EQC Equity Commonwealth

Equity Commonwealth (NYSE: EQC) today reported its financial results for the quarter ended June 30, 2017. All per share results are reported on a diluted basis.

Financial results for the quarter ended June 30, 2017

Net loss attributable to common shareholders was $7.8 million, or $0.06 per share, for the quarter ended June 30, 2017. This compares to net income attributable to common shareholders of $71.3 million, or $0.56 per share, for the quarter ended June 30, 2016. The decline was primarily due to significant gains generated from property sales during the quarter ended June 30, 2016.

Funds from Operations (FFO), as defined by the National Association of Real Estate Investment Trusts, for the quarter ended June 30, 2017, were $31.1 million, or $0.25 per share. This compares to FFO for the quarter ended June 30, 2016 of $45.7 million, or $0.36 per share.

Normalized FFO was $27.1 million, or $0.22 per share. This compares to Normalized FFO for the quarter ended June 30, 2016 of $53.6 million, or $0.42 per share. The following items impacted Normalized FFO for the quarter ended June 30, 2017, compared to the corresponding 2016 period:

• ($0.31) per share of income from properties sold as part of the company’s previously announced repositioning plan;
• ($0.03) per share of same property cash NOI;
• $0.05 per share of interest expense savings;
• $0.04 per share of preferred distribution savings; and
• $0.03 per share increase in interest income.

Normalized FFO begins with FFO and eliminates certain items that, by their nature, are not comparable from period to period, non-cash items, and items that tend to obscure the company’s operating performance. Definitions of FFO, Normalized FFO and reconciliations to net income, determined in accordance with U.S. generally accepted accounting principles, or GAAP, are included at the end of this press release.

The weighted average number of diluted common shares outstanding when calculating net income or loss per share for the quarter ended June 30, 2017 was 124,067,247 shares, compared to 126,936,590 for the quarter ended June 30, 2016. The weighted average number of diluted common shares outstanding when calculating FFO or Normalized FFO per share for the quarter ended June 30, 2017 was 125,255,722 shares, compared to 126,936,590 for the quarter ended June 30, 2016.

Same property results for the quarter ended June 30, 2017

The company’s same property portfolio consisted of 21 properties totaling 11.7 million square feet, which excluded six properties designated as held for sale at the end of the quarter. Operating results were as follows:

• The same property portfolio was 88.4% leased as of June 30, 2017, compared to 88.2% as of March 31, 2017, and 90.2% as of June 30, 2016.
• The same property portfolio commenced occupancy was 86.3% as of June 30, 2017, compared to 85.8% as of March 31, 2017, and 86.9% as of June 30, 2016.
• Same property NOI decreased 5.5% when compared to the same period in 2016.
• Same property cash NOI decreased 7.5% when compared to the same period in 2016.
• The company entered into leases for approximately 448,000 square feet, including renewal leases for approximately 252,000 square feet and new leases for approximately 196,000 square feet.
• GAAP rental rates on new and renewal leases were 17.6% higher compared to prior GAAP rental rates for the same space.
• Cash rental rates on new and renewal leases were 10.7% higher compared to prior cash rental rates for the same space.

The definitions and reconciliations of same property NOI and same property cash NOI to operating income, determined in accordance with GAAP, are included at the end of this press release. The same property portfolio includes properties continuously owned from April 1, 2016 through June 30, 2017 and excludes land parcels and properties owned during this period that are designated as held for sale.

Significant events during the quarter ended June 30, 2017

The company sold three properties totaling 871,000 square feet for a gross sales price of $98.5 million. The assets sold during the quarter include the following:

• Parkshore Plaza, a 73.1% leased, 271,000 square foot office property in Folsom, CA, for a gross sale price of $40 million. The company also repaid the $41.3 million mortgage loan encumbering the property, which extinguished the company’s $2.3 million guaranty of the loan.
• 25 S. Charles, a 94.2% leased, 359,000 square foot office property in Baltimore, MD, for a gross sale price of $24.5 million.
• 802 Delaware, a 100% leased, 241,000 square foot office property in Wilmington, DE, for a gross sale price of $34.0 million.

Subsequent Events

• The company closed on the sale of 1500 Market, also known as Centre Square, a 91.2% leased, 1,759,000 square foot office property in Philadelphia, PA, for a gross sale price of $328 million. This property was held for sale as of June 30, 2017.
• The company redeemed its $250 million 6.65% Senior Unsecured Notes due in 2018, on July 15, 2017.
• In addition to the five remaining held for sale properties, the company currently has four properties totaling 2.1 million square feet in various stages of the sale process.

Earnings Conference Call & Supplemental Data

Equity Commonwealth will host a conference call to discuss second quarter results on Tuesday, July 25, 2017, at 9:00 A.M. CDT. The conference call will be available via live audio webcast on the Investor Relations section of the company’s website (www.eqcre.com). A replay of the audio webcast will also be available following the call.

A copy of EQC’s Second Quarter 2017 Supplemental Operating and Financial Data is available for download on the Investor Relations section of EQC’s website at www.eqcre.com.

About Equity Commonwealth

Equity Commonwealth (NYSE: EQC) is a Chicago based, internally managed and self-advised real estate investment trust (REIT) with commercial office properties throughout the United States. EQC’s portfolio, excluding properties held for sale, is comprised of 21 properties and 11.7 million square feet.

Forward-Looking Statements

Some of the statements contained in this press release constitute forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements regarding marketing the company’s properties for sale, consummating asset sales and identifying future investment opportunities. Any forward-looking statements contained in this press release are intended to be made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this press release reflect the company’s current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause the company’s actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).

While forward-looking statements reflect the company’s good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the company’s future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in the company’s most recent Annual Report on Form 10-K and in the company’s Quarterly Reports on Form 10-Q for subsequent quarters.

  CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

        June 30, 2017   December 31, 2016 ASSETS         Real estate properties:   Land $ 232,857 $ 286,186 Buildings and improvements 1,961,445   2,570,704   2,194,302 2,856,890 Accumulated depreciation (561,003 ) (755,255 ) 1,633,299 2,101,635 Assets held for sale 348,203 — Acquired real estate leases, net 42,719 48,281 Cash and cash equivalents 1,967,549 2,094,674 Marketable securities 278,072 — Restricted cash 6,594 6,532 Rents receivable, net of allowance for doubtful accounts of $4,352 and $5,105, respectively 115,371 152,031 Other assets, net   99,309     122,922   Total assets   $ 4,491,116     $ 4,526,075             LIABILITIES AND EQUITY         Revolving credit facility $ — $ — Senior unsecured debt, net 1,064,954 1,063,950 Mortgage notes payable, net 35,401 77,717 Liabilities related to properties held for sale 2,019 — Accounts payable and accrued expenses 75,800 95,395 Assumed real estate lease obligations, net 1,429 1,946 Rent collected in advance 19,095 18,460 Security deposits   5,957     8,160   Total liabilities   $ 1,204,655     $ 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; 124,089,443 and 123,994,465 shares issued and outstanding, respectively 1,241 1,240 Additional paid in capital 4,372,610 4,363,177 Cumulative net income 2,584,608 2,566,603 Cumulative other comprehensive income (loss) 1,235 (208 ) Cumulative common distributions (3,111,868 ) (3,111,868 ) Cumulative preferred distributions (681,754 ) (677,760 ) Total shareholders’ equity 3,285,335 3,260,447 Noncontrolling interest   1,126     —   Total equity   $ 3,286,461     $ 3,260,447   Total liabilities and equity   $ 4,491,116     $ 4,526,075    

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

        Three Months Ended   Six Months Ended June 30, June 30, 2017   2016   2017   2016 Revenues:     Rental income $ 74,352 $ 121,735 $ 154,557 $ 231,623 Tenant reimbursements and other income   17,247     23,632     36,593     50,879   Total revenues   $ 91,599     $ 145,367     $ 191,150     $ 282,502     Expenses: Operating expenses $ 37,284 $ 51,393 $ 78,371 $ 108,651 Depreciation and amortization 23,922 37,331 50,837 73,582 General and administrative 11,960 12,177 24,038 25,489 Loss on asset impairment   18,428     43,736     19,714     43,736   Total expenses   $ 91,594     $ 144,637     $ 172,960     $ 251,458                     Operating income   $ 5     $ 730     $ 18,190     $ 31,044     Interest and other income 6,019 2,204 10,391 4,171 Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $849, $949, $1,562 and $1,932, respectively) (14,863 ) (21,300 ) (29,877 ) (43,647 ) Loss on early extinguishment of debt (63 ) — (63 ) (118 ) Foreign currency exchange loss — — — (5 ) Gain on sale of properties, net 3,136   106,375   19,590   143,041   (Loss) income before income taxes (5,766 ) 88,009 18,231 134,486 Income tax expense   (45 )   (165 )   (220 )   (240 ) Net (loss) income   $ (5,811 )   $ 87,844     $ 18,011     $ 134,246   Net loss (income) attributable to noncontrolling interest   2     —     (6 )   —   Net (loss) income attributable to Equity Commonwealth   $ (5,809 )   $ 87,844     $ 18,005     134,246   Preferred distributions (1,997 ) (6,981 ) (3,994 ) (13,962 ) Excess fair value of consideration paid over carrying value of preferred shares (1)   —     (9,609 )   —     (9,609 ) Net (loss) income attributable to Equity Commonwealth common shareholders   $ (7,806 )   $ 71,254     $ 14,011     $ 110,675     Weighted average common shares outstanding — basic (2) 124,067   125,508   124,057   125,674   Weighted average common shares outstanding — diluted (2) 124,067   126,937   125,203   127,229     Earnings per common share attributable to Equity Commonwealth common shareholders: Basic

$

(0.06

) $ 0.57   $ 0.11   $ 0.88   Diluted

$

(0.06

) $ 0.56   $ 0.11   $ 0.87     (1) On May 15, 2016, we redeemed all of our 11,000,000 outstanding series E preferred shares at a price of $25.00 per share, for a total of $275.0 million, plus any accrued and unpaid dividends. The redemption payment occurred on May 16, 2016 (the first business day following the redemption date). We recorded $9.6 million related to the excess fair value of consideration paid over the carrying value of the preferred shares as a reduction to net income attributable to Equity Commonwealth common shareholders for the three and six months ended June 30, 2016.   (2) As of June 30, 2017, we had granted RSUs and LTIP Units to certain employees, officers, and trustees. 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 June 30, 2017, and 2016, 1,191 and 1,429 common shares would be issued, respectively. Using a weighted average basis, 0 and 1,429 common shares are reflected in diluted earnings per share for the three months ended June 30, 2017 and 2016, respectively, and 1,146 and 1,555 common shares are reflected in diluted earnings per share for the six months ended June 30, 2017 and 2016, respectively.   CALCULATION OF FUNDS FROM OPERATIONS (FFO) AND NORMALIZED FFO (amounts in thousands, except per share data)         Three Months Ended   Six Months Ended June 30, June 30,     2017   2016   2017   2016 Calculation of FFO                 Net (loss) income $ (5,811 )   $ 87,844 $ 18,011   $ 134,246 Real estate depreciation and amortization 23,619 37,064 50,235 73,108 Loss on asset impairment 18,428 43,736 19,714 43,736 Gain on sale of properties (3,136 ) (106,375 ) (19,590 ) (143,041 ) FFO attributable to Equity Commonwealth 33,100 62,269 68,370 108,049 Preferred distributions (1,997 ) (6,981 ) (3,994 ) (13,962 ) Excess fair value of consideration paid over carrying value of preferred shares (1)   —     (9,609 )   —     (9,609 ) FFO attributable to EQC common shareholders and unitholders   $ 31,103     $ 45,679     $ 64,376     $ 84,478                     Calculation of Normalized FFO                 FFO attributable to EQC common shareholders and unitholders $ 31,103 $ 45,679 $ 64,376 $ 84,478 Lease value amortization 518 3,867 1,091 4,988 Straight line rent adjustments (4,543 ) (5,599 ) (8,930 ) (9,430 ) Loss on early extinguishment of debt 63 — 63 118 Transition related expenses (2) — 35 — 1,137 Foreign currency exchange loss — — — 5 Excess fair value of consideration paid over carrying value of preferred shares (1)   —     9,609     —     9,609   Normalized FFO attributable to EQC common shareholders and unitholders   $ 27,141     $ 53,591     $ 56,600     $ 90,905     Weighted average common shares and units outstanding -- basic (3) 124,106   125,508   124,091   125,674   Weighted average common shares and units outstanding -- diluted (3) 125,256   126,937   125,203   127,229   FFO attributable to EQC common shareholders and unitholders per share -- basic $ 0.25   $ 0.36   $ 0.52   $ 0.67   FFO attributable to EQC common shareholders and unitholders per share -- diluted $ 0.25   $ 0.36   $ 0.51   $ 0.66   Normalized FFO attributable to EQC common shareholders and unitholders per share -- basic $ 0.22   $ 0.43   $ 0.46   $ 0.72   Normalized FFO attributable to EQC common shareholders and unitholders per share -- diluted $ 0.22   $ 0.42   $ 0.45   $ 0.71     (1) On May 15, 2016, we redeemed all of our 11,000,000 outstanding series E preferred shares at a price of $25.00 per share, for a total of $275.0 million, plus any accrued and unpaid dividends. The redemption payment occurred on May 16, 2016 (the first business day following the redemption date). We recorded $9.6 million related to the excess fair value of consideration paid over the carrying value of the preferred shares as a reduction to net income attributable to Equity Commonwealth common shareholders for the three and six months ended June 30, 2016.   (2) Transition related expenses are primarily related to the shareholder-approved liability for the reimbursement of expenses incurred by Related/Corvex beginning in February 2013 in connection with their consent solicitations to remove the former Trustees, elect the new Board of Trustees and engage in related litigation. No transition related expenses were incurred during 2017. There is no future obligation to pay any amounts under the shareholder-approved agreement to Related/Corvex.   (3) As of June 30, 2017, we had granted RSUs and LTIP Units to certain employees, officers, and trustees. 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 June 30, 2017, and 2016, 1,191 and 1,429 common shares would be issued, respectively. Using a weighted average basis, 1,189 and 1,429 common shares are reflected in diluted FFO per common share, and diluted Normalized FFO per common share for the three months ended June 30, 2017 and 2016, respectively and 1,146 and 1,555 common shares are reflected in diluted FFO per common share and diluted Normalized FFO per common for the six months ended June 30, 2017 and 2016, respectively.  

CALCULATION OF FUNDS FROM OPERATIONS (FFO) AND NORMALIZED FFO

(amounts in thousands, except per share data)

  We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as net income (loss), calculated in accordance with GAAP, excluding real estate depreciation and amortization, gains (or losses) from sales of depreciable property, impairment of depreciable real estate, and our portion of these items related to equity investees and noncontrolling interests. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we exclude certain items that we view as nonrecurring or impacting comparability from period to period. FFO and Normalized FFO are supplemental non-GAAP financial measures. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income (loss), net income (loss) attributable to Equity Commonwealth common shareholders, operating income (loss) 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 (loss), net income (loss) attributable to Equity Commonwealth common shareholders, operating income (loss) 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 (loss), net income (loss) attributable to Equity Commonwealth common shareholders, operating income (loss) and cash flow from operating activities as presented in our condensed consolidated statements of operations, condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.   CALCULATION OF SAME PROPERTY NET OPERATING INCOME (NOI) AND SAME PROPERTY CASH BASIS NOI (amounts in thousands)         For the Three Months Ended   For the Six Months Ended June 30, June 30, 2017   2016   2017   2016 Calculation of Same Property NOI and Same Property Cash Basis NOI:     Rental income $ 74,352 $ 121,735 $ 154,557 $ 231,623 Tenant reimbursements and other income 17,247 23,632 36,593 50,879 Operating expenses   (37,284 )   (51,393 )   (78,371 )   (108,651 ) NOI   $ 54,315     $ 93,974     $ 112,779     $ 173,851   Straight line rent adjustments (4,543 ) (5,599 ) (8,930 ) (9,430 ) Lease value amortization 518 3,867 1,091 4,988 Lease termination fees   (814 )   (17,433 )   (2,525 )   (17,744 ) Cash Basis NOI   $ 49,476     $ 74,809     $ 102,415     $ 151,665   Cash Basis NOI from non-same properties (1)   (7,467 )   (29,397 )   (18,449 )   (63,755 ) Same Property Cash Basis NOI   $ 42,009     $ 45,412     $ 83,966     $ 87,910   Non-cash rental income and lease termination fees from same properties   4,469     3,763     8,465     6,271   Same Property NOI   $ 46,478     $ 49,175     $ 92,431     $ 94,181     Reconciliation of Same Property NOI to GAAP Operating Income:                 Same Property NOI   $ 46,478     $ 49,175     $ 92,431     $ 94,181   Non-cash rental income and lease termination fees from same properties   (4,469 )   (3,763 )   (8,465 )   (6,271 ) Same Property Cash Basis NOI   $ 42,009     $ 45,412     $ 83,966     $ 87,910   Cash Basis NOI from non-same properties (1)   7,467     29,397     18,449     63,755   Cash Basis NOI   $ 49,476     $ 74,809     $ 102,415     $ 151,665   Straight line rent adjustments 4,543 5,599 8,930 9,430 Lease value amortization (518 ) (3,867 ) (1,091 ) (4,988 ) Lease termination fees   814     17,433     2,525     17,744   NOI   $ 54,315     $ 93,974     $ 112,779     $ 173,851   Depreciation and amortization (23,922 ) (37,331 ) (50,837 ) (73,582 ) General and administrative (11,960 ) (12,177 ) (24,038 ) (25,489 ) Loss on asset impairment   (18,428 )   (43,736 )   (19,714 )   (43,736 ) Operating Income   $ 5     $ 730     $ 18,190     $ 31,044     (1) Cash Basis NOI from non-same properties for all periods presented includes the operations of properties disposed or classified as held for sale and land parcels.  

CALCULATION OF SAME PROPERTY NET OPERATING INCOME (NOI) AND SAME PROPERTY CASH BASIS NOI

(amounts in thousands)

  NOI is income from our real estate including lease termination fees received from tenants less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and corporate level expenses. Cash Basis NOI is NOI excluding the effects of straight line rent adjustments, lease value amortization, and lease termination fees. The quarter-to-date same property versions of these measures include the results of properties continuously owned from April 1, 2016 through June 30, 2017. The year-to-date same property versions of these measures include the results of properties continuously owned from January 1, 2016 through June 30, 2017. Land parcels and properties classified as held for sale within our condensed consolidated balance sheets are excluded from the same property versions of these measures.   We consider these supplemental non-GAAP financial measures to be appropriate supplemental measures to net income (loss) because they help to understand the operations of our properties. We use these measures internally to evaluate property level performance, and we believe that they provide useful information to investors regarding our results of operations because they reflect only those income and expense items that are incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. Cash Basis NOI is among the factors considered with respect to acquisition, disposition and financing decisions. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income (loss), net income (loss) attributable to Equity Commonwealth common shareholders, operating income (loss) 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 (loss), net income (loss) attributable to Equity Commonwealth common shareholders, operating income (loss) and cash flow from operating activities as presented in our condensed consolidated statements of operations, condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows. Other REITs and real estate companies may calculate these measures differently than we do.

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Equity CommonwealthSarah Byrnes, Investor Relations(312) 646-2801ir@eqcre.com