An activist investor is calling for one of late billionaire Sam Zell’s real estate investment trusts that he led to liquidate its remaining four office buildings and return the cash to shareholders.
With shares in Equity Commonwealth trading below the value of its cash and the implied value of its remaining properties, the Chicago-based REIT should sell off buildings in Denver, Washington, D.C., and Austin, Texas, and wind down the company, Land & Buildings Investment Management wrote in a letter to the board of directors.
Jonathan Litt, founder and chief investment officer of Stamford, Connecticut-based Land & Buildings, made the letter public and issued a statement Wednesday. The move by the 3% shareholder in the REIT occurs less than a year after the death of 81-year-old Zell last May.
The letter and statement from Litt come almost exactly a decade after Zell and longtime lieutenant David Helfand took over leadership of the REIT — then called CommonWealth REIT and based in Newton, Massachusetts — after shareholders led by Corvex Management and Related Cos. voted out leaders Barry and Adam Portnoy.
Investors criticized the father and son for poor performance and benefiting from fees generated from managing the REIT’s properties, which they saw as a conflict of interest.
In Litt’s letter to the board, he refers to the takeover of the REIT in 2014 as “one of the greatest corporate governance victories in the recent history of the real estate sector.” But he added that “continuing the status quo at EQC risks squandering this success.”
“The Equity Commonwealth Board and management team remain committed to maximizing shareholder value,” a spokesperson said in an emailed statement to CoStar News. “We continue to evaluate strategic alternatives, including a potential liquidation, sale or other exit of our business. We regularly engage with our shareholders and look forward to meeting with Land & Buildings.”
Equity Commonwealth shares closed Wednesday at $19.07, up 1.54%.
Litt argued that the REIT, for which Helfand now serves as chairman, president and CEO, has bloated expenses, primarily for executive pay. He wrote that the $37 million spent last year on general and administrative costs is excessive for managing a four-building portfolio.
According to the letter, Equity Commonwealth shares have continued to trade more than 20% below the properties’ net asset value and below the value of its more than $2 billion in cash from a selloff of office buildings that began shortly after Zell’s executive team took over the REIT about a decade ago.
The lone remaining buildings are the 32-story 17th Street Plaza tower at 1225 17th St. in Denver; the 11-story Herald Square at 1250 H Street NW in Washington, D.C.; and the 20-story Capitol Tower at 206 E. Ninth St. along with the five-story Bridgepoint Square 4 at 6200 Bridge Point Parkway, both in Austin, Texas.
Equity Commonwealth has talked for years of using the cash pile for a major acquisition, including a $3.4 billion takeover bid for New Jersey-based industrial landlord Monmouth Real Estate Investment Corp. that was rejected by shareholders in 2021.
The REIT’s next move was one of the biggest unresolved questions when Zell died last year. Equity Commonwealth is publicly traded, and Zell’s family office, Chai Trust, owned about 3.3% of the company’s shares as of the end of 2023, according to Yahoo Finance.
To qualify as a REIT under federal guidelines, a company must have the majority of its assets tied to real estate and distribute at least 90% of its taxable income to shareholders annually in the form of dividends. There is no penalty for sitting on cash.
In the company’s fourth-quarter earnings call with analysts, Chief Operating Officer David Weinberg said executives continued to hunt for a deal, saying that “we believe a compelling investment opportunity is one where we are getting paid for the risk we are taking,” according to a transcript of the call.
“We also believe that investments with strong long-term growth prospects are good businesses for public REITs,” Weinberg said. “Accordingly, while we look across sectors, we are spending more time on industrial and residential investments, including workforce housing. We remain hopeful that we will find a deal. In the meantime, the team remains focused and disciplined.”
Weinberg later added that if no large-scale acquisition can be found, the REIT would have to “look longer and harder” at liquidating.
Litt argued in his statement Wednesday that “the evidence is overwhelming that the time for action is now.” He added that “we believe 10 years is long enough” to ponder the next move.
“A decade ago, the intervention of shareholder advocates, including the legendary Sam Zell, was needed to reset the direction of Equity Commonwealth’s predecessor entity,” Litt wrote. “A new round of shareholder advocacy is required now. If the board continues to take its current stance, we are committed to exercising our rights as shareholders to send a clear message about the need for immediate action that is in the best interests of shareholders, not management.”