Equity Commonwealth (NYSE: EQC), formerly Commonwealth REIT, is an externally managed US-listed real estate investment trust with a portfolio of four class A office properties spanning 1,520,944 square feet in Denver, Austin, and Washington DC. These top properties have helped the company generate free cash flow despite an oversupply in office markets. For Q2, EQC posted a considerable jump in year-over-year (YoY) net income to $22.2 million from $13.8 million. Here, we summarized a May bullish thesis published by chewy on Value Investors Club.
A closeup of the property portfolio, highlighting the REIT’s internally managed investments.
While REIT activity has remained muted in past years, the thesis explores an investment opportunity to capitalize on the gains if shareholders vote to liquidate company assets in early fall. The analysis values the stock at $22.01 per share and estimates a return of 14.9% from trading levels in May. The potential liquidation event gained momentum after activist Land & Building, which took 3% ownership in EQC, publicly called for the company’s liquidation, which possibly has the support of many shareholders. Meanwhile, company management was willing to wind down the business by year-end.
The thesis also pointed out the strong downside protection from the pile of cash EQC sits on. EQC disposed of 164 properties over the past decade for gross proceeds of $7.6 billion under late chairman Sam Zell, who took the helm after activist firm Corvex and property developer Related ousted former EQC external manager RMR. Zell retired $3.3 billion of debt and preferred shares, repurchased over $652 million of common stock, and paid $1.8 billion to common shareholders. While the goal was to use the proceeds to acquire an optimizable real estate portfolio, no such acquisition was made, leaving the company with a pile of cash, a small team, and almost no debt.
While the value of office properties can be hard to gauge before they are sold, the analysis valued the properties at $357.3 million, considering an office REIT average cap rate of 9.6% and applying it to the LTM net operating income of $33.4 million. The estimate translates to a $230 per square foot rate, close to the $220 average calculated by a Colliers market report. However, the valuation is well below the total cost of the properties of $441.9 million, bought over the last three decades. The fact that EQC listed three of the four class A buildings in 2022 but pulled them out of the market when the US Federal Reserve embarked on a historic monetary tightening campaign could be a sign it was already open to liquidating assets.
EQC is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 34 hedge fund portfolios held EQC at the end of the first quarter which was 32 in the previous quarter. While we acknowledge the potential of EQC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as EQC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.