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

Financial results for the quarter ended September 30, 2017

Net income attributable to common shareholders was $31.2 million, or $0.25 per share, for the quarter ended September 30, 2017. This compares to net income attributable to common shareholders of $84.4 million, or $0.67 per share, for the quarter ended September 30, 2016.

Funds from Operations (FFO), as defined by the National Association of Real Estate Investment Trusts, for the quarter ended September 30, 2017, were $27.0 million, or $0.22 per share. This compares to FFO for the quarter ended September 30, 2016 of $31.1 million, or $0.25 per share.

Normalized FFO was $24.0 million, or $0.19 per share. This compares to Normalized FFO for the quarter ended September 30, 2016 of $28.9 million, or $0.23 per share. The following items impacted Normalized FFO for the quarter ended September 30, 2017, compared to the corresponding 2016 period:

  • ($0.16) per share of income from properties sold as part of the company’s previously announced repositioning plan;
  • $0.08 per share of interest expense savings; and
  • $0.04 per share of additional 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 for the quarter ended September 30, 2017 was 125,174,651 shares, compared to 126,568,096 for the quarter ended September 30, 2016.

Same property results for the quarter ended September 30, 2017

The company’s same property portfolio consisted of 20 properties totaling 11.0 million square feet. Operating results were as follows:

  • The same property portfolio was 88.3% leased as of September 30, 2017, compared to 87.7% as of June 30, 2017, and 89.6% as of September 30, 2016.
  • The same property portfolio commenced occupancy was 85.5% as of September 30, 2017, compared to 85.5% as of June 30, 2017, and 87.0% as of September 30, 2016.
  • Same property NOI increased 4.7% when compared to the same period in 2016.
  • Same property cash NOI decreased 4.4% when compared to the same period in 2016.
  • The company entered into leases for approximately 273,000 square feet, including new leases for approximately 192,000 square feet and renewal leases for approximately 81,000 square feet.
  • GAAP rental rates on new and renewal leases were 7.8% higher compared to prior GAAP rental rates for the same space.
  • Cash rental rates on new and renewal leases were 2.3% 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 July 1, 2016 through September 30, 2017 and excludes land parcels.

Significant events during the quarter ended September 30, 2017

  • The company redeemed at par its $250 million 6.65% Senior Unsecured Notes due in 2018.
  • The company sold seven properties totaling 3,401,000 square feet for a gross sales price of $544.1 million. The assets sold during the quarter include the following:
    • 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.
    • A five-property office and industrial portfolio totaling 1,002,000 square feet located in Maryland, Minnesota and Missouri, for a gross sale price of $84 million. These properties were held for sale as of June 30, 2017.
    • 6600 North Military Drive, a 100% leased, 640,000 square foot office property in Boca Raton, FL, for a gross sale price of $132.1 million.
  • The company currently has seven properties totaling 4.7 million square feet in various stages of the sales process.

Earnings Conference Call & Supplemental Data

Equity Commonwealth will host a conference call to discuss third quarter results on Wednesday, October 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 Third 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 is comprised of 20 properties and 11 million square feet.

Regulation FD Disclosures

We intend to use any of the following to comply with our disclosure obligations under Regulation FD: press releases, SEC filings, public conference calls, or our website. We post important information on our website at www.eqcre.com, including information that may be deemed to be material. We encourage investors and others interested in the company to monitor these distribution channels for material disclosures.

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)
   
     
    September 30, 2017   December 31, 2016
ASSETS        
Real estate properties:
Land $ 216,957 $ 286,186
Buildings and improvements 1,841,230   2,570,704  
2,058,187 2,856,890
Accumulated depreciation (554,411 ) (755,255 )
1,503,776 2,101,635
Acquired real estate leases, net 28,108 48,281
Cash and cash equivalents 2,233,077 2,094,674
Marketable securities 279,626 —
Restricted cash 7,657 6,532
Rents receivable, net of allowance for doubtful accounts of $4,217 and $5,105, respectively 107,832 152,031
Other assets, net   100,213     122,922  
Total assets   $ 4,260,289     $ 4,526,075  
         
LIABILITIES AND EQUITY        
Revolving credit facility $ — $ —
Senior unsecured debt, net 815,577 1,063,950
Mortgage notes payable, net 34,999 77,717
Accounts payable and accrued expenses 63,506 95,395
Assumed real estate lease obligations, net 1,215 1,946
Rent collected in advance 14,355 18,460
Security deposits   5,938     8,160  
Total liabilities   $ 935,590     $ 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 4,378,184 4,363,177
Cumulative net income 2,617,820 2,566,603
Cumulative other comprehensive income (loss) 2,671 (208 )
Cumulative common distributions (3,111,868 ) (3,111,868 )
Cumulative preferred distributions (683,751 ) (677,760 )
Total shareholders’ equity 3,323,560 3,260,447
Noncontrolling interest   1,139     —  
Total equity   $ 3,324,699     $ 3,260,447  
Total liabilities and equity   $ 4,260,289     $ 4,526,075  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

   
       
Three Months Ended Nine Months Ended
September 30, September 30,
2017   2016   2017   2016
Revenues:    
Rental income $ 61,091 $ 92,722 $ 215,648 $ 324,345
Tenant reimbursements and other income   16,707     21,910     53,300     72,789  
Total revenues   $ 77,798     $ 114,632     $ 268,948     $ 397,134  
 
Expenses:
Operating expenses $ 32,380 $ 49,313 $ 110,751 $ 157,964
Depreciation and amortization 21,133 29,184 71,970 102,766
General and administrative 11,689 13,277 35,727 38,766
Loss on asset impairment   —     —     19,714     43,736  
Total expenses   $ 65,202     $ 91,774     $ 238,162     $ 343,232  
                   
Operating income   $ 12,596     $ 22,858     $ 30,786     $ 53,902  
 
Interest and other income 7,596 3,013 17,987 7,184
Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $784, $948, $2,346 and $2,880, respectively) (11,510 ) (21,427 ) (41,387 ) (65,074

)

Loss on early extinguishment of debt (203 ) — (266 ) (118

)

Foreign currency exchange loss — —

—

(5

)

Gain on sale of properties, net 25,080   82,169   44,670   225,210  
Income before income taxes 33,559 86,613 51,790 221,099
Income tax expense   (335 )   (225 )   (555 )   (465

)

Net income   $ 33,224     $ 86,388     $ 51,235     $ 220,634  
Net income attributable to noncontrolling interest   (12 )   —     (18 )   —  
Net income attributable to Equity Commonwealth   $ 33,212     $ 86,388     $ 51,217     220,634  
Preferred distributions (1,997 ) (1,997 ) (5,991 ) (15,959

)

Excess fair value of consideration paid over carrying value of preferred shares (1)   —     —     —     (9,609

)

Net income attributable to Equity Commonwealth common shareholders   $ 31,215     $ 84,391     $ 45,226     $ 195,066  
 
Weighted average common shares outstanding — basic (2) 124,089   125,533   124,068   125,627  
Weighted average common shares outstanding — diluted (2) 125,175   126,568   125,194   127,009  
 
Earnings per common share attributable to Equity Commonwealth common shareholders:
Basic $ 0.25   $ 0.67   $ 0.36   $ 1.55  
Diluted $ 0.25   $ 0.67   $ 0.36   $ 1.54  
(1)   On May 15, 2016, we redeemed all of our 11,000,000 outstanding series E preferred shares at a price of $25.00 per share, for a total of $275.0 million, plus any accrued and unpaid dividends. The redemption payment occurred on May 16, 2016 (the first business day following the redemption date). We recorded $9.6 million related to the excess fair value of consideration paid over the carrying value of the preferred shares as a reduction to net income attributable to Equity Commonwealth common shareholders for the nine months ended September 30, 2016.
 
(2) As of September 30, 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 September 30, 2017, and 2016, 1,085 and 1,035 common shares would be issued, respectively. Using a weighted average basis, 1,086 and 1,035 common shares are reflected in diluted earnings per share for the three months ended September 30, 2017 and 2016, respectively, and 1,126 and 1,382 common shares are reflected in diluted earnings per share for the nine months ended September 30, 2017 and 2016, respectively.
CALCULATION OF FUNDS FROM OPERATIONS (FFO) AND NORMALIZED FFO
(amounts in thousands, except per share data)
   
     
Three Months Ended Nine Months Ended
September 30, September 30,
    2017   2016   2017   2016
Calculation of FFO                
Net income $ 33,224   $ 86,388 $ 51,235   $ 220,634
Real estate depreciation and amortization 20,842 28,907 71,077 102,015
Loss on asset impairment — — 19,714 43,736
Gain on sale of properties, net (25,080 ) (82,169 ) (44,670 ) (225,210 )
FFO attributable to Equity Commonwealth 28,986 33,126 97,356 141,175
Preferred distributions (1,997 ) (1,997 ) (5,991 ) (15,959 )
Excess fair value of consideration paid over carrying value of preferred shares (1)   —     —     —     (9,609 )
FFO attributable to EQC common shareholders and unitholders   $ 26,989     $ 31,129     $ 91,365     $ 115,607  
                 
Calculation of Normalized FFO                
FFO attributable to EQC common shareholders and unitholders $ 26,989 $ 31,129 $ 91,365 $ 115,607
Lease value amortization 388 882 1,479 5,870
Straight line rent adjustments (3,557 ) (2,954 ) (12,487 ) (12,384 )
Loss on early extinguishment of debt 203 — 266 118
Transition related expenses (2) — (138 ) — 999
Foreign currency exchange loss — — — 5
Excess fair value of consideration paid over carrying value of preferred shares (1)   —     —     —     9,609  
Normalized FFO attributable to EQC common shareholders and unitholders   $ 24,023     $ 28,919     $ 80,623     $ 119,824  
 
Weighted average common shares and units outstanding -- basic (3) 124,132   125,533   124,105   125,627  
Weighted average common shares and units outstanding -- diluted (3) 125,175   126,568   125,194   127,009  
FFO attributable to EQC common shareholders and unitholders per share -- basic $ 0.22   $ 0.25   $ 0.74   $ 0.92  
FFO attributable to EQC common shareholders and unitholders per share -- diluted $ 0.22   $ 0.25   $ 0.73   $ 0.91  
Normalized FFO attributable to EQC common shareholders and unitholders per share -- basic $ 0.19   $ 0.23   $ 0.65   $ 0.95  
Normalized FFO attributable to EQC common shareholders and unitholders per share -- diluted $ 0.19   $ 0.23   $ 0.64   $ 0.94  
(1)   On May 15, 2016, we redeemed all of our 11,000,000 outstanding series E preferred shares at a price of $25.00 per share, for a total of $275.0 million, plus any accrued and unpaid dividends. The redemption payment occurred on May 16, 2016 (the first business day following the redemption date). We recorded $9.6 million related to the excess fair value of consideration paid over the carrying value of the preferred shares as a reduction to net income attributable to Equity Commonwealth common shareholders for the nine months ended September 30, 2016.
 
(2) 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 September 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 September 30, 2017, and 2016, 1,085 and 1,035 common shares would be issued, respectively. Using a weighted average basis, 1,086 and 1,035 common shares are reflected in diluted FFO per common share, and diluted Normalized FFO per common share for the three months ended September 30, 2017 and 2016, respectively and 1,126 and 1,382 common shares are reflected in diluted FFO per common share and diluted Normalized FFO per common for the nine months ended September 30, 2017 and 2016, respectively.
 
We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as net income (loss), calculated in accordance with GAAP, excluding real estate depreciation and amortization, gains (or losses) from sales of depreciable property, impairment of depreciable real estate, and our portion of these items related to equity investees and noncontrolling interests. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we exclude certain items that we view as nonrecurring or impacting comparability from period to period. 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 Nine Months Ended
September 30, September 30,
2017   2016   2017   2016
Calculation of Same Property NOI and Same Property Cash Basis NOI:    
Rental income $ 61,091 $ 92,722 $ 215,648 $ 324,345
Tenant reimbursements and other income 16,707 21,910 53,300 72,789
Operating expenses   (32,380 )   (49,313 )   (110,751 )   (157,964 )
NOI   $ 45,418     $ 65,319     $ 158,197     $ 239,170  
Straight line rent adjustments (3,557 ) (2,954 ) (12,487 ) (12,384 )
Lease value amortization 388 882 1,479 5,870
Lease termination fees   (1,477 )   (1,825 )   (4,002 )   (19,569 )
Cash Basis NOI   $ 40,772     $ 61,422     $ 143,187     $ 213,087  
Cash Basis NOI from non-same properties (1)   (2,917 )   (21,810 )   (29,784 )   (93,796 )
Same Property Cash Basis NOI   $ 37,855     $ 39,612     $ 113,403     $ 119,291  
Non-cash rental income and lease termination fees from same properties   4,728     1,069     13,507     7,450  
Same Property NOI   $ 42,583     $ 40,681     $ 126,910     $ 126,741  
 
Reconciliation of Same Property NOI to GAAP Operating Income:                
Same Property NOI   $ 42,583     $ 40,681     $ 126,910     $ 126,741  
Non-cash rental income and lease termination fees from same properties   (4,728 )   (1,069 )   (13,507 )   (7,450 )
Same Property Cash Basis NOI   $ 37,855     $ 39,612     $ 113,403     $ 119,291  
Cash Basis NOI from non-same properties (1)   2,917     21,810     29,784     93,796  
Cash Basis NOI   $ 40,772     $ 61,422     $ 143,187     $ 213,087  
Straight line rent adjustments 3,557 2,954 12,487 12,384
Lease value amortization (388 ) (882 ) (1,479 ) (5,870 )
Lease termination fees   1,477     1,825     4,002     19,569  
NOI   $ 45,418     $ 65,319     $ 158,197     $ 239,170  
Depreciation and amortization (21,133 ) (29,184 ) (71,970 ) (102,766 )
General and administrative (11,689 ) (13,277 ) (35,727 ) (38,766 )
Loss on asset impairment   —     —     (19,714 )   (43,736 )
Operating Income   $ 12,596     $ 22,858     $ 30,786     $ 53,902  
(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.
 
NOI is income from our real estate including lease termination fees received from tenants less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and corporate level expenses. Cash Basis NOI is NOI excluding the effects of straight line rent adjustments, lease value amortization, and lease termination fees. The quarter-to-date same property versions of these measures include the results of properties continuously owned from July 1, 2016 through September 30, 2017. The year-to-date same property versions of these measures include the results of properties continuously owned from January 1, 2016 through September 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.