Segment Information

3 Months Ended

Mar. 31, 2013

Segment Information

Segment Information

Note 13.  Segment Information

Our primary business is the ownership and operation of a nationwide portfolio of commercial properties.  We account for each of our individual properties as separate operating segments.  We have aggregated our separate operating segments into three reportable segments based on our primary method of internal reporting: CBD office properties, suburban office properties and industrial & other properties.  Each of our reportable segments includes properties with similar operating and economic characteristics that are subject to unique supply and demand conditions.  Our operating segments (i.e., our individual properties) are managed and operated consistently in accordance with our standard operating procedures, and our management responsibilities do not vary significantly from location to location based on the size of the property or geographic location within each primary reporting segment.  In addition to our three reportable segments, we aggregate our operating segments into geographic regions for financial reporting purposes.  We define these individual geographic regions as those which currently, or during either of the last two quarters, represent or generate 5% or more of our total square feet, annualized rental income or property net operating income, or NOI, which we define as income from our real estate including lease termination fees received from tenants less our property operating expenses, which expenses include property marketing costs.

As of March 31, 2013, we owned 54 CBD office properties, 246 suburban office properties and 145 industrial & other properties, excluding properties classified as held for sale.  Our geographic regions include Oahu, HI, Metro Chicago, IL, Metro Philadelphia, PA, and Other Markets, which includes properties located elsewhere throughout the United States and Australia.  Prior periods have been restated to reflect 40 office properties and 57 industrial properties reclassified to discontinued operations from continuing operations as of December 31, 2012 and three properties reclassified from our Suburban Office segment to our CBD Office segment as of March 31, 2013.

Property level information by geographic region and property type as of March 31, 2013 and for the three months ended March 31, 2013 and 2012, is as follows:

	As of March 31, 2013				As of March 31, 2012
	CBD	Suburban	Industrial &		CBD	Suburban	Industrial &
	Office	Office	Other	Totals	Office	Office	Other	Totals
Property square feet
(in thousands):
Oahu, HI	—	—	17,894	17,894	—	—	17,876	17,876
Metro Chicago, IL	3,601	1,164	103	4,868	3,591	1,164	104	4,859
Metro Philadelphia, PA	4,597	255	—	4,852	4,590	256	—	4,846
Other Markets	13,850	18,926	12,300	45,076	12,136	16,702	10,733	39,571
Totals	22,048	20,345	30,297	72,690	20,317	18,122	28,713	67,152

	Three Months Ended March 31, 2013								Three Months Ended March 31, 2012
	CBD		Suburban		Industrial &				CBD		Suburban		Industrial &
	Office		Office		Other		Totals		Office		Office		Other		Totals
Property rental income:
Oahu, HI	$	—	$	—	$	21,211	$	21,211	$	—	$	—	$	19,895	$	19,895
Metro Chicago, IL	25,149		6,591		111		31,851		24,575		5,863		111		30,549
Metro Philadelphia, PA	29,131		875		—		30,006		29,300		844		—		30,144
Other Markets	88,471		79,667		23,842		191,980		74,264		68,436		20,090		162,790
Totals	$	142,751	$	87,133	$	45,164	$	275,048	$	128,139	$	75,143	$	40,096	$	243,378
Property NOI:
Oahu, HI	$	—	$	—	$	16,737	$	16,737	$	—	$	—	$	15,514	$	15,514
Metro Chicago, IL	12,269		3,670		102		16,041		12,378		2,963		104		15,445
Metro Philadelphia, PA	15,796		205		—		16,001		15,584		203		—		15,787
Other Markets	50,628		48,029		17,953		116,610		44,013		40,973		14,410		99,396
Totals	$	78,693	$	51,904	$	34,792	$	165,389	$	71,975	$	44,139	$	30,028	$	146,142

The following table includes the reconciliation of NOI to net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements.  We define NOI as income from our real estate including lease termination fees received from tenants less our property operating expenses, which expenses include property marketing costs.  NOI excludes amortization of capitalized tenant improvement costs and leasing commissions.  We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties.  We use NOI internally to evaluate individual, regional and company wide 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.  The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our properties’ results of operations.  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 CommonWealth REIT, net income available for CommonWealth REIT common shareholders, operating income 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.  We believe that NOI may facilitate an understanding of our consolidated historical operating results.  This measure should be considered in conjunction with net income, net income attributable to CommonWealth REIT, net income available for CommonWealth REIT common shareholders, operating income 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 NOI differently than we do.  A reconciliation of NOI to net income for the three months ended March 31, 2013 and 2012 is as follows:

	Three Months Ended March 31,
	2013			2012
Rental income	$	275,048		$	243,378
Operating expenses	(109,659		)	(97,236		)
Property net operating income (NOI)	$	165,389		$	146,142
Property NOI	$	165,389		$	146,142
Depreciation and amortization	(66,523		)	(58,019		)
General and administrative	(17,266		)	(11,536		)
Acquisition related costs	(628		)	(2,502		)
Operating income	80,972			74,085
Interest and other income	458			285
Interest expense	(52,344		)	(49,106		)
Loss on early extinguishment of debt	(60,027		)	(67		)
Equity in earnings of investees	4,262			2,958
Gain on sale of equity investment	66,293			—
Income from continuing operations before income tax expense	39,614			28,155
Income tax expense	(988		)	(492		)
Income from continuing operations	38,626			27,663
Loss from discontinued operations	(1,912		)	(3,089		)
Loss on asset impairment from discontinued operations	(3,946		)	—
Gain on sale of properties from discontinued operations	1,260			—
Income before gain on sale of properties	34,028			24,574
Gain on sale of properties	1,596			—
Net income	$	35,624		$	24,574