Edgar Filing: Equity Commonwealth

EQC 9.30.14 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9317

EQUITY COMMONWEALTH

(Exact Name of Registrant as Specified in Its Charter)



Maryland		04-6558834
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)



Two North Riverside Plaza, Suite 600, Chicago, IL		60606
(Address of Principal Executive Offices)		(Zip Code)

(312) 646-2800

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):



Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of October 27, 2014: 128,893,552.

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EQUITY COMMONWEALTH

FORM 10-Q

September 30, 2014

INDEX



		Page

PART I	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Operations	2

	Condensed Consolidated Statements of Comprehensive Income (Loss)	3

	Condensed Consolidated Statements of Cash Flows	4

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	48

PART II	Other Information

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

	Signatures	59

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References in this Quarterly Report on Form 10-Q to the “Company”, “EQC”, “we”, “us” or “our” refer to Equity Commonwealth and its consolidated subsidiaries, as of September 30, 2014, unless the context indicates otherwise.

EXPLANATORY NOTE

EQC is a self-managed and self-advised real estate investment trust (REIT). The financial information presented in this Quarterly Report on Form 10-Q (Quarterly Report) includes the results of operations of Select Income REIT, or SIR, for periods prior to July 2, 2013 when SIR was EQC’s consolidated subsidiary, unless the context indicates otherwise. SIR is itself a public company that has common shares registered under the Securities Exchange Act of 1934, as amended. On July 2, 2013, SIR completed an underwritten public offering of its common shares, at which time we ceased to own a majority of SIR’s common shares. Accordingly, following July 2, 2013, we did not consolidate our investment in SIR, but instead accounted for such investment under the equity method. On July 9, 2014, we sold our entire stake of 22,000,000 common shares of SIR and thus no longer hold any interest in SIR.

For further information about SIR, please see SIR’s periodic reports and other filings with the Securities and Exchange Commission, or the SEC, which are available at the SEC’s website at www.sec.gov. References in this Quarterly Report to SIR’s filings with the SEC are included as textual references only, and the information in SIR’s filings with the SEC is not incorporated by reference into this Quarterly Report.

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PART I. Financial Information

Item 1. Financial Statements.

EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)



	September 30, 2014			December 31, 2013
ASSETS
Real estate properties:
Land	$	740,448		$	699,135
Buildings and improvements	5,145,916			4,838,030
	5,886,364			5,537,165
Accumulated depreciation	(988,323		)	(895,059		)
	4,898,041			4,642,106
Properties held for sale	—			573,531
Acquired real estate leases, net	212,584			255,812
Equity investments	—			517,991
Cash and cash equivalents	597,405			222,449
Restricted cash	15,554			22,101
Rents receivable, net of allowance for doubtful accounts of $7,013 and $7,885, respectively	238,207			223,769
Other assets, net	209,005			188,675
Total assets	$	6,170,796		$	6,646,434

LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility	$	—		$	235,000
Senior unsecured debt, net	1,823,182			1,855,900
Mortgage notes payable, net	619,760			914,510
Liabilities related to properties held for sale	—			28,734
Accounts payable and accrued expenses	163,075			165,855
Assumed real estate lease obligations, net	28,950			33,935
Rent collected in advance	26,197			27,553
Security deposits	13,648			11,976
Distributions payable	6,981			—
Due to related persons	—			9,385
Total liabilities	2,681,793			3,282,848

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; 4,915,497 and 15,180,000 shares issued and outstanding, respectively, aggregate liquidation preference of $122,887 and $379,500, respectively	119,266			368,270
Series E preferred shares; 7 1/4% cumulative redeemable on or after May 15, 2016; 11,000,000 shares issued and outstanding, aggregate liquidation preference $275,000	265,391			265,391
Common shares of beneficial interest, $0.01 par value: 350,000,000 shares authorized; 128,893,552 and 118,386,918 shares issued and outstanding, respectively	1,289			1,184
Additional paid in capital	4,484,552			4,213,474
Cumulative net income	2,392,413			2,209,840
Cumulative other comprehensive loss	(39,765		)	(38,331		)
Cumulative common distributions	(3,111,868		)	(3,082,271		)
Cumulative preferred distributions	(622,275		)	(573,971		)
Total shareholders’ equity	3,489,003			3,363,586
Total liabilities and shareholders’ equity	$	6,170,796		$	6,646,434

See accompanying notes.

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EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues:
Rental income	$	174,216		$	170,908		$	518,663		$	592,221
Tenant reimbursements and other income	42,379			43,293			130,386			146,780
Total revenues	216,595			214,201			649,049			739,001

Expenses:
Operating expenses	99,392			102,350			293,824			310,585
Depreciation and amortization	57,213			56,465			168,693			182,494
General and administrative	47,450			25,742			96,395			63,454
Loss on asset impairment	—			124,253			17,922			124,253
Acquisition related costs	—			(436		)	5			337
Total expenses	204,055			308,374			576,839			681,123

Operating income (loss)	12,540			(94,173		)	72,210			57,878

Interest and other income	406			227			1,071			931
Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $(91), $(608), $(700) and $265, respectively)	(35,245		)	(39,236		)	(111,079		)	(134,452		)
Gain (loss) on early extinguishment of debt	6,699			—			6,699			(60,027		)
Gain on sale of equity investment	171,754			—			171,721			66,293
Gain on issuance of shares by an equity investee	—			—			17,020			—
Income (loss) from continuing operations before income tax expense and equity in earnings of investees	156,154			(133,182		)	157,642			(69,377		)
Income tax expense	(703		)	(785		)	(2,166		)	(2,527		)
Equity in earnings of investees	1,072			10,492			24,460			14,913
Income (loss) from continuing operations	156,523			(123,475		)	179,936			(56,991		)
Discontinued operations:
Income from discontinued operations	95			95			8,220			1,732
Gain (loss) on asset impairment from discontinued operations	122			(92,827		)	(2,238		)	(101,362		)
Loss on early extinguishment of debt from discontinued operations	—			—			(3,345		)	—
Net gain on sale of properties from discontinued operations	—			—			—			3,359
Income (loss) before gain on sale of properties	156,740			(216,207		)	182,573			(153,262		)
Gain on sale of properties	—			—			—			1,596
Net income (loss)	156,740			(216,207		)	182,573			(151,666		)
Net income attributable to noncontrolling interest in consolidated subsidiary	—			(108		)	—			(20,093		)
Net income (loss) attributable to Equity Commonwealth	156,740			(216,315		)	182,573			(171,759		)
Preferred distributions	(6,981		)	(11,151		)	(25,114		)	(33,453		)
Distribution on conversion of preferred shares	—			—			(16,205		)	—
Net income (loss) available for Equity Commonwealth common shareholders	$	149,759		$	(227,466	)	$	141,254		$	(205,212	)

Amounts available for Equity Commonwealth common shareholders:
Income (loss) from continuing operations	$	149,542		$	(134,734	)	$	138,617		$	(108,941	)
Income from discontinued operations	95			95			8,220			1,732
Gain (loss) on asset impairment from discontinued operations	122			(92,827		)	(2,238		)	(101,362		)
Loss on early extinguishment of debt from discontinued operations	—			—			(3,345		)	—
Net gain on sale of properties from discontinued operations	—			—			—			3,359
Net income (loss)	$	149,759		$	(227,466	)	$	141,254		$	(205,212	)

Weighted average common shares outstanding — basic	128,880			118,328			123,736			110,353
Weighted average common shares outstanding — diluted	131,243			118,328			123,736			110,353
Basic and diluted earnings per common share available for Equity Commonwealth common shareholders:
Income (loss) from continuing operations	$	1.16		$	(1.14	)	$	1.12		$	(0.99	)
Income (loss) from discontinued operations	$	—		$	(0.78	)	$	0.02		$	(0.87	)
Net income (loss) available for common shareholders	$	1.16		$	(1.92	)	$	1.14		$	(1.86	)

Distributions declared per common share	$	—		$	0.25		$	0.25		$	0.75

See accompanying notes.

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EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income (loss)	$	156,740		$	(216,207	)	$	182,573		$	(151,666	)

Other comprehensive income (loss), net of tax:
Unrealized gain on derivative instruments	1,805			178			3,432			4,011
Foreign currency translation adjustments	(20,392		)	5,455			(4,844		)	(31,393		)
Equity in unrealized income (loss) of an investee	27			13			(22		)	(149		)
Total comprehensive income (loss)	138,180			(210,561		)	181,139			(179,197		)

Less: comprehensive income attributable to noncontrolling interest in consolidated subsidiary	—			(108		)	—			(20,057		)

Comprehensive income (loss) attributable to Equity Commonwealth	$	138,180		$	(210,669	)	$	181,139		$	(199,254	)

See accompanying notes.

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EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)



	Nine Months Ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	182,573		$	(151,666	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation	122,571			140,357
Net amortization of debt discounts, premiums and deferred financing fees	(703		)	321
Straight line rental income	(10,398		)	(26,056		)
Amortization of acquired real estate leases	39,431			46,350
Other amortization	15,181			14,727
Loss on asset impairment	20,160			225,615
(Gain) loss on early extinguishment of debt	(3,354		)	60,027
Equity in earnings of investees	(24,460		)	(14,913		)
Gain on sale of equity investments	(171,721		)	(66,293		)
Gain on issuance of shares by an equity investee	(17,020		)	—
Distributions of earnings from investees	20,680			13,791
Net gain on sale of properties	—			(4,955		)
Other non-cash expenses	5,544			—
Change in assets and liabilities:
Restricted cash	5,634			2,149
Rents receivable and other assets	(28,586		)	(58,705		)
Accounts payable and accrued expenses	19,826			11,116
Rent collected in advance	(5,399		)	1,945
Security deposits	37			527
Due to related persons	(9,277		)	(4,677		)
Cash provided by operating activities	160,719			189,660

CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions	—			(154,430		)
Real estate improvements	(81,935		)	(80,239		)
Principal payments received from direct financing lease	5,451			5,196
Principal payments received from real estate mortgages receivable	—			1,000
Proceeds from sale of properties, net	185,299			37,699
Proceeds from sale of equity investments, net	710,492			239,576
Distributions in excess of earnings from investees	—			168
Decrease (increase) in restricted cash	913			(3,008		)
Deconsolidation of a subsidiary	—			(12,286		)
Cash provided by investing activities	820,220			33,676

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net	—			626,809
Repurchase and retirement of outstanding debt securities	—			(728,021		)
Proceeds from borrowings	—			1,036,000
Payments on borrowings	(551,174		)	(964,258		)
Deferred financing fees	—			(1,204		)
Distributions to common shareholders	(29,597		)	(80,106		)
Distributions to preferred shareholders	(25,114		)	(33,453		)
Distributions to noncontrolling interest in consolidated subsidiary	—			(14,863		)
Cash used in financing activities	(605,885		)	(159,096		)

Effect of exchange rate changes on cash	(98		)	(469		)

Increase in cash and cash equivalents	374,956			63,771
Cash and cash equivalents at beginning of period	222,449			102,219
Cash and cash equivalents at end of period	$	597,405		$	165,990

See accompanying notes.

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EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(amounts in thousands)

(unaudited)



	Nine Months Ended September 30,
	2014		2013
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	118,948	$	156,841
Taxes paid	2,732		1,197

NON-CASH INVESTING ACTIVITIES:
Investment in real estate mortgage receivable	$	—	$	(7,688	)
Increase in capital expenditures recorded as liabilities	$	15,757	$	4,809

See accompanying notes.

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EQUITY COMMONWEALTH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of EQC have been prepared without audit. Certain information and footnote disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K (Annual Report) for the year ended December 31, 2013. Capitalized terms used, but not defined in this Quarterly Report, have the same meanings as in our Annual Report.

In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

Note 2. Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. We are required to adopt ASU 2014-08 prospectively for all disposals of components of our business classified as held for sale during fiscal periods beginning after December 15, 2014 and are currently evaluating what impact, if any, its adoption will have to the presentation of our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This update is effective for interim and annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact, if any, the adoption of this ASU will have on our condensed consolidated financial statements.

Note 3. Board of Trustees

On March 18, 2014, Related Fund Management, LLC (Related) and Corvex Management LP (Corvex) together, (Related/Corvex), delivered to us written consents which they represented were from a sufficient number of holders of our outstanding common shares to remove all of our then Trustees and any other person or persons elected or appointed to our Board of Trustees prior to the effective time of the Related/Corvex removal proposal. After inspection, our then Board of Trustees determined that holders of more than two-thirds of our outstanding common shares as of the February 18, 2014 record date consented to the Related/Corvex proposal, reaching the threshold required to remove all of our then Trustees and any other person or persons appointed as a Trustee prior to the effective time of the Related/Corvex removal proposal. Accordingly, on March 25, 2014, all of our then Trustees (Prior Trustees) certified their removal as Trustees of EQC.

On May 23, 2014, at a special meeting of our shareholders (Special Meeting), the following seven individuals were elected to serve on our Board of Trustees (New Board of Trustees): Sam Zell, who serves as the Chairman of the New Board of Trustees, James S. Corl, Edward A. Glickman, David A. Helfand, Peter Linneman, James L. Lozier, Jr. and Kenneth Shea. Each of the foregoing individuals was nominated to serve on the New Board of Trustees by Related/Corvex.

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EQUITY COMMONWEALTH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On July 31, 2014, our shareholders elected Martin L. Edelman, Mary Jane Robertson, Gerald A. Spector and James A. Star to serve on our Board of Trustees, bringing our total number of Trustees to eleven.

Note 4. Real Estate Properties

During the nine months ended September 30, 2014, we made improvements to our properties totaling $65.9 million. During the nine months ended September 30, 2013, we made improvements totaling $75.4 million to our properties, including improvements made by SIR to its properties for the period that SIR was our consolidated subsidiary, which was until July 2, 2013.

Property Sales:

We classify all properties that meet the criteria outlined in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, or the Codification, as held for sale, as such on our condensed consolidated balance sheets. As of September 30, 2014, we had no properties classified as held for sale.

During March 2014, the former management team ceased to actively market two CBD properties (two buildings) and 29 suburban properties (65 buildings) with a combined 5,641,450 square feet that we had previously classified as held for sale as of December 31, 2013. These properties were not under agreement for sale when our Prior Trustees were removed in March 2014. These properties were reclassified to properties held and used in operations because they no longer meet the requirements under GAAP for classification as held for sale. Operating results for these properties were reclassified from discontinued operations to continuing operations for all periods presented herein. In connection with this reclassification, we reversed previously recorded impairment losses totaling $4.8 million, which includes the elimination of estimated costs to sell.

On June 27, 2014, we sold one central business district (CBD) property (two buildings) and 13 suburban properties (41 buildings) with a combined 2,784,098 square feet for an aggregate sales price of $215.9 million, excluding mortgage debt repayments and closing costs. In connection with this transaction, we recognized a loss on asset impairment of $2.2 million and a loss on early extinguishment of debt of $3.3 million. These properties were previously classified as held for sale as of both March 31, 2014 and December 31, 2013.

Results of operations for properties sold or held for sale for all periods presented are included in discontinued operations in our condensed consolidated statements of operations. Summarized balance sheet information for all properties classified as held for sale and income statement information for all properties sold is as follows (in thousands):



	December 31, 2013
Real estate properties	$	536,552
Acquired real estate leases	6,937
Rents receivable	14,180
Other assets, net	15,862
Properties held for sale	$	573,531

Mortgage notes payable	$	20,018
Assumed real estate lease obligations	2,070
Rent collected in advance	4,043
Security deposits	2,603
Liabilities related to properties held for sale	$	28,734

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EQUITY COMMONWEALTH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Rental income	$	(16	)	$	13,462		$	14,220		$	44,096
Tenant reimbursements and other income	407			1,697			1,730			5,509
Total revenues	391			15,159			15,950			49,605

Operating expenses	261			9,699			7,115			31,291
Depreciation and amortization	—			3,842			—			11,725
General and administrative	6			1,088			9			3,544
Total expenses	267			14,629			7,124			46,560

Operating income	124			530			8,826			3,045

Interest and other income	2			1			2			13
Interest expense	(31		)	(436		)	(608		)	(1,326		)
Income from discontinued operations	$	95		$	95		$	8,220		$	1,732

Note 5. Investment in Direct Financing Lease

We have an investment in a direct financing lease that relates to a lease with a term that exceeds 75% of the useful life of an office tower located within a mixed use property in Phoenix, AZ. We recognize income using the effective interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease inception represent our initial estimates of the fair value of the leased assets at the expiration of the lease, which do not exceed their original cost. Significant assumptions used in estimating residual values include estimated net cash flows over the remaining lease term and expected future real estate values. The carrying amount of our net investment is included in other assets in our condensed consolidated balance sheets. The following table summarizes the carrying amount of our net investment in this direct financing lease (in thousands):



	September 30, 2014			December 31, 2013
Total minimum lease payments receivable	$	16,913		$	22,986
Estimated unguaranteed residual value of leased asset	4,951			4,951
Unearned income	(7,551		)	(8,174		)
Net investment in direct financing lease	$	14,313		$	19,763

We monitor the payment history and credit profile of the tenant and have determined that no allowance for losses related to our direct financing lease was necessary at September 30, 2014 and December 31, 2013. The direct financing lease has an expiration date in 2045.

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EQUITY COMMONWEALTH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 6. Equity Investments

At September 30, 2014, and December 31, 2013, we had the following equity investments in Select Income REIT (SIR), Government Properties Income Trust (GOV), and Affiliates Insurance Company (AIC) (dollars in thousands):



	Ownership Percentage				Equity Investments				Equity in Earnings (Loss)
									Three Months Ended				Nine Months Ended
	September 30,		December 31,		September 30,		December 31,		September 30,				September 30,
	2014		2013		2014		2013		2014		2013		2014			2013
SIR	—	%	44.2	%	$	—	$	512,078	$	1,072	$	10,428	$	24,516		$	10,428
GOV	—	%	—	%	—		—		—		—		—			4,111
AIC	—	%	12.5	%	—		5,913		—		64		(56		)	374
					$	—	$	517,991	$	1,072	$	10,492	$	24,460		$	14,913

Investment in SIR

SIR is a publicly traded real estate investment trust, or REIT, that is primarily focused on owning and investing in net leased, single tenant properties. SIR was an unconsolidated equity investment until July 9, 2014. During the second quarter of 2014, SIR issued 10,000,000 common shares in a public offering for $29.00 per common share, raising net proceeds (after deducting underwriters’ discounts and commissions and expenses) of approximately $277.4 million. We recognized a gain on this sale by an equity investee of $16.9 million as a result of the per share sales price of this transaction being above our per share carrying value. Our ownership percentage in SIR was reduced to 36.7% as a result of the transaction.

On July 9, 2014, we sold our entire stake of 22,000,000 common shares of SIR. We received $704.8 million in cash representing $32.04 per share and recognized a gain on sale of equity investment of $171.8 million in our condensed consolidated statement of operations. Proceeds from this sale were used to repay our revolving credit facility and certain mortgage loans (Note 8). As a result of this sale, we no longer hold any interest in SIR.

During the nine months ended September 30, 2014, we received cash distributions from SIR totaling $20.7 million.

SIR was one of our consolidated subsidiaries until July 2, 2013. On July 2, 2013, our ownership percentage of SIR was reduced to below 50% and we began accounting for our investment in SIR under the equity method. Under the equity method, we record our percentage share of net earnings of SIR in our consolidated statements of operations. Prior to July 2, 2013, the operating results and investments of SIR were included in our consolidated results of operations and financial position. On July 2, 2013, our share of the underlying equity of SIR exceeded our carrying value by $17.6 million. As required under GAAP, we amortized this difference to equity in earnings of investees over a 34 year period, which approximates the average remaining useful lives of the buildings owned by SIR as of July 2, 2013.

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The following summarized financial data of SIR is unaudited and includes the results of operations for periods prior to July 2, 2013 (the date on which SIR ceased to be our consolidated subsidiary), which are included on a consolidated basis in our condensed consolidated results of operations when SIR was our consolidated subsidiary. Summarized balance sheet information of SIR as of July 9, 2014, the date of sale, and December 31, 2013 and income statement information through July 9, 2014 is as follows (in thousands, except per share data):



	July 9, 2014		December 31, 2013
Real estate properties, net	$	1,772,684	$	1,579,234
Acquired real estate leases, net	125,163		129,426
Cash and cash equivalents	27,531		20,025
Rents receivable, net	60,474		55,335
Other assets, net	17,698		17,839
Total assets	$	2,003,550	$	1,801,859

Revolving credit facility	$	74,000	$	159,000
Term loan	350,000		350,000
Mortgage notes payable	19,069		27,147
Assumed real estate lease obligations, net	26,945		26,966
Other liabilities	44,225		40,055
Shareholders’ equity	1,489,311		1,198,691
Total liabilities and shareholders’ equity	$	2,003,550	$	1,801,859

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	For the Period from July 1, 2014 through July 9, 2014 and for the Three Months Ended September 30, 2013						For the Period from January 1, 2014 through July 9, 2014 and for the Nine Months Ended September 30, 2013
	2014			2013			2014			2013
Rental income	4,698			41,169			98,226			117,333
Tenant reimbursements and other income	923			7,415			16,980			21,057
Total revenues	5,621			48,584			115,206			138,390

Operating expenses	1,018			9,287			20,982			26,172
Depreciation and amortization	1,043			8,485			20,832			22,445
Acquisition related costs	—			790			374			1,479
General and administrative	357			3,208			7,731			8,884
Total expenses	2,418			21,770			49,919			58,980

Operating income	3,203			26,814			65,287			79,410

Interest expense	(295		)	(3,232		)	(7,287		)	(10,484		)
Gain on early extinguishment of debt	—			—			243			—
Income before income tax expense and equity in earnings of an investee	2,908			23,582			58,243			68,926
Income tax expense	—			(52		)	(90		)	(132		)
Equity in earnings of an investee	11			64			32			219
Net income	$	2,919		$	23,594		$	58,185		$	69,013

Weighted average common shares outstanding	59,889			49,686			52,394			42,790

Net income per common share	$	0.05		$	0.47		$	1.11		$	1.61

Investment in AIC

As of May 9, 2014, we had a net investment of $5.8 million in AIC, an insurance company that was owned in equal proportion until May 9, 2014 by us, our former manager Reit Management & Research LLC, or RMR, GOV, SIR and four other companies to which RMR provides management services. On May 9, 2014, as a result of the removal of the Prior Trustees and in accordance with the terms of the shareholders agreement between us and the other AIC shareholders, the other AIC shareholders exercised their right to purchase all of the 20,000 shares of AIC we then owned. We received $5.8 million in aggregate proceeds from this sale. We no longer own any interest in AIC. Our participation in the AIC property insurance program expired in June 2014. See Note 16 for additional information about our investment in AIC.

Note 7. Real Estate Mortgages Receivable

As of September 30, 2014 and December 31, 2013, we had total real estate mortgages receivable with an aggregate carrying value of $8.1 million included in other assets in our condensed consolidated balance sheets. We provided mortgage financing totaling $7.7 million at 6.0% per annum in connection with our sale of three suburban office and industrial properties (18 buildings) in January 2013 in Dearborn, MI; this real estate mortgage requires monthly interest payments and matures on January 24, 2023. We also provided mortgage financing totaling $0.4 million at 6.0% per annum in connection with our sale of a suburban office property in Salina, NY in April 2012; this real estate mortgage requires monthly interest payments and matures on April 30, 2019.

We monitor the payment history and credit profiles of the borrowers and have determined that no allowance for losses related to these real estate mortgages receivable were necessary at September 30, 2014 and December 31, 2013.

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Note 8. Indebtedness

Unsecured Revolving Credit Facility and Unsecured Term Loan:

We have a $750.0 million unsecured revolving credit facility, with availability of $747.5 million, that matures on October 19, 2015, that is used for general business purposes, including acquisitions. We also have a $500.0 million unsecured term loan that matures on December 15, 2016. Borrowings under our revolving credit facility bear interest at LIBOR plus a premium, which was 150 basis points as of September 30, 2014. We also pay a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2014, the interest rate payable on borrowings under our revolving credit facility was 1.7%. The weighted average interest rate for borrowings under our revolving credit facility was 1.7% for both the nine months ended September 30, 2014 and 2013, respectively. On July 18, 2014, we paid off the entire balance of $235.0 million on our revolving credit facility, and no balance remained outstanding as of September 30, 2014.

Our term loan bears interest at a rate of LIBOR plus a premium, which was 185 basis points as of September 30, 2014. The interest rate premium is subject to adjustment based upon changes to our credit ratings. As of September 30, 2014, the interest rate for the amount outstanding under our term loan was 2.0%. The weighted average interest rate for the amount outstanding under our term loan was 2.0% and 2.1% for the nine months ended September 30, 2014 and 2013, respectively.

Credit Facility and Term Loan Debt Covenants:

Our public debt indenture and related supplements, our revolving credit facility agreement and our term loan agreement contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth. At September 30, 2014, we believe we were in compliance with all of our respective covenants under our public debt indenture and related supplements, our revolving credit facility and our term loan agreements.

Senior Unsecured Debt:

On September 15, 2014, we prepaid at par $33.4 million of our 6.40% unsecured senior notes due 2015.

Mortgage Notes Payable:

At September 30, 2014, 11 of our properties (15 buildings) with an aggregate net book value of $724.4 million, had secured mortgage notes totaling $619.8 million (including net premiums and discounts) maturing from 2015 through 2026.

On August 1, 2014, we prepaid at par the $265.0 million of 5.68% mortgage debt at 600 West Chicago Avenue and recognized a net gain on early extinguishment of debt of $6.7 million from the write-off of an unamortized premium and deferred financing fees.

On June 27, 2014, we repaid $11.2 million of 6.14% mortgage debt and $8.5 million of 5.78% mortgage debt in connection with the sale of the related properties and recognized a loss on early extinguishment of debt of $3.3 million from prepayment premiums and the write-off of unamortized discounts and deferred financing fees.

During the quarter ended June 30, 2014, we made the decision to cease making loan servicing payments on One Enterprise Center in Jacksonville, Florida. The first payment we determined not to make for this property was due on June 11, 2014. The property is secured by a non-recourse mortgage loan, with a current principal balance of $40.1 million. On October 10, 2014, we were notified by the lender that our decision to cease making loan servicing payments created an event of default effective July 11, 2014 and the lender has exercised its option to accelerate the maturity of the unpaid balance of the loan.

On March 11, 2014, we prepaid at par the $12.0 million of 4.95% mortgage debt at 3920 Arkwright Road using cash on hand.

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Note 9. Shareholders’ Equity

Common Share Issuances:

On January 28, 2014, we granted 2,000 common shares of beneficial interest, par value $0.01 per share, valued at $23.46 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to two of our former Trustees as part of their then annual compensation.

During the three and nine months ended September 30, 2014 we issued 32,909 and 90,135 common shares, respectively, to RMR pursuant to the amended and restated business management agreement (Note 16).

During the nine months ended September 30, 2014, we issued 10,412,499 common shares to holders of 10,264,503 of our series D cumulative convertible preferred shares (series D preferred shares) who converted their series D preferred shares into our common shares.

Share Awards:

As a result of the removal of our Prior Trustees on March 25, 2014, the vesting of 130,914 common shares previously issued to our former officers and certain employees of RMR pursuant to our equity compensation plans accelerated in accordance with the terms of their governing share grants. During the nine months ended September 30, 2014, we recorded $3.4 million of general and administrative expense related to the vesting of these shares.

Common Share Distributions:

On February 21, 2014, we paid a distribution on our common shares of $0.25 per share, or $29.6 million, to shareholders of record as of January 13, 2014.

Preferred Share Distributions:

Our Board of Trustees declared distributions on our series D preferred shares and series E cumulative redeemable preferred shares during the nine months ended September 30, 2014 as follows:

Declaration Date

Record Date

Payment Date

Series D Dividend Per Share

Series E Dividend Per Share

January 3, 2014

February 1, 2014

February 18, 2014

0.40625

0.45313

July 25, 2014

August 5, 2014

August 15, 2014

0.81250

0.90625

September 24, 2014

October 31, 2014

November 17, 2014

0.40625

0.45313

Under our governing documents and Maryland law, distributions to our shareholders are to be authorized and declared by our Board of Trustees, and our Prior Trustees were removed on March 25, 2014. Additionally, the removal of our Prior Trustees constituted an event of default under our term loan and revolving credit facility agreements, under which we generally are prevented from making any distributions or paying any dividends during the pendency of an event of default. As a result of the foregoing, we were unable to declare and pay dividends between March 25, 2014 and June 6, 2014, the date on which we obtained waivers of the aforementioned events of default from our lenders.

The $0.81250 series D dividend per share declared on July 25, 2014 by our Board of Trustees includes the accrued dividend of $0.40625 per share for the period from February 15, 2014 to May 14, 2014 and the accrued dividend of $0.40625 per share for the period from May 15, 2014 to August 14, 2014. The $0.90625 series E dividend per share declared on July 25, 2014 by our Board of Trustees includes the accrued dividend of $0.453125 per share for the period from February 15, 2014 to May 14, 2014 and the accrued dividend of $0.453125 per share for the period from May 15, 2014 to August 14, 2014.

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Series D Preferred Shares:

The removal of our Prior Trustees on March 25, 2014 triggered a Fundamental Change Conversion Right of the series D preferred shares, as defined in our Articles Supplementary dated October 10, 2006, setting forth the terms of the series D preferred shares. Pursuant to such right, the holders of series D preferred shares had the option to elect to convert all or any portion of their series D preferred shares at any time from April 9, 2014 until the close of business on May 14, 2014 into a number of common shares per $25.00 liquidation preference of the series D preferred shares equal to the sum of such $25.00 liquidation preference plus accrued and unpaid dividends to, but not including, May 14, 2014, divided by 98% of the average of the closing sale prices of the common shares for the five consecutive trading days ending on May 9, 2014, or the Fundamental Change Conversion Rate. We calculated the Fundamental Change Conversion Rate as 1.0145 common shares per $25.00 liquidation preference. May 14, 2014 was the last day upon which holders of the series D preferred shares could exercise their Fundamental Change Conversion Right. Holders of 10,263,003 series D preferred shares elected to exercise their Fundamental Change Conversion Right and converted their series D preferred shares into 10,411,779 of our common shares. As a result of this transaction, we recorded a distribution of $16.2 million, for the excess of the market value of the common shares issued above the carrying value of the series D preferred shares redeemed. As of September 30, 2014, we had 4,915,497 outstanding series D preferred shares that were convertible into 2,363,248 of our common shares.

Note 10. Cumulative Other Comprehensive Income (Loss)

The following tables present the amounts recognized in cumulative other comprehensive income (loss) by component for the three and nine months ended September 30, 2014 (in thousands):



	Three Months Ended September 30, 2014
	Unrealized Gain (Loss) on Derivative Instruments			Foreign Currency Translation Adjustments			Equity in Unrealized Gain (Loss) of an Investee			Total
Balances as of June 30, 2014	$	(10,079	)	$	(11,099	)	$	(27	)	$	(21,205	)

Other comprehensive income (loss) before reclassifications	537			(20,392		)	—			(19,855		)
Amount of loss reclassified from cumulative other comprehensive (loss) income into interest expense	1,268			—			27			1,295
Net current period other comprehensive income (loss)	1,805			(20,392		)	27			(18,560		)

Balances as of September 30, 2014	$	(8,274	)	$	(31,491	)	$	—		$	(39,765	)



	Nine Months Ended September 30, 2014
	Unrealized Gain (Loss) on Derivative Instruments			Foreign Currency Translation Adjustments			Equity in Unrealized Gain (Loss) of an Investee			Total
Balances as of December 31, 2013	$	(11,706	)	$	(26,647	)	$	22		$	(38,331	)

Other comprehensive income (loss) before reclassifications	(324		)	(4,844		)	42			(5,126		)
Amount of loss reclassified from cumulative other comprehensive (loss) income into interest expense	3,756			—			(64		)	3,692
Net current period other comprehensive income (loss)	3,432			(4,844		)	(22		)	(1,434		)

Balances as of September 30, 2014	$	(8,274	)	$	(31,491	)	$	—		$	(39,765	)

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The following tables present reclassifications out of cumulative other comprehensive income (loss) for the three and nine months ended September 30, 2014 (in thousands):



	Amounts Reclassified from Cumulative Other Comprehensive Income (Loss) to Net Income
Details about Cumulative Other Comprehensive Income (Loss) Components	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014			Affected Line Items in the Statement of Operations
Interest rate swap contracts	$	1,268	$	3,756		Interest expense
Realized gains and losses on available for sale securities	27		(64		)	Gain on sale of equity investments
	$	1,295	$	3,692

Note 11. Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and are generally not subject to federal and state income taxes provided we distribute a sufficient amount of our taxable income to our shareholders and meet other requirements for qualifying as a REIT. However, we are subject to certain state, local and Australian taxes without regard to our REIT status. Our provision for income taxes consists of the following (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
State	$	39	$	123	$	300	$	448
Foreign	664		662		1,866		2,079
Income tax provision	$	703	$	785	$	2,166	$	2,527

Note 12. Derivative Instruments

Risk Management Objective of Using Derivatives

We are exposed to certain risks relating to our ongoing business operations, including the effect of changes in foreign currency exchange rates and interest rates. The only risk we currently manage by using derivative instruments is a part of our interest rate risk. Although we have not done so as of September 30, 2014, we may manage our Australian currency exchange exposure by borrowing in Australian dollars or using derivative instruments in the future, depending on the relative significance of our business activities in Australia at that time.

We may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. We do not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, we only enter into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. We do not anticipate that any of the counterparties will fail to meet their obligations.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, we periodically use interest rate swaps, caps, or other similar instruments as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the

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agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2014, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $4.8 million will be reclassified from other comprehensive income as an increase to interest expense.

We have interest rate swap agreements to manage our interest rate risk exposure on $171.8 million of mortgage debt due 2019, which require interest at a premium over LIBOR. The interest rate swap agreements utilized by us qualify as cash flow hedges and effectively modify our exposure to interest rate risk by converting our floating interest rate debt to a fixed interest rate basis for this loan through December 1, 2016, thus reducing the impact of interest rate changes on future interest expense. As of September 30, 2014, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:



Interest Rate Derivative	Number of Instruments	Notional Amount (in thousands)
Interest rate swap	2	$171,947

The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 (amounts in thousands):



		Fair Value as of
Interest Rate Derivative Designated as Hedging Instrument	Balance Sheet Location	September 30, 2014		December 31, 2013
Pay-fixed swaps	Accounts payable and accrued expenses	$	8,274	$	11,705

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2014 and September 30, 2013 (amounts in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Balance at beginning of period	$	(10,079	)	$	(12,791	)	$	(11,706	)	$	(16,624	)
Amount of gain (loss) recognized in cumulative other comprehensive (loss) income	537			(1,087		)	(324		)	274
Amount of loss reclassified from cumulative other comprehensive (loss) income into interest expense	1,268			1,265			3,756			3,737
Unrealized gain on derivative instruments	1,805			178			3,432			4,011
Balance at end of period	$	(8,274	)	$	(12,613	)	$	(8,274	)	$	(12,613	)

Credit-risk-related Contingent Features

We have agreements with each of our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of its indebtedness, then we could also be declared in default on our derivative obligations.

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As of September 30, 2014, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $8.9 million. As of September 30, 2014, we have not posted any collateral related to these agreements and were not in breach of any agreement provisions. If we had breached any of these provisions, we could have been required to settle our obligations under the agreements at their aggregate termination value of $8.9 million at September 30, 2014.

Note 13. Fair Value of Assets and Liabilities

The table below presents certain of our assets and liabilities measured at fair value during 2014, categorized by the level of inputs used in the valuation of each asset and liability (dollars in thousands):



				Fair Value at Reporting Date Using
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
Description	Total			(Level 1)		(Level 2)			(Level 3)

Recurring Fair Value Measurements:
Effective portion of interest rate swap contracts	$	(8,274	)	$	—	$	(8,274	)	$	—
Derivative liability	(7,002		)	—		—			(7,002		)

Non-Recurring Fair Value Measurements:
Properties held and used	$	19,589		$	—	$	—		$	19,589

Effective Portion of Interest Rate Swap Contracts

The fair value of our interest rate swap contracts is determined using the net discounted cash flows of each derivative based on the market based interest rate curve (level 2 inputs) and adjusted for our credit spread and the actual and estimated credit spreads of the counterparties (level 3 inputs). Although we have determined that the majority of the inputs used to value our derivatives fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counterparties. As of September 30, 2014, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified as level 2 inputs in the fair value hierarchy.

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Derivative Liability

On July 31, 2014, our shareholders voted to approve the reimbursement of expenses incurred by Related/Corvex (Note 16). Approximately $8.4 million will be reimbursed only if the average closing price of our common shares is at least $26.00 (as adjusted for any share splits or share dividends) during the one year period after the date on which the reimbursement was approved by shareholders, and the remaining approximately $8.4 million will be reimbursed only if the average closing price of our common shares is at least $26.00 (as adjusted for any share splits or share dividends) during the one year period between the first and second anniversaries of the date on which the reimbursement was approved by shareholders. The potential future reimbursement represents a derivative instrument as codified in ASC 815 Derivatives and Hedging which requires the potential future reimbursement to be recorded at fair value at each reporting date. The valuation techniques and significant unobservable inputs used for our level 3 fair value measurement at September 30, 2014 were as follows:



Description	Fair Value at September 30, 2014			Primary Valuation Techniques	Unobservable Inputs	Rate
Derivative liability	$	(7,002	)	Monte Carlo	Risk-free rate	0.51%
				simulation	Volatility	25.0%

Properties Held and Used

We made the decision to cease making loan servicing payments at a property in Jacksonville, Florida (Note 8). As a result, as of June 30, 2014, we recorded a loss on asset impairment totaling $22.7 million to reduce the aggregate carrying value of this property from $42.3 million to its estimated fair value of $19.6 million. We used discounted cash flow analysis and third party broker information (level 3 inputs) in determining the fair value of this property. The valuation techniques and significant unobservable inputs used for our level 3 fair value measurements at June 30, 2014 were as follows:



Description	Fair Value at June 30, 2014		Primary Valuation Techniques	Unobservable Inputs	Rate
Properties held and used on which we recognized impairment			Discounted	Discount rate	8%
losses	$	19,589	cash flows	Exit capitalization rate	8%

Financial Instruments

In addition to the assets and liabilities described in the above table, our financial instruments include our cash and cash equivalents, rents receivable, investment in direct financing lease receivable, real estate mortgages receivable, restricted cash, revolving credit facility, senior notes and mortgage notes payable, accounts payable and accrued expenses, rent collected in advance, security deposits and amounts due to related persons. At September 30, 2014, the fair value of these additional financial instruments, excluding mortgage debt related to properties held for sale, were not materially different from their carrying values, except as follows (in thousands):



	September 30, 2014
	Carrying Amount		Fair Value
Senior unsecured debt and mortgage notes payable, net	$	2,442,942	$	2,495,991

The fair values of our senior notes and mortgage notes payable are based on estimates using discounted cash flow analyses and currently prevailing interest rates adjusted by credit risk spreads (level 3 inputs).

Other financial instruments that potentially subject us to concentrations of credit risk consist principally of rents receivable; however, as of September 30, 2014, no single tenant of ours is responsible for more than 3% of our total annualized rents.

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Our derivative financial instruments, including interest rate swaps, are entered with major financial institutions and we monitor the amount of credit exposure to any one counterparty.

Note 14. Earnings Per Common Share

As of September 30, 2014, we had 4,915,497 series D preferred shares outstanding that were convertible into 2,363,248 of our common shares. The effect of our convertible preferred shares on income from continuing operations attributable to the Company’s common shareholders per share is anti-dilutive for all periods presented except for the three months ended September 30, 2014.

During the nine months ended September 30, 2014, the holders of 10,264,503 series D preferred shares converted their series D preferred shares into 10,412,499 of our common shares. The issuance of such common shares as a result of this exercise had a dilutive effect on income from continuing operations attributable to Equity Commonwealth common shareholders per share for the three and nine months ended September 30, 2014.

Note 15. Segment Information

Our primary business is the ownership and operation of office properties. We account for each of our individual properties as a separate operating segment. We have aggregated our separate operating segments into two reportable segments based on our primary method of internal reporting: CBD properties and suburban properties. More than 90% of our CBD and suburban properties are office properties. Each of our reportable segments includes properties with similar operating and economic characteristics that are subject to unique supply and demand conditions. Our operating segments (i.e., our individual properties) are managed and operated consistently in accordance with our standard operating procedures. We use property net operating income, or NOI, and cash yield to evaluate the performance of our operating segments. We define NOI as income from our real estate including lease termination fees received from tenants less our property operating expenses, which expenses include property marketing costs. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions.

As of September 30, 2014, we owned 40 CBD properties (53 buildings) and 116 suburban properties (209 buildings). The prior period has been restated to reflect properties reclassified from discontinued operations to continuing operations during 2014. See Note 4 for additional information regarding our properties and the reasons for this reclassification.

Property level information by operating segment for properties classified as held and used in operations as of September 30, 2014, and for the three and nine months ended September 30, 2014 and 2013, is as follows (in thousands):



	As of September 30,
	2014	2013
Square feet:
CBD properties	21,892	21,844
Suburban properties	21,027	21,023
Total properties	42,919	42,867

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Rental income:
CBD properties	$	109,822	$	108,624	$	326,155	$	330,395
Suburban properties	64,394		62,284		192,508		261,826
Total properties	$	174,216	$	170,908	$	518,663	$	592,221

Tenant reimbursements and other income:
CBD properties	$	27,653	$	28,928	$	86,359	$	90,883
Suburban properties	14,726		14,365		44,027		55,897
Total properties	$	42,379	$	43,293	$	130,386	$	146,780

NOI:
CBD properties	$	71,596	$	68,552	$	216,762	$	223,066
Suburban properties	45,607		43,299		138,463		205,350
Total properties	$	117,203	$	111,851	$	355,225	$	428,416

As of September 30, 2014, our investments in CBD properties and suburban properties, net of accumulated depreciation, were $3,014.2 million and $1,883.8 million, respectively, including $137.5 million of CBD properties and $88.0 million of suburban properties located in Australia.

The following table includes the reconciliation of NOI to net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI internally to evaluate individual, regional and combined property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects 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. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our properties’ results of operations. NOI does 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, net income (loss) available for Equity Commonwealth common shareholders, operating income (loss) or cash flow from operating activities, determined in accordance with GAAP, or as an indicator of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs. This measure should be considered in conjunction with net income (loss), net income (loss) attributable to Equity Commonwealth, net income (loss) available for Equity Commonwealth common shareholders, operating income (loss) and cash flow from operating activities as presented in our condensed consolidated statements of operations, condensed consolidated statements of comprehensive income (loss) and condensed consolidated statements of cash flows. Other REITs and real estate companies may calculate NOI differently than we do.

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A reconciliation of NOI to net income (loss) for the three and nine months ended September 30, 2014 and 2013, is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Rental income	$	174,216		$	170,908		$	518,663		$	592,221
Tenant reimbursements and other income	42,379			43,293			130,386			146,780
Operating expenses	(99,392		)	(102,350		)	(293,824		)	(310,585		)
NOI	$	117,203		$	111,851		$	355,225		$	428,416

NOI	$	117,203		$	111,851		$	355,225		$	428,416
Depreciation and amortization	(57,213		)	(56,465		)	(168,693		)	(182,494		)
General and administrative	(47,450		)	(25,742		)	(96,395		)	(63,454		)
Loss on asset impairment	—			(124,253		)	(17,922		)	(124,253		)
Acquisition related costs	—			436			(5		)	(337		)
Operating income (loss)	12,540			(94,173		)	72,210			57,878

Interest and other income	406			227			1,071			931
Interest expense	(35,245		)	(39,236		)	(111,079		)	(134,452		)
Gain (loss) on early extinguishment of debt	6,699			—			6,699			(60,027		)
Gain on sale of equity investments	171,754			—			171,721			66,293
Gain on issuance of shares by an equity investee	—			—			17,020			—
Income (loss) from continuing operations before income tax expense and equity in earnings of investees	156,154			(133,182		)	157,642			(69,377		)
Income tax expense	(703		)	(785		)	(2,166		)	(2,527		)
Equity in earnings of investees	1,072			10,492			24,460			14,913
Income (loss) from continuing operations	156,523			(123,475		)	179,936			(56,991		)
Income from discontinued operations	95			95			8,220			1,732
Gain (loss) on asset impairment from discontinued operations	122			(92,827		)	(2,238		)	(101,362		)
Loss on early extinguishment of debt from discontinued operations	—			—			(3,345		)	—
Net gain on sale of properties from discontinued operations	—			—			—			3,359
Income (loss) before gain on sale of properties	156,740			(216,207		)	182,573			(153,262		)
Gain on sale of properties	—			—			—			1,596
Net income (loss)	$	156,740		$	(216,207	)	$	182,573		$	(151,666	)

Note 16. Related Person Transactions

The following discussion includes a description of our related person transactions for the three and nine months ended September 30, 2014 and 2013. Certain of these related person transactions, and their approvals, occurred prior to the election of our New Board of Trustees at the Special Meeting and the appointment of our current executive officers following the Special Meeting. The disclosure below under “—Transactions with Prior Related Persons” describes our transactions and approvals with our prior related persons.

Related Person Transactions Following the Special Meeting:

Equity Group Investments and associated entities: Effective June 1, 2014, we entered into a one-year license agreement with Equity Group Investments, a private investment firm, or Equity Group, to use office space on the sixth floor at Two North Riverside Plaza in Chicago, Illinois. The license fee is $0.2 million for the year. The license fee includes the non-exclusive use of additional areas on the sixth floor (such as conference rooms and common areas), certain administrative

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services (such as mail room services and reception desk staffing), office equipment, office furniture, supplies, licensee’s share of building operating expenses and real estate taxes and access to one parking space. The license expires on May 31, 2015, unless terminated earlier in accordance with the terms of the license. Mr. Zell, our Chairman, is the Chairman and Chief Executive Officer of Equity Group Investments, and Mr. Helfand, our President and Chief Executive Officer, is the Co-President of Equity Group Investments. This license agreement was approved by the Audit Committee of the Board of Trustees.

Effective June 1, 2014, we entered into a one-year lease with one 3-month renewal option with Two North Riverside Plaza Joint Venture Limited Partnership, an entity associated with Mr. Zell, our Chairman, to occupy office space on the fourteenth floor at Two North Riverside Plaza in Chicago, Illinois. The initial term of the lease expires on May 31, 2015. The lease payment is $0.2 million for the initial term. This lease was approved by the Audit Committee of the Board of Trustees.

Effective July 31, 2014, we entered into a sublease with Equity Residential Management, L.L.C. to occupy office space on the tenth floor of Two North Riverside Plaza in Chicago, Illinois. Equity Residential Management, L.L.C. leases the space from Two North Riverside Plaza Joint Venture Limited Partnership, an entity associated with Mr. Zell, our Chairman. This sublease was approved by the Audit Committee of the Board of Trustees. The initial term of the sublease is approximately seven months commencing on or about October 22, 2014, expiring on May 31, 2015, with one 3-month renewal option. The sublease payment is approximately $0.2 million for the initial term.

Related/Corvex: On July 31, 2014, at the reconvened session of our 2014 annual meeting of shareholders, our shareholders voted to approve the reimbursement of approximately $33.5 million of expenses incurred by Related/Corvex since February 2013 in connection with their consent solicitations to remove our Prior Trustees and elect the New Board of Trustees and to engage in related litigation. Approximately $16.7 million was paid during the three and nine months ended September 30, 2014. Approximately $8.4 million will be reimbursed only if the average closing price of our common shares is at least $26.00 (as adjusted for any share splits or share dividends) during the one year period after the date on which the reimbursement was approved by shareholders, and the remaining approximately $8.4 million will be reimbursed only if the average closing price of our common shares is at least $26.00 (as adjusted for any share splits or share dividends) during the one year period between the first and second anniversaries of the date on which the reimbursement was approved by shareholders.

According to Related/Corvex’s Schedule 13D, as amended, Related/Corvex each owned approximately 2.8%, or approximately 5.7% in the aggregate, of our common shares as of August 5, 2014. Seven of our current trustees were nominated by Related/Corvex for election at our Special Meeting to fill the vacancies on our Board of Trustees created by the removal of our Prior Trustees as a result of Related/Corvex’s consent solicitation. In addition, Sam Zell and David Helfand, our Chairman and Chief Executive Officer, respectively, are associated with EGI-CW Holdings, L.L.C., which entered into certain arrangements with Related/Corvex in connection with the agreement of Messrs. Zell and Helfand to become nominees of Related/Corvex. Also, James Lozier, one of our new trustees, is party to an agreement with Related pursuant to which certain amounts have been paid or are payable to him for consulting and other services provided to Related. In addition, James Corl, one of our new trustees, is entitled to receive payments based on the performance of funds managed by Siguler Guff, which funds invest in an entity associated with Related.

Transactions with Prior Related Persons:

RMR: Prior to entering into the Termination and Cooperation Agreement with RMR, as further described below, we had three primary agreements with RMR and its affiliates to provide management and administrative services to us: (i) a business management agreement, which relates to our business generally, (ii) a property management agreement, which relates to our property level operations, and (iii) an Australia business and property management agreement, which relates to our Australian properties.

During the time we were externally managed by RMR, one of our former Managing Trustees, Mr. Barry Portnoy, was Chairman, majority owner and an employee of RMR. Another former Managing Trustee and our former President, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and was an owner, President, Chief Executive Officer and a director of RMR. Mr. John Popeo, our former Treasurer and Chief Financial Officer, and Mr. David Lepore, our former Chief Operating Officer, were also officers of RMR. Two of our former Independent Trustees served as independent directors or independent trustees of other public companies to which RMR provided management services. Mr. Barry Portnoy served as a managing director or

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managing trustee of a majority of the public companies to which RMR or its affiliate provided management services and Mr. Adam Portnoy served as a managing trustee of a majority of those companies. In addition, officers of RMR served as officers of those companies. As a result of the removal, effective March 25, 2014, of Mr. Barry Portnoy and Mr. Adam Portnoy as Trustees of the Company and the resignation on May 23, 2014, of Mr. Adam D. Portnoy, Mr. John C. Popeo, Mr. David M. Lepore and other officers of RMR from their respective positions as officers of the Company, they, RMR, RMR Australia Asset Management Pty Limited, or RMR Australia, GOV, SIR and AIC have ceased to be related persons of the Company. Therefore, we only present related person transactions with these entities through June 30, 2014.

Pursuant to our business management agreement with RMR, we recognized business management fees of $31.7 million for the six months ended June 30, 2014, and $9.8 million and $33.8 million for the three and nine months ended September 30, 2013, respectively. The fees for the six months ended June 30, 2014, include estimated 2014 incentive fees payable in common shares based on our common share total return. These amounts are included in general and administrative expenses and income from discontinued operations, as appropriate, in our condensed consolidated financial statements. In accordance with the terms of our business management agreement, as amended in December 2013, we issued 68,206 of our common shares to RMR for the six months ended June 30, 2014 as payment for 10% of the base business management fee we recognized for such period. In connection with our property management agreement with RMR, the aggregate property management and construction supervision fees we recognized were $13.8 million for the six months ended June 30, 2014, and $7.9 million and $24.9 million for the three and nine months ended September 30, 2013, respectively. These amounts are included in operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. The business management fees, property management fees and construction supervision fees that we incurred during the three and nine months ended September 30, 2013 include fees incurred by SIR through July 2, 2013, when SIR was a consolidated subsidiary of ours during those periods.

MacarthurCook Fund Management Limited (MacarthurCook) previously provided us with business and property management services related to our Australian properties. Our contract with MacarthurCook terminated on January 31, 2013, and on that date we entered into a business and property management agreement (Australia Management Agreement) with RMR Australia for the benefit of CWH Australia Trust (formerly the MacarthurCook Industrial Property Fund), a subsidiary of ours. The terms of the Australia Management Agreement are substantially similar to the terms of the management agreement we had with MacarthurCook. RMR Australia is owned by our former Managing Trustees and our former President and it has been granted an Australian financial services license by the Australian Securities & Investments Commission. Similar to our prior arrangement with respect to fees we paid to MacarthurCook, RMR has agreed to waive half of the fees payable by us under our property management agreement with RMR and half of the business management fees otherwise payable by us under our business management agreement with RMR related to real estate investments that are subject to the Australia Management Agreement for so long as the Australia Management Agreement is in effect and we or any of our subsidiaries are paying the fees under that agreement. Pursuant to the Australia Management Agreement, we recognized aggregate business and property management fees of $0.9 million for the six months ended June 30, 2014, which amounts are equal to the fees waived by RMR and excluded from the amount that was payable to RMR during the six months ended June 30, 2014. Pursuant to the Australia Management Agreement, we recognized aggregate business and property management fees of $0.4 million and $1.2 million for the three months ended September 30, 2013 and for the period from February 1, 2013 to September 30, 2013, respectively, which amounts are equal to the fees waived by RMR and excluded from the amounts that were payable to RMR during such period.

For January 2013, RMR agreed to waive half of the fees payable by us under our property management agreement and half of the business management fees related to real estate investments located outside of the United States, Puerto Rico and Canada, so long as our business and property management agreement with MacarthurCook, with respect to those investments, was in effect and we or any of our subsidiaries were paying fees under that agreement. MacarthurCook earned $0.2 million in January 2013 with respect to our Australian properties, which amount is equal to the fees waived by RMR and excluded from the amount that was payable to RMR during that month.

Termination and Cooperation Agreement: On September 30, 2014, we entered into a termination and cooperation agreement (Cooperation Agreement) with RMR and RMR Australia together, (Manager). Under the terms of the agreement, the existing business and property management agreements with RMR terminated effective September 30, 2014. Our existing Australia Management Agreement with RMR Australia will remain in effect until December 31, 2015, unless earlier terminated.

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Pursuant to the Cooperation Agreement, until February 28, 2015, Manager has agreed to use best efforts to assist us in the transition of our management and operations. We have agreed to pay Manager $1.2 million per month for transition services from October 1, 2014 to February 28, 2015. The payment of the transition fee also covers continued management and other services for the Australian assets through February 28, 2015. If we require such services beyond February 28, 2015, we have agreed to pay Manager $60,000 per month until the Australia Management Agreement is terminated.

RMR is responsible for any severance payments to its employees. We have agreed to pay accrued vacation benefits for any of Manager’s employees that are terminated as a result of the transition. We remain obligated to pay Manager the $15.3 million pro-rata portion of the current year’s incentive fee under the existing business management agreement for the period from January 1, 2014 to September 30, 2014, which has been accrued as of September 30, 2014. This incentive fee relates to the business management agreement entered into prior to the election of our new Board of Trustees on May 23, 2014. There is no future obligation to pay an incentive fee to RMR.

GOV: GOV was formerly our 100% owned subsidiary. In 2009, GOV completed an initial public offering pursuant to which GOV ceased to be a majority owned subsidiary of ours. To facilitate this offering, we and GOV entered into a transaction agreement that governs our separation from and relationship with GOV. Pursuant to this transaction agreement and subject to certain conditions, among other things, we granted GOV the right of first purchase to acquire any property owned by us that we determine to divest (including sale, mortgage or other financing), if the property is then, or is reasonably expected within twelve (12) months to be, majority leased to a government tenant, which right of first purchase will also apply in the event of an indirect sale of any such properties as a result of a change of control of us. On July 23, 2014, we and GOV entered into a letter agreement whereby GOV irrevocably waived and released us from the right of first purchase described above. Additionally, pursuant to the letter agreement we and GOV each agreed to waive certain consent rights over the other party’s investments in certain categories of properties.

During the time we were externally managed by RMR, RMR provided management services to both us and GOV, our former Managing Trustees and our former President were managing trustees of GOV and GOV’s executive officers were officers of RMR. On March 15, 2013, we sold all of our 9,950,000 common shares of GOV in a public offering for net proceeds (after deducting underwriters’ discounts and commissions and expenses) of $239.6 million and we realized a gain of $66.3 million. In connection with this public offering, on March 11, 2013, we entered into a registration agreement with GOV under which we agreed to pay all expenses incurred by GOV relating to the registration and sale of our GOV common shares. We incurred and paid $0.3 million of reimbursements to GOV pursuant to this agreement during 2013. In addition, under the registration agreement, GOV agreed to indemnify us and our officers, Trustees and controlling persons, and we agreed to indemnify GOV and its officers, trustees and controlling persons, against certain liabilities related to the public offering, including liabilities under the Securities Act of 1933, as amended, or the Securities Act.

SIR: SIR was formerly our 100% owned subsidiary. In March 2012, SIR completed an initial public offering, or the SIR IPO. Until July 9, 2014, we were SIR’s largest shareholder and, until July 2, 2013, SIR was one of our consolidated subsidiaries. As of June 30, 2014, we owned 22,000,000 common shares of SIR, which represented approximately 36.7% of SIR’s outstanding common shares. During the time we were externally managed by RMR, RMR provided management services to both us and SIR. Our former Managing Trustees and our former President were managing trustees of SIR and our former Treasurer and Chief Financial Officer served as the treasurer and chief financial officer of SIR and SIR’s executive officers were officers of RMR. In addition, one of our former Independent Trustees was an independent trustee of SIR. In March 2013, we entered into a registration agreement with SIR, pursuant to which SIR agreed to, among other things, file a registration statement with respect to an offering of up to all of the 22,000,000 common shares of SIR that we owned, and SIR filed a registration statement on Form S-3 to permit the resale by us of some or all of the common shares of SIR we owned. Under the registration agreement, we agreed to pay all expenses incurred by SIR relating to the registration and sale of the shares in an offering. We incurred and paid $0.6 million of reimbursements to SIR pursuant to this agreement. By letter dated March 31, 2014, SIR notified us that, effective that same day, SIR had elected to terminate the registration agreement with us as a result of the removal of all the Prior Trustees effective March 25, 2014, which constituted a change of control of us as provided in that agreement. The letter also noted that SIR would welcome the opportunity to meet with our New Board of Trustees to discuss mutually beneficial arrangements regarding the registration of the shares of SIR owned by EQC. On July 9, 2014, we sold our entire stake of 22,000,000 common shares of SIR, for $32.04 per share, raising aggregate gross proceeds of $704.8 million. As a result of this sale, we no longer hold any interest in SIR.

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AIC: We previously owned 12.5% of AIC, an Indiana insurance company, and, as of May 9, 2014, had invested $5.2 million in AIC since we became an equity owner of AIC in 2009. RMR, GOV, SIR and four other companies to which RMR provides management services also own shares of AIC. During the time we were externally managed by RMR, RMR provided management and administrative services to AIC pursuant to a management and administrative services agreement with AIC and a majority of the Prior Trustees, our former President and most of the trustees and directors of the other AIC shareholders served on the board of directors of AIC. On March 25, 2014, as a result of the removal of the Prior Trustees, we underwent a change in control, as defined in the shareholders’ agreement among us, the other shareholders of AIC and AIC. As a result of that change in control and in accordance with the terms of the shareholders agreement, the other shareholders of AIC, on May 9, 2014, exercised their right to purchase the 20,000 shares of AIC we then owned. We received $5.8 million in aggregate proceeds from this sale and we no longer own any interest in AIC.

We previously purchased property insurance providing $500.0 million of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC was a reinsurer of certain coverage amounts. This program expired in June 2014. We recognized a loss of $0.1 million related to our investment in AIC for the six months ended June 30, 2014, and income of $0.1 million and $0.4 million for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2013, during which time SIR was both a shareholder of AIC and our consolidated subsidiary prior to July 2, 2013, our consolidated financial statements include SIR’s equity investment interest in AIC.

Indemnification: Pursuant to our declaration of trust and separate indemnification agreements, we have advanced amounts incurred for legal fees and costs on behalf of certain of the Prior Trustees and officers with respect to the legal proceedings described in Part II, Item 1, “Legal Proceedings” in this Quarterly Report. Pursuant to indemnification provisions in our business and property management agreements with RMR, we have also incurred legal fees and costs on behalf of RMR for claims brought against RMR in its capacity as our business and property manager with respect to certain legal proceedings described in Part II, Item 1, “Legal Proceedings” in this Quarterly Report. For the six months ended June 30, 2014, we incurred approximately $5.4 million in such legal fees and costs, including our costs, and for the three and nine months ended September 30, 2013, we incurred approximately $13.8 million and $23.9 million, respectively, in such legal fees and costs, including our costs.

Settlement of Certain Tenant Litigation: On March 1, 2014, pursuant to mediation, we and an affiliate of RMR agreed to terms of a settlement of a long running litigation with an unrelated third party that was a tenant, or the Tenant, of two separate properties: one property owned by us and one property owned by the RMR affiliate. This litigation arose as a result of flooding in 1999 and 2001 at both of these properties. After the flooding, the Tenant filed a complaint seeking declaratory and injunctive relief providing that Tenant was no longer obligated to pay rent at the two properties in question and brought claims against EQC and the RMR affiliate, as landlords, for, among other things, breach of the covenants of quiet enjoyment and habitability. We and RMR counterclaimed, seeking damages based in part upon Tenant’s failure to pay rent and make repairs. The settlement agreement regarding this litigation provides for a payment by Tenant of $12.0 million to EQC and the RMR affiliate, payable in three installments ($6.0 million on June 30, 2014 and $3.0 million on each of September 30, 2014 and December 31, 2014), split pro-rata between EQC and the RMR affiliate based upon the balance of the rent due under each lease. The total rent due under the EQC lease was approximately $9.2 million; the total rent due under the lease with the RMR affiliate was approximately $1.1 million. This settlement was approved by the court on May 6, 2014.

Note 17. Subsequent Events

Debt Repayments

On October 31, 2014 we repaid at par the $7.8 million mortgage loan encumbering 6200 Glenn Carlson Drive.

On October 1, 2014 we issued a notice to the trustee to redeem at par $125.0 million of our 7.50% unsecured senior notes due 2019. The notes will be redeemed on November 17, 2014.

Compensation Committee Approvals

On October 28, 2014, our Board of Trustees approved an amendment to the Company’s 2012 Equity Compensation Plan. This amendment permits us to issue restricted share units. Additionally, on October 28, 2014, our Compensation Committee (Committee) approved new forms of Restricted Share and Restricted Share Unit Agreements to be used for grants of

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restricted common shares to members of the Board, as well as grants of restricted common shares and restricted share units to officers and employees of the Company.

On October 28, 2014, the Committee approved compensation terms for David A. Helfand, our President and Chief Executive Officer, David S. Weinberg, our Executive Vice President and Chief Operating Officer, Adam S. Markman, our Executive Vice President, Chief Financial Officer and Treasurer, and Orrin S. Shifrin, our Executive Vice President, General Counsel and Secretary.

On October 28, 2014, the Committee approved the one-time grant of restricted common shares and restricted share units to certain of the Company’s officers and employees and to Mr. Zell, the Chairman of our Board of Trustees. The Committee also approved the one-time grant of restricted common shares to our independent Trustees, a grant of restricted common shares to each independent Trustee as annual compensation for his or her service as a Trustee, and a pro-rata grant of fully vested common shares for five of our independent Trustees for their service from May 23, 2014 through July 31, 2014.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report, and in our Annual Report.

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Quarterly Report constitute forward-looking statements within the meaning of the federal securities laws. Any forward-looking statements contained in this Quarterly Report are intended to be made pursuant to the safe harbor provisions of Section 21E of the Private Securities Litigation Reform Act of 1995. 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 particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions are forward-looking statements. 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,” or “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 Quarterly Report 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). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:


•	changes in the real estate industry, particularly in those markets in which our properties are located;


•	our ability to raise equity or debt capital;


•	our ability to internalize EQC’s corporate and business operations from RMR;


•	our ability to transition property management to CBRE;


•	the future amount of leasing activity and occupancy rates at our properties;


•	the future rent rates we will be able to charge at our properties;


•	the costs we may incur to lease space in our properties;


•	our ability to declare or pay distributions to our shareholders and the amounts of such distributions;


•	the credit quality of our tenants;


•	the likelihood that our tenants will pay rent, renew leases, enter into new leases or be affected by cyclical economic conditions;


•	our sales of properties;


•	our ability to compete for tenancies effectively;


•	our ability to pay interest on and principal of our debt;


•	our ability to obtain credit facilities, and the availability of borrowings under those credit facilities; and


•	our tax status as a REIT.

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While forward-looking statements reflect our 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 our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in our Annual Report.

OVERVIEW

We are a self-managed and self-advised REIT organized under Maryland law. We primarily own office buildings in CBD and suburban locations throughout the United States, consisting of 145 properties (251 buildings) with a combined 41.2 million square feet. In addition, we also own 1.8 million square feet of space in 11 properties (11 buildings) located in Australia. Prior to July 9, 2014, we also owned 22,000,000 common shares, or approximately 36.7%, of SIR, a REIT that primarily owns and invests in net leased, single tenant office and industrial properties throughout the United States and leased lands in Hawaii. SIR was a 100% owned subsidiary of ours until March 12, 2012, on which date SIR completed the SIR IPO and became a publicly owned company with shares listed on the NYSE. After the SIR IPO, and until July 2, 2013, SIR was one of our consolidated subsidiaries and we consolidated SIR’s financial position and results of operations in our financial statements. On July 2, 2013, our ownership percentage in SIR was reduced to below 50% and we began accounting for our investment in SIR under the equity method. On July 9, 2014, we sold our entire stake of 22,000,000 common shares of SIR and thus no longer hold any interest in SIR. See Note 16 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report for further information regarding our agreements with SIR.

On March 18, 2014, Related/Corvex delivered to us written consents which they represented were from a sufficient number of holders of our outstanding common shares to remove our Prior Trustees and any other person or persons elected or appointed to the Board of Trustees prior to the effective time of the Related/Corvex removal proposal. After inspection, the Prior Trustees determined that holders of more than two-thirds of our outstanding common shares as of the February 18, 2014 record date consented to the Related/Corvex proposal, reaching the threshold required to remove our Prior Trustees and any other person or persons appointed as a Trustee prior to the effective time of the Related/Corvex removal proposal. Accordingly, on March 25, 2014, all of our Prior Trustees certified their removal as Trustees of EQC. At a special meeting of shareholders held on May 23, 2014, seven new individuals were elected to serve on our New Board of Trustees. Also, immediately following the Special Meeting, our New Board of Trustees accepted the resignations of our former executive officers and appointed new executive officers. On July 31, 2014, our shareholders elected four additional individuals to serve on our Board of Trustees.

Under the direction of our Prior Trustees, our business plan had been to reposition our portfolio towards CBD office buildings and away from suburban office and industrial properties and, in furtherance thereof, we were actively marketing and pursuing the sale of several properties. As a result of the removal of our Prior Trustees on March 25, 2014, we suspended this plan and ceased to actively market and take actions to sell properties which we had previously classified as held for sale that were not already subject to a binding sale agreement. This resulted in the reclassification of two CBD properties (two buildings) and 29 suburban properties (65 buildings) with a combined 5,641,450 square feet, which we had previously classified as held for sale as of December 31, 2013, to properties held and used in operations because the properties no longer meet the requirements under GAAP for classification as held for sale. The financial information presented in this Quarterly Report reflects the reclassification of these properties for all periods presented.

As of September 30, 2014, all of the properties that were part of our Prior Trustees’ business plan to reposition our portfolio and thus were classified as held for sale as of December 31, 2013, except for the properties noted above that were reclassified to held and used in operations in 2014, have been sold. There have been no other dispositions approved by our New Board of Trustees.

Our Board of Trustees recently adopted a strategy to consider disposing of assets that have one or more of the following attributes: 1) assets that do not offer an opportunity to create a competitive advantage, 2) assets that are less than 150,000 square feet, 3) assets that are not office buildings, 4) assets that are not located in the U.S., or 5) assets that produce a low cash yield or require significant capital expenditures.