Billionaire real estate investor Sam Zell was known for headline-grabbing transactions, including a stomach for distressed deals that led to his colorful nickname, “the Grave Dancer.”
Just over a year after Zell’s death at age 81, one of his former real estate investment trusts is once again in the spotlight for reasons much different than massive deals such as Equity Office's $39 billion sale to Blackstone in 2007.
Office landlord Equity Commonwealth in the past week said it will liquidate and return billions of dollars in cash to shareholders, a development that some investors and REIT observers for years viewed as inevitable.
The announcement ends years of the REIT hoarding cash from sales of properties, while searching in vain for a major acquisition for about $2.2 billion in cash on hand. The process culminated with a failed bidding war against rival billionaire investor Barry Sternlicht’s Starwood Capital Group.
Some prominent Equity Commonwealth investors balked this year, and now longtime Zell associate David Helfand, president and CEO of the Chicago-based REIT, said the firm will begin the process of selling its four remaining buildings, returning cash to investors and winding down the company.
Helfand’s comments on a quarterly earnings call with Wall Street analysts within the past week ended any lingering hopes by investors of a post-Zell blockbuster.
It also resolved years of questions about how Helfand and other executives planned to reinvest the built-up capital, including increasingly loud calls from activist investors seeking a liquidation.
“It’s the right decision,” said Reagan Pratt, a former real estate executive and buy-side portfolio manager in the REIT industry who knew Zell and invested in his companies. “It’s probably a few years too late.”
Equity Commonwealth didn't immediately respond to a request to comment beyond the call with analysts.
Unusual Move
REIT liquidations are relatively unusual, and Equity Commonwealth’s path toward shutting down wouldn’t have been expected just over a decade ago when Zell and his team, including Helfand, were brought on in 2014 to take over leadership of an office landlord then known as CommonWealth REIT.
They were tasked with selling off a far-flung portfolio of office properties that activists and other investors viewed as below the quality typically seen in a publicly traded company.
Some REIT watchers praised the way the Helfand-led landlord sold off unwanted properties to raise cash.
But after the office sector was hit hard by COVID-19, and after years of Helfand talking of seeking a big buyout across multiple property sectors, some investors grew impatient.
Earlier this year, activist investor Jonathan Litt of Stamford, Connecticut-based Land & Buildings Investment Management went public with complaints of high executive pay and other costs for a landlord with just four properties, a languishing share price and no clear progress toward a big, company-transforming transaction.
Then, ahead of this week’s quarterly earnings, another big shareholder, San Francisco-based Indaba Capital Management, publicly voiced similar concerns. Yet another investor, New York-based Irenic Capital Management, soon followed suit.
“It’s one thing to have an activist investor come out and make comments,” said David Auerbach, chief investment officer at Rowayton, Connecticut-based Hoya Capital Real Estate, an exchange-traded funds issuer and research firm that does not own Equity Commonwealth shares. “To have two activist investors come out right before earnings is almost unheard of.
“This was something they can’t run and hide from.”
Lost Monmouth Deal
Helfand did have at least one close call in putting the REIT’s cash back to work.
In 2021, Equity Commonwealth attempted a $3.4 billion takeout of New Jersey-based Monmouth Real Estate Investment Corp. Shareholders in the industrial landlord rejected the offer after a higher bid from Starwood Capital. Monmouth eventually was sold to Industrial Logistics Property Trust for $4 billion.
Helfand continued to hunt for another huge deal during a challenging time in real estate, which included rising interest rates, low deal volume and competition from deep-pocketed investors such as Blackstone and KKR that have been gobbling up real estate.
“They were trying to be prudent investors, but nothing ever lined up at their price tag and there may have been competition from much deeper pockets,” Auerbach said. “It was such a fascinating story that they had all this capital to go out and do something, but they’re earning fees off that capital. They never deployed the capital, and that rubbed investors the wrong way. They started asking: What am I paying these guys for?
“As fund managers, you’re not paid to sit on cash.”
Shutting down Equity Commonwealth includes several upcoming steps, including a vote by shareholders and the sale of the remaining buildings: two in Austin, Texas, and one each in Denver and Washington, D.C.
After Helfand disclosed plans to wind down the REIT by mid-2025, Irenic said in a statement that Equity Commonwealth’s board and management were “making the difficult but correct decision to recommend a liquidation.”
It’s unclear whether Equity Commonwealth ever considered reshaping the portfolio through purchases of single buildings or small portfolios, rather than awaiting a moment of plunging values with “blood in the streets,” leading to one big opportunity at a bargain price, Pratt said.
“There wasn’t a home run to be had, in my opinion,” Pratt said.
Pratt is now the Douglas and Cynthia Crocker Endowed Director of the Real Estate Center at DePaul University. Douglas Crocker, a longtime backer of the Chicago university’s real estate program that Pratt leads, helped take Zell’s Equity Residential public in 1993.
“It was a smart move by the original activists to bring them in to sell the cats-and-dogs portfolio and bring in a new one,” Pratt said of Equity Commonwealth. “Where the disconnect happened was looking for an elephant when they maybe should have been hunting rabbits."