Business Wire | Jul 29, 2020 04:15PM EDT

Equity Commonwealth Reports Second Quarter 2020 Results

Jul. 29, 2020

CHICAGO--(BUSINESS WIRE)--Jul. 29, 2020--Equity Commonwealth (NYSE: EQC) today reported financial results for the quarter ended June 30, 2020 and provided an update on its business due to COVID-19.

Equity Commonwealth continues to monitor the COVID-19 pandemic and its impact on its business. Our priority is the health and safety of our employees, tenants and building staff. As a result of the pandemic, the vast majority of our tenants continue to work remotely. Our buildings are open, and we are working with our tenants to ensure their safety as they return to the office. In our same property portfolio, for the second quarter 2020, we collected 99% of contractual rents, including 5% from the application of security deposits and letters of credit. In July 2020, to date we have collected 97% of contractual rents, including 4% from the application of security deposits and letters of credit.

Financial results for the quarter ended June 30, 2020

Net income attributable to common shareholders was $25.8 million, or $0.21 per diluted share, for the quarter ended June 30, 2020. This compares to net income attributable to common shareholders of $240.3 million, or $1.93 per diluted share, for the quarter ended June 30, 2019. The decline in net income was primarily a result of a decrease in gains from property sales, lower interest earned on cash balances, and property dispositions.

Funds from Operations, or FFO, as defined by the National Association of Real Estate Investment Trusts, for the quarter ended June 30, 2020, were $3.1 million, or $0.03 per diluted share. This compares to FFO for the quarter ended June 30, 2019 of $20.5 million, or $0.17 per diluted share. The following items impacted FFO for the quarter ended June 30, 2020, compared to the corresponding 2019 period:

* ($0.13) per diluted share decrease in interest income; * ($0.08) per diluted share decrease in income from properties sold; * ($0.02) per diluted share decrease in same property termination income; * $0.05 per diluted share decrease in loss on debt extinguishment; * $0.03 per diluted share decrease in interest expense; and * $0.01 per diluted share decrease in general and administrative expense.

Normalized FFO was $3.7 million, or $0.03 per diluted share, for the quarter ended June 30, 2020. This compares to Normalized FFO for the quarter ended June 30, 2019 of $27.2 million, or $0.22 per diluted share. The following items impacted Normalized FFO for the quarter ended June 30, 2020, compared to the corresponding 2019 period:

* ($0.13) per diluted share decrease in interest income; * ($0.08) per diluted share decrease in income from properties sold; * ($0.02) per diluted share decrease in same property termination income; * $0.03 per diluted share decrease in interest expense; and * $0.01 per diluted share decrease in general and administrative expense.

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, 2020, the company's cash and cash equivalents balance was $3.4 billion.

Same property results for the quarter ended June 30, 2020

The company's same property portfolio at the end of the quarter consisted of 4 properties totaling 1.5 million square feet. Operating results were as follows:

* The same property portfolio was 90.1% leased as of June 30, 2020, compared to 90.8% as of March 31, 2020, and 85.7% as of June 30, 2019. * The same property portfolio commenced occupancy was 83.9% as of June 30, 2020, compared to 83.7% as of March 31, 2020, and 84.3% as of June 30, 2019. * Same property NOI decreased 23.9% when compared to the same period in 2019. The decline was largely due to lease termination fees received in 2019 and lower parking revenue due to COVID-19. * Same property cash NOI increased 1.5% when compared to the same period in 2019. * The company entered into a new lease for approximately 22,000 square feet. * The GAAP rental rate on the new lease was 2.3% higher compared to the prior GAAP rental rate for the same space. * The cash rental rate on the new lease was 4.8% lower compared to the prior cash rental rate for the same space.

The definitions and reconciliations of same property NOI and same property cash NOI to net income, determined in accordance with GAAP, are included at the end of this press release. The same property portfolio at the end of the quarter included properties continuously owned from April 1, 2019 through June 30, 2020.

Significant events during the quarter ended June 30, 2020

* The company sold the Georgetown-Green and Harris Buildings, a 240,000 square foot office property in Washington, DC, for a gross sale price of $85 million.

Subsequent Events

* The company repaid at par the outstanding $25.1 million, 5.7% mortgage loan on 206 East 9th Street in Austin, Texas, as of July 5, 2020.

Earnings Conference Call & Supplemental Data

Equity Commonwealth will host a conference call to discuss second quarter results on Thursday, July 30, 2020, at 9:00 A.M. CT. 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 2020 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. EQC's same property portfolio is comprised of 4 properties and 1.5 million square feet.

Regulation FD Disclosures

We 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 pertaining to the marketing of certain properties for sale and consummating any sales, including our statements regarding the overall impact of COVID-19 on the foregoing to the extent we make any such statements. 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, as amended. 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 our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled "Risk Factors" in our most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except share data)

June 30, 2020 December 31, 2019

ASSETS

Real estate properties:

Land $ 44,060 $ 85,627

Buildings and improvements 353,665 576,494

397,725 662,121

Accumulated depreciation (139,061 ) (202,700 )

258,664 459,421

Cash and cash equivalents 3,437,775 2,795,642

Restricted cash 4,103 5,003

Rents receivable 13,968 19,554

Other assets, net 18,645 39,757

Total assets $ 3,733,155 $ 3,319,377



LIABILITIES AND EQUITY

Mortgage notes payable, net $ 25,281 $ 25,691

Accounts payable, accrued expenses and other 25,821 37,153

Rent collected in advance 2,521 3,127

Distributions payable 5,791 7,534

Total liabilities $ 59,414 $ 73,505



Shareholders' equity:

Preferred shares of beneficial interest,$0.01 par value: 50,000,000 shares authorized;

Series D preferred shares; 6.50% cumulativeconvertible; 4,915,196 shares issued and $ 119,263 $ 119,263 outstanding, aggregate liquidation preferenceof $122,880

Common shares of beneficial interest, $0.01par value: 350,000,000 shares authorized; 1,215 1,219 121,521,624 and 121,924,199 shares issued andoutstanding, respectively

Additional paid in capital 4,288,245 4,313,831

Cumulative net income 3,816,245 3,363,654

Cumulative common distributions (3,852,856 ) (3,851,666 )

Cumulative preferred distributions (705,718 ) (701,724 )

Total shareholders' equity 3,666,394 3,244,577

Noncontrolling interest 7,347 1,295

Total equity $ 3,673,741 $ 3,245,872

Total liabilities and equity $ 3,733,155 $ 3,319,377

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except per share data)

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Revenues:

Rental revenue $ 15,248 $ 30,574 $ 32,391 $ 69,464

Other revenue 1,017 2,794 2,694 5,656

Total revenues $ 16,265 $ 33,368 $ 35,085 $ 75,120



Expenses:

Operating expenses $ 6,677 $ 10,974 $ 15,438 $ 26,754

Depreciation and 4,398 7,561 9,512 16,146 amortization

General and 8,302 9,533 18,906 21,629 administrative

Total expenses $ 19,377 $ 28,068 $ 43,856 $ 64,529



Interest and other 4,443 20,695 16,338 38,470 income, net

Interest expense(including netamortization ofdebt discounts,premiums and (302 ) (4,070 ) (611 ) (8,276 ) deferred financingfees of $(60),$154, $(116) and$319,respectively)

Loss on earlyextinguishment of - (6,374 ) - (6,374 ) debt

Gain on sale of 26,916 227,166 446,536 420,203 properties, net

Income before 27,945 242,717 453,492 454,614 income taxes

Income tax expense (59 ) (340 ) (99 ) (1,640 )

Net income $ 27,886 $ 242,377 $ 453,393 $ 452,974

Net incomeattributable to (54 ) (91 ) (802 ) (170 ) noncontrollinginterest

Net incomeattributable to $ 27,832 $ 242,286 $ 452,591 $ 452,804 EquityCommonwealth

Preferred (1,997 ) (1,997 ) (3,994 ) (3,994 ) distributions

Net incomeattributable toEquity $ 25,835 $ 240,289 $ 448,597 $ 448,810 Commonwealthcommonshareholders

Weighted averagecommon shares 121,655 122,122 121,901 122,041 outstanding -basic ^(1)

Weighted averagecommon shares 123,255 125,862 126,358 125,841 outstanding -diluted^(1)(2)



Earnings percommon shareattributable toEquity Commonwealthcommonshareholders:

Basic $ 0.21 $ 1.97 $ 3.68 $ 3.68

Diluted $ 0.21 $ 1.93 $ 3.58 $ 3.60

Weighted average common shares outstanding for the three months ended June(1) 30, 2020 and 2019 includes 150 and 220 unvested, earned RSUs, respectively. Weighted average common shares outstanding for the six months ended June 30, 2020 and 2019 includes 164 and 203 unvested, earned RSUs, respectively.

As of June 30, 2020, we had 4,915 series D preferred shares outstanding. The series D preferred shares were convertible into 2,857 common shares as(2) of June 30, 2020, and 2,563 common shares as of June 30, 2019. The series D preferred shares are antidilutive for GAAP EPS for the three months ended June 30, 2020. They are dilutive for GAAP EPS for all other periods presented.

CALCULATION OF FUNDS FROM OPERATIONS (FFO) AND NORMALIZED FFO

(Unaudited, amounts in thousands, except per share data)

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Calculation of FFO

Net income $ 27,886 $ 242,377 $ 453,393 $ 452,974

Real estatedepreciation and 4,174 7,283 9,055 15,560 amortization

Gain on sale of (26,916 ) (227,166 ) (446,536 ) (420,203 ) properties, net

FFO attributableto Equity 5,144 22,494 15,912 48,331 Commonwealth

Preferred (1,997 ) (1,997 ) (3,994 ) (3,994 ) distributions

FFO attributableto EQC common $ 3,147 $ 20,497 $ 11,918 $ 44,337 shareholders andunitholders



Calculation of Normalized FFO

FFO attributableto EQC common $ 3,147 $ 20,497 $ 11,918 $ 44,337 shareholders andunitholders

Lease value - (39 ) - (78 ) amortization

Straight line rent 515 (11 ) 713 (848 ) adjustments

Loss on earlyextinguishment of - 6,374 - 6,374 debt

Taxes related toproperty salesincluded in 10 - 1,458 - general andadministrative

Taxes related toproperty sales, 44 415 79 565 net included inincome tax expense

Normalized FFOattributable toEQC common $ 3,716 $ 27,236 $ 14,168 $ 50,350 shareholders andunitholders



Weighted averagecommon shares and 121,889 122,168 122,100 122,087 units outstanding-- basic ^(1)

Weighted averagecommon shares and 123,489 123,345 123,700 123,324 units outstanding-- diluted ^(1)



FFO attributableto EQC commonshareholders and $ 0.03 $ 0.17 $ 0.10 $ 0.36 unitholders pershare and unit --basic and diluted

Normalized FFOattributable toEQC commonshareholders and $ 0.03 $ 0.22 $ 0.12 $ 0.41 unitholders pershare and unit --basic

Normalized FFOattributable toEQC commonshareholders and $ 0.03 $ 0.22 $ 0.11 $ 0.41 unitholders pershare and unit --diluted

Our calculations of FFO and Normalized FFO attributable to EQC common shareholders and unitholders per share and unit - basic for the three months ended June 30, 2020 and 2019 include 234 and 46 LTIP/Operating Partnership Units, respectively, that are excluded from the calculation of basic earnings per common share attributable to EQC common shareholders(1) (only). Our calculations of FFO and Normalized FFO attributable to EQC common shareholders and unitholders per share and unit - basic for the six months ended June 30, 2020 and 2019 include 199 and 46 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. Nareitdefines FFO as net income (loss), calculated in accordance with GAAP, excludingreal estate depreciation and amortization, gains (or losses) from sales ofdepreciable property, impairment of depreciable real estate and our portion ofthese items related to equity investees and noncontrolling interests. Ourcalculation of Normalized FFO differs from Nareit's definition of FFO becausewe exclude certain items that we view as nonrecurring or impactingcomparability from period to period. FFO and Normalized FFO are supplementalnon-GAAP financial measures. We consider FFO and Normalized FFO to beappropriate measures of operating performance for a REIT, along with net income(loss), net income (loss) attributable to EQC common shareholders and cash flowfrom operating activities.



We believe that FFO and Normalized FFO provide useful information to investorsbecause by excluding the effects of certain historical amounts, such asdepreciation expense, FFO and Normalized FFO may facilitate a comparison of ouroperating performance between periods and with other REITs. FFO and NormalizedFFO do not represent cash generated by operating activities in accordance withGAAP and should not be considered as alternatives to net income (loss), netincome (loss) attributable to EQC common shareholders or cash flow fromoperating activities, determined in accordance with GAAP, or as indicators ofour financial performance or liquidity, nor are these measures necessarilyindicative of sufficient cash flow to fund all of our needs. These measuresshould be considered in conjunction with net income (loss), net income (loss)attributable to EQC common shareholders and cash flow from operating activitiesas presented in our condensed consolidated statements of operations, condensedconsolidated statements of comprehensive income and condensed consolidatedstatements of cash flows. Other REITs and real estate companies may calculateFFO and Normalized FFO differently than we do.

CALCULATION OF SAME PROPERTY NET OPERATING INCOME (NOI) AND SAME PROPERTY CASHBASIS NOI

(Unaudited, amounts in thousands)

For the Three Months Ended

6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019

Calculation ofSame PropertyNOI and Same Property CashBasis NOI:

Rental revenue $ 15,248 $ 17,143 $ 23,410 $ 23,995 $ 30,574

Other revenue 1,017 1,677 2,585 2,740 2,794

Operating (6,677 ) (8,761 ) (9,741 ) (9,923 ) (10,974 ) expenses

NOI $ 9,588 $ 10,059 $ 16,254 $ 16,812 $ 22,394

Straight linerent 515 198 (69 ) 499 (11 ) adjustments

Lease value - - - (39 ) (39 ) amortization

Leasetermination - - (16 ) (11 ) (2,188 ) fees

Cash Basis NOI $ 10,103 $ 10,257 $ 16,169 $ 17,261 $ 20,156

Cash Basis NOIfrom non-same (1,221 ) (1,399 ) (7,244 ) (8,485 ) (11,401 ) properties ^(1)

Same Property $ 8,882 $ 8,858 $ 8,925 $ 8,776 $ 8,755 Cash Basis NOI

Non-cashrental incomeand lease (408 ) (107 ) (124 ) 10 2,387 terminationfees from sameproperties

Same Property $ 8,474 $ 8,751 $ 8,801 $ 8,786 $ 11,142 NOI



Reconciliationof SameProperty NOI to GAAP NetIncome:

Same Property $ 8,474 $ 8,751 $ 8,801 $ 8,786 $ 11,142 NOI

Non-cashrental incomeand lease 408 107 124 (10 ) (2,387 ) terminationfees from sameproperties

Same Property $ 8,882 $ 8,858 $ 8,925 $ 8,776 $ 8,755 Cash Basis NOI

Cash Basis NOIfrom non-same 1,221 1,399 7,244 8,485 11,401 properties ^(1)

Cash Basis NOI $ 10,103 $ 10,257 $ 16,169 $ 17,261 $ 20,156

Straight linerent (515 ) (198 ) 69 (499 ) 11 adjustments

Lease value - - - 39 39 amortization

Leasetermination - - 16 11 2,188 fees

NOI $ 9,588 $ 10,059 $ 16,254 $ 16,812 $ 22,394

Depreciationand (4,398 ) (5,114 ) (6,037 ) (5,939 ) (7,561 ) amortization

General and (8,302 ) (10,604 ) (8,290 ) (8,523 ) (9,533 ) administrative

Interest andother income, 4,443 11,895 14,521 19,401 20,695 net

Interest (302 ) (309 ) (311 ) (321 ) (4,070 ) expense

Loss on earlyextinguishment - - - - (6,374 ) of debt

Gain on saleof properties, 26,916 419,620 24 1,945 227,166 net

Income before $ 27,945 $ 425,547 $ 16,161 $ 23,375 $ 242,717 income taxes

Income tax(expense) (59 ) (40 ) (165 ) 521 (340 ) benefit

Net income $ 27,886 $ 425,507 $ 15,996 $ 23,896 $ 242,377

(1) Cash Basis NOI from non-same properties for all periods presented includes the operations of disposed properties.

CALCULATION OF SAME PROPERTY NET OPERATING INCOME (NOI) AND SAME PROPERTY CASHBASIS NOI

(Unaudited, amounts in thousands)

For the Six Months Ended June 30,

2020 2019

Calculation of Same Property NOI and Same Property Cash Basis NOI:

Rental revenue $ 32,391 $ 69,464

Other revenue 2,694 5,656

Operating expenses (15,438 ) (26,754 )

NOI $ 19,647 $ 48,366

Straight line rent adjustments 713 (848 )

Lease value amortization - (78 )

Lease termination fees - (2,188 )

Cash Basis NOI $ 20,360 $ 45,252

Cash Basis NOI from non-same properties ^(1) (2,620 ) (27,726 )

Same Property Cash Basis NOI $ 17,740 $ 17,526

Non-cash rental income and lease termination fees (515 ) 2,679 from same properties

Same Property NOI $ 17,225 $ 20,205



Reconciliation of Same Property NOI to GAAP Net Income:

Same Property NOI $ 17,225 $ 20,205

Non-cash rental income and lease termination fees 515 (2,679 ) from same properties

Same Property Cash Basis NOI $ 17,740 $ 17,526

Cash Basis NOI from non-same properties ^(1) 2,620 27,726

Cash Basis NOI $ 20,360 $ 45,252

Straight line rent adjustments (713 ) 848

Lease value amortization - 78

Lease termination fees - 2,188

NOI $ 19,647 $ 48,366

Depreciation and amortization (9,512 ) (16,146 )

General and administrative (18,906 ) (21,629 )

Interest and other income, net 16,338 38,470

Interest expense (611 ) (8,276 )

Loss on early extinguishment of debt - (6,374 )

Gain on sale of properties, net 446,536 420,203

Income before income taxes $ 453,492 $ 454,614

Income tax expense (99 ) (1,640 )

Net income $ 453,393 $ 452,974

(1) Cash Basis NOI from non-same properties for all periods presented includes the operations of disposed properties.

NOI is income from our real estate including lease termination fees receivedfrom tenants less our property operating expenses. NOI excludes amortization ofcapitalized tenant improvement costs and leasing commissions and corporatelevel expenses. Cash Basis NOI is NOI excluding the effects of straight linerent adjustments, lease value amortization and lease termination fees. Thequarter-to-date same property versions of these measures include the results ofproperties continuously owned from April 1, 2019 through June 30, 2020. Theyear-to-date same property versions of these measures include the results ofproperties continuously owned from January 1, 2019 through June 30, 2020.Properties classified as held for sale within our condensed consolidatedbalance sheets are excluded from the same property versions of these measures.



We consider these supplemental non-GAAP financial measures to be appropriatesupplemental measures to net income (loss) because they may help to understandthe operations of our properties. We use these measures internally to evaluateproperty level performance, and we believe that they provide useful informationto investors regarding our results of operations because they reflect onlythose income and expense items that are incurred at the property level and mayfacilitate comparisons of our operating performance between periods and withother REITs. Cash Basis NOI is among the factors considered with respect toacquisition, disposition and financing decisions. These measures do notrepresent cash generated by operating activities in accordance with GAAP andshould not be considered as an alternative to net income (loss), net income(loss) attributable to Equity Commonwealth common shareholders or cash flowfrom operating activities, determined in accordance with GAAP, or as indicatorsof our financial performance or liquidity, nor are these measures necessarilyindicative of sufficient cash flow to fund all of our needs. These measuresshould be considered in conjunction with net income (loss), net income (loss)attributable to EQC common shareholders and cash flow from operating activitiesas presented in our condensed consolidated statements of operations, condensedconsolidated statements of comprehensive income and condensed consolidatedstatements of cash flows. Other REITs and real estate companies may calculatethese measures differently than we do.

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CONTACT: Sarah Byrnes, Investor Relations (312) 646-2801 ir@eqcre.com