Equity Commonwealth (NYSE: EQC) today reported financial results
for the quarter ended September 30, 2016. All per share results are
reported on a diluted basis.
Financial results for the quarter ended September 30,
2016
Operating income was $22.9 million for the quarter ended
September 30, 2016. This compares to $28.9 million for the quarter
ended September 30, 2015. The decline in operating income was
primarily due to property sales.
Net income attributable to common shareholders was $84.4
million, or $0.67 per share, for the quarter ended September 30,
2016. This compares to net income attributable to common
shareholders of $23.5 million, or $0.18 per share, for the quarter
ended September 30, 2015. The increase in net income was primarily
due to an increase in gains from property sales.
Funds from Operations (FFO), as defined by the National
Association of Real Estate Investment Trusts, for the quarter ended
September 30, 2016, were $31.1 million, or $0.25 per share. This
compares to FFO for the quarter ended September 30, 2015 of $24.2
million, or $0.19 per share.
Normalized FFO was $28.9 million, or $0.23 per share. This
compares to Normalized FFO for the quarter ended September 30, 2015
of $46.4 million, or $0.36 per share. The following items impacted
Normalized FFO for the quarter ended September 30, 2016, compared
to the corresponding 2015 period:
- ($0.19) per share of income from
properties sold;
- $0.04 per share of preferred
distribution savings; and
- $0.03 per share of interest expense
savings.
Normalized FFO begins with FFO and eliminates certain items
that, by their nature, are not comparable from period to period,
non-cash items, and items that tend to obscure the company’s
operating performance. Definitions of FFO, Normalized FFO and
reconciliations to net income, determined in accordance with U.S.
generally accepted accounting principles, or GAAP, are included at
the end of this press release.
The weighted average number of diluted common shares outstanding
for the quarter ended September 30, 2016 was 126,568,096 shares,
compared to 129,878,396 for the quarter ended September 30,
2015.
Same property results for the quarter ended September 30,
2016
The company’s same property portfolio consisted of 37 properties
totaling 16.7 million square feet, which excluded one property
designated as held for sale at the end of the quarter that has
subsequently been sold. Operating results were as follows:
- The same property portfolio was 91.2%
leased as of September 30, 2016, compared to 91.3% as of June 30,
2016, and 92.5% as of September 30, 2015.
- The company entered into leases for
approximately 237,000 square feet, including renewal leases for
approximately 46,000 square feet and new leases for approximately
191,000 square feet.
- GAAP rental rates on new and renewal
leases were 9.0% higher compared to prior GAAP rental rates for the
same space.
- Cash rental rates on new and renewal
leases were 5.8% lower compared to prior cash rental rates for the
same space.
- Same property NOI increased 3.5% when
compared to 2015, due to a one-time parking charge and a non-cash
item related to a tenant bankruptcy totaling $2.8 million in
2015.
- Same property cash NOI decreased 0.1%
when compared to 2015, which included $1.7 million from the
one-time parking charge in 2015.
The definitions and reconciliations of same property NOI and
same property cash NOI to operating income, determined in
accordance with GAAP, are included at the end of this press
release. The same property portfolio includes properties
continuously owned from July 1, 2015 through September 30, 2016 and
excludes properties owned during this period that are designated as
held for sale.
Significant events during the quarter ended September 30,
2016
- The company sold 11 properties totaling
5,182,694 square feet for a gross sales price of $728.6 million at
a weighted average cap rate in the mid-7% range. Proceeds after
credits for rent abatements and contractual lease costs were $663.7
million.
Subsequent Events
- The company closed on the sale of 7800
Shoal Creek Boulevard a 151,917 square foot 4-building property in
Austin, TX for a gross sale price of $29.2 million. This property
was held for sale as of September 30, 2016.
- The company called the $250 million
6.25% senior unsecured notes due June 2017 for redemption on
December 15, 2016.
Disposition Update
The company continues to pursue its previously announced plan to
reposition its portfolio through active asset management and
dispositions. Year-to-date, through November 2, 2016, the company
has sold $1.2 billion of properties at a weighted average cap rate
in the high 6% range. Since the change in management in 2014, the
company has sold $4.1 billion of assets. Proceeds generated from
these sales are creating capacity for future opportunities. The
company currently has 12 properties totaling 5 million square feet
in various stages of the sale process.
Earnings Conference Call & Supplemental Data
Equity Commonwealth will host a conference call to discuss third
quarter results on Thursday, November 3, 2016, at 9:00 A.M. CDT.
The conference call will be available via live audio webcast on the
Investor Relations section of the company’s website
(www.eqcre.com). A replay of the audio webcast will also be
available following the call.
A copy of EQC’s Third Quarter 2016 Supplemental Operating and
Financial Data is available for download on the Investor Relations
section of EQC’s website at www.eqcre.com.
About Equity Commonwealth
Equity Commonwealth (NYSE: EQC) is a Chicago based, internally
managed and self-advised real estate investment trust (REIT) with
commercial office properties throughout the United States. EQC’s
portfolio is comprised of 37 properties and 16.7 million square
feet.
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 the redemption of the company’s 6.25% senior unsecured
notes due June 2017, marketing the company’s properties for sale,
consummating asset sales and identifying future investment
opportunities. 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,”
“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)
September 30, 2016
December 31, 2015 ASSETS
Real estate properties: Land $ 293,225 $ 389,410
Buildings and improvements 2,642,588 3,497,942
2,935,813 3,887,352 Accumulated depreciation (751,882 ) (898,939 )
2,183,931 2,988,413 Properties held for sale 13,463 — Acquired real
estate leases, net 52,017 88,760 Cash and cash equivalents
2,405,174 1,802,729 Restricted cash 36,755 32,245 Rents receivable,
net of allowance for doubtful accounts of $4,515 and $7,715,
respectively 150,728 174,676 Other assets, net 123,699
144,341
Total assets $
4,965,767 $ 5,231,164
LIABILITIES AND SHAREHOLDERS’
EQUITY Revolving credit facility $
— $ — Senior unsecured debt, net 1,313,267 1,450,606 Mortgage notes
payable, net 243,993 246,510 Liabilities related to properties held
for sale 667 — Accounts payable and accrued expenses 87,003 123,587
Assumed real estate lease obligations, net 2,140 4,296 Rent
collected in advance 21,529 27,340 Security deposits 8,128
10,338
Total liabilities
$ 1,676,727 $ 1,862,677
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; 4,915,196 shares
issued and outstanding, aggregate liquidation preference of
$122,880 $ 119,263 $ 119,263 Series E preferred shares; 7 1/4%
cumulative redeemable on or after May 15, 2016; 0 and 11,000,000
shares issued and outstanding, respectively, aggregate liquidation
preference $0 and $275,000, respectively — 265,391 Common shares of
beneficial interest, $0.01 par value: 350,000,000 shares
authorized; 125,532,523 and 126,349,914 shares issued and
outstanding, respectively 1,255 1,263 Additional paid in capital
4,402,927 4,414,611 Cumulative net income 2,554,343 2,333,709
Cumulative other comprehensive loss (1,117 ) (3,687 ) Cumulative
common distributions (3,111,868 ) (3,111,868 ) Cumulative preferred
distributions (675,763 ) (650,195 )
Total
shareholders’ equity $ 3,289,040
$ 3,368,487 Total liabilities and
shareholders’ equity $ 4,965,767
$ 5,231,164
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(amounts in thousands, except per share
data)
Three Months Ended
Nine Months Ended September 30, September 30,
2016 2015 2016
2015 Revenues: Rental income $ 92,722 $
125,459 $ 324,345 $ 457,128 Tenant reimbursements and other income
21,910 33,749 72,789
118,829
Total revenues $
114,632 $ 159,208
$ 397,134 $ 575,957
Expenses: Operating expenses $ 49,313 $ 73,571 $
157,964 $ 261,128 Depreciation and amortization 29,184 40,522
102,766 156,858 General and administrative 13,277 16,249 38,766
43,718 Loss on asset impairment — —
43,736 17,162
Total expenses
$ 91,774 $ 130,342
$ 343,232 $
478,866
Operating income $
22,858 $ 28,866
$ 53,902 $ 97,091
Interest and other income 3,013 637 7,184 4,813 Interest
expense (including net amortization of debt discounts, premiums and
deferred financing fees of $948, $171, $2,880 and $23,
respectively) (21,427 ) (25,111 ) (65,074 ) (82,926 ) (Loss) gain
on early extinguishment of debt — (3,887 ) (118 ) 6,111 Foreign
currency exchange loss — (9,809 ) (5 ) (8,953 ) Gain on sale of
properties 82,169 39,793 225,210 42,953
Income before income taxes 86,613 30,489 221,099 59,089 Income tax
expense (225 ) (23 ) (465 ) (2,377 )
Net income $ 86,388
$ 30,466 $ 220,634
$ 56,712 Preferred distributions (1,997
) (6,981 ) (15,959 ) (20,943 ) Excess fair value of consideration
paid over carrying value of preferred shares (1) —
— (9,609 ) —
Net income
attributable to Equity Commonwealth common shareholders
$ 84,391 $ 23,485
$ 195,066 $ 35,769
Weighted average common shares outstanding — basic
125,533 128,739 125,627 129,386
Weighted average common shares outstanding — diluted (2) 126,568
129,878 127,009 130,093 Earnings
per common share attributable to Equity Commonwealth common
shareholders: Basic $ 0.67 $ 0.18 $ 1.55 $
0.28 Diluted $ 0.67 $ 0.18 $ 1.54 $
0.27 (1)
On May 15, 2016, we redeemed all of our
11,000,000 outstanding series E preferred shares at a price of
$25.00 per share, for a total of $275.0 million, plus any accrued
and unpaid dividends. The redemption payment occurred on May 16,
2016 (the first business day following the redemption date). We
recorded $9.6 million related to the excess fair value of
consideration paid over the carrying value of the preferred shares
as a reduction to net income attributable to Equity Commonwealth
common shareholders for the nine months ended September 30,
2016.
(2) As of September 30, 2016, we had granted RSUs to certain
employees, officers, and the Chairman of the Board of Trustees. The
RSUs contain both service and market-based vesting components. None
of the RSUs have vested. If the market-based vesting component was
measured as of September 30, 2016, and 2015, 1,035 and 1,139 common
shares would be issued to the RSU holders, respectively. Using a
weighted average basis, 1,035 and 1,139 common shares are reflected
in diluted earnings per common share, diluted FFO per common share,
and diluted Normalized FFO per common share for the three months
ended September 30, 2016 and 2015, respectively, and 1,382 and 707
common shares are reflected in these measures for the nine months
ended September 30, 2016 and 2015 respectively.
CALCULATION OF FUNDS FROM OPERATIONS
(FFO) AND NORMALIZED FFO
(amounts in thousands, except per share
data)
Three Months Ended
Nine Months Ended September 30, September 30,
2016 2015 2016
2015 Calculation of FFO
Net income $ 86,388 $
30,466 $ 220,634 $ 56,712 Real estate depreciation and
amortization 28,907 40,522 102,015 156,858 Loss on asset impairment
— — 43,736 17,162 Gain on sale of properties (82,169 ) (39,793 )
(225,210 ) (42,953 ) FFO attributable to Equity Commonwealth 33,126
31,195 141,175 187,779 Preferred distributions (1,997 ) (6,981 )
(15,959 ) (20,943 ) Excess fair value of consideration paid over
carrying value of preferred shares (1) — —
(9,609 ) —
FFO attributable to EQC
Common Shareholders $ 31,129
$ 24,214 $ 115,607
$ 166,836
Calculation of Normalized
FFO FFO
attributable to EQC common shareholders $ 31,129 $ 24,214 $ 115,607
$ 166,836 Lease value amortization 882 2,766 5,870 6,033 Straight
line rent adjustments (2,954 ) (1,901 ) (12,384 ) (3,584 ) Loss
(gain) on early extinguishment of debt — 3,887 118 (6,111 ) Minimum
cash rent from direct financing lease (2) — 2,032 — 6,096 Interest
earned from direct financing lease — (96 ) — (356 ) Shareholder
litigation and transition related expenses (3) (138 ) 5,474 999
8,731 Transition services fee — 198 — 2,613 Gain on sale of
securities — — — (3,080 ) Foreign currency exchange loss — 9,809 5
8,953 Excess fair value of consideration paid over carrying value
of preferred shares (1) — —
9,609 —
Normalized FFO attributable to EQC
Common Shareholders $ 28,919
$ 46,383 $ 119,824
$ 186,131 Weighted average
common shares outstanding -- basic 125,533 128,739
125,627 129,386 Weighted average common shares
outstanding -- diluted (4) 126,568 129,878 127,009
130,093 FFO attributable to EQC common shareholders
per share -- basic $ 0.25 $ 0.19 $ 0.92 $ 1.29
FFO attributable to EQC common shareholders per share --
diluted $ 0.25 $ 0.19 $ 0.91 $ 1.28
Normalized FFO attributable to EQC common shareholders per share --
basic $ 0.23 $ 0.36 $ 0.95 $ 1.44
Normalized FFO attributable to EQC common shareholders per share --
diluted $ 0.23 $ 0.36 $ 0.94 $ 1.43 (1)
On May 15, 2016, we redeemed all of our
11,000,000 outstanding series E preferred shares at a price of
$25.00 per share, for a total of $275.0 million, plus any accrued
and unpaid dividends. The redemption payment occurred on May 16,
2016 (the first business day following the redemption date). We
recorded $9.6 million related to the excess fair value of
consideration paid over the carrying value of the preferred shares
as a reduction to FFO attributable to Equity Commonwealth common
shareholders for the nine months ended September 30, 2016.
(2) Amounts relate to contractual cash payments (including
management fees) from one tenant at Arizona Center. Arizona Center
was sold during the fourth quarter of 2015. Our calculation of
Normalized FFO reflects the cash payments received from this
tenant. The terms of this tenant's lease required 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 $104 and $379 for the
three and nine months ended September 30, 2015, respectively. (3)
Shareholder litigation and transition related expenses within
general and administrative for the three and nine months ended
September 30, 2016 is primarily related to the shareholder-approved
liability for the reimbursement of expenses incurred by
Related/Corvex since February 2013 in connection with their consent
solicitations to remove the former Trustees, elect the new Board of
Trustees and engage in related litigation. Approximately $16.7
million was reimbursed to Related/Corvex during 2014, and in August
2016 and 2015, we reimbursed $8.2 million and $8.4 million,
respectively, to Related/Corvex under the terms of the
shareholder-approved agreement. As of September 30, 2016, there is
no future obligation to pay any amounts under the
shareholder-approved agreement to Related/Corvex. No shareholder
litigation related expenses were incurred during 2016. (4) As of
September 30, 2016, we had granted RSUs to certain employees,
officers, and the Chairman of the Board of Trustees. The RSUs
contain both service and market-based vesting components. None of
the RSUs have vested. If the market-based vesting component was
measured as of September 30, 2016, and 2015, 1,035 and 1,139 common
shares would be issued to the RSU holders, respectively. Using a
weighted average basis, 1,035 and 1,139 common shares are reflected
in diluted earnings per common share, diluted FFO per common share,
and diluted Normalized FFO per common share for the three months
ended September 30, 2016 and 2015, respectively, and 1,382 and 707
common shares are reflected in these measures for the nine months
ended September 30, 2016 and 2015 respectively. 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. Our calculation of Normalized FFO
differs from NAREIT’s definition of FFO because we exclude certain
items that we view as nonrecurring or impacting comparability from
period to period. 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
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 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 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 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 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 SAME PROPERTY NET
OPERATING INCOME (NOI) AND SAME PROPERTY CASH BASIS NOI
(amounts in thousands)
For the Three Months Ended
For the Nine Months Ended September 30,
September 30, 2016 2015
2016 2015 Calculation of Same Property NOI
and Same Property Cash Basis NOI: Rental income $
92,722 $ 125,459 $ 324,345 $ 457,128 Tenant reimbursements and
other income 21,910 33,749 72,789 118,829 Operating expenses
(49,313 ) (73,571 ) (157,964 ) (261,128 )
NOI $ 65,319 $
85,637 $ 239,170
$ 314,829 Straight line rent adjustments
(2,954 ) (1,901 ) (12,384 ) (3,584 ) Lease value amortization 882
2,766 5,870 6,033 Lease termination fees (1,825 )
(1,759 ) (19,569 ) (7,875 )
Cash Basis NOI
$ 61,422 $ 84,743
$ 213,087 $
309,403 Cash Basis NOI from non-same properties (1)
(5,866 ) (29,142 ) (44,264 ) (134,062 )
Same Property Cash Basis NOI $ 55,556
$ 55,601 $
168,823 $ 175,341
Non-cash rental income and lease termination fees from same
properties 2,393 411 10,554
(1,007 )
Same Property NOI $
57,949 $ 56,012
$ 179,377 $ 174,334
Reconciliation of Same Property NOI to GAAP
Operating Income:
Same Property NOI $
57,949 $ 56,012
$ 179,377 $ 174,334
Non-cash rental income and lease termination fees from same
properties (2,393 ) (411 ) (10,554 )
1,007
Same Property Cash Basis NOI $
55,556 $ 55,601
$ 168,823 $ 175,341
Cash Basis NOI from non-same properties (1) 5,866
29,142 44,264 134,062
Cash Basis NOI $ 61,422
$ 84,743 $ 213,087
$ 309,403 Straight line rent
adjustments 2,954 1,901 12,384 3,584 Lease value amortization (882
) (2,766 ) (5,870 ) (6,033 ) Lease termination fees 1,825
1,759 19,569 7,875
NOI $ 65,319 $
85,637 $ 239,170
$ 314,829 Depreciation and amortization
(29,184 ) (40,522 ) (102,766 ) (156,858 ) General and
administrative (13,277 ) (16,249 ) (38,766 ) (43,718 ) Loss on
asset impairment — — (43,736 )
(17,162 )
Operating Income $
22,858 $ 28,866
$ 53,902 $ 97,091
(1) Cash Basis NOI from non-same properties for all periods
presented includes the operations of properties disposed or
classified as held for sale. NOI is income from our real estate
including lease termination fees received from tenants less our
property operating expenses. NOI excludes amortization of
capitalized tenant improvement costs and leasing commissions and
corporate level expenses. Cash Basis NOI is NOI excluding the
effects of straight line rent adjustments, lease value
amortization, and lease termination fees. The quarter-to-date same
property versions of these measures include the results of
properties continuously owned from July 1, 2015 through September
30, 2016. The year-to-date same property versions of these measures
include the results of properties continuously owned from January
1, 2015 through September 30, 2016. Properties classified as held
for sale within our condensed consolidated balance sheets are
excluded from the same property versions of these measures.
We consider these measures to be appropriate supplemental measures
to net income because they help to understand the operations of our
properties. We use these measures internally to evaluate property
level performance, and we believe that they 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.
Cash Basis NOI is among the factors considered with respect to
acquisition, disposition and financing decisions. These measures do
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 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 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 and condensed consolidated statements of cash flows. Other
REITs and real estate companies may calculate these measures
differently than we do.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20161102006685/en/
Equity CommonwealthSarah Byrnes, Investor Relations(312)
646-2801ir@eqcre.com
Equity Commonwealth (NYSE:EQC)
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