Capital Markets Could Enable A Move By Equity Commonwealth (EQC)

Aerial view of leafy eastern suburban houses on 4-way cross road intersection in Adelaide, South Australia

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Equity Commonwealth (NYSE:EQC) is a vehicle guided by Sam Zell that is looking to deploy capital in the real estate sector. Nothing has happened for years, and it is still trading at more or less cash value. While some people might complain about that, they dodged buying at the hottest point in the asset price cycle, which can’t be said for massive amounts of PE dollars that were allocated in 2021, all of which is performing in the negative territory. While there are uncertainties in the market, we feel quite strongly that the capital market situation should enable a move by EQC quite soon. Now is a reasonable time to watchlist this issue.

Q3 Breakdown

There’s not much to hear from the quarterly reports of a piggy bank. They aren’t selling some marginal assets, just like most other sellers on the market. Equilibrium between buyers and sellers in private markets has been a huge reason for the capital market slowdown, and has been talked about extensively by investment bankers. Indeed, it’s why EQC themselves hasn’t come across their own deals.

There are a couple of points which we liked to hear and strengthen the bull case:

  1. They are not getting excited by office deals in general, and still see some risks in hospitality. Good, because these are areas where capital impairment can really happen, especially offices, but also hospitality just because they’re relatively capitally intensive as far as commercial real estate goes.
  2. Apparently they have taken a run at industrial real estate. We like this because these markets tend to be more complex, and the dynamics of a good industrial investment can vary quite a bit more based on differing capital intensity of different industrial real estate, and factors relating to logistics and position relative to other key downstream and upstream industrial players in a market. There can be a lot more value add in an industrial investment, and the benefit of a skilled allocator would be more pronounced in an area like that.

Bottom Line

EQC is still trading just a little above the $24 per share cash value, but the premium is not really worth commenting on in any great detail. Ultimately, what it comes down to for investors is that the time is coming where the pieces will fall into place for EQC to make a deal.

As CPI looks to be peaking, we are likely to see more conviction from key actors. On one hand, buyers and sellers are more likely to agree on prices for private transactions like with real estate. On the other hand, leveraged finance players are going to be able to clear assets that might be looking for value on secondary markets at more certain prices, and therefore be able to issue new debt and help finance real estate transactions.

We can see from the US housing price index that leverage is taking its toll on housing values and multiples. This is a time where we are more likely to see a favorable deal. We think that over the typical horizon of a private investment, 5-7 years, the payoff could be substantial, especially as productivity gains over that time can counteract some of the economic disintegration we’ve just experienced in energy markets. There could be multiple expansion on top of price realization in a higher conviction, industrial play – if indeed industrial assets are what EQC end up closing on. Still, capital markets are smoothing over and transactions will start recovering to higher rates.

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