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Equity Commonwealth Reports Second Quarter 2018 Results

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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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