EQUITY COMMONWEALTH Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Form 10-Q)
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, and in our Annual Report.
Some of the statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws including, but not limited to, statements pertaining to our anticipated business strategies, goals, policies and objectives, capital resources and financing, portfolio performance, lease expiration schedules, results of operations or anticipated market conditions, including our statements regarding remote working trends and the overall impact of COVID-19, and changing laws, statutes, regulations, and the interpretations thereof, on the foregoing. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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. You can identify forward-looking statements by the use of forward-looking terminology, including but not limited to, "may," "will," "should," "could," "would," "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. Any forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled "Risk Factors" in our most recent Annual Report and in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.
We are an internally managed and self-advised REIT primarily engaged in the ownership and operation of office properties in
the United States. We were formed in 1986 under Marylandlaw. The Company operates as an UPREIT, conducting substantially all of its activities through the Operating Trust. As of June 30, 2022, the Company beneficially owned 99.75% of the outstanding OP Units.
We use leasing and occupancy metrics to evaluate the performance of our properties. We believe these metrics provide useful information to investors because they reflect the leasing activity and vacant space at the properties and may facilitate comparisons of our leasing and occupancy metrics with other REITs and real estate companies. As of
June 30, 2022, our overall portfolio was 84.8% leased. During the three months ended June 30, 2022, we entered into leases for 34,000 square feet, including lease renewals for 6,000 square feet and new leases for 28,000 square feet. The renewal leases entered into during the three months ended June 30, 2022had cash and GAAP rental rates that were approximately 4.9% higher and 9.6% higher, respectively, compared to prior rental rates for the same space. The new leases entered into during the three months ended June 30, 2022were excluded from the weighted average cash and GAAP rental rate calculations because the suites were vacant longer than two years. The change in GAAP rents is different than the change in cash rents due to differences in the amount of rent abatements, the magnitude and timing of contractual rent increases over the lease term, and the length of term for the newly executed leases compared to the prior leases. Percent change in GAAP and cash rents is a comparison of current rent, including estimated tenant expense reimbursements, if any, to the rent, including actual/projected tenant expense reimbursements, if any, last received for the same space on a GAAP and cash basis, respectively. Cash rent during the reporting period is calculated before deducting any initial period free rent. 14
We have engaged
CBRE, Inc., or CBRE, to provide property management services. We pay CBRE a property-by-property management fee and may engage CBRE from time-to-time to perform project management services, such as coordinating and overseeing the completion of tenant improvements and other capital projects at the properties. We reimburse CBRE for certain expenses incurred in the performance of its duties, including certain personnel and equipment costs. For the three months ended June 30, 2022and 2021, we incurred expenses of $0.7 millionand $0.7 million, respectively, and for the six months ended June 30, 2022and 2021, we incurred expenses of $1.5 millionand $1.5 million, respectively, related to our property management agreement with CBRE, for property management fees, typically calculated as a percentage of the properties' revenues, and salary and benefits reimbursements for property personnel, such as property managers, engineers and maintenance staff. As of June 30, 2022and December 31, 2021, we had amounts payable pursuant to these services of $0.2 millionand $0.3 million, respectively. After executing on our disposition strategy and evaluating a variety of opportunities to invest our capital, on May 4, 2021, we entered into a merger agreement to acquire Monmouth Real Estate Investment Corporation, or Monmouth, a publicly-traded industrial REIT. On August 31, 2021, following Monmouth's failure to obtain shareholder approval of the merger, in accordance with the terms of the merger agreement, we terminated the merger agreement. Following the termination of the merger agreement with Monmouth, we shifted our focus to capital allocation and are continuing to evaluate investment opportunities. We are seeking to use the strength and liquidity of our balance sheet for investments in high-quality assets or businesses in a range of property types that offer a compelling risk-reward profile. We may also determine to sell, liquidate or otherwise exit our business if we believe doing so will maximize shareholder value. Our business has been and is continuing to be impacted by the COVID-19 virus. In addition, our business has been and is continuing to be impacted by tenant uncertainty regarding office space needs given the evolving remote working trends. Many of our employees and the majority of our tenants' employees are currently working at least in part remotely. Overall, our business has experienced a significant reduction in leasing interest and activity when compared to pre-pandemic levels. As of June 30, 2022and December 31, 2019, our comparable property portfolio was 84.8% and 91.5% leased, respectively. The duration of these business disruptions continues to be unknown at this time, and we currently are not able to estimate the full impact of the COVID-19 virus and remote working trends on our business.
Real estate transactions
Leased occupancy data for 2022 and 2021 are as follows (square feet in thousands): All Properties Comparable Properties(1) As of June 30, As of June 30, 2022 2021 2022 2021 Total properties 4 4 4 4 Total square feet 1,507 1,507 1,507 1,507 Percent leased(2) 84.8 % 83.1 % 84.8 % 83.1 % (1)Based on properties owned continuously from
January 1, 2021through June 30, 2022. (2)Percent leased is the percent of space subject to signed leases. Percent leased is disclosed to quantify the ratio of leased square feet to rentable square feet and we believe provides useful information as to the proportion of rentable square feet subject to a lease. The weighted average lease term based on square feet for leases entered into during the three months ended June 30, 2022was 6.0 years. Commitments made for leasing expenditures and concessions, such as tenant improvements and leasing commissions, for the leases entered into during the three months ended June 30, 2022totaled $2.2 million, or $66.31per square foot on average (approximately $10.98per square foot per year of the lease term). As of June 30, 2022, approximately 4.7% of our leased square feet and 5.6% of our annualized rental revenue, determined as set forth below, are included in leases scheduled to expire through December 31, 2022. Renewal and new leases and rental rates at which available space may be relet in the future will depend on prevailing market conditions at the times these leases are negotiated. We believe that the in-place cash rents for leases expiring for the remainder of 2022, that have not been backfilled, are approximately market. Lease expirations by year, as of June 30, 2022, are as follows (square feet and dollars in thousands): 15
Table of Contents Annualized Cumulative % of Leased Cumulative Rental % of % of Number
Leased SquareSquare Feet % of Leased SquareRevenue Annualized Rental Annualized Rental Year of Tenants Expiring(1) Feet Expiring(2) Expiring(2) Feet Expiring(2) Expiring(3) Revenue Expiring Revenue Expiring 2022 5 60 4.7 % 4.7 % $ 3,3625.6 % 5.6 % 2023 19 210 16.4 % 21.1 % 9,664 16.1 % 21.7 % 2024 18 227 17.9 % 39.0 % 10,707 17.9 % 39.6 % 2025 12 155 12.1 % 51.1 % 7,048 11.7 % 51.3 % 2026 8 67 5.2 % 56.3 % 3,268 5.4 % 56.7 % 2027 14 176 13.8 % 70.1 % 8,325 13.9 % 70.6 % 2028 7 82 6.4 % 76.5 % 3,635 6.1 % 76.7 % 2029 7 145 11.3 % 87.8 % 6,970 11.6 % 88.3 % 2030 6 87 6.8 % 94.6 % 2,910 4.8 % 93.1 % 2031 1 12 0.9 % 95.5 % 590 1.0 % 94.1 % Thereafter 4 57 4.5 % 100.0 % 3,541 5.9 % 100.0 % 101 1,278 100.0 % $ 60,020100.0 % Weighted average remaining lease term (in years): 4.0 4.1 (1)Tenants with leases expiring in multiple years are counted in each year they expire. (2)Leased Square Feet as of June 30, 2022includes space subject to leases that have commenced for revenue recognition purposes in accordance with GAAP, space being fitted out for occupancy pursuant to existing leases, and space which is leased but is not occupied or is being offered for sublease by tenants. The Leased Square Feet Expiring corresponds to the latest-expiring signed lease for a given suite. Thus, backfilled suites expire in the year stipulated by the new lease. (3)Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of June 30, 2022, plus estimated recurring expense reimbursements; excludes lease value amortization, straight-line rent adjustments, abated (free) rent periods and parking revenue. We calculate annualized rental revenue by aggregating the recurring billings outlined above for the most recent month during the quarter reported, adding abated rent, and multiplying the sum by 12 to provide an estimation of near-term potentially-recurring revenues. Annualized rental revenue is a forward-looking non-GAAP measure. Annualized rental revenue cannot be reconciled to a comparable GAAP measure without unreasonable efforts, primarily due to the fact that it is calculated from the billings of tenants in the most recent month at the most recent rental rates during the quarter reported, whereas historical GAAP measures include billings from a potentially different group of tenants over multiple months at potentially different rental rates. The principal source of funds for our operations is rents from tenants at our properties. Rents are generally received from our tenants monthly in advance. As of June 30, 2022, tenants representing 2.5% or more of our total annualized rental revenue were as follows (square feet in thousands): Weighted Average % of Total Leased % of Annualized Remaining Tenant Square Feet(1) Square Feet(1) Rental Revenue(2) Lease Term
1. Equinor Energy Services, Inc. 80 6.3 % 5.8 % 1.5 2. KPMG, LLP 71 5.6 % 5.0 % 6.9 3. Salesforce.com, Inc. 65 5.1 % 5.0 % 3.4 4. Wunderman Thompson, LLC(3) 39 3.1 % 3.8 % 3.2 5. Crowdstrike, Inc. 36 2.8 % 3.7 % 2.3 6. CBRE, Inc. 40 3.1 % 3.4 % 5.8 7. RSM US LLP 32 2.5 % 3.1 % 9.9 8. SonarSource US, Inc. 28 2.2 % 2.9 % 5.2 9. Alden Torch Financial, LLC 34 2.7 % 2.5 % 4.7 Total 425 33.4 % 35.2 % 4.5 16
-------------------------------------------------------------------------------- Table of Contents (1)Total Leased Square Feet as of
June 30, 2022includes space subject to leases that have commenced, space being fitted out for occupancy pursuant to existing leases, and space which is leased but is not occupied or is being offered for sublease by tenants. (2)Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of June 30, 2022, plus estimated recurring expense reimbursements; excludes lease value amortization, straight-line rent adjustments, abated (free) rent periods and parking revenue. We calculate annualized rental revenue by aggregating the recurring billings outlined above for the most recent month during the quarter reported, adding abated rent, and multiplying the sum by 12 to provide an estimation of near-term potentially-recurring revenues. Annualized rental revenue is a forward-looking non-GAAP measure. Annualized rental revenue cannot be reconciled to a comparable GAAP measure without unreasonable efforts, primarily due to the fact that it is calculated from the billings of tenants in the most recent month at the most recent rental rates during the quarter reported, whereas historical GAAP measures include billings from a potentially different group of tenants over multiple months at potentially different rental rates. (3)Approximately 24,000 square feet of Wunderman Thompson, LLC'sspace expire in 2027. The remaining 15,000 square feet expire in 2022.
FD Regulation Disclosures
We use any of the following to comply with our disclosure obligations under Regulation FD: press releases,
SECfilings, public conference calls, or our website. We routinely post important information on our website at www.eqcre.com, including information that may be deemed to be material. We encourage investors and others interested in the Company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the information on the website is not incorporated by reference into this Quarterly Report. 17
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