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Equity Commonwealth - Quarter Report: 2021 March (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2021
OR
☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9317
EQUITY COMMONWEALTH
(Exact Name of Registrant as Specified in Its Charter)
Maryland04-6558834
(State or Other Jurisdiction of Incorporation or Organization)(IRS Employer Identification No.)
Two North Riverside Plaza, Suite 2100, Chicago, IL
60606
(Address of Principal Executive Offices)(Zip Code)
(312) 646-2800
(Registrant’s Telephone Number, Including Area Code)

 Securities registered pursuant to Section 12(b) of the Exchange Act:
Title Of Each ClassTrading SymbolName of Each Exchange On Which Registered
Common Shares of Beneficial InterestEQCThe New York Stock Exchange
6.50% Series D Cumulative Convertible Preferred Shares of Beneficial InterestEQCpDThe New York Stock Exchange
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
☒Accelerated filer☐
Non-accelerated filer
☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ý
Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of April 30, 2021:  121,921,850.


Table of Contents
EQUITY COMMONWEALTH
 
FORM 10-Q
 
March 31, 2021
 
INDEX
 
  Page
 
 
 
 
 
 
 
 
 


Table of Contents

 
EXPLANATORY NOTE
 
References in this Quarterly Report on Form 10-Q to the “Company,” “EQC,” “we,” “us” or “our,” refer to Equity Commonwealth and its consolidated subsidiaries as of March 31, 2021, unless the context indicates otherwise.

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PART I.      Financial Information

Item 1.         Financial Statements.
EQUITY COMMONWEALTH
 CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
March 31,
2021		December 31,
2020
(audited)
ASSETS
Real estate properties:
Land$44,060 $44,060 
Buildings and improvements361,107 357,650 
405,167 401,710 
Accumulated depreciation(147,034)(143,319)
258,133 258,391 
Cash and cash equivalents2,971,052 2,987,225 
Rents receivable14,629 14,702 
Other assets, net16,862 17,353 
Total assets$3,260,676 $3,277,671 
LIABILITIES AND EQUITY
Accounts payable, accrued expenses and other$21,007 $20,588 
Rent collected in advance2,979 2,928 
Distributions payable5,072 10,991 
Total liabilities29,058 34,507 
Shareholders’ equity:
Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized;
Series D preferred shares; 6.50% cumulative convertible; 4,915,196 shares issued and
   outstanding, aggregate liquidation preference of $122,880
119,263 119,263 
Common shares of beneficial interest, $0.01 par value: 350,000,000 shares authorized;
   121,916,875 and 121,522,555 shares issued and outstanding, respectively
1,219 1,215 
Additional paid in capital4,295,226 4,294,632 
Cumulative net income3,804,930 3,814,948 
Cumulative common distributions(4,283,753)(4,283,668)
Cumulative preferred distributions(711,709)(709,712)
Total shareholders’ equity3,225,176 3,236,678 
Noncontrolling interest6,442 6,486 
Total equity3,231,618 3,243,164 
Total liabilities and equity$3,260,676 $3,277,671 
See accompanying notes.
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EQUITY COMMONWEALTH
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended March 31,
20212020
Revenues:
Rental revenue$14,169 $17,143 
Other revenue682 1,677 
Total revenues14,851 18,820 
Expenses:
Operating expenses6,621 8,761 
Depreciation and amortization4,351 5,114 
General and administrative15,729 10,604 
Total expenses26,701 24,479 
Interest and other income, net1,843 11,895 
Interest expense (including net amortization of debt premiums and deferred financing fees of $— and $(56), respectively)
— (309)
Gain on sale of properties, net
— 419,620 
(Loss) income before income taxes
(10,007)425,547 
Income tax expense(31)(40)
Net (loss) income(10,038)425,507 
Net loss (income) attributable to noncontrolling interest20 (748)
Net (loss) income attributable to Equity Commonwealth(10,018)424,759 
Preferred distributions(1,997)(1,997)
Net (loss) income attributable to Equity Commonwealth common shareholders
$(12,015)$422,762 
Weighted average common shares outstanding — basic122,002 122,148 
Weighted average common shares outstanding — diluted122,002 126,605 
Earnings per common share attributable to Equity Commonwealth common shareholders:
Basic$(0.10)$3.46 
Diluted
$(0.10)$3.35 

See accompanying notes.
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EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(amounts in thousands)
(unaudited)
Three Months Ended
March 31,
20212020
Net (loss) income$(10,038)$425,507 
Total comprehensive (loss) income$(10,038)$425,507 
Comprehensive loss (income) attributable to noncontrolling interest
20 (748)
Total comprehensive (loss) income attributable to Equity Commonwealth
$(10,018)$424,759 

See accompanying notes.

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EQUITY COMMONWEALTH
 CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(amounts in thousands, except share data)
(unaudited)

 Equity Commonwealth Shareholders
Number of Series D Preferred SharesSeries D Preferred
Shares		Number of Common SharesCommon
Shares		Additional
Paid
in
Capital		Cumulative
Net
Income		Cumulative
Common
Distributions		Cumulative
Preferred
Distributions		Noncontrolling InterestTotal
Balance at January 1, 2021
4,915,196 $119,263 121,522,555 $1,215 $4,294,632 $3,814,948 $(4,283,668)$(709,712)$6,486 $3,243,164 
Net loss— — — — — (10,018)— — (20)(10,038)
Surrender of shares for tax withholding— — (210,334)(2)(6,091)— — — — (6,093)
Share-based compensation— — 604,654 6 6,405 — — — 276 6,687 
Distributions— — — — — — (85)(1,997)(20)(2,102)
Adjustment for noncontrolling interest
— — — — 280 — — — (280)— 
Balance at March 31, 2021
4,915,196 $119,263 121,916,875 $1,219 $4,295,226 $3,804,930 $(4,283,753)$(711,709)$6,442 $3,231,618 


 Equity Commonwealth Shareholders
Number of Series D Preferred SharesSeries D Preferred
Shares		Number of Common
Shares		Common
Shares		Additional
Paid
in
Capital		Cumulative
Net
Income		Cumulative
Common
Distributions		Cumulative
Preferred
Distributions		Noncontrolling InterestTotal
Balance at January 1, 2020
4,915,196 $119,263 121,924,199 $1,219 $4,313,831 $3,363,654 $(3,851,666)$(701,724)$1,295 $3,245,872 
Net income— — — — — 424,759 — — 748 425,507 
Repurchase of shares— — (711,000)(7)(20,862)— — — — (20,869)
Surrender of shares for tax withholding— — (183,466)(2)(6,010)— — — — (6,012)
Share-based compensation— — 472,787 5 2,953 — — — 345 3,303 
Distributions— — — — — — (1,190)(1,997)— (3,187)
Adjustment for noncontrolling interest— — — — (4,646)— — — 4,646 — 
Balance at March 31, 2020
4,915,196 $119,263 121,502,520 $1,215 $4,285,266 $3,788,413 $(3,852,856)$(703,721)$7,034 $3,644,614 

See accompanying notes.
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EQUITY COMMONWEALTH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Three Months Ended March 31,
20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income$(10,038)$425,507 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation3,769 4,382 
Net amortization of debt premiums and deferred financing fees— (56)
Straight-line rental income(307)198 
Other amortization582 732 
Amortization of right-of-use asset— 189 
Share-based compensation6,687 3,303 
Net gain on sale of properties— (419,620)
Change in assets and liabilities:
Rents receivable and other assets269 (733)
Accounts payable, accrued expenses and other535 (1,128)
Rent collected in advance51 (996)
Net cash provided by operating activities1,548 11,778 
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate improvements(3,607)(1,540)
Proceeds from sale of properties, net— 572,599 
Net cash (used in) provided by investing activities(3,607)571,059 
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common shares(6,093)(26,881)
Payments on borrowings— (148)
Distributions to common shareholders(6,024)(1,936)
Distributions to preferred shareholders(1,997)(1,997)
Distributions to holders of noncontrolling interest— (997)
Net cash used in financing activities(14,114)(31,959)
(Decrease) increase in cash, cash equivalents, and restricted cash(16,173)550,878 
Cash, cash equivalents, and restricted cash at beginning of period2,987,225 2,800,645 
Cash, cash equivalents, and restricted cash at end of period$2,971,052 $3,351,523 
See accompanying notes.












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EQUITY COMMONWEALTH 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
(unaudited)

Three Months Ended March 31,
20212020
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid$— $366 
Taxes refunded, net(12)(2,045)
NON-CASH INVESTING ACTIVITIES:
Accrued capital expenditures$840 $1,071 
NON-CASH FINANCING ACTIVITIES:
Distributions payable$5,072 $5,791 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
March 31,
20212020
Cash and cash equivalents$2,971,052 $3,348,349 
Restricted cash— 3,174 
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
$2,971,052 $3,351,523 

See accompanying notes.

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EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Business

Equity Commonwealth, or the Company, is a real estate investment trust, or REIT, formed in 1986 under the laws of the State of Maryland. Our business is primarily the ownership and operation of office properties in the United States.

On November 10, 2016, the Company converted to what is commonly referred to as an umbrella partnership real estate investment trust, or UPREIT. In connection with this conversion, the Company contributed substantially all of its assets to EQC Operating Trust, a Maryland real estate investment trust, or the Operating Trust, and the Operating Trust assumed substantially all of the Company’s liabilities pursuant to a contribution and assignment agreement between the Company and the Operating Trust.
 
Since that time, the Company has conducted and intends to continue to conduct substantially all of its activities through the Operating Trust. The Company beneficially owned 99.8% of the outstanding shares of beneficial interest, designated as units, in the Operating Trust, or OP Units, as of March 31, 2021, 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 March 31, 2021, our portfolio consisted of four properties (eight buildings), with a combined 1.5 million square feet. As of March 31, 2021, we had $3.0 billion of cash and cash equivalents.

Note 2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of EQC have been prepared without audit.  Certain information and footnote disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are appropriate.  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K, or our Annual Report, for the year ended December 31, 2020.  Capitalized terms used, but not defined in this Quarterly Report, have the same meanings as in our Annual Report.

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

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

Share amounts are presented in whole numbers, except where noted.

Note 3.  Real Estate Properties

During the three months ended March 31, 2021 and 2020, we made improvements, excluding tenant-funded improvements, to our properties totaling $3.5 million and $1.2 million, respectively.

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EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Property Dispositions:

We did not sell any properties during the three months ended March 31, 2021. During the three months ended March 31, 2020, we sold the following properties, which did not represent strategic shifts under the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 205 (dollars in thousands):
PropertyDate SoldNumber of
Properties		Number of
Buildings		Square
Footage		Gross Sale Price(1)Gain on Sale
109 Brookline Avenue
February 20201 1 285,556 $270,000 $225,190 
333 108th Avenue NE(2)
March 20201 1 435,406 401,500 194,424 
2 2 720,962 $671,500 $419,614 

(1)Gross sale price is before transfer taxes and credits, such as capital costs, contractual lease costs and rent abatements.
(2)The sale represents an individually significant disposition. The operating results of this property are included in continuing operations for all periods presented through the date of sale. Net (loss) income related to this property was $(9,000) and $193.1 million, of which $194.4 million related to the gain on sale, for the three months ended March 31, 2021 and 2020, respectively.

Lease Payments

The FASB has issued additional guidance for companies to account for any COVID-19 related rent concessions in the form of FASB staff and board members’ remarks at the April 8, 2020 public meeting and the FASB staff question-and-answer document issued on April 10, 2020. We have elected the practical expedient to account for COVID-19 related rent concessions as if they were part of the enforceable rights and obligations of the parties under the existing lease contract. This policy has been elected for our lessor portfolio for any rent deferrals, and we have elected to treat the related leases as if they are unchanged. For the three months ended March 31, 2021, we deferred collection of approximately $20,000 of rental income on revenue that was recognized in that period.

Rental revenue consists of the following (in thousands):
Three Months Ended March 31,
20212020
Lease payments$9,257 $11,770 
Variable lease payments4,912 5,373 
Rental revenue$14,169 $17,143 

Note 4.  Shareholders’ Equity
 
Common Share Issuances:

See Note 7 for information regarding equity issuances related to share-based compensation.

Common Share Repurchases:

On March 10, 2020, our Board of Trustees authorized the repurchase of up to $150.0 million of our outstanding common shares over the twelve months following the date of authorization. On March 10, 2021, this share repurchase authorization, none of which was utilized, expired. On March 1, 2021, our Board of Trustees authorized the repurchase of up to an additional $150.0 million of our outstanding common shares through June 30, 2022. We did not repurchase any common shares under our common share repurchase program during the three months ended March 31, 2021.

During the three months ended March 31, 2021 and 2020, certain of our employees and former employees surrendered 210,334 and 183,466 common shares owned by them, respectively, to satisfy their statutory tax withholding obligations in connection with the vesting of such common shares pursuant to our equity compensation plans.

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EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Common Share and Unit Distribution:

In February 2021, the number of earned awards for recipients of the Company’s restricted stock units granted in January 2018 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 $6.0 million for distributions to common shareholders declared by our Board of Trustees during such awards' performance measurement period.

Preferred Share Distributions:

In 2021, our Board of Trustees declared distributions on our series D preferred shares to date as follows:
Declaration DateRecord DatePayment DateSeries D Dividend Per Share
January 11, 2021January 28, 2021February 16, 2021$0.40625 
April 9, 2021April 29, 2021May 17, 2021$0.40625 

Note 5.  Noncontrolling Interest

Noncontrolling interest represents the portion of the OP Units not beneficially owned by the Company. The ownership of an OP Unit and a common share of beneficial interest have essentially the same economic characteristics. Distributions with respect to OP Units will generally mirror distributions with respect to the Company’s common shares. Unitholders (other than the Company) generally have the right, commencing six months from the date of issuance of such OP Units, to cause the Operating Trust to redeem their OP Units in exchange for cash or, at the option of the Company, common shares of the Company on a one-for-one basis. As sole trustee, the Company has the sole discretion to elect whether the redemption right will be satisfied by the Company in cash or the Company’s common shares. As a result, the Noncontrolling interest is classified as permanent equity. As of March 31, 2021, the portion of the Operating Trust not beneficially owned by the Company is in the form of OP Units and LTIP Units (see Note 7 for a description of LTIP Units). LTIP Units may be subject to additional vesting requirements.

The following table presents the changes in Equity Commonwealth’s issued and outstanding common shares and units for the three months ended March 31, 2021:
Common SharesOP Units and LTIP UnitsTotal
Outstanding at January 1, 2021
121,522,555 243,516 121,766,071 
Repurchase of shares(210,334)— (210,334)
Share-based compensation grants and vesting, net of forfeitures
604,654 — 604,654 
Outstanding at March 31, 2021
121,916,875 243,516 122,160,391 
Noncontrolling ownership interest in the Operating Trust0.20 %

The carrying value of the Noncontrolling interest is allocated based on the number of OP Units and LTIP Units in proportion to the number of OP Units and LTIP Units plus the number of common shares. We adjust the Noncontrolling interest balance at the end of each period to reflect the noncontrolling partners’ interest in the net assets of the Operating Trust. Net income is allocated to the Noncontrolling interest in the Operating Trust based on the weighted average ownership percentage during the period. Equity Commonwealth’s weighted average ownership interest in the Operating Trust was 99.80% and 99.87% for the three months ended March 31, 2021 and 2020, respectively.

Note 6.  Income Taxes
 
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and are generally not subject to federal and state income taxes provided we distribute a sufficient amount of our taxable income to our shareholders and meet other requirements for qualifying as a REIT.  However, we are subject to certain state and local taxes without regard to our REIT status.

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EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Our provision for income taxes consists of the following (in thousands):
Three Months Ended March 31,
20212020
Current:
State and local
$(31)$(40)
Income tax expense$(31)$(40)


Note 7. Share-Based Compensation
Recipients of the Company’s restricted shares have the same voting rights as any other common shareholder. During the period of restriction, holders of unvested restricted shares are eligible to receive dividend payments on their shares at the same rate and on the same date as any other common shareholder.  The restricted shares are service based awards and vest over a four-year period.

Recipients of the Company’s restricted stock units, or RSUs, are entitled to receive dividends with respect to the common shares underlying the RSUs if and when the RSUs are earned, at which time the recipient will be entitled to receive an amount in cash equal to the aggregate amount of cash dividends that would have been paid in respect to the common shares underlying the recipient’s earned RSUs had such common shares been issued to the recipient on the first day of the performance period. To the extent that an award does not vest, the dividends related to unvested RSUs will be forfeited. The RSUs are market-based awards with a service condition and recipients may earn RSUs based on the Company’s total shareholder return, or TSR, relative to the TSRs of the companies that comprise the Nareit Office Index over a three-year performance period. Following the end of the three-year performance period, the number of earned awards will be determined. The earned awards vest in two tranches with 50% of the earned award vesting following the end of the performance period on the date the Compensation Committee of our Board of Trustees, or the Committee, determines the level of achievement of the performance metric and the remaining 50% of the earned award vesting approximately one year thereafter, subject to the grant recipient’s continued employment. Compensation expense for the RSUs is determined using a Monte Carlo simulation model and is recognized ratably from the grant date to the vesting date of each tranche.

LTIP Units are a class of beneficial interests in the Operating Trust that may be issued to employees, officers or trustees of the Operating Trust, the Company or their subsidiaries. Time-based LTIP Units have the same general characteristics as restricted shares and market-based LTIP Units have the same general characteristics as RSUs. Each LTIP Unit will convert automatically into an OP Unit on a one-for-one basis when the LTIP Unit becomes vested and its capital account is equalized with the per-unit capital account of the OP Units. Holders of LTIP Units generally will be entitled to receive the same per-unit distributions as the other outstanding OP Units in the Operating Trust, except that market-based LTIP Units will not participate in distributions until expiration of the applicable performance period, at which time any earned market-based LTIP Units generally will become entitled to receive a catch-up distribution for the periods prior to such time.
2021 Equity Award Activity

During the three months ended March 31, 2021, 482,188 RSUs vested, and, as a result, we issued 482,188 common shares, prior to certain employees surrendering their common shares to satisfy tax withholding obligations (see Note 4).
On January 25, 2021, the Committee approved grants in the aggregate amount of 122,466 restricted shares and 248,646 RSUs at target (619,750 RSUs at maximum) to the Company’s officers, certain employees, and to Mr. Zell, the Chairman of our Board of Trustees, as part of their compensation for fiscal year 2020. The restricted shares were valued at $28.25 per share, the closing price of our common shares on the NYSE on the grant date. The assumptions and fair value for the RSUs and
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EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

market-based LTIP Units granted during the three months ended March 31, 2021 are included in the following table on a per share basis.
 2021
Fair value of market-based awards granted$37.87
Expected term (years)4
Expected volatility16.99 %
Risk-free rate0.17 %

2020 Equity Award Activity

During the three months ended March 31, 2020, 387,729 RSUs vested, and, as a result, we issued 387,729 common shares, prior to certain employees surrendering their common shares to satisfy tax withholding obligations.
On January 27, 2020, the Committee approved grants in the aggregate amount of 20,116 time-based LTIP Units, 40,841 market-based LTIP Units at target (101,796 market-based LTIP Units at maximum), 85,058 restricted shares and 172,697 RSUs at target (430,447 RSUs at maximum) to the Company’s officers, certain employees, an eligible consultant and to Mr. Zell, the Chairman of our Board of Trustees, as part of their compensation for fiscal year 2019. The restricted shares and time-based LTIP Units were valued at $32.81 per share and per unit, the closing price of our common shares on the NYSE on the grant date. The RSUs and market-based LTIP Units were valued at $40.17 per share and per unit, their fair value on the grant date.
Outstanding Equity Awards
As of March 31, 2021, the estimated future compensation expense for all unvested restricted shares and time-based LTIP Units was $7.2 million. Compensation expense for the restricted share and time-based LTIP Unit awards is being recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The weighted average period over which the future compensation expense will be recorded for the restricted shares and time-based LTIP units is approximately 2.8 years.
As of March 31, 2021, the estimated future compensation expense for all unvested RSUs and market-based LTIP Units was $16.3 million. The weighted average period over which the future compensation expense will be recorded for the RSUs and market-based LTIP Units is approximately 2.6 years.
During the three months ended March 31, 2021 and 2020, we recorded $6.7 million and $3.3 million, respectively, of compensation expense, net of forfeitures, in general and administrative expense for grants to our trustees, eligible consultants and employees related to our equity compensation plans. Compensation expense recorded during the three months ended March 31, 2021 and 2020 includes $3.4 million and $25,000, respectively, of accelerated vesting due to staffing reductions. Forfeitures are recognized as they occur. At March 31, 2021, 1,548,936 shares/units remain available for issuance under the Equity Commonwealth 2015 Omnibus Incentive Plan, as amended.

Note 8.  Fair Value of Assets and Liabilities
 
As of March 31, 2021, we do not have any assets or liabilities measured at fair value.

Financial Instruments

Our financial instruments include our cash and cash equivalents.  At March 31, 2021 and December 31, 2020, the fair value of these financial instruments was not different from their carrying values.
 
Other financial instruments that potentially subject us to concentrations of credit risk consist principally of rents receivable. As of March 31, 2021, no single tenant of ours is responsible for more than 10% of our consolidated revenues.

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EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 9.  Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands except per share amounts):
 Three Months Ended March 31,
 20212020
Numerator for earnings per common share - basic:
Net (loss) income$(10,038)$425,507 
Net loss (income) attributable to noncontrolling interest20 (748)
Preferred distributions(1,997)(1,997)
Numerator for net (loss) income per share - basic$(12,015)$422,762 
Numerator for earnings per common share - diluted:
Net (loss) income
$(10,038)$425,507 
Net income attributable to noncontrolling interests20 (748)
Preferred distributions(1,997)— 
Numerator for net (loss) income per share - diluted$(12,015)$424,759 
Denominator for earnings per common share - basic and diluted:
Weighted average number of common shares outstanding - basic(1)
122,002 122,148 
RSUs(2)
— 1,524 
LTIP Units(3)
— 76 
Series D preferred shares; 6.50% cumulative convertible(4)
— 2,857 
Weighted average number of common shares outstanding - diluted122,002 126,605 
Net (loss) income per common share attributable to Equity Commonwealth common shareholders:
Basic
$(0.10)$3.46 
Diluted
$(0.10)$3.35 
Anti-dilutive securities:
Effect of Series D preferred shares; 6.50% cumulative convertible(4)
3,237 — 
Effect of RSUs(2)
848 — 
Effect of LTIP Units
149 89 
Effect of OP Units(5)
170 73 

(1) The three months ended March 31, 2021 and 2020, include 236 and 177 weighted-average, unvested, earned RSUs, respectively.
(2) Represents weighted-average number of common shares that would have been issued if the quarter-end was the measurement date for unvested, unearned RSUs.
(3) Represents the weighted-average dilutive shares issuable from LTIP Units if the quarter-end was the measurement date for the periods shown.
(4) The Series D preferred shares are excluded from the diluted earnings per share calculation for the three months ended March 31, 2021, because including the Series D preferred shares would also require that the preferred distributions be added back to net income, resulting in anti-dilution.
(5) Beneficial interests in the Operating Trust.
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EQUITY COMMONWEALTH
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Note 10.  Segment Information
 
Our primary business is the ownership and operation of office properties, and we currently have one reportable segment.  One hundred percent of our revenues for the three months ended March 31, 2021 were from office properties. 

Note 11.  Related Person Transactions
 
The following discussion includes a description of our related person transactions for the three months ended March 31, 2021 and 2020.

Two North Riverside Plaza Joint Venture Limited Partnership: We entered into a lease on July 20, 2015 with Two North Riverside Plaza Joint Venture Limited Partnership, an entity associated with Mr. Zell, our Chairman, to occupy office space on the twentieth and twenty-first floors of Two North Riverside Plaza in Chicago, Illinois (20th/21st Floor Office Lease). The initial term of the lease was approximately five years, expiring on December 31, 2020. We made improvements to the office space utilizing the $0.7 million tenant improvement allowance pursuant to the lease. In connection with the 20th/21st Floor Office Lease, we also had a storage lease with Two North Riverside Plaza Joint Venture Limited Partnership for storage space in the basement of Two North Riverside Plaza. We terminated the storage lease, effective August 31, 2020.

In December 2020, we entered into an amendment to the 20th/21st Floor Office Lease extending the lease term for one year, through December 31, 2021. There are no renewal options. The lease payment for the extended term is approximately $0.3 million.

During the three months ended March 31, 2021 and 2020, we recognized expense of $0.1 million and $0.2 million, respectively, pursuant to the 20th/21st Floor Office Lease and the related storage space. As of March 31, 2021 and December 31, 2020, we did not have any amounts due to Two North Riverside Plaza Joint Venture Limited Partnership pursuant to the 20th/21st Floor Office Lease.

Note 12.  Subsequent Events

On April 9, 2021, our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which will be paid on May 17, 2021 to shareholders of record on April 29, 2021.

On May 4, 2021, the Company, Monmouth Real Estate Investment Corporation (NYSE: MNR), or Monmouth, and a subsidiary of the Company entered into a definitive agreement and plan of merger, or the Merger Agreement, pursuant to which Monmouth will merge with and into a subsidiary of the Company. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, upon closing of the merger, each share of Monmouth common stock issued and outstanding will be converted into the right to receive 0.67 of a newly issued share of our common shares of beneficial interest, with cash paid in lieu of any fractional shares. The Merger Agreement provides for Monmouth to declare and pay one additional regular quarterly common stock dividend of $0.18 per share without Equity Commonwealth paying a corresponding common dividend to its shareholders. In addition, upon closing, holders of Monmouth Series C preferred stock will receive $25.00 per share plus accumulated and unpaid dividends pursuant to the governing documents of the Monmouth Series C preferred stock. We currently expect the transaction to close in the second half of 2021, subject to the approval of our common shareholders and the Monmouth common shareholders and other customary closing conditions.





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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, and in our Annual Report.

FORWARD-LOOKING STATEMENTS
 
Some of the statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws including, but not limited to, statements pertaining to our capital resources, portfolio performance, results of operations or anticipated market conditions, including our statements regarding the overall impact of COVID-19 on the foregoing to the extent we make any such statements. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
 
The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in our Annual Report and in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

OVERVIEW
 
We are an internally managed and self-advised REIT primarily engaged in the ownership and operation of office properties in the United States. We were formed in 1986 under Maryland law. The Company operates as what is commonly referred to as an UPREIT, conducting substantially all of its activities through the Operating Trust. As of March 31, 2021, the Company beneficially owned 99.8% of the outstanding OP Units.

At March 31, 2021, our portfolio consisted of four properties (eight buildings), with a combined 1.5 million square feet. As of March 31, 2021, 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 March 31, 2021, our overall portfolio was 85.6% leased. During the three months ended March 31, 2021, we entered into leases for 27,000 square feet, including lease renewals for 16,000 square feet and new leases for 11,000 square feet. Renewal leases entered into during the three months ended March 31, 2021 had weighted average cash and GAAP rental rates that were approximately 22.2% lower and 14.1% lower, respectively, compared to prior rental rates for the same space, and new leases entered into during the three months ended March 31, 2021 had weighted average cash and GAAP rental rates that were approximately 0.7% higher and 2.6% higher, respectively, compared to 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.

We have engaged CBRE, Inc., or CBRE, to provide property management services. We pay CBRE a property-by-property management fee and may engage CBRE from time-to-time to perform project management services, such as
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coordinating and overseeing the completion of tenant improvements and other capital projects at the properties. We reimburse CBRE for certain expenses incurred in the performance of its duties, including certain personnel and equipment costs. For the three months ended March 31, 2021 and 2020, we incurred expenses of $0.8 million and $1.0 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 March 31, 2021 and December 31, 2020, we had amounts payable pursuant to these services of $0.3 million and $0.3 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 has been and may continue to be impacted by the evolving COVID-19 outbreak. Since first surfacing, the outbreak has spread throughout the world and has significantly 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 continues to be unknown at this time. The vast majority of our employees and our tenants' employees are currently working at least in part remotely and may be subject to government-imposed restrictions. Due to the uncertainty created by the pandemic, the Company has experienced a significant reduction in leasing interest and activity when compared to pre-pandemic levels. For the three months ended March 31, 2021, in our comparable property portfolio, we collected 97% of contractual rents. For April, to date, we have collected 96% of contractual rents. We currently are not able to estimate the full impact of the COVID-19 outbreak on our business.

Property Operations

Leased occupancy data for 2021 and 2020 are as follows (square feet in thousands):
All PropertiesComparable Properties(1)
As of March 31,As of March 31,
2021202020212020
Total properties4 4 4 4 
Total square feet1,507 1,507 1,507 1,507 
Percent leased(2)
85.6 %90.8 %85.6 %90.8 %

(1)Based on properties owned continuously from January 1, 2020 through March 31, 2021, and excludes properties sold or classified as held for sale as of the end of the period.
(2)Percent leased is the percent of space subject to signed leases. Percent leased is disclosed to quantify the ratio of leased square feet to rentable square feet and we believe provides useful information as to the proportion of rentable square feet subject to a lease.
 
The weighted average lease term based on square feet for leases entered into during the three months ended March 31, 2021 was 4.9 years.  Commitments made for leasing expenditures and concessions, such as tenant improvements and leasing commissions, for the leases entered into during the three months ended March 31, 2021 totaled $0.9 million, or $32.00 per square foot on average (approximately $6.54 per square foot per year of the lease term).
 
As of March 31, 2021, approximately 6.5% of our leased square feet and 6.9% 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 for the remainder of 2021, that have not
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been backfilled, are below market. Lease expirations by year, as of March 31, 2021, are as follows (square feet and dollars in thousands):
YearNumber
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
202112 84 6.5 %6.5 %$3,973 6.9 %6.9 %
202213 124 9.6 %16.1 %6,388 11.0 %17.9 %
202318 195 15.1 %31.2 %8,977 15.5 %33.4 %
202416 213 16.5 %47.7 %9,429 16.3 %49.7 %
202511 145 11.2 %58.9 %5,640 9.8 %59.5 %
20268 80 6.2 %65.1 %3,693 6.4 %65.9 %
202711 122 9.5 %74.6 %5,048 8.7 %74.6 %
20284 63 4.9 %79.5 %3,074 5.3 %79.9 %
20297 144 11.2 %90.7 %6,423 11.1 %91.0 %
20303 58 4.5 %95.2 %2,496 4.3 %95.3 %
Thereafter4 62 4.8 %100.0 %2,698 4.7 %100.0 %
107 1,290 100.0 %$57,839 100.0 %
Weighted average remaining lease term (in years):
4.6 4.5 

(1)Tenants with leases expiring in multiple years are counted in each year they expire.
(2)Leased Square Feet as of March 31, 2021 includes space subject to leases that have commenced for revenue recognition purposes in accordance with GAAP, space being fitted out for occupancy pursuant to existing leases, and space which is leased but is not occupied or is being offered for sublease by tenants. The Leased Square Feet Expiring corresponds to the latest-expiring signed lease for a given suite. Thus, backfilled suites expire in the year stipulated by the new lease. 
(3)Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of March 31, 2021, plus estimated recurring expense reimbursements; excludes lease value amortization, straight-line rent adjustments, abated (free) rent periods and parking revenue. We calculate annualized rental revenue by aggregating the recurring billings outlined above for the most recent month during the quarter reported, adding abated rent, and multiplying the sum by 12 to provide an estimation of near-term potentially-recurring revenues.  Annualized rental revenue is a forward-looking non-GAAP measure.  Annualized rental revenue cannot be reconciled to a comparable GAAP measure without unreasonable efforts, primarily due to the fact that it is calculated from the billings of tenants in the most recent month at the most recent rental rates during the quarter reported, whereas historical GAAP measures include billings from a potentially different group of tenants over multiple months at potentially different rental rates.
 
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 March 31, 2021, tenants representing 2.5% or more of our total annualized rental revenue were as follows (square feet in thousands):
TenantSquare 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 %5.8 %2.8 
2.KPMG, LLP71 5.5 %5.1 %8.2 
3.Crowdstrike, Inc.36 2.8 %3.7 %3.6 
4.CBRE, Inc.40 3.1 %3.4 %7.0 
5.
Salesforce.com, Inc.(3)
65 5.0 %3.4 %4.7 
6.Kazoo, Inc.26 2.0 %2.7 %0.8 
7.Alden Torch Financial, LLC34 2.6 %2.6 %5.9 
8.The Boon Group, Inc.36 2.8 %2.5 %4.9 
Total388 30.0 %29.2 %4.9 

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(1)Total Leased Square Feet as of March 31, 2021 includes space subject to leases that have commenced, space being fitted out for occupancy pursuant to existing leases, and space which is leased but is not occupied or is being offered for sublease by tenants. 
(2)Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of March 31, 2021, plus estimated recurring expense reimbursements; excludes lease value amortization, straight-line rent adjustments, abated (free) rent periods and parking revenue. We calculate annualized rental revenue by aggregating the recurring billings outlined above for the most recent month during the quarter reported, adding abated rent, and multiplying the sum by 12 to provide an estimation of near-term potentially-recurring revenues.  Annualized rental revenue is a forward-looking non-GAAP measure.  Annualized rental revenue cannot be reconciled to a comparable GAAP measure without unreasonable efforts, primarily due to the fact that it is calculated from the billings of tenants in the most recent month at the most recent rental rates during the quarter reported, whereas historical GAAP measures include billings from a potentially different group of tenants over multiple months at potentially different rental rates.
(3)Our lease with Salesforce.com, Inc. has partially commenced. Approximately 44,000 square feet commenced as of December 31, 2020, and the remaining 21,000 square feet are expected to commence in the second half of 2021.
Regulation FD Disclosures
We use any of the following to comply with our disclosure obligations under Regulation FD: press releases, SEC filings, public conference calls, or our website. We routinely post important information on our website at www.eqcre.com, including information that may be deemed to be material. We encourage investors and others interested in the Company to monitor these distribution channels for material disclosures. Our website address is included in this Quarterly Report as a textual reference only and the information on the website is not incorporated by reference into this Quarterly Report.
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RESULTS OF OPERATIONS 

Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020
Comparable Properties Results(1)Other Properties Results(2)Consolidated Results
Three Months Ended March 31,
20212020$ Change% Change2021202020212020$ Change% Change
(dollars in thousands)
Rental revenue$14,026 $14,086 $(60)(0.4)%$143 $3,057 $14,169 $17,143 $(2,974)(17.3)%
Other revenue
682 1,533 (851)(55.5)%— 144 682 1,677 (995)(59.3)%
Operating expenses(6,602)(6,868)266 (3.9)%(19)(1,893)(6,621)(8,761)2,140 (24.4)%
Net operating income(3)
$8,106 $8,751 $(645)(7.4)%$124 $1,308 8,230 10,059 (1,829)(18.2)%
Other expenses:
Depreciation and amortization4,351 5,114 (763)(14.9)%
General and administrative15,729 10,604 5,125 48.3 %
Total other expenses20,080 15,718 4,362 27.8 %
Interest and other income, net1,843 11,895 (10,052)(84.5)%
Interest expense— (309)309 (100.0)%
Gain on sale of properties, net— 419,620 (419,620)(100.0)%
(Loss) income before income taxes
(10,007)425,547 (435,554)(102.4)%
Income tax expense(31)(40)9 (22.5)%
Net (loss) income(10,038)425,507 (435,545)(102.4)%
Net loss (income) attributable to noncontrolling interests20 (748)768 (102.7)%
Net (loss) income attributable to Equity Commonwealth(10,018)424,759 (434,777)(102.4)%
Preferred distributions(1,997)(1,997)— — %
Net (loss) income attributable to Equity Commonwealth common shareholders
$(12,015)$422,762 $(434,777)(102.8)%

(1)Comparable properties consist of four properties we owned continuously from January 1, 2020 to March 31, 2021.
 
(2)Other properties consist of properties sold.

(3)We define net operating income, or 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.  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 the section entitled “- Liquidity and Capital Resources - Property Net Operating Income (NOI).”

Rental revenue. Rental revenue decreased $3.0 million, or 17.3%, in the 2021 period, compared to the 2020 period, primarily due to the loss of revenue from properties sold in 2020. Rental revenue at the comparable properties decreased $0.1 million, or 0.4%, in the 2021 period, compared to the 2020 period, primarily due to a $0.3 million increase in uncollectible receivables, partially offset by a $0.1 million increase in real estate tax recoveries and a $0.1 million increase in escalations.

Rental revenue includes increases (decreases) for straight-line rent adjustments totaling $0.3 million in the 2021 period and $(0.2) million in the 2020 period.

Other revenue. Other revenue, which primarily includes parking revenue, decreased $1.0 million, or 59.3%, in the 2021 period, compared to the 2020 period, primarily due to the decrease at the comparable properties. Other revenue decreased $0.9 million, or 55.5%, at the comparable properties in the 2021 period, compared to the 2020 period, primarily due to decreased parking revenue during the 2021 period as a result of the COVID-19 outbreak.

Operating expenses. Operating expenses decreased $2.1 million, or 24.4%, in the 2021 period, compared to the 2020 period, primarily due to the properties sold in 2020. Operating expenses decreased $0.3 million, or 3.9%, at the comparable properties in the 2021 period, compared to the 2020 period, primarily due to a $0.1 million decrease in utilities expense and a $0.1 million decrease in parking expense.

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Depreciation and amortization. Depreciation and amortization decreased $0.8 million, or 14.9%, in the 2021 period, compared to the 2020 period, primarily due to the properties sold in 2020.

General and administrative. General and administrative expenses increased $5.1 million, or 48.3%, in the 2021 period, compared to the 2020 period, primarily due to a $7.0 million increase in compensation expenses related to severance for our former Executive Vice President, Chief Financial Officer and Treasurer, partially offset by a $1.7 million decrease in state franchise taxes largely related to the 2020 property sales.

Interest and other income, net. Interest and other income, net decreased $10.1 million, or 84.5%, in the 2021 period, compared to the 2020 period, primarily due to $10.1 million less interest received from lower average interest rates.

Interest expense. Interest expense decreased $0.3 million, or 100.0%, in the 2021 period, compared to the 2020 period, due to the repayment at par in July 2020 of mortgage debt at 206 East 9th Street.

Gain on sale of properties, net. We did not have any Gain on sale of properties, net in the 2021 period. Gain on sale of properties, net in the 2020 period primarily related to the following (dollars in thousands):
AssetGain on Sale, Net
109 Brookline Avenue$225,190 
333 108th Avenue NE194,424 
$419,614 

Income tax expense. Income tax expense decreased $9,000, or 22.5%, in the 2021 period, compared to the 2020 period, primarily due to a decrease in state and local taxes as a result of the sale of properties in 2020.

Net loss (income) attributable to noncontrolling interest. In 2017 through 2020, we granted LTIP Units to certain of our trustees and employees. Net loss (income) attributable to noncontrolling interest of $20,000 in the 2021 period and $(0.7) million in the 2020 period relates to the allocation to the LTIP/OP Unit holders.

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LIQUIDITY AND CAPITAL RESOURCES
 
Our Operating Liquidity and Resources
 
As of March 31, 2021, 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 $1.5 million, $(3.6) million and $(14.1) million, respectively, for the three months ended March 31, 2021, and $11.8 million, $571.1 million and $(32.0) million, respectively, for the three months ended March 31, 2020.  Changes in these three categories of our cash flows between 2021 and 2020 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 2021), an increase in real estate improvements, dispositions of properties, repurchase of our common shares and distributions to common shareholders.
 
Our Investment and Financing Liquidity and Resources
 
During the three months ended March 31, 2021, we paid an aggregate of $2.0 million of distributions on our series D preferred shares.  On April 9, 2021, our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which will be paid on May 17, 2021 to shareholders of record on April 29, 2021.

On March 1, 2021, our Board of Trustees authorized the repurchase of up to $150.0 million of our outstanding common shares through June 30, 2022. We did not repurchase any common shares under our common share repurchase program during the three months ended March 31, 2021.
 
We may utilize various types of financings, including debt or equity, to fund future acquisitions and/or investments and to pay any debt we may incur 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 any 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.
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During the three months ended March 31, 2021 and 2020, amounts capitalized at our properties, including properties sold, for tenant improvements, leasing costs and building improvements were as follows (amounts in thousands):
Three Months Ended March 31,
20212020
Tenant improvements(1)
$3,219 $877 
Leasing costs(2)
268 946 
Building improvements(3)
238 351 

(1)Tenant improvements include capital expenditures to improve tenants’ spaces.
(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 three months ended March 31, 2021, commitments made for expenditures in connection with leasing space at our properties were as follows (dollar and square foot measures in thousands):
New
Leases		RenewalsTotal
Square feet leased during the period11 16 27 
Tenant improvements and leasing commissions$109 $759 $868 
Tenant improvements and leasing commissions per square foot$9.89 $47.43 $32.00 
Weighted average lease term by square foot (years)(1)
2.3 6.7 4.9 
Tenant improvements and leasing commissions per square foot per year$4.35 $7.06 $6.54 
 
(1)For renewal lease terms, if the existing rents of an original lease term are modified, the new term starts at the rent modification date. Weighted average lease term generally excludes renewal options.

NON-GAAP MEASURES

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 condensed consolidated statements of operations, condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows.  Other REITs and real estate companies may calculate FFO and Normalized FFO differently than we do.
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The following table provides a reconciliation of net income to FFO attributable to Equity Commonwealth common shareholders and unitholders and a reconciliation to Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders (in thousands):
Three Months Ended March 31,
20212020
Reconciliation to FFO:
Net (loss) income$(10,038)$425,507 
Real estate depreciation and amortization4,301 4,881 
Gain on sale of properties, net— (419,620)
FFO attributable to Equity Commonwealth(5,737)10,768 
Preferred distributions(1,997)(1,997)
FFO attributable to Equity Commonwealth common shareholders and unitholders
$(7,734)$8,771 
Reconciliation to Normalized FFO:  
FFO attributable to Equity Commonwealth common shareholders and unitholders
$(7,734)$8,771 
Straight-line rent adjustments(307)198 
Executive severance expense
7,107 — 
Taxes related to property sales included in general and administrative
— 1,448 
Taxes related to property sales, net included in income tax expense
— 35 
Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders
$(934)$10,452 

Property Net Operating Income (NOI)

We use another non-GAAP measure, 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 may help 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. 

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A reconciliation of NOI to net income for the three months ended March 31, 2021 and 2020, is as follows (in thousands):
 Three Months Ended March 31,
 20212020
Rental revenue$14,169 $17,143 
Other revenue682 1,677 
Operating expenses(6,621)(8,761)
NOI$8,230 $10,059 
NOI$8,230 $10,059 
Depreciation and amortization(4,351)(5,114)
General and administrative(15,729)(10,604)
Interest and other income, net1,843 11,895 
Interest expense— (309)
Gain on sale of properties, net
— 419,620 
(Loss) income before income taxes
(10,007)425,547 
Income tax expense(31)(40)
Net (loss) income$(10,038)$425,507 

Related Person Transactions
 
For information about our related person transactions, see Note 11 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
The Company’s market risk has not changed materially from the amounts and information reported in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report.
 
Item 4.  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 President and Chief Executive Officer and our Senior Vice President, Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15 and Rule 15d-15. Based upon that evaluation, our President and Chief Executive Officer and our Senior Vice President, Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.
 
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  Other Information
 
Item 1. 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.

Item 1A. Risk Factors.
 
Other than the additional risk factors below related to our recently announced merger with Monmouth, there have been no material changes to the risk factors previously disclosed in our Annual Report.

Risks Related to the Merger with Monmouth

The proposed merger with Monmouth presents certain risks to our business, operations and financial condition.

On May 4, 2021, we entered into the Merger Agreement with Monmouth, which provides for the merger of Monmouth with and into one of our subsidiaries. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, upon closing, each share of Monmouth common stock issued and outstanding will be converted into the right to receive 0.67 of a newly issued share of our common shares of beneficial interest, with cash paid in lieu of any fractional shares. The Merger Agreement provides for Monmouth to declare and pay one additional regular quarterly common stock dividend of $0.18 per share without Equity Commonwealth paying a corresponding common dividend to its shareholders. In addition, upon closing, holders of Monmouth Series C preferred stock will receive $25.00 per share plus accumulated and unpaid accrued dividends pursuant to the governing documents of the Monmouth Series C preferred stock. We currently expect the merger to close in the second half of 2021, subject to the approval of our common shareholders and the Monmouth common shareholders and other customary closing conditions, although we cannot assure you that the transaction will close on such timetable or at all.

Because the consideration received by the Monmouth shareholders is fixed and will not be adjusted in the event of any change in our stock price or the stock price of Monmouth, our shareholders have no assurances of the market value of the consideration we will pay to Monmouth shareholders in the merger. Neither we nor Monmouth has the right to terminate the Merger Agreement based on an increase or decrease in the market price of our common shares.

Prior to closing, the merger may present certain risks to our business and operations, which could materially affect our business, financial results and stock price, including, among other things, that:

• failure to complete the merger, including due to the failure of our shareholders or the Monmouth shareholders to approve the merger or the failure of us or Monmouth to satisfy another closing condition, could negatively impact our stock price and our future business and financial results;
• we expect to incur substantial expenses related to the merger, regardless of whether the merger is ultimately completed; and
• the pendency of the merger could adversely affect our business and operations, including by diverting significant focus of management and other resources or preventing us from undertaking other strategic transactions.

In addition, certain risks may continue to exist at and following the closing of the merger, including, among other things, that:

• we may be unable to successfully integrate our and Monmouth’s businesses;
• we may be unable to realize the anticipated benefits of the merger;
• our future results will suffer if we do not effectively manage our repositioned portfolio; and
• the market price of our common shares may decline as a result of the merger.

The merger may not be completed on the terms or timeline currently contemplated, or at all.

The completion of the merger is subject to certain customary closing conditions, including, without limitation: (i) approval by our common shareholders of the issuance of our common shares and approval by the Monmouth common shareholders of the merger; (ii) approval from the New York Stock Exchange for the listing of our common shares to be issued in the merger; (iii) the absence of an injunction or law prohibiting the merger; (iv) the absence of any pending, threatened or
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outstanding government investigation with respect to the merger; (v) the accuracy of each party's representations and warranties, subject in most cases to material adverse effect qualifications, and receipt by each party of a certificate to such effect from an officer of the other party; (vi) the absence of any material adverse effect with respect to either us or Monmouth; (vii) material compliance with each party’s covenants and agreements; (viii) receipt by us and by Monmouth of an opinion to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code and of an opinion as to the qualification of Monmouth and us, respectively, as a REIT under the Code; and (ix) effectiveness of the registration statement that will be filed by us with the SEC and will contain the joint proxy statement/prospectus sent to our common shareholders and the Monmouth common shareholders. We cannot provide assurances that the merger will be consummated on the terms or timeline currently contemplated, or at all.

Monmouth and/or the Company may be or become the target of shareholder class action and/or derivative lawsuits that could result in substantial costs and may delay or prevent the merger from being completed.
Shareholder class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. There can be no assurances as to the outcome of such lawsuits, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting consummation of the merger on the agreed-upon terms, such an injunction may delay or prevent the merger from being completed, which may adversely affect the Company’s and Monmouth’s respective business, results of operations and financial position.

Following the merger, we may be unable to timely and successfully integrate our current operations with those of Monmouth or realize the anticipated benefits of the merger.

The merger involves the combination of two companies that currently operate as independent public companies. We will be required to devote significant management attention and resources to integrating the portfolio and operations of Monmouth into our own. Potential difficulties that we may encounter in the integration process include, among others, the following:

• the inability to successfully manage and grow the Monmouth portfolio in a manner that permits us to achieve the benefits anticipated from the merger, in the time frame currently anticipated, or at all;
• the inability to successfully realize the anticipated value from some of Monmouth’s assets;
• potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger;
• performance shortfalls as a result of the diversion of management's attention caused by completing the merger and integrating the companies’ operations; and
• the possibility that the integration process results in the distraction of our management, the disruption of our business or inconsistencies in our operations, controls, procedures and policies, any of which could adversely affect the ability of us to maintain relationships with tenants, employees and service providers or to achieve the anticipated benefits of the merger, or could otherwise adversely affect our business, results of operations and financial condition.

The merger represents a strategic transformation for our business and we may encounter unanticipated difficulties and costs managing and growing the Monmouth portfolio which may have a material adverse effect on us.

The Monmouth portfolio is comprised primarily of industrial assets and the merger represents a strategic transformation for our business away from the office sector that will require a different set of management expertise and experience. Although we expect to have access to the appropriate resources, relationships and expertise to manage and grow the Monmouth portfolio, there can be no assurance that we will be successful in our utilization, development or procurement of such resources, relationships and expertise. As a result, we may not be able to successfully manage and grow the Monmouth portfolio, and may not achieve the returns we expect, which could have a material adverse effect on us.

We may incur adverse tax consequences if Monmouth has failed or fails to qualify to be taxed under the Code as a REIT.

It is a condition to the obligation of the Company to complete the merger that we receive a written opinion of Monmouth’s legal counsel to the effect that, for Monmouth’s taxable year ended September 30, 2008 and through its taxable year ended September 30, 2020, Monmouth has been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Code and its actual method of operation through the date of such opinion has enabled, and its proposed method of operation will continue to enable, Monmouth to meet the requirements for qualification and taxation as a REIT through the effective time of the merger. The opinion will be subject to customary exceptions,
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assumptions and qualifications and will be based on customary representations made by Monmouth, and if any such representations are or become inaccurate or incomplete, such opinion may be invalid and the conclusions reached therein could be jeopardized. In addition, the opinion will not be binding on the Internal Revenue Service, or the IRS, or any court, and there can be no assurance that the IRS will not take a contrary position or that such position would not be sustained. If Monmouth has failed or fails to qualify to be taxed under the Code as a REIT and the merger is completed, the Company generally would succeed to and may incur significant tax liabilities and the Company could possibly fail to qualify as a REIT. In addition, if Monmouth has failed or fails to qualify to be taxed under the Code as a REIT and the merger is completed, for the five-year period following the merger closing, upon a taxable disposition of any of Monmouth’s assets, the Company generally would be subject to corporate level tax with respect to any gain in such asset at the time of the merger, and any of Monmouth’s earnings and profits accumulated in a non-REIT year must be distributed by the Company before the end of the taxable year in which the merger closes. For more information regarding our REIT status, see “Risk Factors—Risks Related to Our Taxation as a REIT” in Part I, Item 1A of our Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
Surrender of Common Shares for Tax Withholding

During the three months ended March 31, 2021, certain of our employees surrendered common shares 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 March 31, 2021:

PeriodTotal Number of Shares Purchased(1)Average Price Paid per ShareTotal 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
January 2021— $— N/AN/A
February 2021210,334 $28.97 N/AN/A
March 2021— $— N/AN/A
Total$210,334 $28.97 

(1) The number of shares repurchased represents common shares surrendered by certain of our employees to satisfy their statutory 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.

Item 3. Defaults Upon Senior Securities.
 
Not applicable.

Item 4. Mine Safety Disclosures.
 
Not applicable.

Item 5. Other Information.
 
Not applicable.

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Item 6.  Exhibits.
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.)
10.1
31.1
31.2
32.1
Section 1350 Certification. (Furnished herewith.)
101The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) the Condensed Consolidated Statements of Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) related notes to these condensed consolidated financial statements, tagged as blocks of text and in detail. (Filed herewith.)
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

(+)    Management contract or compensatory plan or arrangement.




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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
EQUITY COMMONWEALTH
By:/s/ David A. Helfand
David A. Helfand
President and Chief Executive Officer
Dated:May 5, 2021
By:/s/ William H. Griffiths
William H. Griffiths
Senior Vice President, Chief Financial Officer and Treasurer
Dated:May 5, 2021

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