EQC Equity Commonwealth

Equity Commonwealth (NYSE: EQC) today reported financial results for the quarter ended June 30, 2018. All per share results are reported on a diluted basis.

Financial results for the quarter ended June 30, 2018

Net income attributable to common shareholders was $35.0 million, or $0.29 per share, for the quarter ended June 30, 2018. This compares to net loss attributable to common shareholders of $7.8 million, or $0.06 per share, for the quarter ended June 30, 2017. The increase in net income was primarily due to gains from property sales and a decrease in asset impairment.

Funds from Operations (FFO), as defined by the National Association of Real Estate Investment Trusts, for the quarter ended June 30, 2018, were $20.8 million, or $0.17 per share. This compares to FFO for the quarter ended June 30, 2017 of $31.1 million, or $0.25 per share. The following items impacted FFO for the quarter ended June 30, 2018, compared to the corresponding 2017 period:

• ($0.21) per share of income from properties sold;
• $0.07 per share of interest expense savings; and
• $0.05 per of share of increase in interest and other income.

Normalized FFO was $20.8 million, or $0.17 per share. This compares to Normalized FFO for the quarter ended June 30, 2017 of $27.1 million, or $0.22 per share. The following items impacted Normalized FFO for the quarter ended June 30, 2018, compared to the corresponding 2017 period:

• ($0.21) per share of income from properties sold;
• $0.07 per share of interest expense savings;
• $0.05 per share of increase in interest and other income; and
• $0.02 per share of increase in same property cash NOI.

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.

For the quarter ended June 30, 2018, the company’s balance of cash and marketable securities was $2.8 billion. Total debt outstanding was $280 million and availability under the company’s revolving credit facility was $750 million.

The weighted average number of diluted common shares outstanding when calculating net income per share for the quarter ended June 30, 2018 was 122,649,382 shares, compared to 124,067,247 for the quarter ended June 30, 2017. The weighted average number of diluted common shares outstanding when calculating FFO or Normalized FFO per share for the quarter ended June 30, 2018 was 122,692,289 shares, compared to 125,255,722 for the quarter ended June 30, 2017.

Same property results for the quarter ended June 30, 2018

The company’s same property portfolio at the end of the quarter consisted of 13 properties totaling 6.3 million square feet. Operating results were as follows:

• The same property portfolio was 89.8% leased as of June 30, 2018, compared to 88.6% as of March 31, 2018, and 87.5% as of June 30, 2017.
• The same property portfolio commenced occupancy was 87.7% as of June 30, 2018, compared to 83.5% as of March 31, 2018, and 84.8% as of June 30, 2017.
• Same property NOI increased 2.6% when compared to the same period in 2017.
• Same property cash NOI increased 12.3% when compared to the same period in 2017.
• The company entered into leases for approximately 292,000 square feet, including new leases for approximately 189,000 square feet and renewal leases for approximately 103,000 square feet.
• GAAP rental rates on new and renewal leases were 23.6% higher compared to prior GAAP rental rates for the same space.
• Cash rental rates on new and renewal leases were 10.4% 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, 2017 through June 30, 2018.

Significant events during the quarter ended June 30, 2018

• The company repaid at par its $400 million unsecured floating rate term loans due in 2020 and 2022. The company also terminated its $400 million interest rate cap that would have matured on March 1, 2019.
• The company completed the sale of 1601 Dry Creek in Longmont, Colorado, a 100% leased, 553,000 square foot office property for a gross sale price of $68.5 million.

Subsequent Events

• The company currently has 3 properties totaling 1.2 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 31, 2018, at 8:00 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 2018 Supplemental Operating and Financial Data is available 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 in the United States. As of June 30, 2018, EQC’s portfolio comprised 13 properties and 6.3 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 routinely 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 share repurchases, marketing the company’s properties for sale and consummating asset sales. 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, 2018   December 31, 2017 ASSETS         Real estate properties:   Land $ 146,700 $ 191,775 Buildings and improvements 1,117,446   1,555,836   1,264,146 1,747,611 Accumulated depreciation (387,888 ) (450,718 ) 876,258 1,296,893 Assets held for sale — 97,688 Acquired real estate leases, net 2,946 23,847 Cash and cash equivalents 2,507,117 2,351,693 Marketable securities 248,275 276,928 Restricted cash 8,419 8,897 Rents receivable, net of allowance for doubtful accounts of $5,101 and $4,771, respectively 57,347 93,436 Other assets, net   76,512     87,563   Total assets   $ 3,776,874     $ 4,236,945             LIABILITIES AND EQUITY         Revolving credit facility $ — $ — Senior unsecured debt, net 248,048 815,984 Mortgage notes payable, net 31,964 32,594 Liabilities related to properties held for sale — 1,840 Accounts payable, accrued expenses and other 44,380 74,956 Rent collected in advance   10,173     11,076   Total liabilities   $ 334,565     $ 936,450     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; 121,482,673 and 124,217,616 shares issued and outstanding, respectively 1,215 1,242 Additional paid in capital 4,300,822 4,380,313 Cumulative net income 2,822,793 2,596,259 Cumulative other comprehensive loss (1,469 ) (95 ) Cumulative common distributions (3,111,868 ) (3,111,868 ) Cumulative preferred distributions (689,742 ) (685,748 ) Total shareholders’ equity 3,441,014 3,299,366 Noncontrolling interest   1,295     1,129   Total equity   $ 3,442,309     $ 3,300,495   Total liabilities and equity   $ 3,776,874     $ 4,236,945  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

        Three Months Ended   Six Months Ended June 30, June 30, 2018   2017   2018   2017 Revenues:     Rental income $ 35,211 $ 74,352 $ 78,760 $ 154,557 Tenant reimbursements and other income   13,425     17,247     28,464     36,593   Total revenues   $ 48,636     $ 91,599     $ 107,224     $ 191,150     Expenses: Operating expenses $ 19,521 $ 37,284 $ 44,120 $ 78,371 Depreciation and amortization 13,021 23,922 26,924 50,837 General and administrative 11,222 11,960 24,561 24,038 Loss on asset impairment   —     18,428     12,087     19,714   Total expenses   $ 43,764     $ 91,594     $ 107,692     $ 172,960                     Operating income (loss)   $ 4,872     $ 5     $ (468 )   $ 18,190     Interest and other income, net 12,668 6,019 18,448 10,391 Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $645, $849, $1,446 and $1,562, respectively) (6,350 ) (14,863 ) (16,465 ) (29,877 ) Loss on early extinguishment of debt (1,536 ) (63 ) (6,403 ) (63 ) Gain on sale of properties, net 26,937   3,136   232,148   19,590   Income (loss) before income taxes 36,591 (5,766 ) 227,260 18,231 Income tax benefit (expense)   456     (45 )   (2,551 )   (220 ) Net income (loss)   $ 37,047     $ (5,811 )   $ 224,709     $ 18,011   Net (income) loss attributable to noncontrolling interest   (14 )   2     (77 )   (6 ) Net income (loss) attributable to Equity Commonwealth   $ 37,033     $ (5,809 )   $ 224,632     18,005   Preferred distributions   (1,997 )   (1,997 )   (3,994 )   (3,994 ) Net income (loss) attributable to Equity Commonwealth common shareholders   $ 35,036     $ (7,806 )   $ 220,638     $ 14,011   Weighted average common shares outstanding — basic (1) 121,822   124,067   122,839   124,057   Weighted average common shares outstanding — diluted (1) 122,649   124,067   126,027   125,203       Earnings per common share attributable to Equity Commonwealth common shareholders: Basic $ 0.29   $ (0.06 ) $ 1.80   $ 0.11   Diluted $ 0.29   $ (0.06 ) $ 1.78   $ 0.11   (1)   Weighted average common shares outstanding for the three months ended June 30, 2018 and 2017 includes 362 and 0 unvested, earned RSUs, respectively. Weighted average common shares outstanding for the six months ended June 30, 2018 and 2017 includes 335 and 0 unvested, earned RSUs, respectively. Additionally, as of June 30, 2018, we had 4,915 series D preferred shares outstanding that were convertible into 2,363 common shares. The series D preferred shares are dilutive for GAAP EPS for the six months ended June 30, 2018. They are anti-dilutive for all other periods presented. 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,     2018   2017 2018   2017 Calculation of FFO                 Net income (loss) $ 37,047   $ (5,811 ) $ 224,709   $ 18,011 Real estate depreciation and amortization 12,717 23,619 26,320 50,235 Loss on asset impairment — 18,428 12,087 19,714 Gain on sale of properties, net (26,937 ) (3,136 ) (232,148 ) (19,590 ) FFO attributable to Equity Commonwealth 22,827 33,100 30,968 68,370 Preferred distributions   (1,997 )   (1,997 )   (3,994 )   (3,994 ) FFO attributable to EQC common shareholders and unitholders   $ 20,830     $ 31,103     $ 26,974     $ 64,376                     Calculation of Normalized FFO                 FFO attributable to EQC common shareholders and unitholders $ 20,830 $ 31,103 $ 26,974 $ 64,376 Lease value amortization (18 ) 518 80 1,091 Straight line rent adjustments (1,022 ) (4,543 ) (2,550 ) (8,930 ) Loss on early extinguishment of debt 1,536 63 6,403 63 Income taxes related to gains on property sales (496 ) — 2,473 — Loss on sale of securities   —     —     4,987     —   Normalized FFO attributable to EQC common shareholders and unitholders   $ 20,830     $ 27,141     $ 38,367     $ 56,600     Weighted average common shares and units outstanding -- basic (1) 121,865   124,106   122,882   124,091   Weighted average common shares and units outstanding -- diluted (1) 122,692   125,256   123,707   125,203    

FFO attributable to EQC common shareholders and unitholders per share and unit -- basic

$ 0.17   $ 0.25   $ 0.22   $ 0.52   FFO attributable to EQC common shareholders and unitholders per share and unit -- diluted $ 0.17   $ 0.25   $ 0.22   $ 0.51  

Normalized FFO attributable to EQC common shareholders and unitholders per share and unit -- basic

$ 0.17   $ 0.22   $ 0.31   $ 0.46   Normalized FFO attributable to EQC common shareholders and unitholders per share and unit -- diluted $ 0.17   $ 0.22   $ 0.31   $ 0.45   (1)  

Our calculations of FFO and Normalized FFO attributable to EQC common shareholders and unitholders per share and unit - basic for the three and six months ended June 30, 2018 include 42 LTIP/Operating Partnership Units that are excluded from the calculation of basic earnings per common share attributable to EQC common shareholders (only). Our calculations of FFO and Normalized FFO attributable to EQC common shareholders and unitholders per share and unit - basic for the three and six months ended June 30, 2017 include 39 and 34 LTIP/Operating Partnership Units, respectively, that are excluded from the calculation of basic earnings per common share attributable to EQC common shareholders (only).

We compute FFO in accordance with standards established by 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 EQC 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 EQC 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 EQC 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 6/30/2018   3/31/2018   12/31/2017   9/30/2017   6/30/2017 Calculation of Same Property NOI and Same Property Cash Basis NOI:         Rental income $ 35,211 $ 43,549 $ 54,672 $ 61,091 $ 74,352 Tenant reimbursements and other income 13,425 15,039 16,951 16,707 17,247 Operating expenses   (19,521 )   (24,599 )   (30,674 )   (32,380 )   (37,284 ) NOI   $ 29,115     $ 33,989     $ 40,949     $ 45,418     $ 54,315   Straight line rent adjustments (1,022 ) (1,528 ) (1,938 ) (3,557 ) (4,543 ) Lease value amortization (18 ) 98 295 388 518 Lease termination fees   (1,557 )   (965 )   (942 )   (1,477 )   (814 ) Cash Basis NOI   $ 26,518     $ 31,594     $ 38,364     $ 40,772     $ 49,476   Cash Basis NOI from non-same properties (1)   (775 )   (7,451 )   (13,411 )   (16,531 )   (26,558 ) Same Property Cash Basis NOI   $ 25,743     $ 24,143     $ 24,953     $ 24,241     $ 22,918   Non-cash rental income and lease termination fees from same properties   1,970     1,913     1,845     3,284     4,100   Same Property NOI   $ 27,713     $ 26,056     $ 26,798     $ 27,525     $ 27,018     Reconciliation of Same Property NOI to GAAP Operating Income:                     Same Property NOI   $ 27,713     $ 26,056     $ 26,798     $ 27,525     $ 27,018   Non-cash rental income and lease termination fees from same properties   (1,970 )   (1,913 )   (1,845 )   (3,284 )   (4,100 ) Same Property Cash Basis NOI   $ 25,743     $ 24,143     $ 24,953     $ 24,241     $ 22,918   Cash Basis NOI from non-same properties (1)   775     7,451     13,411     16,531     26,558   Cash Basis NOI   $ 26,518     $ 31,594     $ 38,364     $ 40,772     $ 49,476   Straight line rent adjustments 1,022 1,528 1,938 3,557 4,543 Lease value amortization 18 (98 ) (295 ) (388 ) (518 ) Lease termination fees   1,557     965     942     1,477     814   NOI   $ 29,115     $ 33,989     $ 40,949     $ 45,418     $ 54,315   Depreciation and amortization (13,021 ) (13,903 ) (18,738 ) (21,133 ) (23,922 ) General and administrative (11,222 ) (13,339 ) (12,033 ) (11,689 ) (11,960 ) Loss on asset impairment   —     (12,087 )   —     —     (18,428 ) Operating Income (Loss)   $ 4,872     $ (5,340 )   $ 10,178     $ 12,596     $ 5   (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)

  For the Six Months Ended June 30, 2018   2017 Calculation of Same Property NOI and Same Property Cash Basis NOI:   Rental income $ 78,760 $ 154,557 Tenant reimbursements and other income 28,464 36,593 Operating expenses   (44,120 )   (78,371 ) NOI   $ 63,104     $ 112,779   Straight line rent adjustments (2,550 ) (8,930 ) Lease value amortization 80 1,091 Lease termination fees   (2,522 )   (2,525 ) Cash Basis NOI   $ 58,112     $ 102,415   Cash Basis NOI from non-same properties (1)   (8,226 )   (56,356 ) Same Property Cash Basis NOI   $ 49,886     $ 46,059   Non-cash rental income and lease termination fees from same properties   3,883     7,568   Same Property NOI   $ 53,769     $ 53,627     Reconciliation of Same Property NOI to GAAP Operating Income:         Same Property NOI   $ 53,769     $ 53,627   Non-cash rental income and lease termination fees from same properties   (3,883 )   (7,568 ) Same Property Cash Basis NOI   $ 49,886     $ 46,059   Cash Basis NOI from non-same properties (1)   8,226     56,356   Cash Basis NOI   $ 58,112     $ 102,415   Straight line rent adjustments 2,550 8,930 Lease value amortization (80 ) (1,091 ) Lease termination fees   2,522     2,525   NOI   $ 63,104     $ 112,779   Depreciation and amortization (26,924 ) (50,837 ) General and administrative (24,561 ) (24,038 ) Loss on asset impairment   (12,087 )   (19,714 ) Operating (Loss) Income   $ (468 )   $ 18,190   (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 operations 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, 2017 through June 30, 2018. The year-to-date same property versions of these measures include the results of properties continuously owned from January 1, 2017 through June 30, 2018. 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 EQC 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 EQC 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