EQUITY COMMONWEALTH 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.
FORWARD-LOOKING STATEMENTS
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 capital resources, portfolio performance, results of operations or anticipated market conditions, including our statements regarding the overall impact of COVID-19 on the foregoing to the extent we make any such statements. Any forward-looking statements contained in this 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. 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 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 Annual Report and in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.
OVERVIEW
We are an internally managed and self-advised REIT primarily engaged in the ownership and operation of office properties inthe United States . We were formed in 1986 underMaryland law. The Company operates as an UPREIT, conducting substantially all of its activities through theOperating Trust . As ofJune 30, 2021 , the Company beneficially owned 99.8% of the outstanding OP Units.
At
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 ofJune 30, 2021 , our overall portfolio was 83.1% leased. During the three months endedJune 30, 2021 , we entered into leases for 29,000 square feet, including lease renewals for 21,000 square feet and new leases for 8,000 square feet. Renewal leases entered into during the three months endedJune 30, 2021 had weighted average cash and GAAP rental rates that were approximately 13.2% higher and 20.3% higher, respectively, compared to prior rental rates for the same space. New leases entered into during the three months endedJune 30, 2021 were 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. We have engagedCBRE, 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 16 -------------------------------------------------------------------------------- Table of Conten ts CBRE for certain expenses incurred in the performance of its duties, including certain personnel and equipment costs. For the three months endedJune 30, 2021 and 2020, we incurred expenses of$0.7 million and$0.7 million , respectively, and for the six months endedJune 30, 2021 and 2020, we incurred expenses of$1.5 million and$1.7 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 ofJune 30, 2021 andDecember 31, 2020 , we had amounts payable pursuant to these services of$0.3 million and$0.3 million , respectively.
With the progress we made executing dispositions along with the strength and liquidity of our balance sheet, we shifted our primary focus to capital allocation, including the pursuit of acquisitions and/or investments in high-quality assets or businesses in a range of property types in favorable markets that offer a compelling risk-reward profile.
After evaluating a variety of opportunities to invest our capital, onMay 4, 2021 , we entered into a definitive agreement and plan of merger, or the Merger Agreement, with Monmouth Real Estate Investment Corporation, or Monmouth, pursuant to which we agreed to acquire Monmouth in an all-stock transaction. The closing of this transaction, which is subject to shareholder approval and other customary closing conditions, would represent a strategic transition for us into the industrial sector, and we plan to pursue opportunities to dispose of our remaining office properties over time following such closing. As ofJune 30, 2021 , we recorded transaction costs of$4.2 million , included in Other assets, net, in connection with the merger. If the transaction closes, we estimate recording a total of approximately$77 million of transaction costs on our consolidated balance sheet. If the transaction does not close, any transaction costs will be reclassified to expenses on our consolidated statement of operations. Our business has been and may continue to be impacted by the evolving COVID-19 outbreak. Since first surfacing, the outbreak has spread throughout the world and has significantly impactedthe United States . The pandemic has led to severe business disruptions, including a dramatic decline in economic activity generally. The duration of the business disruption continues to be unknown at this time. The vast majority of our employees and our tenants' employees are currently working at least in part remotely and may be subject to government-imposed restrictions. Due to the uncertainty created by the pandemic, the Company has experienced a significant reduction in leasing interest and activity when compared to pre-pandemic levels. For the three months endedJune 30, 2021 , in our comparable property portfolio, we collected 97% of contractual rents. For July, to date, we have collected 96% of contractual rents. We currently are not able to estimate the full impact of the COVID-19 outbreak on our business. Property Operations Leased occupancy data for 2021 and 2020 are as follows (square feet in thousands): All Properties Comparable Properties(1) As of June 30, As of June 30, 2021 2020 2021 2020 Total properties 4 4 4 4 Total square feet 1,507 1,507 1,507 1,507 Percent leased(2) 83.1 % 90.1 % 83.1 % 90.1 % (1)Based on properties owned continuously fromJanuary 1, 2020 throughJune 30, 2021 , and excludes properties sold. (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 endedJune 30, 2021 was 6.5 years. Commitments made for leasing expenditures and concessions, such as tenant improvements and leasing commissions, for the leases entered into during the three months endedJune 30, 2021 totaled$1.8 million , or$60.47 per square foot on average (approximately$9.33 per square foot per year of the lease term). As ofJune 30, 2021 , approximately 4.1% of our leased square feet and 4.3% of our annualized rental revenue, determined as set forth below, are included in leases scheduled to expire throughDecember 31, 2021 . Renewal and new leases and rental rates at which available space may be relet in the future will depend on prevailing market conditions at the times these leases are negotiated. We believe that the in-place cash rents for leases expiring for the remainder of 2021, that have not been 17 -------------------------------------------------------------------------------- Table of Conten ts backfilled, are slightly above market. Lease expirations by year, as ofJune 30, 2021 , are as follows (square feet and dollars in thousands): Annualized Cumulative % of Leased Cumulative Rental % of % of NumberLeased Square Square Feet % ofLeased Square Revenue Annualized Rental Annualized Rental Year of Tenants Expiring(1) Feet Expiring(2) Expiring(2) Feet Expiring(2) Expiring(3) Revenue Expiring Revenue Expiring 2021 6 51 4.1 % 4.1 %$ 2,416 4.3 % 4.3 % 2022 12 98 7.8 % 11.9 % 4,856 8.6 % 12.9 % 2023 18 195 15.5 % 27.4 % 8,983 15.9 % 28.8 % 2024 16 213 17.0 % 44.4 % 9,711 17.2 % 46.0 % 2025 11 145 11.6 % 56.0 % 5,741 10.2 % 56.2 % 2026 9 86 6.9 % 62.9 % 4,221 7.5 % 63.7 % 2027 11 122 9.7 % 72.6 % 5,267 9.3 % 73.0 % 2028 4 63 5.0 % 77.6 % 3,194 5.7 % 78.7 % 2029 7 144 11.5 % 89.1 % 6,755 11.9 % 90.6 % 2030 4 66 5.3 % 94.4 % 2,513 4.4 % 95.0 % Thereafter 5 70 5.6 % 100.0 % 2,823 5.0 % 100.0 % 103 1,253 100.0 %$ 56,480 100.0 % Weighted average remaining lease term (in years): 4.6 4.6 (1)Tenants with leases expiring in multiple years are counted in each year they expire. (2)Leased Square Feet as ofJune 30, 2021 includes 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 ofJune 30, 2021 , 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. 18 -------------------------------------------------------------------------------- Table of Conten ts 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 ofJune 30, 2021 , 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 6.4 % 6.0 % 2.5
2. KPMG, LLP 71 5.7 % 5.3 % 7.9
3. Crowdstrike, Inc. 36 2.9 % 3.8 % 3.3
4. CBRE, Inc. 40 3.2 % 3.6 % 6.8
5. Salesforce.com, Inc.(3) 65 5.2 % 3.5 % 4.4
6. Kazoo, Inc.(4) 26 2.1 % 2.8 % 2.0
7. Alden Torch Financial, LLC 34 2.7 % 2.7 % 5.7
8. The Boon Group, Inc. 36 2.9 % 2.6 % 4.7
9. Capitol Services, Inc. 26 2.1 % 2.5 % 1.1
Total 414 33.2 % 32.8 % 4.5
(1)Total Leased Square Feet as of June 30, 2021 includes 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, 2021 , 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)Our lease with Salesforce.com, Inc. has partially commenced. Approximately
44,000 square feet commenced as of December 31, 2020 , and the remaining 21,000
square feet are expected to commence in the fourth quarter of 2021.
(4)During the second quarter of 2021, Kazoo, Inc. signed a five-year extension
for approximately 13,000 square feet. The extension is expected to commence in
the fourth quarter of 2021.
Regulation FD Disclosures
We use any of the following to comply with our disclosure obligations under
Regulation FD: press releases, SEC filings, public conference calls, or our
website. We routinely post important information on our website at
www.eqcre.com, including information that may be deemed to be material. We
encourage investors and others interested in the Company to monitor these
distribution channels for material disclosures. 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.
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Table of Conten ts
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