Equity Commonwealth - Quarter Report: 2023 September (Form 10-Q)

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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 September 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9317

EQUITY COMMONWEALTH

(Exact name of registrant as specified in its charter)


Maryland						04-6558834
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)

Two North Riverside Plaza, Suite 2000, Chicago, IL						60606
(Address of principal executive offices)						(Zip Code)
(312) 646-2800
(Registrant’s telephone number, including area code)
Two North Riverside Plaza, Suite 2100
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title Of Each Class

Trading Symbol

Name of Each Exchange On Which Registered

Common Shares of Beneficial Interest

EQC

The New York Stock Exchange

6.50% Series D Cumulative Convertible Preferred Shares of Beneficial Interest

EQCpD

The 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 October 25, 2023: 106,712,046.

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EQUITY COMMONWEALTH

FORM 10-Q

September 30, 2023

INDEX


		Page

PART I	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Operations	2

	Condensed Consolidated Statements of Equity	3

	Condensed Consolidated Statements of Cash Flows	5

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II	Other Information

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	27

	Signatures	28

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EXPLANATORY NOTE

References in this Quarterly Report on Form 10-Q to the “Company,” “EQC,” “we,” “us” or “our,” refer to Equity Commonwealth and its consolidated subsidiaries as of September 30, 2023, 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)


	September 30, 2023		December 31, 2022
			(audited)
ASSETS
Real estate properties:
Land	$	44,060	$	44,060
Buildings and improvements	366,908		364,063
	410,968		408,123
Accumulated depreciation	(178,201)		(169,530)
	232,767		238,593


Cash and cash equivalents	2,127,788		2,582,222


Rents receivable	15,174		16,009
Other assets, net	18,057		18,061
Total assets	$	2,393,786	$	2,854,885

LIABILITIES AND EQUITY



Accounts payable, accrued expenses and other	$	23,027	$	25,935

Rent collected in advance	2,133		2,355

Distributions payable	6,390		2,863
Total liabilities	31,550		31,153

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; 106,712,046 and 109,428,252 shares issued and outstanding, respectively	1,067		1,094
Additional paid in capital	3,930,372		3,979,566
Cumulative net income	3,900,430		3,835,815

Cumulative common distributions	(4,865,190)		(4,393,522)
Cumulative preferred distributions	(731,679)		(725,688)
Total shareholders’ equity	2,354,263		2,816,528
Noncontrolling interest	7,973		7,204
Total equity	2,362,236		2,823,732
Total liabilities and equity	$	2,393,786	$	2,854,885

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Rental revenue	$	13,928	$	13,869	$	41,512	$	44,135
Other revenue	1,284		1,257		3,866		3,218
Total revenues	15,212		15,126		45,378		47,353
Expenses:
Operating expenses	6,722		6,073		20,920		17,198
Depreciation and amortization	4,436		4,451		13,260		13,176
General and administrative	7,061		7,593		29,470		23,241

Total expenses	18,219		18,117		63,650		53,615
Interest and other income, net	29,269		15,145		84,997		22,682



Gain on sale of properties, net	—		90		—		90
Income before income taxes	26,262		12,244		66,725		16,510
Income tax expense	(30)		(23)		(1,906)		(81)
Net income	26,232		12,221		64,819		16,429
Net income attributable to noncontrolling interest	(86)		(31)		(204)		(41)
Net income attributable to Equity Commonwealth	26,146		12,190		64,615		16,388
Preferred distributions	(1,997)		(1,997)		(5,991)		(5,991)


Net income attributable to Equity Commonwealth common shareholders	$	24,149	$	10,193	$	58,624	$	10,397



Weighted average common shares outstanding — basic	108,931		111,305		109,494		112,341
Weighted average common shares outstanding — diluted	110,217		112,596		110,916		113,383
Earnings per common share attributable to Equity Commonwealth common shareholders:
Basic	$	0.22	$	0.09	$	0.54	$	0.09
Diluted	$	0.22	$	0.09	$	0.53	$	0.09

Distributions declared per common share	$	—	$	1.00	$	4.25	$	1.00

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 Shares	Series D Preferred Shares		Number of Common Shares	Common Shares		Additional Paid in Capital		Cumulative Net Income		Cumulative Common Distributions		Cumulative Preferred Distributions		Noncontrolling Interest		Total
Balance at July 1, 2023	4,915,196	$	119,263	109,730,457	$	1,097	$	3,984,681	$	3,874,284	$	(4,865,668)	$	(729,682)	$	7,852	$	2,391,827
Net income	—	—		—	—		—		26,146		—		—		86		26,232
Repurchase of shares	—	—		(3,018,411)	(30)		(56,773)		—		—		—		—		(56,803)

Share-based compensation	—	—		—	—		2,447		—		—		—		52		2,499

Distributions	—	—		—	—		—		—		478		(1,997)		—		(1,519)

Adjustment for noncontrolling interest	—	—		—	—		17		—		—		—		(17)		—
Balance at September 30, 2023	4,915,196	$	119,263	106,712,046	$	1,067	$	3,930,372	$	3,900,430	$	(4,865,190)	$	(731,679)	$	7,973	$	2,362,236

Balance at January 1, 2023	4,915,196	$	119,263	109,428,252	$	1,094	$	3,979,566	$	3,835,815	$	(4,393,522)	$	(725,688)	$	7,204	$	2,823,732

Net income	—	—		—	—		—		64,615		—		—		204		64,819


Repurchase of shares	—	—		(3,018,411)	(30)		(56,773)		—		—		—		—		(56,803)
Surrender of shares for tax withholding	—	—		(134,193)	(1)		(3,394)		—		—		—		—		(3,395)
Share-based compensation	—	—		436,398	4		10,807		—		—		—		2,665		13,476

Distributions	—	—		—	—		—		—		(471,668)		(5,991)		(1,934)		(479,593)

Adjustment for noncontrolling interest	—	—		—	—		166		—		—		—		(166)		—
Balance at September 30, 2023	4,915,196	$	119,263	106,712,046	$	1,067	$	3,930,372	$	3,900,430	$	(4,865,190)	$	(731,679)	$	7,973	$	2,362,236

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EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)

(amounts in thousands, except share data)

(unaudited)


	Equity Commonwealth Shareholders
	Number of Series D Preferred Shares	Series D Preferred Shares		Number of Common Shares	Common Shares		Additional Paid in Capital		Cumulative Net Income		Cumulative Common Distributions		Cumulative Preferred Distributions		Noncontrolling Interest		Total
Balance at July 1, 2022	4,915,196	$	119,263	111,241,842	$	1,112	$	4,018,440	$	3,802,750	$	(4,281,442)	$	(721,694)	$	7,393	$	2,945,822
Net income	—	—		—	—		—		12,190		—		—		31		12,221


Repurchase of shares	—	—		(590,271)	(6)		(16,022)		—		—		—		—		(16,028)

Share-based compensation	—	—		—	—		2,498		—		—		—		387		2,885

Distributions	—	—		—	—		—		—		(111,848)		(1,997)		(460)		(114,305)

Adjustment for noncontrolling interest	—	—		—	—		209		—		—		—		(209)		—
Balance at September 30, 2022	4,915,196	$	119,263	110,651,571	$	1,106	$	4,005,125	$	3,814,940	$	(4,393,290)	$	(723,691)	$	7,142	$	2,830,595

Balance at January 1, 2022	4,915,196	$	119,263	115,205,818	$	1,152	$	4,128,656	$	3,798,552	$	(4,281,195)	$	(717,700)	$	6,542	$	3,055,270

Net income	—	—		—	—		—		16,388		—		—		41		16,429


Repurchase of shares	—	—		(4,887,327)	(49)		(127,278)		—		—		—		—		(127,327)
Surrender of shares for tax withholding	—	—		(160,506)	(2)		(4,158)		—		—		—		—		(4,160)
Share-based compensation	—	—		493,586	5		7,956		—		—		—		1,093		9,054
Contributions	—	—		—	—		—		—		—		—		1		1
Distributions	—	—		—	—		—		—		(112,095)		(5,991)		(586)		(118,672)

Adjustment for noncontrolling interest	—	—		—	—		(51)		—		—		—		51		—
Balance at September 30, 2022	4,915,196	$	119,263	110,651,571	$	1,106	$	4,005,125	$	3,814,940	$	(4,393,290)	$	(723,691)	$	7,142	$	2,830,595

See accompanying notes.

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EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)


	Nine Months Ended September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	64,819	$	16,429
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	11,353		11,267

Straight-line rental income	445		(151)

Other amortization	1,907		1,909

Share-based compensation	13,476		9,054



Net gain on sale of properties	—		(90)


Change in assets and liabilities:
Rents receivable and other assets	(1,082)		(5,710)
Accounts payable, accrued expenses and other	(4,253)		1,024
Rent collected in advance	(222)		(1,349)

Net cash provided by operating activities	86,443		32,383

CASH FLOWS FROM INVESTING ACTIVITIES:

Real estate improvements	(4,613)		(3,189)


Proceeds from sale of properties, net	—		90




Net cash used in investing activities	(4,613)		(3,099)

CASH FLOWS FROM FINANCING ACTIVITIES:

Repurchase and retirement of common shares	(60,198)		(130,476)





Contributions from holders of noncontrolling interest	—		1
Distributions to common shareholders	(468,232)		(1,462)
Distributions to preferred shareholders	(5,991)		(5,991)
Distributions to holders of noncontrolling interest	(1,843)		—

Net cash used in financing activities	(536,264)		(137,928)

Decrease in cash and cash equivalents	(454,434)		(108,644)
Cash and cash equivalents at beginning of period	2,582,222		2,800,998
Cash and cash equivalents at end of period	$	2,127,788	$	2,692,354

See accompanying notes.

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EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(amounts in thousands)

(unaudited)


	Nine Months Ended September 30,
	2023		2022
SUPPLEMENTAL CASH FLOW INFORMATION:

Taxes paid, net	$	1,946	$	108

NON-CASH INVESTING ACTIVITIES:


Accrued capital expenditures	$	1,819	$	269


NON-CASH FINANCING ACTIVITIES:
Distributions payable	$	6,390	$	113,584

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.

The Company operates in an umbrella partnership real estate investment trust, or UPREIT, and conducts substantially all of its activities through EQC Operating Trust, a Maryland real estate investment trust, or the Operating Trust. The Company beneficially owned 99.66% of the outstanding shares of beneficial interest, designated as units, in the Operating Trust, or OP Units, as of September 30, 2023, 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 September 30, 2023, our portfolio consisted of four properties (eight buildings), with a combined 1.5 million square feet, and we had $2.1 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, 2022. 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.

Dollar amounts presented may be approximate. Share amounts are presented in whole numbers, except where noted.

Note 3. Real Estate Properties

During the nine months ended September 30, 2023 and 2022, we made improvements, excluding tenant-funded improvements, to our properties totaling $5.5 million and $2.9 million, respectively.

Property Dispositions:

We did not sell any properties during the nine months ended September 30, 2023 or 2022.

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EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Lease Payments

Rental revenue consists of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Lease payments	$	9,115	$	9,381	$	26,878	$	28,792
Variable lease payments	4,813		4,488		14,634		15,343
Rental revenue	$	13,928	$	13,869	$	41,512	$	44,135

Note 4. Shareholders’ Equity

Common Share Issuances:

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

Common Share Repurchases:

On June 13, 2023, our Board of Trustees authorized the repurchase of up to $150.0 million of our outstanding common shares under our share repurchase program from July 1, 2023 through June 30, 2024. During the nine months ended September 30, 2023, we repurchased and retired an aggregate of 3,018,411 shares at a weighted average price of $18.78 per share, for a total investment of $56.7 million. As of September 30, 2023, we had $93.3 million of remaining availability under our share repurchase program, which expires on June 30, 2024.

During the nine months ended September 30, 2023 and 2022, certain of our employees and former employees surrendered 134,193 and 160,506 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.

Common Share and Unit Distributions:

On February 13, 2023, our Board of Trustees declared a special, one-time cash distribution of $4.25 per common share/unit to shareholders/unitholders of record on February 23, 2023. On March 9, 2023, we paid this distribution to such shareholders/unitholders in the aggregate amount of $468.3 million.

In February 2023, the number of earned awards for recipients of the Company’s restricted stock units and market-based LTIP units granted in January 2020 was determined. Pursuant to the terms of such awards, we paid one-time catch-up cash distributions to these recipients in the aggregate amount of $1.8 million, for distributions to common shareholders and unitholders declared by our Board of Trustees during such awards’ performance measurement period.

Series D Preferred Shares:

Our series D preferred shares are convertible, at the holder’s option, into our common shares at a conversion rate of 0.8204 common shares per series D preferred share, which is equivalent to a conversion price of $30.47 per common share, or 4,032,427 additional common shares at September 30, 2023. The conversion rate changed from 0.6846 to 0.8204 common shares per series D preferred share effective February 24, 2023 as a result of the common share distribution declared by our Board of Trustees in 2023.

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EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Preferred Share Distributions:

In 2023, our Board of Trustees declared distributions on our series D preferred shares to date as follows:

Declaration Date

Record Date

Payment Date

Series D Dividend Per Share

January 13, 2023

January 31, 2023

February 15, 2023

0.40625

April 13, 2023

April 28, 2023

May 15, 2023

0.40625

July 13, 2023

July 31, 2023

August 15, 2023

0.40625

October 16, 2023

October 31, 2023

November 15, 2023

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 September 30, 2023, 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 nine months ended September 30, 2023:


	Common Shares	OP Units and LTIP Units	Total
Outstanding at January 1, 2023	109,428,252	279,892	109,708,144
Repurchase and surrender of shares	(3,152,604)	—	(3,152,604)

Share-based compensation grants and vesting, net of forfeitures	436,398	81,518	517,916
Outstanding at September 30, 2023	106,712,046	361,410	107,073,456
Noncontrolling ownership interest in the Operating Trust			0.34	%

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 99.67% and 99.68% for the three and nine months ended September 30, 2023, 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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Current:
State and local	$	(30)	$	(23)	$	(90)	$	(81)
Federal	—		—		(1,816)		—





Income tax expense	$	(30)	$	(23)	$	(1,906)	$	(81)

Federal income tax expense in the 2023 period relates to federal income taxes at our taxable REIT subsidiary.

Note 7. Share-Based Compensation

At our annual meeting of shareholders on June 13, 2023, our shareholders approved an amendment to the Equity Commonwealth 2015 Omnibus Incentive Plan to increase the number of common shares of beneficial interest authorized thereunder by 1,650,000.

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 service period determined by the Compensation Committee of our Board of Trustees, or the Compensation Committee.

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 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.

2023 Equity Award Activity

During the nine months ended September 30, 2023, 274,739 RSUs vested, and, as a result, we issued 274,739 common shares, prior to certain employees surrendering their common shares to satisfy tax withholding obligations (see Note 4).

On January 26, 2023, the Compensation Committee approved grants in the aggregate amount of 132,794 restricted shares and 269,609 RSUs at target (672,000 RSUs at maximum) to the Company’s officers, certain employees, and to Mr. Zell, the former Chairman of our Board of Trustees, as part of their compensation for fiscal year 2022. The restricted shares were valued at $25.61 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on the grant date.

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EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The assumptions and fair value for the RSUs granted during the nine months ended September 30, 2023 are included in the following table on a per share basis.


	2023
Fair value of market-based awards granted	$	36.51
Expected term (years)	4
Expected volatility	18.47		%

Risk-free rate	3.84		%

On June 13, 2023, in accordance with the Company’s compensation program for independent Trustees, the Committee awarded each of the six independent Trustees $0.1 million in restricted shares or time-based LTIP Units as part of their compensation for the 2023-2024 year of service on the Board of Trustees. These awards equated to 5,773 shares or time-based LTIP Units per Trustee, for a total of 28,865 shares and 5,773 time-based LTIP Units, valued at $20.79 per share and unit, the closing price of our common shares on the NYSE on that day. These shares and time-based LTIP Units vest one year after the date of the award, on June 13, 2024.

2022 Equity Award Activity

During the nine months ended September 30, 2022, 382,993 RSUs vested, and, as a result, we issued 382,993 common shares, prior to certain employees surrendering their common shares to satisfy tax withholding obligations.

On January 26, 2022, the Compensation Committee approved grants in the aggregate amount of 29,071 time-based LTIP Units, 59,024 market-based LTIP Units at target (147,117 market-based LTIP Units at maximum), 92,573 restricted shares and 187,951 RSUs at target (468,468 RSUs at maximum) to the Company’s officers, certain employees, and to Mr. Zell, the former Chairman of our Board of Trustees, as part of their compensation for fiscal year 2021. The restricted shares and time-based LTIP Units were valued at $25.50 per share/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 $35.11 per share/unit, their fair value on the grant date.

On June 21, 2022, in accordance with the Company’s compensation program for independent Trustees, the Committee awarded each of the six independent Trustees $0.1 million in restricted shares or time-based LTIP Units as part of their compensation for the 2022-2023 year of service on the Board of Trustees. These awards equated to 3,604 shares or time-based LTIP Units per Trustee, for a total of 18,020 shares and 3,604 time-based LTIP Units, valued at $27.75 per share and unit, the closing price of our common shares on the NYSE on that day. These shares and time-based LTIP Units vested on June 21, 2023.

Outstanding Equity Awards

As of September 30, 2023, the estimated future compensation expense for all unvested restricted shares and time-based LTIP Units was $5.1 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 2.4 years.

As of September 30, 2023, the estimated future compensation expense for all unvested RSUs and market-based LTIP Units was $11.4 million. The weighted average period over which the future compensation expense will be recorded for the RSUs and market-based LTIP Units is approximately 2.3 years.

During the three months ended September 30, 2023 and 2022, we recorded $2.5 million and $2.9 million, respectively, and during the nine months ended September 30, 2023 and 2022, we recorded $13.5 million and $9.1 million, respectively, of compensation expense, net of forfeitures, in general and administrative expense for grants to our trustees, employees and an eligible consultant related to our equity compensation plans. We did not record any accelerated vesting during the three months ended September 30, 2023 and 2022. Compensation expense recorded during the nine months ended September 30, 2023 and 2022 includes $5.2 million and $0.4 million, respectively, of accelerated vesting due to the passing of our former Chairman in

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EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2023 and staffing reductions in 2022. Forfeitures are recognized as they occur. At September 30, 2023, 2,073,350 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 September 30, 2023, we do not have any assets or liabilities measured at fair value.

Financial Instruments

Our financial instruments include our cash and cash equivalents. At September 30, 2023 and December 31, 2022, 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 September 30, 2023, no single tenant of ours is responsible for more than 10% of our consolidated revenues.

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator for earnings per common share - basic:
Net income	$	26,232	$	12,221	$	64,819	$	16,429
Net income attributable to noncontrolling interest	(86)		(31)		(204)		(41)
Preferred distributions	(1,997)		(1,997)		(5,991)		(5,991)


Numerator for net income per share - basic	$	24,149	$	10,193	$	58,624	$	10,397

Numerator for earnings per common share - diluted:
Net income	$	26,232	$	12,221	$	64,819	$	16,429
Net income attributable to noncontrolling interest	(86)		(31)		(204)		(41)
Preferred distributions	(1,997)		(1,997)		(5,991)		(5,991)

Numerator for net income per share - diluted	$	24,149	$	10,193	$	58,624	$	10,397

Denominator for earnings per common share - basic and diluted:
Weighted average number of common shares outstanding - basic(1)	108,931		111,305		109,494		112,341
RSUs(2)	1,176		1,111		1,299		875
LTIP Units(3)	110		180		123		167


Weighted average number of common shares outstanding - diluted	110,217		112,596		110,916		113,383

Net income per common share attributable to Equity Commonwealth common shareholders:
Basic	$	0.22	$	0.09	$	0.54	$	0.09
Diluted	$	0.22	$	0.09	$	0.53	$	0.09

Anti-dilutive securities(4):
Effect of Series D preferred shares; 6.50% cumulative convertible	4,032		3,365		4,032		3,365


Effect of OP Units and time-based LTIP Units(5)	361		280		348		275

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EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) The three months ended September 30, 2023 and 2022, include 131 and 86 weighted-average, unvested, earned RSUs, respectively, and the nine months ended September 30, 2023 and 2022, include 125 and 111 weighted-average, unvested, earned RSUs, respectively.

(2) Represents the 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 market-based LTIP Units if the quarter-end was the measurement date for the periods shown.

(4) These securities are excluded from the diluted earnings per share calculation for one or more of the periods presented because including them results in anti-dilution.

(5) Beneficial interests in the Operating Trust.

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 nine months ended September 30, 2023 were from office properties.

Note 11. Related Person Transactions

The following discussion includes a description of our related person transactions for the nine months ended September 30, 2023 and 2022.

We lease office space for our corporate headquarters from Two North Riverside Plaza Joint Venture Limited Partnership, an entity associated with Equity Group Investments (“EGI”), a private entrepreneurial investment firm founded by Sam Zell, our former Chairman who passed away on May 18, 2023. Messrs. Helfand and Weinberg continue to be advisors to EGI and certain other members of our team are expected to continue to have limited involvement in its activities.

In December 2021, we entered into a second amendment to a July 20, 2015 lease with Two North Riverside Plaza Joint Venture Limited Partnership to occupy office space on the twentieth and twenty-first floors of Two North Riverside Plaza in Chicago, Illinois (Two North Office Lease). The second amendment extended the lease term for one year, through December 31, 2022, with no renewal options. The lease payment for the second extended term was $0.4 million. In December 2022, we entered into a third amendment to the Two North Office Lease extending the lease term for one year, through December 31, 2023, with no renewal options. The lease payment for the third extended term is $0.4 million. In August 2023, we entered into a fourth amendment to the Two North Office Lease extending the lease term for one year, through December 31, 2024, with no renewal options and contracting square feet to the existing space on the twentieth floor. The lease payment for the fourth extended term is $0.4 million.

During the three months ended September 30, 2023 and 2022, we recognized expense of $0.1 million and $0.1 million, respectively, and during the nine months ended September 30, 2023 and 2022, we recognized expense of $0.3 million and $0.3 million, respectively, pursuant to the Two North Office Lease. As of December 31, 2022 and September 30, 2023, we did not have any amounts due to Two North Riverside Plaza Joint Venture Limited Partnership pursuant to the Two North Office Lease.

Note 12. Subsequent Events

Preferred Share Distribution

On October 16, 2023, our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which will be paid on November 15, 2023 to shareholders of record on October 31, 2023.

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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 anticipated business strategies, goals, policies and objectives, capital resources and financing, portfolio performance, lease expiration schedules, results of operations or anticipated market conditions, including our statements regarding remote working trends and the overall impact of COVID-19, and changing laws, statutes, regulations, and the interpretations thereof, on the foregoing. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. You can identify forward-looking statements by the use of forward-looking terminology, including but not limited to, “may,” “will,” “should,” “could,” “would,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Any forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in our most recent Annual Report and in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

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 an UPREIT, conducting substantially all of its activities through the Operating Trust. As of September 30, 2023, the Company beneficially owned 99.66% of the outstanding OP Units.

At September 30, 2023, our portfolio consisted of four properties (eight buildings), with a combined 1.5 million square feet, and we had $2.1 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 September 30, 2023, our overall portfolio was 80.8% leased. During the three months ended September 30, 2023, we entered into leases for 54,000 square feet, including lease renewals for 39,000 square feet and new leases for 15,000 square feet. The renewal leases entered into during the three months ended September 30, 2023 had cash and GAAP rental rates that were approximately 1.7% lower and 8.8% higher, respectively, compared to prior rental rates for the same space. The new leases entered into during the three months ended September 30, 2023 had cash and GAAP rental rates that were approximately 2.2% lower and 1.3% lower, 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.

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We have engaged CBRE, Inc., or CBRE, to provide property management services. We pay CBRE a property-by-property management fee and may engage CBRE from time-to-time to perform project management services, such as coordinating and overseeing the completion of tenant improvements and other capital projects at the properties. We reimburse CBRE for certain expenses incurred in the performance of its duties, including certain personnel and equipment costs. For the three months ended September 30, 2023 and 2022, we incurred expenses of $0.8 million and $0.7 million, respectively, and for the nine months ended September 30, 2023 and 2022, we incurred expenses of $2.3 million and $2.2 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 September 30, 2023 and December 31, 2022, we had amounts payable pursuant to these services of $0.4 million and $0.4 million, respectively.

We are focusing our efforts on capital allocation as we continue to evaluate investment opportunities. We are seeking to use the strength and liquidity of our balance sheet for investments in high-quality assets or businesses in a range of property types that offer a compelling risk-reward profile. We may also determine to sell, liquidate or otherwise exit our business if we believe doing so will maximize shareholder value.

Our business has been and is continuing to be impacted by economic uncertainty and an overall slowdown in the office leasing market following the COVID-19 virus due to a variety of factors, including tenant uncertainty regarding office space needs given the evolving remote and hybrid working trends and other factors impacting the demand for office space. Many of our employees and the majority of our tenants’ employees are currently working at least in part remotely. Overall, our business has experienced a significant reduction in leasing interest and activity as well as parking revenue when compared to pre-pandemic levels. As of September 30, 2023 and December 31, 2019, our comparable property portfolio was 80.8% and 91.5% leased, respectively. The duration of these business disruptions continues to be unknown at this time, and we currently are not able to estimate the full impact of the overall slowdown in the office leasing market on our business.

Property Operations

Leased occupancy data for 2023 and 2022 are as follows (square feet in thousands):


	All Properties				Comparable Properties(1)
	As of September 30,				As of September 30,
	2023		2022		2023		2022
Total properties	4		4		4		4
Total square feet	1,521		1,507		1,521		1,507
Percent leased(2)	80.8	%	83.4	%	80.8	%	83.4	%

(1)Based on properties owned continuously from January 1, 2022 through September 30, 2023.

(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 it 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 September 30, 2023 was 6.4 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 September 30, 2023 totaled $2.2 million, or $40.57 per square foot on average (approximately $6.38 per square foot per year of the lease term).

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As of September 30, 2023, approximately 0.5% of our leased square feet and 0.6% of our annualized rental revenue, determined as set forth below, are included in leases scheduled to expire through December 31, 2023. 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 2023, that have not been backfilled, are above market. Lease expirations by year, as of September 30, 2023, 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
2023	3	6	0.5	%	0.5	%	$	339	0.6	%	0.6	%
2024	21	224	18.2	%	18.7	%	10,045		17.0	%	17.6	%
2025	6	115	9.4	%	28.1	%	5,441		9.2	%	26.8	%
2026	11	80	6.5	%	34.6	%	4,083		6.9	%	33.7	%
2027	16	226	18.3	%	52.9	%	11,242		19.0	%	52.7	%
2028	11	128	10.4	%	63.3	%	6,016		10.1	%	62.8	%
2029	8	142	11.6	%	74.9	%	6,185		10.4	%	73.2	%
2030	8	147	12.0	%	86.9	%	7,233		12.2	%	85.4	%
2031	4	58	4.7	%	91.6	%	2,553		4.3	%	89.7	%
2032	1	32	2.6	%	94.2	%	1,954		3.3	%	93.0	%
Thereafter	6	71	5.8	%	100.0	%	4,157		7.0	%	100.0	%
	95	1,229	100.0	%			$	59,248	100.0	%

Weighted average remaining lease term (in years):		4.3					4.4

(1)Tenants with leases expiring in multiple years are counted in each year they expire.

(2)Leased Square Feet as of September 30, 2023 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 September 30, 2023, 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.

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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 September 30, 2023, 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.(3)	80	6.5	%	5.8	%	0.3
2.	Salesforce.com, Inc.	66	5.4	%	5.3	%	2.2
3.	Crowdstrike, Inc.	48	3.9	%	4.9	%	6.4
4.	KPMG, LLP	66	5.4	%	4.8	%	5.7
5.	CBRE, Inc.	41	3.3	%	3.6	%	4.5
6.	RSM US LLP	32	2.6	%	3.3	%	8.7
7.	Jones Lang LaSalle Americas, Inc.	42	3.4	%	3.0	%	6.8
8.	SonarSource US, Inc.	28	2.3	%	2.9	%	3.9
9.	Alden Torch Financial, LLC	35	2.8	%	2.7	%	3.4
	Total	438	35.6	%	36.3	%	4.2

(1)Total Leased Square Feet as of September 30, 2023 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 September 30, 2023, plus estimated recurring expense reimbursements; excludes lease value amortization, straight-line rent adjustments, abated (free) rent periods and parking revenue. We calculate annualized rental revenue by aggregating the recurring billings outlined above for the most recent month during the quarter reported, adding abated rent, and multiplying the sum by 12 to provide an estimation of near-term potentially-recurring revenues. Annualized rental revenue is a forward-looking non-GAAP measure. Annualized rental revenue cannot be reconciled to a comparable GAAP measure without unreasonable efforts, primarily due to the fact that it is calculated from the billings of tenants in the most recent month at the most recent rental rates during the quarter reported, whereas historical GAAP measures include billings from a potentially different group of tenants over multiple months at potentially different rental rates.

(3)Approximately 4,000 square feet of Equinor Energy Services, Inc.’s space has been backfilled and will expire in 2026.

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 September 30, 2023, Compared to Three Months Ended September 30, 2022


	Comparable Properties Results(1)								Other Properties Results(2)				Consolidated Results
	Three Months Ended September 30,
	2023		2022		$ Change		% Change		2023		2022		2023		2022		$ Change		% Change
	(dollars in thousands)
Rental revenue	$	13,927	$	13,868	$	59	0.4	%	$	1	$	1	$	13,928	$	13,869	$	59	0.4	%
Other revenue	1,277		1,252		25		2.0	%	7		5		1,284		1,257		27		2.1	%
Operating expenses	(6,719)		(6,019)		(700)		11.6	%	(3)		(54)		(6,722)		(6,073)		(649)		10.7	%
Net operating income(3)	$	8,485	$	9,101	$	(616)	(6.8)	%	$	5	$	(48)	8,490		9,053		(563)		(6.2)	%
Other expenses:
Depreciation and amortization													4,436		4,451		(15)		(0.3)	%
General and administrative													7,061		7,593		(532)		(7.0)	%

Total other expenses													11,497		12,044		(547)		(4.5)	%
Interest and other income, net													29,269		15,145		14,124		93.3	%


Gain on sale of properties, net													—		90		(90)		(100.0)	%
Income before income taxes													26,262		12,244		14,018		114.5	%
Income tax expense													(30)		(23)		(7)		30.4	%
Net income													26,232		12,221		14,011		114.6	%
Net income attributable to noncontrolling interest													(86)		(31)		(55)		177.4	%
Net income attributable to Equity Commonwealth													26,146		12,190		13,956		114.5	%
Preferred distributions													(1,997)		(1,997)		—		—	%


Net income attributable to Equity Commonwealth common shareholders													$	24,149	$	10,193	$	13,956	136.9	%

(1)Comparable properties consist of four properties we owned continuously from July 1, 2022 to September 30, 2023.

(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 at the comparable properties increased $0.1 million, or 0.4%, in the 2023 period, compared to the 2022 period, primarily due to a $0.2 million increase in real estate tax recoveries and a $0.1 million increase in escalations, partially offset by a $0.3 million decrease in base rent due to a decrease in commenced occupancy.

Other revenue. Other revenue, which primarily includes parking revenue, increased $27,000, or 2.1%, in the 2023 period, compared to the 2022 period, primarily due to an increase in parking demand.

Operating expenses. Operating expenses increased $0.7 million, or 11.6%, at the comparable properties in the 2023 period, compared to the 2022 period, primarily due to a $0.5 million increase in real estate tax expense and a $0.2 million increase in pre-leasing demolition costs.

General and administrative. General and administrative expenses decreased $0.5 million, or 7.0% in the 2023 period, compared to the 2022 period, primarily due to a $0.4 million decrease in legal fees following an internal restructuring in 2022 and a $0.4 million decrease in share-based compensation expenses, partially offset by a $0.2 million increase in bonus expense and a $0.1 million increase in payroll expense.

Interest and other income, net. Interest and other income, net increased $14.1 million, or 93.3% in the 2023 period, compared to the 2022 period, primarily due to more interest received from higher average interest rates, partially offset by lower average cash balances.

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Gain on sale of properties, net. We did not have any gain on sale of properties, net in the 2023 period. Gain on sale of properties, net of $0.1 million in the 2022 period relates to adjustments to prior period sales.

Net income attributable to noncontrolling interest. From 2017 through 2022, we granted LTIP Units to certain of our trustees and employees. Net income attributable to noncontrolling interest of $0.1 million in the 2023 period and $31,000 in the 2022 period relates to the allocation of income to the LTIP/OP Unit holders.

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RESULTS OF OPERATIONS

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022


	Comparable Properties Results(1)								Other Properties Results(2)				Consolidated Results
	Nine Months Ended September 30,
	2023		2022		$ Change		% Change		2023		2022		2023		2022		$ Change		% Change
	(dollars in thousands)
Rental revenue	$	41,511	$	44,283	$	(2,772)	(6.3)	%	$	1	$	(148)	$	41,512	$	44,135	$	(2,623)	(5.9)	%
Other revenue	3,848		3,203		645		20.1	%	18		15		3,866		3,218		648		20.1	%
Operating expenses	(20,914)		(18,955)		(1,959)		10.3	%	(6)		1,757		(20,920)		(17,198)		(3,722)		21.6	%
Net operating income(3)	$	24,445	$	28,531	$	(4,086)	(14.3)	%	$	13	$	1,624	24,458		30,155		(5,697)		(18.9)	%
Other expenses:
Depreciation and amortization													13,260		13,176		84		0.6	%
General and administrative													29,470		23,241		6,229		26.8	%

Total other expenses													42,730		36,417		6,313		17.3	%
Interest and other income, net													84,997		22,682		62,315		274.7	%


Gain on sale of properties, net													—		90		(90)		(100.0)	%
Income before income taxes													66,725		16,510		50,215		304.1	%
Income tax expense													(1,906)		(81)		(1,825)		2,253.1	%
Net income													64,819		16,429		48,390		294.5	%
Net income attributable to noncontrolling interests													(204)		(41)		(163)		397.6	%
Net income attributable to Equity Commonwealth													64,615		16,388		48,227		294.3	%
Preferred distributions													(5,991)		(5,991)		—		—	%


Net income attributable to Equity Commonwealth common shareholders													$	58,624	$	10,397	$	48,227	463.9	%

(1)Comparable properties consist of four properties we owned continuously from January 1, 2022 to September 30, 2023.

(2)Other properties consist of properties sold.

Rental revenue. Rental revenue at the comparable properties decreased $2.8 million, or 6.3%, in the 2023 period, compared to the 2022 period, primarily due to the $1.9 million collection of a previously reserved receivable in 2022, a $0.9 million decrease in base rent due to a decrease in commenced occupancy, a $0.4 million decrease in lease termination fees and a $0.2 million decrease in real estate tax recoveries, partially offset by a $0.6 million increase in escalations. Excluding the collection of the previously reserved receivable, rental revenue at the comparable properties decreased $0.9 million, or 2.0%, in the 2023 period, compared to the 2022 period.

Other revenue. Other revenue, which primarily includes parking revenue, increased $0.6 million, or 20.1%, in the 2023 period, compared to the 2022 period, primarily due to an increase in parking demand.

Operating expenses. Operating expenses increased $3.7 million, or 21.6%, in the 2023 period, compared to the 2022 period, due to an increase in operating expenses at the comparable properties and a $1.8 million real estate tax refund received at a sold property in 2022. Operating expenses increased $2.0 million, or 10.3%, at the comparable properties in the 2023 period, compared to the 2022 period, primarily due to a $1.2 million increase in pre-leasing demolition costs, a $0.2 million increase in maintenance and repairs, a $0.2 million increase in utilities expense and a $0.1 million increase in parking garage expense.

General and administrative. General and administrative expenses increased $6.2 million, or 26.8%, in the 2023 period, compared to the 2022 period, primarily due to $6.0 million of compensation expenses related to the passing of our former chairman in the 2023 period, a $0.5 million increase in bonus expense, a $0.3 million increase in payroll taxes primarily due to refunds received in 2022 and a $0.3 million increase in payroll expense, partially offset by a $0.6 million decrease in

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compensation expenses related to severance and a $0.3 million decrease in share-based compensation expenses. Excluding the $6.0 million of compensation expense related to the passing of our former chairman in the 2023 period, general and administrative expenses increased $0.3 million, or 1.2%, in the 2023 period, compared to the 2022 period.

Interest and other income, net. Interest and other income, net increased $62.3 million, or 274.7%, in the 2023 period, compared to the 2022 period, primarily due to more interest received from higher average interest rates, partially offset by lower average cash balances.

Income tax expense. Income tax expense increased $1.8 million in the 2023 period, compared to the 2022 period, primarily due to an increase in federal income taxes at our taxable REIT subsidiary.

Net income attributable to noncontrolling interest. From 2017 through 2022, we granted LTIP Units to certain of our trustees and employees. Net income attributable to noncontrolling interest of $0.2 million in the 2023 period and $41,000 in the 2022 period relates to the allocation of income to the LTIP/OP Unit holders.

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LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

As of September 30, 2023, we had $2.1 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 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 economic uncertainty and an overall slowdown in the office leasing market following the COVID-19 virus, including remote and hybrid working trends and other factors impacting the demand for office space. We cannot predict the ultimate impact of the overall slowdown in the office leasing market 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 $86.4 million, $(4.6) million and $(536.3) million, respectively, for the nine months ended September 30, 2023, and $32.4 million, $(3.1) million and $(137.9) million, respectively, for the nine months ended September 30, 2022. Changes in these three categories of our cash flows between 2023 and 2022 are primarily related to an increase in interest income as a result of higher average interest rates partially offset by lower average balances in 2023, repurchase of our common shares and distributions to common shareholders.

Our Investment and Financing Liquidity and Resources

During the nine months ended September 30, 2023, we paid an aggregate of $6.0 million of distributions on our series D preferred shares. On October 16, 2023, our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which will be paid on November 15, 2023 to shareholders of record on October 31, 2023.

We may utilize various types of financings, including debt or equity, to fund future 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

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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.

During the three and nine months ended September 30, 2023 and 2022, amounts capitalized at our properties for tenant improvements, leasing costs and building improvements were as follows (amounts in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Tenant improvements(1)	$	224	$	557	$	3,332	$	2,583
Leasing costs(2)	646		501		2,481		1,922
Building improvements(3)	1,438		59		2,166		366

(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 September 30, 2023, commitments made for expenditures in connection with leasing space at our properties were as follows (dollar and square foot measures in thousands):


	New Leases		Renewals		Total
Square feet leased during the period	15		39		54
Tenant improvements and leasing commissions	$	591	$	1,600	$	2,191
Tenant improvements and leasing commissions per square foot	$	39.38	$	41.02	$	40.57
Weighted average lease term by square foot (years)(1)	4.6		7.0		6.4
Tenant improvements and leasing commissions per square foot per year of lease term	$	8.50	$	5.84	$	6.38

(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, 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 noncontrolling 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 (loss) 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 (loss) attributable to Equity Commonwealth common shareholders and cash flow from operating activities as presented in our condensed consolidated statements of operations 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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Reconciliation to FFO:
Net income	$	26,232	$	12,221	$	64,819	$	16,429
Real estate depreciation and amortization	4,429		4,412		13,231		13,058

Gain on sale of properties, net	—		(90)		—		(90)
FFO attributable to Equity Commonwealth	30,661		16,543		78,050		29,397
Preferred distributions	(1,997)		(1,997)		(5,991)		(5,991)

FFO attributable to Equity Commonwealth common shareholders and unitholders	$	28,664	$	14,546	$	72,059	$	23,406

Reconciliation to Normalized FFO:
FFO attributable to Equity Commonwealth common shareholders and unitholders	$	28,664	$	14,546	$	72,059	$	23,406

Straight-line rent adjustments	(107)		(61)		445		(151)




Former chairman accelerated compensation expense	—		—		5,957		—



Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders	$	28,557	$	14,485	$	78,461	$	23,255

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 (loss) attributable to Equity Commonwealth common shareholders and cash flow from operating activities as presented in our consolidated statements of operations 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 and nine months ended September 30, 2023 and 2022, is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Rental revenue	$	13,928	$	13,869	$	41,512	$	44,135
Other revenue	1,284		1,257		3,866		3,218
Operating expenses	(6,722)		(6,073)		(20,920)		(17,198)
NOI	$	8,490	$	9,053	$	24,458	$	30,155

NOI	$	8,490	$	9,053	$	24,458	$	30,155
Depreciation and amortization	(4,436)		(4,451)		(13,260)		(13,176)
General and administrative	(7,061)		(7,593)		(29,470)		(23,241)

Interest and other income, net	29,269		15,145		84,997		22,682


Gain on sale of properties, net	—		90		—		90
Income before income taxes	26,262		12,244		66,725		16,510
Income tax expense	(30)		(23)		(1,906)		(81)
Net income	$	26,232	$	12,221	$	64,819	$	16,429

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 Chair of the Board, President and Chief Executive Officer and our Executive 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 Chair of the Board, President and Chief Executive Officer and our Executive 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 September 30, 2023 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 as previously disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023, there have been no material changes to the risk factors previously disclosed in our Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Common Share Repurchase Program

The following table provides information with respect to the common share repurchases made by the Company during the three months ended September 30, 2023:


Period	Total Number of Shares Purchased	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
July 2023	—	$	—	—	$	150,000,000
August 2023	1,695,398	$	18.81	1,695,398	$	118,114,721
September 2023	1,323,013	$	18.74	1,323,013	$	93,317,306
Total	3,018,411	$	18.78	3,018,411	$	93,317,306

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 6.50% 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.)

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			The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, 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 Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes to these condensed consolidated 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).

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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
	Chair of the Board, President and Chief Executive Officer
	Dated:	October 31, 2023


By:	/s/ William H. Griffiths
	William H. Griffiths
	Executive Vice President, Chief Financial Officer and Treasurer
	Dated:	October 31, 2023