Equity Commonwealth (NYSE: EQC) today announced financial
results for the quarter and six months ended June 30, 2014.
Results for the Quarter Ended June 30, 2014:
Normalized funds from operations, or Normalized FFO, available
for Equity Commonwealth common shareholders for the quarter ended
June 30, 2014 was $84.6 million, or $0.68 per share basic and
diluted, compared to Normalized FFO available for Equity
Commonwealth common shareholders for the quarter ended June 30,
2013 of $81.6 million, or $0.69 per share basic and diluted.
Cash available for distribution, or CAD, for the quarter ended
June 30, 2014 was $62.5 million, or $0.50 per share, compared to
CAD for the quarter ended June 30, 2013 of $44.3 million, or $0.37
per share.
Normalized FFO and CAD each exclude:
- shareholder litigation costs and
related expenses totaling $4.6 million, or $0.04 per share, and
$7.0 million, or $0.06 per share, for the quarters ended June 30,
2014 and 2013, respectively; and
- estimated incentive fees payable in
EQC’s common shares, based upon common share total return, totaling
$7.0 million, or $0.06 per share, for the quarter ended June 30,
2014; and incentive fees paid in EQC’s common shares, based upon
increases in annual funds from operations, or FFO, per share,
totaling $0.2 million, or less than $0.01 per share, for the
quarter ended June 30, 2013. Incentive fees payable for the quarter
ended June 30, 2013 were calculated prior to the amendment of EQC’s
business management agreement on December 19, 2013, which changed
the structure of the incentive fees beginning January 1, 2014.
Net loss available for Equity Commonwealth common shareholders
was $17.8 million for the quarter ended June 30, 2014, compared to
net income available for Equity Commonwealth common shareholders of
$7.7 million for the same period last year. Net loss available for
Equity Commonwealth common shareholders per share, basic and
diluted (earnings per share, or EPS), was $0.14 for the quarter
ended June 30, 2014, compared to net income available for Equity
Commonwealth common shareholders per share, basic and diluted
(EPS), of $0.07 for the quarter ended June 30, 2013. Net loss
available for Equity Commonwealth common shareholders for the
quarter ended June 30, 2014 includes:
- aggregate losses of $28.1 million, or
$0.23 per share, from asset impairment and the early extinguishment
of debt, $5.4 million, or $0.04 per share, which was in connection
with asset sales during the quarter;
- $4.6 million, or $0.04 per share, of
shareholder litigation costs and related expenses included in
general and administrative expenses;
- $7.0 million, or $0.06 per share, of
estimated incentive fees payable in EQC’s common shares based upon
common share total return;
- preferred distributions of $23.2
million, or $0.19 per share, resulting in a net increase in
preferred distributions of $12.0 million, or $1.1728 per share,
related to the conversion in May 2014 of 10,263,003 series D
convertible preferred shares into 10,411,779 common shares, as
further discussed later in this press release; and
- partially offset by a gain of $16.9
million, or $0.14 per share, from the issuance of shares at a price
above our per share carrying value by Select Income REIT, or SIR,
an equity investee.
Net income available for Equity Commonwealth common shareholders
for the quarter ended June 30, 2013 includes:
- a gain of $2.1 million, or $0.02 per
share, from the sale of properties;
- offset by a loss of $4.6 million, or
$0.04 per share, from asset impairments;
- incentive fees of $0.2 million, or less
than $0.01 per share; and
- $7.0 million, or $0.06 per share, of
shareholder litigation costs and related expenses.
The weighted average number of basic and diluted common shares
outstanding for the quarters ended June 30, 2014 and 2013, was
123,811,937 and 118,309,343, respectively.
Results for the Six Months Ended June 30, 2014:
Normalized FFO available for Equity Commonwealth common
shareholders for the six months ended June 30, 2014 was $156.2
million, or $1.29 per share basic and diluted, compared to
Normalized FFO available for Equity Commonwealth common
shareholders of $158.7 million, or $1.49 per share basic and
diluted, for the six months ended June 30, 2013.
CAD for the six months ended June 30, 2014 was $101.0 million,
or $0.83 per share, compared to CAD for the six months ended June
30, 2013 of $94.3 million, or $0.89 per share.
Net loss available for Equity Commonwealth common shareholders
was $8.5 million for the six months ended June 30, 2014, compared
to net income available for Equity Commonwealth common shareholders
of $22.3 million for the same period last year. Net loss available
for Equity Commonwealth common shareholders per share, basic and
diluted (EPS), was $0.07 for the six months ended June 30, 2014,
compared to net income available for Equity Commonwealth common
shareholders per share, basic and diluted (EPS), of $0.21 for the
six months ended June 30, 2013.
The weighted average number of basic and diluted common shares
outstanding for the six months ended June 30, 2014 and 2013, was
121,120,842 and 106,298,433, respectively.
The definitions and an explanation of the calculations of
Normalized FFO and FFO are provided in the footnotes on page 11 of
this press release, and an explanation of the calculation of CAD is
provided in the footnotes on page 13 of this press release.
A reconciliation of net income attributable to Equity
Commonwealth, determined in accordance with U.S. generally accepted
accounting principles, or GAAP, to FFO available for Equity
Commonwealth common shareholders and Normalized FFO available for
Equity Commonwealth common shareholders for the quarters and six
months ended June 30, 2014 and 2013 appears later in this press
release on page 10. A reconciliation of Normalized FFO available
for Equity Commonwealth common shareholders to CAD for the quarters
and six months ended June 30, 2014 and 2013 also can be found on
page 13 of this press release.
Operating Results (excluding EQC’s former consolidated
subsidiary, SIR):
As of June 30, 2014, 86.7% of EQC’s total square feet included
within continuing operations was leased, compared to 86.5% as of
March 31, 2014 and 87.0% as of June 30, 2013. During the quarter
ended June 30, 2014, EQC entered into leases for 1,562,000 square
feet, including lease renewals for 1,204,000 square feet and new
leases for 358,000 square feet, and leases for 1,483,000 square
feet expired. Leases entered into during the quarter ended June 30,
2014, including both lease renewals and new leases, had weighted
average cash rental rates that were approximately 4.4% lower than
prior rental rates for the same space and weighted average GAAP
rental rates that were approximately 1.3% higher than prior rental
rates for the same space.
The weighted average lease term based on square feet for leases
entered into during the quarter ended June 30, 2014 was 6.0 years.
Commitments for tenant improvements, leasing commission costs and
concessions for leases entered into during the quarter ended June
30, 2014 totaled approximately $27.9 million, or $2.98 per square
foot per year of the lease term.
Same property occupancy for 156 properties, consisting of 40
central business district, or CBD, properties and 116 suburban
properties, owned continuously since April 1, 2013 decreased 30
basis points from 87.0% as of June 30, 2013 to 86.7% as of June 30,
2014. Same property occupancy for the 40 CBD properties decreased
20 basis points from 85.6% as of June 30, 2013 to 85.4% as of June
30, 2014. Same property occupancy for the 116 suburban properties
decreased 40 basis points from 88.4% as of June 30, 2013 to 88.0%
as of June 30, 2014.
Same property cash basis net operating income, or Cash Basis
NOI, increased by 6.8% during the quarter ended June 30, 2014,
which was driven by a 14.7% increase in Cash Basis NOI at suburban
properties and a 2.0% increase in Cash Basis NOI at CBD properties.
Same property GAAP net operating income, or NOI, increased by 1.3%
during the quarter ended June 30, 2014, driven by a 9.3% increase
in same property GAAP NOI at suburban properties, offset by a 3.7%
decrease in same property GAAP NOI at CBD properties. The increase
in Cash Basis NOI and same property GAAP NOI at suburban properties
primarily reflects approximately $4.0 million recognized from the
settlement of litigation with a former tenant at a suburban
property. The increase in CBD property Cash Basis NOI reflects the
expiration of free rent periods. The decline in same property GAAP
NOI at CBD properties primarily reflects the decline in
occupancy.
The definitions and an explanation of the calculations of NOI
and Cash Basis NOI and a reconciliation of NOI and Cash Basis NOI
to net income, determined according to GAAP, for the quarters and
six months ended June 30, 2014 and 2013 appears later in this press
release on page 14.
Significant Events during the Second Quarter 2014:
The removal of EQC’s prior Trustees on March 25, 2014 triggered
a Fundamental Change Conversion Right of the 6 ½% cumulative
convertible series D preferred shares, as defined in EQC’s Articles
Supplementary, dated October 10, 2006, setting forth the terms of
the series D preferred shares. Pursuant to such right, the holders
of series D preferred shares had the option to elect to convert all
or any portion of their series D preferred shares at any time from
April 9, 2014 until the close of business on May 14, 2014 into a
number of common shares per $25.00 liquidation preference of the
series D preferred shares equal to the Fundamental Change
Conversion Rate. EQC calculated the Fundamental Change Conversion
Rate as 1.0145 common shares per $25.00 liquidation preference. As
of the close of business on May 14, 2014, the holders of 10,263,003
series D preferred shares elected to exercise their Fundamental
Change Conversion Right and EQC issued 10,411,779 of its common
shares to the holders of those series D preferred shares.
On March 31, 2014, EQC owned 12.5% of Affiliates Insurance
Company, or AIC, an insurance company then owned in equal
proportion by EQC, its manager Reit Management & Research LLC,
or RMR, and six other companies to which RMR provides management
services. On March 25, 2014, as a result of the removal of all of
EQC’s then Trustees, EQC underwent a change in control, as defined
in the shareholders’ agreement among EQC, the other shareholders of
AIC, and AIC. As a result of this change in control and in
accordance with the terms of the shareholders' agreement, the other
shareholders of AIC, on May 9, 2014, exercised their right to
purchase the 20,000 shares of AIC that EQC owned. EQC received $5.8
million in aggregate proceeds from this sale, and EQC no longer
holds any interest in AIC.
Due to the removal of the prior Trustees on March 25, 2014, EQC
was not able to declare regular quarterly common or preferred share
dividends until the election of the new Trustees on May 23, 2014.
In addition, beginning March 25, 2014, EQC was not able to pay
dividends under the terms of the forbearance agreements entered
into with EQC’s revolving credit facility and term loan lenders. On
June 6, 2014, EQC amended its revolving credit facility and term
loan agreements and in connection with such amendments, the
forbearance agreements were terminated. As noted below, on July 25,
2014, the Board of Trustees declared dividends on the series D
preferred shares and the series E preferred shares representing the
full amounts of accrued and unpaid dividends on such shares.
On May 23, 2014, EQC’s shareholders elected all seven of the
nominees for the Board of Trustees nominated by Related Fund
Management, LLC and Corvex Management LP, or together,
Related/Corvex, for election at EQC’s special meeting of
shareholders. The new Trustees are Sam Zell, James Corl, Edward
Glickman, David Helfand, Peter Linneman, Jim Lozier and Kenneth
Shea. The new Board of Trustees, or the Board, has elected Zell as
EQC’s Chairman of the Board.
Additionally on May 23, 2014, the Board accepted the
resignations of EQC’s previous executive officers and appointed
David Helfand as the new President and Chief Executive Officer,
Adam Markman as the new Executive Vice President, Chief Financial
Officer and Treasurer (as of July 14, 2014), David Weinberg as the
new Executive Vice President and Chief Operating Officer, and Orrin
Shifrin as the new Executive Vice President, General Counsel and
Secretary.
EQC made a number of improvements to its corporate governance
during the second quarter as follows:
- On June 5, 2014, EQC adopted Amended
and Restated Bylaws as well as new corporate governance guidelines,
a new code of business conduct and ethics, and new audit,
compensation and nominating and corporate governance committee
charters. The changes reflect EQC’s transition to an internally
managed company, the alignment of EQC’s governing documents with
Maryland law, and the strengthening of EQC’s commitment to
shareholder interests.
- On June 17, 2014, EQC terminated its
Renewed Rights Agreement, commonly known as a “poison pill”.
On June 13, 2014, a wholly owned subsidiary of EQC entered into
a Master Sub-Management Agreement, or the Sub-Management Agreement,
with CBRE, Inc., or CBRE. Under the terms of the Sub-Management
agreement, CBRE will act as sub-manager for each of EQC’s current
domestic properties and any additional domestic properties EQC may
acquire in the future for an initial term of two years, subject to
automatic one-year renewal terms, unless given 90 days advance
notice of non-renewal. EQC and CBRE are currently targeting that
CBRE will begin providing management services for all domestic
properties on October 1, 2014. CBRE began providing certain
transition services on June 13, 2014.
Under the Sub-Management Agreement, EQC will pay CBRE a
property-by-property management services fee. In addition, EQC will
pay CBRE a $0.6 million transition services fee for the transition
services provided by CBRE. They will also be reimbursed for certain
expenses incurred in the performance of their duties, including
personnel costs and equipment costs.
On June 27, 2014, EQC sold a portfolio of 14 properties (43
buildings) with a combined 2,784,098 square feet, consisting of 13
office properties with 2,492,098 square feet and one
industrial/flex property with 292,000 square feet, for an aggregate
sales price of $215.9 million, excluding mortgage debt repayments
and closing costs, pursuant to a sale agreement entered into on
March 17, 2014. In connection with these property sales, EQC repaid
$19.8 million of mortgage debt, along with prepayment costs of $2.8
million.
Subsequent Events:
On July 9, 2014, EQC sold its entire stake of 22.0 million
common shares of SIR, a publicly traded REIT. EQC received
approximately $704.8 million in cash, representing $32.04 per
share. As a result of this sale, EQC no longer holds any interest
in SIR. Following the sale, EQC subsequently repaid the $235.0
million outstanding balance on its revolving credit facility and
prepaid at par the $265.0 million non-recourse mortgage loan on two
buildings in Chicago, IL.
On July 25, 2014, the Board declared a dividend of $0.8125 per
series D preferred share to be paid on August 15, 2014 to
shareholders of record on August 5, 2014. This dividend includes
the accrued dividend of $0.40625 per share for the period from
February 15, 2014 to May 14, 2014 and the accrued dividend of
$0.40625 per share for the period from May 15, 2014 to August 14,
2014. On July 25, 2014, the Board also declared a dividend of
$0.90625 per series E preferred share to be paid on August 15, 2014
to shareholders of record on August 5, 2014. This dividend includes
the accrued dividend of $0.453125 per share for the period from
February 15, 2014 to May 14, 2014 and the accrued dividend of
$0.453125 per share for the period from May 15, 2014 to August 14,
2014. The aggregate amounts of $0.8125 and $0.90625 that will be
paid to the holders of series D preferred shares and series E
preferred shares, respectively, represent the full amounts of
accrued and unpaid dividends under the series D preferred shares
and the series E preferred shares.
At EQC’s annual meeting of shareholders held on July 31, 2014,
EQC’s shareholders approved various amendments to EQC’s Declaration
of Trust to, among other things, implement best-practice corporate
governance improvements.
Also at the annual meeting, EQC’s shareholders voted over 101
million shares, representing 94% of shares voted, in support of the
reimbursement to Related/Corvex of approximately $33.5 million of
expenses they incurred in connection with their consent
solicitations to remove EQC’s prior Trustees and to elect a new
slate of nominees to serve on EQC’s Board. Following this
proposal’s approval, approximately $16.7 million is expected to be
reimbursed in the third quarter 2014. An additional $8.35 million
is expected to be reimbursed in each of 2015 and 2016, if EQC’s
average closing price is at least $26.00 in each of these
years.
On August 1, 2014, the company changed its name from
CommonWealth REIT to Equity Commonwealth. On and after that date,
the common shares of the company began trading on the New York
Stock Exchange under the new name and the new ticker symbol “EQC.”
This name change reflects a new chapter for the Company. In keeping
with the other ‘Equity’ companies, Equity Commonwealth will operate
with an entrepreneurial culture, where the interests of all
stakeholders are aligned, focusing on long-term value creation for
shareholders.
Transition:
Equity Commonwealth is in the process of a significant
transition, during which the management team and Trustees are
evaluating all aspects of the Company’s operations. The transition
includes taking over and internalizing EQC’s corporate and business
operations from RMR, and the transitioning of property management
from RMR to CBRE. RMR continues to receive its contracted payments
for providing certain services under the business management
agreement and property management agreements. Additional
transition-related costs will be incurred as EQC ramps up
operations and transitions to CBRE as property manager.
With respect to the common dividend, EQC is evaluating its
options regarding the appropriate policy. EQC anticipates that the
quarterly common dividend likely will be reduced from the level
being paid before the prior Trustees were removed on March 25,
2014.
Any expectations or guidance previously provided by RMR or the
prior officers of the Company do not represent the current views of
EQC.
Presentation:
As of June 30, 2014, EQC owned approximately 36.7% of the common
shares of SIR, a publicly traded REIT that primarily owns and
invests in net leased, single tenant office and industrial
properties throughout the United States and leased lands in Hawaii.
On July 2, 2013, SIR issued and sold to the public 10.5 million
common shares in an underwritten public offering. Prior to this
offering, EQC’s 22.0 million common shares of SIR represented more
than 50% of SIR's outstanding common shares and SIR’s financial
position and results of operations were consolidated in EQC’s
financial statements. Beginning on July 2, 2013, EQC no longer
consolidates its investment in SIR, but instead accounts for its
investment in SIR under the equity method. Unless the context
indicates otherwise, the amounts reported in this press release
include SIR’s financial position and results of operations on a
consolidated basis with EQC for periods prior to July 2, 2013, when
SIR was EQC’s consolidated subsidiary. As described above, on July
9, 2014, EQC sold its entire stake of 22.0 million common shares of
SIR. EQC received approximately $704.8 million in cash,
representing $32.04 per share. As a result of this sale, EQC no
longer holds any interest in SIR.
For further information about SIR and its subsidiaries, please
see SIR’s periodic reports and other filings with the Securities
and Exchange Commission, or the SEC, which are available at the
SEC’s website at www.sec.gov. References in this press release to
SIR’s filings with the SEC are included to identify the source of
SIR information only, and the information in SIR’s filings with the
SEC is not incorporated by reference into this press release.
Supplemental Data:
A copy of EQC’s Second Quarter 2014 Supplemental Operating and
Financial Data is available for download at EQC’s website,
www.eqcre.com.
Equity Commonwealth is an internally managed and self-advised
REIT, which primarily owns office buildings located in central
business districts and suburban locations across the country, with
executive offices in Chicago, IL.
Please see the pages attached hereto for a more detailed
statement of EQC’s operating results and financial condition, for
an explanation of EQC’s calculation of FFO, Normalized FFO, CAD,
NOI and Cash Basis NOI and for a reconciliation of those non-GAAP
amounts to net income and net income attributable to Equity
Commonwealth.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this press release
constitute forward-looking statements within the meaning of the
federal securities laws. Any forward-looking statements contained
in this press release are intended to be made pursuant to the safe
harbor provisions of Section 21E of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements relate to
expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning
matters that are not historical facts. In some cases, you can
identify forward-looking statements by the use of forward-looking
terminology such as “may,” “will,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” or
“potential” or the negative of these words and phrases or similar
words or phrases which are predictions of or indicate future events
or trends and which do not relate solely to historical matters. You
can also identify forward-looking statements by discussions of
strategy, plans or intentions.
The forward-looking statements contained in this press release
reflect our current views about future events and are subject to
numerous known and unknown risks, uncertainties, assumptions and
changes in circumstances that may cause our actual results to
differ significantly from those expressed in any forward-looking
statement. We do not guarantee that the transactions and events
described will happen as described (or that they will happen at
all). The following factors, among others, could cause actual
results and future events to differ materially from those set forth
or contemplated in the forward-looking statements:
- changes in the real estate industry,
particularly in those markets in which our properties are
located;
- our ability to raise equity or debt
capital;
- our ability to internalize EQC’s
corporate and business operations from RMR;
- our ability to transition property
management to CBRE;
- the future amount of leasing activity
and occupancy rates at our properties;
- the future rent rates we will be able
to charge at our properties;
- the costs we may incur to lease space
in our properties;
- our ability to declare or pay
distributions to our shareholders and the amounts of such
distributions;
- the credit quality of our tenants;
- the likelihood that our tenants will
pay rent, renew leases, enter into new leases or be affected by
cyclical economic conditions;
- our sales of properties;
- our ability to compete for tenancies
effectively;
- our ability to pay interest on and
principal of our debt;
- our ability to obtain credit
facilities, and the availability of borrowings under those credit
facilities; and
- our tax status as a REIT.
While forward-looking statements reflect our good faith beliefs,
they are not guarantees of future performance. We disclaim any
obligation to publicly update or revise any forward-looking
statement to reflect changes in underlying assumptions or factors,
of new information, data or methods, future events or other
changes. For a further discussion of these and other factors that
could cause our future results to differ materially from any
forward-looking statements, see the section entitled “Risk Factors”
in our Annual Report on Form 10-K for the year ended December 31,
2013.
Equity Commonwealth
Condensed Consolidated Statements of
Operations
(amounts in thousands)
(unaudited)
Quarter Ended June 30, Six Months Ended June 30, 2014 2013
2014 2013 Revenues: Rental income $ 172,407 $ 210,013 $ 344,447 $
421,313 Tenant reimbursements and other income 42,787
52,175 88,007 103,487 Total revenues 215,194
262,188 432,454 524,800 Expenses:
Operating expenses 92,701 104,105 194,432 208,235 Depreciation and
amortization 59,831 63,459 111,480 126,029 General and
administrative 24,097 21,049 48,945 37,712 Loss on asset impairment
22,683 - 17,922 - Acquisition related costs - 145
5 773 Total expenses 199,312 188,758
372,784 372,749 Operating income 15,882 73,430
59,670 152,051 Interest and other income 281 249 665 704
Interest expense (including net amortization of debt discounts,
premiums and deferred financing fees of ($300), $265, ($609), and
$873, respectively) (37,899) (43,320) (75,834) (95,216) Loss on
early extinguishment of debt - - - (60,027) (Loss) gain on sale of
equity investments (33) - (33) 66,293 Gain on issuance of shares by
an equity investee 16,911 - 17,020 -
(Loss) income from continuing operations
before income tax expense
and equity
in earnings of investees (4,858) 30,359 1,488 63,805 Income tax
expense (908) (754) (1,463) (1,742) Equity in earnings of investees
12,454 159 23,388 4,421 Income from
continuing operations 6,688 29,764 23,413 66,484 Discontinued
operations: Income from discontinued operations 4,114 1,643 8,125
1,637 Loss on asset impairment from discontinued operations (2,072)
(4,589) (2,360) (8,535) Loss on early extinguishment of debt from
discontinued operations (3,345) - (3,345) - Net gain on sale of
properties from discontinued operations - 2,099
- 3,359 Income before gain on sale of properties
5,385 28,917 25,833 62,945 Gain on sale of properties -
- - 1,596 Net income 5,385 28,917 25,833
64,541 Net income attributable to noncontrolling interest in
consolidated subsidiary - (10,028) -
(19,985) Net income attributable to Equity Commonwealth 5,385
18,889 25,833 44,556 Preferred distributions (6,982) (11,151)
(18,133) (22,302) Distribution on conversion of preferred shares
(16,205) - (16,205) - Net (loss) income available for Equity
Commonwealth
common shareholders $ (17,802) $ 7,738 $ (8,505) $ 22,254
Amounts attributable to Equity Commonwealth common
shareholders: (Loss) income from continuing operations $ (16,499) $
8,585 $ (10,925) $ 25,793 Income from discontinued operations 4,114
1,643 8,125 1,637 Loss on asset impairment from discontinued
operations (2,072) (4,589) (2,360) (8,535) Loss on early
extinguishment of debt from discontinued operations (3,345) -
(3,345) - Net gain on sale of properties from discontinued
operations - 2,099 - 3,359 Net (loss)
income $ (17,802) $ 7,738 $ (8,505) $ 22,254
Equity Commonwealth
Reconciliation of Net Income
Attributable to Equity Commonwealth to Funds from
Operations
and Normalized Funds from
Operations
(amounts in thousands, except per share
data)
(unaudited)
Quarter Ended June 30, Six Months Ended June 30, 2014 2013
2014 2013 Calculation of FFO:(1) Net income attributable to Equity
Commonwealth $ 5,385 $ 18,889 $ 25,833 $ 44,556 Plus: depreciation
and amortization from continuing operations 59,831 63,459 111,480
126,029 Plus: depreciation and amortization from discontinued
operations - 3,930 - 7,883 Plus: loss on asset impairment from
continuing operations 22,683 - 17,922 - Plus: loss on asset
impairment from discontinued operations 2,072 4,589 2,360 8,535
Plus: FFO from investees 16,611 159 31,551 4,901 Plus: net income
attributable to noncontrolling interest - 10,028 - 19,985 Less: FFO
attributable to noncontrolling interest - (13,239) - (26,128) Less:
gain on sale of properties - - - (1,596) Less: net gain on sale of
properties from discontinued operations - (2,099) - (3,359) Less:
equity in earnings of investees (12,454) (159)
(23,388) (4,421) FFO attributable to Equity Commonwealth
94,128 85,557 165,758 176,385 Less: preferred distributions
(6,982) (11,151) (18,133) (22,302) FFO
available for Equity Commonwealth common shareholders $ 87,146 $
74,406 $ 147,625 $ 154,083 Calculation of Normalized FFO:(1)
FFO attributable to Equity Commonwealth $ 94,128 $ 85,557 $ 165,758
$ 176,385 Plus: acquisition related costs from continuing
operations - 145 5 773 Plus: normalized FFO from investees, net of
FFO from investees (725) - 313 5 Plus: loss on early extinguishment
of debt from continuing operations - - - 60,027 Plus: loss on early
extinguishment of debt from discontinued operations 3,345 - 3,345 -
Plus: shareholder litigation costs and related expenses 4,588 6,987
8,458 10,125 Plus: estimated business management incentive fees(2)
6,996 196 13,225 392 Plus: average minimum rent from direct
financing lease, net of interest earned 121 37 221 53 Plus: FFO
attributable to noncontrolling interest - 13,239 - 26,128 Less:
normalized FFO attributable to noncontrolling interest - (13,394) -
(26,603) Less: loss (gain) on sale of equity investments 33 - 33
(66,293) Less: gain on issuance of shares by an equity investee
(16,911) - (17,020) - Normalized FFO
attributable to Equity Commonwealth 91,575 92,767 174,338 180,992
Less: preferred distributions (6,982) (11,151)
(18,133) (22,302) Normalized FFO available for Equity
Commonwealth common shareholders $ 84,593 $ 81,616 $ 156,205 $
158,690 Weighted average common shares outstanding – basic
and diluted(3) 123,812 118,309 121,121
106,298 Per common share: (Loss) income from continuing
operations attributable to Equity Commonwealth common shareholders
– basic and diluted $ (0.13) $ 0.07 $ (0.09) $ 0.24 (Loss) income
from discontinued operations attributable to Equity Commonwealth
common shareholders – basic and diluted $ (0.01) $ (0.01) $ 0.02 $
(0.03) Net (loss) income available for Equity Commonwealth common
shareholders – basic and diluted $ (0.14) $ 0.07 $ (0.07) $ 0.21
FFO available for Equity Commonwealth common shareholders – basic
and diluted $ 0.70 $ 0.63 $ 1.22 $ 1.45 Normalized FFO available
for Equity Commonwealth common shareholders – basic and diluted $
0.68 $ 0.69 $ 1.29 $ 1.49
Equity CommonwealthReconciliation of
Net Income Attributable to Equity Commonwealth to Funds from
Operationsand Normalized Funds from Operations
(continued)(amounts in thousands)(unaudited)
(1) EQC calculates FFO and Normalized FFO as shown above. FFO is
calculated on the basis defined by The National Association of Real
Estate Investment Trusts, or NAREIT, which is net income,
calculated in accordance with GAAP, plus real estate depreciation
and amortization, loss on real estate asset impairment, net income
attributable to noncontrolling interest and FFO from equity
investees, excluding any gain or loss on sale of properties, equity
in earnings from investees and FFO attributable to noncontrolling
interests. EQC’s calculation of Normalized FFO differs from
NAREIT's definition of FFO because EQC excludes acquisition related
costs, estimated business management incentive fees, gains from
issuance of shares by equity investees, gains and losses from sales
of equity investments, loss on early extinguishment of debt,
shareholder litigation costs and related expenses, the difference
between average minimum rent and interest earned from EQC’s direct
financing lease and the difference between FFO and Normalized FFO
from equity investees and noncontrolling interests. EQC considers
FFO and Normalized FFO to be appropriate measures of operating
performance for a REIT, along with net income, net income
attributable to Equity Commonwealth, net income available for
Equity Commonwealth common shareholders, operating income and cash
flow from operating activities. EQC believes that FFO and
Normalized FFO provide useful information to investors because by
excluding the effects of certain historical amounts, such as
depreciation expense, FFO and Normalized FFO may facilitate a
comparison of EQC’s operating performance between periods and with
other REITs. FFO and Normalized FFO are among the factors
considered by EQC’s Board of Trustees when determining the amount
of distributions to EQC’s shareholders. FFO and Normalized FFO do
not represent cash generated by operating activities in accordance
with GAAP and should not be considered as alternatives to net
income, net income attributable to Equity Commonwealth, net income
available for Equity Commonwealth common shareholders, operating
income or cash flow from operating activities, determined in
accordance with GAAP, or as indicators of EQC’s financial
performance or liquidity, nor are these measures necessarily
indicative of sufficient cash flow to fund all of EQC’s needs.
These measures should be considered in conjunction with net income,
net income attributable to Equity Commonwealth, net income
available for Equity Commonwealth common shareholders, operating
income and cash flow from operating activities as presented in
EQC’s condensed consolidated statements of operations, condensed
consolidated statements of comprehensive income (loss) and
condensed consolidated statements of cash flows. Other REITs and
real estate companies may calculate FFO and Normalized FFO
differently than EQC does.
(2) Amounts represent estimated incentive fees under EQC’s and
SIR’s business management agreement payable in common shares after
the end of each calendar year calculated: (i) prior to 2014 based
upon increases in annual FFO per share (as defined), and (ii)
beginning in 2014 based on common share total return. In
calculating net income in accordance with GAAP, EQC recognizes
estimated business management incentive fee expense each quarter.
Although EQC recognizes this expense each quarter for purposes of
calculating net income, EQC does not include these amounts in the
calculation of Normalized FFO until the fourth quarter, which is
when the actual expense amount for the year is determined. Amounts
for SIR are only for the period when SIR was a consolidated
subsidiary of EQC. Adjustments were made to prior period amounts to
conform to the current period Normalized FFO calculation.
(3) As of June 30, 2014, EQC had 4,917 series D cumulative
convertible preferred shares that were convertible into 2,364
common shares. The effect of a conversion of EQC’s series D
cumulative convertible preferred shares on income from continuing
operations attributable to Equity Commonwealth common shareholders
per share is anti-dilutive to income, FFO and Normalized FFO for
all periods presented. The removal of EQC’s entire prior Board of
Trustees on March 25, 2014 triggered a Fundamental Change
Conversion Right, as defined in EQC’s governing documents. Pursuant
to such right, on May 14, 2014, the holders of 10,263 series D
preferred shares opted to convert their series D preferred shares
into, and EQC issued, 10,412 common shares. Set forth below is the
calculation of diluted net income available for common
shareholders, diluted FFO available for common shareholders,
diluted Normalized FFO available for common shareholders and
diluted weighted average common shares outstanding.
Equity
CommonwealthReconciliation of Net Income Attributable to
Equity Commonwealth to Funds from Operationsand Normalized
Funds from Operations (continued)(amounts in
thousands)(unaudited)
Quarter Ended June 30, Six Months Ended June 30, 2014
2013 2014 2013 Net (loss) income available for Equity
Commonwealth common shareholders $ (17,802) $ 7,738 $ (8,505) $
22,254 Add - Series D convertible preferred distributions
1,998 6,167 8,165 12,334 Net (loss) income
available for Equity Commonwealth common shareholders – diluted $
(15,804) $ 13,905 $ (340) $ 34,588 FFO available for Equity
Commonwealth common shareholders $ 87,146 $ 74,406 $ 147,625 $
154,083 Add - Series D convertible preferred distributions
1,998 6,167 8,165 12,334 FFO available for
Equity Commonwealth common shareholders – diluted $ 89,144 $ 80,573
$ 155,790 $ 166,417 Normalized FFO available for Equity
Commonwealth common shareholders $ 84,593 $ 81,616 $ 156,205 $
158,690 Add - Series D convertible preferred distributions
1,998 6,167 8,165 12,334 Normalized FFO
available for Equity Commonwealth common shareholders – diluted $
86,591 $ 87,783 $ 164,370 $ 171,024 Weighted average common
shares outstanding – basic 123,812 118,309 121,121 106,298 Effect
of dilutive Series D preferred shares 2,364 7,298
2,364 7,298 Weighted average common shares
outstanding – diluted 126,176 125,607 123,485
113,596
Equity Commonwealth
Reconciliation of Normalized Funds from
Operations to Cash Available for Distribution
(amounts in thousands, except per share
data)
(unaudited)
Quarter Ended June 30, Six Months Ended June 30, 2014 2013
2014 2013 Calculation of CAD:(1) Normalized FFO available for
Equity Commonwealth common shareholders $ 84,593 $ 81,616 $ 156,205
$ 158,690 Plus: lease value amortization from continuing operations
4,166 2,658 6,418 5,422 Plus: lease value amortization from
discontinued operations - (227) - (462) Plus: amortization of
prepaid interest and debt discounts from continuing operations
(300) 265 (609) 873 Plus: amortization of prepaid interest and debt
discounts from discontinued operations (3) 19 (3) 40 Plus:
distributions from investees 10,560 - 20,680 4,279 Plus: general
and administrative expense paid in common shares(2) 911 616 5,178
1,132 Plus: minimum cash rent from direct financing lease 2,025
2,025 4,049 4,049 Plus: normalized FFO attributable to
noncontrolling interest - 13,394 - 26,603 Less: CAD attributable to
noncontrolling interest - (11,807) - (24,184) Less: average minimum
rent from direct financing lease (329) (329) (658) (658) Less:
straight line rent from continuing operations (1,079) (8,939)
(6,975) (19,744) Less: straight line rent from discontinued
operations (145) 103 (226) (54) Less: recurring capital
expenditures (22,007) (34,970) (51,169) (56,822) Less: normalized
FFO from investees (15,886) (159) (31,864)
(4,906) CAD $ 62,506 $ 44,265 $ 101,026 $ 94,258
Weighted average common shares outstanding - basic 123,812
118,309 121,121 106,298 CAD per share $
0.50 $ 0.37 $ 0.83 $ 0.89
(1) EQC calculates CAD as shown above. EQC considers CAD to be
an appropriate measure of its operating performance, along with net
income, net income attributable to Equity Commonwealth, net income
available for Equity Commonwealth common shareholders, operating
income and cash flow from operating activities. EQC believes that
CAD provides useful information to investors because CAD may
facilitate a comparison of cash based operating performance between
periods and with other REITs. CAD does not represent cash generated
by operating activities in accordance with GAAP and should not be
considered as an alternative to net income, net income attributable
to Equity Commonwealth, net income available for Equity
Commonwealth common shareholders, operating income or cash flow
from operating activities, determined in accordance with GAAP, or
as an indicator of EQC’s financial performance or liquidity, nor is
this measure necessarily indicative of sufficient cash flow to fund
all of EQC’s needs. This measure should be considered in
conjunction with net income, net income attributable to Equity
Commonwealth, net income available for Equity Commonwealth common
shareholders, operating income and cash flow from operating
activities as presented in EQC’s condensed consolidated statements
of operations, condensed consolidated statements of comprehensive
income (loss) and condensed consolidated statements of cash flows.
Other REITs and real estate companies may calculate CAD differently
than EQC does.
(2) Amounts represent the portion of business management fees
that are payable in EQC’s common shares as well as equity based
compensation for EQC’s and SIR’s trustees, officers and certain
employees of RMR (amounts for SIR are only for the period when SIR
was a consolidated subsidiary of EQC).
Equity Commonwealth
Calculation of Property Net Operating
Income (NOI) and Cash Basis NOI and Reconciliation to Net
Income
(amounts in thousands)
(unaudited)
Quarter Ended June 30, Six Months Ended June 30, 2014
2013 2014 2013 Calculation of NOI and Cash Basis NOI:(1) (2)
Rental income $ 172,407 $ 210,013 $ 344,447 $ 421,313 Tenant
reimbursements and other income 42,787 52,175 88,007 103,487
Operating expenses (92,701) (104,105)
(194,432) (208,235) Property net operating income (NOI)
122,493 158,083 238,022 316,565 Non cash straight line rent
adjustments (1,079) (8,939) (6,975) (19,744) Lease value
amortization 4,166 2,658 6,418 5,422 Lease termination fees
(1,145) (966) (1,738) (1,311) Cash Basis NOI $
124,435 $ 150,836 $ 235,727 $ 300,932 Reconciliation of Cash
Basis NOI to Net Income: Cash Basis NOI $ 124,435 $ 150,836 $
235,727 $ 300,932 Non cash straight line rent adjustments 1,079
8,939 6,975 19,744 Lease value amortization (4,166) (2,658) (6,418)
(5,422) Lease termination fees 1,145 966 1,738
1,311 Property NOI 122,493 158,083 238,022 316,565
Depreciation and amortization (59,831) (63,459) (111,480) (126,029)
General and administrative (24,097) (21,049) (48,945) (37,712) Loss
on asset impairment (22,683) - (17,922) - Acquisition related costs
- (145) (5) (773) Operating income
15,882 73,430 59,670 152,051 Interest and other income 281
249 665 704 Interest expense (37,899) (43,320) (75,834) (95,216)
Loss on early extinguishment of debt - - - (60,027) (Loss) gain on
sale of equity investments (33) - (33) 66,293 Gain on issuance of
shares by an equity investee 16,911 - 17,020 - (Loss) income from
continuing operations before income
tax expense and equity in earnings of
investees (4,858) 30,359 1,488 63,805 Income tax expense (908)
(754) (1,463) (1,742) Equity in earnings of investees 12,454
159 23,388 4,421 Income from continuing
operations 6,688 29,764 23,413 66,484 Discontinued operations:
Income from discontinued operations 4,114 1,643 8,125 1,637 Loss on
asset impairment from discontinued operations (2,072) (4,589)
(2,360) (8,535) Loss on early extinguishment of debt from
discontinued operations (3,345) - (3,345) - Net gain on sale of
properties from discontinued operations - 2,099
- 3,359 Income before gain on sale of properties
5,385 28,917 25,833 62,945 Gain on sale of properties -
- - 1,596 Net income $ 5,385 $ 28,917 $ 25,833
$ 64,541
(1) Excludes properties classified as discontinued operations
for the period ended June 30, 2014.
(2) EQC calculates NOI on a GAAP and cash basis as shown above.
EQC defines NOI as income from EQC’s real estate including lease
termination fees received from tenants less EQC’s property
operating expenses, which expenses include property marketing
costs. NOI excludes amortization of capitalized tenant improvement
costs and leasing commissions. EQC defines Cash Basis NOI as NOI
less non cash straight line rent adjustments, lease value
amortization and lease termination fees. EQC considers NOI and Cash
Basis NOI to be appropriate supplemental measures to net income
because they may help both investors and management to understand
the operations of EQC’s properties. EQC uses NOI and Cash Basis NOI
internally to evaluate individual, regional and combined property
level performance, and EQC believes that NOI and Cash Basis NOI
provide useful information to investors regarding EQC’s results of
operations because they reflect only those income and expense items
that are incurred at the property level and may facilitate
comparisons of EQC’s operating performance between periods and with
other REITs. The calculation of NOI and Cash Basis NOI exclude
certain components of net income in order to provide results that
are more closely related to EQC’s properties' results of
operations. NOI and Cash Basis NOI do not represent cash generated
by operating activities in accordance with GAAP, and should not be
considered as alternatives to net income, net income attributable
to Equity Commonwealth, net income available for Equity
Commonwealth common shareholders, operating income or cash flow
from operating activities, determined in accordance with GAAP, or
as indicators of EQC’s financial performance or liquidity, nor are
these measures necessarily indicative of sufficient cash flow to
fund all of EQC’s needs. These measures should be considered in
conjunction with net income, net income attributable to Equity
Commonwealth, net income available for Equity Commonwealth common
shareholders, operating income and cash flow from operating
activities as presented in EQC’s condensed consolidated statements
of operations, condensed consolidated statements of comprehensive
income (loss) and condensed consolidated statements of cash flows.
Other REITs and real estate companies may calculate NOI and Cash
Basis NOI differently than EQC does.
Equity Commonwealth
Condensed Consolidated Balance
Sheets
(amounts in thousands, except share
data)
(unaudited)
June 30, December 31, 2014 2013
ASSETS
Real estate properties: Land $ 748,302 $ 699,135 Buildings and
improvements 5,146,617 4,838,030 5,894,919 5,537,165
Accumulated depreciation (956,057) (895,059)
4,938,862 4,642,106 Properties held for sale - 573,531 Acquired
real estate leases, net 227,197 255,812 Equity investments 531,862
517,991 Cash and cash equivalents 428,373 222,449 Restricted cash
22,829 22,101 Rents receivable, net of allowance for doubtful
accounts of $7,451 and $7,885, respectively 238,033 223,769 Other
assets, net 206,204 188,675 Total assets $ 6,593,360
$ 6,646,434
LIABILITIES AND
SHAREHOLDERS' EQUITY
Revolving credit facility $ 235,000 $ 235,000 Senior unsecured
debt, net 1,856,373 1,855,900 Mortgage notes payable, net 895,231
914,510 Liabilities related to properties held for sale - 28,734
Accounts payable and accrued expenses 138,412 165,855 Assumed real
estate lease obligations, net 31,354 33,935 Rent collected in
advance 29,266 27,553 Security deposits 13,852 11,976 Due to
related persons 22,984 9,385 Total liabilities
3,222,472 3,282,848 Shareholders' equity: Preferred
shares of beneficial interest, $0.01 par value: 50,000,000 shares
authorized; Series D preferred shares; 6 1/2% cumulative
convertible; 4,916,997 and 15,180,000 shares issued and
outstanding, respectively, aggregate liquidation preference of
$122,925 and $379,500, respectively 119,286 368,270 Series E
preferred shares; 7 1/4% cumulative redeemable on or after May 15,
2016; 11,000,000 shares issued and outstanding, aggregate
liquidation preference $275,000 265,391 265,391 Common shares of
beneficial interest, $0.01 par value: 350,000,000 shares
authorized; 128,859,923 and 118,386,918 shares issued and
outstanding, respectively 1,289 1,184 Additional paid in capital
4,483,653 4,213,474 Cumulative net income 2,235,673 2,209,840
Cumulative other comprehensive loss (21,205) (38,331) Cumulative
common distributions (3,111,868) (3,082,271) Cumulative preferred
distributions (601,331) (573,971) Total shareholders'
equity 3,370,888 3,363,586 Total liabilities and
shareholders' equity $ 6,593,360 $ 6,646,434
Equity CommonwealthSarah Byrnes, 312-646-2801Investor
Relationswww.eqcre.com
Equity Commonwealth (NYSE:EQC)
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