Segment Information

9 Months Ended

Sep. 30, 2014

Segment Reporting [Abstract]

Segment Information

Segment Information

Our primary business is the ownership and operation of office 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.  We use property net operating income, or NOI, and cash yield 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. 

As of September 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 September 30, 2014, and for the three and nine months ended September 30, 2014 and 2013, is as follows (in thousands):

	As of September 30,
	2014	2013
Square feet:
CBD properties	21,892	21,844
Suburban properties	21,027	21,023
Total properties	42,919	42,867

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Rental income:
CBD properties	$	109,822	$	108,624	$	326,155	$	330,395
Suburban properties	64,394		62,284		192,508		261,826
Total properties	$	174,216	$	170,908	$	518,663	$	592,221
Tenant reimbursements and other income:
CBD properties	$	27,653	$	28,928	$	86,359	$	90,883
Suburban properties	14,726		14,365		44,027		55,897
Total properties	$	42,379	$	43,293	$	130,386	$	146,780
NOI:
CBD properties	$	71,596	$	68,552	$	216,762	$	223,066
Suburban properties	45,607		43,299		138,463		205,350
Total properties	$	117,203	$	111,851	$	355,225	$	428,416

As of September 30, 2014, our investments in CBD properties and suburban properties, net of accumulated depreciation, were $3,014.2 million and $1,883.8 million, respectively, including $137.5 million of CBD properties and $88.0 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 (loss), net income (loss) attributable to Equity Commonwealth, net income (loss) available for Equity Commonwealth common shareholders, operating income (loss) 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 (loss), net income (loss) attributable to Equity Commonwealth, net income (loss) available for Equity Commonwealth common shareholders, operating income (loss) 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 (loss) for the three and nine months ended September 30, 2014 and 2013, is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Rental income	$	174,216		$	170,908		$	518,663		$	592,221
Tenant reimbursements and other income	42,379			43,293			130,386			146,780
Operating expenses	(99,392		)	(102,350		)	(293,824		)	(310,585		)
NOI	$	117,203		$	111,851		$	355,225		$	428,416
NOI	$	117,203		$	111,851		$	355,225		$	428,416
Depreciation and amortization	(57,213		)	(56,465		)	(168,693		)	(182,494		)
General and administrative	(47,450		)	(25,742		)	(96,395		)	(63,454		)
Loss on asset impairment	—			(124,253		)	(17,922		)	(124,253		)
Acquisition related costs	—			436			(5		)	(337		)
Operating income (loss)	12,540			(94,173		)	72,210			57,878
Interest and other income	406			227			1,071			931
Interest expense	(35,245		)	(39,236		)	(111,079		)	(134,452		)
Gain (loss) on early extinguishment of debt	6,699			—			6,699			(60,027		)
Gain on sale of equity investments	171,754			—			171,721			66,293
Gain on issuance of shares by an equity investee	—			—			17,020			—
Income (loss) from continuing operations before income tax expense and equity in earnings of investees	156,154			(133,182		)	157,642			(69,377		)
Income tax expense	(703		)	(785		)	(2,166		)	(2,527		)
Equity in earnings of investees	1,072			10,492			24,460			14,913
Income (loss) from continuing operations	156,523			(123,475		)	179,936			(56,991		)
Income from discontinued operations	95			95			8,220			1,732
Gain (loss) on asset impairment from discontinued operations	122			(92,827		)	(2,238		)	(101,362		)
Loss on early extinguishment of debt from discontinued operations	—			—			(3,345		)	—
Net gain on sale of properties from discontinued operations	—			—			—			3,359
Income (loss) before gain on sale of properties	156,740			(216,207		)	182,573			(153,262		)
Gain on sale of properties	—			—			—			1,596
Net income (loss)	$	156,740		$	(216,207	)	$	182,573		$	(151,666	)