Segment Information

6 Months Ended

Jun. 30, 2014

Segment Information

Segment Information

Note 14.  Segment Information

Our primary business is the ownership and operation of a nationwide portfolio of properties.  We account for each of our individual properties as a separate operating segment.  We have aggregated our separate operating segments into two reportable segments based on our primary method of internal reporting: CBD properties and suburban properties.  More than 90% of our CBD and suburban properties are office 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.  We use property net operating income, or NOI, to evaluate the performance of our operating segments.  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.  See Note 6 for financial information relating to SIR.

As of June 30, 2014, we owned 40 CBD properties (53 buildings) and 116 suburban properties (209 buildings).  The prior period has been restated to reflect properties reclassified from discontinued operations to continuing operations during 2014.  See Note 4 for additional information regarding our properties and the reasons for this reclassification.

Property level information by operating segment for properties classified as held and used in operations as of June 30, 2014, and for the three and six months ended June 30, 2014 and 2013, is as follows (in thousands):

	As of June 30,
	2014	2013
Square feet:
CBD properties	21,892	22,149
Suburban properties	21,028	46,114
Total properties	42,920	68,263

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Rental income:
CBD properties	$	106,094	$	109,600	$	216,333	$	221,771
Suburban properties	66,313		100,413		128,114		199,542
Total properties	$	172,407	$	210,013	$	344,447	$	421,313
Tenant reimbursements and other income:
CBD properties	$	28,465	$	30,847	$	58,706	$	61,955
Suburban properties	14,322		21,328		29,301		41,532
Total properties	$	42,787	$	52,175	$	88,007	$	103,487
NOI:
CBD properties	$	71,996	$	75,529	$	145,166	$	154,514
Suburban properties	50,497		82,554		92,856		162,051
Total properties	$	122,493	$	158,083	$	238,022	$	316,565

As of June 30, 2014, our investments in CBD properties and suburban properties, net of accumulated depreciation, were $3,039.2 million and $1,899.7 million, respectively, including $148.9 million of CBD properties and $94.6 million of suburban properties located in Australia.

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 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 combined 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.  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 Equity Commonwealth, net income available for Equity Commonwealth 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.  This measure should be considered in conjunction with net income, net income attributable to Equity Commonwealth, net income available for Equity Commonwealth 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 (loss) 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 and six months ended June 30, 2014 and 2013, is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Rental income	$	172,407		$	210,013		$	344,447		$	421,313
Tenant reimbursements and other income	42,787			52,175			88,007			103,487
Operating expenses	(92,701		)	(104,105		)	(194,432		)	(208,235		)
NOI	$	122,493		$	158,083		$	238,022		$	316,565
NOI	$	122,493		$	158,083		$	238,022		$	316,565
Depreciation and amortization	(59,831		)	(63,459		)	(111,480		)	(126,029		)
General and administrative	(24,097		)	(21,049		)	(48,945		)	(37,712		)
Loss on asset impairment	(22,683		)	—			(17,922		)	—
Acquisition related costs	—			(145		)	(5		)	(773		)
Operating income	15,882			73,430			59,670			152,051
Interest and other income	281			249			665			704
Interest expense	(37,899		)	(43,320		)	(75,834		)	(95,216		)
Loss on early extinguishment of debt	—			—			—			(60,027		)
(Loss) gain on sale of equity investments	(33		)	—			(33		)	66,293
Gain on issuance of shares by an equity investee	16,911			—			17,020			—
(Loss) income from continuing operations before income tax expense and equity in earnings of investees	(4,858		)	30,359			1,488			63,805
Income tax expense	(908		)	(754		)	(1,463		)	(1,742		)
Equity in earnings of investees	12,454			159			23,388			4,421
Income from continuing operations	6,688			29,764			23,413			66,484
Income from discontinued operations	4,114			1,643			8,125			1,637
Loss on asset impairment from discontinued operations	(2,072		)	(4,589		)	(2,360		)	(8,535		)
Loss on early extinguishment of debt from discontinued operations	(3,345		)	—			(3,345		)	—
Net gain on sale of properties from discontinued operations	—			2,099			—			3,359
Income before gain on sale of properties	5,385			28,917			25,833			62,945
Gain on sale of properties	—			—			—			1,596
Net income	$	5,385		$	28,917		$	25,833		$	64,541