Equity Commonwealth (NYSE: EQC) today reported financial results
for the quarter and year ended December 31, 2014. All per share
results are reported on a fully diluted basis.
Results for the quarter ended December 31, 2014
Funds from Operations (FFO), as defined by the National
Association of Real Estate Investment Trusts, for the quarter ended
December 31, 2014 was $60.4 million, or $0.47 per share. This
compares to FFO for the quarter ended December 31, 2013 of $67.0
million, or $0.57 per share.
Normalized FFO for the quarter ended December 31, 2014 was $68.7
million, or $0.53 per share. This compares to Normalized FFO for
the quarter ended December 31, 2013 of $72.4 million, or $0.61 per
share. The following items impacted Normalized FFO per share for
the quarter ended December 31, 2014 compared to the corresponding
2013 period:
- approximately ($0.10) per share due to
the company’s sale of its entire interest in Select Income REIT
(SIR);
- approximately $0.05 per share from
higher same property cash net operating income (NOI), which
includes $0.02 per share from the settlement of litigation with a
former tenant;
- approximately $0.05 per share from
lower interest expense;
- approximately ($0.04) per share from
properties sold; and
- a net impact of approximately ($0.02)
per share due to dilution from the conversion of series D preferred
shares to common shares.
Normalized FFO begins with FFO and eliminates certain items
that, by their nature, are not comparable from period to period,
non-cash items, or items that tend to obscure the company’s
operating performance. Definitions and reconciliations of FFO and
Normalized FFO to net loss attributable to Equity Commonwealth,
determined in accordance with U.S. generally accepted accounting
principles, or GAAP, are included at the end of this press
release.
Net loss attributable to common shareholders was $165.5 million,
or $1.28 per share, for the quarter ended December 31, 2014. This
compares to net loss attributable to common shareholders of $16.5
million, or $0.14 per share for the quarter ended December 31,
2013.
Net loss attributable to common shareholders for the quarter
ended December 31, 2014 includes a loss on asset impairment of
$167.1 million. During the quarter, the company performed an
asset-by-asset review which contributed to the decision to market
multiple properties for sale. This decision shortened the
anticipated holding period for these properties and resulted in 34
assets meeting the criteria for impairment.
The weighted average number of common shares outstanding for the
quarter ended December 31, 2014 was 129,397,816 shares, compared to
118,387,388 shares for the quarter ended December 31, 2013.
Results for the year ended December 31, 2014
FFO for the year ended December 31, 2014 was $415.3 million, or
$3.32 per share. This compares to FFO for the year ended December
31, 2013 of $274.6 million, or $2.44 per share. FFO for the full
year 2014 included the company’s sale of its entire stake in SIR,
for $704.8 million, which generated a gain of $171.6 million, or
$1.37 per share.
Normalized FFO for the year ended December 31, 2014 was $268.3
million, or $2.14 per share. This compares to Normalized FFO for
the year ended December 31, 2013 of $284.3 million, or $2.53 per
share. In addition to other adjustments, Normalized FFO excludes
the $171.6 million gain on sale of the company’s stake in SIR in
2014 and the $66.3 million gain on sale of the company’s stake in
Government Properties Income Trust (GOV) in 2013.
Net loss attributable to common shareholders was $24.3 million,
or $0.19 per share, for the year ended December 31, 2014. This
compares to net loss attributable to common shareholders of $221.7
million, or $1.97 per share for the year ended December 31,
2013.
The net loss attributable to common shareholders for the year
ended December 31, 2014 includes a loss on asset impairment for
continuing and discontinued operations of $187.3 million. The asset
impairment for the full year 2014 includes the impairment described
above, for the quarter ended December 31, 2014, and an impairment
on an encumbered property taken earlier in the year.
The weighted average number of common shares outstanding for the
year ended December 31, 2014 was 125,162,915 shares, compared to
112,377,732 shares for the year ended December 31, 2013.
Operating Results
As of December 31, 2014, the company’s results for its
consolidated and same property portfolio, which consisted of 156
properties and 42.9 million square feet, were as follows:
- The overall portfolio was 85.8% leased,
compared to 85.9% as of September 30, 2014, and 87.0% as of
December 31, 2013.
- During the quarter, the company entered
into leases for approximately 1,448,000 square feet, including
lease renewals for approximately 1,173,000 square feet and new
leases for approximately 275,000 square feet.
- During the quarter, cash rental rates
on new and renewal leases were approximately 1.2% higher than prior
cash rental rates for the same space, primarily due to a 210,000
square foot short-term lease extension.
- During the quarter, GAAP rental rates
on new and renewal leases were approximately 8.1% higher than prior
GAAP rental rates for the same space, primarily due to a 210,000
square foot short-term lease extension.
- The company received income from the
settlement of litigation with a former tenant of $2.7 million for
the quarter ended December 31, 2014 and $8.8 million for the year
ended December 31, 2014.
- Same property NOI increased 3.6% for
the quarter ended December 31, 2014 and increased 0.9% for the year
ended December 31, 2014, when compared to the same periods in 2013.
Excluding the settlement of litigation with a former tenant, same
property NOI increased 1.2% for the quarter ended December 31, 2014
and decreased 1.0% for the year ended December 31, 2014, when
compared to the same periods in 2013.
- Same property cash NOI increased 5.9%
for the quarter ended December 31, 2014 and increased 3.7% for the
year ended December 31, 2014, when compared to the same periods in
2013. Excluding the settlement of litigation with a former tenant,
same property cash NOI increased 3.5% for the quarter ended
December 31, 2014 and increased 1.8% for the year ended December
31, 2014, when compared to the same periods in 2013.
The definitions and reconciliations of same property NOI and
same property cash NOI to operating income/loss, determined in
accordance with GAAP, are included at the end of this press
release. Same property NOI and same property cash NOI include
properties continuously owned from October 1, 2013 through December
31, 2014 for the quarter to date periods and properties
continuously owned from January 1, 2013 through December 31, 2014
for the year to date periods. Same property NOI and same property
cash NOI also exclude amounts related to the settlement of
outstanding assets and liabilities of previously-disposed
properties that are reflected in the company’s consolidated
results.
Significant Events for the year ended December 31,
2014
- The company repaid a total of $805.0
million of debt during 2014, including principal amortization,
reducing total debt to total market capitalization from 47.7% on
December 31, 2013 to 37.2% on December 31, 2014.
- On March 25, 2014, the company’s prior
Board of Trustees was removed following the delivery by Related
Fund Management, LLC and Corvex Management LP (Related/Corvex) of
written consents of holders of more than two-thirds of the
company’s common shares.
- During 2014, 10,264,503 series D
preferred shares converted to 10,412,499 common shares.
- On May 9, 2014, the company received
$5.8 million in aggregate proceeds from the sale of its interest in
Affiliates Insurance Company (AIC).
- On May 23, 2014, the company’s
shareholders elected all seven of the nominees for the Board of
Trustees proposed by Related/Corvex for election at the company’s
special meeting of shareholders. On July 31, 2014, the company’s
shareholders re-elected all seven of the new Trustees and elected
four additional nominees to the Board of Trustees.
- Additionally, on May 23, 2014, the
Board accepted the resignations of the company’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.
- On June 5, 2014, the company made a
number of improvements to its corporate governance, including:
adopting amended and restated bylaws, new corporate governance
guidelines, a new code of business conduct and ethics, and new
committee charters.
- On June 13, 2014, a wholly-owned
subsidiary of the company entered into a Master Sub-Management
Agreement, or the Sub-Management Agreement, with CBRE Group, Inc.
(CBRE). Under the terms of the Sub-Management Agreement, CBRE acts
as sub-manager for each of the company’s current domestic
properties and any additional domestic properties the company 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.
- On June 17, 2014, the company
terminated its Renewed Rights Agreement, commonly known as a
“poison pill.”
- On June 27, 2014, the company sold a
portfolio of 14 properties with a combined 2,784,098 square feet
for an aggregate sales price of $215.9 million, excluding mortgage
debt repayments and closing costs. In connection with these
property sales, the company repaid $19.7 million of mortgage debt,
along with prepayment costs of $2.8 million.
- On July 9, 2014, the company sold its
entire stake of 22.0 million common shares of SIR. The company
received approximately $704.8 million in cash, or $32.04 per share.
As a result of the sale, the company no longer holds any interest
in SIR.
- On July 31, 2014, the company’s
shareholders approved various amendments to the company’s
Declaration of Trust that, among other things, implemented
best-practice corporate governance improvements.
- Also on July 31, 2014, the company’s
shareholders approved the reimbursement to Related/Corvex of a
maximum of $33.5 million of expenses they incurred in connection
with their consent solicitations to remove the company’s prior
Trustees and to elect a new slate of nominees to serve on the
company’s Board of Trustees. Approximately $16.7 million was paid
in the third quarter 2014. The remaining payments in 2015 and 2016
are contingent on an average closing share price of at least $26.00
in each year.
- On August 1, 2014, the company changed
its name to Equity Commonwealth. The common shares of the company
began trading on the New York Stock Exchange under the new name and
ticker symbol “EQC.”
- On September 30, 2014, the company
terminated its external management agreements with RMR with the
exception of the existing Australian management agreement with RMR
Australia which will remain in effect until December 31, 2015,
unless earlier terminated. RMR has agreed to use best efforts to
assist the company in the transition of the company’s management
and operations. The company has agreed to pay RMR $1.2 million per
month for transition services from October 1, 2014 to February 28,
2015.
- The company paid a $15.3 million
incentive fee to RMR under the now-terminated business management
agreement. The incentive fee relates to the business management
agreement entered into prior to the election of the company’s new
Board of Trustees. There is no further incentive fee obligation to
RMR.
- On October 1, 2014, the company assumed
responsibility of its operations from REIT Management &
Research, LLC (RMR), the previous external advisor, and completed
the internalization of the company's management with the move of
corporate and business operations to Chicago, IL. In addition, CBRE
assumed day to day property management responsibilities for the
company’s US properties.
- On October 28, 2014, the company
established compensation terms for executive management, including
a long-term incentive plan (LTIP) comprised of 33% time-based
equity grants (RSA) and 67% time-based and performance-based equity
grants (RSU). The RSUs are earned based on the company’s relative
total shareholder return over a three-year period and fully vest in
the fourth year. One-time special equity awards, similar to the
LTIP awards described above, were granted on October 28, 2014.
Equity awards under the LTIP, for fiscal year 2014 performance,
were granted on January 28, 2015.
Subsequent Events
- On January 29, 2015, the company
entered into a new $1.15 billion Credit Agreement that reduced the
interest rate and extended the term of the company’s unsecured
revolving credit facility and term loan. The agreement is comprised
of a $750 million revolving credit facility, a $200 million
five-year term loan, and a $200 million seven-year term loan.
Strategic Update
The company is in the midst of transition, de-levering the
balance sheet and preparing to sell a significant portion of the
portfolio. The company intends to execute this plan over the next
two to three years, which may result in cash proceeds that the
company intends to retain for future investment opportunities.
During this time, dividend decisions will be deferred until we
assess the company’s taxable gains and losses at the end of the
year. If required, or prudent, the company’s Board of Trustees will
then declare a dividend.
General and Administrative (G&A) Costs Update
The company expects to have incremental non-recurring G&A
costs resulting from shareholder litigation and transition related
expenses of approximately $6.5 million for the full-year 2015,
excluding any of the remaining Related/Corvex expense
reimbursements.
In 2015, $8.4 million of the Related/Corvex expenses will be
reimbursed if the average closing price of the company’s common
shares is at least $26.00 during the one year period after July 31,
2014. The final $8.4 million will be reimbursed in 2016, if the
average closing price of the company’s common shares is at least
$26.00 during the one year period after July 31, 2015. Of this
$16.8 million potential future obligation, $6.6 million of expenses
were accrued for the full year December 31, 2014.
The company anticipates total G&A costs will be
approximately $61.5 million to $71.7 million in 2015. This estimate
anticipates recurring G&A expenses to be approximately $55
million, an additional $6.5 million of expected non-recurring
shareholder litigation and transition related expenses, and up to
$10.2 million of expense related to the potential Related/Corvex
reimbursement, as described above.
Earnings Conference Call & Supplemental Data
Equity Commonwealth will host a conference call on Thursday,
February 19, 2015 at 8:00 a.m. Central Standard Time to discuss
fourth quarter 2014 results. The conference call will be available
via live audio webcast on the Investor Relations section of the
company’s website (www.eqcre.com). In addition, a replay of the
audio webcast will be available on the Investor Relations section
of the company’s website.
A copy of EQC’s Fourth Quarter 2014 Supplemental Operating and
Financial Data is available for download within the Investor
Relations section of EQC’s website at www.eqcre.com.
About Equity Commonwealth
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.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this press release
constitute forward-looking statements within the meaning of the
federal securities laws, including, but not limited to, statements
regarding marketing the company’s properties for sale, potential
payments to Related/Corvex, transitioning management and operations
from RMR, de-levering the balance sheet, proceeds from asset sales,
future investment opportunities, expected G&A costs and the
company’s dividend policy. 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 the company’s current views about future events and are
subject to numerous known and unknown risks, uncertainties,
assumptions and changes in circumstances that may cause the
company’s 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).
While forward-looking statements reflect the company’s 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 the company’s future results to
differ materially from any forward-looking statements, see the
section entitled “Risk Factors” in the company’s most recent Annual
Report on Form 10-K and in the company’s Quarterly Reports on Form
10-Q for subsequent quarters.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
December 31, December 31, 2014 2013 ASSETS Real estate
properties: Land $ 714,238 $ 699,135 Buildings and improvements
5,014,205 4,838,030 5,728,443 5,537,165
Accumulated depreciation (1,030,445 ) (895,059 )
4,697,998 4,642,106 Properties held for sale - 573,531 Acquired
real estate leases, net 198,287 255,812 Equity investments -
517,991 Cash and cash equivalents 379,058 222,449 Restricted cash
17,715 22,101 Rents receivable, net of allowance for doubtful
accounts of $6,565 and $7,885, respectively 248,101 223,769 Other
assets, net 220,480 188,675 Total
assets $ 5,761,639 $ 6,646,434 LIABILITIES AND
SHAREHOLDERS' EQUITY Revolving credit facility $ - $ 235,000 Senior
unsecured debt, net 1,598,416 1,855,900 Mortgage notes payable, net
609,249 914,510 Liabilities related to properties held for sale -
28,734 Accounts payable and accrued expenses 162,204 165,855
Assumed real estate lease obligations, net 26,784 33,935 Rent
collected in advance 31,359 27,553 Security deposits 14,044 11,976
Distributions payable - - Due to related persons -
9,385 Total liabilities 2,442,056
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; 4,915,497 and 15,180,000 shares issued and
outstanding, respectively, aggregate liquidation preference of
$122,887 and $379,500, respectively $ 119,266 $ 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; 129,607,279 and 118,386,918 shares issued and
outstanding, respectively (including 710,182 and 130,914 unvested
restricted shares) 1,296 1,184 Additional paid in capital 4,487,133
4,213,474 Cumulative net income 2,233,852 2,209,840 Cumulative
other comprehensive loss (53,216 ) (38,331 ) Cumulative common
distributions (3,111,868 ) (3,082,271 ) Cumulative preferred
distributions (622,271 ) (573,971 ) Total
shareholders' equity 3,319,583 3,363,586
Total liabilities and shareholders' equity $ 5,761,639
$ 6,646,434
Condensed Consolidated
Statements of Operations (amounts in thousands, except per
share data)
For the Three Months Ended For the Year Ended December 31, December
31, 2014 2013 2014 2013 Revenues Rental income (1) $ 173,036 $
171,041 $ 691,699 $ 763,262 Tenant reimbursements and other income
39,772 42,987 170,158
189,767 Total revenues 212,808
214,028 861,857 953,029
Expenses Operating expenses 94,158 99,460 387,982 410,045
Depreciation and amortization 58,839 51,908 227,532 234,402 General
and administrative 16,760 17,050 113,155 80,504 Loss on asset
impairment 167,145 - 185,067 124,253 Acquisition related costs
- (19 ) 5 318
Total expenses 336,902 168,399
913,741 849,522 Operating (loss) income
(124,094 ) 45,629 (51,884 ) 103,507 Interest and other
income 490 298 1,561 1,229 Interest expense (including net
amortization of debt discounts, premiums and deferred financing
fees of $151, $(256), $(549), and $9, respectively) (32,151 )
(38,559 ) (143,230 ) (173,011 ) (Loss) gain on early extinguishment
of debt (1,790 ) (25 ) 4,909 (60,052 ) (Loss) gain on sale of
equity investments (160 ) - 171,561 66,293 Gain on issuance of
shares by an equity investee - -
17,020 - (Loss) income from continuing
operations before income tax expense and equity in earnings of
investees (157,705 ) 7,343 (63 ) (62,034 ) Income tax expense
(1,025 ) (107 ) (3,191 ) (2,634 ) Equity in earnings of investees
- 10,841 24,460
25,754 (Loss) income from continuing operations (158,730 )
18,077 21,206 (38,914 ) Discontinued operations: Income from
discontinued operations (1) 169 4,661 8,389 6,393 Loss on asset
impairment from discontinued operations - (1,507 ) (2,238 )
(102,869 ) Loss on early extinguishment of debt from discontinued
operations - (1,011 ) (3,345 ) (1,011 ) Net loss on sale of
properties from discontinued operations -
(25,521 ) - (22,162 ) (Loss) income before
gain on sale of properties (158,561 ) (5,301 ) 24,012 (158,563 )
Gain on sale of properties - - -
1,596 Net (loss) income (158,561 ) (5,301 )
24,012 (156,967 ) Net income attributable to noncontrolling
interest in consolidated subsidiary - -
- (20,093 ) Net (loss) income attributable to
Equity Commonwealth (158,561 ) (5,301 ) 24,012 (177,060 ) Preferred
distributions (6,981 ) (11,151 ) (32,095 ) (44,604 ) Distribution
on conversion of preferred shares - -
(16,205 ) - Net loss attributable to EQC
common shareholders $ (165,542 ) $ (16,452 ) $ (24,288 ) $ (221,664
) Amounts attributable to EQC common shareholders: (Loss)
income from continuing operations $ (165,711 ) $ 6,926 $ (27,094 )
$ (102,015 ) Income from discontinued operations 169 4,661 8,389
6,393 (Loss) gain on asset impairment from discontinued operations
- (1,507 ) (2,238 ) (102,869 ) Loss on early extinguishment of debt
from discontinued operations - (1,011 ) (3,345 ) (1,011 ) Net loss
on sale of properties from discontinued operations -
(25,521 ) - (22,162 ) Net loss $
(165,542 ) $ (16,452 ) $ (24,288 ) $ (221,664 ) Weighted
average common shares outstanding - basic and diluted (2)
129,398 118,387 125,163
112,378 Basic and diluted earnings per common share
attributable to EQC common shareholders (1): (Loss) income from
continuing operations $ (1.28 ) $ 0.06 $ (0.21 ) $ (0.91 )
(Loss) income from discontinued operations $ - $ (0.20 ) $
0.02 $ (1.06 ) Net loss $ (1.28 ) $ (0.14 ) $ (0.19 ) $
(1.97 ) (1) We report rental income on a straight line basis
over the terms of the respective leases; rental income and income
from discontinued operations include non-cash straight line rent
adjustments. Rental income and income from discontinued operations
also include non-cash amortization of intangible lease assets and
liabilities. (2) As of December 31, 2014, we had 4,915 series D
preferred shares outstanding that were convertible into 2,363 of
our common shares, which were anti-dilutive for earnings per common
share attributable to EQC common shareholders for all periods
presented.
Calculation of Funds from
Operations (FFO) and Normalized FFO (amounts in thousands,
except per share data) For the Three Months Ended
For the Year Ended December 31, December 31, 2014 2013 2014 2013
Calculation of FFO Net (loss) income attributable to Equity
Commonwealth $ (158,561) $ (5,301) $ 24,012 $ (177,060) Plus:
Depreciation and amortization from continuing operations 58,839
51,908 227,532 234,402 Depreciation and amortization from
discontinued operations - 825 - 12,550 Loss on asset impairment
from continuing operations 167,145 - 185,067 124,253 Loss on asset
impairment from discontinued operations - 1,507 2,238 102,869 FFO
from equity investees - 14,568 33,007 33,564 Net income
attributable to noncontrolling interest - - - 20,093 Less: FFO
attributable to noncontrolling interest - - - (26,270) Gain on sale
of properties - - - (1,596) Net loss on sale of properties from
discontinued operations - 25,521 - 22,162 Equity in earnings of
investees - (10,841) (24,460) (25,754) FFO attributable to Equity
Commonwealth 67,423 78,187 447,396 319,213 Less: Preferred
distributions (6,981) (11,151) (32,095) (44,604) FFO attributable
to EQC common shareholders $ 60,442 $ 67,036 $ 415,301 $ 274,609
Calculation of Normalized FFO FFO attributable to EQC common
shareholders $ 60,442 $ 67,036 $ 415,301 $ 274,609 Recurring
adjustments: Lease value amortization from continuing operations
2,133 2,445 10,650 10,310 Lease value amortization from
discontinued operations - (126) - (775) Straight line rent from
continuing operations (2,359) (5,511) (12,531) (31,791) Straight
line rent from discontinued operations - 338 (226) 562 Loss (gain)
on early extinguishment of debt from continuing operations 1,790 25
(4,909) 60,052 Loss on early extinguishment of debt from
discontinued operations - 1,011 3,345 1,011 Minimum cash rent from
direct financing lease (1) 2,032 2,032 8,128 8,125 Loss (gain) on
sale of equity investments 160 - (171,561) (66,293) Gain on
issuance of shares by an equity investee - - (17,020) - Interest
earned from direct financing lease (164) (251) (787) (1,128)
Normalized FFO from equity investees, net of FFO - (1,085) (3,353)
(2,530) Normalized FFO from noncontrolling interest, net of FFO - -
- 1,987 Other items which affect comparability: Shareholder
litigation and transition related expenses 1,099 6,475 37,681
29,874 Transition services fee (2) 3,600 - 3,600 - Acquisition
related costs from continuing operations - (19) 5 318 Normalized
FFO attributable to EQC common shareholders $ 68,733 $ 72,370 $
268,323 $ 284,331 Weighted average common shares outstanding
-- basic & diluted (3) 129,398 118,387 125,163 112,378 FFO
attributable to EQC common shareholders per share -- basic &
diluted (3) $ 0.47 $ 0.57 $ 3.32 $ 2.44 Normalized FFO available
for EQC common shareholders per share -- basic & diluted (3) $
0.53 $ 0.61 $ 2.14 $ 2.53 (1) Contractual cash payments
(including management fees) from one tenant at Arizona Center for
2014 were $8,128 and will decrease to approximately $515 beginning
in 2016. Our calculation of Normalized FFO reflects the cash
payments received from this tenant. The terms of this tenant's
lease require us to classify the lease as a direct financing (or
capital) lease. As such, the revenue recognized on a GAAP basis
within our condensed consolidated statements of operations was $172
and $257 for the quarters ended December 31, 2014 and 2013,
respectively and $817 and $1,154 years ended December 31, 2014 and
2013, respectively. This direct financing lease has an expiration
date in 2045. (2) EQC has agreed to pay RMR $1.2 million per month
for transition services from October 1, 2014 to February 28, 2015.
(3) As of December 31, 2014, we had 4,915 series D preferred shares
outstanding that were convertible into 2,363 of our common shares,
which were anti-dilutive for FFO and Normalized FFO per common
share for all periods presented.
We compute FFO in accordance with
standards established by the National Association of Real Estate
Investment Trusts (NAREIT). NAREIT defines FFO as net income
(loss), calculated in accordance with GAAP, excluding real estate
depreciation and amortization, gains (or losses) from sales of
depreciable property, impairment of depreciable real estate, and
our portion of these items related to equity investees and
noncontrolling interests. Normalized FFO begins with FFO and
excludes lease value amortization, straight line rent, gains and
losses on early extinguishment of debt, gains and losses on the
sale of equity investments, gains and losses on the issuance of
shares by an equity investee, shareholder litigation and
transition-related expenses, acquisition related costs, interest
earned from a direct financing lease, and our portion of these
items related to equity investees and noncontrolling interests.
Normalized FFO also includes the minimum cash rent from a direct
financing lease. We consider 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 attributable to EQC common shareholders, operating
income and cash flow from operating activities.
We believe 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 our
operating performance between periods and with other REITs. FFO and
Normalized FFO are among the factors considered by our Board of
Trustees when determining the amount of distributions to our
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 attributable to EQC
common shareholders, operating income or cash flow from operating
activities, determined in accordance with GAAP, or as indicators of
our financial performance or liquidity, nor are these measures
necessarily indicative of sufficient cash flow to fund all of our
needs. These measures should be considered in conjunction with net
income, net income attributable to Equity Commonwealth, net income
attributable to EQC common shareholders, operating income and cash
flow from operating activities as presented in our 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 we
do.
Calculation of Property Net
Operating Income (NOI) (amounts in thousands) For
the Three Months Ended For the Year Ended December 31, December 31,
2014 2013 2014 2013 Calculation of Same Property NOI and Same
Property Cash Basis NOI (1), (2): Rental income $ 173,036 $ 171,041
$ 691,699 $ 763,262 Tenant reimbursements and other income 39,772
42,987 170,158 189,767 Operating expenses (94,158) (99,460)
(387,982) (410,045) NOI 118,650 114,568 473,875 542,984 Straight
line rent adjustments (2,359) (5,511) (12,531) (31,791) Lease value
amortization 2,133 2,445 10,650 10,310 Lease termination fees
(1,477) (1,063) (4,749) (2,786) Cash Basis NOI 116,947 110,439
467,245 518,717 Cash Basis NOI from non-same properties 11 1 (266)
(68,470) Same Property Cash Basis NOI 116,958 110,440 466,979
450,247 Non-cash rental and termination income from same properties
1,704 4,129 6,629 19,064 Same Property NOI $ 118,662 $ 114,569 $
473,608 $ 469,311 Reconciliation of Same Property NOI to
GAAP Operating (Loss) Income Same Property NOI $ 118,662 $ 114,569
$ 473,608 $ 469,311 Non-cash rental and termination income from
same properties (1,704) (4,129) (6,629) (19,064) Same Property Cash
Basis NOI 116,958 110,440 466,979 450,247 Cash Basis NOI from
non-same properties (11) (1) 266 68,470 Cash Basis NOI 116,947
110,439 467,245 518,717 Straight line rent adjustments 2,359 5,511
12,531 31,791 Lease value amortization (2,133) (2,445) (10,650)
(10,310) Lease termination fees 1,477 1,063 4,749 2,786 NOI 118,650
114,568 473,875 542,984 Depreciation and amortization (58,839)
(51,908) (227,532) (234,402) General and administrative (16,760)
(17,050) (113,155) (80,504) Loss on asset impairment (167,145) -
(185,067) (124,253) Acquisition related costs - 19 (5) (318)
Operating Income (Loss) $ (124,094) $ 45,629 $ (51,884) $ 103,507
(1) Properties classified as discontinued operations are
excluded. Quarter-to-date same property results include properties
continuously owned from October 1, 2013 through December 31, 2014.
Year-to-date same property results include properties continuously
owned from January 1, 2013 through December 31, 2014. Amounts
related to the settlement of outstanding assets and liabilities of
previously-disposed properties that are reflected in our
consolidated results are excluded from same property results. (2)
2014 results include income from the settlement of litigation with
a former tenant of $2.7 million and $8.8 million for the three
months and year ended December 31, 2014, respectively. We define
NOI as income from our real estate including lease termination fees
received from tenants less our property operating expenses, which
expenses include property marketing costs. NOI excludes
amortization of capitalized tenant improvement costs and leasing
commissions. We define Cash Basis NOI as NOI less non cash straight
line rent adjustments, lease value amortization and lease
termination fees. We consider 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
our properties. We use NOI and Cash Basis NOI internally to
evaluate individual, regional and combined property level
performance, and we believe that NOI and Cash Basis NOI provide
useful information to investors regarding our results of operations
because they reflect only those income and expense items that are
incurred at the property level and may facilitate comparisons of
our operating performance between periods and with other REITs. The
calculations of NOI and Cash Basis NOI exclude certain components
of net income in order to provide results that are more closely
related to our 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 attributable to EQC common shareholders,
operating income or cash flow from operating activities, determined
in accordance with GAAP, or as indicators of our financial
performance or liquidity, nor are these measures necessarily
indicative of sufficient cash flow to fund all of our needs. These
measures should be considered in conjunction with net income, net
income attributable to Equity Commonwealth, net income attributable
to EQC common shareholders, operating income and cash flow from
operating activities as presented in our 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 we do.
Equity CommonwealthSarah Byrnes, Investor Relations(312)
646-2801www.eqcre.com
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