Equity Commonwealth, a real estate investment trust once led by late billionaire real estate investor and REIT pioneer Sam Zell, plans to wind down after pressure from activist investors to return a pile of cash to shareholders.
Leaders of the Chicago-based office REIT on Wednesday disclosed the liquidation plan in a quarterly call with analysts, a move that will end a long-running but unfruitful pursuit of a big deal to reinvest more than $2 billion in cash racked up through sales of office buildings throughout the country over several years.
The move comes just over a year after Zell’s death at age 81. The decision also follows months of calls by big investors to shut down the company and return the cash to shareholders.
The start of the liquidation comes a little more than a decade after a takeover of the REIT’s leadership by Zell and longtime lieutenant David Helfand were hailed by REIT observers as a victory for corporate governance.
More recently, Helfand — now president and CEO of Equity Commonwealth — had faced criticism that the continued pursuit of a major acquisition, rather than a sell-off of the last four remaining buildings and a wind-down of the company, was not in shareholders’ best interests.
Twice this year, activist investors from firms that each owned about 3% of Equity Commonwealth’s shares went public with demands that Helfand and other executives liquidate the REIT.
Helfand said during Wednesday’s call that “we have been evaluating potential investment opportunities in an effort to create long-term value for shareholders.”
“After working through our pipeline, we have been unable to consummate a compelling transaction,” Helfand added. “As a result, our board of trustees has determined that it’s advisable and in the best interests of our shareholders to proceed with the wind-down of our operations and the liquidation of our assets in order to maximize value for our shareholders.”
Zell's Legacy
Zell was a brash and outspoken investor who earned the nickname “The Grave Dancer” for buying distressed assets and often taking contrarian investment approaches. He also was known for traveling the world by motorcycle with a group of friends known as “Zell’s Angels,” adding to his rebel image.
His Equity Group Investments firm led several REITs, including Equity Office, which sold to Blackstone for a REIT-record $39 billion in 2007.
Zell created the firm that became Equity Residential while he was still a student at the University of Michigan. He took that company public in 1993, during a time when Zell helped popularize the REIT investment model.
Despite Zell’s reputation as a dealmaker, Equity Commonwealth was unable in the final years of his life to find a way to reinvest about $2.2 billion in cash on hand in a whopper new deal. That included a $3.4 billion takeover bid for New Jersey-based industrial landlord Monmouth Real Estate Investment Corp. that was rejected by shareholders in 2021.
2014 Takeover
Equity Commonwealth previously was known as CommonWealth REIT. Then based in Massachusetts, the REIT’s leaders, Barry and Adam Portnoy, came under public fire from shareholders in 2014 for poor performance and for collecting fees to manage the REIT’s properties, which was criticized as a conflict of interest.
The father-son leadership was voted out by shareholders and replaced by Zell and Helfand, with the headquarters moving to Zell’s longtime perch at 2 N. Riverside Plaza along the Chicago River.
Those changes were hailed at the time as a victory for shareholder-focused leadership of REITs.
That outlook began to change more recently, with some big shareholders complaining that Helfand and other executives were collecting millions of dollars in annual compensation to oversee a four-building portfolio across three cities.
In March, activist investor Jonathan Litt of Stamford, Connecticut-based Land & Buildings Investment Management went public with concerns that “continuing the status quo at [Equity Commonwealth] risks squandering” the legacy of the 2014 leadership change. He pointed out that shares in the REIT continued to trade at less than the value of the cash on hand, saying it made more sense to sell remaining buildings and return all the money to investors. Litt wrote in a statement that “10 years is long enough” to ponder the next deal.
Earlier this month, another approximately 3% shareholder, San Francisco-based Indaba Capital Management, went public with similar arguments, writing in a letter to the REIT’s board that the REIT “is severely undervalued due to its leadership’s actions and decisions.”
Following the liquidation announcement, shares were trading up about 2% as of Wednesday afternoon.
Liquidation Process
Helfand said the REIT already has three of its buildings on the market for sale. Those are the 11-story Herald Square building at 1250 H Street NW in Washington, D.C., and two buildings in Austin, Texas: the 20-story Capitol Tower at 206 E. Ninth St. and the five-story Bridgepoint Square 4 at 6200 Bridge Point Parkway.
He said the final building in the portfolio, the 32-story 17th Street Plaza tower at 1225 17th St. in Denver, will hit the for-sale market in early September.
Helfand said the timing of those potential sales is uncertain, saying “current market conditions for selling office assets are uniquely challenging.”
“Transaction volume for the first six months of the year was the lowest since 2010 and down 75% from pre-COVID levels,” Helfand said on the call. “Moreover, debt availability for office assets is scarce and when available is priced at double-digit coupons. Given the market environment, it is difficult to estimate both the timing and the proceeds from these sales. We’re hopeful that the dispositions will generate proceeds in excess of our $234 million net book value for the assets.”
While property sales play out, Helfand said Equity Commonwealth expects to file a proxy by mid-September recommending that shareholders approve a plan of sale and liquidation. Pending Securities and Exchange Commission approval, a vote is expected no later than December, he said.
If the plan is approved by at least a two-thirds vote, shareholders would receive a distribution of “substantially all of our cash,” Helfand said.
Shareholders would receive proceeds from the sale of any remaining properties after those deals are completed, he said. Helfand said executives anticipate fully winding down the REIT by mid-2025.