth noting that FedEx is by far the biggest at 45.8% of its square footage and 55.4% of its annual rent. Other notable tenants include Amazon at 6.8% of its yearly rent and Home Depot at 4.1% of its annual rent.
While that's a high concentration among its largest tenants, these companies are some of the country's financially strongest. Further, they need more logistics space to support their growth.
Equity Commonwealth news
The headliner for Equity Commonwealth is its transformational merger with Monmouth. The all-stock deal values the industrial REIT at $3.4 billion and will give the company an attractive and scalable platform in the fast-growing industrial sector.
Meanwhile, because it's an all-stock deal, Equity Commonwealth will maintain its cash-rich balance sheet. The company expects to have $2.5 billion in cash after closing the deal. In addition, the company plans to sell off its remaining office properties while eventually monetizing Monmouth's marketable security portfolio to further enhance its financial flexibility.
Before agreeing to buy Monmouth, Equity Commonwealth's primary focus was monetizing its office portfolio. The company entered 2020 with seven properties totaling 2.5 million square feet, which it trimmed down to four by year-end.
The most notable sale was Tower 333 in Bellevue, Washington. The company sold the 435,000-square-foot Class A office property for more than $401 million. It then used the asset sales proceeds to repay debt, repurchase stock, and pay a special dividend.
While Equity Commonwealth has been shrinking its portfolio, Monmouth is in expansion mode. The company completed two acquisitions in fiscal 2021, investing $170 million to add 1.1 million square feet of space. In addition, it had six new build-to-suit projects in its pipeline, comprising 1.8 million square feet and $238.1 million of investment.
The REIT also has several FedEx Ground parking expansion projects in progress and under discussion. It expects to invest $31.4 million on those expansion projects that will capture additional rent and lengthen its lease terms. The company also renewed several leases at higher rates than expiring rents.
Equity Commonwealth stock price
Equity Commonwealth's strategy shift has weighed on its stock price over the last few years: