Issues Open Letter to the Board Following
its Resistance to Indaba’s Private Engagement and Growing Concern
Among Shareholders About the Company’s Path Forward
Makes Clear That the Board’s Arbitrary
End-of-Year Deadline for Deciding Between a Major Transaction or
Liquidation Incentivizes Poor Decision-Making and Reckless Capital
Allocation
Reminds the Board it
has Presided Over a Decade of Poor Financial Performance and Lacks
Any Track Record of Effectively Allocating Capital to
Value-Enhancing Acquisitions
Urges the Board to Stop Wasting Company
Resources and Embrace Shareholder-Friendly Governance by Convening
a Vote on a Prospective Liquidation
Indaba Capital Management, L.P. (together with its affiliates,
“Indaba” or “we”), which is a top 10 shareholder of Equity
Commonwealth (NYSE: EQC) (“EQC” or the “Company”), today issued the
following open letter to the Company’s Board of Trustees (the
“Board”) regarding the need to protect shareholders’ capital and
prioritize their best interests following years of financial
underperformance.
***
July 22, 2024
Equity Commonwealth Two North Riverside Plaza, Suite 2000
Chicago, IL 60606 Attn: Board of Trustees
Members of the Board,
As you know from our prior communications, Indaba is a
significant shareholder of EQC, with ownership of approximately 3%
of the Company’s outstanding common shares. We are a value-focused
investment firm with a long-term track record of avoiding public
activism in favor of maintaining productive, private relationships
with corporate leadership teams. In rare instances, we are forced
to publicize our concerns and suggestions pertaining to a portfolio
company. We do so only after private engagement has proven
unproductive and when our thorough analysis indicates that
shareholder value is at risk of being permanently impaired.
Unfortunately, EQC is now one of these rare instances.
After following EQC for many years, we can state with conviction
that the Company is severely undervalued due to its leadership’s
actions and decisions. EQC’s equity market value should far exceed
its current level of approximately $2 billion given the Company has
nearly $2.2 billion of cash on hand, processes underway to sell
three of its remaining four properties, and recent public
disclosure about a prospective liquidation. Instead, EQC’s stock
trades at a paltry premium to cash, net of all liabilities and
windup costs, attributing negligible value to the Company’s
remaining assets.
We believe EQC’s valuation reflects investor fear about the
Company exploring a large “transformative" acquisition instead of
exclusively focusing on the orderly, safe liquidation that a
growing number of shareholders appear to want.1 Moreover, we
maintain that the Board’s arbitrary end-of-year deadline for
deciding between the two aforementioned paths incentivizes
leadership to recklessly allocate capital to a risky transaction.
The Board’s decision to set this timeline seems to reflect a
pattern of poor corporate governance, as evidenced by the
following:
- The Board is giving management just a few months to find a
multi-billion-dollar deal or lose its jobs, thereby undermining
thoughtful decision-making and creating conflicts of interest with
shareholders.
- The Board is broadcasting the urgency of identifying a target,
effectively compromising the Company’s leverage as a discerning
purchaser.
- The Board is devoting the Company’s resources to an assessment
of acquisitions despite having no track record of allocating
capital to value-enhancing deals over its 10-year tenure.
- The Board appears comfortable risking all of the Company’s
capital on a multi-billion-dollar transaction without shareholder
approval.
Shareholders might be more inclined to give you the benefit of
the doubt if not for the long-term financial underperformance and
stagnation under your leadership. Despite the Company’s
dispositions and distributions over the past decade, the fact is
the Company’s total shareholder returns have been extremely
disappointing. This reinforces the merits of a liquidation.
It is time for the Board and management to carefully reflect on
what is best for shareholders, not what is best for you as
long-serving directors and highly paid executives.
It would be a corporate governance “worst practice” for EQC
to now pursue a risky deal without incorporating direct shareholder
input.
As you know, we have engaged with you in a private manner to
share our analysis and concerns about your current course of
action. We expressed our view that for shareholders to achieve full
and fair value for their stock, EQC needs to stop pursuing new
investments, promptly announce a plan to commence a liquidation,
and set a date for a shareholder vote to ratify that path forward.
To that end, we urged the Board to announce a plan to liquidate EQC
by its second quarter earnings release later this month.
We hoped you would be receptive and engage with us in good
faith; however, we have found leadership to be defensive and
dismissive. This is equal parts problematic and ironic,
particularly since all but one current Board member joined EQC as a
result of shareholder activism a decade ago. It has now been almost
a month since we last spoke and you have yet to follow up with us
at all. Your total silence reflects an alarming disregard for
shareholders. This apparent neglect, amidst the Company’s pursuit
of a near-term “transformative” transaction, has prompted us to
begin communicating publicly.
The Board must immediately rethink its standards for
corporate governance at this inflection point and, in turn, start
to prioritize acting for the benefit of shareholders.
Amidst a challenging real estate environment, it is all the more
inappropriate for this Board to pursue a “transformative”
transaction over the objections of a growing subset of shareholders
and without a shareholder vote. EQC was unable to execute accretive
acquisitions during much more attractive market environments,
leaving us to question how the Board could seriously ask
shareholders to trust leadership’s acquisition capabilities right
now.
Leadership’s protracted continuation of the Company and its
mixed messaging around a possible liquidation are unmistakably
detrimental to shareholders, including the many long-suffering ones
who placed their trust in this Board many years ago. With only four
properties remaining, the Company does not need its massive
overhead. Nor should its top four executives have earned $45
million in compensation in just the past three years, while the
Company’s stock price has declined.
Although we acknowledge that you showed discipline by avoiding
bad deals in the past, the Board altered these dynamics by
disclosing a self-imposed deadline for announcing a large
transaction. Putting management in a figurative do-or-die scenario
alters incentives and motivations. There are now serious conflicts
of interests in play, with the management team and its advisors
having obvious economic incentives to find a large acquisition that
extends their roles and the Company’s lifecycle.
We will not stand idly by as the Board continues to disregard
the tenets of sound corporate governance and push such risks on
shareholders.
EQC must adopt checks and balances, with the Board publicly
committing to give shareholders the final say on any
“transformative” transaction for which they will bear the
risks.
At present, EQC is essentially an unconstrained vehicle with
well over $2 billion of equity purchasing power that the Board and
management can speculatively deploy without shareholder approval.
With leverage, EQC could feasibly spend more than twice that,
amplifying potential risk to investors. Simply put, shareholders
did not sign up for this. This context is similar to that of a
SPAC, but worse, as it is without any of the investor safeguards
such as a shareholder’s right to vote or redeem its capital.
Although we do not support the exploration of acquisitions, the
Board needs to immediately right this wrong if it wants to continue
down such a path. Shareholders need to know they will be able to
vote on a bet-the-house deal.
In case the Board has forgotten, we remind you that an unknown
“transformative” transaction carries high degrees of execution risk
and underwriting uncertainty, for both the Company and for
shareholders. A liquidation represents a value-maximizing path with
a high degree of certainty and a low degree of difficulty.
It seems to us that the Board has lost sight of its obligation
to act exclusively for the benefit of shareholders. Remember that
you only gained your positions of power after EQC shareholders
replaced an entire team of underperforming managers that
prioritized empire building over returns. It would be an
ignominious end to this chapter of EQC’s story if the Board were
seduced into a “transformative” transaction for the benefit of
insiders and to the detriment of shareholders.
In sum, you have not earned the right to unilaterally gamble
with shareholders’ capital.
Shareholders have been patient while this Board spent a decade
exploring pathways to recast the trajectory of EQC. Despite six of
the seven current Board members serving since 2014, you have
demonstrated an inability to effectively allocate capital.
Shareholders do not trust this Board to do so now at the eleventh
hour.
As a veteran Board, you are also judged by the performance you
have presided over. The vast majority of you have spent your
tenures overseeing objectively poor share price performance on an
absolute basis and relative to the market:2
1 YEAR TSR
3 YEAR TSR
5 YEAR TSR
10 YEAR TSR
EQC
-6.63%
-11.26%
-8.02%
23.01%
FTSE NAREIT All Equity
REITs
8.98%
-1.18%
25.48%
88.18%
S&P 500 Index
22.38%
35.39%
100.56%
234.29%
Russell 2000 Index
11.69%
6.86%
50.79%
116.98%
This underperformance, including consistently negative total
returns, is astounding given that the Company’s cash balance over
the last five years averaged nearly 90% of total assets and the
Company had few liabilities. It has been insulting to shareholders
when you have congratulated yourself for relative outperformance
versus self-selected indices, like the FTSE NAREIT Office Index,
when the Company has barely owned office properties for the past
several years and investors could have productively reinvested
capital elsewhere.
And while the Board’s disclosure of a prospective liquidation
may have been well-intended, its failure to oversee accretive
acquisitions and meaningful value creation over the past decade is
fueling investor skepticism about EQC’s path forward from here. Why
else would EQC’s stock trade at a material discount to its net
asset value, which is primarily cash? If investors were comfortable
with you allocating the Company’s vast cash hoard to a
“transformative” deal, the Company’s stock would be expected to
trade at a premium – not a discount – to its net asset value.
Next steps for the benefit of EQC’s shareholders.
It is not too late for the Board to prioritize the best
interests of shareholders by announcing it (i) has stopped
assessing potential acquisitions and (ii) will solicit formal
approval from shareholders on whether to liquidate the Company
following many years of underperformance. We welcome the
opportunity to have a productive, private dialogue should you
desire to reengage and resume our interactions with an open mind.
Our preference is to collaborate with you on a value-enhancing
outcome, although we are prepared to use the tools at our disposal
to publicly oppose anti-shareholder actions.
Sincerely,
Derek Schrier Managing Partner Indaba Capital Management, L.P.
About Indaba Capital Management, L.P. Indaba was founded in
2010 in San Francisco to invest in corporate equity and debt. Learn
more at www.IndabaCapital.com.
____________________ 1 See EQC’s Q4 2023 Earnings Call on
February 12, 2024, during which Chief Operating Officer David S.
Weinberg states “[p]lease keep in mind we're looking for larger
transformative investments […] we saw opportunities last year and
we're continuing to look at opportunities.” 2 Total shareholder
returns, inclusive of dividends reinvested, reflects data obtained
through Bloomberg LP and runs through July 19, 2024.
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Longacre Square Partners Greg Marose / Charlotte Kiaie,
646-386-0091 gmarose@longacresquare.com /
ckiaie@longacresquare.com