EDGAR 10-K Filing

Company CIK: 803649
Filing Year: 2021
Filename: 803649_10-K_2021_0000803649-21-000023.json

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ITEM 1. BUSINESS
Item 1. Business.
The Company. We are an internally managed and self-advised real estate investment trust, or REIT, primarily engaged in the ownership and operation of office buildings in the United States. We were formed in 1986 under Maryland law and we have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Code. The Company operates as what is commonly referred to as an umbrella partnership real estate investment trust, or UPREIT, conducting substantially all of its activities through EQC Operating Trust, a Maryland real estate investment trust, or the Operating Trust.
The Company beneficially owned 99.80% of the outstanding shares of beneficial interest, designated as units, or OP Units, in the Operating Trust, as of December 31, 2020, and the Company is the sole trustee of the Operating Trust. As the sole trustee, the Company generally has the power under the declaration of trust of the Operating Trust to manage and conduct the business of the Operating Trust, subject to certain limited approval and voting rights of other holders of OP Units.
At December 31, 2020, our portfolio consisted of four properties, with a total of 1.5 million square feet. Over the past seven years, we disposed of 164 properties and three land parcels totaling 44.3 million square feet for an aggregate gross sales price of $6.9 billion, as well as $704.8 million of common shares of Select Income REIT. The remaining four properties were 85.7% leased and had 81.7% commenced occupancy as of December 31, 2020. In 2020, the Company completed three property dispositions totaling $756.5 million. Since 2014, we have used proceeds to retire $3.3 billion of debt and preferred shares and paid $1.2 billion in distributions to our common shareholders. We have $3.0 billion of cash and cash equivalents and no debt outstanding as of December 31, 2020.
The COVID-19 outbreak caused significant business and economic disruptions in 2020, including for tenants at our properties. The Company experienced a significant reduction in leasing interest and activity as well as parking revenue when compared to pre-pandemic levels. In response to the pandemic, we adapted our business operations, including transitions to working from home and in the office in the new social distancing environment. 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. Our emphasis continues to be on tenant, building staff and employee safety and productivity while maintaining our focus on rent collections. The impact of the pandemic on our business in 2021 and beyond is uncertain.
During the year ended December 31, 2020, we entered into leases, excluding leasing activity for assets during the quarter in which the asset was sold or classified as held for sale, for 142,000 square feet, including lease renewals for 76,000 square feet and new leases for 66,000 square feet. Leases entered into during the year ended December 31, 2020, including both lease renewals and new leases, had weighted average cash rental rates that were approximately 1.4% lower than prior rental rates for the same space and weighted average GAAP rental rates that were approximately 11.9% higher than prior rental rates for the same space.
As of December 31, 2020, approximately 8.4% of our leased square feet and 7.4% of our annualized rental revenue are included in leases scheduled to expire through December 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 in 2021, that have not been backfilled, are below market.
Business Strategy. While we remain focused on creating value through proactive asset management and improved operating results, we are evaluating opportunities to invest capital in high-quality assets or businesses in favorable markets that offer a compelling risk-reward profile. The set of opportunities that we may pursue include acquisitions and/or investments in a range of property types. Alternatively, we may determine to sell, liquidate or otherwise exit our business through one or more transactions if we believe doing so will maximize shareholder value.
Human Capital Resources. As of December 31, 2020, we had 28 full-time employees, reduced from 66 full-time employees as of December 31, 2015, as the size of our property portfolio decreased. Our employee compensation program consists of the following: (i) base salary, (ii) annual cash bonus, (iii) long-term, at-risk time and performance-based equity awards, and (iv) health and welfare benefits. Each year, we set corporate, department and individual goals that we use to measure performance during our annual review process. We believe that the structure of our compensation program is aligned with the interests of our shareholders, rewards performance and serves to attract and retain employees. We also believe that our entrepreneurial culture, which is focused on encouraging transparency and open communication based on our guiding principles, is an important contributor to our success. We strive to provide our employees with a variety of resources and tools to promote training and development.
Our principal executive offices are located at Two North Riverside Plaza, Suite 2100, Chicago, Illinois 60606, our telephone number is (312) 646-2800 and our website is www.eqcre.com.
Investment Policies. In evaluating potential property investments and dispositions, we consider various factors, including but not limited to the following:
•the type of properties;
•the risk-adjusted returns projected for the properties;
•the historical and projected rents received and likely to be received from the properties;
•the historical and expected operating expenses, including real estate taxes, incurred and expected to be incurred at the properties;
•the growth, tax and regulatory environments of the market in which the properties are located;
•the quality and credit worthiness of the tenants;
•occupancy and demand for similar properties in the same or nearby markets;
•the construction quality, physical condition and design of the properties, and expected capital expenditures that may need to be made;
•the location of the properties; and
•the pricing of comparable properties as evidenced by recent market sales.
We have no policies that specifically limit the percentage of our assets that may be invested in any individual property, in any one type of property, in properties in one geographic area, in properties leased to any one tenant, in properties leased to an affiliated group of tenants, in real estate joint ventures or in participating, convertible or other types of mortgages. We have in the past provided seller financing for properties we have sold and may do so again in the future.
In the past, we have considered the possibility of acquiring other companies or entering into mergers or strategic combinations with other companies. We may undertake such considerations in the future.
Financing Policies. We may seek additional capital through equity offerings, debt financings, retention of cash flows in excess of distributions to shareholders or a combination of these methods. To the extent that our Board of Trustees decides to obtain debt financing, we may do so on an unsecured basis or a secured basis, subject to limitations in existing financing or other contractual arrangements; we may seek to obtain lines of credit or to issue securities senior to our common and/or preferred shares, including preferred shares or debt securities which may be convertible into common shares or be accompanied by warrants to purchase common shares; or we may engage in transactions which involve a sale or other conveyance of properties to affiliated or unaffiliated entities. We may finance acquisitions and/or investments by using retained cash flow from operations and dispositions, by the issuance of additional equity securities or debt, by assuming outstanding mortgage debt on the acquired properties or by an exchange of properties. The proceeds from any of our financings may be used to pay distributions, to provide working capital, to refinance indebtedness or to finance acquisitions and/or investments and expansions of existing or new properties or businesses. We may from time to time re-evaluate and modify our financing policies in light of then current market conditions, relative availability and costs of debt and equity capital, the changing values of properties, growth and acquisition and/or investment opportunities and other factors, and we may increase or decrease our ratio of debt to total capitalization.
The Investment Policies and Financing Policies discussed above are established by our Board of Trustees and may be changed by our Board of Trustees at any time without shareholder approval.
Competition. Investing in and operating real estate is a highly competitive business. We compete against other REITs, numerous financial institutions, individuals and public and private companies who are actively engaged in the real estate business. Also, we compete for tenants and investments based on a number of factors including pricing, underwriting criteria and reputation. Our ability to successfully compete is also impacted by economic and population trends, availability of acceptable acquisition and/or investment opportunities, our ability to negotiate beneficial leasing and investment terms, availability and cost of capital and new and existing laws and regulations. Some of our competitors are dominant in selected geographic markets, including in markets in which we operate. Some of our competitors have greater financial and other resources than we have.
For additional information on competition and the risks associated with our business, please see "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.
Environmental and Climate Change Matters. Under various federal, state and local laws related to environmental, health and safety matters, owners, former owners, operators and tenants of real estate may be subject to liabilities resulting from the presence of hazardous substances, waste or petroleum products at, on, under, or emanating from such real estate, including costs for investigating and remediating or removing hazardous substances present at or migrating from such properties, liabilities for property damage or personal injuries, natural resource damages, and costs and losses arising from property use restrictions or diminution in value. We, or our tenants, also may incur liability for failing to comply with environmental, health and safety laws. We do not believe that there are environmental conditions or issues at any of our properties that have had or will have a material adverse effect on us. However, no assurances can be given that conditions or issues are not present at our properties or that costs we may be required to incur in the future to remediate contamination or comply with environmental, health and safety laws will not have a material adverse effect on our business or financial condition.
We estimate the cost to remove hazardous substances or address environmental issues at some of our properties based in part on environmental surveys and analyses conducted on our properties.
Some of our properties have been or may be impacted by releases of hazardous substances or petroleum products. Such contamination may arise from a variety of sources, including historic uses of our properties for commercial or industrial purposes, spills of such materials at adjacent properties, or releases from tanks used on our properties to store petroleum or hazardous substances. In addition, certain of our properties have been or may be on sites upon which or are adjacent to or near other properties upon which others, including former owners or tenants, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances. Though we have reviewed these properties for potential environmental liabilities, we cannot assure that we have identified all potential environmental liabilities.
Certain of our buildings contain asbestos. We believe any asbestos in our buildings is contained in accordance with current regulations. If we remove the asbestos or renovate or demolish these properties, certain environmental regulations govern the manner in which the asbestos must be handled and removed, which could result in increased costs.
For more information regarding environmental matters and their possible adverse impact on us, see "Risk Factors-Risks Related to Our Business-We could incur significant costs and liabilities with respect to environmental matters” in Part I, Item 1A of this Annual Report on Form 10-K.
The current political debate about climate change has resulted in various treaties, laws and regulations which are intended to impact carbon emissions. We believe these laws may cause energy costs at our properties to increase, but we do not expect the direct impact of these increases to be material to our results of operations because the increased costs either would be the responsibility of our tenants directly or in large part may be passed through by us to our tenants as additional lease payments. Laws enacted to mitigate climate change may cause us to make material investments in our properties which could materially and adversely affect our financial condition. We evaluate ways to improve the energy efficiency at all of our properties. For more information regarding climate change matters and their possible adverse impact on us, see "Risk Factors-Risks Related to Our Business-We may be adversely affected by laws, regulations or other issues related to climate change" in Part I, Item 1A of this Annual Report on Form 10-K.
Regulation FD Disclosures and Internet Website. 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.
Copies of our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of our Audit, Compensation and Nominating and Corporate Governance committees are posted on our website and may be obtained free of charge by writing to our Secretary, Equity Commonwealth, Two North Riverside Plaza, Suite 2100, Chicago, Illinois 60606. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC. Any shareholder or other interested party who desires to communicate with our Board of Trustees, or our non-management Trustees, individually or as a group, may do so by contacting our investor relations department through our website. Our website address is included in this Annual Report on Form 10-K as a textual reference only and the information on the website is not incorporated by reference into this Annual Report on Form 10-K.
RISK FACTORS

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Before making an investment decision, you should carefully consider the following risk factors together with all of the other information contained in this Annual Report on Form 10-K.
Risks Related to Our Business
If we are unsuccessful in identifying and completing acquisitions and/or investments that we believe are strategically compelling, we may decide to sell, liquidate or otherwise exit our business in one or more transactions, which could materially and adversely impact us, including our stock price.
We continue to evaluate potential acquisition and investment opportunities, both in and outside the office sector. We are seeking to reinvest the significant cash balances we have accumulated, but we cannot provide any assurances that we will be successful in identifying acquisitions and/or investments that we believe are strategically compelling and completing such transactions on favorable terms or at all. Our ability to identify and consummate acquisitions and/or investments is subject to significant risks, including the following:
•we may be unable to identify attractive acquisition and/or investment opportunities;
•we may be unable to make an acquisition and/or investment because of competition from other real estate investors, such as private real estate companies, publicly traded REITs and institutional investment funds; and
•we may be unable to finance acquisitions and/or investments on favorable terms or at all.
If we are unable to successfully complete any acquisitions and/or investments, we may sell or liquidate the Company or otherwise exit our business through one or more transactions. The Board of Trustees and management regularly evaluate the best course of action for the Company and have not set a timetable for making any decision regarding a sale, liquidation or exit of the Company, and the timing and manner of any such sale, liquidation or exit may be viewed unfavorably. If a sale, liquidation or other exit occurs, or does not occur in a time frame or manner viewed favorably, our stock price could be negatively impacted.
We may make acquisitions and/or investments that are viewed unfavorably by our investors, which could materially and adversely affect our stock price.
We may make acquisitions and/or investments that are viewed unfavorably by our investors. We evaluate a range of investments in office and non-office property types, including portfolios of properties, individual properties and businesses, that vary in significance from relatively minor initial investments to transformative transactions. Our investors may view negatively any acquisition and/or investment that we make for a number of reasons, including because they believe we overvalued the acquired assets or businesses, they dislike the property type or types, quality or location of the acquired assets or businesses, they view the initial investment as small and therefore requiring substantially more time to complete the repositioning of our portfolio, or they disfavor the management or other personnel involved in any acquired businesses. If we make acquisitions and/or investments that are viewed unfavorably by our investors, it could negatively affect our stock price.
We may incur significant costs pursuing acquisition and/or investment opportunities that we may not consummate, which could adversely affect our results of operations.
We have incurred and may continue to incur costs such as diligence, legal, advisory and consulting fees in connection with pursuing acquisitions and/or investments that we ultimately may not consummate, which could adversely affect our results of operations.
We may encounter unanticipated difficulties and costs relating to integrating any properties or businesses we acquire, particularly if outside of the office sector, which may have a material adverse effect on us.
We may encounter unanticipated difficulties and expenditures relating to any properties or businesses we acquire. For example, notwithstanding pre-investment due diligence, we could become subject to unknown liabilities without any or limited recourse against the seller, including without limitation tenant claims, vendor claims, indemnification and other claims, and we may incur higher than expected property operating and capital costs. In addition, we may experience unexpected adverse market changes, including without limitation, re-leasing difficulties, occupancy and rental declines. For these and other reasons, we may not successfully integrate any properties or businesses we acquire, particularly if outside of the office sector, and may not achieve the returns we expected, which could have a material adverse effect on us.
The ongoing COVID-19 outbreak may adversely affect us, including our growth prospects, results of operations and financial condition.
The COVID-19 outbreak has spread throughout the world and has significantly impacted the United States. The outbreak has led governmental authorities to impose stay-at-home orders, quarantines, closures and travel restrictions. This has led to severe business disruptions throughout the U.S. and the world, including a dramatic decline in economic activity, layoffs, downsizing and other similar factors. If these disruptions continue, they could negatively impact our efforts to use our capital for acquisitions and/or investments.
The COVID-19 outbreak has adversely affected our results of operations in 2020, particularly our parking-related revenues, and may continue to do so. During the time period in which stay-at-home orders, quarantines, closures and travel restrictions have been imposed, our parking-related revenues have been adversely impacted, and we expect that may continue. For the three months and year ended December 31, 2020, parking-related revenues included in Other revenue represented approximately 4.3% and 6.1%, respectively, of our total revenues and decreased approximately 58.1% and 36.6% when compared to the comparable property portfolio for the three months and year ended December 31, 2019, respectively. We have incurred and expect to continue to incur expenses related to our efforts to respond to the business disruption caused by the COVID-19 outbreak, which could impact our future results of operations.
The ongoing COVID-19 outbreak also may have a longer-term impact on demand for office space, which could adversely impact the value of our office properties. To the extent that many workforces have adapted to the COVID-19 outbreak by working remotely, businesses and tenants may reassess their long-term demand for office space, which could adversely affect our ability to successfully re-lease our properties, the lease terms we are able to negotiate and the long-term value of our office properties. For the above reasons, the ongoing COVID-19 outbreak may adversely affect us, including our growth prospects, results of operations and financial condition.
The failure of one or more of our tenants to pay rent due to the market disruption caused by the COVID-19 outbreak or for any other reason could materially and adversely affect us, including our results of operations.
Our performance depends on the financial condition of our tenants and their ability to fulfill their lease obligations. The COVID-19 outbreak has adversely affected some of our tenants’ businesses, and we cannot predict the impact on our results of operations. To the extent the COVID-19 outbreak continues, it could increase the risk of sustained business disruption in the markets in which our properties are located and exacerbate the risk that our tenants will not be able to meet their lease obligations.
In addition, we would be harmed if one or more of our major tenants, or a number of our smaller tenants, were to experience financial difficulties, including bankruptcy, insolvency or a general downturn of business. As of December 31, 2020, our portfolio was comprised of four properties, and the failure of one or more of our tenants to pay all or a substantial portion of their rent obligations could materially and adversely affect us. The inability of a major tenant, or a significant number of our smaller tenants, to pay rent, or the bankruptcy or insolvency of such tenants, would adversely affect income. If any of our major tenants, or a significant number of our smaller tenants, were to stop paying rent due to the market disruption caused by the COVID-19 outbreak or otherwise experience a downturn in their business, or a weakening of their financial condition, such an event could have a material adverse effect on our business and results of operations.
To the extent we make any dispositions, they may be on unfavorable terms, which could adversely affect us.
To the extent we seek to dispose of additional assets, they may be on unfavorable terms or we may not be able to complete sales in a timely manner, if at all, which could adversely affect us. We could incur significant costs and liabilities in connection with the dispositions of any properties, including through indemnification protection we provide to purchasers, which could adversely affect us.
We may make investments in assets that we do not control, including in joint ventures with third parties, which may subject us to various risks, including limited decision-making authority, reliance on our joint venture partners’ financial condition and the risk of disputes with our joint venture partners, which could adversely affect us.
We may make investments in assets that we do not control, including joint venture partnerships, or other structures with third parties. We also may make investments in which we share responsibility for managing the affairs of a business, property or partnership. If we enter into any joint ventures or similar ownership structures, we may have limited decision-making authority. In addition, we may face the risk of disputes with our joint venture partners, including without limitation potential deadlocks in making major decisions and restrictions on our ability to exit the joint venture. Any disputes that may arise between us and joint venture partners may result in litigation or arbitration. We also face risks associated with our joint venture partners’ financial condition, including, among other things, the risk of bankruptcy and/or failure to fund their share of required capital contributions. As a result, we may be exposed to liabilities in excess of our share of the joint venture, which could jeopardize our REIT status. Joint venture partners may also have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. We may, in specific circumstances, be liable for the actions of our joint venture partners. We also may invest in public securities, unsecured debt and third-party mortgages which we do not control. Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.
We may not decrease our general and administrative expenses proportionally with any further reduction in the size of our portfolio, which could adversely affect us, including our results of operations.
Because our current strategy is to grow through acquisitions and/or investments, we maintain a level of staffing that we believe will enable us to effectively identify acquisition and/or investment opportunities and integrate any acquisitions and/or investments that we complete. As a result of this strategy, our general and administrative expenses may be higher than if we were not seeking growth through acquisitions and/or investments. If we are unable to grow through acquisitions and/or investments, and do not decrease our general and administrative expenses, our profitability and our results of operations could be adversely affected.
We derive a substantial portion of our revenues from four properties, and losses at any one of our properties could materially and adversely affect us.
As of December 31, 2020, we owned four office properties and, as a result, any events that negatively impact one or more of our properties, such as a natural disaster, could materially and adversely affect us, including our financial condition and results of operations.
We may be unable to renew leases, re-lease properties as leases expire or lease vacant spaces on favorable terms, which could materially and adversely affect us.
As of December 31, 2020, leases representing 8.4% of our portfolio square footage and 7.4% of our annualized rental revenue will expire by the end of 2021 and leases representing 18.5% of our portfolio square footage and 19.1% of our annualized rental revenue will expire by the end of 2022. For more information on how we calculate lease expirations, please see “Management's Discussion and Analysis of Financial Condition and Results of Operations-Property Operations.” We expect that many of our current tenants will decline to renew their leases when they expire in 2021, and other tenants may also decline for any reason to renew their leases. We also cannot assure you that any leases that are renewed will have terms as economically favorable as the expiring lease terms. If tenants do not renew their leases as they expire, we cannot provide any assurance that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to or above the current rates in place. To attract new tenants, we may be required to offer substantial rent abatements, tenant improvement allowances, early termination rights or below-market renewal options. We may experience significant costs in connection with re-leasing our properties, which could materially and adversely affect us. Our inability to renew leases, re-lease properties as leases expire or lease vacant space on favorable terms could materially and adversely affect us.
Significant competition for tenants may reduce rents which could materially and adversely affect us.
We encounter significant competition for tenants at all of our properties. Some competing properties may be newer, better located or otherwise more attractive to tenants. Competing landlords may offer available space at lower rents or on other more attractive terms than we offer at our properties. This competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge, which could materially and adversely affect us.
Tenant demand may decline due to disruptions to the office sector, which could materially and adversely affect us.
Companies have been increasing their utilization of shared office spaces, co-working spaces, telecommuting, flexible work schedules, work-from-home alternatives and videoconferencing. To the extent these trends continue, tenant demand for our office space may be reduced, which could materially and adversely affect us.
Our reliance on CBRE for third-party property management services may have a negative effect on our financial condition and results of operations.
We have engaged CBRE to provide property management services for our properties pursuant to a master property management agreement. The successful operation and management of our properties requires significant coordination between us and CBRE. Additionally, CBRE can terminate the property management agreement, as a whole or as to any one or more of our properties, without cause upon providing three months’ notice, and we are permitted to terminate the property management agreement, as a whole or as to any one or more of our properties, without cause upon 60 days’ notice. If we are unable to successfully coordinate with CBRE with respect to property management or the property management agreement with CBRE is terminated, in whole or in part, our operations could be disrupted, which may have a negative effect on our financial condition and results of operations.
Political instability and/or regulatory uncertainty could lead to higher interest rates, inflation, increased market volatility or recession, which could materially and adversely affect us.
We may encounter disruptions in one or more of the markets in which we operate due to political instability and/or regulatory uncertainty. Political instability or regulatory uncertainty may result in higher interest rates, inflation, increased market volatility or recession, which could adversely affect our tenants. As a result, it could adversely affect our occupancy rates, rental rates, rent collections, lease renewals, pursuit of new tenants and the overall value of our office properties, which could materially and adversely affect us.
The loss of one or more members of our senior leadership team, particularly our Chairman or our Chief Executive Officer, could materially and adversely affect us.
Our success, including our ability to complete any acquisitions and/or investments and manage our operations, depends to a significant degree upon the efforts of our senior leadership team, particularly our Chairman and our Chief Executive Officer. The loss of one or more members of our senior leadership team could materially and adversely affect us.
An increase in interest rates could increase our interest costs on any future debt we incur, which could adversely affect us.
Interest rates currently remain substantially below historical long-term averages and are subject to change and may increase in the future. To the extent we incur any debt in the future, including in connection with any potential acquisitions or investments, and interest rates rise, our interest costs may increase, which could adversely affect our cash flow, ability to pay principal and interest on debt, cost of refinancing debt when it becomes due and our ability to make distributions to our shareholders. Additionally, if we choose to hedge any interest rate risk, we cannot assure that any such hedge will be effective or that our hedging counterparty will meet its obligations to us. An increase in interest rates also could adversely affect the value of our properties to the extent that it decreases the amount buyers may be willing to pay for our properties. As a result, any increases in future interest rates could adversely affect us.
We can increase our leverage without any limits under our governing documents, which may be viewed unfavorably by our shareholders and could result in a decline in our stock price.
Our governing documents do not limit the amount of debt we may incur. In connection with potential acquisitions and/or investments, we may incur debt and significantly increase our leverage, which could reduce cash available for distributions and be viewed unfavorably by our shareholders, resulting in a decline in our stock price.
Future impairment charges could materially and adversely affect us, including our results of operations in the period for which the charge occurs.
We periodically evaluate the recoverability of the carrying values of each of our office properties. As part of this evaluation, we compare the current carrying value of the asset to the estimated undiscounted cash flows that are directly associated with the use and ultimate disposition of the asset. Our estimated cash flows are based on several key assumptions, including anticipated hold periods, assumptions regarding the residual value upon disposition, including the exit capitalization rate, rental rates, costs of tenant improvements, and leasing commissions. These key assumptions are subjective in nature and could differ materially from actual results. Additionally, circumstances may cause us to alter the hold period of an asset or asset group, which may result in an impairment loss and such loss could be material to the Company's financial condition or operating performance. To the extent that the carrying value of the asset exceeds the estimated undiscounted cash flows, an impairment loss is recognized equal to the excess of carrying value over fair value. Any future impairment could materially and adversely affect us, including our results of operations in the period in which the charge is taken.
Any failure to maintain effective internal controls could materially and adversely affect us.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. Our internal controls over financial reporting and operations may not prevent or detect financial misstatements or loss of assets due to human error, management override of controls or fraud. Effective internal controls can provide only reasonable assurance regarding financial statement accuracy, public disclosures and safeguarding of assets. Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with the New York Stock Exchange, or NYSE. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the per share trading price of our securities. Any failure to maintain effective internal controls could materially and adversely affect us.
We may become subject to litigation which could materially and adversely affect us.
We may become subject to litigation, including, but not limited to, claims relating to our operations, corporate transactions, dispositions and acquisitions and/or investments and otherwise in the ordinary course of our business, that could have a material adverse effect on us. Some of these claims could result in significant defense costs and potentially significant judgments against us, which may not be covered by insurance. Protracted litigation also may divert management’s and our Trustees’ attention away from our business. We cannot provide any assurance regarding the outcome of any claims that may arise in the future. We also have agreed to indemnify our present and former trustees, officers and property managers in connection with litigation in which they are named or threatened to be named in their capacity as a party, which can be expensive. Any fines, judgments or settlements that exceed our insurance coverage and any indemnification costs that we are required to pay could materially and adversely affect us.
Any environmental contamination or other environmental liabilities could materially and adversely affect us.
Under various federal, state and local laws and regulations, as the current or former owners or operators of real estate, we may be liable for costs and damages resulting from the presence or release of hazardous substances, including waste or petroleum products, at, on, in, under or from such property, including costs for investigation, removal or remediation of such contamination and for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal or property damage, adversely affect our ability to lease, sell or rent such property, or adversely affect our ability to borrow using such property as collateral. Environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. If contamination is discovered on our properties, environmental laws also may impose reporting requirements and/or restrictions on the manner in which those properties may be used or businesses may be operated, and these reporting
requirements and/or restrictions may require significant expenditures. Additionally, we may remain responsible for costs and liabilities arising from environmental issues related to representations and warranties we make in sales agreements for properties of which we have disposed. We also may be liable for the costs of removal or remediation of hazardous substances or waste at disposal or treatment facilities if we arranged for disposal or treatment of hazardous substances at such facilities, whether or not we own or operate such facility.
Some of our current or sold properties have been or may be impacted by releases of hazardous substances or petroleum products. Such contamination may arise from a variety of sources, including historic uses of our properties for commercial or industrial purposes, spills of such materials at adjacent properties, or releases from tanks used on our properties to store petroleum or hazardous substances. In addition, certain of our current or sold properties are or were on sites upon which, or are or were adjacent to or near, other properties upon which others, including former owners or tenants, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances.
We, our tenants, and our properties are subject to various federal, state and local regulatory requirements related to environmental, health and safety matters, such as environmental laws, state and local fire and safety requirements, building codes and land use regulations. Failure to comply with these requirements could subject us or our tenants to governmental fines or private litigant damage awards. In addition, compliance with these requirements, including new requirements or stricter interpretation of existing requirements, may require us or our tenants to incur significant expenditures. We do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change laws or regulations, will develop. Environmental noncompliance liability also could impact a tenant’s ability to make rental payments to us, and our reputation could be negatively affected if we or our tenant’s violate environmental laws or regulations.
Buildings and other structures on properties that we currently own or operate or formerly owned or operated or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to undertake special precautions, such as removal or abatement, if ACM would be disturbed during maintenance, renovation, or demolition of a building, potentially resulting in substantial costs. Moreover, laws regarding ACM may impose fines and penalties on owners, employers and operators, and we may be subject to liability for releases of ACM into the air in our current or sold buildings and third parties may seek recovery from owners or operators of real property for personal injury associated with ACM.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. The presence of mold or other airborne contaminants in our current or sold buildings could expose us to costs and liabilities to address these issues, including from third parties if property damage or personal injury occurs.
We may be adversely affected by laws, regulations or other issues related to climate change.
If we become subject to laws or regulations related to climate change, our business, results of operations and financial condition could be impacted adversely. The federal government has enacted, and some of the states and localities in which we operate may enact certain climate change laws and regulations or have begun regulating carbon footprints and greenhouse gas emissions. Although these laws and regulations have not had any known material adverse effects on our business to date, they could result in substantial costs, including compliance costs, increased energy costs, retrofit costs and construction costs, including monitoring and reporting costs, and capital expenditures for environmental control facilities and other new equipment. Furthermore, our reputation could be negatively affected if we violate climate change laws or regulations. We cannot predict how future laws and regulations, or future interpretations of current laws and regulations, related to climate change will affect our business, results of operations and financial condition. Lastly, the potential physical impacts of climate change on our operations are highly uncertain, and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. These impacts may adversely affect our business, financial condition and results of operations.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personal identifying information of tenants and lease data. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing confidential tenant information, such as individually identifiable information relating to financial accounts. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced to third party service providers. In addition, information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber attacks. Although we have taken steps to protect the security of the data maintained in our information systems, it is possible that our security measures will not be able to prevent the systems' improper functioning, or the improper disclosure of personally identifiable information such as in the event of cyber attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers, including ransom attacks, and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect us.
Risks Related to the Real Estate Industry
Real estate ownership creates risks and liabilities that could materially and adversely affect us.
Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to risks inherently associated with real estate ownership, including:
•changes in supply of or demand for properties in areas in which we own buildings;
•the illiquid nature of real estate markets, which limits our ability to sell our assets rapidly or to respond to changing market conditions;
•the subjectivity of real estate valuations and changes in such valuations over time;
•property and casualty losses;
•the ongoing need for property maintenance and repair, and the need to make expenditures due to changes in governmental regulations, including the Americans with Disabilities Act;
•the inability of tenants to pay rent;
•competition from the development of properties in the markets in which we own property and the quality of such competition, such as the attractiveness of our properties as compared to our competitors' properties based on considerations such as convenience of location, rental rates, amenities and safety record;
•civil unrest, acts of war, acts of God, including earthquakes, hurricanes, pandemics and other natural disasters (which may result in uninsured losses), and other factors beyond our control;
•legislative, tax and regulatory developments that may occur at the federal, state and local levels that have direct or indirect impact on the ownership, leasing and operation of our properties; and
•litigation incidental to our business.
If any of the foregoing events occur, our properties may generate less revenues than expected and that may not be sufficient to meet our operating expenses, including debt service and capital expenditures, which could have a material adverse effect on us.
Potential losses may not be covered by our insurance policies, which could materially and adversely affect us.
We do not carry insurance for certain losses such as loss from riots, war or acts of God. For other potential losses relating to acts of terrorism, hurricanes, earthquakes and floods, we currently carry insurance but our insurance policies contain limitations, including large deductibles, co-payments and general policy limits. We cannot provide any assurances that any losses we incur resulting from the COVID-19 pandemic will be covered by our insurance policies, and any such coverage may be subject to limitations. In the future, we may be unable to renew or duplicate our current insurance coverage at adequate levels or at reasonable prices or at all. In addition, insurance companies may no longer offer coverage against certain types of losses, such as losses due to terrorist acts, environmental liabilities, or other catastrophic events including hurricanes and floods, or, if offered, the expense of obtaining these types of insurance may not be justified. If an uninsured loss or a loss in excess of our insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property, but still remain obligated for certain financial obligations related to the property. If any of our
properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. If we experience losses that are ultimately uninsured, it could materially and adversely affect us.
Actual or threatened terrorist attacks, crimes, shootings, riots, other acts of violence or other incidents beyond our control may materially and adversely affect us.
We have significant investments in large metropolitan markets that have been or may be in the future the targets of actual or threatened terrorism attacks, crimes, shootings, riots, other acts of violence or other incidents beyond our control. As a result, tenant demand for our office space could decline if some tenants in these markets choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be perceived to be less likely targets of future incidents. In addition, our office properties could be damaged, directly or indirectly, from future terrorist attacks or other acts of violence. If a future attack or incident occurs, it could require us to close a property for some time, it could increase vacancies at our properties, it could necessitate leasing our properties on less favorable terms or both, or it could expose us to civil liability, all of which could materially and adversely affect us.
Changes in accounting pronouncements may materially and adversely affect our financial statements, our tenants’ credit quality and our ability to secure long-term leases and renewal options.
Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board and the Securities and Exchange Commission, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations or could affect our tenants’ preferences regarding leasing real estate.
Risks Related to Our Securities
We may not distribute any of our significant existing cash balances to shareholders, which could be viewed unfavorably by our shareholders and materially and adversely affect our share price.
Any distributions will be made at the discretion of our Board of Trustees and will depend upon various factors that our Board deems relevant. We currently hold a significant amount of cash and cash equivalents ($3.0 billion as of December 31, 2020) which enables us to pursue acquisitions and/or investments and, as a result, we may elect not to distribute any of our existing cash to our shareholders. To the extent that our actual distributions are less than expected by investors, it could materially and adversely affect our share price.
A substantial portion of our assets is currently held in cash, which is expected to earn a limited rate of return and is subject to a risk of loss, which could materially and adversely affect us, including limiting our growth.
As of December 31, 2020, we held approximately $3.0 billion of cash and cash equivalents. We currently invest the majority of our cash in bank deposits with investment grade financial institutions that are expected to earn a limited rate of return given current interest rates and the potential for their further decline, any of which could adversely affect our results of operations. In addition, nearly all of our cash and bank deposits are not insured by the Federal Deposit Insurance Corporation, or the FDIC. Therefore, our cash and any bank deposits or other investments that we now hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value, interest rate risk, and liquidity risk.
Changes in market conditions could adversely affect the market price of our common shares.
As with other publicly traded equity securities, our stock price depends on various market conditions that may change from time to time. Among the market conditions that may affect the value of our common shares are the following:
•the extent of investor interest in our securities;
•the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;
•our underlying asset value;
•national and global economic conditions;
•interest rates;
•changes in tax laws;
•our financial performance; and
•general stock and bond market conditions.
Changes in one or more of these market conditions could cause the market price of our common shares to decline.
The number of our common shares available for future issuance or sale could adversely affect the per share trading price of our common shares and may be dilutive to current shareholders.
Our declaration of trust authorizes our Board of Trustees to, among other things, issue additional shares of capital stock without stockholder approval. We cannot predict whether future issuances or sales of our common shares or the availability of shares for resale in the open market will decrease the per share trading price of our common shares. The issuance of substantial numbers of our common shares in the public market, including, but not limited to, in connection with any future transaction involving the Company or upon conversion of our Series D preferred shares, or the perception that such issuances might occur, could adversely affect the per share trading price of our common shares. In addition, we may issue our common shares or other long-term equity awards under the Equity Commonwealth 2015 Omnibus Incentive Plan, as amended. Any such future issuances may be dilutive to existing shareholders.
Conversion of our Series D preferred shares may dilute the ownership interests of existing shareholders.
The conversion of some or all of our Series D preferred shares may dilute the ownership interests of existing shareholders.
Risks Related to Our Organization and Structure
Ownership limitations and certain provisions in our declaration of trust and bylaws, as well as certain provisions of Maryland law, may deter, delay or prevent a change in our control or unsolicited acquisition proposals that otherwise could be viewed favorably by our shareholders.
Our declaration of trust and bylaws prohibit any shareholder other than certain persons who have been exempted by our Board of Trustees from owning (directly and by attribution) more than 9.8% of the number or value of shares of any class or series of our outstanding shares of beneficial interest, including our common shares. These provisions are intended to assist with our REIT compliance under the Code and otherwise promote our orderly governance. However, these provisions also inhibit acquisitions of a significant stake in us and may deter, delay or prevent a change in our control or unsolicited acquisition proposals that a shareholder may consider favorable.
Additionally, provisions contained in our declaration of trust and bylaws or under Maryland law may have a similar impact, including, for example, provisions relating to: the authority of our Board of Trustees to fill most vacancies on our Board of Trustees; the fact that only the Chairman of the Board of Trustees, our Chief Executive Officer, our President, a majority of our Trustees or the holders of 10% of our common shares may call a special meeting of shareholders; and advance notice requirements for shareholder proposals.
Furthermore, our Board of Trustees has the authority to create and issue new classes or series of shares (including shares with voting rights and other rights and privileges that may deter a change in control) and issue additional common shares. The authorization and issuance of a new class of capital stock or additional common shares could have the effect of delaying or preventing someone from taking control of us, even if a change in control could be viewed favorably by our shareholders.
Our Board of Trustees has the authority, without shareholder approval, to opt into certain provisions of Maryland law that could inhibit changes in control which otherwise could be viewed favorably by our shareholders.
We currently have opted out of certain provisions of Maryland law that may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the
holders of our common shares with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
•“business combination moratorium/fair price” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes stringent fair price and super-majority shareholder voting requirements on these combinations; and
•“control share” provisions that provide that “control shares” of our company - defined as shares which, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees - acquired in a “control share acquisition” - defined as the direct or indirect acquisition of ownership or control of “control shares” from a party other than the issuer - have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two thirds of all the votes entitled to be cast on the matter, excluding all interested shares, and are subject to redemption in certain circumstances.
Our Board of Trustees has the authority, without shareholder approval, to opt into these provisions at any time, which could inhibit changes in control which otherwise could be viewed favorably by our shareholders.
Our Operating Trust’s organizational documents contain provisions that may delay, defer or prevent unsolicited acquisitions of us or changes in our control that otherwise could be viewed favorably by our shareholders.
Our Operating Trust’s organizational documents contain provisions that may delay, defer or prevent unsolicited acquisitions or changes in our control that might involve a premium price for the Company’s common shares. These provisions include, among others:
•redemption rights of qualifying parties;
•prohibition against our removal as the trustee of the Operating Trust with or without cause;
•transfer restrictions on the OP Units held directly or indirectly by us;
•our ability as trustee in some cases to amend the organizational documents of the Operating Trust without the consent of the other holders of OP Units;
•the right of the holders of OP Units to consent to mergers involving us under specified circumstances; and
•the right of the holders of OP Units to consent to our withdrawal as the sole trustee of the Operating Trust.
These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control that otherwise could be viewed favorably by our shareholders.
As an UPREIT, we are a holding company with no direct operations and will rely on distributions received from our Operating Trust to make distributions to our shareholders.
We are a holding company and conduct all of our operations through our Operating Trust, and we rely on distributions from our Operating Trust to make any distributions to our shareholders and to meet any of our obligations. The ability of our Operating Trust to make distributions to us will depend on its operating results and the ability of subsidiaries of our Operating Trust to make distributions to our Operating Trust, which could be subject to restrictions of any of its subsidiaries. In addition, the claims of our shareholders will be structurally subordinated to all existing and future liabilities and other obligations and any preferred equity of the Operating Trust and its subsidiaries, including in the case of any liquidation, bankruptcy or reorganization of our company.
We may complete acquisitions or investments through issuance of OP units in tax-deferred contribution transactions, which could result in shareholder dilution and restrict our ability to sell such assets, which could adversely affect us.
In the future, we may complete acquisitions or investments through tax-deferred contribution transactions in exchange for OP Units in the Operating Trust, which may result in shareholder dilution. In addition, such transactions may reduce the amount of tax depreciation we could deduct over the tax lives of the acquired properties and may require that we agree to protect the contributors’ abilities to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell or finance an asset at a time, or on terms, that otherwise would be favorable to us.
Our shareholders’ recourse against our Trustees and officers is limited by the terms contained in our declaration of trust and bylaws, which may be viewed unfavorably by our shareholders.
Our declaration of trust limits the liability of our Trustees and officers to us and our shareholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our Trustees and officers will not have any liability to us and our shareholders for money damages other than liability resulting from:
•actual receipt of an improper benefit or profit in money, property or services; or
•active and deliberate dishonesty by the Trustee or officer that was established by a final judgment as being material to the cause of action adjudicated.
Our declaration of trust and bylaws require us to indemnify any present or former Trustee or officer, to the maximum extent permitted by Maryland law, who is made or threatened to be made a party to a proceeding by reason of his or her service in that capacity. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former Trustees and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, our shareholders’ recourse against our Trustees and officers is limited, which may be viewed unfavorably by our shareholders.
Our bylaws provide that actions by our shareholders against us or against our Trustees and officers, including derivative and class actions, may be referred to binding arbitration proceedings. As a result, our shareholders would not be able to pursue litigation for these disputes in courts against us or our Trustees and officers if the disputes were referred to arbitration. In addition, the ability to collect attorneys' fees or other damages may be limited, which may discourage attorneys from agreeing to represent parties wishing to commence such a proceeding. As a result, our shareholders’ recourse against our Trustees and officers is limited by the terms of our declaration of trust and bylaws, which may be viewed unfavorably by our shareholders.
Conflicts of interest could arise in the future between the interests of the Company’s shareholders and the interests of OP Unitholders, which may impede business decisions that could benefit our shareholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between the Company and its affiliates, on the one hand, and the Operating Trust or holders of OP Units, on the other. Our trustees and officers have duties to the Company and its shareholders under applicable Maryland law in connection with their management of the Company. At the same time, we, as trustee, have fiduciary duties to the Operating Trust and to the holders of all OP Units under Maryland law in connection with the management of the Operating Trust. The Company’s duties as trustee to the Operating Trust and its Unitholders may come into conflict with the duties of our trustees and officers to the Company and our shareholders.
Additionally, the organizational documents of the Operating Trust expressly limit our liability by providing that the Company will not be liable for monetary or other damages or otherwise for losses sustained, liabilities incurred or benefits not derived in connection with such decisions unless the Company acted with willful misfeasance, bad faith, gross negligence or reckless disregard of duty, and the act or omission was material to the matter giving rise to the loss, liability or benefit not derived. Moreover, the organizational documents of the Operating Trust provide that the Operating Trust may indemnify, and pay or reimburse reasonable expenses to, the Company and the Company’s and the Operating Trust’s present or former unitholders, trustees, officers or agents and any other persons acting on behalf of the Company that the Company may designate from and against all claims and liabilities by reason of his, her or its service in such capacity. The Operating Trust has the power, with the approval of the Company, to provide such indemnification and advancement of expenses. The provisions of Maryland law that allow the fiduciary duties of a trustee to be modified by such organizational documents have not been resolved in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the organizational documents of the Operating Trust that purport to waive or restrict our fiduciary duties that would be in effect were it not for such organizational documents.
We may change our operational, financing and investment policies without shareholder approval, and any future changes we may implement may be viewed unfavorably.
Our Board of Trustees determines our operational, financing and investment policies and may amend or revise our policies, including our policies with respect to our intention to qualify for taxation as a REIT, acquisitions and/or investments, dispositions, growth, operations, indebtedness, capitalization and distributions, or approve transactions that deviate from these policies, without shareholder approval. Policy changes could adversely affect the market value of our common shares and our ability to make distributions to our shareholders. Further, our organizational documents do not limit the amount or percentage
of indebtedness, funded or otherwise, that we may incur. We could significantly increase our leverage, which could increase the risk of default on our obligations. In addition, we could change our investment policies, including how we allocate our resources across our portfolio or the types of assets in which we seek to invest and how we address our exposure to interest rate risk, real estate market fluctuations and liquidity risk.
Risks Related to Our Taxation as a REIT
If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax and potentially to additional state and local taxes which would reduce the amount of cash available for distribution to our shareholders.
We believe that we have been organized and have operated, and will continue to be organized and to operate, in a manner to allow us to qualify us to be taxed under the Code as a REIT. However, we cannot be certain that, upon review or audit, the IRS will agree with this conclusion. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for us to remain qualified as a REIT. We do not intend to request a ruling from the IRS as to our REIT qualification.
As a REIT, we generally do not pay U.S. federal income tax on our net income that we distribute currently to our shareholders. However, actual qualification as a REIT under the Code depends on satisfying complex statutory requirements, for which there are only limited judicial and administrative interpretations. Many of the REIT requirements are highly technical and complex. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control.
If we fail to qualify as a REIT for U.S. federal income tax purposes, and are unable to avail ourselves of certain savings provisions set forth in the Code, we likely would be subject to U.S. federal income tax at regular corporate rates. As a taxable corporation, we would not be allowed to take a deduction for distributions to shareholders in computing our taxable income or pass through long-term capital gains to individual shareholders at favorable rates. We also could be subject to the U.S. federal alternative minimum tax (for taxable years beginning before December 31, 2017) and possibly increased state and local taxes. We would not be able to elect to be taxed as a REIT for four years following the year we first failed to qualify unless the IRS were to grant us relief under certain statutory provisions. If we failed to qualify as a REIT, we likely would have to pay significant income taxes, which likely would reduce our net earnings available for investment or distribution to our shareholders. If we fail to qualify as a REIT, such failure may adversely affect our ability to raise capital and to service our debt. This likely would have a significant adverse effect on our earnings and the value of our securities. In addition, we would no longer be required to pay any distributions to shareholders. If we fail to qualify as a REIT for U.S. federal income tax purposes and are able to avail ourselves of one or more of the statutory savings provisions in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of $50,000 or more for each such failure.
Even if we qualify and remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we qualify and remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes. We are subject to U.S. federal and state income tax (and any applicable non-U.S. taxes) on the net income earned by our taxable REIT subsidiaries. Moreover, if we have net income from “prohibited transactions,” for example in connection with the dispositions of property held primarily for sale to customers in the ordinary course of business, that income will be subject to a 100% tax. Finally, some state and local jurisdictions may impose taxes, such as franchise taxes, on some of our income even though as a REIT we are not subject to U.S. federal income tax on that income because not all states and localities treat REITs the same way they are treated for federal U.S. income tax purposes. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders.
With less rental revenue, in order to comply with the 75% gross income test, we may be required to make qualifying investments in real property that satisfy this test, which may have more risk than investments in cash and cash equivalents.
One of the gross income requirements a REIT must satisfy each taxable year is that at least 75% of its gross income (excluding gross income from prohibited transactions and qualifying hedges) generally must be derived directly or indirectly from investments relating to real property or mortgages on real property. As of December 31, 2020, we had equity interests in four office properties and cash and cash equivalents of $3.0 billion. With a large cash balance and fewer income-producing real properties, we receive less rental revenue as a percentage of our total revenue. In order to comply with the 75% gross income test for each taxable year, we may be required to invest more of our assets in qualifying investments in real property, including investments in assets that we do not control, rather than cash and cash equivalents. Such investments may have more risks than investments in cash and cash equivalents.
The tax on “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Our Trustees previously adopted an office repositioning strategy to own and acquire at a discount to replacement cost high-quality, multi-tenant assets in markets and sub-markets with favorable long-term supply and demand fundamentals. We believe that the dispositions related to the repositioning of our portfolio along with other dispositions that we have made or that we might make in the future will not be subject to the 100% penalty tax; however, because application of the prohibited transactions tax could be based on an analysis of all of the facts and circumstances, there can be no assurance that the gains on some of our prior real estate sales, or any future real estate sales, will not be subject to the 100% prohibited transaction tax.
Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries, or TRS, and no more than 25% of the value of our assets can be represented by debt instruments issued by “publicly offered REITs.” If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio, or contribute to a TRS, otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income, increasing our income tax liability, and reducing amounts available for distribution to our stockholders. In addition, we may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments (or, in some cases, forego the sale of such investments) that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of certain attractive investments.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our “REIT taxable income” (determined before the deduction for dividends paid and excluding net capital gains) in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our shareholders to comply with the REIT requirements of the Code and avoid entity-level taxes.
From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with U.S. generally accepted accounting principles, or GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash or between the deduction of expenses and actual payment of those expenses may occur. If we do not have other funds available in these situations we could be required to (i) borrow funds on unfavorable terms, (ii) sell investments at disadvantageous prices, (iii) distribute amounts that would otherwise be invested in future acquisitions and/or investments, or (iv) make a taxable distribution of our common shares as part of a distribution in which shareholders may elect to receive our common shares or (subject to a limit measured as a percentage of the total distribution) cash to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement. These alternatives could increase our costs or reduce our shareholders' equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our shares.
Our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s length terms.
A REIT may own up to 100% of the stock of one or more TRS. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRS. The tax rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s length basis.
TRSs that we have formed are subject to and will continue to be subject to U.S. federal, state and local income tax on their taxable income, and their after-tax net income is available for distribution to us but is not required to be distributed by such TRSs to us. We believe that the aggregate value of the stock and securities of our TRSs has been and we anticipate that the aggregate value will continue to be less than 20% of the value of our total assets (including our TRS stock and securities). Furthermore, we have monitored and will continue to monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations. In addition, we have scrutinized and will continue to scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the TRS limitation discussed above or to avoid application of the 100% excise tax discussed above.
There is a risk of changes in the tax law applicable to REITs.
The IRS, the United States Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations and other guidance. We cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our shareholders.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
General. At December 31, 2020, we had real estate investments totaling approximately $401.7 million in four properties (eight buildings), that were leased to 109 tenants. We account for the operations of all our properties in one reporting segment. At December 31, 2020, we owned the following real estate (dollars in thousands):
Property State Number of
Buildings Undepreciated
Carrying
Value Depreciated
Carrying
Value Annualized
Rental
Revenue(1)
1225 Seventeenth Street (17th Street Plaza) CO 1 $ 171,214 $ 124,956 $ 27,301
1250 H Street, NW DC 1 75,892 39,354 9,092
206 East 9th Street (Capitol Tower) TX 1 52,468 42,360 8,381
Bridgepoint Square TX 5 102,136 51,721 12,724
Total 8 $ 401,710 $ 258,391 $ 57,498
(1)Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of December 31, 2020, 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.
At December 31, 2020, we did not have any properties encumbered by mortgage notes.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
We are or may become a party to various legal proceedings. We are not currently involved in any litigation nor, to our knowledge, is any litigation threatened against us where the outcome would, in our judgment based on information currently available to us, have a material adverse effect on the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are traded on the NYSE (symbol: EQC). As of February 5, 2021, there were 1,068 shareholders of record of our common shares. However, because many of our common shares are held by brokers and other institutions on behalf of shareholders, we believe that there are considerably more beneficial holders of our common shares than record holders.
Distributions
Under our governing documents and Maryland law, distributions to our shareholders are to be authorized and declared by our Board of Trustees.
On September 16, 2020 our Board of Trustees declared a special, one-time cash distribution of $3.50 per common share/unit to shareholders/unitholders of record on October 1, 2020. On October 20, 2020, we paid this distribution to such shareholders/unitholders in the aggregate amount of $426.7 million.
On September 24, 2019, our Board of Trustees declared a special, one-time cash distribution of $3.50 per common share/unit to shareholders/unitholders of record on October 7, 2019. On October 23, 2019, we paid this distribution to such shareholders/unitholders in the aggregate amount of $427.7 million. In February 2020, the number of earned awards for certain recipients of the Company’s restricted stock units and market-based LTIP Units was determined. Pursuant to the terms of such awards, we paid a one-time catch-up cash distribution to these recipients in the aggregate amount of $2.9 million for distributions to common shareholders and unitholders declared by our Board of Trustees during such awards' performance measurement period.
On September 26, 2018, our Board of Trustees declared a special, one-time cash distribution of $2.50 per common share/unit to shareholders/unitholders of record on October 9, 2018. On October 23, 2018, we paid this distribution to such shareholders/unitholders in the aggregate amount of $304.7 million. In February 2019, the number of earned awards for certain recipients of the Company's restricted stock units was determined. Pursuant to the terms of such awards, we paid a one-time catch-up cash distribution to these recipients in the aggregate amount of $1.2 million for distributions to common shareholders and unitholders declared by our Board of Trustees during such awards' performance measurement period.
The timing and amount of future distributions is determined at the discretion of our Board of Trustees and will depend upon various factors that our Board of Trustees deems relevant, including, but not limited to, our results of operations, our financial condition, debt and equity capital available to us, our expectations of our future capital requirements and operating performance, including our FFO, our Normalized FFO, and our cash available for distribution, restrictive covenants in our financial or other contractual arrangements (including those in our senior notes indenture), tax law requirements to qualify for taxation as and to remain a REIT, restrictions under Maryland law and our expected needs and availability of cash to pay our obligations and fund acquisitions. If our taxable income exceeds our net operating loss carryforwards, we will be required to make a distribution of at least 90% of our taxable income to maintain our qualification as a REIT. Whether we will make a distribution in 2021 and the timing of any such distribution remains uncertain. There can be no assurance that we will pay distributions in the future.
Issuer Repurchases
Common Share Repurchase Program
On March 13, 2019, our Board of Trustees authorized the repurchase of up to $150.0 million of our outstanding common shares over the twelve month period following the date of authorization. In March 2020, this share repurchase authorization, of which $129.2 million was not utilized, expired. On March 10, 2020, our Board of Trustees authorized the repurchase of up to an additional $150.0 million of our outstanding common shares over the twelve months following the date of authorization, none of which has been utilized.
During the year ended December 31, 2020, we repurchased and retired 711,000 of our common shares under the March 2019 authorization at a weighted average price of $29.31 per share, for a total investment of $20.8 million. The share repurchases were completed prior to the special, one-time cash distribution of $3.50 per common share/unit to shareholders/
unitholders paid on October 20, 2020. The $150.0 million of remaining authorization available under our share repurchase program as of December 31, 2020 is scheduled to expire on March 10, 2021.
Surrender of Common Shares for Tax Withholding
During the year ended December 31, 2020, certain of our employees surrendered common shares owned by them to satisfy their statutory tax withholding obligations in connection with the vesting of restricted common shares and restricted stock units.
The following table summarizes all of these repurchases during the three months ended December 31, 2020:
Period Total Number of Shares Purchased(1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number or Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
October 2020 76 $ 26.60 N/A N/A
November 2020 - $ - N/A N/A
December 2020 - $ - N/A N/A
Total 76 $ 26.60
(1) The number of shares repurchased represents common shares surrendered by a former employee to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares and restricted stock units of beneficial interest. With respect to these shares, the price paid per share is based on the closing price of our common shares as of the date of the determination of the statutory minimum federal and state tax obligations.
Unregistered Sales of Securities
There were no unregistered sales of equity securities during the year ended December 31, 2020.
Performance Graph
Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act or the Exchange Act that might incorporate SEC filings, in whole or in part, the following performance graph will not be incorporated by reference into any such filings.
The following graph compares the cumulative total shareholder return of our common shares for the period from December 31, 2015 to December 31, 2020, to the Nareit All REITs Index, Standard & Poor’s 500 Index (S&P 500 Index), and to the Nareit Equity Office Index over the same period. The graph assumes an investment of $100.00 in our common shares and each index and the reinvestment of all distributions. The shareholder return shown on the graph below is not indicative of future performance.
Period Ended
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Equity Commonwealth $ 100.00 $ 109.05 $ 110.03 $ 117.47 $ 142.91 $ 134.35
Nareit All REITs Index $ 100.00 $ 109.28 $ 119.41 $ 114.51 $ 146.66 $ 138.06
S&P 500 Index $ 100.00 $ 111.96 $ 136.40 $ 130.42 $ 171.49 $ 203.04
Nareit Equity Office Index $ 100.00 $ 113.17 $ 119.11 $ 101.84 $ 133.83 $ 109.16
Source: S&P Global Market Intelligence

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OBJECTIVE
The objective of this section of this Annual Report on Form 10-K is to provide a discussion and analysis, from management’s perspective, of the material information necessary to assess our financial condition, results of operations, liquidity and cash flows for the year ended December 31, 2020. In addition, we have also included a discussion of any material events or uncertainties that we believe are reasonably likely to cause our 2020 financial results to not be indicative of future results. We also discuss potential business opportunities that we may pursue and the uncertainties associated with such pursuit. We have included an executive summary to identify what we believe are the more important items that affected our 2020 financial results, including both our business activities as well as events outside of our control. In addition to the executive summary, we encourage you to read the entire discussion in this section of our material financial and statistical data together with our consolidated financial statements and the accompanying notes that are included in Part IV, Item 15 of this Annual Report on Form 10-K. The full discussion analyzes in detail our financial condition, results of operations, liquidity and cash flows, including comparisons of our 2020 and 2019 financial results. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
OVERVIEW
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 Maryland law. The Company operates as what is commonly referred to as an umbrella partnership real estate investment trust, or UPREIT, conducting substantially all of its activities through the Operating Trust. As of December 31, 2020, the Company beneficially owned 99.80% of the outstanding OP Units.
At December 31, 2020, our portfolio consisted of four properties (eight buildings), with a combined 1.5 million square feet. As of December 31, 2020, we had $3.0 billion of cash and cash equivalents.
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 December 31, 2020, our overall portfolio was 85.7% leased. During the year ended December 31, 2020, we entered into leases, excluding leasing activity for assets during the quarter in which the asset was sold or classified as held for sale, for 142,000 square feet, including lease renewals for 76,000 square feet and new leases for 66,000 square feet. Leases entered into during the year ended December 31, 2020, including both lease renewals and new leases, had weighted average cash rental rates that were approximately 1.4% lower than prior rental rates for the same space and weighted average GAAP rental rates that were approximately 11.9% higher than prior rental rates for the same space. 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.
During the year ended December 31, 2020, we sold three properties (four buildings) with a combined 1.0 million square feet for an aggregate gross sales price of $756.5 million. During the year ended December 31, 2019, we sold three properties (six buildings) with a combined 2.7 million square feet for an aggregate gross sale price of $812.1 million. For more information regarding these transactions, see Note 3 of the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
On September 16, 2020 our Board of Trustees declared a special, one-time cash distribution of $3.50 per common share/unit to shareholders/unitholders of record on October 1, 2020. On October 20, 2020, we paid this distribution to such shareholders/unitholders in the aggregate amount of $426.7 million.
We have engaged CBRE, Inc., (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 years ended December 31, 2020 and 2019, we incurred expenses of $3.2 million and $5.2 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 December 31, 2020 and 2019, we had amounts payable pursuant to these services of $0.3 million and $0.6 million, respectively.
In connection with repositioning our portfolio, we may sell additional properties, depending on market conditions. With the progress we have made executing dispositions, and the strength and liquidity of our balance sheet, we have shifted our primary focus to capital allocation. We may use our capital for acquisitions and/or investments in new properties or businesses, repurchase shares or make distributions that further our long-term strategic goals.
With respect to acquisitions and/or investments, we are evaluating opportunities to invest capital in high-quality assets or businesses in favorable markets that offer a compelling risk-reward profile. The set of opportunities that we pursue may include acquisitions and/or investments in a range of property types.
We may be unable to identify suitable investment opportunities. If we do not redeploy capital, we will strive to achieve a sale, liquidation or otherwise exit our business in one or more transactions in a manner that optimizes shareholder value. We are unable to predict if or when we will make a determination to sell, liquidate or otherwise exit our business.
Our business may be impacted by the evolving COVID-19 outbreak. Since first surfacing, the outbreak has spread throughout the world and has significantly impacted the United States. The pandemic has led to severe business disruptions, including a dramatic decline in economic activity generally. The duration of the business disruption is 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 ended December 31, 2020, in our comparable property portfolio, we collected 97% of contractual rents, including 1% from the application of security deposits and letters of credit. For January, 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 2020 and 2019 is as follows (square feet in thousands):
All Properties Comparable Properties(1)
As of December 31, As of December 31,
2020 2019 2020 2019
Total properties 4 7 4 4
Total square feet 1,507 2,469 1,507 1,507
Percent leased(2)
85.7 % 94.7 % 85.7 % 91.5 %
(1)Based on properties owned continuously from January 1, 2019 through December 31, 2020, 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 year ended December 31, 2020 was 7.3 years. Commitments made for leasing expenditures and concessions, such as tenant improvements and leasing commissions, for leases entered into during the year ended December 31, 2020, excluding leasing activity for assets during the quarter in which the asset was sold or classified as held for sale, totaled $9.8 million, or $68.83 per square foot on average (approximately $9.37 per square foot per year of the lease term).
As of December 31, 2020, approximately 8.4% of our leased square feet and 7.4% of our annualized rental revenue, determined as set forth below, are included in leases scheduled to expire through December 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 in 2021, that have not been backfilled, are below market. Lease expirations by year, as of December 31, 2020, are as follows (square feet and dollars in thousands):
Year Number
of Tenants Expiring(1) Leased Square
Feet Expiring(2) % of Leased Square Feet Expiring(2) Cumulative
% of Leased Square
Feet Expiring(2) Annualized Rental
Revenue Expiring(3) % of
Annualized Rental
Revenue Expiring
Cumulative
% of
Annualized Rental Revenue Expiring
2021 20 109 8.4 % 8.4 % $ 4,264 7.4 % 7.4 %
2022 13 130 10.1 % 18.5 % 6,748 11.7 % 19.1 %
2023 18 195 15.1 % 33.6 % 9,296 16.2 % 35.3 %
2024 15 207 16.0 % 49.6 % 9,224 16.0 % 51.3 %
2025 11 145 11.2 % 60.8 % 6,049 10.5 % 61.8 %
2026 8 80 6.2 % 67.0 % 3,659 6.4 % 68.2 %
2027 7 103 8.0 % 75.0 % 4,377 7.6 % 75.8 %
2028 4 63 4.9 % 79.9 % 2,971 5.2 % 81.0 %
2029 6 139 10.8 % 90.7 % 5,669 9.9 % 90.9 %
2030 3 58 4.5 % 95.2 % 2,468 4.3 % 95.2 %
Thereafter 4 62 4.8 % 100.0 % 2,773 4.8 % 100.0 %
109 1,291 100.0 % $ 57,498 100.0 %
Weighted average remaining lease term (in years):
4.7 4.5
(1)Tenants with leases expiring in multiple years are counted in each year they expire.
(2)Leased Square Feet as of December 31, 2020 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 of December 31, 2020, 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 December 31, 2020, tenants representing 2.5% or more of our total annualized rental revenue were as follows (square feet in thousands):
Tenant Square Feet(1) % of Total Leased Square Feet(1) % of Annualized Rental Revenue(2) Weighted Average Remaining Lease Term
1. Equinor Energy Services, Inc. 80 6.2 % 5.9 % 3.0
2. KPMG, LLP 71 5.5 % 5.1 % 8.4
3. Crowdstrike, Inc. 36 2.8 % 3.6 % 3.8
4. CBRE, Inc. 40 3.1 % 3.4 % 7.3
5. Salesforce.com, Inc.(3)
65 5.0 % 3.4 % 4.9
6. International Dairy Foods Association(4)
23 1.8 % 2.6 % 5.5
7. Alden Torch Financial, LLC 34 2.6 % 2.6 % 6.2
8. Kazoo, Inc. 26 2.0 % 2.6 % 1.1
Total 375 29.0 % 29.2 % 5.2
(1)Total Leased Square Feet as of December 31, 2020 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 December 31, 2020, 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 second half of 2021.
(4)Approximately 10,000 square feet of International Dairy Foods Association's space expire in 2034. The remaining 13,000 square feet expire (including the expiration dates for backfilling tenants) in the following years: 5,900 square feet in 2021, 3,100 square feet in 2022, and 4,100 square feet in 2027.
Financing Activities
As of July 5, 2020, we repaid at par $25.1 million of mortgage debt at 206 East 9th Street and recognized a gain on early extinguishment of debt of $0.1 million for the year ended December 31, 2020 from the write off of an unamortized premium, net of prepayment fees and the write off of unamortized deferred financing fees.
For more information regarding our financing sources and activities, please see the section captioned “Liquidity and Capital Resources-Our Investment and Financing Liquidity and Resources” below.
RESULTS OF OPERATIONS
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Comparable Properties Results(1) Other Properties Results(2) Consolidated Results
Year Ended December 31,
2020 2019 $ Change % Change 2020 2019 2020 2019 $ Change % Change
(in thousands)
Rental revenue $ 57,387 $ 58,109 (722) (1.2) % $ 4,747 $ 58,760 $ 62,134 $ 116,869 $ (54,735) (46.8) %
Other revenue
3,833 6,042 (2,209) (36.6) % 311 4,939 4,144 10,981 (6,837) (62.3) %
Operating expenses
(26,854) (26,359) (495) 1.9 % (2,004) (20,059) (28,858) (46,418) 17,560 (37.8) %
Net operating income(3) $ 34,366 $ 37,792 $ (3,426) (9.1) % $ 3,054 $ 43,640 37,420 81,432 (44,012) (54.0) %
Other expenses:
Depreciation and amortization 19,329 28,122 (8,793) (31.3) %
General and administrative 33,233 38,442 (5,209) (13.6) %
Total other expenses 52,562 66,564 (14,002) (21.0) %
Interest and other income, net 21,228 72,392 (51,164) (70.7) %
Interest expense (620) (8,908) 8,288 (93.0) %
Gain (loss) on early extinguishment of debt 131 (6,374) 6,505 (102.1) %
Gain on sale of properties, net
446,744 422,172 24,572 5.8 %
Income before income taxes
452,341 494,150 (41,809) (8.5) %
Income tax expense (248) (1,284) 1,036 (80.7) %
Net income 452,093 492,866 (40,773) (8.3) %
Net income attributable to noncontrolling interest (799) (186) (613) 329.6 %
Net income attributable to Equity Commonwealth 451,294 492,680 (41,386) (8.4) %
Preferred distributions (7,988) (7,988) - - %
Net income attributable to Equity Commonwealth common shareholders
$ 443,306 $ 484,692 $ (41,386) (8.5) %
(1)Comparable properties consist of four properties we owned continuously from January 1, 2019 to December 31, 2020.
(2)Other properties consist of properties sold.
(3)We define net operating income, or NOI, as shown above, as income from our real estate including lease termination fees received from tenants less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and corporate level expenses. For a discussion of why we consider NOI to be an appropriate supplemental measure to net income as well as a reconciliation of NOI to net income, the most directly comparable financial measure under GAAP reported on our consolidated financial statements, please see "Liquidity and Capital Resources - Property Net Operating Income (NOI)."
Rental revenue. Rental revenue decreased $54.7 million, or 46.8%, in the 2020 period, compared to the 2019 period, primarily due to the properties sold in 2020 and 2019. Rental revenue at the comparable properties decreased $0.7 million, or 1.2%, in the 2020 period, compared to the 2019 period, primarily due to a $0.9 million decrease in lease termination fees and a $0.4 million increase in uncollectible receivables, partially offset by a $0.3 million increase in escalations and a $0.5 million increase in real estate tax recoveries.
Rental revenue includes (decreases) increases for straight-line rent adjustments totaling $(0.3) million in the 2020 period and $0.4 million in the 2019 period, and net increases for amortization of acquired real estate leases and assumed real estate lease obligations totaling $0 in the 2020 period and $0.1 million in the 2019 period. Rental income also includes the recognition of lease termination fees totaling $1.3 million in the 2020 period and $2.2 million in the 2019 period.
Other revenue. Other revenue, which primarily includes parking revenue, decreased $6.8 million, or 62.3% in the 2020 period, compared to the 2019 period, primarily due to the properties sold in 2020 and 2019. Other revenue decreased $2.2 million, or 36.6%, at the comparable properties in the 2020 period, compared to the 2019 period primarily due to decreased parking revenue during the 2020 period as a result of the COVID-19 outbreak.
Operating expenses. Operating expenses decreased $17.6 million, or 37.8%, in the 2020 period, compared to the 2019 period, primarily due to the properties sold in 2020 and 2019. Operating expenses at our comparable properties increased $0.5 million, or 1.9%, primarily due to a $0.5 million increase in real estate tax expense, a $0.2 million increase in maintenance and repairs
expense, a $0.2 million increase in salaries and benefits expense and a $0.1 million increase in HVAC expense, partially offset by a $0.5 million decrease in utilities expense and a $0.2 million decrease in parking expense.
Depreciation and amortization. Depreciation and amortization decreased $8.8 million, or 31.3%, in the 2020 period, compared to the 2019 period, primarily due to the properties sold in 2020 and 2019.
General and administrative. General and administrative expenses decreased $5.2 million, or 13.6% in the 2020 period, compared to the 2019 period, primarily due to a $3.2 million decrease in compensation expenses related to severance, a $1.6 million decrease in bonus expense, a $0.7 million decrease in payroll expenses as a result of a staffing reduction, a $0.4 million decrease in share-based compensation expense and a $0.3 million decrease in travel, meals and entertainment expense as a result of the COVID-19 outbreak, partially offset by a $1.4 million increase in state franchise taxes largely related to property sales.
Interest and other income, net. Interest and other income, net decreased $51.2 million, or 70.7%, in the 2020 period, compared to the 2019 period, primarily due to $49.4 million less interest received from lower average interest rates.
Interest expense. Interest expense decreased $8.3 million, or 93.0%, in the 2020 period, compared to the 2019 period, primarily due to the redemption in June 2019 of all $250 million of our 5.875% senior unsecured notes due 2020, the repayment at par in July 2020 of mortgage debt at 206 East 9th Street and a decrease in amortization of a discount and a decrease in amortization of deferred financing fees, partially offset by a decrease in amortization of a premium.
Gain (loss) on early extinguishment of debt. The gain on early extinguishment of debt of $0.1 million in the 2020 period reflects the write off of an unamortized premium, net of prepayment fees and the write off of unamortized deferred financing fees related to the repayment at par of mortgage debt at 206 East 9th Street. The loss on early extinguishment of debt of $6.4 million in the 2019 period reflects the write off of unamortized deferred financing fees, the write off of an unamortized discount and prepayment fees related to the redemption of all $250 million of our 5.875% senior unsecured notes due 2020.
Gain on sale of properties, net. Gain on sale of properties, net increased $24.6 million, or 5.8%, in the 2020 period, compared to the 2019 period. Gain on sale of properties, net in the 2020 period primarily related to the following (dollars in thousands):
Asset Gain on Sale
109 Brookline Avenue
$ 225,190
333 108th Avenue NE
194,662
Georgetown-Green and Harris Buildings 24,916
Research Park(1)
2,000
$ 446,768
(1)There was consideration of $2.0 million being held in escrow related to the sale of this property in 2019. In June 2020, these proceeds were released to the Company, and we recorded an additional $2.0 million gain on the sale for year ended December 31, 2020.
Gain on sale of properties, net in the 2019 period primarily related to the following (dollars in thousands):
Asset Gain on Sale
1735 Market Street $ 192,985
600 108th Avenue NE 149,009
Research Park 78,158
$ 420,152
Income tax expense. Income tax expense decreased $1.0 million, or 80.7%, in the 2020 period, compared to the 2019 period, primarily due to a decrease in state and local taxes as a result of the sale of properties.
Net income attributable to noncontrolling interest. From 2017 through 2020, we granted LTIP Units to certain of our trustees and employees. As these LTIP Units vest, they automatically convert to operating partnership units, or OP Units. The net income attributable to noncontrolling interest increased $0.6 million, or 329.6% in the 2020 period, compared to the 2019 period, primarily due to the measurement of LTIP Units in the 2020 period.
LIQUIDITY AND CAPITAL RESOURCES
Our Operating Liquidity and Resources
As of December 31, 2020, we had $3.0 billion of cash and cash equivalents. We expect to use our cash balances, cash flow from our operations and proceeds of any future property sales to fund our operations, make distributions, repurchase our common shares, make acquisitions and/or investments in properties or businesses, fund tenant improvements and leasing costs and for other general business purposes. We believe our cash balances and the cash flow from our operations will be sufficient to fund our ordinary course activities.
Our future cash flows from operating activities will depend on our ability to collect rent from our current tenants under their leases. Our ability to collect rent and generate parking revenue in the near term may continue to be adversely impacted by the market disruption caused by the COVID-19 outbreak. We cannot predict the ultimate impact of the pandemic on our results of operations.
Our future cash flows from operating activities will also depend upon our:
•ability to maintain or improve the occupancy of, and the rental rates at, our properties;
•ability to control operating and financing expense increases at our properties; and
•ability to purchase additional properties, which produce rents, less property operating expenses, in excess of our costs of acquisition capital.
In addition, our future cash flows will also depend in part on interest income earned on our invested cash balances.
Volatility in energy costs and real estate taxes may cause our future operating expenses to fluctuate; however, the impact of these fluctuations is expected to be partially offset by the pass through of operating expenses to our tenants pursuant to lease terms, although there can be no assurance that we will be able to successfully offset these expenses or that doing so would not negatively impact our competitive position or business.
Net cash flows provided by (used in) operating, investing and financing activities were $33.3 million, $643.3 million and $(490.0) million, respectively, for the year ended December 31, 2020, and $98.9 million, $995.7 million and $(698.1) million, respectively, for the year ended December 31, 2019. Changes in these three categories of our cash flows between 2020 and 2019 are primarily related to a decrease in property net operating income (as a result of property dispositions), a decrease in interest income (as a result of lower average interest rates in 2020), a decrease in real estate improvements, dispositions of properties, proceeds from maturities of marketable securities, repayments of debt and repurchase of our common shares.
Our Investment and Financing Liquidity and Resources
As of July 5, 2020, we repaid at par $25.1 million of mortgage debt at 206 East 9th Street and recognized a gain on early extinguishment of debt of $0.1 million for the year ended December 31, 2020 from the write off of an unamortized premium, net of prepayment fees and the write off of unamortized deferred financing fees.
On September 16, 2020 our Board of Trustees declared a special, one-time cash distribution of $3.50 per common share/unit to shareholders/unitholders of record on October 1, 2020. On October 20, 2020, we paid this distribution to such shareholders/unitholders in the aggregate amount of $426.7 million.
During the year ended December 31, 2020, we paid an aggregate of $8.0 million of distributions on our series D preferred shares. On January 11, 2021, our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which will be paid on February 16, 2021 to shareholders of record on January 28, 2021.
During the year ended December 31, 2020, we repurchased and retired 711,000 of our common shares under the March 2019 authorization at a weighted average price of $29.31 per share, for a total investment of $20.8 million. The share repurchases were completed prior to the special, one-time cash distribution of $3.50 per common share/unit to shareholders/unitholders paid on October 20, 2020. On March 10, 2020, our Board of Trustees authorized the repurchase of up to an additional $150.0 million of our outstanding common shares over the twelve months following the date of authorization, none of which has been utilized. The $150.0 million of remaining authorization available under our share repurchase program as of December 31, 2020 is scheduled to expire on March 10, 2021.
We may utilize various types of financings, including debt or equity, to fund future acquisitions and/or investments and to pay any debt and other obligations as they become due. Although we are not currently rated by the debt rating agencies, the completion and the costs of any future debt transactions will depend primarily upon market conditions and our credit ratings at such time, if any. We have no control over market conditions. Any credit ratings will depend upon evaluations by credit rating agencies of our business practices and plans and, in particular, whether we appear to have the ability to maintain our earnings, to space our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably foreseeable adverse changes. We intend to conduct our business activities in a manner which will continue to afford us reasonable access to capital for investment and financing activities. However, there can be no assurance regarding our ability to complete any debt or equity offerings or that our cost of any future public or private financings will not increase.
During the year ended December 31, 2020, we sold three properties with a combined 1.0 million square feet for an aggregate sale price of $756.5 million. For more information regarding these transactions, see Note 3 of the Notes to Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K, which is incorporated herein by reference.
During the years ended December 31, 2020, 2019 and 2018 amounts capitalized at our properties, including properties sold or classified as held for sale, for tenant improvements, leasing costs and building improvements were as follows (amounts in thousands):
Years Ended December 31,
2020 2019 2018
Tenant improvements(1)
$ 9,598 $ 7,529 $ 47,248
Leasing costs(2)
2,097 5,409 21,674
Building improvements(3)
2,044 6,366 9,046
(1)Tenant improvements include capital expenditures to improve tenants’ space.
(2)Leasing costs include leasing commissions and related legal expenses.
(3)Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets. Tenant-funded capital expenditures are excluded.
During the year ended December 31, 2020, commitments made for expenditures in connection with leasing space at our properties, excluding leasing activity for assets during the quarter in which the asset was sold or classified as held for sale, were as follows (dollar and square foot measures in thousands):
New
Leases
Renewals Total
Square feet leased during the period 66 76 142
Tenant improvements and leasing commissions $ 5,916 $ 3,858 $ 9,774
Tenant improvements and leasing commissions per square foot $ 89.63 $ 50.76 $ 68.83
Weighted average lease term by square foot (years) 8.5 6.3 7.3
Tenant improvements and leasing commissions per square foot per year of lease term
$ 10.49 $ 8.04 $ 9.37
Committed but unspent tenant related obligations are leasing commissions and tenant improvements. Based on existing leases as of December 31, 2020, committed but unspent tenant related obligations were $9.6 million.
Debt Covenants
We have no debt outstanding as of December 31, 2020, and, as a result, we have no debt covenants. We are also no longer rated by the debt rating agencies.
FUNDS FROM OPERATIONS (FFO) AND NORMALIZED FFO
We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or Nareit. Nareit defines FFO as net income (loss), calculated in accordance with GAAP, excluding real estate depreciation and amortization, gains (or losses) from sales of depreciable property, impairment of depreciable real estate, and our portion of
these items related to equity investees and non-controlling interests. Our calculation of Normalized FFO differs from Nareit’s definition of FFO because we exclude certain items that we view as nonrecurring or impacting comparability from period to period. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, net income attributable to Equity Commonwealth common shareholders and cash flow from operating activities.
We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, net income attributable to Equity Commonwealth common shareholders or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. These measures should be considered in conjunction with net income, net income attributable to Equity Commonwealth common shareholders and cash flow from operating activities as presented in our consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows. Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.
The following table provides a reconciliation of net income to FFO attributable to Equity Commonwealth common shareholders and unitholders and a calculation to Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders (in thousands):
Years Ended December 31,
2020 2019 2018
Reconciliation of FFO:
Net income $ 452,093 $ 492,866 $ 272,908
Real estate depreciation and amortization
18,442 27,037 47,816
Loss on asset impairment
- - 12,087
Gain on sale of properties, net (446,744) (422,172) (251,417)
FFO attributable to Equity Commonwealth 23,791 97,731 81,394
Preferred distributions (7,988) (7,988) (7,988)
FFO attributable to Equity Commonwealth common shareholders and unitholders $ 15,803 $ 89,743 $ 73,406
Reconciliation of Normalized FFO:
FFO attributable to Equity Commonwealth common shareholders and unitholders $ 15,803 $ 89,743 $ 73,406
Lease value amortization - (117) 54
Straight-line rent adjustments 340 (418) (4,971)
Sold property expense included in interest and other income, net 515 - -
(Gain) loss on early extinguishment of debt
(131) 6,374 7,122
Loss on sale of securities - - 4,987
Loss on sale of real estate mortgage receivable - - 2,117
Taxes related to property sales included in general and administrative 1,472 - -
Taxes related to property sales, net included in income tax expense 130 142 2,726
Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders
$ 18,129 $ 95,724 $ 85,441
PROPERTY NET OPERATING INCOME (NOI)
We use property net operating income, or NOI, to evaluate the performance of our properties. We define NOI as income from our real estate including lease termination fees received from tenants less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions and corporate level expenses.
The following table includes the reconciliation of NOI to net income, the most directly comparable financial measure under GAAP reported in our consolidated financial statements. We consider NOI to be an appropriate supplemental measure to net income because it helps to understand the operations of our properties. We use NOI internally to evaluate 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. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, net income attributable to Equity Commonwealth common shareholders 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, net income attributable to Equity Commonwealth common shareholders and cash flow from operating activities as presented in our consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows. Other REITs and real estate companies may calculate NOI differently than we do.
A reconciliation of NOI to net income for the years ended December 31, 2020, 2019 and 2018, is as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Rental revenue $ 62,134 $ 116,869 $ 184,368
Other revenue 4,144 10,981 12,654
Operating expenses (28,858) (46,418) (79,916)
NOI $ 37,420 $ 81,432 $ 117,106
NOI $ 37,420 $ 81,432 $ 117,106
Depreciation and amortization (19,329) (28,122) (49,041)
General and administrative (33,233) (38,442) (44,439)
Loss on asset impairment - - (12,087)
Interest and other income, net 21,228 72,392 46,815
Interest expense (620) (8,908) (26,585)
Gain (loss) on early extinguishment of debt 131 (6,374) (7,122)
Gain on sale of properties, net
446,744 422,172 251,417
Income before income taxes
452,341 494,150 276,064
Income tax expense (248) (1,284) (3,156)
Net income $ 452,093 $ 492,866 $ 272,908
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are those that will have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in real property. These policies affect our assessment of the carrying values and impairments of long lived assets.
We periodically evaluate our properties for possible impairments. Impairment indicators may include declining tenant occupancy, lack of progress releasing vacant space, tenant bankruptcies, low long-term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the related property by comparing it to the expected future undiscounted cash flows to be generated from that property over our anticipated hold period. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. Projections of expected future operating cash flows require that we estimate future market rental revenue amounts subsequent to the expiration of current lease agreements, future property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property's fair value and could result in the misstatement of the carrying value of our real estate assets and net income (loss).
These policies involve significant judgments made based upon experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability and willingness of our tenants to perform their obligations to us, current and future economic conditions and competitive factors in the markets in which our properties are located. Competition, economic conditions and other factors may cause occupancy declines in the future. In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own or decrease the carrying values of our assets.
RELATED PERSON TRANSACTIONS
For information about our related person transactions, see Note 17 of the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which is incorporated herein by reference.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We do not currently have any exposure to risks associated with market changes in interest rates.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 is included in Item 15 of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Assessment of Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of December 31, 2020 our internal control over financial reporting is effective.
Ernst & Young LLP, the independent registered public accounting firm that audited our 2020 consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting. The report appears on page.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Our Code of Business Conduct and Ethics applies to all our representatives, including our officers and Trustees. Our Code of Business Conduct and Ethics is posted on our website, www.eqcre.com. A printed copy of our Code of Business Conduct and Ethics is also available free of charge to any person who requests a copy by writing to our Secretary, Equity Commonwealth, Two North Riverside Plaza, Suite 2100, Chicago, IL 60606. We have disclosed and intend to disclose any amendments or waivers to our Code of Business Conduct and Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller (or any person performing similar functions) on our website.
The remainder of the information required by Item 10 is incorporated by reference to our definitive Proxy Statement.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to our definitive Proxy Statement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 is incorporated by reference to our definitive Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is incorporated by reference to our definitive Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required by Item 14 is incorporated by reference to our definitive Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
(a)The following documents are filed as part of this Annual Report on Form 10-K:
(i) and (ii) Financial Statements and Financial Statement Schedule.
The following consolidated financial statements and financial statement schedule of Equity Commonwealth are included on the pages indicated:
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule III-Real Estate and Accumulated Depreciation
S-1
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
(iii) Exhibits.
The following documents are filed as exhibits to this Annual Report on Form 10-K:
Exhibit
Number
Description
3.1 Articles of Amendment and Restatement of Declaration of Trust of the Company, dated July 1, 1994, as amended to date. (Incorporated by reference to the Company’s Current Report on Form 8-K filed August 1, 2014.)
3.2 Articles Supplementary, dated October 10, 2006. (Incorporated by reference to the Company’s Current Report on Form 8-K filed October 11, 2006.)
3.3 Articles Supplementary, dated May 31, 2011. (Incorporated by reference to the Company’s Current Report on Form 8-K filed May 31, 2011.)
3.4 Articles Supplementary, dated March 14, 2018. (Incorporated by reference to the Company’s Current Report on Form 8-K filed March 15, 2018.)
3.5 Fourth Amended and Restated Bylaws of the Company, adopted April 2, 2020. (Incorporated by reference to the Company’s Current Report on Form 8-K filed April 3, 2020.)
4.1 Form of Common Share Certificate. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.)
4.2 Form of 6 1/2% Series D Cumulative Convertible Preferred Share Certificate. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.)
4.3 Description of the Company's Securities. (Filed herewith.)
10.1 Articles of Amendment and Restatement of Declaration of Trust of EQC Operating Trust, dated November 10, 2016. (Incorporated by reference to the Company's Current Report on Form 8-K filed November 14, 2016.)
Exhibit
Number
Description
10.2 Master Sub-Management Agreement, dated as of June 13, 2014, between Equity Commonwealth Management LLC, a wholly owned subsidiary of the Company, and CBRE, Inc. (+) (Incorporated by reference to the Company’s Current Report on Form 8-K filed June 17, 2014.)
10.3 Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company's Current Report on Form 8-K filed June 18, 2015.)
10.4 Amendment No. 1 to the Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 18, 2016.)
10.5 Amendment No. 2 to the Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company's Registration Statement on Form S-8 filed July 16, 2019.)
10.6 Form of Restricted Stock Agreement for Employees under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.7 Form of Restricted Stock Unit Agreement for Employees under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.8 Form of Time-Based LTIP Unit Agreement for Employees under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.9 Form of Performance-Based LTIP Unit Agreement for Employees under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.10 Form of Restricted Stock Agreement for Chairman of the Board under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.11 Form of Restricted Stock Unit Agreement for Chairman of the Board under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.12 Form of Time-Based LTIP Unit Agreement for Chairman of the Board under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.13 Form of Performance-Based LTIP Unit Agreement for Chairman of the Board under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Annual Report on Form 10-K filed February 15, 2018.)
10.14 Form of Restricted Stock Agreement for Trustees under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company's Current Report on Form 8-K filed June 15, 2016.)
10.15 Form of Time-Based LTIP Unit Agreement for Trustees under Equity Commonwealth 2015 Omnibus Incentive Plan. (+) (Incorporated by reference to the Company’s Current Report on Form 8-K filed June 21, 2017.)
10.16 Summary of Trustee Compensation. (+) (Filed herewith.)
10.17 Change in Control Agreement, dated as of April 24, 2019, by and between the Company, Equity Commonwealth Management LLC and David Helfand. (+) (†) (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.)
Exhibit
Number
Description
21.1 Subsidiaries of the Company. (Filed herewith.)
23.1 Consent of Ernst & Young LLP. (Filed herewith.)
31.1 Rule 13a-14(a) Certification. (Filed herewith.)
31.2 Rule 13a-14(a) Certification. (Filed herewith.)
32.1 Section 1350 Certification. (Furnished herewith.)
101.1 The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
(+) Management contract or compensatory plan or arrangement.
† Pursuant to Instruction 2 of Item 601 of Regulation S-K, Registrant has omitted certain change in control agreements (the “Omitted CIC Agreements”), which are substantially identical in all material respects except as to the parties thereto, the dates of execution, or other details. The below schedule identifies the Omitted CIC Agreements. The only term in the Omitted CIC Agreements that differs from the change in control agreement filed herewith is the term of coverage under the Company’s group health plan, which is 24 months under Section 3(a)(iv) of the Omitted CIC Agreements. The Registrant hereby agrees to file the Omitted CIC Agreements upon request by the Commission.
Schedule
1.Change in Control Agreement, dated as of April 24, 2019, by and between the Company, Equity Commonwealth Management LLC and Adam Markman.
2.Change in Control Agreement, dated as of April 24, 2019, by and between the Company, Equity Commonwealth Management LLC and David Weinberg.
3.Change in Control Agreement, dated as of April 24, 2019, by and between the Company, Equity Commonwealth Management LLC and Orrin Shifrin.