10-Q
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, 2015
OR
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 31, 2015: 126,349,914.
EQUITY COMMONWEALTH
FORM 10-Q
September 30, 2015
INDEX
EXPLANATORY NOTE
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, 2015, unless the context indicates otherwise.
PART I. Financial Information
Item 1. Financial Statements.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
|
| | | | | | | |
| September 30,
2015 | | December 31,
2014 |
| | | (audited) |
ASSETS | | | |
Real estate properties: | | | |
Land | $ | 413,281 |
| | $ | 714,238 |
|
Buildings and improvements | 3,559,060 |
| | 5,014,205 |
|
| 3,972,341 |
| | 5,728,443 |
|
Accumulated depreciation | (884,183 | ) | | (1,030,445 | ) |
| 3,088,158 |
| | 4,697,998 |
|
Properties held for sale | 112,150 |
| | — |
|
Acquired real estate leases, net | 99,017 |
| | 198,287 |
|
Cash and cash equivalents | 1,649,162 |
| | 364,516 |
|
Restricted cash | 28,463 |
| | 32,257 |
|
Rents receivable, net of allowance for doubtful accounts of $9,281 and $6,565, respectively | 184,679 |
| | 248,101 |
|
Other assets, net | 162,614 |
| | 220,480 |
|
Total assets | $ | 5,324,243 |
| | $ | 5,761,639 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Senior unsecured debt, net | $ | 1,460,360 |
| | $ | 1,598,416 |
|
Mortgage notes payable, net | 367,713 |
| | 609,249 |
|
Liabilities related to properties held for sale | 1,909 |
| | — |
|
Accounts payable and accrued expenses | 121,697 |
| | 162,204 |
|
Assumed real estate lease obligations, net | 4,890 |
| | 26,784 |
|
Rent collected in advance | 29,744 |
| | 31,359 |
|
Security deposits | 10,722 |
| | 14,044 |
|
Total liabilities | 1,997,035 |
| | 2,442,056 |
|
| | | |
Shareholders’ equity: | | | |
Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized; | | | |
Series D preferred shares; 6 1/2% cumulative convertible; 4,915,196 and 4,915,497 shares issued and outstanding, respectively, aggregate liquidation preference of $122,880 and $122,887, respectively | 119,263 |
| | 119,266 |
|
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; 126,349,914 and 129,607,279 shares issued and outstanding, respectively | 1,263 |
| | 1,296 |
|
Additional paid in capital | 4,410,951 |
| | 4,487,133 |
|
Cumulative net income | 2,290,564 |
| | 2,233,852 |
|
Cumulative other comprehensive loss | (5,142 | ) | | (53,216 | ) |
Cumulative common distributions | (3,111,868 | ) | | (3,111,868 | ) |
Cumulative preferred distributions | (643,214 | ) | | (622,271 | ) |
Total shareholders’ equity | 3,327,208 |
| | 3,319,583 |
|
Total liabilities and shareholders’ equity | $ | 5,324,243 |
| | $ | 5,761,639 |
|
See accompanying notes.
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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenues: | | | | | | | |
Rental income | $ | 125,459 |
| | $ | 174,216 |
| | $ | 457,128 |
| | $ | 518,663 |
|
Tenant reimbursements and other income | 33,749 |
| | 42,379 |
| | 118,829 |
| | 130,386 |
|
Total revenues | 159,208 |
| | 216,595 |
| | 575,957 |
| | 649,049 |
|
Expenses: | | | | | | | |
Operating expenses | 73,571 |
| | 99,392 |
| | 261,128 |
| | 293,824 |
|
Depreciation and amortization | 40,522 |
| | 57,213 |
| | 156,858 |
| | 168,693 |
|
General and administrative | 16,249 |
| | 47,450 |
| | 43,718 |
| | 96,395 |
|
Loss on asset impairment | — |
| | — |
| | 17,162 |
| | 17,922 |
|
Acquisition related costs | — |
| | — |
| | — |
| | 5 |
|
Total expenses | 130,342 |
| | 204,055 |
| | 478,866 |
| | 576,839 |
|
Operating income | 28,866 |
| | 12,540 |
| | 97,091 |
| | 72,210 |
|
Interest and other income | 637 |
| | 406 |
| | 4,813 |
| | 1,071 |
|
Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $171, $(91), $23 and $(700), respectively) | (25,111 | ) | | (35,245 | ) | | (82,926 | ) | | (111,079 | ) |
(Loss) gain on early extinguishment of debt | (3,887 | ) | | 6,699 |
| | 6,111 |
| | 6,699 |
|
Gain on sale of equity investment | — |
| | 171,754 |
| | — |
| | 171,721 |
|
Gain on issuance of shares by an equity investee | — |
| | — |
| | — |
| | 17,020 |
|
Foreign currency exchange loss | (9,809 | ) | | — |
| | (8,953 | ) | | — |
|
Gain on sale of properties | 39,793 |
| | — |
| | 42,953 |
| | — |
|
Income from continuing operations before income taxes and equity in earnings of investees | 30,489 |
| | 156,154 |
| | 59,089 |
| | 157,642 |
|
Income tax expense | (23 | ) | | (703 | ) | | (2,377 | ) | | (2,166 | ) |
Equity in earnings of investees | — |
| | 1,072 |
| | — |
| | 24,460 |
|
Income from continuing operations | 30,466 |
| | 156,523 |
| | 56,712 |
| | 179,936 |
|
Discontinued operations: | | | | | | | |
Income from discontinued operations | — |
| | 95 |
| | — |
| | 8,220 |
|
Gain (loss) on asset impairment from discontinued operations | — |
| | 122 |
| | — |
| | (2,238 | ) |
Loss on early extinguishment of debt from discontinued operations | — |
| | — |
| | — |
| | (3,345 | ) |
Net income | 30,466 |
| | 156,740 |
| | 56,712 |
| | 182,573 |
|
Preferred distributions | (6,981 | ) | | (6,981 | ) | | (20,943 | ) | | (25,114 | ) |
Excess fair value of consideration over carrying value of preferred shares | — |
| | — |
| | — |
| | (16,205 | ) |
Net income attributable to Equity Commonwealth common shareholders | $ | 23,485 |
| | $ | 149,759 |
| | $ | 35,769 |
| | $ | 141,254 |
|
Amounts attributable to Equity Commonwealth common shareholders: | | | | | | | |
Income from continuing operations | $ | 23,485 |
| | $ | 149,542 |
| | $ | 35,769 |
| | $ | 138,617 |
|
Income from discontinued operations | — |
| | 95 |
| | — |
| | 8,220 |
|
Gain (loss) on asset impairment from discontinued operations | — |
| | 122 |
| | — |
| | (2,238 | ) |
Loss on early extinguishment of debt from discontinued operations | — |
| | — |
| | — |
| | (3,345 | ) |
Net income | $ | 23,485 |
| | $ | 149,759 |
| | $ | 35,769 |
| | $ | 141,254 |
|
Weighted average common shares outstanding — basic | 128,739 |
| | 128,880 |
| | 129,386 |
| | 123,736 |
|
Weighted average common shares outstanding — diluted | 129,878 |
| | 131,243 |
| | 130,093 |
| | 123,736 |
|
Basic earnings per common share attributable to Equity Commonwealth common shareholders: | | | | | | | |
Income from continuing operations | $ | 0.18 |
| | $ | 1.16 |
| | $ | 0.28 |
| | $ | 1.12 |
|
Income from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.02 |
|
Net income | $ | 0.18 |
| | $ | 1.16 |
| | $ | 0.28 |
| | $ | 1.14 |
|
Diluted earnings per common share attributable to Equity Commonwealth common shareholders: | | | | | | | |
Income from continuing operations | $ | 0.18 |
| | $ | 1.16 |
| | $ | 0.27 |
| | $ | 1.12 |
|
Income from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.02 |
|
Net income | $ | 0.18 |
| | $ | 1.16 |
| | $ | 0.27 |
| | $ | 1.14 |
|
Distributions declared per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.25 |
|
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net income | $ | 30,466 |
| | $ | 156,740 |
| | $ | 56,712 |
| | $ | 182,573 |
|
| | | | | | | |
Other comprehensive income, net of tax: | | | | | | | |
Unrealized gain (loss) on derivative instruments and other assets | 821 |
| | 1,805 |
| | (843 | ) | | 3,432 |
|
Foreign currency translation adjustments | — |
| | (20,392 | ) | | 48,917 |
| | (4,844 | ) |
Equity in unrealized income (loss) of an investee | — |
| | 27 |
| | — |
| | (22 | ) |
Total comprehensive income | $ | 31,287 |
| | $ | 138,180 |
| | $ | 104,786 |
| | $ | 181,139 |
|
See accompanying notes.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 56,712 |
| | $ | 182,573 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | |
Depreciation | 117,239 |
| | 122,571 |
|
Net amortization of debt discounts, premiums and deferred financing fees | 23 |
| | (703 | ) |
Straight line rental income | (3,512 | ) | | (10,398 | ) |
Amortization of acquired real estate leases | 28,386 |
| | 39,431 |
|
Other amortization | 17,224 |
| | 15,181 |
|
Share-based compensation | 11,765 |
| | 3,142 |
|
Loss on asset impairment | 17,162 |
| | 20,160 |
|
Gain on early extinguishment of debt | (6,111 | ) | | (3,354 | ) |
Equity in earnings of investees | — |
| | (24,460 | ) |
Loss on sale of equity investments | — |
| | (171,721 | ) |
Gain on issuance of shares by an equity investee | — |
| | (17,020 | ) |
Distributions of earnings from investees | — |
| | 20,680 |
|
Foreign currency exchange loss | 8,953 |
| | — |
|
Net gain on sale of properties | (42,953 | ) | | — |
|
Other non-cash expenses | — |
| | 2,402 |
|
Change in assets and liabilities: | | | |
Restricted cash | (6,275 | ) | | 5,634 |
|
Rents receivable and other assets | (46,607 | ) | | (28,586 | ) |
Accounts payable and accrued expenses | (5,769 | ) | | 19,826 |
|
Rent collected in advance | (6,112 | ) | | (5,399 | ) |
Security deposits | 1,298 |
| | 37 |
|
Due to related persons | — |
| | (9,277 | ) |
Cash provided by operating activities | 141,423 |
| | 160,719 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Real estate improvements | (43,396 | ) | | (81,935 | ) |
Principal payments received from direct financing lease | 5,717 |
| | 5,451 |
|
Proceeds from sale of properties, net | 1,425,590 |
| | 185,299 |
|
Proceeds from sale of securities | 27,068 |
| | — |
|
Proceeds from sale of equity investments, net | — |
| | 710,492 |
|
Increase in restricted cash | (3,238 | ) | | (4,796 | ) |
Cash provided by investing activities | 1,411,741 |
| | 814,511 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Purchase and retirement of common shares | (87,983 | ) | | — |
|
Payments on borrowings | (142,868 | ) | | (551,174 | ) |
Deferred financing fees | (7,143 | ) | | — |
|
Distributions to common shareholders | — |
| | (29,597 | ) |
Distributions to preferred shareholders | (20,943 | ) | | (25,114 | ) |
Cash used in financing activities | (258,937 | ) | | (605,885 | ) |
| | | |
Effect of exchange rate changes on cash | (9,581 | ) | | (98 | ) |
| | | |
Increase in cash and cash equivalents | 1,284,646 |
| | 369,247 |
|
Cash and cash equivalents at beginning of period | 364,516 |
| | 217,032 |
|
Cash and cash equivalents at end of period | $ | 1,649,162 |
| | $ | 586,279 |
|
See accompanying notes.
EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
(unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
Interest paid | $ | 93,598 |
| | $ | 118,948 |
|
Taxes paid | 5,853 |
| | 2,732 |
|
| | | |
NON-CASH INVESTING ACTIVITIES: | | | |
(Decrease) increase in capital expenditures recorded as liabilities | $ | (9,753 | ) | | $ | 15,757 |
|
See accompanying notes.
EQUITY COMMONWEALTH
NOTES TO UNAUDITED 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, 2014. 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.
Share amounts are presented in whole numbers, except where noted.
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 adopted ASU 2014-08 on January 1, 2015, and determined that our 2015 dispositions and properties held for sale as of September 30, 2015 do not individually represent a strategic shift, as defined by the standard, that has or will have a major effect on our operations and financial results. As a result, the 2015 dispositions have not been presented as discontinued operations in the 2015 statements of operations.
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, 2017. 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.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. We do not expect that the adoption of this standard will have a material impact 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 written consents which they represented were from a sufficient number of holders of our outstanding common shares to remove all of our then Trustees (former 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
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 former 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: 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. On July 31, 2014, our shareholders re-elected the seven individuals listed above and 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 (new Board of Trustees). At the 2015 annual meeting of shareholders held on June 16, 2015, our shareholders re-elected each of our eleven Trustees to serve on our Board of Trustees for the 2015-2016 term.
Note 4. Real Estate Properties
During the nine months ended September 30, 2015 and 2014, we made improvements, excluding tenant-funded improvements, to our properties totaling $46.7 million and $65.9 million, respectively.
Properties Held For Sale:
We classify all properties that meet the criteria outlined in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification (Codification) as held for sale on our condensed consolidated balance sheets. As of December 31, 2014, we had no properties classified as held for sale. As of September 30, 2015, we classified the following properties as held for sale (dollars in thousands):
|
| | | | | | | | | | | | | | | | | |
Asset | | Date Sold | | Segment | | Number of
Properties | | Number of
Buildings | | Square Footage | | Gross Sales Price |
Properties | | |
| | |
|
One South Church Avenue | | October 2015 | | CBD | | 1 |
| | 1 |
| | 240,811 |
| | $ | 32,000 |
|
775 Ridge Lake Boulevard | | October 2015 | | CBD | | 1 |
| | 1 |
| | 120,678 |
| | 16,300 |
|
One Park Square | | October 2015 | | CBD | | 1 |
| | 6 |
| | 259,737 |
| | 34,300 |
|
| | | | | | | | | | | | |
Portfolio of Properties | | | | |
9040 Roswell Road | | October 2015 | | Suburban | | 1 |
| | 1 |
| | 178,941 |
| | |
The Exchange | | October 2015 | | Suburban | | 1 |
| | 2 |
| | 187,632 |
| | |
3920 Arkwright Road | | October 2015 | | Suburban | | 1 |
| | 1 |
| | 196,156 |
| | |
1775 West Oak Commons Court | | October 2015 | | Suburban | | 1 |
| | 1 |
| | 79,854 |
| | |
Georgia portfolio | | | | | | 4 |
| | 5 |
| | 642,583 |
| | $ | 48,550 |
|
| | | | | | 7 |
| | 13 |
| | 1,263,809 |
| | $ | 131,150 |
|
Summarized balance sheet information for all properties classified as held for sale is as follows (in thousands):
|
| | | |
| September 30, 2015 |
Real estate properties | $ | 108,023 |
|
Other assets, net | 4,127 |
|
Properties held for sale | $ | 112,150 |
|
| |
Accounts payable and accrued expenses | $ | 1,479 |
|
Security deposits | 430 |
|
Liabilities related to properties held for sale | $ | 1,909 |
|
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property Dispositions:
During the nine months ended September 30, 2015, we disposed of the following properties (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | | | |
Asset | | Date Disposed | | Segment | | Number of
Properties | | Number of
Buildings | | Square Footage | | Gross Sales Price | | Gain (Loss) on Sale |
Properties | | |
| | |
| | |
|
11350 North Meridian Street | | January 2015 | | Suburban | | 1 |
| | 1 |
| | 72,264 |
| | $ | 4,200 |
| | $ | 766 |
|
333 Laurel Oak Drive(1) | | March 2015 | | Suburban | | — |
| | 1 |
| | 27,164 |
| | 2,450 |
| | 251 |
|
1921 E. Alton Avenue | | March 2015 | | Suburban | | 1 |
| | 1 |
| | 67,846 |
| | 14,533 |
| | 4,850 |
|
46 Inverness Center Parkway | | April 2015 | | Suburban | | — |
| | — |
| | — |
| | 2,000 |
| | 1,857 |
|
225 Water Street(2) | | May 2015 | | CBD | | 1 |
| | 1 |
| | 318,997 |
| | — |
| | — |
|
Sorrento Valley Business Park | | June 2015 | | Suburban | | 1 |
| | 4 |
| | 105,003 |
| | 23,500 |
| | 11,896 |
|
Illinois Center | | August 2015 | | CBD | | 1 |
| | 2 |
| | 2,090,162 |
| | 376,000 |
| | 26,929 |
|
16th and Race Street | | August 2015 | | CBD | | 1 |
| | 1 |
| | 608,625 |
| | 43,000 |
| | 7,922 |
|
185 Asylum Street | | September 2015 | | CBD | | 1 |
| | 1 |
| | 868,395 |
| | 113,250 |
| | 17,619 |
|
| | | | | | | | | | | | | | |
Portfolio of properties | | | | | | |
7450 Campus Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 77,411 |
| | | | |
129 Worthington Ridge Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 227,500 |
| | | | |
599 Research Parkway | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 48,249 |
| | | | |
181 Marsh Hill Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 162,036 |
| | | | |
101 Barnes Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 45,755 |
| | | | |
15 Sterling Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 173,015 |
| | | | |
35 Thorpe Avenue | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 79,862 |
| | | | |
50 Barnes Industrial Road North | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 154,255 |
| | | | |
5-9 Barnes Industrial Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 38,006 |
| | | | |
860 North Main Street | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 31,165 |
| | | | |
One Barnes Industrial Road South | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 30,170 |
| | | | |
Village Lane | | May 2015 | | Suburban | | 1 |
| | 2 |
| | 58,185 |
| | | | |
100 Northfield Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 116,986 |
| | | | |
905 Meridian Lake Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 74,652 |
| | | | |
1717 Deerfield Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 141,186 |
| | | | |
1955 West Field Court | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 59,130 |
| | | | |
5015 S. Water Circle | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 113,524 |
| | | | |
Adams Place | | May 2015 | | Suburban | | 1 |
| | 2 |
| | 230,259 |
| | | | |
Cabot Business Park | | May 2015 | | Suburban | | 1 |
| | 2 |
| | 252,755 |
| | | | |
2300 Crown Colony Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 45,974 |
| | | | |
Myles Standish Industrial Park | | May 2015 | | Suburban | | 1 |
| | 2 |
| | 74,800 |
| | | | |
340 Thompson Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 25,000 |
| | | | |
100 South Charles Street | | May 2015 | | CBD | | 1 |
| | 1 |
| | 159,616 |
| | | | |
6710 Oxon Hill | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 118,336 |
| | | | |
8800 Queen Avenue South | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 280,822 |
| | | | |
9800 Sherlard Parkway | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 46,765 |
| | | | |
Rosedale Corporate Plaza | | May 2015 | | Suburban | | 1 |
| | 3 |
| | 149,116 |
| | | | |
1000 Shelard Parkway | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 62,499 |
| | | | |
525 Park Street | | May 2015 | | CBD | | 1 |
| | 1 |
| | 75,636 |
| | | | |
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | |
Asset | | Date Disposed | | Segment | | Number of
Properties | | Number of
Buildings | | Square Footage | | Gross Sales Price | | Gain (Loss) on Sale |
1900 Meyer Drury Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 65,225 |
| | | | |
131-165 West Ninth Street | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 75,517 |
| | | | |
7-9 Vreeland Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 155,891 |
| | | | |
5 Paragon Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 119,089 |
| | | | |
1000 Vorhees Drive and 400 Laurel Oak Drive(1) | | May 2015 | | Suburban | | 1 |
| | 2 |
| | 125,415 |
| | | | |
1601 Veterans Highway | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 63,608 |
| | | | |
Two Corporate Center Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 291,230 |
| | | | |
11311 Cornell Park Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 93,413 |
| | | | |
5300 Kings Island Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 159,421 |
| | | | |
3 Crown Point Court | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 73,987 |
| | | | |
515 Pennsylvania Avenue | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 82,000 |
| | | | |
443 Gulph Road | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 21,000 |
| | | | |
4350 Northern Pike | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 503,885 |
| | | | |
Thunderbolt Place | | May 2015 | | Suburban | | 1 |
| | 2 |
| | 100,505 |
| | | | |
6160 Kempsville Circle | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 129,565 |
| | | | |
448 Viking Drive | | May 2015 | | Suburban | | 1 |
| | 1 |
| | 75,374 |
| | | | |
Portfolio of small office and industrial assets | | | | | | 45 |
| | 53 |
| | 5,287,790 |
| | $ | 376,000 |
| | $ | (8,075 | ) |
| | | | | | | | | | | | | | |
2501 20th Place South | | June 2015 | | CBD | | 1 |
| | 1 |
| | 125,722 |
| | | | |
420 20th Street North | | June 2015 | | CBD | | 1 |
| | 1 |
| | 514,893 |
| | | | |
Inverness Center | | June 2015 | | Suburban | | 1 |
| | 4 |
| | 475,882 |
| | | | |
701 Poydras Street | | June 2015 | | CBD | | 1 |
| | 1 |
| | 1,256,971 |
| | | | |
300 North Greene Street | | June 2015 | | CBD | | 1 |
| | 1 |
| | 324,305 |
| | | | |
1320 Main Street | | June 2015 | | CBD | | 1 |
| | 1 |
| | 334,075 |
| | | | |
AL, LA, NC, SC office portfolio | | | | | | 6 |
| | 9 |
| | 3,031,848 |
| | $ | 417,450 |
| | $ | 41,596 |
|
| | | | | | | | | | | | | | |
12655 Olive Boulevard | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 98,588 |
| | | | |
1285 Fern Ridge Parkway | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 66,510 |
| | | | |
St. Louis portfolio | | | | | | 2 |
| | 2 |
| | 165,098 |
| | $ | 14,300 |
| | $ | (2,349 | ) |
| | | | | | | | | | | | | | |
310-314 Invermay Road(3) | | April 2015 | | Suburban | | 1 |
| | 1 |
| | 47,480 |
| | | | |
253-293 George Town Road(3) | | April 2015 | | Suburban | | 1 |
| | 1 |
| | 143,914 |
| | | | |
7 Modal Crescent | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 164,160 |
| | | | |
71-93 Whiteside Road | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 303,488 |
| | | | |
9-13 Titanium Court | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 69,664 |
| | | | |
16 Rodborough Road | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 90,525 |
| | | | |
22 Rodborough Road | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 43,427 |
| | | | |
127-161 Cherry Lane | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 278,570 |
| | | | |
310-320 Pitt Street | | June 2015 | | CBD | | 1 |
| | 1 |
| | 313,865 |
| | | | |
44-46 Mandarin Street | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 226,718 |
| | | | |
19 Leadership Way | | June 2015 | | Suburban | | 1 |
| | 1 |
| | 76,714 |
| | | | |
Australia portfolio(4) | | | | | | 11 |
| | 11 |
| | 1,758,525 |
| | $ | 232,955 |
| | $ | (47,851 | ) |
| | | | | | | | | | | | | | |
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | |
Asset | | Date Disposed | | Segment | | Number of
Properties | | Number of
Buildings | | Square Footage | | Gross Sales Price | | Gain (Loss) on Sale |
Widewaters Parkway | | August 2015 | | Suburban | | 1 |
| | 8 |
| | 514,241 |
| | | | |
5062 Brittonfield Parkway | | August 2015 | | Suburban | | 1 |
| | 1 |
| | 40,162 |
| | | | |
Woodcliff Drive | | August 2015 | | Suburban | | 1 |
| | 6 |
| | 516,760 |
| | | | |
Interstate Place | | August 2015 | | Suburban | | 1 |
| | 2 |
| | 61,399 |
| | | | |
1000 Pittsford - Victor Road | | August 2015 | | Suburban | | 1 |
| | 1 |
| | 73,358 |
| | | | |
1200 Pittsford - Victor Road | | August 2015 | | Suburban | | 1 |
| | 1 |
| | 18,900 |
| | | | |
Corporate Crossing | | August 2015 | | Suburban | | 1 |
| | 5 |
| | 216,126 |
| | | | |
Canal View Boulevard | | August 2015 | | Suburban | | 1 |
| | 3 |
| | 118,375 |
| | | | |
14 Classic Street | | August 2015 | | Suburban | | 1 |
| | 1 |
| | 37,084 |
| | | | |
110 W Fayette Street | | August 2015 | | CBD | | 1 |
| | 1 |
| | 304,906 |
| | | | |
251 Salina Meadows Parkway | | August 2015 | | Suburban | | 1 |
| | 1 |
| | 65,617 |
| | | | |
Upstate New York portfolio | | | | | | 11 |
| | 30 |
| | 1,966,928 |
| | $ | 104,625 |
| | $ | (12,458 | ) |
| | | | | | 82 |
| | 117 |
| | 16,368,645 |
| | $ | 1,724,263 |
| | $ | 42,953 |
|
| |
(1) | This property contains three buildings. We sold one building in March 2015 and two buildings in May 2015. |
| |
(2) | Title to this property was transferred to the lender pursuant to a consensual foreclosure in full satisfaction of the mortgage debt with a principal balance of $40.1 million, resulting in a gain on early extinguishment of debt of $17.3 million for the nine months ended September 30, 2015. See Note 8 for additional information. |
| |
(3) | These properties were sold in a separate transaction to a different buyer than other Australian properties. |
| |
(4) | The loss on sale includes a $63.2 million cumulative foreign currency translation adjustment reclassified from cumulative other comprehensive loss due to the disposition of the Australian portfolio. |
On June 27, 2014, we sold one 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 conjunction with this transaction, we recognized a loss on asset impairment of $2.4 million and a loss on early extinguishment of debt of $3.3 million.
Results of operations for properties sold prior to December 31, 2014, are included in discontinued operations in our condensed consolidated statements of operations. Summarized income statement information for properties included in discontinued operations is as follows (in thousands):
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2014 |
Rental income | $ | (16 | ) | | $ | 14,220 |
|
Tenant reimbursements and other income | 407 |
| | 1,730 |
|
Total revenues | 391 |
| | 15,950 |
|
| | | |
Operating expenses | 261 |
| | 7,115 |
|
General and administrative | 6 |
| | 9 |
|
Total expenses | 267 |
| | 7,124 |
|
Operating income | 124 |
| | 8,826 |
|
Interest and other income | 2 |
| | 2 |
|
Interest expense | (31 | ) | | (608 | ) |
Income from discontinued operations | $ | 95 |
| | $ | 8,220 |
|
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The carrying amount of our net investment of $6.7 million and $12.5 million as of September 30, 2015 and December 31, 2014, respectively, is included in other assets in our condensed consolidated balance sheets.
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, 2015 and December 31, 2014. Our direct financing lease has an expiration date in 2045.
Note 6. Equity Investments
Investment in SIR
SIR is a REIT that is primarily focused on owning and investing in net leased, single tenant properties. SIR was an unconsolidated equity method investment from July 2, 2013 until July 9, 2014. On July 9, 2014, we sold our entire stake of 22,000,000 common shares of SIR. As a result of this sale, we no longer hold any interest in SIR.
For the three and nine months ended September 30, 2014, we recorded equity in earnings of $1.1 million and $24.5 million, respectively, related to our investment in SIR on our condensed consolidated statement of operations. During the nine months ended September 30, 2014, we received cash distributions from SIR totaling $20.7 million.
The following unaudited summarized income statement information of SIR for the period from July 1, 2014 through July 9, 2014 and for the period from January 1, 2014 through July 9, 2014 is as follows (in thousands, except per share data):
|
| | | | | | | |
| For the Period from July 1, 2014 through July 9, 2014 | | For the Period from January 1, 2014 through July 9, 2014 |
Rental income | $ | 4,698 |
| | 98,226 |
|
Tenant reimbursements and other income | 923 |
| | 16,980 |
|
Total revenues | 5,621 |
| | 115,206 |
|
| | | |
Operating expenses | 1,018 |
| | 20,982 |
|
Depreciation and amortization | 1,043 |
| | 20,832 |
|
Acquisition related costs | — |
| | 374 |
|
General and administrative | 357 |
| | 7,731 |
|
Total expenses | 2,418 |
| | 49,919 |
|
Operating income | 3,203 |
| | 65,287 |
|
Interest expense | (295 | ) | | (7,287 | ) |
Gain on early extinguishment of debt | — |
| | 243 |
|
Income before income tax expense and equity in earnings of an investee | 2,908 |
| | 58,243 |
|
Income tax expense | — |
| | (90 | ) |
Equity in earnings of an investee | 11 |
| | 32 |
|
Net income | $ | 2,919 |
| | $ | 58,185 |
|
Weighted average common shares outstanding | 59,889 |
| | 52,394 |
|
Net income per common share | $ | 0.05 |
| | $ | 1.11 |
|
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 by us, our former manager Reit Management & Research LLC (RMR), SIR and five other companies to which RMR provides management services.
On May 9, 2014, as a result of the removal of the former Trustees and in accordance with the terms of the shareholder 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. For the period from January 1, 2014 through May 9, 2014, we recorded equity in loss of $0.1 million related to our investment in AIC on our condensed consolidated statement of operations.
Our participation in the AIC property insurance program expired in June 2014. See Note 17 for additional information about our investment in AIC.
Note 7. Real Estate Mortgages Receivable
As of September 30, 2015 and December 31, 2014, 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 of the borrowers and have determined that no allowance for losses related to these real estate mortgages receivable were necessary at September 30, 2015, and December 31, 2014.
Note 8. Indebtedness
Unsecured Revolving Credit Facility and Term Loan:
Prior to January 29, 2015, we had a $750.0 million unsecured revolving credit facility. The unsecured revolving credit facility was set to mature on October 19, 2015, and had an interest rate of LIBOR plus a spread, which was 150 basis points as of December 31, 2014. We paid a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility. Prior to January 29, 2015, we also had a $400.0 million unsecured term loan that was set to mature on December 15, 2016. Our term loan had an interest rate of LIBOR plus a spread, which was 185 basis points as of December 31, 2014.
On January 29, 2015, we entered into a new credit agreement, pursuant to which the lenders agreed to provide (i) a $750.0 million unsecured revolving credit facility, (ii) a $200.0 million 5-year term loan facility and (iii) a $200.0 million 7-year term loan facility. The new agreement replaced our prior credit agreement, dated as of August 9, 2010, and our prior term loan agreement, dated as of December 16, 2010. In connection with the new agreement, we recognized a loss on early extinguishment of debt of $0.4 million from the write-off of unamortized deferred financing fees for the nine months ended September 30, 2015. The revolving credit facility has a scheduled maturity date of January 28, 2019, which maturity date may be extended for up to two additional periods of six months at our option subject to satisfaction of certain conditions and the payment of an extension fee of 0.075% of the aggregate amount available under the revolving credit facility. The 5-year term loan and the 7-year term loan have scheduled maturity dates of January 28, 2020 and January 28, 2022, respectively. We used the proceeds of borrowings under the credit agreement to repay all amounts outstanding and due under the previous term loan agreement.
The credit agreement permits us to utilize up to $100.0 million of the revolving credit facility for the issuance of letters of credit. Amounts outstanding under the credit agreement generally may be prepaid at any time without premium or penalty, subject to certain exceptions. We have the right to request increases in the aggregate maximum amount of borrowings available under the revolving credit facility and term loans up to an additional $1.15 billion, subject to certain conditions.
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Borrowings under the 5-year term loan and 7-year term loan will, subject to certain exceptions, bear interest at a LIBOR rate plus a margin of 90 to 180 basis points for the 5-year term loan and 140 to 235 basis points for the 7-year term loan, in each case depending on our credit rating. Borrowings under the revolving credit facility will, subject to certain exceptions, bear interest at a rate equal to, at our option, either a LIBOR rate or a base rate plus a margin of 87.5 to 155 basis points for LIBOR rate advances and 0 to 55 basis points for base rate advances, in each case depending on our credit rating. In addition, we are required to pay a facility fee of 12.5 to 30 basis points, depending on our credit rating, on the borrowings available under the revolving credit facility, whether or not utilized.
Borrowings under our revolving credit facility currently bear interest at LIBOR plus a spread, which was 125 basis points as of September 30, 2015. As of September 30, 2015, the interest rate payable on borrowings under our revolving credit facility was 1.44%. As of September 30, 2015, we had no balance outstanding and $750.0 million available under our revolving credit facility. Our term loans currently bear interest at a rate of LIBOR plus a spread, which was 140 and 180 basis points for the 5-year and 7-year term loan, respectively, as of September 30, 2015. As of September 30, 2015, the interest rates for the amounts outstanding under our 5-year term loan and 7-year term loan were 1.59% and 1.99%, respectively. As of September 30, 2015, we had $200.0 million outstanding under each of our 5-year and 7-year term loans.
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, 2015, 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 Notes:
On May 1, 2015, we redeemed at par $138.8 million of our 5.75% senior unsecured notes due 2015 and recognized a loss on early extinguishment of debt of $0.1 million from the write-off of an unamortized discount and unamortized deferred financing fees.
Mortgage Notes Payable:
At September 30, 2015, six of our properties (10 buildings) with an aggregate net book value of $452.4 million had secured mortgage notes totaling $367.7 million (including net premiums and discounts) maturing from 2016 through 2026.
During the quarter ended June 30, 2014, we made the decision to cease making loan servicing payments on 225 Water Street in Jacksonville, Florida. The first payment we determined not to make for this property was due on June 11, 2014. The property was secured by a non-recourse mortgage loan. 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 exercised its option to accelerate the maturity of the unpaid balance of the loan. Beginning July 11, 2014, we accrued interest on this loan at 10.03%, to include the 4.0% of default interest. The lender filed a suit of foreclosure for this property and we cooperated with the lender to allow for a consensual foreclosure process. On May 22, 2015, title to 225 Water Street was transferred to the lender pursuant to the consensual foreclosure in full satisfaction of the mortgage debt, with a principal balance of $40.1 million. The transaction resulted in a gain on early extinguishment of debt of $17.3 million for the excess of the debt principal balance over the net book value of the property for the nine months ended September 30, 2015.
In accordance with the agreement to sell 1320 Main Street, we were required to deliver the property unencumbered. On June 3, 2015, prior to the sale, we defeased the $38.7 million outstanding balance of the mortgage loan secured by 1320 Main Street. The defeasance costs and write off of the unamortized deferred financing costs, net of the write off of the unamortized premium, resulted in a net loss on early extinguishment of debt of $6.2 million for the nine months ended September 30, 2015.
In accordance with the agreement to sell 2501 20th Place South, we were required to deliver the property unencumbered. On June 5, 2015, we prepaid $10.0 million of 7.36% mortgage debt at 2501 20th Place South and recognized a
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loss on early extinguishment of debt totaling $0.6 million for the nine months ended September 30, 2015, which consisted of a prepayment premium and the write off of unamortized deferred financing fees, net of the write off of an unamortized premium.
In accordance with the agreement to sell Illinois Center, we were required to deliver the property unencumbered. On August 3, 2015, prior to the sale, we defeased the outstanding $141.4 million balance of the mortgage loan secured by 111 East Wacker Drive, one of the buildings included in Illinois Center. The defeasance costs and write off of the unamortized deferred financing costs, net of the write off of the unamortized premium, resulted in a net loss on early extinguishment of debt of $3.9 million for the three and nine months ended September 30, 2015.
Note 9. Shareholders’ Equity
Common Share Issuances:
During the nine months ended September 30, 2015, we issued 144 common shares to holders of 301 of our series D cumulative convertible preferred shares (series D preferred shares) who elected to convert their series D preferred shares into our common shares.
During 2014, we issued 10,412,499 common shares to holders of 10,264,503 of our series D preferred shares who converted their series D preferred shares into our common shares.
See Note 13 for information regarding equity issuances related to share-based compensation.
Common Share Repurchases:
On August 24, 2015, our Board of Trustees approved a common share repurchase plan, which authorizes the repurchase of up to $100.0 million of our outstanding common shares over the twelve month period following the date of authorization. On September 14, 2015, our Board of Trustees authorized the repurchase of up to an additional $100.0 million of our outstanding common shares over the twelve month period following the date of authorization. During the three and nine months ended September 30, 2015, we purchased and retired 3,410,300 of our common shares at a weighted average price of $25.76 per share.
Preferred Share Distributions:
In 2015, our Board of Trustees declared distributions on our series D preferred shares and series E cumulative redeemable preferred shares to date as follows:
|
| | | | | | | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Series D Dividend Per Share | | Series E Dividend Per Share |
January 16, 2015 | | February 2, 2015 | | February 17, 2015 | | $ | 0.40625 |
| | $ | 0.453125 |
|
April 8, 2015 | | May 1, 2015 | | May 15, 2015 | | $ | 0.40625 |
| | $ | 0.453125 |
|
July 9, 2015 | | July 31, 2015 | | August 17, 2015 | | $ | 0.40625 |
| | $ | 0.453125 |
|
October 9, 2015 | | November 2, 2015 | | November 16, 2015 | | $ | 0.40625 |
| | $ | 0.453125 |
|
Series D Preferred Shares:
The removal of our former 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. 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
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transaction, we recorded a preferred 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, 2015, we had 4,915,196 outstanding series D preferred shares that were convertible into 2,363,103 of our common shares.
Note 10. Cumulative Other Comprehensive Loss
The following tables present the amounts recognized in cumulative other comprehensive loss by component for the three and nine months ended September 30, 2015 (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, 2015 |
| Unrealized Loss on Derivative Instruments and Other Assets | | Foreign Currency Translation Adjustments | | Total |
Balances as of July 1, 2015 | $ | (5,963 | ) | | $ | — |
| | $ | (5,963 | ) |
| | | | | |
Other comprehensive loss before reclassifications | (418 | ) | | — |
| | (418 | ) |
Amounts reclassified from cumulative other comprehensive loss to net income | 1,239 |
| | — |
| | 1,239 |
|
Net current period other comprehensive income | 821 |
| | — |
| | 821 |
|
| | | | | |
Balances as of September 30, 2015 | $ | (5,142 | ) | | $ | — |
| | $ | (5,142 | ) |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2015 |
| Unrealized Loss on Derivative Instruments and Other Assets | | Foreign Currency Translation Adjustments | | Total |
Balances as of January 1, 2015 | $ | (4,299 | ) | | $ | (48,917 | ) | | $ | (53,216 | ) |
| | | | | |
Other comprehensive loss before reclassifications | (1,461 | ) | | (14,290 | ) | | (15,751 | ) |
Amounts reclassified from cumulative other comprehensive loss to net income | 618 |
| | 63,207 |
| | 63,825 |
|
Net current period other comprehensive (loss) income | (843 | ) | | 48,917 |
| | 48,074 |
|
| | | | | |
Balances as of September 30, 2015 | $ | (5,142 | ) | | $ | — |
| | $ | (5,142 | ) |
The following tables present reclassifications out of cumulative other comprehensive loss for the three and nine months ended September 30, 2015 (in thousands):
|
| | | | | | | | | | |
| | Amounts Reclassified from Cumulative Other Comprehensive Loss to Net Income | | |
Details about Cumulative Other Comprehensive Loss Components | | Three Months Ended September 30, 2015 | | Nine Months Ended September 30, 2015 | | Affected Line Items in the Statement of Operations |
Interest rate swap contracts | | $ | 1,239 |
| | $ | 3,698 |
| | Interest expense |
Foreign currency translation adjustment activity | | — |
| | 63,207 |
| | Gain on sale of properties |
Realized gain on available for sale securities | | — |
| | (3,080 | ) | | Interest and other income |
| | $ | 1,239 |
| | $ | 63,825 |
| | |
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Federal income tax expense for the nine months ended September 30, 2015 relates to taxes incurred as a result of a taxable built-in gain triggered by the sale of a property that was previously owned by a C corporation. We are also 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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Current: | | | | | | | |
State | $ | 90 |
| | $ | 39 |
| | $ | 270 |
| | $ | 300 |
|
Federal | — |
| | — |
| | 525 |
| | — |
|
Foreign | (67 | ) | | 664 |
| | 2,337 |
| | 1,866 |
|
| 23 |
| | 703 |
| | 3,132 |
| | 2,166 |
|
| | | | | | | |
Deferred: | | | | | | | |
Foreign | — |
| | — |
| | (755 | ) | | — |
|
| — |
| | — |
| | (755 | ) | | — |
|
| | | | | | | |
Income tax expense | $ | 23 |
| | $ | 703 |
| | $ | 2,377 |
| | $ | 2,166 |
|
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.
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 our 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 we and our 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 our 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 us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in cumulative other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2015, 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.
EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amounts reported in cumulative other comprehensive loss 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 $4.5 million will be reclassified from cumulative other comprehensive loss as an increase to interest expense.
We have interest rate swap agreements to manage our interest rate risk exposure on $170.1 million of mortgage debt due 2019, which require interest at a spread 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, 2015, 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 |
| | $170,097 |
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, 2015 and December 31, 2014 (amounts in thousands):