Equity Commonwealth Reports Third Quarter 2020 Results

·20-min read

Equity Commonwealth (NYSE: EQC) today reported financial results for the quarter ended September 30, 2020 and provided an update on our business due to COVID-19.

Equity Commonwealth continues to monitor the COVID-19 pandemic and the impact on our 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’ employees continue to work remotely. Our buildings are open, and we are working with our tenants to enhance their safety as they return to the office. In our same property portfolio, for the third quarter 2020, we collected 98% of contractual rents, including 3% from the application of security deposits and letters of credit. In October 2020, to date we have collected 97% of contractual rents, including 1% from the application of security deposits and letters of credit.

Financial results for the quarter ended September 30, 2020

Net loss attributable to common shareholders was $1.6 million, or $0.01 per diluted share, for the quarter ended September 30, 2020. This compares to net income attributable to common shareholders of $21.9 million, or $0.18 per diluted share, for the quarter ended September 30, 2019. The decline in net income was primarily a result of a decrease in 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 September 30, 2020, were $3.3 million, or $0.03 per diluted share. This compares to FFO for the quarter ended September 30, 2019 of $25.6 million, or $0.21 per diluted share. The following items impacted FFO for the quarter ended September 30, 2020, compared to the corresponding 2019 period:

  • ($0.14) per diluted share decrease in interest income and other, net;

  • ($0.06) per diluted share decrease in NOI from properties sold;

  • $0.01 per diluted share increase in same property NOI; and

  • $0.01 per diluted share decrease in general and administrative expense.

Normalized FFO was $3.4 million, or $0.03 per diluted share, for the quarter ended September 30, 2020. This compares to Normalized FFO for the quarter ended September 30, 2019 of $25.7 million, or $0.21 per diluted share. The following items impacted Normalized FFO for the quarter ended September 30, 2020, compared to the corresponding 2019 period:

  • ($0.13) per diluted share decrease in interest income;

  • ($0.07) per diluted share decrease in cash NOI from properties sold;

  • $0.01 per diluted share increase in same property termination income; 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 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 September 30, 2020, the company’s cash and cash equivalents balance was $3.4 billion. Following the common distribution paid on October 20, 2020, the company’s cash and cash equivalents balance was $3.0 billion.

Same property results for the quarter ended September 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 87.7% leased as of September 30, 2020, compared to 90.1% as of June 30, 2020, and 89.5% as of September 30, 2019.

  • The same property portfolio commenced occupancy was 85.1% as of September 30, 2020, compared to 83.9% as of June 30, 2020, and 85.8% as of September 30, 2019.

  • Same property NOI increased 11.8% when compared to the same period in 2019. The increase was largely due to an increase in lease termination fees.

  • Same property cash NOI decreased 7.1% when compared to the same period in 2019. The decrease was largely due to lower parking revenue due to COVID-19.

  • The company entered into a renewal lease for approximately 6,000 square feet.

  • The GAAP rental rate on the new lease was 3.2% higher compared to the prior GAAP rental rate for the same space.

  • The cash rental rate on the new lease was 0.4% 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 July 1, 2019 through September 30, 2020.

Significant events during the quarter ended September 30, 2020

  • Ellen-Blair Chube was appointed to serve as a member of the Board of Trustees until the next annual meeting of shareholders. Ms. Chube will also serve as a member of the Nominating and Corporate Governance Committee.

  • The company declared a special, one-time cash distribution of $3.50 per common share, which was paid on October 20, 2020 to shareholders of record on October 1, 2020.

  • 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 third quarter results on Thursday, October 29, 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 Third 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)

September 30, 2020

December 31, 2019

ASSETS

Real estate properties:

Land

$

44,060

$

85,627

Buildings and improvements

355,877

576,494

399,937

662,121

Accumulated depreciation

(142,053

)

(202,700

)

257,884

459,421

Cash and cash equivalents

3,418,240

2,795,642

Restricted cash

5,003

Rents receivable

14,486

19,554

Other assets, net

18,164

39,757

Total assets

$

3,708,774

$

3,319,377

LIABILITIES AND EQUITY

Mortgage notes payable, net

$

$

25,691

Accounts payable, accrued expenses and other

25,702

37,153

Rent collected in advance

1,861

3,127

Distributions payable

438,105

7,534

Total liabilities

$

465,668

$

73,505

Shareholders’ equity:

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

Series D preferred shares; 6.50% 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; 121,524,510 and 121,924,199 shares issued and outstanding, respectively

1,215

1,219

Additional paid in capital

4,291,293

4,313,831

Cumulative net income

3,816,614

3,363,654

Cumulative common distributions

(4,284,050

)

(3,851,666

)

Cumulative preferred distributions

(707,715

)

(701,724

)

Total shareholders’ equity

3,236,620

3,244,577

Noncontrolling interest

6,486

1,295

Total equity

$

3,243,106

$

3,245,872

Total liabilities and equity

$

3,708,774

$

3,319,377

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Revenues:

Rental revenue

$

15,742

$

23,995

$

48,133

$

93,459

Other revenue (1)

743

2,740

3,437

8,396

Total revenues

$

16,485

$

26,735

$

51,570

$

101,855

Expenses:

Operating expenses

$

6,444

$

9,923

$

21,882

$

36,677

Depreciation and amortization

5,137

5,939

14,649

22,085

General and administrative

7,191

8,523

26,097

30,152

Total expenses

$

18,772

$

24,385

$

62,628

$

88,914

Interest and other income, net

2,606

19,401

18,944

57,871

Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $(3), $(55), $(119) and $264, respectively)

(9

)

(321

)

(620

)

(8,597

)

Gain (loss) on early extinguishment of debt

131

131

(6,374

)

Gain on sale of properties, net

1,945

446,536

422,148

Income before income taxes

441

23,375

453,933

477,989

Income tax (expense) benefit

(71

)

521

(170

)

(1,119

)

Net income

$

370

$

23,896

$

453,763

$

476,870

Net income attributable to noncontrolling interest

(1

)

(10

)

(803

)

(180

)

Net income attributable to Equity Commonwealth

$

369

$

23,886

$

452,960

$

476,690

Preferred distributions

(1,997

)

(1,997

)

(5,991

)

(5,991

)

Net (loss) income attributable to Equity Commonwealth common shareholders

$

(1,628

)

$

21,889

$

446,969

$

470,699

Weighted average common shares outstanding — basic (2)

121,673

122,140

121,824

122,075

Weighted average common shares outstanding — diluted(2)(3)

121,673

123,564

126,282

125,938

Earnings per common share attributable to Equity Commonwealth common shareholders:

Basic

$

(0.01

)

$

0.18

$

3.67

$

3.86

Diluted

$

(0.01

)

$

0.18

$

3.59

$

3.79

Distributions declared per common share

$

3.50

$

3.50

$

3.50

$

3.50

(1)

Other revenue is primarily comprised of parking revenue that does not represent a component of a lease.

(2)

Weighted average common shares outstanding for the three months ended September 30, 2020 and 2019 includes 150 and 217 unvested, earned RSUs, respectively. Weighted average common shares outstanding for the nine months ended September 30, 2020 and 2019 includes 159 and 208 unvested, earned RSUs, respectively.

(3)

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

CALCULATION OF FUNDS FROM OPERATIONS (FFO) AND NORMALIZED FFO

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Calculation of FFO

Net income

$

370

$

23,896

$

453,763

$

476,870

Real estate depreciation and amortization

4,917

5,683

13,972

21,243

Gain on sale of properties, net

(1,945

)

(446,536

)

(422,148

)

FFO attributable to Equity Commonwealth

5,287

27,634

21,199

75,965

Preferred distributions

(1,997

)

(1,997

)

(5,991

)

(5,991

)

FFO attributable to EQC common shareholders and unitholders

$

3,290

$

25,637

$

15,208

$

69,974

Calculation of Normalized FFO

FFO attributable to EQC common shareholders and unitholders

$

3,290

$

25,637

$

15,208

$

69,974

Lease value amortization

(39

)

(117

)

Straight line rent adjustments

(367

)

499

346

(349

)

Sold property expense included in interest and other income, net

515

515

(Gain) loss on early extinguishment of debt

(131

)

(131

)

6,374

Taxes related to property sales included in general and administrative

1,458

Taxes related to property sales, net included in income tax expense

99

(423

)

178

142

Normalized FFO attributable to EQC common shareholders and unitholders

$

3,406

$

25,674

$

17,574

$

76,024

Weighted average common shares and units outstanding -- basic (1)

121,916

122,189

122,038

122,121

Weighted average common shares and units outstanding -- diluted (1)

123,517

123,613

123,639

123,421

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

$

0.03

$

0.21

$

0.12

$

0.57

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

$

0.03

$

0.21

$

0.14

$

0.62

(1)

Our calculations of FFO and Normalized FFO attributable to EQC common shareholders and unitholders per share and unit - basic for the three months ended September 30, 2020 and 2019 include 243 and 49 LTIP/Operating Partnership Units, respectively, 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 nine months ended September 30, 2020 and 2019 include 214 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. 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 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 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 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

(Unaudited, amounts in thousands)

For the Three Months Ended

9/30/2020

6/30/2020

3/31/2020

12/31/2019

9/30/2019

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

Rental revenue

$

15,742

$

15,248

$

17,143

$

23,410

$

23,995

Other revenue (1)

743

1,017

1,677

2,585

2,740

Operating expenses

(6,444

)

(6,677

)

(8,761

)

(9,741

)

(9,923

)

NOI

$

10,041

$

9,588

$

10,059

$

16,254

$

16,812

Straight line rent adjustments

(367

)

515

198

(69

)

499

Lease value amortization

(39

)

Lease termination fees

(1,300

)

(16

)

(11

)

Cash Basis NOI

$

8,374

$

10,103

$

10,257

$

16,169

$

17,261

Cash Basis NOI from non-same properties (2)

(218

)

(1,221

)

(1,399

)

(7,244

)

(8,485

)

Same Property Cash Basis NOI

$

8,156

$

8,882

$

8,858

$

8,925

$

8,776

Non-cash rental income and lease termination fees from same properties

1,668

(408

)

(107

)

(124

)

10

Same Property NOI

$

9,824

$

8,474

$

8,751

$

8,801

$

8,786

Reconciliation of Same Property NOI to GAAP Net Income:

Same Property NOI

$

9,824

$

8,474

$

8,751

$

8,801

$

8,786

Non-cash rental income and lease termination fees from same properties

(1,668

)

408

107

124

(10

)

Same Property Cash Basis NOI

$

8,156

$

8,882

$

8,858

$

8,925

$

8,776

Cash Basis NOI from non-same properties (2)

218

1,221

1,399

7,244

8,485

Cash Basis NOI

$

8,374

$

10,103

$

10,257

$

16,169

$

17,261

Straight line rent adjustments

367

(515

)

(198

)

69

(499

)

Lease value amortization

39

Lease termination fees

1,300

16

11

NOI

$

10,041

$

9,588

$

10,059

$

16,254

$

16,812

Depreciation and amortization

(5,137

)

(4,398

)

(5,114

)

(6,037

)

(5,939

)

General and administrative

(7,191

)

(8,302

)

(10,604

)

(8,290

)

(8,523

)

Interest and other income, net

2,606

4,443

11,895

14,521

19,401

Interest expense

(9

)

(302

)

(309

)

(311

)

(321

)

Gain on early extinguishment of debt

131

Gain on sale of properties, net

26,916

419,620

24

1,945

Income before income taxes

$

441

$

27,945

$

425,547

$

16,161

$

23,375

Income tax (expense) benefit

(71

)

(59

)

(40

)

(165

)

521

Net income

$

370

$

27,886

$

425,507

$

15,996

$

23,896

(1)

Other revenue is primarily comprised of parking revenue that does not represent a component of a lease.

(2)

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 CASH BASIS NOI

(Unaudited, amounts in thousands)

For the Nine Months Ended September 30,

2020

2019

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

Rental revenue

$

48,133

$

93,459

Other revenue (1)

3,437

8,396

Operating expenses

(21,882

)

(36,677

)

NOI

$

29,688

$

65,178

Straight line rent adjustments

346

(349

)

Lease value amortization

(117

)

Lease termination fees

(1,300

)

(2,199

)

Cash Basis NOI

$

28,734

$

62,513

Cash Basis NOI from non-same properties (2)

(2,838

)

(36,211

)

Same Property Cash Basis NOI

$

25,896

$

26,302

Non-cash rental income and lease termination fees from same properties

1,153

2,689

Same Property NOI

$

27,049

$

28,991

Reconciliation of Same Property NOI to GAAP Net Income:

Same Property NOI

$

27,049

$

28,991

Non-cash rental income and lease termination fees from same properties

(1,153

)

(2,689

)

Same Property Cash Basis NOI

$

25,896

$

26,302

Cash Basis NOI from non-same properties (2)

2,838

36,211

Cash Basis NOI

$

28,734

$

62,513

Straight line rent adjustments

(346

)

349

Lease value amortization

117

Lease termination fees

1,300

2,199

NOI

$

29,688

$

65,178

Depreciation and amortization

(14,649

)

(22,085

)

General and administrative

(26,097

)

(30,152

)

Interest and other income, net

18,944

57,871

Interest expense

(620

)

(8,597

)

Gain (loss) on early extinguishment of debt

131

(6,374

)

Gain on sale of properties, net

446,536

422,148

Income before income taxes

$

453,933

$

477,989

Income tax expense

(170

)

(1,119

)

Net income

$

453,763

$

476,870

(1)

Other revenue is primarily comprised of parking revenue that does not represent a component of a lease.

(2)

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 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, 2019 through September 30, 2020. The year-to-date same property versions of these measures include the results of properties continuously owned from January 1, 2019 through September 30, 2020. 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 may 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 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 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20201028005962/en/

Contacts

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