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Activist Investors Tell REIT Their Cash Is More Valuable Than the Company Itself
Defining the future of real estate
Franco Faraudo
March 14, 2024
Propmodo Daily
By Franco Faraudo · Mar. 14, 2024
Greetings!
It’s not easy being a REIT today. They face the challenges of a tough market environment and declining stock values. They are becoming targets for activist investors. This time, the former company of the late Sam Zell, Equity Commonwealth, is under pressure from a call to liquidate. In today's email, we examine a letter sent by the activist investor Jonathan Litt's firm, Land & Buildings, urging Equity Commonwealth to liquidate their assets and cease operations.
Also, this week, Propmodo Technology is focusing on the multifamily tenant experience. Our spotlight is made possible with the support of our sponsor, Amenify, which has recently unveiled the Multifamily Ancillary Income Report. Be sure to check out our content highlighting some of the most innovative ways apartment owners are enhancing resident satisfaction and generating ancillary revenue streams.
Now, let's dig in!
Activist Investors Tell REIT Its Cash Is More Valuable Than the Company Itself
Real estate's most notorious activist investor, Jonathan Litt, is at it again. Just months after pressuring Ventas to replace its board of directors, his company, Land & Buildings, has sent a letter to Equity Commonwealth suggesting that they liquidate the company.
Equity Commonwealth was started back in 1988 but was taken over by the famed investor Sam Zell in 2014. Now, less than a year after Zell's passing, they are down to only four buildings. Currently, the company's market cap is $2.04 billion, which, according to the letter, is about how much cash the REIT has on its balance sheet.
Like most REITs, Equity has seen its valuation drop. It is down to nearly half of what it was worth back in 2020. The drop in valuation isn't just due to speculation either; in their last earnings call, they announced that "same property NOI was down 2.3%, and the same property cash NOI was 12% lower compared to the fourth quarter of 2022."
Litt and his team think that Equity Commonwealth's current valuation, its cash position, and the state of the market today mean that investors would be best served if the current portfolio were sold off and the assets disbursed. The complaint cites the past underperformance of the stock, the $119 million in overhead the company pays every year, and the current interest rates as reasons that the cash shouldn't be redeployed.
Currently, Equity Commonwealth is focused on investing in less risky property types like warehouses and multifamily, but according to the letter, those might not provide the necessary returns either: "Private market pricing for the property types EQC is targeting, industrial warehouses and residential, remain full. There is limited distress in the private market as fundamentals remain sound, and values have not declined enough to cause substantial debt maturity issues. Moreover, the vast majority of warehouse and residential REITs are trading at material discounts to NAV today. We would not expect EQC to be any different, particularly without a platform or track record in those subsectors."
Land & Buildings currently owns only 3 percent of the company, but if they can get other investors on board, they could force the company to liquidate with a proxy vote. Equity Commonwealth has been repurchasing tens of millions of shares of its stock, likely to help it outvote any possible dissent. If Litt is able to force the company to liquidate, it would be a blow to other REITs, whose investors might also start thinking about whether or not their money would be better invested somewhere outside the tumultuous property market.
Insider Insights
🦢 Contrarian play: Goldman Sachs is resuming its investment in U.S. property as other big banks continue to pull back.
🏢 Government utilization: The House of Representatives has passed a bill that requires the General Services Administration (GSA) and the Office of Management and Budget (OMB) to implement a standard methodology for measuring the utilization of public buildings and directs the disposal of unused space.
Overheard
A record number of Americans are taking hardship withdrawals from their 401k.
The figure has nearly doubled over the last four years.
40% of these hardship withdrawals are to avoid foreclosure.
People are running out of money.
— Nick Gerli (@nickgerli1)
4:35 PM • Mar 12, 2024
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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.
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