Item 1.
Financial Statements.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
|
|
(audited)
|
ASSETS
|
|
|
|
Real estate properties:
|
|
|
|
Land
|
$
|
269,062
|
|
|
$
|
286,186
|
|
Buildings and improvements
|
2,395,748
|
|
|
2,570,704
|
|
|
2,664,810
|
|
|
2,856,890
|
|
Accumulated depreciation
|
(705,000
|
)
|
|
(755,255
|
)
|
|
1,959,810
|
|
|
2,101,635
|
|
Properties held for sale
|
64,396
|
|
|
—
|
|
Acquired real estate leases, net
|
45,482
|
|
|
48,281
|
|
Cash and cash equivalents
|
1,888,537
|
|
|
2,094,674
|
|
Marketable securities
|
275,597
|
|
|
—
|
|
Restricted cash
|
6,155
|
|
|
6,532
|
|
Rents receivable, net of allowance for doubtful accounts of $4,593 and $5,105, respectively
|
152,081
|
|
|
152,031
|
|
Other assets, net
|
126,698
|
|
|
122,922
|
|
Total assets
|
$
|
4,518,756
|
|
|
$
|
4,526,075
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Senior unsecured debt, net
|
$
|
1,064,450
|
|
|
$
|
1,063,950
|
|
Mortgage notes payable, net
|
77,178
|
|
|
77,717
|
|
Liabilities related to properties held for sale
|
1,013
|
|
|
—
|
|
Accounts payable and accrued expenses
|
62,518
|
|
|
95,395
|
|
Assumed real estate lease obligations, net
|
1,630
|
|
|
1,946
|
|
Rent collected in advance
|
18,485
|
|
|
18,460
|
|
Security deposits
|
6,957
|
|
|
8,160
|
|
Total liabilities
|
1,232,231
|
|
|
1,265,628
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized;
|
|
|
|
Series D preferred shares; 6 1/2% cumulative convertible; 4,915,196 shares issued and outstanding, aggregate liquidation preference of $122,880
|
119,263
|
|
|
119,263
|
|
Common shares of beneficial interest, $0.01 par value: 350,000,000 shares authorized; 124,064,195 and 123,994,465 shares issued and outstanding, respectively
|
1,240
|
|
|
1,240
|
|
Additional paid in capital
|
4,367,190
|
|
|
4,363,177
|
|
Cumulative net income
|
2,590,417
|
|
|
2,566,603
|
|
Cumulative other comprehensive loss
|
(1,002
|
)
|
|
(208
|
)
|
Cumulative common distributions
|
(3,111,868
|
)
|
|
(3,111,868
|
)
|
Cumulative preferred distributions
|
(679,757
|
)
|
|
(677,760
|
)
|
Total shareholders’ equity
|
3,285,483
|
|
|
3,260,447
|
|
Noncontrolling interest
|
1,042
|
|
|
—
|
|
Total equity
|
3,286,525
|
|
|
3,260,447
|
|
Total liabilities and equity
|
$
|
4,518,756
|
|
|
$
|
4,526,075
|
|
See accompanying notes.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
Rental income
|
$
|
80,205
|
|
|
$
|
109,888
|
|
Tenant reimbursements and other income
|
19,346
|
|
|
27,247
|
|
Total revenues
|
99,551
|
|
|
137,135
|
|
Expenses:
|
|
|
|
Operating expenses
|
41,087
|
|
|
57,258
|
|
Depreciation and amortization
|
26,915
|
|
|
36,251
|
|
General and administrative
|
12,078
|
|
|
13,312
|
|
Loss on asset impairment
|
1,286
|
|
|
—
|
|
Total expenses
|
81,366
|
|
|
106,821
|
|
Operating income
|
18,185
|
|
|
30,314
|
|
Interest and other income
|
4,372
|
|
|
1,967
|
|
Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $713 and $983, respectively)
|
(15,014
|
)
|
|
(22,347
|
)
|
Loss on early extinguishment of debt
|
—
|
|
|
(118
|
)
|
Foreign currency exchange loss
|
—
|
|
|
(5
|
)
|
Gain on sale of properties, net
|
16,454
|
|
|
36,666
|
|
Income before income taxes
|
23,997
|
|
|
46,477
|
|
Income tax expense
|
(175
|
)
|
|
(75
|
)
|
Net income
|
23,822
|
|
|
46,402
|
|
Net income attributable to noncontrolling interest
|
(8
|
)
|
|
—
|
|
Net income attributable to Equity Commonwealth
|
$
|
23,814
|
|
|
$
|
46,402
|
|
Preferred distributions
|
(1,997
|
)
|
|
(6,981
|
)
|
Net income attributable to Equity Commonwealth common shareholders
|
$
|
21,817
|
|
|
$
|
39,421
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
124,047
|
|
|
125,840
|
|
Weighted average common shares outstanding — diluted
|
125,150
|
|
|
127,522
|
|
Earnings per common share attributable to Equity Commonwealth common shareholders:
|
|
|
|
Basic
|
$
|
0.18
|
|
|
$
|
0.31
|
|
Diluted
|
$
|
0.17
|
|
|
$
|
0.31
|
|
See accompanying notes.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Net income
|
$
|
23,822
|
|
|
$
|
46,402
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
Unrealized (loss) gain on derivative instruments
|
(153
|
)
|
|
673
|
|
Unrealized loss on marketable securities
|
(641
|
)
|
|
—
|
|
Total comprehensive income
|
23,028
|
|
|
47,075
|
|
Comprehensive income attributable to the noncontrolling interest
|
(8
|
)
|
|
—
|
|
Total comprehensive income attributable to Equity Commonwealth
|
$
|
23,020
|
|
|
$
|
47,075
|
|
See accompanying notes.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(amounts in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Noncontrolling Interest
|
|
Total
|
Balance at December 31, 2015
|
4,915,196
|
|
|
$
|
119,263
|
|
|
11,000,000
|
|
|
$
|
265,391
|
|
|
$
|
(650,195
|
)
|
|
126,349,914
|
|
|
$
|
1,263
|
|
|
$
|
(3,111,868
|
)
|
|
$
|
4,414,611
|
|
|
$
|
2,333,709
|
|
|
$
|
(3,687
|
)
|
|
$
|
—
|
|
|
$
|
3,368,487
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,402
|
|
|
—
|
|
|
—
|
|
|
46,402
|
|
Unrealized gain on derivative instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
673
|
|
|
—
|
|
|
673
|
|
Purchase of shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(983,789
|
)
|
|
(10
|
)
|
|
—
|
|
|
(25,553
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,563
|
)
|
Share-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
136,623
|
|
|
2
|
|
|
—
|
|
|
4,351
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,353
|
|
Distributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,981
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,981
|
)
|
Balance at March 31, 2016
|
4,915,196
|
|
|
$
|
119,263
|
|
|
11,000,000
|
|
|
$
|
265,391
|
|
|
$
|
(657,176
|
)
|
|
125,502,748
|
|
|
$
|
1,255
|
|
|
$
|
(3,111,868
|
)
|
|
$
|
4,393,409
|
|
|
$
|
2,380,111
|
|
|
$
|
(3,014
|
)
|
|
$
|
—
|
|
|
$
|
3,387,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,814
|
|
|
—
|
|
|
8
|
|
|
23,822
|
|
Unrealized loss on derivative instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(153
|
)
|
|
—
|
|
|
(153
|
)
|
Unrealized loss on marketable securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(641
|
)
|
|
—
|
|
|
(641
|
)
|
Purchase of shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,694
|
)
|
|
—
|
|
|
—
|
|
|
(209
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(209
|
)
|
Share-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76,424
|
|
|
—
|
|
|
—
|
|
|
4,999
|
|
|
—
|
|
|
—
|
|
|
227
|
|
|
5,226
|
|
Contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
30
|
|
Distributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,997
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,997
|
)
|
Adjustment for noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(777
|
)
|
|
—
|
|
|
—
|
|
|
777
|
|
|
—
|
|
Balance at March 31, 2017
|
4,915,196
|
|
|
$
|
119,263
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
(679,757
|
)
|
|
124,064,195
|
|
|
$
|
1,240
|
|
|
$
|
(3,111,868
|
)
|
|
$
|
4,367,190
|
|
|
$
|
2,590,417
|
|
|
$
|
(1,002
|
)
|
|
$
|
1,042
|
|
|
$
|
3,286,525
|
|
See accompanying notes.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net income
|
$
|
23,822
|
|
|
$
|
46,402
|
|
Adjustments to reconcile net income to cash (used in) provided by operating activities:
|
|
|
|
Depreciation
|
21,893
|
|
|
28,582
|
|
Net amortization of debt discounts, premiums and deferred financing fees
|
713
|
|
|
983
|
|
Straight line rental income
|
(4,387
|
)
|
|
(3,831
|
)
|
Amortization of acquired real estate leases
|
2,540
|
|
|
4,629
|
|
Other amortization
|
3,055
|
|
|
4,161
|
|
Share-based compensation
|
5,226
|
|
|
4,353
|
|
Loss on asset impairment
|
1,286
|
|
|
—
|
|
Loss on early extinguishment of debt
|
—
|
|
|
118
|
|
Foreign currency exchange loss
|
—
|
|
|
5
|
|
Net gain on sale of properties
|
(16,454
|
)
|
|
(36,666
|
)
|
Change in assets and liabilities:
|
|
|
|
Restricted cash
|
1,311
|
|
|
(458
|
)
|
Rents receivable and other assets
|
(18,239
|
)
|
|
(15,486
|
)
|
Accounts payable and accrued expenses
|
(24,053
|
)
|
|
(6,361
|
)
|
Rent collected in advance
|
416
|
|
|
(3,255
|
)
|
Security deposits
|
181
|
|
|
(192
|
)
|
Cash (used in) provided by operating activities
|
(2,690
|
)
|
|
22,984
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Real estate improvements
|
(19,889
|
)
|
|
(25,963
|
)
|
Insurance proceeds received
|
2,000
|
|
|
—
|
|
Proceeds from sale of properties, net
|
94,138
|
|
|
118,391
|
|
Purchase of marketable securities
|
(276,238
|
)
|
|
—
|
|
Increase in restricted cash
|
(934
|
)
|
|
(3,487
|
)
|
Cash (used in) provided by investing activities
|
(200,923
|
)
|
|
88,941
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Purchase and retirement of common shares
|
(209
|
)
|
|
(25,563
|
)
|
Payments on borrowings
|
(348
|
)
|
|
(139,922
|
)
|
Deferred financing fees
|
—
|
|
|
(52
|
)
|
Contributions from holders of noncontrolling interest
|
30
|
|
|
—
|
|
Distributions to preferred shareholders
|
(1,997
|
)
|
|
(6,981
|
)
|
Cash used in financing activities
|
(2,524
|
)
|
|
(172,518
|
)
|
|
|
|
|
Effect of exchange rate changes on cash
|
—
|
|
|
(8
|
)
|
|
|
|
|
Decrease in cash and cash equivalents
|
(206,137
|
)
|
|
(60,601
|
)
|
Cash and cash equivalents at beginning of period
|
2,094,674
|
|
|
1,802,729
|
|
Cash and cash equivalents at end of period
|
$
|
1,888,537
|
|
|
$
|
1,742,128
|
|
See accompanying notes.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
Interest paid
|
$
|
22,285
|
|
|
$
|
28,542
|
|
Taxes paid (refunded)
|
335
|
|
|
(72
|
)
|
|
|
|
|
NON-CASH INVESTING ACTIVITIES:
|
|
|
|
Increase (decrease) in capital expenditures recorded as liabilities
|
$
|
4,266
|
|
|
$
|
(6,312
|
)
|
See accompanying notes.
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
Equity Commonwealth (the Company) 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, 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 (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
99.97%
of the outstanding shares of beneficial interest, designated as units, in the Operating Trust (OP Units) as of
March 31, 2017
, 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
March 31, 2017
, our portfolio, excluding properties held for sale, included
28
properties (
56
buildings), and
one
land parcel, with a combined
14.6
million square feet. As of
March 31, 2017
, we had
$2.2 billion
of cash and cash equivalents and marketable securities.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements of EQC have been prepared without audit. Certain information and footnote disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K (Annual Report) for the year ended December 31, 2016. Capitalized terms used, but not defined in this Quarterly Report, have the same meanings as in our Annual Report.
In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.
Share amounts are presented in whole numbers, except where noted.
Recent 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,
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2017, and for interim periods within those fiscal years. We early adopted this ASU effective January 1, 2017, and the adoption of this ASU did not 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 February 2016, the FASB issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes previous leasing standards. ASU 2016-02 is effective for us for reporting periods beginning after December 15, 2018, with early adoption permitted. We are still assessing the impact of adopting ASU 2016-02. For leases where we are the lessor, we expect to account for these leases using an approach that is substantially equivalent to current guidance. However, we expect that certain executory and non-lease components (such as common area maintenance), will need to be accounted for separately from the lease component of the lease with the lease component continuing to be recognized on a straight-line basis over the lease term. We intend to account for the executory and non-lease components under the new revenue recognition guidance in ASU 2014-09, upon our adoption of ASU 2016-02. When the revenue for such activities is not separately stipulated in the lease, we will need to separate the lease components of revenue due under leases from the non-lease components. For leases in which we are the lessee, we expect to recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments with rent expense being recognized on a straight-line basis and the right of use asset being reduced when lease payments are made. Subsequent to initial recognition, the lease liability will be re-measured based on the present value of the remaining lease payments with an offset to the right-of-use asset.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The objective of ASU 2014-09, as amended, is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC, and more particularly lease contracts with customers, which are a scope exception. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017, with early adoption permitted. While our consideration of this matter is ongoing, we are not planning to early adopt ASU 2014-09, as amended, and we expect to use the modified retrospective method of adoption that will result in a cumulative effect adjustment as of the date of adoption. We are currently conducting our evaluation of the impact of the guidance. We believe the effects on our existing
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accounting policies will be associated with our non-leasing revenue components, specifically the amount, timing and presentation of tenant expense reimbursements revenue. We continue to evaluate the potential impact to our consolidated financial statements as a result of this ASU.
Note 3. Real Estate Properties
During the
three
months ended
March 31, 2017
and
2016
, we made improvements, excluding tenant-funded improvements, to our properties totaling
$14.2 million
and $
31.9 million
, respectively.
Properties Held For Sale:
We classify all properties that meet the criteria outlined in the Property, Plant and Equipment Topic of the FASB ASC as held for sale on our condensed consolidated balance sheets. As of December 31, 2016, we had
no
properties classified as held for sale. As of
March 31, 2017
, we classified the following properties as held for sale (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Date Sold
|
|
Number of
Properties
|
|
Number of
Buildings
|
|
Square
Footage
|
|
Gross Sales Price
|
25 S. Charles Street
|
|
April 2017
|
|
1
|
|
|
1
|
|
|
359,254
|
|
|
$
|
24,500
|
|
Parkshore Plaza
|
|
April 2017
|
|
1
|
|
|
4
|
|
|
271,072
|
|
|
40,000
|
|
|
|
|
|
2
|
|
|
5
|
|
|
630,326
|
|
|
$
|
64,500
|
|
Summarized balance sheet information for the properties classified as held for sale is as follows (in thousands):
|
|
|
|
|
|
March 31, 2017
|
Real estate properties
|
$
|
61,829
|
|
Other assets, net
|
2,567
|
|
Properties held for sale
|
$
|
64,396
|
|
|
|
Accounts payable and accrued expenses
|
$
|
150
|
|
Security deposits
|
863
|
|
Liabilities related to properties held for sale
|
$
|
1,013
|
|
Property Dispositions:
During the
three
months ended
March 31, 2017
, we sold 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
|
|
|
|
|
|
|
|
|
|
|
|
|
111 Market Place
|
|
January 2017
|
|
1
|
|
|
1
|
|
|
589,380
|
|
|
$
|
60,100
|
|
|
$
|
(5,968
|
)
|
Cabot Business Park Land
|
|
March 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
575
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolios of properties
|
|
|
|
|
|
|
|
|
|
|
|
|
4515 Seton Center Parkway
|
|
March 2017
|
|
1
|
|
|
1
|
|
|
117,265
|
|
|
|
|
|
4516 Seton Center Parkway
|
|
March 2017
|
|
1
|
|
|
1
|
|
|
120,559
|
|
|
|
|
|
Seton Center
|
|
|
|
2
|
|
|
2
|
|
|
237,824
|
|
|
$
|
52,450
|
|
|
$
|
22,479
|
|
|
|
|
|
3
|
|
|
3
|
|
|
827,204
|
|
|
$
|
113,125
|
|
|
$
|
16,454
|
|
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 2016, we sold
30
properties (
62
buildings) with a combined
8.0 million
square feet for an aggregate gross sales price of
$1.3 billion
, excluding closing costs.
Note 4. Marketable Securities
All of our marketable securities are classified as available-for-sale and consist of United States Treasury notes, which mature in 2019, and common stock. Available-for-sale securities are presented on our condensed consolidated balance sheets at fair value. Changes in values of these securities are recognized in accumulated other comprehensive loss. Realized gains and losses are recognized in earnings only upon the sale of the securities.
We evaluate our marketable securities for impairment each reporting period. For securities with unrealized losses, we review the underlying cause of the decline in value and the estimated recovery period, as well as the severity and duration of the decline. In our evaluation, we consider our ability and intent to hold these investments for a reasonable period of time sufficient for us to recover our cost basis. To the extent an other-than-temporary impairment is deemed to have occurred, an impairment charge is recorded and a new cost basis is established.
Below is a summary of our marketable securities as of March 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
Cost or Amortized Cost
|
|
Unrealized Losses
|
|
Estimated Fair Value
|
Marketable securities
|
|
$
|
276,238
|
|
|
$
|
(641
|
)
|
|
$
|
275,597
|
|
Note 5. Indebtedness
Unsecured Revolving Credit Facility and Term Loan:
We are party to a credit agreement pursuant to which the lenders agreed to provide a
$750.0 million
unsecured revolving credit facility, a
$200.0 million
5
-year term loan facility, and a
$200.0 million
7
-year term loan facility. 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.
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
March 31, 2017
. As of
March 31, 2017
, the interest rate payable on borrowings under our revolving credit facility was
2.23%
. As of
March 31, 2017
, we had
no
balance outstanding and
$750.0 million
available under our revolving credit facility and the facility fee as of
March 31, 2017
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
March 31, 2017
. As of
March 31, 2017
, the interest rates for the amounts outstanding under our
5
-year term loan and
7
-year term loan were
2.38%
and
2.78%
, respectively. As of
March 31, 2017
, we had
$200.0 million
outstanding under each of our
5
-year and
7
-year term loans.
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
March 31, 2017
, we believe we were in compliance with all of our respective covenants under our public debt indenture and related supplements and our credit agreement.
Senior Unsecured Notes:
At
March 31, 2017
, we had senior unsecured notes of
$675.0 million
(excluding net discounts and unamortized deferred financing fees) maturing from 2018 through 2042.
Mortgage Notes Payable:
At
March 31, 2017
,
four
of our properties (
7
buildings) with an aggregate net book value of
$102.2 million
had secured mortgage notes totaling
$77.2 million
(including net premiums and unamortized deferred financing fees) maturing from 2017 through 2026.
Note 6. Shareholders’ Equity
Common Share Issuances:
See Note 11 for information regarding equity issuances related to share-based compensation.
Common Share Repurchases:
On March 17, 2016, our Board of Trustees authorized the repurchase of up to
$150.0 million
of our outstanding common shares over the
twelve
month period following the date of authorization. In March 2017, this share repurchase authorization, of which
$106.6 million
was not utilized, expired. On March 15, 2017, 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
three
months ended
March 31, 2017
, we did not purchase any common shares.
During the
three
months ended
March 31, 2017
, certain of our employees surrendered
6,694
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).
Preferred Share Redemption:
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).
Preferred Share Distributions:
In 2017, our Board of Trustees declared distributions on our series D preferred shares to date as follows:
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Series D Dividend Per Share
|
January 12, 2017
|
|
January 30, 2017
|
|
February 15, 2017
|
|
$
|
0.40625
|
|
April 10, 2017
|
|
April 28, 2017
|
|
May 15, 2017
|
|
$
|
0.40625
|
|
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7. Noncontrolling Interest
Noncontrolling interest represents the portion of the units in the Operating Trust not beneficially owned by the Company. An operating partnership unit (OP Unit) and a share of our common stock have essentially the same economic characteristics. Distributions with respect to OP Units will generally mirror distributions with respect to the Company’s common shares. Unitholders (other than the Company) generally have the right, commencing
six
months from the date of issuance of such OP Units, to cause the Operating Trust to redeem their OP Units in exchange for cash or, at the option of the Company, common shares of the Company on a
one
-for-one basis. As sole trustee, the Company will have the sole discretion to elect whether the redemption right will be satisfied by the Company in cash or the Company’s common shares. As a result, the Noncontrolling interest is classified as permanent equity. As of March 31, 2017, the portion of the Operating Trust not beneficially owned by the Company is in the form of LTIP Units (see Note 11 for a description of LTIP Units). LTIP Units may be subject to additional vesting requirements.
The following table presents the changes in Equity Commonwealth’s issued and outstanding common shares and units for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
LTIP Units
|
|
Total
|
Outstanding at January 1, 2017
|
|
123,994,465
|
|
|
—
|
|
|
123,994,465
|
|
Restricted share and time-based LTIP Unit grants, net of forfeitures
|
|
69,730
|
|
|
39,364
|
|
|
109,094
|
|
Outstanding at March 31, 2017
|
|
124,064,195
|
|
|
39,364
|
|
|
124,103,559
|
|
Noncontrolling ownership interest in the Operating Trust
|
|
|
|
|
|
|
|
0.03
|
%
|
The carrying value of the Noncontrolling interest is allocated based on the number of LTIP Units in proportion to the number of LTIP Units plus the number of common shares. We adjust the noncontrolling interest balance at the end of each period to reflect the noncontrolling partners’ interest in the net assets of the Operating Trust. Net income is allocated to the Noncontrolling interest in the Operating Trust based on the weighted average ownership percentage during the period. Equity Commonwealth’s weighted average ownership interest in the Operating Trust was
99.97%
for the three months ended March 31, 2017.
Note 8. Cumulative Other Comprehensive Loss
The following table presents the amounts recognized in cumulative other comprehensive loss for the
three
months ended
March 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Derivative Instruments
|
|
Unrealized Loss on Marketable Securities
|
|
Total
|
Balance as of January 1, 2017
|
|
$
|
(208
|
)
|
|
$
|
—
|
|
|
$
|
(208
|
)
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
|
(154
|
)
|
|
(641
|
)
|
|
(795
|
)
|
Amounts reclassified from cumulative other comprehensive loss to net income
|
|
1
|
|
|
—
|
|
|
1
|
|
Net current period other comprehensive loss
|
|
(153
|
)
|
|
(641
|
)
|
|
(794
|
)
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
(361
|
)
|
|
$
|
(641
|
)
|
|
$
|
(1,002
|
)
|
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents reclassifications out of cumulative other comprehensive loss for the
three
months ended
March 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Cumulative Other Comprehensive Loss to Net Income
|
Details about Cumulative Other Comprehensive Loss Components
|
|
Three Months Ended March 31, 2017
|
|
Affected Line Items in the Statement of Operations
|
Interest rate cap contract
|
|
$
|
1
|
|
|
Interest expense
|
Note 9. Income Taxes
We have elected to be taxed as 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 a sufficient amount of our taxable income to our shareholders and meet other requirements for qualifying as a REIT. We are also subject to certain state and local taxes without regard to our REIT status. 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.
Our provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Current:
|
|
|
|
State
|
$
|
170
|
|
|
$
|
75
|
|
Federal
|
5
|
|
|
—
|
|
Income tax expense
|
$
|
175
|
|
|
$
|
75
|
|
Note 10. 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 or 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.
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 use interest rate caps, as part of our interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate.
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 2017, 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.
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$97,000
will be reclassified from cumulative other comprehensive loss as an increase to interest expense.
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
March 31, 2017
, we had the following outstanding interest rate derivative that was designated as a cash flow hedge 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 instrument as well as its classification on the condensed consolidated balance sheets as of
March 31, 2017
and
December 31, 2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
|
Interest Rate Derivative Designated as Hedging Instrument
|
|
Balance Sheet Location
|
|
March 31,
2017
|
|
December 31,
2016
|
Interest rate cap
|
|
Other assets
|
|
$
|
161
|
|
|
$
|
314
|
|
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
three
months ended
March 31, 2017
and
2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Amount of loss recognized in cumulative other comprehensive loss
|
$
|
(154
|
)
|
|
$
|
(445
|
)
|
Amount of loss reclassified from cumulative other comprehensive loss into interest expense
|
1
|
|
|
1,118
|
|
Credit-risk-related Contingent Features
As of
March 31, 2017
, we did not have any derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk.
Note 11. Share-Based Compensation
Equity Commonwealth 2015 Omnibus Incentive Plan
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. The restricted shares are service based awards and vest over a
four
-year period.
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 related to unvested RSUs will be forfeited. The RSUs are market based awards with a service condition and recipients may earn RSUs based on the Company’s total shareholder return (TSR) relative to the TSRs of the companies that comprise the NAREIT Office Index over 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
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RSUs is determined using a Monte Carlo simulation model and is recognized ratably from the grant date to the vesting date of each tranche.
LTIP Units are a class of beneficial interests in the Operating Trust that may be issued to employees, officers, or trustees of the Operating Trust, the Company or their subsidiaries (LTIP Units). Time-based LTIP Units have the same general characteristics as restricted shares and market-based LTIP Units have the same general characteristics as RSUs. Each LTIP Unit will convert automatically into an OP Unit on a
one
-for-one basis when the LTIP Unit becomes vested and its capital account is equalized with the per-unit capital account of the OP Units. Holders of LTIP Units generally will be entitled to receive the same per-unit distributions as the other outstanding OP Units in the Operating Trust, except that market-based LTIP Units will not participate in distributions until expiration of the applicable performance period, at which time any earned market-based LTIP Units generally will become entitled to receive a catch-up distribution for the periods prior to such time.
2017 Equity Award Activity
On January 24, 2017, the Compensation Committee (the Committee) approved a grant of
119,288
LTIP Units (which includes time-based LTIP Units and market-based LTIP Units),
76,424
restricted shares and
155,168
RSUs at target (
386,756
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 2016. The LTIP Unit grant includes
39,364
time-based LTIP Units and
79,924
market-based LTIP Units at target (
199,211
market-based LTIP Units at maximum).
The restricted shares and time-based LTIP Units were granted on January 24, 2017 and were valued at
$31.47
per share, the closing price of our common shares on the NYSE on that day. The assumptions and fair values for the RSUs and market-based LTIP Units granted for the
three
months ended
March 31, 2017
are included in the following table on a per share and unit basis.
|
|
|
|
|
|
2017
|
Fair value of RSUs and market-based LTIP units granted
|
$
|
39.81
|
|
Expected term (years)
|
4
|
|
Expected volatility
|
—
|
|
Expected dividend yield
|
1.59
|
%
|
Risk-free rate
|
1.49
|
%
|
2016 Equity Award Activity
On January 26, 2016, the Committee approved a grant of
136,623
restricted 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.
Outstanding Equity Awards
As of
March 31, 2017
, the estimated future compensation expense for all unvested restricted share and time-based LTIP Units was
$14.2 million
. Compensation expense for the restricted share and time-based LTIP Unit 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 and time-based LTIP units is approximately
2.4
years.
As of
March 31, 2017
, the estimated future compensation expense for all unvested RSUs and market-based LTIP Units was
$25.2 million
. The weighted average period over which the future compensation expense will be recorded for the RSUs and market-based LTIP Units is approximately
2.3
years.
During the three months ended
March 31, 2017
and
2016
, we recorded
$5.2 million
and
$4.4 million
, respectively, of compensation expense, net of forfeitures, in general and administrative expense for grants to our Trustees and employees related to our 2015 Omnibus Incentive Plan (as amended, the 2015 Incentive Plan). At
March 31, 2017
,
1,656,709
common shares remain available for issuance under the 2015 Incentive Plan.
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12. Fair Value of Assets and Liabilities
The table below presents assets measured at fair value during
2017
, categorized by the level of inputs used in the valuation of the assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at March 31, 2017 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:
|
|
|
|
|
|
|
|
|
Interest rate cap contract
|
|
$
|
161
|
|
|
$
|
—
|
|
|
$
|
161
|
|
|
$
|
—
|
|
Marketable securities
|
|
$
|
275,597
|
|
|
$
|
275,597
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest Rate Cap Contract
The fair value of our interest rate cap contract is determined using the net discounted cash flows of the 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 derivative fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivative utilize level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counterparties. As of
March 31, 2017
, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivative. As a result, we have determined that our derivative valuation in its entirety is classified as level 2 inputs in the fair value hierarchy.
Properties Held and Used
As part of our office repositioning strategy, and pursuant to our accounting policy, in 2017, 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 office repositioning strategy and current estimates of market value less estimated costs to sell, 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 first quarter of 2017, we recorded an impairment charge related to 25 S. Charles Street of
$1.3 million
for the three months ended
March 31, 2017
in accordance with our impairment analysis procedures. We determined this impairment 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 reduced the aggregate carrying value of this property from
$24.6 million
to its estimated fair value less estimated costs to sell of
$23.3 million
. This property was sold in April 2017 (see Note 3 for additional information). We evaluated each of our properties and determined there were no additional valuation adjustments necessary at
March 31, 2017
.
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, marketable securities, senior unsecured debt and mortgage notes payable. At
March 31, 2017
and December 31, 2016, the fair value of these additional financial instruments were not materially different from their carrying values, except as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Senior unsecured debt and mortgage notes payable
|
$
|
1,151,286
|
|
|
$
|
1,175,642
|
|
|
$
|
1,151,634
|
|
|
$
|
1,167,031
|
|
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).
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other financial instruments that potentially subject us to concentrations of credit risk consist principally of rents receivable; however, as of
March 31, 2017
,
no
single tenant of ours is responsible for more than
6.0%
of our total annualized rents.
Our derivative financial instruments, including interest rate swaps and cap, are entered with major financial institutions and we monitor the amount of credit exposure to any one counterparty.
Note 13. 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):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Numerator for earnings per common share - basic:
|
|
|
|
Net income
|
$
|
23,822
|
|
|
$
|
46,402
|
|
Net income attributable to noncontrolling interest
|
(8
|
)
|
|
—
|
|
Preferred distributions
|
(1,997
|
)
|
|
(6,981
|
)
|
Numerator for net income per share - basic
|
$
|
21,817
|
|
|
$
|
39,421
|
|
|
|
|
|
Numerator for earnings per common share - diluted:
|
|
|
|
Net income
|
$
|
23,822
|
|
|
$
|
46,402
|
|
Preferred distributions
|
(1,997
|
)
|
|
(6,981
|
)
|
Numerator for net income per share - diluted
|
$
|
21,825
|
|
|
$
|
39,421
|
|
|
|
|
|
Denominator for earnings per common share - basic and diluted:
|
|
|
|
Weighted average number of common shares outstanding - basic
|
124,047
|
|
|
125,840
|
|
RSUs
|
1,023
|
|
|
1,682
|
|
LTIP Units
|
80
|
|
|
—
|
|
Weighted average number of common shares outstanding - diluted
(1)
|
125,150
|
|
|
127,522
|
|
|
|
|
|
Net income per common share attributable to Equity Commonwealth common shareholders:
|
|
|
|
Basic
|
$
|
0.18
|
|
|
$
|
0.31
|
|
Diluted
|
$
|
0.17
|
|
|
$
|
0.31
|
|
|
|
|
|
Anti-dilutive securities:
|
|
|
|
Effect of Series D preferred shares; 6 1/2% cumulative convertible
(2)
|
2,363
|
|
|
2,363
|
|
|
|
(1)
|
As of
March 31, 2017
, we had granted RSUs and LTIP Units to certain employees, officers, and the chairman of the Board of Trustees. The RSUs and LTIP Units contain service and market-based vesting components.
None
of the RSUs or LTIP Units have vested. If the market-based vesting component of these awards was measured as of
March 31, 2017
, and
2016
,
1,165
and
1,754
common shares would be issued, respectively. Using a weighted average basis,
1,103
and
1,682
common shares are reflected in diluted earnings per share for the three months ended
March 31, 2017
and
2016
, 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 14. Segment Information
Our primary business is the ownership and operation of office properties, and we currently have
one
reportable segment. More than
95%
of our revenues for the
three
months ended
March 31, 2017
are from office properties.
Note 15. Related Person Transactions
The following discussion includes a description of our related person transactions for the
three
months ended
March 31, 2017
and
2016
.
Two North Riverside Plaza Joint Venture Limited Partnership:
We have 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 have completed improvements to the office space utilizing the
$0.7 million
tenant improvement allowance pursuant to 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
three
months ended
March 31, 2017
and
2016
, we recognized expense of
$0.2 million
and
$0.2 million
, respectively, pursuant to the 20
th
/21
st
Floor Office Lease and the related storage space.
Related/Corvex:
On July 31, 2014, at our 2014 annual meeting of shareholders, our shareholders voted to approve the reimbursement of approximately
$33.5 million
of verified expenses incurred by Related Fund Mangement, LLC and Corvex Management LP (Related/Corvex) beginning February 2013 in connection with their consent solicitations to remove our former Trustees, elect the new Board of Trustees and to engage in related litigation. We paid approximately
$16.7 million
during the year ended December 31, 2014. Approximately
$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 an
$8.2 million
final payment and
$8.4 million
, respectively, to Related/Corvex.
Note 16. Subsequent Events
In April 2017, we sold
two
properties (Parkshore Plaza and 25 S. Charles Street) (
five
buildings), with
630,326
square feet for
$64.5 million
, excluding closing costs. These properties were classified as held for sale as of
March 31, 2017
(see Note 3).
In April 2017, we repaid at par
$41.3 million
of mortgage debt at Parkshore Plaza in connection with the sale of the property.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report, and in our Annual Report.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Quarterly Report constitute forward-looking statements within the meaning of the federal securities laws. Any forward-looking statements contained in this Quarterly Report are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in market conditions are forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements contained in this Quarterly Report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in our Annual Report on Form 10-K.
OVERVIEW
We are an internally managed and self-advised REIT engaged in the ownership and operation primarily of office buildings throughout the United States. We were formed in 1986 under Maryland law. On November 10, 2016, we converted to what is commonly referred to as an umbrella partnership real estate investment trust, or UPREIT, structure. Substantially all of the Company’s assets and liabilities are now held in an Operating Trust through which the Company conducts its business.
At
March 31, 2017
, our portfolio, excluding properties held for sale, included
28
properties (
56
buildings) and one land parcel, with a combined
14.6 million
square feet for a total investment of
$2.7 billion
at cost and a depreciated book value of
$2.0 billion
. As of
March 31, 2017
, we had
$2.2 billion
of cash and cash equivalents and marketable securities.
As of
March 31, 2017
, our overall portfolio was
89.0%
leased. During the three months ended
March 31, 2017
, we entered into leases for
331,000
square feet, including lease renewals for
264,000
square feet and new leases for
67,000
square feet. Renewal leases entered into during the three months ended
March 31, 2017
had weighted average cash and GAAP rental rates that were approximately
7.2%
lower and
22.8%
higher, respectively, as compared to prior rental rates for the same space, and new leases entered into during the three months ended
March 31, 2017
had weighted average cash and GAAP rental rates that were approximately
8.4%
higher and
15.8%
higher, respectively, than prior rental rates for the same space. The change in GAAP rents is different than the change in cash rents due to differences in the amount of rent abatements, the magnitude and timing of contractual rent increases over the lease term, and the years of term for the newly executed leases compared to the prior leases.
During the year ended December 31, 2016, we sold 30 properties (62 buildings) with a combined 8.0 million square feet for an aggregate gross sales price of $1.3 billion, excluding closing costs. During the
three
months ended
March 31, 2017
, we sold
three
properties (
three
buildings) and one land parcel with a combined
0.8 million
square feet for an aggregate gross sales price of
$113.1 million
, excluding closing costs. We have generated significant proceeds from our dispositions to date and have a cash balance of
$1.9 billion
as of
March 31, 2017
. In April 2017, we sold
two
properties (
five
buildings), with
630,326
square feet for
$64.5 million
, excluding closing costs. These properties were classified as held for sale as of
March 31, 2017
. For more information regarding these transactions, see Notes 3 and 16 to the notes to our condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report. In addition, as our real estate investments have decreased, our income from operations has also declined.
In connection with our office portfolio, in December 2016, our Board of Trustees adopted an office repositioning strategy to own and acquire at a discount to replacement cost high-quality, multi-tenant office assets in markets and sub-markets with favorable long-term supply and demand fundamentals. Our efforts within our office portfolio will primarily be focused on larger buildings in central business districts and major urban areas that offer an attractive quality of life, including opportunities for tenants to live and play in close proximity to where they work, with a preference for markets that have above average limitations on new supply.
While executing this strategy, depending on market conditions, we may sell additional properties and are seeking to acquire attractive properties in markets meeting the criteria above. With the progress we have had executing dispositions, and the strength and liquidity of our balance sheet, we are in a position today to increasingly shift our focus to capital allocation. We seek to reinvest the capital received from dispositions to purchase new properties, repay debt, buy back common shares or make other investments or distributions that further our long-term strategic goals and the repositioning strategy adopted by our Board of Trustees.
As we continue to reposition our portfolio, we expect our efforts will be balanced among leasing assets to create value, selling assets when we are able to achieve attractive pricing, and evaluating a wide range of opportunities to deploy capital. However, we may not be able to make suitable acquisitions or other investments with the proceeds from the dispositions.
As part of the office repositioning strategy noted above, and pursuant to our accounting policy, in 2017, 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 our office repositioning strategy 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 less estimated costs to sell. As a result, we recorded an impairment charge of
$1.3 million
for the three months ended
March 31, 2017
in accordance with our impairment analysis procedures.
We have engaged CBRE, Inc. (CBRE) to provide property management services for our properties. We pay CBRE a property-by-property management fee and may engage CBRE from time-to-time to perform project management services, such as coordinating and overseeing the completion of tenant improvements and other capital projects at the properties. We reimburse CBRE for certain expenses incurred in the performance of its duties, including certain personnel and equipment costs.
For the three months ended
March 31, 2017
and
2016
, we incurred expenses of $5.2 million and $7.5 million, respectively, related to our property management agreement with CBRE, for property management fees, typically calculated as a portion of the properties' revenues, and salary and benefits reimbursements for property personnel, such as property managers, engineers and maintenance staff. As of
March 31, 2017
and
December 31, 2016
, we had amounts payable pursuant to these services of $2.2 million and $2.7 million, respectively.
Property Operations
Leased occupancy data for
2017
and
2016
are as follows (square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties(1)
|
|
Comparable Properties(2)
|
|
As of March 31,
|
|
As of March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total properties
|
28
|
|
|
60
|
|
|
28
|
|
|
28
|
|
Total square feet
|
14,593
|
|
|
23,037
|
|
|
14,593
|
|
|
14,578
|
|
Percent leased
(3)
|
89.0
|
%
|
|
91.4
|
%
|
|
89.0
|
%
|
|
91.6
|
%
|
|
|
(1)
|
Excludes properties sold or classified as held for sale in the period.
|
|
|
(2)
|
Based on properties owned continuously from
January 1, 2016
through
March 31, 2017
, and excludes properties sold or classified as held for sale during the period.
|
|
|
(3)
|
Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases and (ii) space which is leased but is not occupied or is being offered for sublease by tenants.
|
The weighted average lease term based on square feet for leases entered into during the three months ended
March 31, 2017
was
11.8
years. Commitments made for leasing expenditures and concessions, such as tenant improvements and leasing commissions, for leases entered into during the three months ended
March 31, 2017
totaled
$9.7 million
, or
$28.88
per square foot on average (approximately
$2.44
per square foot per year of the lease term).
As of
March 31, 2017
, approximately
3.6%
of our leased square feet and
3.6%
of our annualized rental revenue, determined as set forth below, are included in leases scheduled to expire through December 31,
2017
. Renewed and new leases and rental rates at which available space may be relet in the future will depend on prevailing market conditions at the times these leases are negotiated. We believe that the in-place cash rents for leases expiring for the remainder of
2017
are below market. Lease expirations by year, as of
March 31, 2017
, are as follows (square feet and dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Number
of Tenants Expiring
|
|
Leased Square
Feet Expiring(1)
|
|
% of Leased
Square Feet Expiring(1)
|
|
Cumulative
% of Leased Square
Feet Expiring(1)
|
|
Annualized Rental
Revenue Expiring(2)
|
|
% of
Annualized Rental
Revenue Expiring
|
|
Cumulative
% of
Annualized Rental Revenue Expiring
|
2017
|
|
87
|
|
|
464
|
|
|
3.6
|
%
|
|
3.6
|
%
|
|
$
|
12,253
|
|
|
3.6
|
%
|
|
3.6
|
%
|
2018
|
|
75
|
|
|
557
|
|
|
4.3
|
%
|
|
7.9
|
%
|
|
17,469
|
|
|
5.2
|
%
|
|
8.8
|
%
|
2019
|
|
85
|
|
|
1,230
|
|
|
9.5
|
%
|
|
17.4
|
%
|
|
36,342
|
|
|
10.8
|
%
|
|
19.6
|
%
|
2020
|
|
77
|
|
|
2,144
|
|
|
16.5
|
%
|
|
33.9
|
%
|
|
50,940
|
|
|
15.1
|
%
|
|
34.7
|
%
|
2021
|
|
63
|
|
|
1,053
|
|
|
8.1
|
%
|
|
42.0
|
%
|
|
31,770
|
|
|
9.4
|
%
|
|
44.1
|
%
|
2022
|
|
42
|
|
|
693
|
|
|
5.3
|
%
|
|
47.3
|
%
|
|
25,598
|
|
|
7.6
|
%
|
|
51.7
|
%
|
2023
|
|
42
|
|
|
1,459
|
|
|
11.2
|
%
|
|
58.5
|
%
|
|
44,024
|
|
|
13.1
|
%
|
|
64.8
|
%
|
2024
|
|
15
|
|
|
217
|
|
|
1.7
|
%
|
|
60.2
|
%
|
|
7,264
|
|
|
2.2
|
%
|
|
67.0
|
%
|
2025
|
|
20
|
|
|
758
|
|
|
5.8
|
%
|
|
66.0
|
%
|
|
20,238
|
|
|
6.0
|
%
|
|
73.0
|
%
|
2026
|
|
13
|
|
|
677
|
|
|
5.2
|
%
|
|
71.2
|
%
|
|
22,593
|
|
|
6.7
|
%
|
|
79.7
|
%
|
Thereafter
|
|
64
|
|
|
3,739
|
|
|
28.8
|
%
|
|
100.0
|
%
|
|
68,765
|
|
|
20.3
|
%
|
|
100.0
|
%
|
|
|
583
|
|
|
12,991
|
|
|
100.0
|
%
|
|
|
|
$
|
337,256
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
6.8
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
(1)
|
Square footage is pursuant to existing leases as of
March 31, 2017
, excluding leases related to properties classified as held for sale, and includes (i) space being fitted out for occupancy and (ii) space which is leased but is not occupied or is being offered for sublease.
|
|
|
(2)
|
Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of
March 31, 2017
, plus estimated recurring expense reimbursements; includes triple net lease rents and excludes lease value amortization, straight line rent adjustments, abated (free) rent periods and parking revenue. We calculate annualized rental revenue by aggregating the recurring billings outlined above for the most recent month during the quarter reported, adding abated rent, and multiplying the sum by 12 to provide an estimation of near-term potentially-recurring revenues. Annualized rental revenue is a forward-looking non-GAAP measure. Annualized rental revenue cannot be reconciled to a comparable GAAP measure without unreasonable efforts, primarily due to the fact that it is calculated from the billings of tenants in the most recent month at the most recent rental rates during the quarter reported, whereas historical GAAP measures include billings from a potentially different group of tenants over multiple months at potentially different rental rates.
|
A principal source of funds for our operations is rents from tenants at our properties. Rents are generally received from our tenants monthly in advance, except from our government tenants, who usually pay rents monthly in arrears. As of
March 31, 2017
, tenants representing 1.5% or more of our total annualized rental revenue were as follows (square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant(1)
|
|
Square Feet(2)
|
|
% of Total Square Feet(2)
|
|
% of Annualized Rental Revenue(3)
|
|
Weighted Average Remaining Lease Term
|
1.
|
Expedia, Inc.
|
|
427
|
|
|
2.9
|
%
|
|
6.0
|
%
|
|
2.7
|
2.
|
Office Depot, Inc.
|
|
651
|
|
|
4.5
|
%
|
|
5.1
|
%
|
|
6.5
|
3.
|
Groupon, Inc.
(4)
|
|
376
|
|
|
2.6
|
%
|
|
3.6
|
%
|
|
8.8
|
4.
|
PNC Financial Services Group
|
|
363
|
|
|
2.5
|
%
|
|
3.3
|
%
|
|
9.7
|
5.
|
Flextronics International Ltd.
|
|
1,051
|
|
|
7.2
|
%
|
|
3.2
|
%
|
|
12.8
|
6.
|
Ballard Spahr LLP
|
|
217
|
|
|
1.5
|
%
|
|
2.4
|
%
|
|
12.9
|
7.
|
RE/MAX Holdings, Inc.
|
|
248
|
|
|
1.7
|
%
|
|
2.2
|
%
|
|
11.1
|
8.
|
University of Pennsylvania Health System
|
|
267
|
|
|
1.8
|
%
|
|
2.1
|
%
|
|
8.6
|
9.
|
Georgetown University
|
|
240
|
|
|
1.6
|
%
|
|
1.9
|
%
|
|
2.5
|
10.
|
Willis Towers Watson
|
|
251
|
|
|
1.7
|
%
|
|
1.9
|
%
|
|
3.1
|
11.
|
Echo Global Logistics, Inc.
|
|
226
|
|
|
1.5
|
%
|
|
1.8
|
%
|
|
10.5
|
12.
|
West Corporation
|
|
336
|
|
|
2.3
|
%
|
|
1.7
|
%
|
|
11.9
|
13.
|
Wm. Wrigley Jr. Company
|
|
150
|
|
|
1.0
|
%
|
|
1.7
|
%
|
|
4.8
|
|
Total
|
|
4,803
|
|
|
32.8
|
%
|
|
36.9
|
%
|
|
8.7
|
|
|
(1)
|
Tenants located in properties classified as held for sale are excluded.
|
|
|
(2)
|
Square footage is pursuant to existing leases as of
March 31, 2017
, and includes (i) space being fitted out for occupancy and (ii) space which is leased but is not occupied or is being offered for sublease.
|
|
|
(3)
|
Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of
March 31, 2017
, plus estimated recurring expense reimbursements; includes triple net lease rents and excludes lease value amortization, straight line rent adjustments, abated (free) rent periods and parking revenue. We calculate annualized rental revenue by aggregating the recurring billings outlined above for the most recent month during the quarter reported, adding abated rent, and multiplying the sum by 12 to provide an estimation of near-term potentially-recurring revenues. Annualized rental revenue is a forward-looking non-GAAP measure. Annualized rental revenue cannot be reconciled to a comparable GAAP measure without unreasonable efforts, primarily due to the fact that it is calculated from the billings of tenants in the most recent month at the most recent rental rates during the quarter reported, whereas historical GAAP measures include billings from a potentially different group of tenants over multiple months at potentially different rental rates.
|
|
|
(4)
|
Groupon, Inc. statistics include 207,536 square feet that are sublet from Bankers Life and Casualty Company.
|
RESULTS OF OPERATIONS
Three Months Ended
March 31, 2017
, Compared to Three Months Ended
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Properties Results(1)
|
|
Other Properties Results(2)
|
|
Consolidated Results
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
(in thousands)
|
Rental income
|
$
|
73,646
|
|
|
$
|
71,372
|
|
|
$
|
2,274
|
|
|
3.2
|
%
|
|
$
|
6,559
|
|
|
$
|
38,516
|
|
|
$
|
80,205
|
|
|
$
|
109,888
|
|
|
$
|
(29,683
|
)
|
|
(27.0
|
)%
|
Tenant reimbursements and other income
|
18,625
|
|
|
17,573
|
|
|
1,052
|
|
|
6.0
|
%
|
|
721
|
|
|
9,674
|
|
|
19,346
|
|
|
27,247
|
|
|
(7,901
|
)
|
|
(29.0
|
)%
|
Operating expenses
|
(38,435
|
)
|
|
(36,878
|
)
|
|
(1,557
|
)
|
|
4.2
|
%
|
|
(2,652
|
)
|
|
(20,380
|
)
|
|
(41,087
|
)
|
|
(57,258
|
)
|
|
16,171
|
|
|
(28.2
|
)%
|
Net operating income(3)
|
$
|
53,836
|
|
|
$
|
52,067
|
|
|
$
|
1,769
|
|
|
3.4
|
%
|
|
$
|
4,628
|
|
|
$
|
27,810
|
|
|
58,464
|
|
|
79,877
|
|
|
(21,413
|
)
|
|
(26.8
|
)%
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
26,915
|
|
|
36,251
|
|
|
(9,336
|
)
|
|
(25.8
|
)%
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
12,078
|
|
|
13,312
|
|
|
(1,234
|
)
|
|
(9.3
|
)%
|
Loss on asset impairment
|
|
|
|
|
|
|
|
|
|
1,286
|
|
|
—
|
|
|
1,286
|
|
|
100.0
|
%
|
Total other expenses
|
|
|
|
|
|
|
|
|
|
|
|
40,279
|
|
|
49,563
|
|
|
(9,284
|
)
|
|
(18.7
|
)%
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
18,185
|
|
|
30,314
|
|
|
(12,129
|
)
|
|
(40.0
|
)%
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
4,372
|
|
|
1,967
|
|
|
2,405
|
|
|
122.3
|
%
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,014
|
)
|
|
(22,347
|
)
|
|
7,333
|
|
|
(32.8
|
)%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
—
|
|
|
(118
|
)
|
|
118
|
|
|
(100.0
|
)%
|
Foreign currency exchange loss
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
(5
|
)
|
|
5
|
|
|
(100.0
|
)%
|
Gain on sale of properties, net
|
|
|
|
|
|
|
|
|
|
|
|
16,454
|
|
|
36,666
|
|
|
(20,212
|
)
|
|
(55.1
|
)%
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
23,997
|
|
|
46,477
|
|
|
(22,480
|
)
|
|
(48.4
|
)%
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
(175
|
)
|
|
(75
|
)
|
|
(100
|
)
|
|
133.3
|
%
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
23,822
|
|
|
46,402
|
|
|
(22,580
|
)
|
|
(48.7
|
)%
|
Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
(8
|
)
|
|
—
|
|
|
(8
|
)
|
|
100.0
|
%
|
Net income attributable to Equity Commonwealth
|
|
|
|
|
|
|
|
|
|
23,814
|
|
|
46,402
|
|
|
(22,588
|
)
|
|
(48.7
|
)%
|
Preferred distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,997
|
)
|
|
(6,981
|
)
|
|
4,984
|
|
|
(71.4
|
)%
|
Net income attributable to Equity Commonwealth common shareholders
|
|
|
|
|
|
|
|
|
|
$
|
21,817
|
|
|
$
|
39,421
|
|
|
$
|
(17,604
|
)
|
|
(44.7
|
)%
|
|
|
(1)
|
Comparable properties consist of
28
properties (
56
buildings) we owned continuously from
January 1, 2016
to
March 31, 2017
.
|
|
|
(2)
|
Other properties consist of properties sold or classified as held for sale as of the end of the period.
|
|
|
(3)
|
We define NOI as income from our real estate including lease termination fees received from tenants less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI internally to evaluate property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, net income attributable to Equity Commonwealth common shareholders, operating income or cash flow from operating activities, determined in accordance with GAAP, or as an indicator of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs. This measure should be considered in conjunction with net income, net income attributable to Equity Commonwealth common shareholders, operating income and cash flow from operating activities as presented in our consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows. Other REITs and real estate companies may calculate NOI differently than we do.
|
We refer to the
28
properties (
56
buildings) we owned continuously from
January 1, 2016
to
March 31, 2017
, as comparable properties. We refer to the sold properties and properties classified as held for sale as other properties. Our condensed consolidated statements of operations for the three months ended
March 31, 2017
and
2016
include the operating results of
28
properties for the entire periods, as we owned these properties as of
January 1, 2016
.
Rental income.
Rental income decreased
$29.7 million
, or
27.0%
, in the
2017
period, compared to the
2016
period, primarily due to the properties sold in 2017 and 2016, partially offset by an increase of
3.2%
in rental income at the comparable properties. The increase in rental income at the comparable properties is due to an increase in rents resulting from new leasing activity, partially offset by several large tenant lease expirations and lease contractions.
Rental income includes increases for straight line rent adjustments totaling
$4.4 million
in the
2017
period and
$3.8 million
in the
2016
period, and net reductions for amortization of acquired real estate leases and assumed real estate lease obligations totaling
$0.6 million
in the
2017
period and
$1.1 million
in the
2016
period. Rental income also includes the recognition of lease termination fees totaling
$1.7 million
in the
2017
period and
$0.3 million
in the
2016
period.
Tenant reimbursements and other income.
Tenant reimbursements and other income decreased
$7.9 million
, or
29.0%
, in the
2017
period, compared to the
2016
period, primarily due to the properties sold in 2017 and 2016. Tenant reimbursements and other income increased
$1.1 million
, or
6.0%
, at our comparable properties primarily due to an increase in real estate tax reimbursements and an increase in reimbursements related to new leasing activity.
Operating expenses.
Operating expenses decreased
$16.2 million
, or
28.2%
, in the
2017
period, compared to the
2016
period, primarily due to the properties sold in 2017 and 2016. Operating expenses increased
$1.6 million
, or
4.2%
, at the comparable properties primarily due to an increase in real estate tax expense, partially offset by a decrease in utilities.
Depreciation and amortization.
Depreciation and amortization decreased
$9.3 million
, or
25.8%
, in the
2017
period, compared to the
2016
period primarily due to properties sold in 2017 and 2016.
General and administrative.
General and administrative expenses decreased
$1.2 million
, or
9.3%
, in the 2017 period, compared to the 2016 period, primarily due to a $1.1 million decrease related to the shareholder approved reimbursement of expenses incurred by Related/Corvex in connection with their consent solicitation to remove our former Trustees and decreases in technology, payroll and legal expenses, partially offset by a $0.9 million increase in share-based compensation expense.
Loss on asset impairment.
We recorded impairment charges of
$1.3 million
in the first quarter of 2017 related to 25 S. Charles Street based upon the shortening of our expected period of ownership and updated market information in accordance with our impairment analysis procedures.
Operating income.
Operating income decreased
$12.1 million
, or
40.0%
, in the 2017 period, compared to the 2016 period, primarily due to the properties sold in 2017 and 2016.
Interest and other income.
Interest and other income increased
$2.4 million
in the
2017
period, compared to the 2016 period, primarily due to additional interest received on higher invested balances and higher average interest rates in 2017.
Interest expense.
Interest expense decreased
$7.3 million
, or
32.8%
, in the 2017 period, compared to the 2016 period, primarily due to the prepayment of $139.1 million of our 6.25% senior unsecured notes in February 2016, the repayment of the $167.8 million mortgage debt at 1735 Market Street in November 2016, the prepayment of $250.0 million of our 6.25% senior unsecured notes in December 2016 and a decrease in amortization of deferred financing fees, partially offset by an increase in interest expense related to our term loans as a result of an increase in interest rates.
Loss on early extinguishment of debt
. The loss on early extinguishment of debt in the 2016 period reflects the write-off of an unamortized discount and unamortized deferred financing fees related to our redemption of $139.1 million of our 6.25% senior unsecured notes due 2016.
Gain on sale of properties, net.
Gain on sale of properties, net decreased
$20.2 million
in the 2017 period, as compared to the 2016 period. Gain on sale of properties in the 2017 period relates to a
$22.5 million
gain related to the sale of Seton Center, partially offset by losses of
$6.0 million
and
$0.1 million
related to the sales of 111 Market Place and Cabot Business Park Land, respectively. Gain on sale of properties in the 2016 period relates to a $16.5 million gain on the sale of Executive Park, a $5.5 million gain on the sale of 3330 N Washington Boulevard and a $14.7 million gain on the sale of 111 East Kilbourn Avenue.
Income tax expense.
The
$0.1 million
increase in state income tax expense primarily relates to the sale of properties in certain states.
Net income attributable to noncontrolling interest.
In January 2017, we granted LTIP Units. The net income attributable to noncontrolling interest of
$8,000
in the 2017 period relates to the allocation of net income to the LTIP Unit holders.
Preferred distributions.
The
$5.0 million
decrease in preferred distributions is due to the redemption of all of our 11,000,000 outstanding series E preferred shares on May 15, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Our Operating Liquidity and Resources
As of
March 31, 2017
, we had
$1.9 billion
of cash and cash equivalents. We expect to use our cash balances, cash flow from our operations and proceeds of any future property sales to fund our operations, repay debt, make distributions, purchase our common shares, acquire assets or entities, fund tenant improvements and leasing costs and for other general business purposes. We believe our cash balances and the cash flow from our operations will be sufficient to fund our ordinary course activities.
Our future cash flows from operating activities will depend primarily upon our:
•
ability to maintain or improve the occupancy of, and the rental rates at, our properties;
•
ability to control operating and financing cost increases at our properties; and
|
|
•
|
ability to purchase additional properties which produce rents, less property operating expenses, in excess of our costs of acquisition capital which are consistent with our office repositioning strategy.
|
Volatility in energy costs and real estate taxes may cause our future operating costs to fluctuate; however, the impact of these fluctuations is expected to be partially offset by the pass through of operating costs to our tenants pursuant to lease terms, although there can be no assurance that we will be able to successfully offset these costs or that doing so would not negatively impact our competitive position or business.
Cash flows (used in) provided by operating, investing and financing activities were
$(2.7) million
,
$(200.9) million
and
$(2.5) million
, respectively, for the
three
months ended
March 31, 2017
, and
$23.0 million
,
$88.9 million
and
$(172.5) million
, respectively, for the
three
months ended
March 31, 2016
. Changes in these three categories of our cash flows between 2017 and 2016 are primarily related to a decrease in property net operating income, real estate improvements, dispositions of properties, purchase of marketable securities, repayments of debt and repurchase of our common shares.
Our Investment and Financing Liquidity and Resources
In order to maintain financial flexibility, to fund potential acquisitions and to meet cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions and investments or pay operating or capital expenses, we maintain an unsecured revolving credit facility with a group of institutional lenders. Our credit agreement provides us with (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 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.
Borrowings under our revolving credit facility currently bear interest at LIBOR plus a spread, which was 125 basis points as of
March 31, 2017
. We also pay a facility fee of 25 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate spread and the facility fee are subject to adjustment based upon changes to our credit ratings. We are allowed to borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of
March 31, 2017
, the interest rate payable on borrowings under our revolving credit facility was
2.23%
. As of
March 31, 2017
, we had no balance outstanding under our revolving credit facility.
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
March 31, 2017
. The interest rate spread is subject to adjustment based upon changes to our credit ratings. As of
March 31, 2017
, the interest rate for the amounts outstanding under our term loan was
2.38%
and
2.78%
for the 5-year and 7-year term loan, respectively. As of
March 31, 2017
, our 5-year and 7-year term loans each had outstanding balances of $200.0 million.
During the
three
months ended
March 31, 2017
, we paid an aggregate of
$2.0 million
of distributions on our series D preferred shares. On April 10, 2017, we announced that our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which is expected to be paid on May 15, 2017 to shareholders of record on April 28, 2017.
On March 17, 2016, our Board of Trustees authorized the repurchase of up to
$150.0 million
of our outstanding common shares over the twelve month period following the date of authorization. In March 2017, this share repurchase authorization, of which
$106.6 million
was not utilized, expired. On March 15, 2017, 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
three
months ended
March 31, 2017
, we did not purchase any common shares.
During the
three
months ended
March 31, 2017
, we purchased
$276.2 million
of marketable securities. For further information about our marketable securities, see Note 4 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
Our outstanding debt maturities and weighted average interest rates as of
March 31, 2017
, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Principal Payments During Period
|
|
|
Year
|
|
Unsecured Floating Rate Debt
|
|
Unsecured Fixed Rate Debt
|
|
Secured Fixed Rate Debt
|
|
Total(1)
|
|
Weighted Average Interest Rate(2)
|
2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,328
|
|
(3)
|
$
|
42,328
|
|
|
5.7
|
%
|
2018
|
|
—
|
|
|
250,000
|
|
|
1,487
|
|
|
251,487
|
|
|
6.6
|
%
|
2019
|
|
—
|
|
|
—
|
|
|
1,580
|
|
|
1,580
|
|
|
6.0
|
%
|
2020
|
|
200,000
|
|
|
250,000
|
|
|
1,674
|
|
|
451,674
|
|
|
4.3
|
%
|
2021
|
|
—
|
|
|
—
|
|
|
25,982
|
|
|
25,982
|
|
|
5.7
|
%
|
2022
|
|
200,000
|
|
|
—
|
|
|
799
|
|
|
200,799
|
|
|
2.8
|
%
|
2023
|
|
—
|
|
|
—
|
|
|
702
|
|
|
702
|
|
|
5.7
|
%
|
2024
|
|
—
|
|
|
—
|
|
|
743
|
|
|
743
|
|
|
5.7
|
%
|
2025
|
|
—
|
|
|
—
|
|
|
787
|
|
|
787
|
|
|
5.7
|
%
|
2026
|
|
—
|
|
|
—
|
|
|
204
|
|
|
204
|
|
|
5.7
|
%
|
Thereafter
|
|
—
|
|
|
175,000
|
|
(4)
|
—
|
|
|
175,000
|
|
|
5.8
|
%
|
|
|
$
|
400,000
|
|
|
$
|
675,000
|
|
|
$
|
76,286
|
|
|
$
|
1,151,286
|
|
|
4.9
|
%
|
|
|
(1)
|
Total debt outstanding as of
March 31, 2017
, including net unamortized premiums and discounts and net unamortized deferred financing costs, equals
$1,141,628
.
|
|
|
(2)
|
Weighted based on current contractual interest rates.
|
|
|
(3)
|
In April 2017, we repaid at par
$41.3 million
of mortgage debt at Parkshore Plaza in connection with the sale of the property.
|
|
|
(4)
|
The 5.75% senior unsecured notes due 2042 are callable at par on or after August 1, 2017.
|
For further information about our indebtedness, see Note 5 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
When significant amounts are outstanding under our revolving credit facility, or as the maturity dates of our revolving credit facility and term debts approach, we explore alternatives to repay amounts due. Such alternatives may include incurring additional debt and issuing new equity securities, extending the maturity of our revolving credit facility and entering into a new revolving credit facility. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.
We believe that we will have access to various types of financings, including debt or equity offerings, to fund any future acquisitions and to pay our debts and other obligations as they become due. The completion and the costs of any future debt transactions will depend primarily upon market conditions and our credit ratings. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans and, in particular, whether we appear to have the ability to maintain our earnings, to space our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably foreseeable adverse changes. We intend to conduct our business activities in a manner which will continue to afford us reasonable access to
capital for investment and financing activities. However, there can be no assurance regarding our credit ratings or our ability to complete any debt or equity offerings or that our cost of any future public or private financings will not increase.
During the
three
months ended
March 31, 2017
, we sold
three
properties (
three
buildings) and one land parcel with a combined
827,204
square feet for an aggregate sales price of
$113.1 million
, excluding closing costs. In April 2017, we sold
two
properties (
five
buildings), with
630,326
square feet for
$64.5 million
, excluding closing costs. These properties were classified as held for sale as of
March 31, 2017
. For more information regarding these transactions, see Notes 3 and 16 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
During the
three
months ended
March 31, 2017
and
2016
, amounts capitalized at our properties, including properties sold or held for sale, for tenant improvements, leasing costs and building improvements were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Tenant improvements
(1)
|
$
|
9,427
|
|
|
$
|
25,391
|
|
Leasing costs
(2)
|
4,617
|
|
|
9,765
|
|
Building improvements
(3)
|
4,785
|
|
|
6,541
|
|
|
|
(1)
|
Tenant improvements include capital expenditures to improve tenants’ spaces.
|
|
|
(2)
|
Leasing costs primarily include brokerage commissions and legal expenses.
|
|
|
(3)
|
Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets. Tenant-funded capital expenditures are excluded.
|
During the three months ended
March 31, 2017
, commitments made for expenditures in connection with leasing space at our properties were as follows (dollar and square foot measures in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
Leases
|
|
Renewals
|
|
Total
|
Rentable square feet leased during the period
|
67
|
|
|
264
|
|
|
331
|
|
Tenant improvements and leasing commissions
|
$
|
2,910
|
|
|
$
|
6,759
|
|
|
$
|
9,669
|
|
Tenant improvements and leasing commissions per rentable square foot
|
$
|
42.02
|
|
|
$
|
25.58
|
|
|
$
|
28.88
|
|
Weighted average lease term by square foot (years)
|
7.4
|
|
|
13.0
|
|
|
11.8
|
|
Total tenant improvements and leasing commissions per rentable square foot per year
|
$
|
5.70
|
|
|
$
|
1.97
|
|
|
$
|
2.44
|
|
Debt Covenants
Our unsecured debt obligations at
March 31, 2017
were our term loans and our publicly issued senior unsecured notes. Our public debt indenture and related supplements and our credit agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and require us to maintain other financial ratios. At
March 31, 2017
, we believe we were in compliance with all covenants under both our indenture and related supplements, and under our credit agreement. In addition to our unsecured debt obligations, we had
$77.2 million
(including net unamortized premiums and net unamortized deferred financing costs) of mortgage notes outstanding at
March 31, 2017
.
None of our indenture and related supplements, our credit agreement, or our mortgage notes contain provisions for acceleration or require us to provide collateral security which could be triggered by our debt ratings. However, our senior debt rating is used to determine the interest rate and the fees payable under our credit agreement.
Off Balance Sheet Arrangements
As of
March 31, 2017
, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no swaps or hedges as of
March 31, 2017
, other than the interest rate cap described in Note 10 to the notes to our condensed consolidated financial statements, and under “Quantitative and Qualitative Disclosures About Market Risk” included in Part I, Item 3 of this Quarterly Report.
Funds from Operations (FFO) and Normalized FFO
We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as net income (loss), calculated in accordance with GAAP, excluding real estate depreciation and amortization, gains (or losses) from sales of depreciable property, impairment of depreciable real estate, and our portion of these items related to equity investees and non-controlling interests. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we exclude certain items that we view as nonrecurring or impacting comparability from period to period. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, net income attributable to Equity Commonwealth common shareholders, operating income and cash flow from operating activities.
We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, net income attributable to Equity Commonwealth common shareholders, operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. These measures should be considered in conjunction with net income, net income attributable to Equity Commonwealth common shareholders, operating income and cash flow from operating activities as presented in our condensed consolidated statements of operations, condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.
The following table provides a reconciliation of net income to FFO attributable to Equity Commonwealth common shareholders and unitholders and a calculation to Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Reconciliation to FFO:
|
|
|
|
Net income
|
$
|
23,822
|
|
|
$
|
46,402
|
|
Real estate depreciation and amortization
|
26,616
|
|
|
36,044
|
|
Loss on asset impairment
|
1,286
|
|
|
—
|
|
Gain on sale of properties
|
(16,454
|
)
|
|
(36,666
|
)
|
FFO attributable to Equity Commonwealth
|
35,270
|
|
|
45,780
|
|
Preferred distributions
|
(1,997
|
)
|
|
(6,981
|
)
|
FFO attributable to Equity Commonwealth common shareholders and unitholders
|
$
|
33,273
|
|
|
$
|
38,799
|
|
|
|
|
|
Reconciliation to Normalized FFO:
|
|
|
|
|
|
FFO attributable to Equity Commonwealth common shareholders and unitholders
|
$
|
33,273
|
|
|
$
|
38,799
|
|
Lease value amortization
|
573
|
|
|
1,121
|
|
Straight line rent adjustments
|
(4,387
|
)
|
|
(3,831
|
)
|
Loss on early extinguishment of debt
|
—
|
|
|
118
|
|
Transition-related expenses
|
—
|
|
|
1,102
|
|
Foreign currency exchange loss
|
—
|
|
|
5
|
|
Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders
|
$
|
29,459
|
|
|
$
|
37,314
|
|
Property Net Operating Income (NOI)
We use property net operating income, or NOI, to evaluate the performance of our properties. We define NOI as income from our real estate including lease termination fees received from tenants less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and corporate level expenses.
The following table includes the reconciliation of NOI to net income, the most directly comparable financial measure under GAAP reported in our consolidated financial statements. We consider NOI to be an appropriate supplemental measure to net income because we believe it helps to understand the operations of our properties. We use NOI internally to evaluate property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, net income attributable to Equity Commonwealth common shareholders, operating income or cash flow from operating activities, determined in accordance with GAAP, or as an indicator of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs. This measure should be considered in conjunction with net income, net income attributable to Equity Commonwealth common shareholders, operating income and cash flow from operating activities as presented in our consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows. Other REITs and real estate companies may calculate NOI differently than we do.
A reconciliation of NOI to net income for the
three
months ended
March 31, 2017
and
2016
, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Rental income
|
$
|
80,205
|
|
|
$
|
109,888
|
|
Tenant reimbursements and other income
|
19,346
|
|
|
27,247
|
|
Operating expenses
|
(41,087
|
)
|
|
(57,258
|
)
|
NOI
|
$
|
58,464
|
|
|
$
|
79,877
|
|
|
|
|
|
NOI
|
$
|
58,464
|
|
|
$
|
79,877
|
|
Depreciation and amortization
|
(26,915
|
)
|
|
(36,251
|
)
|
General and administrative
|
(12,078
|
)
|
|
(13,312
|
)
|
Loss on asset impairment
|
(1,286
|
)
|
|
—
|
|
Operating income
|
18,185
|
|
|
30,314
|
|
|
|
|
|
Interest and other income
|
4,372
|
|
|
1,967
|
|
Interest expense
|
(15,014
|
)
|
|
(22,347
|
)
|
Loss on early extinguishment of debt
|
—
|
|
|
(118
|
)
|
Foreign currency exchange loss
|
—
|
|
|
(5
|
)
|
Gain on sale of properties, net
|
16,454
|
|
|
36,666
|
|
Income from continuing operations before income taxes
|
23,997
|
|
|
46,477
|
|
Income tax expense
|
(175
|
)
|
|
(75
|
)
|
Net income
|
$
|
23,822
|
|
|
$
|
46,402
|
|
Related Person Transactions
For information about our related person transactions and about the risks that may arise as a result of these related person transactions and relationships, see Note 15 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.