EQUITY COMMONWEALTH
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Commonwealth Shareholders
|
|
Preferred Shares
|
|
Common Shares
|
|
|
|
Series D
|
|
Series E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Preferred
Shares
|
|
Number
of
Shares
|
|
Preferred
Shares
|
|
Cumulative
Preferred
Distributions
|
|
Number
of
Shares
|
|
Common
Shares
|
|
Cumulative
Common
Distributions
|
|
Additional
Paid
in
Capital
|
|
Cumulative
Net
Income
|
|
Cumulative Other Comprehensive Loss
|
|
Total
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
232,894
|
|
|
—
|
|
|
232,894
|
|
Unrealized gain on derivative instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,479
|
|
|
3,479
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,373
|
|
Purchase of shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,491,675
|
)
|
|
(25
|
)
|
|
—
|
|
|
(69,962
|
)
|
|
—
|
|
|
—
|
|
|
(69,987
|
)
|
Redemption of shares
|
—
|
|
|
—
|
|
|
(11,000,000
|
)
|
|
(275,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(275,000
|
)
|
Excess fair value of consideration paid over carrying value of preferred shares
|
—
|
|
|
—
|
|
|
—
|
|
|
9,609
|
|
|
(9,609
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share grants
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
136,226
|
|
|
2
|
|
|
—
|
|
|
18,528
|
|
|
—
|
|
|
—
|
|
|
18,530
|
|
Distributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,956
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,956
|
)
|
Balance at December 31, 2016
|
4,915,196
|
|
|
$
|
119,263
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
(677,760
|
)
|
|
123,994,465
|
|
|
$
|
1,240
|
|
|
$
|
(3,111,868
|
)
|
|
$
|
4,363,177
|
|
|
$
|
2,566,603
|
|
|
$
|
(208
|
)
|
|
$
|
3,260,447
|
|
See accompanying notes.
EQUITY COMMONWEALTH
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
$
|
232,894
|
|
|
$
|
99,857
|
|
|
$
|
24,012
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
102,695
|
|
|
145,888
|
|
|
166,076
|
|
Net amortization of debt discounts, premiums and deferred financing fees
|
3,725
|
|
|
1,028
|
|
|
(552
|
)
|
Straight line rental income
|
(14,083
|
)
|
|
(5,255
|
)
|
|
(12,759
|
)
|
Amortization of acquired real estate leases
|
21,129
|
|
|
34,277
|
|
|
51,140
|
|
Other amortization
|
14,513
|
|
|
21,309
|
|
|
20,931
|
|
Share-based compensation
|
18,530
|
|
|
15,425
|
|
|
5,733
|
|
Loss on asset impairment
|
58,476
|
|
|
17,162
|
|
|
187,305
|
|
Loss (gain) on early extinguishment of debt
|
2,680
|
|
|
(6,661
|
)
|
|
(1,564
|
)
|
Equity in earnings of investees
|
—
|
|
|
—
|
|
|
(24,460
|
)
|
Gain on sale of equity investments
|
—
|
|
|
—
|
|
|
(171,561
|
)
|
Gain on issuance of shares by an equity investee
|
—
|
|
|
—
|
|
|
(17,020
|
)
|
Distributions of earnings from investees
|
—
|
|
|
—
|
|
|
20,680
|
|
Foreign currency exchange loss
|
5
|
|
|
8,857
|
|
|
—
|
|
Net gain on sale of properties
|
(250,886
|
)
|
|
(84,421
|
)
|
|
—
|
|
Other non-cash expenses
|
—
|
|
|
—
|
|
|
2,402
|
|
Change in assets and liabilities:
|
|
|
|
|
|
Restricted cash
|
(687
|
)
|
|
(6,570
|
)
|
|
3,486
|
|
Rents receivable and other assets
|
(23,921
|
)
|
|
(47,472
|
)
|
|
(30,785
|
)
|
Accounts payable and accrued expenses
|
4,663
|
|
|
(4,643
|
)
|
|
10,389
|
|
Rent collected in advance
|
(6,981
|
)
|
|
(8,462
|
)
|
|
(229
|
)
|
Security deposits
|
264
|
|
|
1,225
|
|
|
433
|
|
Due to related persons
|
—
|
|
|
—
|
|
|
(9,277
|
)
|
Cash provided by operating activities
|
163,016
|
|
|
181,544
|
|
|
224,380
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Real estate acquisitions
|
(2,802
|
)
|
|
—
|
|
|
—
|
|
Real estate improvements
|
(121,450
|
)
|
|
(70,633
|
)
|
|
(99,651
|
)
|
Insurance proceeds received
|
500
|
|
|
—
|
|
|
—
|
|
Principal payments received from direct financing lease
|
—
|
|
|
7,352
|
|
|
7,311
|
|
Proceeds from sale of properties, net
|
1,149,471
|
|
|
1,691,831
|
|
|
185,299
|
|
Purchase of securities
|
—
|
|
|
—
|
|
|
(23,988
|
)
|
Proceeds from sale of securities
|
—
|
|
|
27,068
|
|
|
—
|
|
Proceeds from sale of equity investments, net
|
—
|
|
|
—
|
|
|
710,492
|
|
Decrease (increase) in restricted cash
|
26,400
|
|
|
(6,725
|
)
|
|
(8,225
|
)
|
Cash provided by investing activities
|
1,052,119
|
|
|
1,648,893
|
|
|
771,238
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Purchase and retirement of common shares
|
(69,987
|
)
|
|
(87,983
|
)
|
|
—
|
|
Redemption of preferred shares
|
(275,000
|
)
|
|
—
|
|
|
—
|
|
Payments on borrowings
|
(560,187
|
)
|
|
(259,672
|
)
|
|
(785,316
|
)
|
Deferred financing fees
|
(52
|
)
|
|
(7,143
|
)
|
|
—
|
|
Distributions to common shareholders
|
—
|
|
|
—
|
|
|
(29,597
|
)
|
Distributions to preferred shareholders
|
(17,956
|
)
|
|
(27,924
|
)
|
|
(32,095
|
)
|
Cash used in financing activities
|
(923,182
|
)
|
|
(382,722
|
)
|
|
(847,008
|
)
|
Effect of exchange rate changes on cash
|
(8
|
)
|
|
(9,502
|
)
|
|
(1,126
|
)
|
Increase in cash and cash equivalents
|
291,945
|
|
|
1,438,213
|
|
|
147,484
|
|
Cash and cash equivalents at beginning of period
|
1,802,729
|
|
|
364,516
|
|
|
217,032
|
|
Cash and cash equivalents at end of period
|
$
|
2,094,674
|
|
|
$
|
1,802,729
|
|
|
$
|
364,516
|
|
See accompanying notes.
EQUITY COMMONWEALTH
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
Interest paid
|
$
|
85,310
|
|
|
$
|
111,324
|
|
|
$
|
146,265
|
|
Taxes paid
|
327
|
|
|
6,028
|
|
|
2,732
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Increase (decrease) in capital expenditures recorded as liabilities
|
10,331
|
|
|
(13,528
|
)
|
|
7,690
|
|
Mortgage note payable and interest payable transferred in consensual foreclosure
|
—
|
|
|
43,255
|
|
|
—
|
|
See accompanying notes.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Equity Commonwealth is a real estate investment trust, or REIT, formed in 1986 under the laws of the State of Maryland. Our primary business is the ownership and operation of real estate, primarily office buildings, throughout the United States.
On November 10, 2016, Equity Commonwealth (the Company) converted to what is commonly referred to as an umbrella partnership real estate investment trust, or UPREIT, structure. In connection with this conversion, the Company contributed substantially all of its assets to EQC Operating Trust, a Maryland real estate investment trust through which the Company will conduct its business (the Operating Trust), and the Operating Trust assumed substantially all of the Company’s liabilities pursuant to a contribution and assignment agreement between the Company and the Operating Trust.
The Company now conducts and intends to continue to conduct substantially all of its activities through the Operating Trust. The Company beneficially owned, directly and indirectly, 100.0% of the outstanding shares of beneficial interest, designated as units, in the Operating Trust (OP Units) as of December 31, 2016 and the Company is the sole trustee of the Operating Trust. As the sole trustee, the Company generally has the exclusive power under the declaration of trust of the Operating Trust to manage and conduct the business of the Operating Trust, subject to certain limited approval and voting rights of other holders of OP Units that may be admitted in the future.
At December 31,
2016
, our portfolio included
33
properties (
64
buildings), one land parcel and one property taken out of service which is now classified as a land parcel, with a combined
16.1 million
square feet. All numbers of properties, numbers of buildings and square feet are unaudited.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation.
The consolidated financial statements include our investments in
100%
owned subsidiaries and majority owned subsidiaries that are controlled by us. References to we, us, our and the Company, refer to Equity Commonwealth and its consolidated subsidiaries as of December 31,
2016
, unless the context indicates otherwise. All intercompany transactions and balances have been eliminated.
We account for our investments in
50%
or less owned companies over which we can exercise influence, but do not control, using the equity method of accounting, which included our prior investments in Select Income REIT and its consolidated subsidiaries (SIR) (beginning on July 2, 2013 when SIR ceased to be our consolidated subsidiary through the sale date on July 9, 2014) and Affiliates Insurance Company, or AIC (until May 9, 2014, when we sold all of our AIC shares). We used the income statement method to account for issuance of common shares of beneficial interest by SIR, and shares of common stock by AIC. Under this method, gains and losses reflecting changes in the value of our investments at the date of issuance of additional common shares by SIR, or common stock by AIC, are recognized in our income statement.
Real Estate Properties.
We record real estate properties at cost. We depreciate real estate investments on a straight line basis over estimated useful lives of up to
40
years for buildings and improvements, and up to
12
years for personal property.
Each time we enter into a new lease, or materially modify an existing lease, we evaluate its classification as either a capital or operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and fair market value of a leased property, appropriate discount rates and future cash flows.
We allocate the consideration paid for our properties among land, buildings and improvements and, for properties that qualify as acquired businesses under the Business Combinations Topic of the
FASB Accounting Standards Codification
™
, or the Codification, to identified intangible assets and liabilities, consisting of the value of above market and below market leases, the value of acquired in place leases and the value of tenant relationships. Purchase price allocations and the determination of useful lives are based on our estimates and, under some circumstances, studies from independent real estate appraisal firms to provide market information and evaluations that are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determination of useful lives.
We allocate the consideration to land, buildings and improvements based on a determination of the fair values of these assets assuming the property is vacant. We determine the fair value of a property using methods that we believe are similar to those used by independent appraisers. Purchase price allocations to above market and below market leases are based on the estimated present value (using an interest rate which reflects our assessment of the risks associated with the leases acquired) of
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the difference between (1) the contractual amounts to be paid pursuant to the acquired in place leases and (2) our estimate of fair market lease rates for the corresponding leases, measured over a period equal to the remaining non-cancelable terms of the respective leases. Purchase price allocations to acquired in place leases and tenant relationships are determined as the excess of (1) the purchase price paid for a property after adjusting existing in place leases to estimated market rental rates over (2) the estimated fair value of the property as if vacant. We aggregate this value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease; however, the value of tenant relationships has not been separated from acquired in place lease value for our properties because we believe such value and related amortization expense is immaterial for acquisitions reflected in our historical financial statements. We consider certain factors in performing these analyses including estimates of carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs to execute similar leases in current market conditions, such as leasing commissions, legal and other related costs. If we believe the value of tenant relationships is material in the future, those amounts will be separately allocated and amortized over the estimated lives of the relationships. We recognize the excess, if any, of the consideration paid over amounts allocated to land, buildings and improvements and identified intangible assets and liabilities as goodwill and we recognize gains if amounts allocated exceed the consideration paid.
We amortize capitalized above market lease values (presented in our consolidated balance sheets as acquired real estate leases) as a reduction to rental income over the remaining terms of the respective leases. We amortize capitalized below market lease values (presented in our consolidated balance sheets as assumed real estate lease obligations) as an increase to rental income over the remaining terms of the respective leases. We amortize the value of acquired in place leases exclusive of the value of above market and below market acquired in place leases to expense over the remaining terms of the respective leases. If a lease is terminated prior to its stated expiration, the unamortized lease intangibles relating to that lease is written off.
We review our properties for impairment quarterly, or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment indicators may include declining tenant occupancy, lack of progress releasing vacant space, tenant bankruptcies, low long term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life. When indicators of potential impairment are present that suggest that the carrying amounts of real estate assets may not be recoverable, we assess the recoverability of these assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. The determination of undiscounted cash flow includes consideration of many factors including income to be earned from the investment, holding costs (exclusive of interest), estimated selling prices, and prevailing economic and market conditions. In the event that such expected undiscounted future cash flows do not exceed the carrying values, we estimate the fair value of the assets and record an impairment charge equal to the amount by which the carrying value exceeds the estimated fair value. Estimated fair values are calculated based on the following information, (i) recently quoted market prices, (ii) market prices for comparable properties, or (iii) the present value of future cash flows. During the years ended December 31,
2016
,
2015
, and
2014
we recorded a loss on asset impairment in continuing operations totaling
$58.5 million
,
$17.2 million
and
$185.1 million
respectively, to reduce the carrying value of properties to their estimated fair values (see Note 15).
When we classify properties as held for sale, we discontinue the recording of depreciation expense and estimate their fair value less costs to sell. If we determine that the carrying value for these properties exceed their estimated fair value less costs to sell, we record a loss on asset impairment.
Certain of our real estate assets contain hazardous substances, including asbestos. We believe any asbestos in our buildings is contained in accordance with current regulations, and we have no current plans to remove any such asbestos. If we remove the asbestos or renovate or demolish these properties, certain environmental regulations govern the manner in which the asbestos must be handled and removed. We do not believe that there are other environmental conditions at any of our properties that have a material adverse effect on us. However, no assurances can be given that such conditions are not present in our properties or that other costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. As of December 31,
2016
and
2015
, we did not have any accrued environmental remediation costs.
Cash and Cash Equivalents.
Our cash and cash equivalents consist of cash maintained in time deposits, depository accounts and money market accounts. From time-to-time we may also invest in various U.S. government securities. We continually monitor the credit ratings of the financial institutions holding our deposits to minimize our exposure to credit risk. Throughout the year, we have cash balances in excess of federally insured limits deposited with various financial institutions. We do not believe we are exposed to any significant credit risk on cash and cash equivalents.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Cash.
Restricted cash consists of amounts escrowed for future real estate taxes, insurance, leasing costs, capital expenditures and debt service, as required by some of our mortgage debts, as well as security deposits paid to us by some of our tenants.
Other Assets, Net.
Other assets consist principally of deferred financing fees, deferred leasing costs, capitalized lease incentives and prepaid property operating expenses. Deferred financing fees include issuance costs related to borrowings and are capitalized and amortized over the terms of the respective loans. Deferred leasing costs include brokerage, legal and other fees associated with the successful negotiation of leases and are amortized on a straight line basis over the terms of the respective leases. Capitalized lease incentives are amortized on a straight line basis against rental income over the terms of the respective leases.
Accounting Policy for Derivative Instruments.
The Derivatives and Hedging Topic of the Codification requires companies to recognize all their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether such instrument has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. As of December 31,
2016
, we have an interest rate cap agreement that qualifies as a cash flow hedge.
We are exposed to certain risks relating to our ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps and caps are entered into to manage interest rate risk associated with our floating rate borrowings. We designate interest rate swaps and caps as cash flow hedges of floating rate borrowings.
Revenue Recognition.
Rental income from operating leases, which includes rent concessions (including free rent and other lease incentives) and scheduled increases in rental rates during the lease term, is recognized on a straight line basis over the life of the lease agreements. We defer the recognition of contingent rental income, such as percentage rents, until the specific targets that trigger the contingent rental income are achieved. Tenant reimbursements and other income includes property level operating expenses reimbursed by our tenants, as well as other incidental revenues, which are recorded as expenses are incurred.
Allowance for Doubtful Accounts.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of certain tenants to make payments required under their leases. The computation of the allowance is based on the tenants' payment histories and current credit profiles, as well as other considerations.
Share-Based Compensation.
All share-based compensation is measured at fair value on the grant date or date of modification, as applicable, and recognized in earnings over the requisite service period. Depending upon the settlement terms of the awards, all or a portion of the fair value of share-based awards may be presented as a liability or as equity in the consolidated balance sheets.
Earnings Per Common Share.
Earnings per common share, or EPS, is computed using the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if our series D convertible preferred shares or our restricted share units (RSUs) were converted into our common shares, which could result in a lower EPS amount. The effect of our series D convertible preferred shares on income from continuing operations and net income attributable to common shareholders is anti-dilutive for all periods presented.
Reclassifications.
Reclassifications have been made to the prior years' financial statements and notes to conform to the current year's presentation.
Income Taxes.
We are a REIT under the Internal Revenue Code of 1986, as amended, and are generally not subject to federal and state income taxes provided we distribute our taxable income to our shareholders and meet other requirements for qualifying as a real estate investment trust. However, we are subject to certain state and local taxes without regard to our REIT status.
The Income Taxes Topic of the Codification prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Deferred tax assets are recognized to the extent that it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not" standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than
50%
likelihood of being realized upon settlement. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates.
Preparation of these financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates.
Foreign Operations.
During the year ended December 31, 2015, we sold our Australian properties (see Note 3) and as of each of December 31, 2016 and 2015, we did not have any foreign operations. The U.S. dollar was the functional currency for our consolidated subsidiaries operating in the United States prior to the sale of the Australian portfolio. The functional currency for our consolidated subsidiaries in countries other than the United States was the principal currency in which the entity's assets, liabilities, income and expenses were denominated. The functional currency of our consolidated subsidiary that operated in Australia was the Australian dollar. We translated our Australian subsidiary's financial statements into U.S. dollars when we consolidated that subsidiary's financial statements on a quarterly basis. Generally, we translated assets and liabilities at the exchange rate in effect as of the balance sheet date. The resulting translation adjustments were included in cumulative other comprehensive loss in our consolidated balance sheets. We translated income statement accounts using the average exchange rate for the period and income statement accounts that include significant non-recurring transactions at the rate in effect as of the date of the transaction. We were subject to foreign currency risk due to potential fluctuations in exchange rates between Australian and U.S. currencies.
Subsequent to the disposition of the Australian properties, we recognized a foreign currency exchange loss of
$8.9 million
in our consolidated statement of operations for the year ended December 31, 2015. The foreign currency exchange loss for the year ended December 31, 2015 relates to the change in foreign currency rates resulting in losses on cash proceeds from the Australian portfolio disposition maintained in an Australian bank account prior to the transfer of cash from our Australian subsidiary to our U.S bank accounts. As of December 31, 2015, we did
no
t have any cumulative foreign currency translation adjustments as the cumulative foreign currency translation adjustment of
$63.2 million
was reclassified from other comprehensive loss to earnings upon disposition of the Australian properties.
New Accounting Pronouncements.
In February 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-01, Clarifying the Definition of a Business, that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. This update is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which amends FASB Accounting Standards Codification (ASC) Topic 230, Statements of Cash Flows, to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires more timely recognition of credit losses associated with financial assets. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. We are currently in the process of evaluating the impact, if any, the adoption of this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
classification on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, but early adoption is permitted. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. The ASU also requires lessees or lessors to capitalize only initial direct costs of leases. This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, but early adoption is permitted. We are currently in the process of evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which creates a single source of revenue guidance. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other GAAP requirements, such as the leasing literature). The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. The new standard is effective for fiscal years beginning after December 15, 2017 and for interim periods therein. Early adoption is permitted beginning after December 15, 2016. Upon adoption of ASU 2016-02, Leases, the majority of our revenue, will be subject to the allocation provisions outlined within the revenue standard. We are currently evaluating the specific implementation requirements for allocating the consideration within our contracts in accordance with ASU No. 2014-09.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. We adopted this standard on January 1, 2016 and made the following reclassifications to the prior years' consolidated balance sheet to conform to the current year's presentation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of December 31, 2015
|
|
Originally Reported
|
|
Effect of Change
|
|
As Adjusted
|
Other assets, net
|
|
$
|
157,549
|
|
|
$
|
(13,208
|
)
|
|
$
|
144,341
|
|
Senior unsecured debt, net
|
|
1,460,592
|
|
|
(9,986
|
)
|
|
1,450,606
|
|
Mortgage notes payable, net
|
|
249,732
|
|
|
(3,222
|
)
|
|
246,510
|
|
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. We adopted ASU 2014-08 on January 1, 2015, and determined that our 2016 dispositions and 2015 dispositions do not individually represent a strategic shift, as defined by the standard, that has or will have a major effect on our operations and financial results. As a result, the 2016 and 2015 dispositions have not been presented as discontinued operations in the statements of operations.
Note 3. Real Estate Properties
Acquisitions and Expenditures
In October 2016, we purchased a parcel of land adjacent to our Research Park property in Austin, Texas for
$2.8 million
. We did not make any acquisitions during the year ended December 31,
2015
.
During the years ended
December 31, 2016
,
2015
, and
2014
, we made improvements, excluding tenant-funded improvements, to our properties totaling
$110.7 million
, $
75.7 million
and
$91.6 million
, respectively.
We committed
$143.0 million
for expenditures related to
4.3 million
square feet of leases executed during
2016
. Committed but unspent tenant related obligations are leasing commissions and tenant improvements. Based on existing leases as of December 31,
2016
, committed but unspent tenant related obligations were
$91.8 million
.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Properties Held For Sale:
We classify all properties that meet the criteria outlined in the Property, Plant and Equipment Topic of the
FASB Accounting Standards Codification
(Codification) as held for sale on our consolidated balance sheets. During March 2014, the former management team ceased to actively market
31
properties (
67
buildings) with a combined
5,641,450
square feet that we had previously classified as held for sale as of December 31, 2013. These properties were not under agreement for sale when our former Trustees were removed in March 2014. These properties were reclassified to properties held and used in operations because they no longer met the requirements under GAAP for classification as held for sale. Operating results for these properties were reclassified from discontinued operations to continuing operations for all periods presented herein. In connection with this reclassification, we reversed previously recorded impairment losses totaling
$4.8 million
, which included the elimination of estimated costs to sell. As of December 31,
2016
and
2015
, we had
no
properties classified as held for sale.
Property Dispositions:
During the year ended December 31, 2016, we disposed of the following properties (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Date Sold
|
|
Number of
Properties
|
|
Number of
Buildings
|
|
Square
Footage
|
|
Gross Sales Price
|
|
Gain (Loss) on Sale
|
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Park
|
|
February 2016
|
|
1
|
|
|
9
|
|
|
427,443
|
|
|
$
|
50,865
|
|
|
$
|
16,531
|
|
3330 N Washington Boulevard
|
|
March 2016
|
|
1
|
|
|
1
|
|
|
55,719
|
|
|
11,250
|
|
|
5,455
|
|
111 East Kilbourn Avenue
|
|
March 2016
|
|
1
|
|
|
1
|
|
|
373,669
|
|
|
60,500
|
|
|
14,687
|
|
1525 Locust Street
|
|
April 2016
|
|
1
|
|
|
1
|
|
|
98,009
|
|
|
17,700
|
|
|
8,956
|
|
633 Ahua Street
|
|
April 2016
|
|
1
|
|
|
1
|
|
|
93,141
|
|
|
29,000
|
|
|
15,963
|
|
Lakewood on the Park
|
|
May 2016
|
|
1
|
|
|
2
|
|
|
180,558
|
|
|
37,100
|
|
|
13,616
|
|
Leased Land
|
|
June 2016
|
|
1
|
|
|
7
|
|
|
—
|
|
|
48,450
|
|
|
15,914
|
|
9110 East Nichols Avenue
|
|
June 2016
|
|
1
|
|
|
1
|
|
|
143,958
|
|
|
17,200
|
|
|
642
|
|
111 River Street
(1)
|
|
July 2016
|
|
1
|
|
|
1
|
|
|
566,215
|
|
|
235,000
|
|
|
78,207
|
|
Sky Park Centre
|
|
July 2016
|
|
1
|
|
|
2
|
|
|
63,485
|
|
|
13,700
|
|
|
4,746
|
|
Raintree Industrial Park
|
|
July 2016
|
|
1
|
|
|
12
|
|
|
563,182
|
|
|
11,500
|
|
|
(653
|
)
|
8701 N Mopac
|
|
August 2016
|
|
1
|
|
|
1
|
|
|
121,901
|
|
|
21,500
|
|
|
8,394
|
|
7800 Shoal Creek Boulevard
|
|
October 2016
|
|
1
|
|
|
4
|
|
|
151,917
|
|
|
29,210
|
|
|
14,908
|
|
1200 Lakeside Drive
|
|
November 2016
|
|
1
|
|
|
1
|
|
|
260,084
|
|
|
65,270
|
|
|
3,062
|
|
6200 Glenn Carlson Drive
|
|
December 2016
|
|
1
|
|
|
1
|
|
|
338,000
|
|
|
23,050
|
|
|
7,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolios of properties
|
|
|
|
|
|
|
|
|
|
|
|
|
812 San Antonio Street
|
|
May 2016
|
|
1
|
|
|
1
|
|
|
59,321
|
|
|
|
|
|
1601 Rio Grande Street
|
|
May 2016
|
|
1
|
|
|
1
|
|
|
56,219
|
|
|
|
|
|
Downtown Austin portfolio
|
|
|
|
2
|
|
|
2
|
|
|
115,540
|
|
|
$
|
32,600
|
|
|
$
|
20,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
785 Schilinger Road South
|
|
June 2016
|
|
1
|
|
|
1
|
|
|
72,000
|
|
|
|
|
|
401 Vine Street
|
|
June 2016
|
|
1
|
|
|
1
|
|
|
53,980
|
|
|
|
|
|
633 Frazier Drive
|
|
June 2016
|
|
1
|
|
|
1
|
|
|
150,000
|
|
|
|
|
|
9840 Gateway Boulevard North
|
|
June 2016
|
|
1
|
|
|
1
|
|
|
72,000
|
|
|
|
|
|
3003 South Expressway 281
|
|
June 2016
|
|
1
|
|
|
1
|
|
|
150,000
|
|
|
|
|
|
1331 North Center Parkway
|
|
June 2016
|
|
1
|
|
|
1
|
|
|
53,980
|
|
|
|
|
|
Movie theater portfolio
|
|
|
|
6
|
|
|
6
|
|
|
551,960
|
|
|
$
|
109,100
|
|
|
$
|
30,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Date Sold
|
|
Number of
Properties
|
|
Number of
Buildings
|
|
Square
Footage
|
|
Gross Sales Price
|
|
Gain (Loss) on Sale
|
128 Crews Drive
|
|
July 2016
|
|
1
|
|
|
1
|
|
|
185,600
|
|
|
|
|
|
111 Southchase Boulevard
|
|
July 2016
|
|
1
|
|
|
1
|
|
|
168,087
|
|
|
|
|
|
1043 Global Avenue
|
|
July 2016
|
|
1
|
|
|
1
|
|
|
450,000
|
|
|
|
|
|
South Carolina industrial portfolio
|
|
|
|
3
|
|
|
3
|
|
|
803,687
|
|
|
$
|
30,000
|
|
|
$
|
7,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 East Wisconsin Avenue
|
|
August 2016
|
|
1
|
|
|
1
|
|
|
435,067
|
|
|
|
|
|
111 Monument Circle
|
|
August 2016
|
|
1
|
|
|
2
|
|
|
1,121,764
|
|
|
|
|
|
101-115 W. Washington Street
|
|
August 2016
|
|
1
|
|
|
1
|
|
|
634,058
|
|
|
|
|
|
North Point Office Complex
|
|
August 2016
|
|
1
|
|
|
2
|
|
|
873,335
|
|
|
|
|
|
Midwest portfolio
|
|
|
|
4
|
|
|
6
|
|
|
3,064,224
|
|
|
$
|
416,900
|
|
|
$
|
(15,800
|
)
|
Total
|
|
|
|
30
|
|
|
62
|
|
|
7,972,692
|
|
|
$
|
1,259,895
|
|
|
$
|
250,761
|
|
|
|
(1)
|
Property sale represented a leasehold interest.
|
During the year ended December 31, 2015, we disposed of the following properties (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Date Disposed
|
|
Number of
Properties
|
|
Number of
Buildings
|
|
Square
Footage
|
|
Gross Sales Price
|
|
Gain (Loss) on Sale
|
Properties
|
|
|
|
|
|
|
|
|
|
11350 North Meridian Street
|
|
January 2015
|
|
1
|
|
|
1
|
|
|
72,264
|
|
|
$
|
4,200
|
|
|
$
|
766
|
|
333 Laurel Oak Drive
(1)
|
|
March 2015
|
|
—
|
|
|
1
|
|
|
27,164
|
|
|
2,450
|
|
|
251
|
|
1921 E. Alton Avenue
|
|
March 2015
|
|
1
|
|
|
1
|
|
|
67,846
|
|
|
14,533
|
|
|
4,851
|
|
46 Inverness Center Parkway
|
|
April 2015
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
1,857
|
|
225 Water Street
(2)
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
318,997
|
|
|
—
|
|
|
—
|
|
Sorrento Valley Business Park
|
|
June 2015
|
|
1
|
|
|
4
|
|
|
105,003
|
|
|
23,500
|
|
|
11,896
|
|
Illinois Center
|
|
August 2015
|
|
1
|
|
|
2
|
|
|
2,090,162
|
|
|
376,000
|
|
|
26,956
|
|
16th and Race Street
|
|
August 2015
|
|
1
|
|
|
1
|
|
|
608,625
|
|
|
43,000
|
|
|
7,922
|
|
185 Asylum Street
|
|
September 2015
|
|
1
|
|
|
1
|
|
|
868,395
|
|
|
113,250
|
|
|
17,619
|
|
One South Church Avenue
|
|
October 2015
|
|
1
|
|
|
1
|
|
|
240,811
|
|
|
32,000
|
|
|
4,282
|
|
775 Ridge Lake Boulevard
|
|
October 2015
|
|
1
|
|
|
1
|
|
|
120,678
|
|
|
16,300
|
|
|
(360
|
)
|
One Park Square
|
|
October 2015
|
|
1
|
|
|
6
|
|
|
259,737
|
|
|
34,300
|
|
|
9,512
|
|
Arizona Center
|
|
December 2015
|
|
1
|
|
|
4
|
|
|
1,070,724
|
|
|
126,000
|
|
|
22,838
|
|
4 South 84th Avenue
|
|
December 2015
|
|
1
|
|
|
1
|
|
|
236,007
|
|
|
18,000
|
|
|
8,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio of properties
|
|
|
|
|
|
|
7450 Campus Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
77,411
|
|
|
|
|
|
129 Worthington Ridge Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
227,500
|
|
|
|
|
|
599 Research Parkway
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
48,249
|
|
|
|
|
|
181 Marsh Hill Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
162,036
|
|
|
|
|
|
101 Barnes Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
45,755
|
|
|
|
|
|
15 Sterling Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
173,015
|
|
|
|
|
|
35 Thorpe Avenue
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
79,862
|
|
|
|
|
|
50 Barnes Industrial Road North
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
154,255
|
|
|
|
|
|
5-9 Barnes Industrial Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
38,006
|
|
|
|
|
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Date Disposed
|
|
Number of
Properties
|
|
Number of
Buildings
|
|
Square
Footage
|
|
Gross Sales Price
|
|
Gain (Loss) on Sale
|
860 North Main Street
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
31,165
|
|
|
|
|
|
One Barnes Industrial Road South
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
30,170
|
|
|
|
|
|
Village Lane
|
|
May 2015
|
|
1
|
|
|
2
|
|
|
58,185
|
|
|
|
|
|
100 Northfield Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
116,986
|
|
|
|
|
|
905 Meridian Lake Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
74,652
|
|
|
|
|
|
1717 Deerfield Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
141,186
|
|
|
|
|
|
1955 West Field Court
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
59,130
|
|
|
|
|
|
5015 S. Water Circle
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
113,524
|
|
|
|
|
|
Adams Place
|
|
May 2015
|
|
1
|
|
|
2
|
|
|
230,259
|
|
|
|
|
|
Cabot Business Park
|
|
May 2015
|
|
1
|
|
|
2
|
|
|
252,755
|
|
|
|
|
|
2300 Crown Colony Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
45,974
|
|
|
|
|
|
Myles Standish Industrial Park
|
|
May 2015
|
|
1
|
|
|
2
|
|
|
74,800
|
|
|
|
|
|
340 Thompson Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
25,000
|
|
|
|
|
|
100 South Charles Street
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
159,616
|
|
|
|
|
|
6710 Oxon Hill
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
118,336
|
|
|
|
|
|
8800 Queen Avenue South
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
280,822
|
|
|
|
|
|
9800 Sherlard Parkway
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
46,765
|
|
|
|
|
|
Rosedale Corporate Plaza
|
|
May 2015
|
|
1
|
|
|
3
|
|
|
149,116
|
|
|
|
|
|
1000 Shelard Parkway
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
62,499
|
|
|
|
|
|
525 Park Street
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
75,636
|
|
|
|
|
|
1900 Meyer Drury Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
65,225
|
|
|
|
|
|
131-165 West Ninth Street
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
75,517
|
|
|
|
|
|
7-9 Vreeland Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
155,891
|
|
|
|
|
|
5 Paragon Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
119,089
|
|
|
|
|
|
1000 Voorhees Drive and 400 Laurel Oak Drive
(1)
|
|
May 2015
|
|
1
|
|
|
2
|
|
|
125,415
|
|
|
|
|
|
1601 Veterans Highway
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
63,608
|
|
|
|
|
|
Two Corporate Center Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
291,230
|
|
|
|
|
|
11311 Cornell Park Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
93,413
|
|
|
|
|
|
5300 Kings Island Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
159,421
|
|
|
|
|
|
3 Crown Point Court
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
73,987
|
|
|
|
|
|
515 Pennsylvania Avenue
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
82,000
|
|
|
|
|
|
443 Gulph Road
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
21,000
|
|
|
|
|
|
4350 Northern Pike
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
503,885
|
|
|
|
|
|
Thunderbolt Place
|
|
May 2015
|
|
1
|
|
|
2
|
|
|
100,505
|
|
|
|
|
|
6160 Kempsville Circle
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
129,565
|
|
|
|
|
|
448 Viking Drive
|
|
May 2015
|
|
1
|
|
|
1
|
|
|
75,374
|
|
|
|
|
|
Portfolio of small office and industrial assets
|
|
|
|
45
|
|
|
53
|
|
|
5,287,790
|
|
|
$
|
376,000
|
|
|
$
|
(8,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2501 20th Place South
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
125,722
|
|
|
|
|
|
420 20th Street North
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
514,893
|
|
|
|
|
|
Inverness Center
|
|
June 2015
|
|
1
|
|
|
4
|
|
|
475,882
|
|
|
|
|
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Date Disposed
|
|
Number of
Properties
|
|
Number of
Buildings
|
|
Square
Footage
|
|
Gross Sales Price
|
|
Gain (Loss) on Sale
|
701 Poydras Street
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
1,256,971
|
|
|
|
|
|
300 North Greene Street
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
324,305
|
|
|
|
|
|
1320 Main Street
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
334,075
|
|
|
|
|
|
AL, LA, NC, SC office portfolio
|
|
|
|
6
|
|
|
9
|
|
|
3,031,848
|
|
|
$
|
417,450
|
|
|
$
|
41,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12655 Olive Boulevard
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
98,588
|
|
|
|
|
|
1285 Fern Ridge Parkway
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
66,510
|
|
|
|
|
|
St. Louis portfolio
(3)
|
|
|
|
2
|
|
|
2
|
|
|
165,098
|
|
|
$
|
14,300
|
|
|
$
|
(2,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310-314 Invermay Road
(4)
|
|
April 2015
|
|
1
|
|
|
1
|
|
|
47,480
|
|
|
|
|
|
253-293 George Town Road
(4)
|
|
April 2015
|
|
1
|
|
|
1
|
|
|
143,914
|
|
|
|
|
|
7 Modal Crescent
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
164,160
|
|
|
|
|
|
71-93 Whiteside Road
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
303,488
|
|
|
|
|
|
9-13 Titanium Court
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
69,664
|
|
|
|
|
|
16 Rodborough Road
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
90,525
|
|
|
|
|
|
22 Rodborough Road
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
43,427
|
|
|
|
|
|
127-161 Cherry Lane
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
278,570
|
|
|
|
|
|
310-320 Pitt Street
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
313,865
|
|
|
|
|
|
44-46 Mandarin Street
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
226,718
|
|
|
|
|
|
19 Leadership Way
|
|
June 2015
|
|
1
|
|
|
1
|
|
|
76,714
|
|
|
|
|
|
Australia portfolio
(5)
|
|
|
|
11
|
|
|
11
|
|
|
1,758,525
|
|
|
$
|
232,955
|
|
|
$
|
(47,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Widewaters Parkway
|
|
August 2015
|
|
1
|
|
|
8
|
|
|
514,241
|
|
|
|
|
|
5062 Brittonfield Parkway
|
|
August 2015
|
|
1
|
|
|
1
|
|
|
40,162
|
|
|
|
|
|
Woodcliff Drive
|
|
August 2015
|
|
1
|
|
|
6
|
|
|
516,760
|
|
|
|
|
|
Interstate Place
|
|
August 2015
|
|
1
|
|
|
2
|
|
|
61,399
|
|
|
|
|
|
1000 Pittsford - Victor Road
|
|
August 2015
|
|
1
|
|
|
1
|
|
|
73,358
|
|
|
|
|
|
1200 Pittsford - Victor Road
|
|
August 2015
|
|
1
|
|
|
1
|
|
|
18,900
|
|
|
|
|
|
Corporate Crossing
|
|
August 2015
|
|
1
|
|
|
5
|
|
|
216,126
|
|
|
|
|
|
Canal View Boulevard
|
|
August 2015
|
|
1
|
|
|
3
|
|
|
118,375
|
|
|
|
|
|
14 Classic Street
|
|
August 2015
|
|
1
|
|
|
1
|
|
|
37,084
|
|
|
|
|
|
110 W Fayette Street
|
|
August 2015
|
|
1
|
|
|
1
|
|
|
304,906
|
|
|
|
|
|
251 Salina Meadows Parkway
|
|
August 2015
|
|
1
|
|
|
1
|
|
|
65,617
|
|
|
|
|
|
Upstate New York portfolio
(3)
|
|
|
|
11
|
|
|
30
|
|
|
1,966,928
|
|
|
$
|
104,625
|
|
|
$
|
(12,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9040 Roswell Road
|
|
October 2015
|
|
1
|
|
|
1
|
|
|
178,941
|
|
|
|
|
|
The Exchange
|
|
October 2015
|
|
1
|
|
|
2
|
|
|
187,632
|
|
|
|
|
|
3920 Arkwright Road
|
|
October 2015
|
|
1
|
|
|
1
|
|
|
196,156
|
|
|
|
|
|
1775 West Oak Commons Court
|
|
October 2015
|
|
1
|
|
|
1
|
|
|
79,854
|
|
|
|
|
|
Georgia portfolio
(3)
|
|
|
|
4
|
|
|
5
|
|
|
642,583
|
|
|
$
|
48,550
|
|
|
$
|
(3,059
|
)
|
Total
|
|
|
|
91
|
|
|
135
|
|
|
18,939,185
|
|
|
$
|
1,999,413
|
|
|
$
|
84,421
|
|
|
|
(1)
|
This property contains
three
buildings. We sold
one
building in March 2015 and
two
buildings in May 2015.
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(2)
|
Title to this property was transferred to the lender pursuant to a consensual foreclosure in full satisfaction of the mortgage debt with a principal balance of
$40.1 million
, resulting in a gain on early extinguishment of debt of
$17.3 million
for the year ended December 31, 2015. See Note 9 for additional information.
|
|
|
(3)
|
Prior to the disposition of these properties, we recorded a total impairment charge of
$17.2 million
during the year ended December 31, 2015, based upon updated market information in accordance with our impairment analysis procedures.
|
|
|
(4)
|
These properties were sold in a separate transaction to a different buyer than the other Australian properties.
|
|
|
(5)
|
The loss on sale includes a
$63.2 million
cumulative foreign currency translation adjustment reclassified from cumulative other comprehensive loss due to the disposition of the Australian portfolio.
|
During the year ended December 31, 2014, we sold
14
properties (
43
buildings) with a combined
2,784,098
square feet for an aggregate gross sales price of
$215.9 million
, excluding closing costs and mortgage debt repayments. In connection with this transaction, we recognized a loss on asset impairment of
$2.2 million
and a loss on early extinguishment of debt of
$3.3 million
for the year ended December 31, 2014.
Results of operations for properties sold prior to December 31, 2014, are included in discontinued operations in our consolidated statements of operations. Summarized income statement information for properties included in discontinued operations is as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
Rental income
|
$
|
14,243
|
|
Tenant reimbursements and other income
|
1,900
|
|
Total revenues
|
16,143
|
|
|
|
Operating expenses
|
7,138
|
|
General and administrative
|
10
|
|
Total expenses
|
7,148
|
|
Operating income
|
8,995
|
|
Interest and other income
|
2
|
|
Interest expense
|
(608
|
)
|
Income from discontinued operations
|
$
|
8,389
|
|
Lease Payments
Our real estate properties are generally leased on gross lease, modified gross lease or triple net lease bases pursuant to non-cancelable, fixed term operating leases expiring between 2017 and 2034. Our triple net leases generally require the lessee to pay all property operating costs. Our gross leases and modified gross leases require us to pay all or some property operating expenses and to provide all or some property management services. A portion of these property operating expenses are reimbursed by the tenants.
The future minimum lease payments, excluding tenant reimbursement revenue, scheduled to be received by us during the current terms of our leases as of December 31,
2016
are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
292,388
|
|
2018
|
299,449
|
|
2019
|
278,531
|
|
2020
|
244,953
|
|
2021
|
206,046
|
|
Thereafter
|
850,539
|
|
|
$
|
2,171,906
|
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
One of our real estate properties that we sold in 2016, 111 River Street in Hoboken, New Jersey, was subject to a ground lease. The amount of ground lease expense included in operating expenses during the years ended December 31,
2016
,
2015
and
2014
, totaled
$0.9 million
,
$1.8 million
and
$1.8 million
, respectively. Ground lease expense includes percentage rent.
Note 4. Lease Intangibles
The following table summarizes the carrying amounts for our acquired real estate leases and assumed real estate lease obligations as of December 31,
2016
, and
2015
, and (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Acquired in-place leases
|
|
$
|
102,102
|
|
|
$
|
147,056
|
|
Acquired above market leases
|
|
44,752
|
|
|
78,210
|
|
Acquired real estate leases
|
|
146,854
|
|
|
225,266
|
|
Accumulated amortization, acquired in-place leases
|
|
(71,320
|
)
|
|
(91,301
|
)
|
Accumulated amortization, acquired above market leases
|
|
(27,253
|
)
|
|
(45,205
|
)
|
Acquired real estate leases, net
|
|
$
|
48,281
|
|
|
$
|
88,760
|
|
|
|
|
|
|
Acquired below market leases
|
|
10,434
|
|
|
19,742
|
|
Accumulated amortization
|
|
(8,488
|
)
|
|
(15,446
|
)
|
Assumed real estate lease obligations, net
|
|
$
|
1,946
|
|
|
$
|
4,296
|
|
Amortization of the lease intangibles for the years ended December 31,
2016
,
2015
, and
2014
, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Income Statement Location
|
|
2016
|
|
2015
|
|
2014
|
Amortization of acquired in-place leases
|
|
Depreciation and amortization
|
|
$
|
14,598
|
|
|
$
|
26,787
|
|
|
$
|
40,493
|
|
Amortization of above and below market leases
|
|
Increase (decrease) to rental income
|
|
(6,531
|
)
|
|
(7,515
|
)
|
|
(10,650
|
)
|
Future amortization of net intangible lease assets and liabilities to be recognized by us during the current terms of our leases as of December 31,
2016
, are approximately (in thousands):
|
|
|
|
|
|
2017
|
|
$
|
9,670
|
|
2018
|
|
8,397
|
|
2019
|
|
6,178
|
|
2020
|
|
5,882
|
|
2021
|
|
5,252
|
|
Thereafter
|
|
10,956
|
|
|
|
$
|
46,335
|
|
Note 5. Investment in Direct Financing Lease
We had an investment in a direct financing lease that related to a lease with a term that exceeded
75%
of the useful life of an office tower located within a mixed use property in Phoenix, AZ. In December 2015, we sold this property. Prior to the sale of the property, we recognized income using the effective interest method to produce a level yield on funds not yet recovered.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Equity Investments
At
December 31, 2016
, and
2015
, we did not have any ownership interests in equity investments. For the year ended December 31, 2014, equity in earnings is as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
SIR
|
$
|
24,516
|
|
AIC
|
(56
|
)
|
|
$
|
24,460
|
|
Investment in SIR
SIR was one of our consolidated subsidiaries until July 2, 2013 and was an unconsolidated equity investment from July 2, 2013 until July 9, 2014. Under the equity method, we recorded our percentage share of net earnings of SIR in our consolidated statements of operations. On July 9, 2014, we sold our entire stake of
22,000,000
common shares of SIR. We received
$704.8 million
in cash representing
$32.04
per share and recognized a gain on sale of equity investment of
$171.8 million
in our consolidated statement of operations. Proceeds from this sale were used to repay our revolving credit facility and certain mortgage loans. As a result of this sale, we
no
longer hold any interest in SIR. See Note 18 for additional information about our investment in AIC.
During the second quarter of 2014, SIR issued
10,000,000
common shares in a public offering for
$29.00
per common share, raising net proceeds (after deducting underwriters’ discounts and commissions and expenses) of approximately
$277.4 million
. We recognized a gain on this sale by an equity investee of
$16.9 million
as a result of the per share sales price of this transaction being above our per share carrying value. Our ownership percentage in SIR was reduced to
36.7%
as a result of the transaction.
On July 2, 2013, SIR issued and sold to the public
10,500,000
of its common shares for
$28.25
per common share. Prior to the completion of this offering, our
22,000,000
common shares of SIR represented approximately
56.0%
of SIR's outstanding common shares, and SIR was one of our consolidated subsidiaries. Following the completion of this offering, our
22,000,000
common shares of SIR represented approximately
44.2%
of SIR's outstanding common shares and SIR ceased to be our consolidated subsidiary.
For the period from January 1, 2014, through July 9, 2014, we received cash distributions from SIR totaling
$20.7 million
.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited summarized income statement information of SIR for the period from January 1, 2014, through July 9, 2014, is as follows (in thousands, except per share data):
|
|
|
|
|
|
For the Period from January 1, 2014 through July 9, 2014
|
Rental income
|
$
|
98,226
|
|
Tenant reimbursements and other income
|
16,980
|
|
Total revenues
|
115,206
|
|
|
|
Operating expenses
|
20,982
|
|
Depreciation and amortization
|
20,832
|
|
Acquisition related costs
|
374
|
|
General and administrative
|
7,731
|
|
Total expenses
|
49,919
|
|
Operating income
|
65,287
|
|
Interest expense
|
(7,287
|
)
|
Gain on early extinguishment of debt
|
243
|
|
Income before income tax expense and equity in earnings of an investee
|
58,243
|
|
Income tax expense
|
(90
|
)
|
Equity in earnings of an investee
|
32
|
|
Net income
|
$
|
58,185
|
|
Weighted average common shares outstanding
|
52,394
|
|
Net income per common share
|
$
|
1.11
|
|
Investment in AIC
As of May 9, 2014, we had a net investment of
$5.8 million
in AIC, an insurance company that was owned in equal proportion by us, our former manager Reit Management & Research LLC (RMR), SIR and
five
other companies to which RMR provides management services. On May 9, 2014, as a result of the removal of the former Trustees and in accordance with the terms of the shareholder agreement between us and the other AIC shareholders, the other AIC shareholders exercised their right to purchase all of the
20,000
shares of AIC we then owned. We received
$5.8 million
in aggregate proceeds from this sale. We
no
longer own any interest in AIC.
Our participation in the AIC property insurance program expired in June 2014. See Note 18 for additional information about our investment in AIC.
Note 7. Other Assets
Real Estate Mortgages Receivable
As of
December 31, 2016
, and
2015
, we had total real estate mortgages receivable with an aggregate carrying value of
$8.1 million
included in other assets in our consolidated balance sheets. We provided mortgage financing totaling
$7.7 million
at
6.0%
per annum in connection with our sale of
three
properties (
18
buildings) in January 2013 in Dearborn, MI; this real estate mortgage requires monthly interest payments and matures on
January 24, 2023
. We also provided mortgage financing totaling
$0.4 million
at
6.0%
per annum in connection with our sale of a property in Salina, NY in April 2012. This real estate mortgage requires monthly interest payments and matures on
April 30, 2019
.
We monitor the payment history of the borrowers and have determined that
no
allowance for losses related to these real estate mortgages receivable was necessary at
December 31, 2016
, and
2015
.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Financing Fees, Deferred Leasing Costs and Capitalized Lease Incentives
The following table summarizes our deferred financing fees related to our unsecured revolving credit facility included in other assets, deferred leasing costs and capitalized lease incentives as of
December 31, 2016
, and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred financing fees
|
$
|
14,458
|
|
|
$
|
14,458
|
|
Accumulated amortization
|
(11,093
|
)
|
|
(9,478
|
)
|
Deferred financing fees, net
|
$
|
3,365
|
|
|
$
|
4,980
|
|
|
|
|
|
Deferred leasing costs
|
$
|
133,771
|
|
|
$
|
166,390
|
|
Accumulated amortization
|
(41,148
|
)
|
|
(56,162
|
)
|
Deferred leasing costs, net
|
$
|
92,623
|
|
|
$
|
110,228
|
|
|
|
|
|
Capitalized lease incentives
|
$
|
10,344
|
|
|
$
|
11,623
|
|
Accumulated amortization
|
(2,680
|
)
|
|
(2,498
|
)
|
Capitalized lease incentives, net
|
$
|
7,664
|
|
|
$
|
9,125
|
|
Future amortization of deferred leasing costs and capitalized lease incentives to be recognized by us during the current terms of our leases as of
December 31, 2016
are approximately (in thousands):
|
|
|
|
|
|
|
|
|
|
Deferred Leasing Costs
|
|
Capitalized Lease Incentives
|
2017
|
$
|
12,796
|
|
|
$
|
1,319
|
|
2018
|
12,318
|
|
|
1,287
|
|
2019
|
11,611
|
|
|
1,552
|
|
2020
|
10,291
|
|
|
1,273
|
|
2021
|
8,687
|
|
|
996
|
|
Thereafter
|
36,920
|
|
|
1,237
|
|
|
$
|
92,623
|
|
|
$
|
7,664
|
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Indebtedness
At December 31,
2016
and
2015
, our outstanding indebtedness included the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Interest Rate at December 31, 2016
|
|
Maturity Date
|
|
2016
|
|
2015
|
Unsecured revolving credit facility, at LIBOR plus a premium
|
2.02
|
%
|
|
1/28/2019
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5-year unsecured term loan, at LIBOR plus a premium
|
2.17
|
%
|
|
1/28/2020
|
|
|
200,000
|
|
|
200,000
|
|
7-year unsecured term loan, at LIBOR plus a premium
|
2.57
|
%
|
|
1/28/2022
|
|
|
200,000
|
|
|
200,000
|
|
Unsecured floating rate debt
|
2.37
|
%
|
(1)
|
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
6.25% Senior Unsecured Notes due 2016
|
—
|
%
|
|
—
|
|
|
$
|
—
|
|
|
$
|
139,104
|
|
6.25% Senior Unsecured Notes due 2017
|
—
|
%
|
|
—
|
|
|
—
|
|
|
250,000
|
|
6.65% Senior Unsecured Notes due 2018
|
6.65
|
%
|
|
1/15/2018
|
|
|
250,000
|
|
|
250,000
|
|
5.875% Senior Unsecured Notes due 2020
|
5.88
|
%
|
|
9/15/2020
|
|
|
250,000
|
|
|
250,000
|
|
5.75% Senior Unsecured Notes due 2042
|
5.75
|
%
|
|
8/1/2042
|
|
|
175,000
|
|
|
175,000
|
|
Unsecured fixed rate debt
|
6.13
|
%
|
(1)
|
|
|
$
|
675,000
|
|
|
$
|
1,064,104
|
|
|
|
|
|
|
|
|
|
Parkshore Plaza
(2)
|
5.67
|
%
|
|
5/1/2017
|
|
|
$
|
41,275
|
|
|
$
|
41,275
|
|
1735 Market Street
(3)
|
—
|
%
|
|
—
|
|
|
—
|
|
|
169,612
|
|
206 East 9th Street
|
5.69
|
%
|
|
1/5/2021
|
|
|
27,041
|
|
|
27,515
|
|
33 Stiles Lane
|
6.75
|
%
|
|
3/1/2022
|
|
|
2,415
|
|
|
2,785
|
|
97 Newberry Road
|
5.71
|
%
|
|
3/1/2026
|
|
|
5,903
|
|
|
6,375
|
|
Secured fixed rate debt
|
5.71
|
%
|
(1)
|
|
|
$
|
76,634
|
|
|
$
|
247,562
|
|
|
|
|
|
|
$
|
1,151,634
|
|
|
$
|
1,711,666
|
|
Unamortized net premiums, discounts and deferred financing fees
|
|
|
|
|
(9,967
|
)
|
|
(14,550
|
)
|
|
|
|
|
|
$
|
1,141,667
|
|
|
$
|
1,697,116
|
|
|
|
(1)
|
Represents weighted average interest rate at December 31,
2016
.
|
|
|
(2)
|
The Company guarantees
$3.2 million
of this non-recourse loan.
|
|
|
(3)
|
Interest on this loan was payable at
LIBOR
plus
2.625%
but was fixed for the first
seven
years to December 1, 2016 by a cash flow hedge which set the rate at approximately
5.66%
.
|
Unsecured Revolving Credit Facility and Term Loan:
Prior to January 29, 2015, we had a
$750.0 million
unsecured revolving credit facility. The unsecured revolving credit facility was set to mature on October 19, 2015, and had an interest rate of
LIBOR
plus a spread, which was 150 basis points as of December 31, 2014. We paid a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility. Prior to January 29, 2015, we also had a
$500.0 million
unsecured term loan that was set to mature on December 15, 2016. Our term loan had an interest rate of
LIBOR
plus a spread, which was 185 basis points as of December 31, 2014. On December 5, 2014, we paid
$100.0 million
of our unsecured term loan, reducing our term loan borrowings to
$400.0 million
.
On January 29, 2015, we entered into a new credit agreement, pursuant to which the lenders agreed to provide (i) a
$750.0 million
unsecured revolving credit facility, (ii) a
$200.0 million
5
-year term loan facility and (iii) a
$200.0 million
7
-year term loan facility. The new agreement replaced our prior credit agreement, dated as of August 9, 2010, and our prior term loan
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
agreement, dated as of December 16, 2010. In connection with the termination of the prior agreements, we recognized a loss on early extinguishment of debt of
$0.4 million
from the write-off of unamortized deferred financing fees for the year ended December 31, 2015.
On November 10, 2016, in connection with our conversion to an UPREIT structure, the Operating Trust entered into an amended and restated credit agreement, replacing the Company’s prior credit agreement. Under the amended and restated credit agreement, the Operating Trust has assumed all obligations of the Company as borrower and the Company is released from such obligations. The economic terms of the amended and restated credit agreement are substantially the same as the terms of the Company’s prior credit agreement.
The revolving credit facility has a scheduled maturity date of January 28, 2019, which maturity date may be extended for up to
two
additional periods of
six months
at our option subject to satisfaction of certain conditions and the payment of an extension fee of
0.075%
of the aggregate amount available under the revolving credit facility. The
5
-year term loan and the
7
-year term loan have scheduled maturity dates of January 28, 2020 and January 28, 2022, respectively. We used the proceeds of borrowings under the credit agreement to repay all amounts outstanding and due under the previous term loan agreement.
The credit agreement permits us to utilize up to
$100.0 million
of the revolving credit facility for the issuance of letters of credit. Amounts outstanding under the credit agreement generally may be prepaid at any time without premium or penalty, subject to certain exceptions. We have the right to request increases in the aggregate maximum amount of borrowings available under the revolving credit facility and term loans up to an additional
$1.15 billion
, subject to certain conditions.
Borrowings under the
5
-year term loan and
7
-year term loan will, subject to certain exceptions, bear interest at a LIBOR rate plus a margin of 90 to 180 basis points for the
5
-year term loan and 140 to 235 basis points for the
7
-year term loan, in each case depending on our credit rating. Borrowings under the revolving credit facility will, subject to certain exceptions, bear interest at a rate equal to, at our option, either a LIBOR rate or a base rate plus a margin of 87.5 to 155 basis points for LIBOR rate advances and 0 to 55 basis points for base rate advances, in each case depending on our credit rating. In addition, we are required to pay a facility fee of 12.5 to 30 basis points, depending on our credit rating, on the borrowings available under the revolving credit facility, whether or not utilized.
Borrowings under our revolving credit facility currently bear interest at LIBOR plus a spread, which was 125 basis points as of
December 31, 2016
. As of
December 31, 2016
, the interest rate payable on borrowings under our revolving credit facility was
2.02%
. As of
December 31, 2016
, we had
no
balance outstanding and
$750.0 million
available under our revolving credit facility and the facility fee as of
December 31, 2016
was
0.25%
. Our term loans currently bear interest at a rate of LIBOR plus a spread, which was 140 and 180 basis points for the
5
-year and
7
-year term loan, respectively, as of
December 31, 2016
. As of
December 31, 2016
, the interest rates for the amounts outstanding under our
5
-year term loan and
7
-year term loan were
2.17%
and
2.57%
, respectively. As of
December 31, 2016
, we had
$200.0 million
outstanding under each of our
5
-year and
7
-year term loans.
Debt Covenants:
Our public debt indenture and related supplements and our credit agreement contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth. At
December 31, 2016
, we believe we were in compliance with all of our respective covenants under our public debt indenture and related supplements, our credit agreement.
Senior Unsecured Notes:
On December 15, 2016, we redeemed at par
$250.0 million
of our
6.25%
senior unsecured notes due 2017 and recognized a loss on early extinguishment of debt of
$0.1 million
from the write-off of an unamortized discount and unamortized deferred financing fees.
On February 16, 2016, we redeemed at par
$139.1 million
of our
6.25%
senior unsecured notes due 2016 and recognized a loss on early extinguishment of debt of
$0.1 million
from the write-off of an unamortized discount and unamortized deferred financing fees.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On May 1, 2015, we redeemed at par
$138.8 million
of our
5.75%
senior unsecured notes due 2015 and recognized a loss on early extinguishment of debt of
$0.1 million
from the write-off of an unamortized discount and unamortized deferred financing fees.
On November 17, 2014, we redeemed at par
$125.0 million
of our
7.50%
unsecured senior notes due 2019 and recognized a loss on early extinguishment of debt of
$1.8 million
from the write-off of an unamortized discount and deferred financing fees.
On September 15, 2014, we redeemed at par
$33.4 million
of our
6.40%
unsecured senior notes due 2015.
Mortgage Notes Payable:
At
December 31, 2016
,
four
of our properties (
7
buildings) with an aggregate net book value of
$102.7 million
had secured mortgage notes totaling
$77.7 million
(including net premiums and unamortized deferred financing fees) maturing from 2017 through 2026.
On November 10, 2016, we repaid at par
$167.8 million
of mortgage debt at 1735 Market Street and recognized a loss on early extinguishment of debt of
$2.4 million
from the write-off of unamortized deferred financing fees and breakage costs for the year ended December 31, 2016. We also recognized
$0.2 million
of expense included in interest and other income related to an interest rate swap as a result of the early repayment of debt for the year ended December 31, 2016.
On December 1, 2015, we repaid at par
$116.0 million
of mortgage debt at 111 Monument Circle and recognized a gain on early extinguishment of debt of
$0.6 million
for the year ended December 31, 2015 from the write-off of an unamortized premium, net of the write-off of unamortized deferred financing fees.
In accordance with the agreement to sell Illinois Center, we were required to deliver the property unencumbered. On August 3, 2015, prior to the sale, we defeased the outstanding
$141.4 million
balance of the mortgage loan secured by 111 East Wacker Drive, one of the buildings included in Illinois Center. The defeasance costs and write off of the unamortized deferred financing costs, net of the write off of the unamortized premium, resulted in a net loss on early extinguishment of debt of
$3.9 million
for the year ended December 31, 2015.
In accordance with the agreement to sell 2501 20th Place South, we were required to deliver the property unencumbered. On June 5, 2015, we prepaid
$10.0 million
of mortgage debt at 2501 20th Place South and recognized a loss on early extinguishment of debt totaling
$0.6 million
for the year ended December 31, 2015, which consisted of a prepayment premium and the write off of unamortized deferred financing fees, net of the write off of an unamortized premium.
In accordance with the agreement to sell 1320 Main Street, we were required to deliver the property unencumbered. On June 3, 2015, prior to the sale, we defeased the
$38.7 million
outstanding balance of the mortgage loan secured by 1320 Main Street. The defeasance costs and write off of the unamortized deferred financing costs, net of the write off of the unamortized premium, resulted in a net loss on early extinguishment of debt of
$6.2 million
for the year ended December 31, 2015.
During the quarter ended June 30, 2014, we made the decision to cease making loan servicing payments on 225 Water Street in Jacksonville, Florida. The first payment we determined not to make for this property was due on June 11, 2014. The property was secured by a non-recourse mortgage loan. On October 10, 2014, we were notified by the lender that our decision to cease making loan servicing payments created an event of default effective July 11, 2014, and the lender exercised its option to accelerate the maturity of the unpaid balance of the loan. Beginning July 11, 2014, we accrued interest on this loan at
10.03%
, to include the
4.0%
of default interest. The lender filed a suit of foreclosure for this property and we cooperated with the lender to allow for a consensual foreclosure process. On May 22, 2015, title to 225 Water Street was transferred to the lender pursuant to the consensual foreclosure in full satisfaction of the mortgage debt, with a principal balance of
$40.1 million
. The transaction resulted in a gain on early extinguishment of debt of
$17.3 million
for the excess of the debt principal balance over the net book value of the property for the year ended December 31, 2015.
On October 31, 2014, we rep
aid at par the
$7.8 million
mortgage loan encumbering 6200 Glenn Carlson Drive.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 1, 2014, we prepaid at par the
$265.0 million
of mortgage debt at 600 West Chicago Avenue and recognized a net gain on early extinguishment of debt of
$6.7 million
from the write-off of an unamortized premium, net of the write-off of unamortized deferred financing fees.
On June 27, 2014, we repaid
$11.2 million
of mortgage debt at Madrone Business Park and
$8.5 million
of mortgage debt at Stafford Commerce Center and Stafford Commerce Park in connection with the sale of the related properties and recognized a loss on early extinguishment of debt of
$3.3 million
, included in loss on early extinguishment of debt from discontinued operations, from prepayment penalties and the write-off of unamortized discounts and deferred financing fees.
On March 11, 2014, we prepaid at par the
$12.0 million
of mortgage debt at 3920 Arkwright Road.
Required Principal Payments:
The required principal payments due during the next five years and thereafter under all of our outstanding debt at December 31,
2016
are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
42,675
|
|
2018
|
251,488
|
|
2019
|
1,580
|
|
2020
|
451,674
|
|
2021
|
25,982
|
|
Thereafter
|
378,235
|
|
|
$
|
1,151,634
|
|
Note 9. Shareholders’ Equity
Common Share Issuances:
During the year ended December 31, 2015, we issued
144
common shares to holders of
301
of our series D cumulative convertible preferred shares (series D preferred shares) who elected to convert their series D preferred shares into our common shares.
During the year ended December 31, 2014, we issued
10,412,499
common shares to holders of
10,264,503
of our series D preferred shares who converted their series D preferred shares into our common shares.
During the year ended December 31, 2014, we issued
90,135
common shares to RMR pursuant to the amended and restated business management agreement. See Note 18 for further information regarding this agreement.
See Note 13 for information regarding equity issuances related to share-based compensation.
Common Share Repurchases:
On August 24, 2015, our Board of Trustees approved a common share repurchase plan, which authorizes the repurchase of up to
$100.0 million
of our outstanding common shares over the
twelve
month period following the date of authorization. On September 14, 2015, our Board of Trustees authorized the repurchase of up to an additional
$100.0 million
of our outstanding common shares over the
twelve
month period following the date of authorization. On March 17, 2016, our Board of Trustees authorized the repurchase of up to an additional
$150.0 million
of our outstanding common shares over the
twelve
month period following the date of authorization.
During the years ended December 31,
2016
and
2015
, we purchased and retired
2,491,675
and
3,410,300
of our common shares, respectively, at a weighted average price of
$27.68
and
$25.76
per share, respectively, for a total investment of
$69.0 million
and
$87.8 million
, respectively. Since the inception of the common share repurchase plan through December 31,
2016
, we have purchased and retired a total of
5,901,975
of our common shares at a weighted average price of
$26.57
per share, for a
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
total of
$156.8 million
. In August and September 2016, the first
two
share repurchase authorizations, of which
$86.6 million
was not utilized, expired. The
$106.6 million
of remaining authorization available under our share repurchase program as of December 31,
2016
is scheduled to expire in March 2017.
During the year ended December 31, 2016, certain of our employees surrendered
31,025
common shares owned by them to satisfy their statutory tax withholding obligations in connection with the vesting of such common shares under the Equity Commonwealth 2015 Omnibus Incentive Plan (the 2015 Incentive Plan).
Common Share Distributions:
In January 2014, we declared a distribution of
$0.25
per common share, or
$29.6 million
, which we paid on February 21, 2014 to shareholders of record on January 13, 2014. Our credit agreement contains a number of financial and other covenants, including a covenant which restricts our ability to make distributions under certain circumstances. See Note 8 for additional information regarding our credit agreement.
The following characterizes distributions paid per common share for the years ended December 31,
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Ordinary income
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Return of capital
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Capital gain
|
—
|
%
|
|
—
|
%
|
|
100.00
|
%
|
Unrecaptured Section 1250 gain
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
100.00
|
%
|
Series D Preferred Shares:
Each of our
4,915,196
series D cumulative convertible preferred shares accrue dividends of
$1.625
, or
6.50%
per annum of the liquidation amount, payable in equal quarterly payments. Our series D preferred shares are convertible, at the holder's option, into our common shares at an initial conversion rate of
0.480775
common shares per series D preferred share, which is equivalent to an initial conversion price of
$52.00
per common share, or
2,363,103
additional common shares at
December 31, 2016
. On or after November 20, 2011, if our common shares trade at or above the then applicable conversion price, we may, at our option, convert some or all of the series D preferred shares into common shares at the then applicable conversion rate. If a fundamental change occurs, which generally will be deemed to occur upon a change in control or a termination of trading of our common shares (or other equity securities into which our series D preferred shares are then convertible), holders of our series D preferred shares will have a special right to convert their series D preferred shares into a number of our common shares per
$25.00
liquidation preference, plus accrued and unpaid distributions, divided by
98%
of the average closing market price of our common shares for a specified period before such event is effective, unless we exercise our right to repurchase these series D preferred shares for cash, at a purchase price equal to
100%
of their liquidation preference, plus accrued and unpaid distributions. The issuance of a large number of common shares as a result of the exercise of this conversion right after a fundamental change may have a dilutive effect on income from continuing operations attributable to Equity Commonwealth common shareholders per share for future periods.
The removal of our former Trustees on March 25, 2014, triggered a Fundamental Change Conversion Right of the series D preferred shares, as defined in our 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 sum of such
$25.00
liquidation preference plus accrued and unpaid dividends to, but not including, May 14, 2014, divided by
98%
of the average of the closing sale prices of the common shares for the
five
consecutive trading days ending on May 9, 2014, or the Fundamental Change Conversion Rate. Holders of
10,263,003
series D preferred shares elected to exercise their Fundamental Change Conversion Right and converted their series D preferred shares into
10,411,779
of our common shares. As a result of this transaction, we recognized a non-cash preferred distribution of
$16.2 million
, for the excess of the market value of the common
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
shares issued above the carrying value of the series D preferred shares redeemed. As of
December 31, 2016
, we had
4,915,196
outstanding series D preferred shares that were convertible into
2,363,103
of our common shares.
Series E Preferred Shares:
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). Each of our series E preferred shares had a liquidation preference of
$25.00
and required dividends of
$1.8125
, or
7.25%
per annum of the liquidation amount, payable in equal quarterly payments. 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 common shareholders for the year ended December 31, 2016.
Preferred Share Distributions:
In
2016
, our Board of Trustees declared distributions on our series D preferred shares and series E cumulative redeemable preferred shares to date as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Series D Dividend Per Share
|
|
Series E Dividend Per Share
|
January 26, 2016
|
|
February 5, 2016
|
|
February 16, 2016
|
|
$
|
0.40625
|
|
|
$
|
0.453125
|
|
April 15, 2016
|
|
April 25, 2016
|
|
May 16, 2016
|
|
$
|
0.40625
|
|
|
$
|
0.453125
|
|
July 11, 2016
|
|
July 29, 2016
|
|
August 15, 2016
|
|
$
|
0.40625
|
|
|
$
|
—
|
|
October 10, 2016
|
|
October 28, 2016
|
|
November 15, 2016
|
|
$
|
0.40625
|
|
|
$
|
—
|
|
Under our governing documents and Maryland law, distributions to our shareholders are to be authorized and declared by our Board of Trustees. Additionally, the removal of our former Trustees, which occurred on March 25, 2014, constituted an event of default under our credit agreement, under which we generally are prevented from making any distributions or paying any dividends during the pendency of an event of default. As a result of the foregoing, we were unable to declare and pay dividends between March 25, 2014, and June 6, 2014, the date on which we obtained waivers of the aforementioned events of default from our lenders.
Alternative Minimum Tax:
Alternative minimum tax adjustments are to be apportioned between a REIT and its shareholders under Internal Revenue Code Section 59(d). Although regulations have not yet been issued under that provision, based on regulations issued pursuant to a similar provision of prior law and the legislative history of the current provision, it appears that such alternative minimum tax adjustments are to be apportioned to a REIT’s shareholders to the extent that the REIT distributes its regular taxable income. It is our policy to distribute all of our regular taxable income and accordingly, all of our alternative minimum tax adjustments are being apportioned to our shareholders.
We have determined that
96.31%
,
0%
and
15.41%
of each distribution to our shareholders for the tax years ended December 31,
2016
,
2015
, and
2014
, respectively, consists of an alternative minimum tax adjustment.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Cumulative Other Comprehensive Loss
The following tables present the amounts recognized in cumulative other comprehensive loss for the years ended
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
Unrealized Loss
on Derivative
Instruments
|
Balance as of January 1, 2016
|
$
|
(3,687
|
)
|
|
|
Other comprehensive loss before reclassifications
|
(554
|
)
|
Amounts reclassified from cumulative other comprehensive loss to net income
|
4,033
|
|
Net current period other comprehensive income
|
3,479
|
|
|
|
Balance as of December 31, 2016
|
$
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss
on Derivative
Instruments and Other Assets
|
|
Foreign Currency
Translation
Adjustments
|
|
Total
|
Balances as of January 1, 2015
|
$
|
(4,299
|
)
|
|
$
|
(48,917
|
)
|
|
$
|
(53,216
|
)
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
(1,232
|
)
|
|
(14,290
|
)
|
|
(15,522
|
)
|
Amounts reclassified from cumulative other comprehensive loss to net income
|
1,844
|
|
|
63,207
|
|
|
65,051
|
|
Net current period other comprehensive income
|
612
|
|
|
48,917
|
|
|
49,529
|
|
|
|
|
|
|
|
Balances as of December 31, 2015
|
$
|
(3,687
|
)
|
|
$
|
—
|
|
|
$
|
(3,687
|
)
|
The following tables present reclassifications out of cumulative other comprehensive loss for the years ended
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Cumulative Other Comprehensive Loss to Net Income
|
|
|
|
|
Year Ended December 31,
|
|
|
Details about Cumulative Other Comprehensive Loss Components
|
|
2016
|
|
2015
|
|
Affected Line Items in the Statement of Operations
|
Interest rate swap contracts
|
|
$
|
3,792
|
|
|
$
|
4,924
|
|
|
Interest expense
|
Interest rate swap contracts
|
|
241
|
|
|
—
|
|
|
Interest and other income
|
Foreign currency translation adjustment activity
|
|
—
|
|
|
63,207
|
|
|
Gain on sale of properties
|
Realized gain on available for sale securities
|
|
—
|
|
|
(3,080
|
)
|
|
Interest and other income
|
|
|
$
|
4,033
|
|
|
$
|
65,051
|
|
|
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Income Taxes
Our provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
State
|
$
|
745
|
|
|
$
|
270
|
|
|
$
|
350
|
|
Federal
|
—
|
|
|
513
|
|
|
—
|
|
Foreign
|
—
|
|
|
2,336
|
|
|
2,772
|
|
|
745
|
|
|
3,119
|
|
|
3,122
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Foreign
|
—
|
|
|
(755
|
)
|
|
69
|
|
|
—
|
|
|
(755
|
)
|
|
69
|
|
|
|
|
|
|
|
Income tax expense
|
$
|
745
|
|
|
$
|
2,364
|
|
|
$
|
3,191
|
|
Federal income tax expense for the year ended December 31, 2015 relates to taxes incurred as a result of a taxable built-in gain triggered by the sale of a property that was previously owned by a C corporation. As a result of the disposition of the Australian properties, we incurred net income tax expense of
$1.6 million
for the year ended December 31, 2015.
A reconciliation of our effective tax rate and the U.S. Federal statutory income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Taxes at statutory U.S. federal income tax rate
|
35.00
|
%
|
|
35.00
|
%
|
|
35.00
|
%
|
Dividends paid deduction and net operating loss utilization
|
(35.00
|
)%
|
|
(35.00
|
)%
|
|
(35.00
|
)%
|
Federal taxes on built-in gain
|
—
|
%
|
|
0.50
|
%
|
|
—
|
%
|
State, local, and foreign income taxes
|
0.32
|
%
|
|
1.81
|
%
|
|
11.73
|
%
|
Effective tax rate
|
0.32
|
%
|
|
2.31
|
%
|
|
11.73
|
%
|
We have a net operating loss carryforward from prior years and we have fully reserved the associated deferred tax assets due to the uncertainty of our ability to utilize the net operating losses in the future.
Note 12. Derivative Instruments
Risk Management Objective of Using Derivatives
We are exposed to certain risks relating to our ongoing business operations, including the effect of changes in interest rates. The only risk we currently manage by using derivative instruments is related to our interest rate risk.
We may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. We do not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, we only enter into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which we and our affiliates may also have other financial relationships. We do not anticipate that any of the counterparties will fail to meet their obligations.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we periodically use interest rate swaps, caps, or other similar instruments as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in cumulative other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During
2016
, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Amounts reported in cumulative other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional
$49,000
will be reclassified from cumulative other comprehensive loss as an increase to interest expense.
We previously had interest rate swap agreements to manage our interest rate risk exposure on
$167.8 million
of mortgage debt at 1735 Market Street, which required interest at a spread over LIBOR. The interest rate swap agreements utilized by us qualified as cash flow hedges and effectively modified our exposure to interest rate risk by converting our floating interest rate debt to a fixed interest rate basis for this loan through December 1, 2016, thus reducing the impact of interest rate changes on future interest expense. On November 10, 2016 we repaid at par the mortgage debt at 1735 Market Street and terminated the related interest rate swap agreement. We recognized
$0.2 million
in interest and other income on the consolidated statement of operations for the year ended December 31, 2016 related to the early termination of the interest rate swap agreement.
On March 4, 2016, we purchased an interest rate cap with a LIBOR strike price of
2.50%
. The interest rate cap, effective April 1, 2016, has a notional amount of
$400.0 million
and a maturity date of March 1, 2019.
As of
December 31, 2016
, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
|
|
|
|
|
|
|
Interest Rate Derivative
|
|
Number of Instruments
|
|
Notional Amount (in thousands)
|
Interest rate cap
|
|
1
|
|
|
$400,000
|
The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheets as of
December 31, 2016
, and
2015
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31,
|
Interest Rate Derivative Designated as Hedging Instrument
|
|
Balance Sheet Location
|
|
2016
|
|
2015
|
Interest rate cap
|
|
Other assets
|
|
$
|
314
|
|
|
$
|
—
|
|
Pay-fixed swaps
|
|
Accounts payable and accrued expenses
|
|
—
|
|
|
3,687
|
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the years ended
December 31, 2016
,
2015
, and
2014
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Amount of loss recognized in cumulative other comprehensive loss (effective portion)
|
$
|
(554
|
)
|
|
$
|
(1,149
|
)
|
|
$
|
(776
|
)
|
Amount of loss reclassified from cumulative other comprehensive loss into interest expense (effective portion)
|
3,792
|
|
|
4,924
|
|
|
5,020
|
|
Amount of loss recognized in income (ineffective portion and amount excluded from effectiveness testing)
|
241
|
|
|
—
|
|
|
—
|
|
Credit-risk-related Contingent Features
Our agreements with each of our derivative counterparties contain a provision providing that if we default or are capable of being declared in default on any of our indebtedness, we could also be declared in default on our derivative obligations.
As of
December 31, 2016
, we did not have any derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk.
Note 13. Share-Based Compensation
Equity Commonwealth 2015 Omnibus Incentive Plan
On June 16, 2015, at our 2015 annual meeting of shareholders, our shareholders approved the 2015 Incentive Plan. The 2015 Incentive Plan replaced the Equity Commonwealth 2012 Equity Compensation Plan (as amended, the 2012 Plan). The Board of Trustees approved the 2015 Incentive Plan, subject to shareholder approval, on March 18, 2015 (the Effective Date). On January 26, 2016, the Board of Trustees approved an amendment to the 2015 Incentive Plan to allow the Compensation Committee (Committee) to authorize in an award agreement a transfer of all or a part of certain equity awards not for value to a “family member” (as defined in the 2015 Incentive Plan). The following description of certain terms of the 2015 Incentive Plan is qualified in all respects by the terms of the 2015 Incentive Plan.
Eligibility.
Awards may be granted under the 2015 Incentive Plan to employees, officers and non-employee directors of the Company, its subsidiaries or its affiliates, or consultants and advisors (who are natural persons) providing services to the Company, its subsidiaries or its affiliates, or any other person whose participation in the 2015 Incentive Plan is determined by the Committee to be in the best interests of the Company.
Term
. The 2015 Incentive Plan terminates automatically
ten
years after the Effective Date, unless it is terminated earlier by the Board of Trustees.
Shares Available for Issuance.
Subject to adjustment as provided in the 2015 Incentive Plan, the maximum number of common shares of the Company that are available for issuance under the 2015 Incentive Plan is
3,250,000
shares.
Awards.
The following types of awards may be made under the 2015 Incentive Plan, subject to limitations set forth in the 2015 Incentive Plan:
· Stock options;
· Stock appreciation rights;
· Restricted stock;
· Restricted stock units;
· Unrestricted stock;
· Dividend equivalent rights;
· Performance shares and other performance-based awards;
· Limited partnership interests in any partnership entity through which the Company may conduct its business in the future;
· Other equity-based awards; and
· Cash bonus awards.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recipients of the Company’s restricted shares have the same voting rights as any other common shareholder. During the period of restriction, the Company’s unvested restricted shareholders are eligible to receive dividend payments on their shares at the same rate and on the same date as any other common shareholder. Recipients of the Company’s restricted stock units (RSUs) are entitled to receive dividends with respect to the common shares underlying the RSUs if and when the RSUs are earned, at which time the recipient will be entitled to receive an amount in cash equal to the aggregate amount of cash dividends that would have been paid in respect of the common shares underlying the recipient’s earned RSUs had such common shares been issued to the recipient on the first day of the performance period. To the extent that an award does not vest, the dividends will be forfeited.
The RSUs are market based awards with a service condition and recipients may earn the RSU grants based on the Company’s total shareholder return (TSR) relative to the TSR's for the constituent REITs that comprise the NAREIT Office Index for a three year performance period. Following the end of the performance period, the number of earned awards will be determined. The earned awards vest in
two
tranches with
50%
of the earned award vesting at the end of the performance period and the remaining
50%
of the earned award vesting one year after the end of the performance period, subject to the grant recipient’s continued employment. Compensation expense for the RSU awards is determined using a Monte Carlo simulation model and is being recognized ratably from the grant date to the vesting date of each tranche.
Administration.
The 2015 Incentive Plan will be administered by the Committee, which will determine all terms and recipients of awards under the 2015 Incentive Plan.
2016 Equity Award Activity
On June 15, 2016, in accordance with the Company’s compensation plan for independent Trustees, the Committee awarded each of the
nine
independent Trustees
$0.1 million
in restricted shares as part of their compensation for the 2016-2017 year of service on the Board of Trustees. These awards equated to
3,463
shares per Trustee, for a total of
31,167
shares, valued at
$28.88
per share, the closing price of our common shares on the New York Stock Exchange (NYSE) on that day. These shares vest
one
year after the date of the award.
On January 26, 2016, the Committee approved a grant of
136,623
restricted common shares and
277,386
RSUs at target (
691,385
RSUs at maximum) to the Company’s officers, certain employees and to Mr. Zell, the Chairman of our Board of Trustees, as part of their compensation for fiscal year 2015.
The restricted shares are service based awards and vest over a
four
-year period. The restricted shares were granted on January 26, 2016 and were valued at
$26.93
per share, the closing price of our common shares on the NYSE on that day.
2015 Equity Award Activity
On June 16, 2015, in accordance with the Company’s compensation plan for independent Trustees, the Committee awarded each of the
nine
independent Trustees
$0.1 million
in restricted shares as part of their compensation for the 2015-2016 year of service on the Board of Trustees. These awards equated to
3,843
shares per Trustee, for a total of
34,587
shares, valued at
$26.02
per share, the closing price of our common shares on the NYSE on that day. These shares vest
one
year after the date of the award.
On January 28, 2015, the Committee approved a grant of
126,319
restricted common shares and
256,467
RSUs at target (
639,250
RSUs at maximum) to the Company’s officers, certain employees and to Mr. Zell, the Chairman of our Board of Trustees, as part of their compensation for fiscal year 2014.
The restricted shares are service based awards and vest over a
four
-year period. The restricted shares were granted on January 28, 2015 and were valued at
$26.58
per share, the closing price of our common shares on the NYSE on that day.
2014 Equity Award Activity
On October 28, 2014, the Committee approved the one-time grant of restricted common shares and restricted share units under the 2012 Plan to certain of the Company’s officers and employees and to Mr. Zell, the Chairman of our Board of
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trustees. The Committee also approved the one-time grant of restricted common shares under the 2012 Plan to our independent Trustees, a grant of restricted common shares to each independent Trustee as annual compensation for his or her service as a Trustee, and a pro-rata grant of fully vested common shares for
five
of our independent Trustees for their service from May 23, 2014 through July 31, 2014.
Outstanding Equity Awards
The table below presents a summary of restricted share and RSU activity under the 2015 Incentive Plan and the 2012 Plan for the years ended
December 31, 2016
,
2015
and
2014
, excluding restricted shares granted to our former Trustees, former officers and certain employees of RMR, our former manager, under the terms of our 2012 Plan (which grants are further described below):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Restricted Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number
of
RSUs
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at December 31, 2013
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
713,727
|
|
|
26.66
|
|
|
1,266,237
|
|
|
15.99
|
|
Vested
|
(3,545
|
)
|
|
26.66
|
|
|
—
|
|
|
—
|
|
Outstanding at December 31, 2014
|
710,182
|
|
|
|
|
1,266,237
|
|
|
|
Granted
|
160,906
|
|
|
26.46
|
|
|
639,250
|
|
|
15.47
|
|
Vested
|
(86,517
|
)
|
|
26.02
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(8,115
|
)
|
|
26.64
|
|
|
(21,377
|
)
|
|
15.80
|
|
Outstanding at December 31, 2015
|
776,456
|
|
|
|
|
1,884,110
|
|
|
|
Granted
|
167,790
|
|
|
27.29
|
|
|
691,385
|
|
|
15.57
|
|
Vested
|
(191,498
|
)
|
|
26.54
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(539
|
)
|
|
26.82
|
|
|
(2,727
|
)
|
|
15.54
|
|
Outstanding at December 31, 2016
|
752,209
|
|
|
|
|
2,572,768
|
|
|
|
The
752,209
unvested restricted shares as of
December 31, 2016
are scheduled to vest as follows:
216,486
shares in
2017
,
373,140
shares in
2018
,
95,554
shares in
2019
and
67,029
shares in
2020
. As of
December 31, 2016
, the estimated future compensation expense for all unvested restricted share grants was
$12.4 million
. Compensation expense for the restricted share awards is being recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The weighted average period over which the future compensation expense will be recorded for the restricted shares is approximately
2.1
years.
As of
December 31, 2016
, the estimated future compensation expense for all unvested RSUs was
$19.2 million
. The weighted average period over which the future compensation expense will be recorded for the RSUs is approximately
2.0
years.
The assumptions and fair values for the RSUs granted for the years ended
December 31, 2016
,
2015
and
2014
are included in the following table on a per share basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Fair value of RSUs granted at the target amount
|
$
|
38.80
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fair value of RSUs granted at the maximum amount
|
$
|
—
|
|
|
$
|
15.47
|
|
|
$
|
15.99
|
|
Expected term (years)
|
4
|
|
|
4
|
|
|
4
|
|
Expected volatility
|
—
|
|
|
—
|
|
|
—
|
|
Expected dividend yield
|
1.86
|
%
|
|
1.88
|
%
|
|
1.88
|
%
|
Risk-free rate
|
1.07
|
%
|
|
0.81
|
%
|
|
0.84
|
%
|
During the years ended
December 31, 2016
,
2015
and
2014
, we recorded
$18.5 million
,
$15.4 million
and
$2.6 million
, respectively, of compensation expense, net of forfeitures, in general and administrative expense for grants to our Board of
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trustees and the Company's employees related to our Plan. At
December 31, 2016
,
2,358,464
common shares remain available for issuance under the Plan.
2012 Equity Compensation Plan
Prior to the adoption of the 2015 Incentive Plan, we had common shares available for issuance under the 2012 Plan. The 2012 Plan was adopted in May 2012 and replaced our 2003 Incentive Share Award Plan, or the 2003 Plan. We awarded common shares to our former officers and certain employees of RMR pursuant to both of these plans. On January 28, 2014, we granted
2,000
common shares of beneficial interest, par value
$0.01
per share, valued at
$23.46
per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to
two
of our former Trustees as part of their then annual compensation. The common shares awarded to our former Trustees vested immediately. We include the value of awarded shares in general and administrative expenses at the time the awards vest. See Note 18 for further information regarding grants of restricted shares we made to our former officers and certain employees of RMR.
On October 28, 2014, the Board of Trustees approved an amendment to the 2012 Plan to permit the Company to issue RSUs. Additionally, on October 28, 2014, the Committee approved new forms of Restricted Share and Restricted Share Unit Agreements to be used for grants of restricted common shares to members of the Board of Trustees, as well as grants of restricted common shares and restricted share units to officers and employees of the Company.
The 2015 Incentive Plan replaced the 2012 Plan. No future grants will be made under the 2012 Plan, although the terms and conditions of the 2012 Plan will continue to govern any outstanding awards granted under the 2012 Plan. A summary of shares granted and vested to our former Trustees, former officers and certain employees of RMR under the terms of our 2012 Plan and our 2003 Plan for the year ended December 31, 2014, is as follows:
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested shares at December 31, 2013
|
130,914
|
|
|
$
|
20.70
|
|
Granted
|
4,000
|
|
|
23.46
|
|
Vested
|
(134,914
|
)
|
|
25.79
|
|
Unvested shares at December 31, 2014
|
—
|
|
|
$
|
—
|
|
As a result of the removal of our former Trustees on March 25, 2014, the vesting of
130,914
common shares previously issued to our former officers and certain employees of RMR pursuant to our equity compensation plans accelerated in accordance with the terms of their governing share grants. During the year ended December 31, 2014, we recorded
$3.4 million
of general and administrative expense related to the vesting of these shares.
Note 14. Defined Contribution Plan
We have a defined contribution plan that covers employees meeting eligibility requirements. We match
100%
of the first
3%
of compensation that an employee elects to defer plus
50%
of compensation that an employee elects to defer exceeding
3%
but not exceeding
5%
, subject to a maximum of
$8,000
. The Company’s matching contribution vests immediately. The Company's contributions were
$0.4 million
and
$0.3 million
for the years ended
December 31, 2016
and
2015
, respectively.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Fair Value of Assets and Liabilities
The table below presents certain of our assets and liabilities measured at fair value during
2016
and
2015
, categorized by the level of inputs used in the valuation of each asset and liability (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2016 Using
|
|
|
|
|
Quoted Prices in Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant Unobservable
Inputs
|
Description
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Recurring Fair Value Measurements:
|
|
|
|
|
|
|
|
|
Effective portion of interest rate cap contract
|
|
$
|
314
|
|
|
$
|
—
|
|
|
$
|
314
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2015 Using
|
|
|
|
|
Quoted Prices in Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant Unobservable
Inputs
|
Description
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Recurring Fair Value Measurements:
|
|
|
|
|
|
|
|
|
Effective portion of interest rate swap contracts
|
|
$
|
(3,687
|
)
|
|
$
|
—
|
|
|
$
|
(3,687
|
)
|
|
$
|
—
|
|
Derivative liability
|
|
(7,219
|
)
|
|
—
|
|
|
—
|
|
|
(7,219
|
)
|
Effective Portion of Interest Rate Swap and Cap Contracts
The fair value of our interest rate swap and cap contracts is determined using the net discounted cash flows of each derivative based on the market based interest rate curve (level 2 inputs) and adjusted for our credit spread and the actual and estimated credit spreads of the counterparties (level 3 inputs). Although we have determined that the majority of the inputs used to value our derivatives fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counterparties. As of
December 31, 2016
, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified as level 2 inputs in the fair value hierarchy.
Derivative Liability
On July 31, 2014, our shareholders voted to approve the reimbursement of verified expenses incurred by Related Fund Mangement, LLC and Corvex Management LP (Related/Corvex) (see Note 18 for additional information). Approximately
$16.7 million
was paid during the year ended December 31, 2014. Up to
$8.4 million
was to be reimbursed only if the average closing price of our common shares was at least
$26.00
(as adjusted for any share splits or share dividends) during the
one
year period after the date on which the reimbursement was approved by shareholders, and up to
$8.4 million
was to be reimbursed only if the average closing price of our common shares was at least
$26.00
(as adjusted for any share splits or share dividends) during the one year period between the first and second anniversaries of the date on which the reimbursement was approved by shareholders. The average closing price of our common shares was at least
$26.00
during both the first and second one year periods after the date on which the reimbursement was approved by shareholders, and as a result, in August 2016 and 2015 we paid
$8.2 million
and
$8.4 million
, respectively, to Related/Corvex.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to the payment of the reimbursement in August 2016, the potential future reimbursement of
$8.4 million
for the second one year period represented a derivative instrument as codified in ASC 815
Derivatives and Hedging
which required the potential future reimbursement to be recorded at fair value at each reporting date. We recognized expense of
$1.0 million
and
$9.0 million
, which was recorded in general and administrative expenses in our consolidated statements of operations for the years ended
December 31, 2016
and 2015, respectively. The valuation techniques and significant unobservable inputs used for our level 3 fair value measurement at December 31, 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value at December 31, 2015
|
|
Primary
Valuation
Technique
|
|
Unobservable Inputs
|
|
Rate
|
Derivative liability
|
|
$
|
7,219
|
|
|
Monte Carlo simulation
|
|
Risk-free rate
|
|
0.52%
|
|
|
|
|
|
|
Volatility
|
|
20.0%
|
Properties Held and Used
As part of our disposition plan, and pursuant to our accounting policy, in 2016, we evaluated the recoverability of the carrying values of each of the real estate assets that comprised our portfolio and determined that due to the shortening of the expected periods of ownership as a result of the disposition plan and current estimates of market value, it was necessary to reduce the net book value of a portion of the real estate assets in our portfolio to their estimated fair values. We anticipate the potential disposition of certain properties prior to the end of their remaining useful lives. As a result, in the second quarter of 2016, we recorded an impairment charge related to 111 Monument Circle, 101-115 W. Washington Street and 100 East Wisconsin Avenue of
$43.7 million
for the year ended December 31, 2016 in accordance with our impairment analysis procedures. We reduced the aggregate carrying value of these properties from
$308.6 million
to their estimated fair value of
$264.9 million
. These properties were sold in August 2016 (see Note 3 for additional information). In the fourth quarter of 2016, we recorded an impairment charge related to Parkshore Plaza, Cabot Business Park Land, 625 Crane Street and 111 Market Place of
$14.7 million
for the year ended December 31, 2016 in accordance with our impairment analysis procedures. We reduced the aggregate carrying value of these properties from
$98.2 million
to their estimated fair value of
$83.5 million
. 111 Market Place was sold in January 2017 (see Note 20 for additional information). We determined these impairments based on third party offer prices and independent third party broker information, which are level 2 inputs according to the fair value hierarchy established in ASC 820. We evaluated each of our properties and determined there were no additional valuation adjustments necessary at December 31, 2016.
As part of our disposition plan, and pursuant to our accounting policy, in 2015, we evaluated the recoverability of the carrying values of each of the real estate assets that comprised our portfolio and determined that due to the shortening of the expected periods of ownership as a result of the disposition plan, it was necessary to reduce the net book value of a portion of the real estate assets in our portfolio to reduce the assets to their estimated fair values. During the year ended December 31, 2015, we recorded an impairment charge of
$17.2 million
in accordance with our impairment analysis procedures.
Financial Instruments
In addition to the assets and liabilities described in the above table, our financial instruments include our cash and cash equivalents, real estate mortgages receivable, restricted cash, senior unsecured debt and mortgage notes payable. At
December 31, 2016
and
2015
, the fair value of these additional financial instruments were not materially different from their carrying values, except as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Principal Balance
|
|
Fair Value
|
|
Principal Balance
|
|
Fair Value
|
Senior unsecured debt and mortgage notes payable
|
$
|
1,151,634
|
|
|
$
|
1,167,031
|
|
|
$
|
1,711,666
|
|
|
$
|
1,749,211
|
|
The fair values of our senior notes and mortgage notes payable are based on estimates using discounted cash flow analyses and currently prevailing interest rates adjusted by credit risk spreads (level 3 inputs).
Other financial instruments that potentially subject us to concentrations of credit risk consist principally of rents receivable; however, as of
December 31, 2016
,
no
single tenant of ours is responsible for more than
5.5%
of our total annualized rents.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our derivative financial instruments, including interest rate swaps and caps, are entered with major financial institutions and we monitor the amount of credit exposure to any one counterparty.
Note 16. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator for earnings per common share - basic and diluted:
|
|
|
|
|
|
Income from continuing operations
|
$
|
232,894
|
|
|
$
|
99,857
|
|
|
$
|
21,206
|
|
Preferred distributions
|
(17,956
|
)
|
|
(27,924
|
)
|
|
(32,095
|
)
|
Excess fair value of consideration paid over carrying value of preferred shares
|
(9,609
|
)
|
|
—
|
|
|
—
|
|
Excess fair value of consideration over carrying vale of preferred shares
|
—
|
|
|
—
|
|
|
(16,205
|
)
|
Income (loss) from continuing operations attributable to Equity Commonwealth common shareholders
|
205,329
|
|
|
71,933
|
|
|
(27,094
|
)
|
Discontinued operations
|
—
|
|
|
—
|
|
|
2,806
|
|
Numerator for net income (loss) per share - basic and diluted
|
$
|
205,329
|
|
|
$
|
71,933
|
|
|
$
|
(24,288
|
)
|
|
|
|
|
|
|
Denominator for earnings per common share - basic and diluted:
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
125,474
|
|
|
128,621
|
|
|
125,163
|
|
Weighted average number of common shares outstanding - diluted
(1)
|
126,768
|
|
|
129,437
|
|
|
125,163
|
|
|
|
|
|
|
|
Earnings per share - basic:
|
|
|
|
|
|
Income (loss) from continuing operations attributable to Equity Commonwealth common shareholders
|
$
|
1.64
|
|
|
$
|
0.56
|
|
|
$
|
(0.21
|
)
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.02
|
|
Net income (loss) per share - basic
|
$
|
1.64
|
|
|
$
|
0.56
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
Earnings per share - diluted:
|
|
|
|
|
|
Income (loss) from continuing operations attributable to Equity Commonwealth common shareholders
|
$
|
1.62
|
|
|
$
|
0.56
|
|
|
$
|
(0.21
|
)
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.02
|
|
Net income (loss) per share - diluted
|
$
|
1.62
|
|
|
$
|
0.56
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
Anti-dilutive securities:
|
|
|
|
|
|
Effect of Series D preferred shares; 6 1/2% cumulative convertible
(2)
|
2,363
|
|
|
2,363
|
|
|
4,175
|
|
|
|
(1)
|
As of
December 31, 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
December 31, 2016
and
2015
,
1,027
and
1,143
common shares would be issued to the RSU holders, respectively, and
no
shares would have been issued as of December 31, 2014. Using a weighted average basis,
1,294
and
816
common shares are reflected in diluted earnings per share for the years ended ended
December 31, 2016
and
2015
, respectively.
|
|
|
(2)
|
The Series D preferred shares are excluded from the diluted earnings per share calculation because including the Series D preferred shares would also require that the preferred distributions be added back to net income, resulting in anti-dilution during the periods presented.
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17. Segment Information
Our primary business is the ownership and operation of office properties, and we currently have
one
reportable segment. Due to significant dispositions, during the fourth quarter of 2015, we changed the composition of our operating segments from
two
reportable segments (central business district properties and suburban properties) to
one
reportable segment. This change was made based on the financial information reviewed and used by the chief operating decision maker to make operating decisions, assess performance, develop strategy and allocate capital resources. More than
95%
of our revenues for the year ended
December 31, 2016
are from office properties.
Note 18. Related Person Transactions
The following discussion includes a description of our related person transactions for the years ended
December 31, 2016
,
2015
and
2014
. Certain of these related person transactions, and their approvals, relate to RMR and RMR Australia Asset Management Pty Ltd (together, Former Manager) or occurred prior to the election of our new Board of Trustees at the special meeting of shareholders held on May 23, 2014 (Special Meeting) and the appointment of our current executive officers following the Special Meeting, as described under “—Transactions with Prior Related Persons.”
Related Person Transactions Following the Special Meeting:
Equity Group Investments and associated entities:
Effective July 20, 2015, we entered into a lease with Two North Riverside Plaza Joint Venture Limited Partnership, an entity associated with Mr. Zell, our Chairman, to occupy office space on the twentieth and twenty-first floors of Two North Riverside Plaza in Chicago, Illinois (20th/21st Floor Office Lease). The initial term of the lease is approximately
five
years, with
one
5
-year renewal option. We recently completed improvements to the office space utilizing the
$0.7 million
tenant improvement allowance provided for by the lease. In connection with the 20th/21st Floor Office Lease, we also have a lease with Two North Riverside Plaza Joint Venture Limited Partnership for storage space in the basement of Two North Riverside Plaza. The lease expires December 31, 2020, however, each party has the right to terminate on 30 days' prior written notice. During the year ended December 31, 2016, we recognized expense of
$0.8 million
pursuant to the 20th/21st Floor Office Lease and the related storage space. The future minimum lease payments scheduled to be paid by us during the current terms of this lease as of December 31, 2016 are as follows:
$0.8 million
in 2017,
$0.9 million
in 2018,
$0.9 million
in 2019 and
$0.9 million
in 2020. As of December 31, 2016, we had
$0.1 million
due to Two North Riverside Plaza Joint Venture Limited Partnership pursuant to the 20th/21st Floor Office Lease and the related storage space.
We had a license agreement with Equity Group Investments, a private investment firm (Equity Group), to use office space on the sixth floor at Two North Riverside Plaza. The license fee included the non-exclusive use of additional areas on the sixth floor (such as conference rooms and common areas), certain administrative services (such as mail room services and reception desk staffing), office equipment, office furniture, supplies, licensee’s share of building operating expenses and real estate taxes and access to
one
parking space. Mr. Zell, our Chairman, is the Chairman and Chief Executive Officer of Equity Group, and Mr. Helfand, our President and Chief Executive Officer, is the Co-President of Equity Group. The license agreement was terminated as of December 30, 2015. During the years ended December 31, 2015 and 2014, we recognized expense of
$0.2 million
and
$0.1 million
, respectively, pursuant to the license agreement.
We had a
one
-year lease with
one
3
-month renewal option with Two North Riverside Plaza Joint Venture Limited Partnership to occupy office space on the fourteenth floor at Two North Riverside Plaza. This lease was terminated, effective January 31, 2015. During the years ended December 31, 2015 and 2014, we recognized expense of
$13,000
and
$0.1 million
, respectively, pursuant to the office space on the fourteenth floor.
We had a sublease with Equity Residential Management, L.L.C., an entity associated with Mr Zell, our Chairman, to occupy office space on the tenth floor of Two North Riverside Plaza. Equity Residential Management, L.L.C. leases the space from Two North Riverside Plaza Joint Venture Limited Partnership. The sublease agreement was terminated as of December 30, 2015. During the years ended December 31, 2015 and 2014, we recognized expense of
$0.4 million
and
$38,000
, respectively, pursuant to the tenth floor office sublease.
Related/Corvex:
On July 31, 2014, at the reconvened session of our 2014 annual meeting of shareholders, our shareholders voted to approve the reimbursement of approximately
$33.5 million
of verified expenses incurred by Related/
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Corvex in connection with their consent solicitations to remove our former Trustees and elect the new Board of Trustees and to engage in related litigation. Approximately
$16.7 million
was paid during the year ended December 31, 2014. Up to
$8.4 million
was to be reimbursed only if the average closing price of our common shares was at least
$26.00
(as adjusted for any share splits or share dividends) during the
one
year period after the date on which the reimbursement was approved by shareholders, and up to
$8.4 million
was to be reimbursed only if the average closing price of our common shares was at least
$26.00
(as adjusted for any share splits or share dividends) during the one year period between the first and second anniversaries of the date on which the reimbursement was approved by shareholders. The average closing price of our common shares was at least
$26.00
during both the first and second one year periods after the date on which the reimbursement was approved by shareholders, and as a result, in August 2016 and 2015, we paid
$8.2 million
and
$8.4 million
, respectively, to Related/Corvex.
Transactions with Prior Related Persons:
RMR
: Prior to entering into the Termination and Cooperation Agreement with RMR, as further described below, we had
three
primary agreements with RMR and its affiliates to provide management and administrative services to us: (i) a business management agreement, which related to our business generally, (ii) a property management agreement, which related to our property level operations, and (iii) an Australia business and property management agreement, which related to our Australian properties.
During the time we were externally managed by RMR,
one
of our former Managing Trustees, Mr. Barry Portnoy, was Chairman, majority owner and an employee of RMR. Another former Managing Trustee and our former President, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and was an owner, President, Chief Executive Officer and a director of RMR. Mr. John Popeo, our former Treasurer and Chief Financial Officer, and Mr. David Lepore, our former Chief Operating Officer, were also officers of RMR.
Two
of our former independent Trustees served as independent directors or independent trustees of other public companies to which RMR provided management services. Mr. Barry Portnoy served as a managing director or managing trustee of a majority of the public companies to which RMR or its affiliate provided management services and Mr. Adam Portnoy served as a managing trustee of a majority of those companies. In addition, officers of RMR served as officers of those companies. As a result of the removal, effective March 25, 2014, of Mr. Barry Portnoy and Mr. Adam Portnoy as Trustees of the Company and the resignation on May 23, 2014, of Mr. Adam D. Portnoy, Mr. John C. Popeo, Mr. David M. Lepore and other officers of RMR from their respective positions as officers of the Company, they, RMR, RMR Australia Asset Management Pty Limited, or RMR Australia, Government Properties Income Trust (GOV), SIR and AIC have ceased to be related persons of the Company. Therefore, we only present related person transactions with these entities through June 30, 2014.
On December 19, 2013, we and RMR entered into an amended and restated business management agreement, effective with respect to services performed on and after January 1, 2014. Under the terms of this amended and restated business management agreement:
|
|
•
|
The annual amount of the base management fee which was to be paid to RMR by us for each applicable period was to be equal to the lesser of:
|
|
|
•
|
the sum of (a)
0.7%
of the average historical cost of our real estate investments during such period up to
$250.0 million
, plus (b)
1.0%
of the average historical cost of our real estate investments located outside the United States, Puerto Rico and Canada during such period, plus (c)
0.5%
of the average historical cost of our real estate investments during such period exceeding
$250.0 million
and the average historical cost of our real estate investments located outside the United States, Puerto Rico and Canada combined; and
|
|
|
•
|
the sum of (a)
0.7%
of the average closing price per share of our common shares on the NYSE, during such period, multiplied by the average number of our common shares outstanding during such period, plus the daily weighted average of the aggregate liquidation preference of each class of our preferred shares outstanding during such period, plus the daily weighted average of the aggregate principal amount of our consolidated indebtedness during such period, or, together, our Average Market Capitalization, up to
$250.0 million
, plus (b)
1.0%
of the average historical cost of our real estate investments located outside the United States, Puerto Rico and Canada during such period, plus (c)
0.5%
of our Average Market Capitalization exceeding
$250.0
|
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million
and the average historical cost of our real estate investments located outside the United States, Puerto Rico and Canada during such period combined.
The average historical cost of our real estate investments included our consolidated assets invested, directly or indirectly, in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs and costs which have been allocated to intangibles or are unallocated), all before reserves for depreciation, amortization, impairment charges or bad debts or other similar noncash reserves. Our investment in SIR (or in any other company which has a management agreement with RMR) was not counted for purposes of calculating the fees payable by us to RMR.
|
|
•
|
Although the fee calculation was stated in annual percentages, the base management fee was paid monthly to RMR, ninety percent (
90%
) in cash and ten percent (
10%
) in our common shares, which was to be fully-vested when issued. The number of our common shares to be issued in payment of the base management fee for each month was equal to the value of
10.0%
of the total base management fee for that month divided by the average daily closing price of our common shares during that month.
|
|
|
•
|
The incentive management fee which may have been earned by RMR for an annual period was an amount, subject to a cap based on the value of our outstanding common shares, equal to
12.0%
of the product of (a) our equity market capitalization on the last trading day on the year immediately prior to the relevant measurement period, and (b) the amount (expressed as a percentage) by which the total returns per share realized by the holders of our common shares (i.e., share price appreciation plus dividends) exceeded the total shareholder return of the SNL Office REIT Index (in each case subject to certain adjustments) for the relevant measurement period. The measurement periods were generally
three
-year periods ending with the year for which the incentive management fee was being calculated, with shorter periods applicable in the case of the calculation of the incentive management fee for 2014 (
one year
) and 2015 (
two years
).
|
|
|
•
|
The incentive management fee was payable in our common shares, with
one-third
of our common shares issued in payment of an incentive management fee vested on the date of issuance, and the remaining
two-thirds
vesting thereafter in
two
equal annual installments. If the issuance of common shares in payment of a portion of the base management fee or incentive management fee would be limited by applicable law and regulations, such portion of the applicable fee would instead be paid in cash.
|
|
|
•
|
RMR and certain eligible transferees of our common shares issued in payment of the base management fee or incentive management fee were entitled to demand registration rights, exercisable not more frequently than twice per year, and to "piggy-back" registration rights, with certain expenses to be paid by us. We and applicable selling shareholders also had agreed to indemnify each other (and their officers, trustees, directors and controlling persons) against certain liabilities, including liabilities under the Securities Act in connection with any such registration.
|
Pursuant to our business management agreement with RMR as described above, we recognized business management fee expense of
$31.7 million
for the six months ended June 30, 2014. The fees for the six months ended June 30, 2014, include estimated 2014 incentive fees payable in common shares based on our common share total return. These amounts are included in general and administrative expenses, in our consolidated financial statements. In accordance with the terms of our business management agreement, as amended in December 2013, we issued
68,206
of our common shares to RMR for the six months ended June 30, 2014 as payment for
10%
of the base business management fee we recognized for such period.
Our property management agreement with RMR provided for management fees equal to
3.0%
of gross collected rents and construction supervision fees for construction equal to
5.0%
of construction costs. The aggregate property management and construction supervision fees we recognized on a consolidated basis were
$13.8 million
for the six months ended June 30, 2014. These amounts are included in operating expenses and income from discontinued operations or have been capitalized, as appropriate, in our consolidated financial statements.
MacarthurCook Fund Management Limited (MacarthurCook) previously provided us with business and property management services related to our Australian properties. Our contract with MacarthurCook terminated on January 31, 2013, and on that date we entered into a business and property management agreement (Australia Management Agreement) with RMR Australia for the benefit of CWH Australia Trust, a subsidiary of ours (CWHAT). RMR Australia is owned by
two
of our former Trustees and our former President and it has been granted an Australian financial services license by the Australian Securities & Investments Commission. The Australia Management Agreement provides for compensation to RMR Australia for business management and real estate investment services at an annual rate equal to
0.5%
of the average historical cost of
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CWHAT's real estate investments, as described in the Australia Management Agreement. The Australia Management Agreement also provides for additional compensation to RMR Australia (i) for property management services at an annual rate equal to
50%
of the difference between
3.0%
of collected gross rents and the aggregate of all amounts paid or payable by or on behalf of CWHAT to third party property managers, and (ii) for construction supervision services at an annual rate equal to
50%
of the difference between
5.0%
of constructions costs and any amounts paid to third parties for construction management and/or supervision. Similar to our prior arrangement with respect to fees we paid to MacarthurCook, RMR has agreed to waive half of the fees payable by us under our property management agreement with RMR and half of the business management fees otherwise payable by us under our business management agreement with RMR related to real estate investments that are subject to the Australia Management Agreement for so long as the Australia Management Agreement is in effect and we or any of our subsidiaries are paying the fees under that agreement. The aggregate business and property management fees we recognized pursuant to the Australia Management Agreement were
$0.9 million
for the six months ended June 30, 2014, which amounts are equal to the fees waived by RMR and excluded from the amount that was payable to RMR during the six months ended June 30, 2014.
RMR also leased from us office space for
eleven
of its regional offices. We earned approximately
$0.4 million
for the six months ended June 30, 2014, with respect to approximately
36,500
square feet of office space, which we believe was commercially reasonable rent for this office space, not all of which was leased to RMR for the entire
three
-year period. These leases were terminated when our management agreements with RMR terminated.
Under our share award plans, we granted restricted shares to certain employees of RMR, some of whom are our former officers. As a result of the removal of our former Trustees on March 25, 2014, the vesting of common shares previously issued to our former officers and certain employees of RMR pursuant to our equity compensation plans accelerated in accordance with the terms of their governing share grants (Note 13).
Termination and Cooperation Agreement:
On September 30, 2014, we entered into a termination and cooperation agreement (Cooperation Agreement) with Former Manager. Under the terms of the agreement, the existing business and property management agreements with RMR terminated effective September 30, 2014.
Pursuant to the Cooperation Agreement, through February 28, 2015, Former Manager agreed to use best efforts to assist us in the transition of our management and operations. We paid Former Manager
$1.2 million
per month for transition services from October 1, 2014 to February 28, 2015, which included continued management and other services for the Australian assets pursuant to the Australian Management Agreement. Beginning March 1, 2015, we agreed to pay Former Manager
$0.1 million
per month until we no longer required such services or until the Australia Management Agreement was terminated, which was terminated in the third quarter of 2015, effective October 31, 2015. There is no future obligation to pay any fees to Former Manager.
RMR is responsible for any severance payments to its employees. We paid accrued vacation benefits for any of Manager’s employees that were terminated as a result of the transition and we paid Manager the
$15.3 million
pro-rata portion of the current year’s incentive fee under the existing business management agreement for the period from January 1, 2014 to September 30, 2014. This incentive fee relates to the business management agreement entered into prior to the election of our new Board of Trustees on May 23, 2014. There is no future obligation to pay an incentive fee to RMR.
GOV:
GOV was formerly our
100%
owned subsidiary. In 2009, GOV completed an initial public offering pursuant to which GOV ceased to be a majority owned subsidiary of ours. To facilitate this offering, we and GOV entered into a transaction agreement that governs our separation from and relationship with GOV. Pursuant to this transaction agreement and subject to certain conditions, among other things, we granted GOV the right of first purchase to acquire any property owned by us that we determine to divest (including sale, mortgage or other financing), if the property is then, or is reasonably expected within twelve (
12
) months to be, majority leased to a government tenant, which right of first purchase will also apply in the event of an indirect sale of any such properties as a result of a change of control of us. On July 23, 2014, we and GOV entered into a letter agreement whereby GOV irrevocably waived and released us from the right of first purchase described above. Additionally, pursuant to the letter agreement we and GOV each agreed to waive certain consent rights over the other party’s investments in certain categories of properties.
During the time we were externally managed by RMR, RMR provided management services to both us and GOV,
two
of our former Trustees and our former President were managing trustees of GOV and GOV’s executive officers were officers of RMR. On March 15, 2013, we sold all of our
9,950,000
common shares of GOV in a public offering.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SIR
: SIR was formerly our
100%
owned subsidiary. In March 2012, SIR completed an initial public offering, or the SIR IPO. As of June 30, 2014, we owned
22,000,000
common shares of SIR, which represented approximately
36.7%
of SIR’s outstanding common shares.
Two
of our former Trustees and our former President were managing trustees of SIR and our former Treasurer and Chief Financial Officer served as the treasurer and chief financial officer of SIR and SIR’s executive officers were officers of RMR. In addition,
one
of our former independent Trustees was an independent trustee of SIR.
In March 2012, SIR completed an initial public offering pursuant to which it issued
9,200,000
of its common shares for net proceeds (after deducting underwriters' discounts and commissions and expenses) of
$180.8 million
.
In March 2013, we entered into a registration agreement with SIR, pursuant to which SIR agreed to, among other things, file a registration statement with respect to an offering of up to all of the
22,000,000
common shares of SIR that we owned, and SIR filed a registration statement on Form S-3 to permit the resale by us of some or all of the common shares of SIR we owned. By letter dated March 31, 2014, SIR notified us that, effective that same day, SIR had elected to terminate the registration agreement with us as a result of the removal of all the former Trustees effective March 25, 2014, which constituted a change of control of us as provided in that agreement. The letter also noted that SIR would welcome the opportunity to meet with our new Board of Trustees to discuss mutually beneficial arrangements regarding the registration of the shares of SIR owned by EQC. On July 9, 2014, we sold our entire stake of
22,000,000
common shares of SIR, for
$32.04
per share, raising aggregate gross proceeds of
$704.8 million
. As a result of this sale, we
no
longer hold any interest in SIR.
AIC
: We previously owned
12.5%
of AIC, an Indiana insurance company, and, as of May 9, 2014, had invested
$5.2 million
in AIC since we became an equity owner of AIC in 2009. RMR, GOV, SIR and
four
other companies to which RMR provides management services also own shares of AIC. During the time we were externally managed by RMR, RMR provided management and administrative services to AIC pursuant to a management and administrative services agreement with AIC and a majority of the former Trustees, our former President and most of the trustees and directors of the other AIC shareholders served on the board of directors of AIC. On March 25, 2014, as a result of the removal of the former Trustees, we underwent a change in control, as defined in the shareholders’ agreement among us, the other shareholders of AIC and AIC. As a result of that 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 we then owned. We received
$5.8 million
in aggregate proceeds from this sale and we
no
longer own any interest in AIC.
We previously purchased property insurance providing
$500.0 million
of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC was a reinsurer of certain coverage amounts. This program expired in June 2014. We paid AIC a premium, including taxes and fees, of approximately
$6.0 million
in connection with that policy.
Indemnification
: Pursuant to our declaration of trust and separate indemnification agreements, we have advanced amounts incurred for legal fees and costs on behalf of certain of the former Trustees and officers with respect to legal proceedings for shareholder litigation. No shareholder litigation related expenses were incurred during the year ended December 31, 2016. Pursuant to indemnification provisions in our business and property management agreements with RMR, we have also incurred legal fees and costs on behalf of RMR for claims brought against RMR in its capacity as our business and property manager with respect to certain legal proceedings. For the six months ended June 30, 2014, we incurred approximately
$5.4 million
in such legal fees and costs.
Settlement of Certain Tenant Litigation
: On March 1, 2014, pursuant to mediation, we and an affiliate of RMR agreed to terms of a settlement of a long running litigation with an unrelated third party that was a tenant, or the Tenant, of
two
separate properties:
one
property owned by us and
one
property owned by the RMR affiliate. This litigation arose as a result of flooding in 1999 and 2001 at both of these properties. After the flooding, the Tenant filed a complaint seeking declaratory and injunctive relief providing that Tenant was no longer obligated to pay rent at the
two
properties in question and brought claims against EQC and the RMR affiliate, as landlords, for, among other things, breach of the covenants of quiet enjoyment and habitability. We and RMR counterclaimed, seeking damages based in part upon Tenant’s failure to pay rent and make repairs. The settlement agreement regarding this litigation provides for a payment by Tenant of
$12.0 million
to EQC and the RMR affiliate, payable in
three
installments (
$6.0 million
on June 30, 2014 and
$3.0 million
on each of September 30, 2014 and December 31, 2014), split pro-rata between EQC and the RMR affiliate based upon the balance of the rent due under each lease. The total rent due under the EQC lease was approximately
$9.2 million
; the total rent due under the lease with the RMR affiliate was approximately
$1.1 million
. This settlement was approved by the court on May 6, 2014.
EQUITY COMMONWEALTH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19. Selected Quarterly Financial Data (Unaudited)
The following is a summary of our unaudited quarterly results of operations for
2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Total revenues
|
$
|
137,135
|
|
|
$
|
145,367
|
|
|
$
|
114,632
|
|
|
$
|
103,546
|
|
Net income attributable to Equity Commonwealth common shareholders
|
39,421
|
|
|
71,254
|
|
|
84,391
|
|
|
10,263
|
|
Net income attributable to Equity Commonwealth common shareholders per share—basic
|
0.31
|
|
|
0.57
|
|
|
0.67
|
|
|
0.08
|
|
Net income attributable to Equity Commonwealth common shareholders per share—diluted
|
0.31
|
|
|
0.56
|
|
|
0.67
|
|
|
0.08
|
|
The increase in the second quarter
2016
total revenues was primarily attributable to a
$16.6 million
lease termination fee received at 111 Monument Circle. The decrease in the third and fourth quarter
2016
total revenues is primarily attributable to properties sold in 2016. The increase in the second and third quarter
2016
net income attributable to Equity Commonwealth common shareholders was primarily attributable to the gain on sale of properties of
$106.4 million
and
$82.2 million
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Total revenues
|
$
|
213,055
|
|
|
$
|
203,694
|
|
|
$
|
159,208
|
|
|
$
|
138,934
|
|
Net income attributable to Equity Commonwealth common shareholders
|
6,649
|
|
|
5,635
|
|
|
23,485
|
|
|
36,164
|
|
Net income attributable to Equity Commonwealth common shareholders per share—basic
|
0.05
|
|
|
0.04
|
|
|
0.18
|
|
|
0.29
|
|
Net income attributable to Equity Commonwealth common shareholders per share—diluted
|
0.05
|
|
|
0.04
|
|
|
0.18
|
|
|
0.28
|
|
The decrease in the third and fourth quarter
2015
total revenues and net income attributable to Equity Commonwealth common shareholders was primarily attributable to properties sold in the second, third and fourth quarters of 2015.
Note 20. Subsequent Events
On January 12, 2017, we announced that our Board of Trustees declared a dividend of
$0.40625
per series D preferred share, which was paid on February 15, 2017 to shareholders of record on January 30, 2017.
On January 31, 2017, we sold 111 Market Place (
one
building), with
589,380
square feet for
$60.1 million
.
In February 2017, we purchased
$100.0 million
of
2
-year United States Treasury Notes with a coupon rate of
1.125%
and a weighted average yield of
1.227%
.
EQUITY COMMONWEALTH
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning of
Period
|
|
Charged to
Costs and
Expenses
|
|
Deductions
|
|
Balance at
End of
Period
|
Year Ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
7,885
|
|
|
$
|
2,196
|
|
|
$
|
(3,516
|
)
|
|
$
|
6,565
|
|
Year Ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
6,565
|
|
|
$
|
4,533
|
|
|
$
|
(3,383
|
)
|
|
$
|
7,715
|
|
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
7,715
|
|
|
$
|
1,056
|
|
|
$
|
(3,666
|
)
|
|
$
|
5,105
|
|
EQUITY COMMONWEALTH
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost to Company
|
|
|
|
|
|
Cost Amount Carried at Close of Period
|
|
|
|
|
|
|
Property
|
|
City
|
|
State
|
|
Encumbrances(1)
|
|
Land
|
|
Buildings and
Improvements
|
|
Costs
Capitalized
Subsequent to
Acquisition, Net
|
Impairment/Write Downs
|
|
Land
|
|
Buildings and
Improvements
|
|
Total(2)
|
|
Accumulated
Depreciation(3)
|
|
Date
Acquired
|
|
Original
Construction
Date
|
Parkshore Plaza
|
|
Folsom
|
|
CA
|
|
$
|
41,275
|
|
|
$
|
4,370
|
|
|
$
|
41,749
|
|
|
$
|
5,630
|
|
|
$
|
(6,310
|
)
|
|
$
|
3,841
|
|
|
$
|
41,598
|
|
|
$
|
45,439
|
|
|
$
|
6,695
|
|
|
6/16/2011
|
|
1999
|
1225 Seventeenth Street
|
|
Denver
|
|
CO
|
|
—
|
|
|
22,400
|
|
|
110,090
|
|
|
24,798
|
|
|
(485
|
)
|
|
22,400
|
|
|
134,403
|
|
|
156,803
|
|
|
25,990
|
|
|
6/24/2009
|
|
1982
|
5073, 5075, & 5085 S. Syracuse Street
|
|
Denver
|
|
CO
|
|
—
|
|
|
4,720
|
|
|
58,890
|
|
|
—
|
|
|
—
|
|
|
4,720
|
|
|
58,890
|
|
|
63,610
|
|
|
9,815
|
|
|
4/16/2010
|
|
2007
|
1601 Dry Creek Drive
|
|
Longmont
|
|
CO
|
|
—
|
|
|
3,714
|
|
|
24,397
|
|
|
6,439
|
|
|
—
|
|
|
3,715
|
|
|
30,835
|
|
|
34,550
|
|
|
10,012
|
|
|
10/26/2004
|
|
1982
|
97 Newberry Road
|
|
East Windsor
|
|
CT
|
|
5,903
|
|
|
2,960
|
|
|
12,360
|
|
|
30
|
|
|
—
|
|
|
2,943
|
|
|
12,407
|
|
|
15,350
|
|
|
3,175
|
|
|
10/24/2006
|
|
1989
|
33 Stiles Lane
|
|
North Haven
|
|
CT
|
|
2,415
|
|
|
2,090
|
|
|
9,141
|
|
|
216
|
|
|
(1,654
|
)
|
|
1,799
|
|
|
7,994
|
|
|
9,793
|
|
|
2,353
|
|
|
10/24/2006
|
|
1970
|
1250 H Street, NW
|
|
Washington
|
|
DC
|
|
—
|
|
|
5,975
|
|
|
53,778
|
|
|
13,103
|
|
|
(248
|
)
|
|
5,975
|
|
|
66,633
|
|
|
72,608
|
|
|
28,384
|
|
|
6/23/1998
|
|
1992
|
Georgetown-Green and Harris Buildings
|
|
Washington
|
|
DC
|
|
—
|
|
|
24,000
|
|
|
35,979
|
|
|
44
|
|
|
—
|
|
|
24,000
|
|
|
36,023
|
|
|
60,023
|
|
|
6,600
|
|
|
9/3/2009
|
|
1960;1975
|
802 Delaware Avenue
|
|
Wilmington
|
|
DE
|
|
—
|
|
|
4,409
|
|
|
39,681
|
|
|
10,562
|
|
|
(11,156
|
)
|
|
3,390
|
|
|
40,106
|
|
|
43,496
|
|
|
24,217
|
|
|
7/23/1998
|
|
1986
|
6600 North Military Trail
|
|
Boca Raton
|
|
FL
|
|
—
|
|
|
15,900
|
|
|
129,790
|
|
|
118
|
|
|
—
|
|
|
15,900
|
|
|
129,908
|
|
|
145,808
|
|
|
19,471
|
|
|
1/11/2011
|
|
2008
|
625 Crane Street
|
|
Aurora
|
|
IL
|
|
—
|
|
|
1,180
|
|
|
3,411
|
|
|
(2
|
)
|
|
(4,589
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4/2/2007
|
|
1977
|
600 West Chicago Avenue
|
|
Chicago
|
|
IL
|
|
—
|
|
|
34,980
|
|
|
315,643
|
|
|
44,821
|
|
|
—
|
|
|
34,980
|
|
|
360,464
|
|
|
395,444
|
|
|
45,839
|
|
|
8/10/2011
|
|
1908
|
8750 Bryn Mawr Avenue
|
|
Chicago
|
|
IL
|
|
—
|
|
|
6,600
|
|
|
77,764
|
|
|
9,498
|
|
|
(257
|
)
|
|
6,600
|
|
|
87,005
|
|
|
93,605
|
|
|
14,411
|
|
|
10/28/2010
|
|
1985
|
109 Brookline Avenue
|
|
Boston
|
|
MA
|
|
—
|
|
|
3,168
|
|
|
30,397
|
|
|
14,090
|
|
|
(119
|
)
|
|
3,168
|
|
|
44,368
|
|
|
47,536
|
|
|
20,196
|
|
|
9/28/1995
|
|
1915
|
Cabot Business Park Land
|
|
Mansfield
|
|
MA
|
|
—
|
|
|
1,033
|
|
|
—
|
|
|
—
|
|
|
(458
|
)
|
|
575
|
|
|
—
|
|
|
575
|
|
|
—
|
|
|
8/1/2003
|
|
-
|
111 Market Place
|
|
Baltimore
|
|
MD
|
|
—
|
|
|
6,328
|
|
|
54,645
|
|
|
17,781
|
|
|
(7,199
|
)
|
|
5,814
|
|
|
65,741
|
|
|
71,555
|
|
|
27,356
|
|
|
1/28/2003
|
|
1990
|
25 S. Charles Street
|
|
Baltimore
|
|
MD
|
|
—
|
|
|
2,830
|
|
|
22,996
|
|
|
12,678
|
|
|
—
|
|
|
2,830
|
|
|
35,674
|
|
|
38,504
|
|
|
13,640
|
|
|
7/16/2004
|
|
1972
|
820 W. Diamond
|
|
Gaithersburg
|
|
MD
|
|
—
|
|
|
4,381
|
|
|
18,798
|
|
|
10,516
|
|
|
(35
|
)
|
|
4,461
|
|
|
29,199
|
|
|
33,660
|
|
|
12,777
|
|
|
3/31/1997
|
|
1995
|
Danac Stiles Business Park
|
|
Rockville
|
|
MD
|
|
—
|
|
|
7,638
|
|
|
62,572
|
|
|
6,483
|
|
|
(10,975
|
)
|
|
6,595
|
|
|
59,123
|
|
|
65,718
|
|
|
20,919
|
|
|
7/20/2004
|
|
2002
|
East Eisenhower Parkway
|
|
Ann Arbor
|
|
MI
|
|
—
|
|
|
6,760
|
|
|
46,988
|
|
|
2,628
|
|
|
—
|
|
|
6,760
|
|
|
49,616
|
|
|
56,376
|
|
|
8,189
|
|
|
6/15/2010
|
|
1975;2006
|
2250 Pilot Knob Road
|
|
Mendota Heights
|
|
MN
|
|
—
|
|
|
533
|
|
|
4,795
|
|
|
1,202
|
|
|
—
|
|
|
533
|
|
|
5,997
|
|
|
6,530
|
|
|
2,896
|
|
|
3/19/1998
|
|
1995
|
411 Farwell Avenue
|
|
South St. Paul
|
|
MN
|
|
—
|
|
|
1,303
|
|
|
10,451
|
|
|
4,603
|
|
|
—
|
|
|
1,304
|
|
|
15,053
|
|
|
16,357
|
|
|
4,056
|
|
|
6/2/2004
|
|
1970
|
4700 Belleview Avenue
|
|
Kansas City
|
|
MO
|
|
—
|
|
|
1,165
|
|
|
3,097
|
|
|
2,989
|
|
|
(26
|
)
|
|
1,165
|
|
|
6,060
|
|
|
7,225
|
|
|
1,286
|
|
|
7/17/2008
|
|
1986
|
Cherrington Corporate Center
|
|
Moon Township
|
|
PA
|
|
—
|
|
|
11,369
|
|
|
39,892
|
|
|
28,319
|
|
|
(7,616
|
)
|
|
10,664
|
|
|
61,300
|
|
|
71,964
|
|
|
22,494
|
|
|
9/14/1998; 8/23/1999
|
|
1987;1988; 1989;1990;
1991;1992;
1994
|
1500 Market Street
|
|
Philadelphia
|
|
PA
|
|
—
|
|
|
18,758
|
|
|
167,487
|
|
|
119,060
|
|
|
(759
|
)
|
|
18,758
|
|
|
285,788
|
|
|
304,546
|
|
|
88,717
|
|
|
10/10/2002
|
|
1974
|
EQUITY COMMONWEALTH
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost to Company
|
|
|
|
|
|
Cost Amount Carried at Close of Period
|
|
|
|
|
|
|
Property
|
|
City
|
|
State
|
|
Encumbrances(1)
|
|
Land
|
|
Buildings and
Improvements
|
|
Costs
Capitalized
Subsequent to
Acquisition, Net
|
Impairment/Write Downs
|
|
Land
|
|
Buildings and
Improvements
|
|
Total(2)
|
|
Accumulated
Depreciation(3)
|
|
Date
Acquired
|
|
Original
Construction
Date
|
1600 Market Street
|
|
Philadelphia
|
|
PA
|
|
—
|
|
|
3,462
|
|
|
111,946
|
|
|
20,637
|
|
|
(194
|
)
|
|
3,462
|
|
|
132,389
|
|
|
135,851
|
|
|
59,435
|
|
|
3/30/1998
|
|
1983
|
1735 Market Street
|
|
Philadelphia
|
|
PA
|
|
—
|
|
|
24,753
|
|
|
222,775
|
|
|
67,076
|
|
|
(12,071
|
)
|
|
24,747
|
|
|
277,786
|
|
|
302,533
|
|
|
118,405
|
|
|
6/30/1998
|
|
1990
|
Foster Plaza
|
|
Pittsburgh
|
|
PA
|
|
—
|
|
|
6,168
|
|
|
51,588
|
|
|
20,229
|
|
|
(1,729
|
)
|
|
6,170
|
|
|
70,086
|
|
|
76,256
|
|
|
21,553
|
|
|
9/16/2005
|
|
1987;1990; 1994;
1995; 1996
|
206 East 9th Street
|
|
Austin
|
|
TX
|
|
27,041
|
|
|
7,900
|
|
|
38,533
|
|
|
2,776
|
|
|
(12
|
)
|
|
7,900
|
|
|
41,297
|
|
|
49,197
|
|
|
4,879
|
|
|
5/31/2012
|
|
1984
|
4515 Seton Center Parkway
|
|
Austin
|
|
TX
|
|
—
|
|
|
2,038
|
|
|
18,338
|
|
|
2,814
|
|
|
(60
|
)
|
|
2,037
|
|
|
21,093
|
|
|
23,130
|
|
|
9,749
|
|
|
10/8/1999
|
|
1996
|
4516 Seton Center Parkway
|
|
Austin
|
|
TX
|
|
—
|
|
|
2,028
|
|
|
18,251
|
|
|
4,003
|
|
|
(25
|
)
|
|
2,027
|
|
|
22,230
|
|
|
24,257
|
|
|
10,497
|
|
|
10/8/1999
|
|
1998
|
Bridgepoint Square
|
|
Austin
|
|
TX
|
|
—
|
|
|
7,784
|
|
|
70,526
|
|
|
13,727
|
|
|
(705
|
)
|
|
7,785
|
|
|
83,547
|
|
|
91,332
|
|
|
39,708
|
|
|
12/5/1997
|
|
1986;1996;1997
|
Research Park
|
|
Austin
|
|
TX
|
|
—
|
|
|
15,859
|
|
|
60,175
|
|
|
17,410
|
|
|
—
|
|
|
21,213
|
|
|
72,231
|
|
|
93,444
|
|
|
32,295
|
|
|
10/7/1998
|
|
1968;1998; 2001
|
333 108th Avenue NE
|
|
Bellevue
|
|
WA
|
|
—
|
|
|
14,400
|
|
|
136,412
|
|
|
2,438
|
|
|
(31
|
)
|
|
14,400
|
|
|
138,819
|
|
|
153,219
|
|
|
25,788
|
|
|
11/12/2009
|
|
2008
|
600 108th Avenue NE
|
|
Bellevue
|
|
WA
|
|
—
|
|
|
3,555
|
|
|
30,244
|
|
|
17,305
|
|
|
(508
|
)
|
|
3,555
|
|
|
47,041
|
|
|
50,596
|
|
|
13,458
|
|
|
7/16/2004
|
|
1980
|
|
|
|
|
|
|
$
|
76,634
|
|
|
$
|
286,511
|
|
|
$
|
2,133,579
|
|
|
$
|
504,021
|
|
|
$
|
(67,221
|
)
|
|
$
|
286,186
|
|
|
$
|
2,570,704
|
|
|
$
|
2,856,890
|
|
|
$
|
755,255
|
|
|
|
|
|
EQUITY COMMONWEALTH
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2016
(dollars in thousands)
Analysis of the carrying amount of real estate properties and accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
Real Estate
Properties
|
|
Accumulated
Depreciation
|
Balance at January 1, 2014
|
$
|
5,537,165
|
|
|
$
|
895,059
|
|
Additions(4)
|
70,963
|
|
|
164,815
|
|
Loss on asset impairment
|
(191,490
|
)
|
|
(6,423
|
)
|
Properties reclassified to discontinued operations
|
341,024
|
|
|
5,724
|
|
Disposals
|
(29,219
|
)
|
|
(28,730
|
)
|
Balance at December 31, 2014
|
5,728,443
|
|
|
1,030,445
|
|
Additions(4)
|
68,118
|
|
|
144,844
|
|
Loss on asset impairment
|
(17,162
|
)
|
|
—
|
|
Disposals
|
(1,892,047
|
)
|
|
(276,350
|
)
|
Balance at December 31, 2015
|
3,887,352
|
|
|
898,939
|
|
Additions(4)
|
113,258
|
|
|
101,647
|
|
Loss on asset impairment
|
(58,595
|
)
|
|
(119
|
)
|
Disposals
|
(1,085,125
|
)
|
|
(245,212
|
)
|
Balance at December 31, 2016
|
$
|
2,856,890
|
|
|
$
|
755,255
|
|
|
|
(1)
|
Excludes net unamortized premiums and net unamortized deferred financing costs.
|
|
|
(2)
|
Excludes value of real estate intangibles. Aggregate cost for federal income tax purposes is approximately
$2,988,563
.
|
|
|
(3)
|
Depreciation is calculated using the straight line method over estimated useful lives of up to
40
years for buildings and improvements and up to
12
years for personal property.
|
|
|
(4)
|
Includes adjustments related to changes in foreign currency exchange rates for real estate properties additions of
$0
,
$(13,217)
and
$(20,445)
, and adjustments to accumulated depreciation additions of
$0
,
$(887)
and
$(1,279)
, during
2016
,
2015
and
2014
, respectively.
|
EQUITY COMMONWEALTH
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Interest
Rate
|
|
Final
Maturity Date
|
|
Periodic Payment Terms
|
|
Face
Amount of
Mortgage(1)
|
|
Carrying
Amount
of Mortgage
|
|
Principal Amount of
Loans Subject to
Delinquent Principal
or Interest
|
Salina, NY
|
|
6.00%
|
|
4/30/2019
|
|
Interest payable monthly in arrears.
$419 due at maturity.
|
|
$
|
419
|
|
|
392
|
|
|
$
|
—
|
|
Dearborn, MI
|
|
6.00%
|
|
1/24/2023
|
|
Interest payable monthly in arrears.
$7,688 due at maturity.
|
|
7,688
|
|
|
7,688
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
8,107
|
|
|
$
|
8,080
|
|
|
$
|
—
|
|
Reconciliation of the carrying amount of mortgage loans at the beginning of the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
|
|
|
|
|
|
$
|
8,107
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
|
|
|
|
|
$
|
8,107
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
|
|
|
|
|
$
|
8,107
|
|
|
|
|
|
|
|
|
|
(1)
|
Also represents cost for federal income tax purposes.
|
Equity Commonwealth (NYSE:EQC)
Gráfico Histórico do Ativo
De Jun 2024 até Jul 2024
Equity Commonwealth (NYSE:EQC)
Gráfico Histórico do Ativo
De Jul 2023 até Jul 2024