UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June 30, 2018~~March 31, 2019

o 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 2100, Chicago, IL		60606
(Address of Principal Executive Offices)		(Zip Code)

(312) 646-2800

(Registrant’s Telephone Number, Including Area Code)

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



Title Of Each Class	Trading Symbol	Name of Each Exchange On Which Registered
Common Shares of Beneficial Interest	EQC	New York Stock Exchange
6 1/2% Series D Cumulative Convertible Preferred Shares of Beneficial Interest	EQCpD	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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
~~(Do not check if a smaller reporting company)~~		Emerging growth company o

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 o No ý

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of ~~July 26, 2018: 121,482,673.~~April 25, 2019: 121,898,969.

EQUITY COMMONWEALTH

FORM 10-Q

~~June 30, 2018~~March 31, 2019

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 Comprehensive Income ~~(Loss)~~	3

	Condensed Consolidated Statements of Equity	4

	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	2016

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3327

Item 4.	Controls and Procedures	3327

PART II	Other Information

Item 1.	Legal Proceedings	3428

Item 1A.	Risk Factors	3428

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3428

Item 3.	Defaults Upon Senior Securities	3428

Item 4.	Mine Safety Disclosures	3428

Item 5.	Other Information	3428

Item 6.	Exhibits	3529

	Signatures	3630

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 ~~June 30, 2018,~~March 31, 2019, unless the context indicates otherwise.

Table of Contents

PART I. Financial Information

Item 1. Financial Statements.

EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
				(audited)						(audited)
ASSETS
Real estate properties:
Land	$	146,700		$	191,775		$	110,395		$	135,142
Buildings and improvements	1,117,446			1,555,836			704,142			1,004,500
	1,264,146			1,747,611			814,537			1,139,642
Accumulated depreciation	(387,888		)	(450,718		)	(245,528		)	(375,968		)
	876,258			1,296,893			569,009			763,674
Assets held for sale	—			97,688
Acquired real estate leases, net	2,946			23,847			183			275
Cash and cash equivalents	2,507,117			2,351,693			3,069,501			2,400,803
Marketable securities	248,275			276,928			—			249,602
Restricted cash	8,419			8,897			1,767			3,298
Rents receivable, net of allowance for doubtful accounts of $5,101 and $4,771, respectively	57,347			93,436
Rents receivable							31,151			51,089
Other assets, net	76,512			87,563			42,326			62,031
Total assets	$	3,776,874		$	4,236,945		$	3,713,937		$	3,530,772

LIABILITIES AND EQUITY
Senior unsecured debt, net	$	248,048		$	815,984		$	248,689		$	248,473
Mortgage notes payable, net	31,964			32,594			26,288			26,482
Liabilities related to properties held for sale	—			1,840
Accounts payable, accrued expenses and other	44,380			74,956			42,280			62,368
Rent collected in advance	10,173			11,076			5,119			9,451
Total liabilities	334,565			936,450			322,376			346,774

Shareholders' equity:
Preferred shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized;
Series D preferred shares; 6 1/2% cumulative convertible; 4,915,196 shares issued and outstanding, aggregate liquidation preference of $122,880	119,263			119,263			119,263			119,263
Common shares of beneficial interest, $0.01 par value: 350,000,000 shares authorized; 121,482,673 and 124,217,616 shares issued and outstanding, respectively	1,215			1,242
Common shares of beneficial interest, $0.01 par value: 350,000,000 shares authorized; 121,899,625 and 121,572,155 shares issued and outstanding, respectively							1,219			1,216
Additional paid in capital	4,300,822			4,380,313			4,304,560			4,305,974
Cumulative net income	2,822,793			2,596,259			3,081,492			2,870,974
Cumulative other comprehensive loss	(1,469		)	(95		)	—			(342		)
Cumulative common distributions	(3,111,868		)	(3,111,868		)	(3,420,512		)	(3,420,548		)
Cumulative preferred distributions	(689,742		)	(685,748		)	(695,733		)	(693,736		)
Total shareholders’ equity	3,441,014			3,299,366			3,390,289			3,182,801
Noncontrolling interest	1,295			1,129			1,272			1,197
Total equity	3,442,309			3,300,495			3,391,561			3,183,998
Total liabilities and equity	$	3,776,874		$	4,236,945		$	3,713,937		$	3,530,772

See accompanying notes.

EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Revenues:
Rental income	$	35,211		$	74,352		$	78,760		$	154,557
Tenant reimbursements and other income	13,425			17,247			28,464			36,593
Rental revenue													$	38,890		$	55,273
Other revenue													2,862			3,315
Total revenues	48,636			91,599			107,224			191,150			41,752			58,588
Expenses:
Operating expenses	19,521			37,284			44,120			78,371			15,780			24,599
Depreciation and amortization	13,021			23,922			26,924			50,837			8,585			13,903
General and administrative	11,222			11,960			24,561			24,038			12,096			13,339
Loss on asset impairment	—			18,428			12,087			19,714			—			12,087
Total expenses	43,764			91,594			107,692			172,960			36,461			63,928
Operating income (loss)	4,872			5			(468		)	18,190
Interest and other income, net	12,668			6,019			18,448			10,391			17,775			5,780
Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $645, $849, $1,446 and $1,562, respectively)	(6,350		)	(14,863		)	(16,465		)	(29,877		)
Interest expense (including net amortization of debt discounts, premiums and deferred financing fees of $165 and $801, respectively)													(4,206		)	(10,115		)
Loss on early extinguishment of debt	(1,536		)	(63		)	(6,403		)	(63		)	—			(4,867		)
Gain on sale of properties, net	26,937			3,136			232,148			19,590			193,037			205,211
Income (loss) before income taxes	36,591			(5,766		)	227,260			18,231
Income tax benefit (expense)	456			(45		)	(2,551		)	(220		)
Net income (loss)	37,047			(5,811		)	224,709			18,011
Net (income) loss attributable to noncontrolling interest	(14		)	2			(77		)	(6		)
Net income (loss) attributable to Equity Commonwealth	$	37,033		$	(5,809	)	$	224,632		$	18,005
Income before income taxes													211,897			190,669
Income tax expense													(1,300		)	(3,007		)
Net income													210,597			187,662
Net income attributable to noncontrolling interest													(79		)	(63		)
Net income attributable to Equity Commonwealth													$	210,518		$	187,599
Preferred distributions	(1,997		)	(1,997		)	(3,994		)	(3,994		)	(1,997		)	(1,997		)
Net income (loss) attributable to Equity Commonwealth common shareholders	$	35,036		$	(7,806	)	$	220,638		$	14,011
Net income attributable to Equity Commonwealth common shareholders													$	208,521		$	185,602

Weighted average common shares outstanding — basic	121,822			124,067			122,839			124,057			121,960			123,867
Weighted average common shares outstanding — diluted	122,649			124,067			126,027			125,203			125,822			127,097
Earnings per common share attributable to Equity Commonwealth common shareholders:
Basic	$	0.29		$	(0.06	)	$	1.80		$	0.11		$	1.71		$	1.50
Diluted	$	0.29		$	(0.06	)	$	1.78		$	0.11		$	1.67		$	1.48

See accompanying notes.

EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(amounts in thousands)

(unaudited)

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Net income (loss) $ 37,047
$ (5,811 ) $ 224,709
$ 18,011

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivative instruments 339
(108 ) 456
(261 )
Unrealized gain on marketable securities 298
2,345
72
1,704
Total comprehensive income (loss) 37,684
(3,574 ) 225,237
19,454
Comprehensive (income) loss attributable to the noncontrolling interest (14 ) 2
(77 ) (6 )
Total comprehensive income (loss) attributable to Equity Commonwealth $ 37,670
$ (3,572 ) $ 225,160
$ 19,448



	Three Months Ended March 31,
	2019			2018
Net income	$	210,597		$	187,662

Other comprehensive income (loss), net of tax:
Unrealized gain on derivative instruments	—			117
Unrealized gain (loss) on marketable securities	342			(226		)
Total comprehensive income	210,939			187,553
Comprehensive income attributable to the noncontrolling interest	(79		)	(63		)
Total comprehensive income attributable to Equity Commonwealth	$	210,860		$	187,490

See accompanying notes.

EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in thousands, except share data)

(unaudited)


	Equity Commonwealth Shareholders																												Equity Commonwealth Shareholders
	Preferred Shares						Common Shares																						Preferred Shares						Common Shares
	Series D																												Series D
	Number of Shares	Preferred Shares		Cumulative Preferred Distributions			Number of Shares		Common Shares			Cumulative Common Distributions			Additional Paid in Capital			Cumulative Net Income		Cumulative Other Comprehensive Loss			Noncontrolling Interest			Total			Number of Shares	Preferred Shares		Cumulative Preferred Distributions			Number of Shares		Common Shares			Cumulative Common Distributions			Additional Paid in Capital			Cumulative Net Income		Cumulative Other Comprehensive Loss			Noncontrolling Interest			Total
Balance at December 31, 2017	4,915,196	$	119,263	$	(685,748	)	124,217,616		$	1,242		$	(3,111,868	)	$	4,380,313		$	2,596,259	$	(95	)	$	1,129		$	3,300,495
Reclassification pursuant to change in accounting principle	—	—		—			—		—			—			—			1,902		(1,902		)	—			—
Balance at December 31, 2018																													4,915,196	$	119,263	$	(693,736	)	121,572,155		$	1,216		$	(3,420,548	)	$	4,305,974		$	2,870,974	$	(342	)	$	1,197		$	3,183,998
Net income	—	—		—			—		—			—			—			224,632		—			77			224,709			—	—		—			—		—			—			—			210,518		—			79			210,597
Unrealized gain on derivative instruments	—	—		—			—		—			—			—			—		456			—			456
Unrealized gain on marketable securities	—	—		—			—		—			—			—			—		72			—			72			—	—		—			—		—			—			—			—		342			—			342
Repurchase of shares	—	—		—			(3,027,557	)	(30		)	—			(89,880		)	—		—			—			(89,910		)	—	—		—			(163,913	)	(2		)	—			(5,340		)	—		—			—			(5,342		)
Share-based compensation	—	—		—			292,614		3			—			9,822			—		—			655			10,480			—	—		—			491,383		5			—			3,585			—		—			337			3,927
Contributions	—	—		—			—		—			—			—			—		—			1			1
Distributions	—	—		(3,994		)	—		—			—			—			—		—			—			(3,994		)	—	—		(1,997		)	—		—			36			—			—		—			—			(1,961		)
Adjustment for noncontrolling interest	—	—		—			—		—			—			567			—		—			(567		)	—			—	—		—			—		—			—			341			—		—			(341		)	—
Balance at June 30, 2018	4,915,196	$	119,263	$	(689,742	)	121,482,673		$	1,215		$	(3,111,868	)	$	4,300,822		$	2,822,793	$	(1,469	)	$	1,295		$	3,442,309
Balance at March 31, 2019																													4,915,196	$	119,263	$	(695,733	)	121,899,625		$	1,219		$	(3,420,512	)	$	4,304,560		$	3,081,492	$	—		$	1,272		$	3,391,561



Balance at December 31, 2017	4,915,196	$	119,263	$	(685,748	)	124,217,616		$	1,242		$	(3,111,868	)	$	4,380,313		$	2,596,259	$	(95	)	$	1,129		$	3,300,495
Reclassification pursuant to change in accounting principle	—	—		—			—		—			—			—			1,902		(1,902		)	—			—
Net income	—	—		—			—		—			—			—			187,599		—			63			187,662
Unrealized gain on derivative instruments	—	—		—			—		—			—			—			—		117			—			117
Unrealized loss on marketable securities	—	—		—			—		—			—			—			—		(226		)	—			(226		)
Repurchase of shares	—	—		—			(3,027,557	)	(30		)	—			(89,880		)	—		—			—			(89,910		)
Share-based compensation	—	—		—			267,014		2			—			5,010			—		—			326			5,338
Distributions	—	—		(1,997		)	—		—			—			—			—		—			—			(1,997		)
Adjustment for noncontrolling interest	—	—		—			—		—			—			329			—		—			(329		)	—
Balance at March 31, 2018	4,915,196	$	119,263	$	(687,745	)	121,457,073		$	1,214		$	(3,111,868	)	$	4,295,772		$	2,785,760	$	(2,106	)	$	1,189		$	3,401,479

See accompanying notes.

EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	224,709		$	18,011		$	210,597		$	187,662
Adjustments to reconcile net income to cash provided by operating activities:
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation	21,740			41,237			7,403			11,279
Net amortization of debt discounts, premiums and deferred financing fees	1,446			1,562			165			801
Straight line rental income	(2,550		)	(8,930		)	(837		)	(1,528		)
Amortization of acquired real estate leases	1,562			4,955			53			997
Other amortization	3,505			5,607			1,034			1,628
Share-based compensation	10,480			10,732			3,927			5,338
Loss on asset impairment	12,087			19,714			—			12,087
Loss on marketable securities	4,987			—			—			4,987
Loss on early extinguishment of debt	6,403			63			—			4,867
Net gain on sale of properties	(232,148		)	(19,590		)	(193,037		)	(205,211		)
Change in assets and liabilities:
Rents receivable and other assets	(16,856		)	(19,902		)	(8,116		)	(11,410		)
Accounts payable, accrued expenses and other	(8,514		)	(10,469		)	(6,548		)	(10,082		)
Rent collected in advance	(2,971		)	1,166			(1,871		)	(1,786		)
Cash provided by operating activities	23,880			44,156
Cash provided by (used in) operating activities							12,770			(371		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate improvements	(32,203		)	(37,985		)	(14,340		)	(12,761		)
Insurance proceeds received	1,443			4,000			—			1,443
Proceeds from sale of properties, net	807,322			185,300			427,379			744,324
Purchase of marketable securities	—			(276,238		)
Proceeds from maturity of marketable securities							250,000			—
Proceeds from sale of marketable securities	23,933			—			—			18,613
Cash provided by (used in) investing activities	800,495			(124,923		)
Cash provided by investing activities							663,039			751,619

CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common shares	(89,910		)	(209		)	(5,342		)	(89,910		)
Payments on borrowings	(575,526		)	(42,124		)	(143		)	(175,265		)
Contributions from holders of noncontrolling interest	1			31
Distributions to common shareholders							(1,160		)	—
Distributions to preferred shareholders	(3,994		)	(3,994		)	(1,997		)	(1,997		)
Cash used in financing activities	(669,429		)	(46,296		)	(8,642		)	(267,172		)

Increase (decrease) in cash, cash equivalents, and restricted cash	154,946			(127,063		)
Increase in cash, cash equivalents, and restricted cash							667,167			484,076
Cash, cash equivalents, and restricted cash at beginning of period	2,360,590			2,101,206			2,404,101			2,360,590
Cash, cash equivalents, and restricted cash at end of period	$	2,515,536		$	1,974,143		$	3,071,268		$	2,844,666

See accompanying notes.

EQUITY COMMONWEALTH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(amounts in thousands)

(unaudited)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	17,704		$	28,416		$	7,714		$	14,631
Taxes paid, net	2,417			729
Taxes (refunded), net							(2		)	(2		)

NON-CASH INVESTING ACTIVITIES:
Decrease in accrued capital expenditures	$	(2,629	)	$	(2,456	)
(Decrease) increase in accrued capital expenditures							$	(10,633	)	$	103

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):


	June 30,				March 31,
	2018		2017		2019		2018
Cash and cash equivalents	$	2,507,117	$	1,967,549	$	3,069,501	$	2,837,671
Restricted cash	8,419		6,594		1,767		6,995
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	2,515,536	$	1,974,143	$	3,071,268	$	2,844,666

See accompanying notes.

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business

Equity Commonwealth, ~~(the Company)~~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 ~~real estate, primarily~~ office ~~buildings,~~properties in the United States.

On November 10, 2016, the Company converted to what is commonly referred to as an umbrella partnership real estate investment trust, or ~~UPREIT, structure.~~UPREIT. In connection with this conversion, the Company contributed substantially all of its assets to EQC Operating Trust, a Maryland real estate investment trust, ~~(the~~or the Operating ~~Trust),~~Trust, and the Operating Trust assumed substantially all of the Company’s liabilities pursuant to a contribution and assignment agreement between the Company and the Operating Trust.

The Company now conducts and intends to continue to conduct substantially all of its activities through the Operating Trust. The Company beneficially owned 99.96% of the outstanding shares of beneficial interest, designated as units, in the Operating Trust, ~~(OP Units)~~or OP Units, as of ~~June 30, 2018,~~March 31, 2019, and the Company is the sole trustee of the Operating Trust. As the sole trustee, the Company generally has the ~~exclusive~~ 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 ~~June 30, 2018,~~March 31, 2019, our portfolio consisted of 139 properties ~~(22~~(17 buildings), with a combined ~~6.3~~3.8 million square feet. As of ~~June 30, 2018,~~March 31, 2019, we had ~~$2.8~~$3.1 billion of cash and cash ~~equivalents and marketable securities.~~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 ~~adequate to make the information presented not misleading. However, the~~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, ~~(Annual Report)~~or our Annual Report, for the year ended December 31, ~~2017.~~2018. 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. ~~Reclassifications~~Certain reclassifications have been made to the prior ~~years’~~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 ~~allowance for doubtful accounts,~~assessment of the collectability of rental revenue, purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

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

Recent Accounting Pronouncements

In ~~June~~August 2018, the Financial Accounting Standards Board, ~~(FASB)~~or FASB, issued Accounting Standards Update, ~~(ASU)~~or ASU, 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of FASB Accounting Standards Codification, or ASC, 820. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. We do not expect the adoption of ASU 2018-13 to have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. This update is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. We do not expect the adoption of ASU 2018-07 to have a material impact on our consolidated financial statements.

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In May 2017, the FASB issued ASU 2017-09 Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 is designed to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for fiscal years beginning after December 15, ~~2017.~~2018, and for interim periods within those fiscal years. We adopted ASU ~~2017-09~~2018-07 on January 1, ~~2018,~~2019, and the adoption did not have a material impact on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. This update is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. We early adopted ASU 2017-01 effective January 1, 2017, and the adoption did not have a material impact on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05 Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 is designed to provide guidance on how to recognize gain and losses on sales, including partial sales, of nonfinancial assets to noncustomers. We adopted ASU 2017-05 on January 1, 2018 and the adoption did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which amends FASB Accounting Standards Codification (ASC) Topic 230, Statements of Cash Flows, to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.

We early adopted both ASU 2016-18 and ASU 2016-15 for the period ended December 31, 2017 and made the following reclassifications to the prior year's condensed consolidated statement of cash flows to conform to the current year's presentation (in thousands):

Statement of Cash Flows for the Six Months Ended June 30, 2017 Originally Reported Effect of Change As Adjusted
Cash provided by operating activities $ 45,864
$ (1,708 ) $ 44,156
Cash used in investing activities (126,693 ) 1,770
(124,923 )

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires more timely recognition of credit losses associated with financial assets. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. We are currently evaluating the impact, if any, that the adoption of ASU 2016-13 will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether ~~or not~~ the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes previous leasing standards. ~~ASU 2016-02 is effective for us for reporting periods beginning after December 15, 2018, with early adoption permitted. We are still assessing the impact of adopting ASU 2016-02.~~ For leases where we are the lessor, we ~~expect to~~ account for these leases using an approach that is substantially equivalent to ~~current guidance.~~previous guidance prior to the adoption of ASU 2016-02. Additionally, under ASU 2016-02, lessors may only capitalize incremental direct leasing costs. For leases in which we are the lessee, we ~~expect to~~ recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments, with rent expense being recognized on a straight-line basis and the right of use asset being reduced when lease payments are made.

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

In ~~January 2016,~~July 2018, the FASB issued ASU ~~2016-01, Financial Instruments-Overall: Recognition and Measurement~~2018-11 to provide entities with relief from the costs of ~~Financial Assets and Financial Liabilities, related to~~implementing certain aspects of ~~recognition, measurement, presentation,~~ASU 2016-02. The amendment to the new leases standard includes a practical expedient that provides lessors an option not to separate lease and ~~disclosure~~non-lease components when certain criteria are met and instead account for those components as a single component under the new leases standard. The amendment also provides a transition option that permits the application of ~~financial instruments. ASU 2016-01 will require entities to measure their equity investments at fair value and recognize any changes in fair value in net income, with certain exceptions,~~the new guidance as of the adoption date rather than ~~other comprehensive income. This update is effective~~to all periods presented. We elected the practical expedient to account for ~~fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.~~both our lease (primarily base rent) and non-lease (primarily tenant reimbursements) components as a single component under the leases standard and elected the new transition option. We adopted ~~ASU 2016-01~~these pronouncements on January 1, ~~2018 and reclassified a $1.9 million unrealized gain from cumulative other comprehensive loss to cumulative net income on our condensed consolidated balance sheet (see Note 8).~~

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The objective of ASU 2014-09, as amended, is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC, and more particularly lease contracts with customers, which are a scope exception. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted ASU 2014-09 on January 1, 20182019, and the adoption did not have a material impact on our consolidated financial ~~statements.~~statements, both as a lessor and as a lessee.

Certain reclassifications were made to conform the prior period to our presentation of the condensed consolidated statements of operations as a result of adopting ASU 2016-02. Amounts that were previously disclosed as "Tenant reimbursements and other income" are now included in "Rental revenue" and are no longer presented as a separate line item. Parking revenues that do not represent components of leases and were previously disclosed as "Rental income" are now included in "Other revenue." Subsequent to January 1, 2019, provisions for credit losses are included in "Rental revenue." Provisions for credit losses prior to January 1, 2019 were disclosed as "Operating expenses" and were not reclassified to conform prior periods to the current presentation.

Note 3. Real Estate Properties

During the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we made improvements, excluding tenant-funded improvements, to our properties totaling ~~$29.6~~$3.7 million and $~~31.8~~$12.9 million,, respectively.

~~Properties Held For Sale:~~

We classify all properties that meet the criteria outlined in the Property, Plant and Equipment Topic of the FASB ASC as held for sale on our condensed consolidated balance sheets. As of December 31, 2017, we classified 1600 Market Street as held for sale. This property was sold in February 2018. As of June 30, 2018, we did not have any properties classified as held for sale.

~~Summarized balance sheet information for the property classified as held for sale is as follows (in thousands):~~

December 31, 2017
Real estate properties $ 76,066
Rents receivable 13,270
Other assets, net 8,352
Assets held for sale $ 97,688

Accounts payable and accrued expenses $ 1,021
Rent collected in advance 408
Security deposits 411
Liabilities related to properties held for sale $ 1,840

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Property ~~Dispositions:~~Disposition:

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we sold the following ~~properties~~property (dollars in thousands):

Asset Date Sold Number of
Properties Number of
Buildings
Square
Footage
Gross Sales Price Gain on Sale
Properties
1600 Market Street February 2018 1
1
825,968
$ 160,000
$ 54,599
600 West Chicago Avenue(1)
February 2018 1
2
1,561,477
510,000
107,830
5073, 5075, & 5085 S. Syracuse Street March 2018 1
1
248,493
115,186
42,762
1601 Dry Creek Drive May 2018 1
1
552,865
68,500
26,992
4
5
3,188,803
$ 853,686
$ 232,183



Property	Date Sold	Number of Properties	Number of Buildings	Square Footage	Gross Sales Price		Gain on Sale
1735 Market Street(1)	March 2019	1	1	1,286,936	$	451,600	$	192,985

(1)

Certain of our subsidiaries sold 100% of the equity interests in the fee simple owner of this property. The sale of this property did not represent a strategic shift under ASC Topic 205. However, the sale does represent an individually significant disposition. The operating results of this property are included in ~~continued~~continuing operations for all periods ~~presented through the date of sale. Net income for this property was $0.2 million and $2.3 million for the three months ended June 30, 2018 and 2017, respectively, and~~ ~~$110.3 million~~ ~~and $5.0 million for the six months ended June 30, 2018 and 2017, respectively.~~

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

presented through the date of sale. Net income related to this property was $197.1 million and $1.8 million for the three months ended March 31, 2019 and 2018, respectively.

Lease Payments

The future minimum lease payments, excluding tenant reimbursement revenue, scheduled to be received by us during the current terms of our leases as of March 31, 2019 are as follows (in thousands):



2019	$	62,740
2020	71,503
2021	77,133
2022	68,176
2023	61,616
Thereafter	419,981
	$	761,149

Rental revenue consists of the following (in thousands):



	Three Months Ended March 31,
	2019		2018
Lease payments	$	27,905	$	39,536
Variable lease payments	10,985		15,737
Rental revenue	$	38,890	$	55,273

Note 4. Marketable Securities

~~During the six months ended June 30,~~As of December 31, 2018, our marketable securities consisted of United States Treasury notes and ~~common stock.~~were classified as available-for-sale. The United States Treasury notes ~~are classified~~matured in January and February 2019, and as ~~available-for-sale and mature in 2019. Available-for-sale securities are presented on our condensed consolidated balance sheets at fair value. Changes in values~~ of ~~the United States Treasury notes are recognized in accumulated other comprehensive loss.~~

~~On January 1, 2018~~March 31, 2019, we adopted ASU 2016-01 (see Note 2) and reclassified a $1.9 million unrealized gain from cumulative other comprehensive loss to cumulative net income on our condensed consolidated balance sheet. Changes in values of common stock are recognized in interest and other income, net on the condensed consolidated statements of operations. In March 2018, we sold all common stock we held and recognized a loss of $5.0 million in interest and other income, net during the six months ended June 30, 2018.do not have any marketable securities.

Below is a summary of our marketable securities as of ~~June 30, 2018 and~~ December 31, ~~2017~~2018 (in thousands):

June 30, 2018 December 31, 2017
Amortized Cost Unrealized Loss Estimated Fair Value Cost or Amortized Cost Unrealized Gain, Net Estimated Fair Value
Marketable securities $ 249,744
$ (1,469 ) $ 248,275
$ 276,567
$ 361
$ 276,928

The unrealized losses on our United States Treasury notes were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, we do not consider those investments to be other-than-temporarily impaired at June 30, 2018.



	December 31, 2018
	Amortized Cost		Unrealized Loss			Estimated Fair Value
Marketable securities	$	249,944	$	(342	)	$	249,602

Note 5. Indebtedness

~~Unsecured Revolving Credit Facility and Term Loan:~~

We are party to a credit agreement pursuant to which the lenders agreed to provide a $750.0 million unsecured revolving credit facility, a $200.0 million 5-year term loan facility and a $200.0 million 7-year term loan facility. The revolving credit facility has a scheduled maturity date of January 28, 2019, which maturity date may be extended for up to two additional periods of six months at our option subject to satisfaction of certain conditions and the payment of an extension fee of 7.5 basis points of the aggregate amount available under the revolving credit facility. On May 4, 2018, we redeemed at par the total

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~$400.0 million outstanding under our 5-year and 7-year term loans and recognized a loss on early extinguishment of debt of $1.5 million from the write off of unamortized deferred financing fees.~~

The credit agreement permits us to utilize up to $100.0 million of the revolving credit facility for the issuance of letters of credit. Amounts outstanding under the credit agreement generally may be prepaid at any time without premium or penalty, subject to certain exceptions. We have the right to request increases in the aggregate maximum amount of borrowings available under the revolving credit facility and term loans up to an additional $1.15 billion, subject to certain conditions.

Prior to the redemption of the term loans, borrowings under the 5-year term loan and 7-year term loan, subject to certain exceptions, had interest rates of LIBOR rate plus a margin of 90 to 180 basis points for the 5-year term loan and 140 to 235 basis points for the 7-year term loan, in each case depending on our credit rating. Borrowings under the revolving credit facility will, subject to certain exceptions, bear interest at a rate equal to, at our option, either a LIBOR rate or a base rate plus a margin of 87.5 to 155 basis points for LIBOR rate advances and 0 to 55 basis points for base rate advances, in each case depending on our credit rating. In addition, we are required to pay a facility fee of 12.5 to 30 basis points, depending on our credit rating, on the borrowings available under the revolving credit facility, whether or not utilized.

Borrowings under our revolving credit facility currently bear interest at LIBOR plus a spread, which was 105 basis points as of June 30, 2018. As of June 30, 2018, the interest rate payable on borrowings under our revolving credit facility was 3.14%. As of June 30, 2018, we had no balance outstanding and $750.0 million available under our revolving credit facility and the facility fee as of June 30, 2018 was 20 basis points.

Debt Covenants:

Our public debt indenture and related supplements ~~and our credit agreement~~ contain a number of financial ~~and other~~ratio covenants ~~including covenants~~ that generally restrict our ability to incur ~~indebtedness or to make distributions under certain circumstances~~debts, in excess of calculated amounts, and require us to maintain other financial ~~ratios and a minimum net worth.~~ratios. At ~~June 30, 2018,~~March 31, 2019, we believe we were in compliance with all of our respective covenants under our public debt indenture and related ~~supplements and our credit agreement.~~supplements.

Senior Unsecured Notes:

At ~~June 30, 2018,~~March 31, 2019, we had senior unsecured notes of $250.0 million (excluding net discounts and unamortized deferred financing fees) maturing in 2020.

On March 7, 2018, we redeemed at par all $175.0 million of our 5.75% senior unsecured notes due 2042 and recognized a loss on early extinguishment of debt of $4.9 million from the write off of unamortized deferred financing fees.

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Mortgage ~~Notes~~Note Payable:

At ~~June 30, 2018, two~~March 31, 2019, one of our properties with an aggregate net book value of ~~$51.6~~$44.3 million had a secured mortgage ~~notes~~note totaling ~~$32.0~~$26.3 million (including a net ~~premiums~~premium and unamortized deferred financing fees) maturing in ~~2021 and 2026.~~2021.

Note 6. Shareholders’ Equity

Common Share Issuances:

See Note 1110 for information regarding equity issuances related to share-based compensation.

Common Share Repurchases:

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~price of $29.67 per~~under our share ~~for a total investment of $88.1 million, of which $69.0 million was under the March 2017 authorization and $19.1 million was under the March 2018 authorization.~~repurchase program. The ~~$130.9~~$150.0 million of remaining authorization available under our share repurchase program as of ~~June 30, 2018~~March 31, 2019 is scheduled to expire on March ~~14, 2019.~~13, 2020.

During the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ certain of our employees surrendered ~~57,348~~163,913 and ~~6,694~~57,348 common shares owned by them, respectively, to satisfy their statutory tax withholding obligations in connection with the vesting of such common shares.

Common Share and Unit Distribution:

On September 26, 2018, our Board of Trustees declared a special, one-time cash distribution of $2.50 per common share/unit to shareholders/unitholders of record on October 9, 2018. On October 23, 2018, we paid this distribution to such shareholders/unitholders in the aggregate amount of $304.7 million. In February 2019, the number of earned awards for certain recipients of the Company's restricted stock units was determined. Pursuant to the terms of such awards, we paid a one-time catch-up cash distribution of $2.50 per common share/unit to these recipients in the aggregate amount of $1.2 million upon such determination.

Preferred Share Distributions:

In ~~2018,~~2019, 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 12, 2018 January 30, 2018 February 15, 2018 $ 0.40625
April 11, 2018 April 27, 2018 May 15, 2018 $ 0.40625
July 12, 2018 July 30, 2018 August 15, 2018 $ 0.40625



Declaration Date	Record Date	Payment Date	Series D Dividend Per Share
January 11, 2019	January 30, 2019	February 15, 2019	$	0.40625
April 11, 2019	April 29, 2019	May 15, 2019	$	0.40625

Note 7. Noncontrolling Interest

Noncontrolling interest represents the portion of the ~~units in the Operating Trust~~OP Units not beneficially owned by the Company. AnThe ownership of an OP Unit and a common share of ~~our common stock~~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 will have 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 ~~June 30, 2018,~~March 31, 2019, the portion of the Operating Trust not beneficially owned by the Company is in the form of OP Units and LTIP Units (see Note 1110 for a description of LTIP Units). LTIP Units may be subject to additional vesting requirements.

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents the changes in Equity Commonwealth’s issued and outstanding common shares and units for the ~~six~~three months ended ~~June 30, 2018:~~

March 31, 2019:

Common Shares OP Units and LTIP Units Total
Outstanding at January 1, 2018 124,217,616
42,520
124,260,136
Repurchase of shares (2,970,209 ) —
(2,970,209 )
Restricted share, time-based LTIP Unit grants and vested restricted stock units, net of forfeitures 235,266
3,200
238,466
Outstanding at June 30, 2018 121,482,673
45,720
121,528,393
Noncontrolling ownership interest in the Operating Trust

0.04 %



	Common Shares		OP Units and LTIP Units	Total
Outstanding at January 1, 2019	121,572,155		45,720	121,617,875
Repurchase of shares	(163,913	)	—	(163,913	)
Restricted share grants and vested restricted stock units	491,383		—	491,383
Outstanding at March 31, 2019	121,899,625		45,720	121,945,345
Noncontrolling ownership interest in the Operating Trust				0.04	%

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~~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 99.96% ~~and 99.97%~~ for the three ~~and six~~ months ended ~~June 30, 2018, respectively.~~March 31, 2019.

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Note 8. Cumulative Other Comprehensive Loss

The following table presents the amounts recognized in cumulative other comprehensive loss for the three ~~and six~~ months ended ~~June 30, 2018 (in thousands):~~

Unrealized Loss on Derivative Instruments Unrealized Loss on Marketable Securities Total
Balance as of April 1, 2018 $ (339 ) $ (1,767 ) $ (2,106 )

Other comprehensive income before reclassifications 17
298
315
Amounts reclassified from cumulative other comprehensive loss to net income (loss) 322
—
322
Net current period other comprehensive income 339
298
637

Balance as of June 30, 2018 $ —
$ (1,469 ) $ (1,469 )

Unrealized Loss on Derivative Instruments Unrealized Gain (Loss) on Marketable Securities Total
Balance as of January 1, 2018 $ (456 ) $ 361
$ (95 )

Amounts reclassified from cumulative other comprehensive loss to cumulative net income pursuant to a change in accounting principle —
(1,902 ) (1,902 )

Other comprehensive income before reclassifications 84
72
156
Amounts reclassified from cumulative other comprehensive loss to net income (loss) 372
—
372
Net current period other comprehensive income 456
72
528

Balance as of June 30, 2018 $ —
$ (1,469 ) $ (1,469 )

~~The following table presents reclassifications out of cumulative other comprehensive loss for the three and six months ended June 30, 2018~~March 31, 2019 (in thousands):

Amounts Reclassified from Cumulative Other Comprehensive Loss to Net Income (Loss)
Details about Cumulative Other Comprehensive Loss Components Three Months Ended June 30, 2018 Six Months Ended June 30, 2018 Affected Line Items in the Statement of Operations
Interest rate cap contract $ 29
$ 79
Interest expense
Interest rate cap contract 293
293
Interest and other income, net
$ 322
$ 372



	Unrealized Loss on Marketable Securities
Balance as of January 1, 2019	$	(342	)

Other comprehensive income before reclassifications	342
Net current period other comprehensive income	342

Balance as of March 31, 2019	$	—

Note 9. 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. We are also subject to certain state and local taxes without regard to our REIT status.

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Our provision for income taxes consists of the following (in thousands):

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Current:
State and local $ 456
$ (45 ) $ (2,551 ) $ (215 )
Federal —
—
—
(5 )
Income tax benefit (expense) 456
(45 ) $ (2,551 ) $ (220 )

~~The tax expense recorded in the current period is the result of the taxable gains from sales of properties during the six months ended June 30, 2018.~~

~~Note 10. Derivative Instruments~~

~~Risk Management Objective of Using Derivatives~~

~~We are exposed to certain risks relating to our ongoing business operations, including the effect of changes in interest rates.~~

We may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to reduce the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. We do not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To reduce this risk, we only enter into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which we and our affiliates may also have other financial relationships.

~~Cash Flow Hedges of Interest Rate Risk~~

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate caps as part of our interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in cumulative other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2018, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

On May 8, 2018, we terminated an interest rate cap that had a LIBOR strike price of 2.50%, a notional amount of $400.0 million and a maturity date of March 1, 2019. We recognized $0.3 million of expense in interest and other income, net on the condensed consolidated statement of operations for the three and six months ended June 30, 2018 related to the early termination of the interest rate cap agreement. As of June 30, 2018, we do not have any outstanding interest rate derivatives designated as cash flow hedges of interest rate risk.

The table below presents the fair value of derivative financial instruments as well as classification on the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017 (amounts in thousands):

Fair Value as of
Interest Rate Derivative Designated as Hedging Instrument Balance Sheet Location June 30,
2018 December 31,
2017
Interest rate cap Other assets $ —
$ 17



	Three Months Ended March 31,
	2019			2018
Current:
State and local	$	(300	)	$	(3,007	)

Deferred:
State and local	(1,000		)	—

Income tax expense	$	(1,300	)	$	(3,007	)

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for~~During the three ~~and six~~ months ended ~~June 30, 2018 and 2017 (amounts in thousands):~~

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Amount of gain (loss) recognized in cumulative other comprehensive loss (effective portion) $ 17
$ (114 ) $ 84
$ (268 )
Amount of loss reclassified from cumulative other comprehensive loss into interest expense (effective portion) 29
6
79
7
Amount of loss recognized in income (ineffective portion and amount excluded from effectiveness testing) 293
—
293
—
March 31, 2019, we recorded $1.0 million related to an uncertain tax position, as part of our income tax provision.

Note ~~11.~~10. Share-Based Compensation

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

Recipients of the Company’s restricted stock units, ~~(RSUs)~~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 of 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, ~~(TSR)~~or TSR, relative to the TSRs of the companies that comprise the NAREIT Office Index over a three-year performance period. Following the end of the three-year performance period, the number of earned awards will be determined. The earned awards vest in two tranches with 50% of the earned award vesting following the end of the performance period on the date the Compensation Committee of our Board of Trustees, ~~(the Committee)~~or the Committee, determines the level of achievement of the performance metric and the remaining 50% of the earned award vesting approximately one year thereafter, subject to the grant recipient’s continued employment. Compensation expense for the RSUs is determined using a Monte Carlo simulation model and is recognized ratably from the grant date to the vesting date of each tranche.

LTIP Units are a class of beneficial interests in the Operating Trust that may be issued to employees, officers or trustees of the Operating Trust, the Company or their subsidiaries, ~~(LTIP Units).~~or LTIP Units. 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.

~~2018~~2019 Equity Award Activity

On ~~June 20, 2018,~~January 29, 2019, the Committee approved grants in ~~accordance with~~the aggregate amount of 112,359 restricted shares and 228,128 RSUs at target (568,609 RSUs at maximum) to the Company’s ~~compensation plan for independent~~officers, certain employees and to Mr. Zell, the Chairman of our Board of Trustees, ~~the Committee awarded each of the nine independent Trustees $0.1 million in restricted shares or time-based LTIP Units~~ as part of their compensation for ~~the 2018-2019~~fiscal year ~~of service~~2018. The restricted shares granted on ~~the Board of Trustees. These awards equated to 3,200 shares or time-based LTIP Units per Trustee, for a total of 25,600 shares and 3,200 time-based LTIP Units,~~January 29, 2019 were valued at ~~$31.25~~$31.77 per share, ~~and unit,~~ the closing price of our common shares on the ~~New York Stock Exchange (NYSE)~~NYSE on that day. ~~These shares~~The assumptions and ~~time-based LTIP Units vest one year after~~fair value for the ~~date of~~RSUs granted during the ~~award.~~three months ended March 31, 2019 are included in the following table on a per share basis.



	2019
Fair value of RSUs granted	$	39.65
Expected term (years)	4
Expected volatility	13.98		%
Risk-free rate	2.52		%

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

2018 Equity Award Activity

On January 29, 2018, the Committee approved ~~a grant~~grants in the aggregate amount of 125,409 restricted shares and 254,615 RSUs at target (634,628 RSUs at maximum) to the Company’s officers, certain employees and to Mr. Zell, the Chairman of our Board of Trustees, as part of their compensation for fiscal year 2017. The restricted shares ~~granted on January 29, 2018~~ were valued at $29.78 per share, the closing price of our common shares on the NYSE on ~~that day. The assumptions and fair value for the RSUs granted during the six months ended June 30, 2018 are included in the following table on a per share basis.~~

2018
Fair value of RSUs granted $ 37.13
Expected term (years) 4
Expected volatility —
Expected dividend yield 1.68 %
Risk-free rate 2.26 %

~~2017 Equity Award Activity~~

On June 20, 2017, in accordance with the Company’s compensation plan for independent Trustees, the Committee awarded each of the nine independent Trustees $0.1 million in restricted shares or time-based LTIP Units as part of their compensation for the 2017-2018 year of service on the Board of Trustees. These awards equated to 3,156 shares or time-based LTIP Units per Trustee, for a total of 25,248 shares and 3,156 time-based LTIP Units, valued at $31.69 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 20, 2018.

On January 24, 2017, the Committee approved a grant of 39,364 time-based LTIP Units, 79,924 market-based LTIP Units at target (199,211 market-based LTIP Units at maximum), 76,424 restricted shares and 155,168 RSUs at target (386,756 RSUs at maximum) to the Company’s officers, certain employees and to Mr. Zell, the Chairman of our Board of Trustees, as part of their compensation for fiscal year 2016. The restricted shares and time-based LTIP Units were valued at $31.47 per share and 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 ~~$39.81~~$37.13 per share, ~~and unit,~~ their fair value on the grant date.

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Outstanding Equity Awards

As of ~~June 30, 2018,~~March 31, 2019, the estimated future compensation expense for all unvested restricted shares and time-based LTIP Units was ~~$9.7~~$8.6 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 ~~2.2~~2.8 years.

As of ~~June 30, 2018,~~March 31, 2019, the estimated future compensation expense for all unvested RSUs and market-based LTIP Units was ~~$18.1~~$19.0 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~~2.6 years.

During the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we recorded ~~$5.1~~$3.9 million and ~~$5.5 million, respectively, and during the six months ended June 30, 2018 and 2017, we recorded $10.5 million and $10.7~~$5.3 million, respectively, of compensation expense, net of forfeitures, in general and administrative expense for grants to our trustees and employees related to our equity compensation plans. ~~The $10.5 million of compensation~~Compensation expense recorded during the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 includes $0.5 million and $0.4 million, respectively, of accelerated vesting due to a staffing ~~reduction.~~reductions. Forfeitures are recognized as they occur. At ~~June 30, 2018, 839,470~~March 31, 2019, 384,156 shares/units remain available for issuance under the Equity Commonwealth 2015 Omnibus Incentive Plan, as amended.

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Note ~~12.~~11. Fair Value of Assets and Liabilities

~~The table below presents~~As of March 31, 2019, we do not have any assets measured at fair ~~value during 2018, categorized by the level of inputs used in the valuation of the assets (dollars in thousands):~~

Fair Value at June 30, 2018 Using

Quoted Prices in Active Markets for
Identical Assets

Significant Other
Observable Inputs

Significant Unobservable
Inputs
Description Total (Level 1) (Level 2) (Level 3)
Recurring Fair Value Measurements:
Marketable securities $ 248,275
$ 248,275
$ —
$ —

~~Properties Held and Used~~

As part of our office repositioning strategy adopted by our Board of Trustees, and pursuant to our accounting policy, in 2018, we evaluated the recoverability of the carrying values of each of the real estate assets that comprised our portfolio and determined that due to the shortening of the expected periods of ownership as a result of the office repositioning strategy and current estimates of market value less estimated costs to sell, it was necessary to reduce the net book value of a portion of the real estate assets in our portfolio to their estimated fair values. We anticipate the potential disposition of certain properties prior to the end of their remaining useful lives. As a result, in the first quarter of 2018, we recorded an impairment charge related to 777 East Eisenhower Parkway and 97 Newberry Road of $12.1 million in accordance with our impairment analysis procedures. We determined this impairment based on independent third party broker information, which are level 3 inputs according to the fair value hierarchy established in ASC 820. We reduced the aggregate carrying value of these properties from $41.8 million to their estimated fair value less estimated costs to sell of $29.7 million. We evaluated each of our properties and determined there were no additional valuation adjustments necessary at June 30, 2018.value.

Financial Instruments

~~In addition to the assets described in the above table, our~~Our financial instruments include our cash and cash equivalents, ~~real estate mortgage receivable,~~ restricted cash, marketable securities, senior unsecured debt and mortgage ~~notes~~note payable. At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the fair value of these additional financial instruments were not materially different from their carrying values, except as follows (in thousands):

June 30, 2018 December 31, 2017
Carrying Amount Fair Value Carrying Amount Fair Value
Senior unsecured debt and mortgage notes payable $ 281,414
$ 290,638
$ 856,940
$ 874,280



	March 31, 2019				December 31, 2018
	Principal Balance		Fair Value		Principal Balance		Fair Value
Senior unsecured debt and mortgage note payable	$	275,856	$	282,710	$	276,000	$	283,214

The fair values of our senior notes are based on quoted market prices (level 2 inputs), and the fair ~~values~~value of our mortgage ~~notes~~note payable ~~are~~is based on estimates using discounted cash flow analyses and currently prevailing interest rates adjusted by credit risk spreads (level 3 inputs).

Other financial instruments that potentially subject us to concentrations of credit risk consist principally of rents receivable; however, as of ~~June 30, 2018,~~March 31, 2019, no single tenant of ours is responsible for more than ~~6.5%~~10.0% of our total annualized rents, other than one tenant that is responsible for ~~12.5%~~18.2% of our total annualized rents.

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note ~~13.~~12. 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 June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Numerator for earnings per common share - basic:
Net income (loss)	$	37,047		$	(5,811	)	$	224,709		$	18,011
Net (income) loss attributable to noncontrolling interest	(14		)	2			(77		)	(6		)
Net income													$	210,597		$	187,662
Net income attributable to noncontrolling interest													(79		)	(63		)
Preferred distributions	(1,997		)	(1,997		)	(3,994		)	(3,994		)	(1,997		)	(1,997		)
Numerator for net income (loss) per share - basic	$	35,036		$	(7,806	)	$	220,638		$	14,011
Numerator for net income per share - basic													$	208,521		$	185,602

Numerator for earnings per common share - diluted:
Net income (loss)	$	37,047		$	(5,811	)	$	224,709		$	18,011
Net income													$	210,597		$	187,662
Net income attributable to noncontrolling interests	(14		)	—			(77		)	—			(79		)	—
Preferred distributions	(1,997		)	(1,997		)	—			(3,994		)
Numerator for net income (loss) per share - diluted	$	35,036		$	(7,808	)	$	224,632		$	14,017
Numerator for net income per share - diluted													$	210,518		$	187,662

Denominator for earnings per common share - basic and diluted:
Weighted average number of common shares outstanding - basic(1)	121,822			124,067			122,839			124,057			121,960			123,867
RSUs(2)	762			—			746			1,043			1,124			730
LTIP Units(3)	65			—			79			103			175			136
OP Units(4)													—			1
Series D preferred shares; 6 1/2% cumulative convertible~~(4)~~	—			—			2,363			—			2,563			2,363
Weighted average number of common shares outstanding - diluted	122,649			124,067			126,027			125,203			125,822			127,097

Net income (loss) per common share attributable to Equity Commonwealth common shareholders:
Net income per common share attributable to Equity Commonwealth common shareholders:
Basic	$	0.29		$	(0.06	)	$	1.80		$	0.11		$	1.71		$	1.50
Diluted	$	0.29		$	(0.06	)	$	1.78		$	0.11		$	1.67		$	1.48

Anti-dilutive securities:
Effect of Series D preferred shares; 6 1/2% cumulative convertible(4)	2,363			2,363			—			2,363
Effect of RSUs(2)	—			1,063			—			—
Effect of LTIP Units	42			126			42			—			42			—
Effect of OP Units(5)	1			—			1			—
Effect of OP Units(4)													4			—


(1)	The three months ended ~~June 30,~~March 31, 2019 and 2018, includes 187 and ~~2017, includes 362 and 0~~307 weighted-average, unvested, ~~measured RSUs, respectively, and the six months ended June 30, 2018 and 2017, includes 335 and 0 weighted-average, unvested, measured~~earned RSUs, respectively.


(2)	Represents weighted-average number of common shares that would have been issued if the quarter-end was the measurement date for RSUs.


(3)	Represents the weighted-average dilutive shares issuable from LTIP Units if the quarter-end was the measurement date for the periods shown.


(4)	The Series D preferred shares are excluded from the diluted earnings per share calculation for the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2017 because including the Series D preferred shares would also require that the preferred distributions be added back to net income, resulting in anti-dilution.

~~EQUITY COMMONWEALTH~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~


~~(5)~~	Beneficial interests in the Operating Trust.

Note ~~14.~~13. Segment Information

Our primary business is the ownership and operation of office properties, and we currently have one reportable segment. More than 90% of our revenues for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 were from office properties.

EQUITY COMMONWEALTH

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note ~~15.~~14. Related Person Transactions

The following discussion includes a description of our related person transactions for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

Two North Riverside Plaza Joint Venture Limited Partnership: We have a lease with Two North Riverside Plaza Joint Venture Limited Partnership, an entity associated with Mr. Zell, our Chairman, to occupy office space on the twentieth and twenty-first floors of Two North Riverside Plaza in Chicago, Illinois (20th/21st Floor Office Lease). The initial term of the lease is approximately five years, expiring in December 2020, with one 5-year renewal option. We ~~completed~~made improvements to the office space utilizing the $0.7 million tenant improvement allowance pursuant to the lease. In connection with the 20th/21st Floor Office Lease, we also have a storage lease with Two North Riverside Plaza Joint Venture Limited Partnership for storage space in the basement of Two North Riverside Plaza. The storage lease expires December 31, 2020; however, each party has the right to terminate on 30 days' prior written notice. During the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we recognized expense of $0.2 million and $0.2 ~~million, respectively, and during the six months ended June 30, 2018 and 2017, we recognized expense of $0.4 million and $0.4~~ million, respectively, pursuant to the 20^th/21^st Floor Office Lease and the related storage space.

Note ~~16.~~15. Subsequent Events

On ~~July 12, 2018, we announced that~~April 11, 2019, our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which will be paid on ~~August~~May 15, ~~2018~~2019 to shareholders of record on ~~July 30, 2018 (see Note 6).~~April 29, 2019.

On April 23, 2019, we sold 600 108^th Avenue NE in Bellevue, WA, for a gross price of $195.0 million. The property includes a 254,510 square foot office building and additional development rights.

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.~~laws including, but not limited to, statements pertaining to our capital resources, portfolio performance, results of operations or anticipated market conditions. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in market conditions are forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

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

OVERVIEW

We are an internally managed and self-advised REIT primarily engaged in the ownership and operation of office ~~buildings~~properties in the United States. We were formed in 1986 under Maryland law. ~~On November 10, 2016, we converted to~~The Company operates as what is commonly referred to as an umbrella partnership real estate investment trust, or UPREIT, ~~structure. Substantially~~conducting substantially all of its activities through the ~~Company’s assets and liabilities are now held in an~~ Operating ~~Trust through which the Company conducts its business.~~Trust.

At ~~June 30, 2018,~~March 31, 2019, our portfolio consisted of 139 properties ~~(22~~(17 buildings), with a combined ~~6.3~~3.8 million square feet for a total undepreciated book value of ~~$1.3 billion at cost~~$814.5 million and a depreciated book value of ~~$0.9 billion.~~$569.0 million. We currently have one property totaling 1.1 million square feet for sale.

As of ~~June 30, 2018,~~March 31, 2019, our overall portfolio was ~~89.8%~~94.4% leased. During the three months ended ~~June 30, 2018,~~March 31, 2019, we entered into leases, excluding leasing activity for assets during the quarter in which the asset was sold, ~~or classified as held~~ for ~~sale for 292,000~~108,000 square feet, including lease renewals for ~~103,000~~95,000 square feet and new leases for ~~189,000~~13,000 square feet. Renewal leases entered into during the three months ended ~~June 30, 2018~~March 31, 2019 had weighted average cash and GAAP rental rates that were approximately ~~12.0%~~8.2% higher and ~~20.2%~~18.4% higher, respectively, compared to prior rental rates for the same space, and new leases entered into during the three months ended ~~June 30, 2018~~March 31, 2019 had weighted average cash and GAAP rental rates that were approximately ~~9.6%~~4.7% higher and ~~25.5%~~7.4% higher, respectively, than 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 ~~years~~length of term for the newly executed leases compared to the prior leases.

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we sold ~~four properties (five buildings) with a combined 3.2~~one 1.3 million square ~~feet~~foot property (one building) for ~~an aggregate~~a gross ~~sales~~sale price of ~~$853.7~~$451.6 million, excluding ~~closing~~ credits and closing costs. ~~We have generated significant proceeds from our dispositions to date~~On April 23, 2019, we sold 600 108^th Avenue NE in Bellevue, WA, for a gross price of $195.0 million. The property includes a 254,510 square foot office building and ~~have cash and cash equivalents and marketable securities of $2.8 billion as of June 30, 2018.~~additional development rights. For more information regarding these transactions, see ~~Note~~Notes 3 and 15 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly ~~Report.~~Report on Form 10-Q. We have generated significant proceeds from our dispositions to date and have cash and cash equivalents of $3.1 billion as of March 31, 2019. As we have sold assets, our income from operations has also declined.

The taxable gain from sales of properties during the six months ended June 30, 2018 resulted in the state income tax provision shown in the financial statements. Although we did not make a distribution to common shareholders in 2017 or the first two quarters of 2018, we expect to make a distribution for 2018.

We have engaged CBRE, Inc. ~~(CBRE)~~, or CBRE, to provide property management services for our properties. 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 ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we incurred expenses of ~~$2.2~~$1.8 million and ~~$4.9 million, respectively, and for the six months ended June 30, 2018 and 2017, we incurred expenses of $5.2 million and $10.1~~$3.0 million, respectively, related to our property management agreement with CBRE, for property management fees, typically calculated as a ~~portion~~percentage of ~~the properties'~~property revenues, and salary and benefits reimbursements for property personnel, such as property managers, engineers and maintenance staff. As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, we had amounts payable pursuant to these services of ~~$1.0~~$0.8 million and ~~$1.8~~$0.8 million, respectively.

We continue to execute our office repositioning strategy to own and acquire at a discount to replacement cost high-quality, multi-tenant office assets in markets and sub-markets with favorable long-term supply and demand fundamentals. We expect our efforts in the office sector to continue to be primarily focused on larger buildings in central business districts and major urban areas that offer an attractive quality of life, including opportunities for tenants to live and play in close proximity to where they work, with a preference for markets that have above average limitations on new supply. We currently target ~~our~~such efforts towards acquiring portfolios of properties or pursuing other large acquisitions as opposed to purchasing individual properties, although we may acquire individual properties if opportunities to do so are consistent with our strategy. The set of opportunities that we pursue in the future may include acquisitions in the office sector as well as other property types in order to create a foundation for long-term growth.

In executing this strategy, we may sell additional properties, depending on market conditions. With the progress we have had executing dispositions, and the strength and liquidity of our balance sheet, we are in a position to increasingly shift our focus to capital allocation. We intend to use ~~this~~our capital to purchase new properties or businesses, repay debt, buy back common shares or make other investments or distributions that further our long-term strategic goals.

We may be unable to identify suitable opportunities. If we do not redeploy capital, we will strive to achieve a sale or liquidation of the Company in a manner that optimizes shareholder value. We are unable to predict if or when we will make a determination to sell or liquidate the Company.

As part of the office repositioning strategy noted above, and pursuant to our accounting policy, in 2018, we evaluated the recoverability of the carrying values of each of the real estate assets that comprised our portfolio and determined that due to the shortening of the expected periods of ownership as a result of our office repositioning strategy and current estimates of market value less estimated costs to sell, it was necessary to reduce the net book value of a portion of the real estate assets in our portfolio to their estimated fair values. We anticipate the potential disposition of certain properties prior to the end of their remaining useful lives. As a result, in the first quarter of 2018, we recorded an impairment charge related to 777 East Eisenhower Parkway and 97 Newberry Road of $12.1 million in accordance with our impairment analysis procedures.

Property Operations

Leased occupancy data for ~~2018~~2019 and ~~2017~~2018 are as follows (square feet in thousands):


	All Properties(1)				Comparable Properties(2)				All Properties(1)				Comparable Properties(2)
	As of June 30,				As of June 30,				As of March 31,				As of March 31,
	2018		2017		2018		2017		2019		2018		2019		2018
Total properties	13		21		13		13		9		13		9		9
Total square feet	6,341		11,651		6,341		6,324		3,833		6,344		3,833		3,841
Percent leased(3)	89.8	%	88.4	%	89.8	%	87.5	%	94.4	%	88.6	%	94.4	%	92.3	%


(1)	Excludes properties sold or classified as held for sale in the period.


(2)	Based on properties owned continuously from January 1, ~~2017~~2018 through ~~June 30, 2018,~~March 31, 2019, and excludes properties sold or classified as held for sale during the period.


(3)	Percent leased includes ~~(i)~~space subject to leases that have commenced, space being fitted out for occupancy pursuant to existing leases, and ~~(ii)~~ space ~~which~~that is leased but is not occupied or is being offered for sublease by tenants.

The weighted average lease term based on square feet for leases entered into during the three months ended ~~June 30, 2018~~March 31, 2019 was ~~9.4~~4.5 years. Commitments made for leasing expenditures and concessions, such as tenant improvements and leasing commissions, for leases entered into during the three months ended ~~June 30, 2018~~March 31, 2019 totaled ~~$17.4~~$2.7 million, or ~~$59.54~~$24.78 per square foot on average (approximately ~~$6.36~~$5.56 per square foot per year of the lease term).

As of ~~June 30, 2018,~~March 31, 2019, approximately ~~1.7%~~7.8% of our leased square feet and ~~2.2%~~8.6% of our annualized rental revenue, determined as set forth below, are included in leases scheduled to expire through December 31, ~~2018. Renewed~~2019. 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 ~~2018,~~2019, that have not been backfilled, are ~~slightly below~~above market. Lease expirations by year, as of ~~June 30, 2018,~~March 31, 2019, are as follows (square feet and dollars in thousands):


Year		Number of Tenants Expiring	Leased Square Feet Expiring(1)	% of Leased Square Feet Expiring(1)		Cumulative % of Leased Square Feet Expiring(1)		Annualized Rental Revenue Expiring(2)		% of Annualized Rental Revenue Expiring		Cumulative % of Annualized Rental Revenue Expiring			Number of Tenants Expiring	Leased Square Feet Expiring(1)	% of Leased Square Feet Expiring(1)		Cumulative % of Leased Square Feet Expiring(1)		Annualized Rental Revenue Expiring(2)		% of Annualized Rental Revenue Expiring		Cumulative % of Annualized Rental Revenue Expiring
2018		18	99	1.7	%	1.7	%	$	3,646	2.2	%	2.2	%
2019		50	564	9.9	%	11.6	%	21,196		12.5	%	14.7	%		25	281	7.8	%	7.8	%	$	10,215	8.6	%	8.6	%
2020		37	876	15.4	%	27.0	%	31,454		18.6	%	33.3	%		26	134	3.7	%	11.5	%	5,663		4.7	%	13.3	%
2021		37	268	4.7	%	31.7	%	8,451		5.0	%	38.3	%		31	246	6.8	%	18.3	%	10,078		8.5	%	21.8	%
2022		32	406	7.1	%	38.8	%	13,758		8.1	%	46.4	%		21	291	8.0	%	26.3	%	13,131		11.0	%	32.8	%
2023		35	440	7.7	%	46.5	%	16,618		9.8	%	56.2	%		22	286	7.9	%	34.2	%	11,895		10.0	%	42.8	%
2024		15	268	4.7	%	51.2	%	8,203		4.8	%	61.0	%		20	299	8.3	%	42.5	%	11,031		9.2	%	52.0	%
2025		13	209	3.7	%	54.9	%	8,271		4.9	%	65.9	%		9	99	2.7	%	45.2	%	3,785		3.2	%	55.2	%
2026		9	139	2.4	%	57.3	%	5,039		3.0	%	68.9	%		8	80	2.2	%	47.4	%	3,398		2.8	%	58.0	%
2027		11	198	3.5	%	60.8	%	7,502		4.4	%	73.3	%		3	87	2.5	%	49.9	%	3,348		2.8	%	60.8	%
2028															3	59	1.6	%	51.5	%	2,868		2.4	%	63.2	%
Thereafter		35	2,227	39.2	%	100.0	%	45,223		26.7	%	100.0	%		11	1,755	48.5	%	100.0	%	43,895		36.8	%	100.0	%
		292	5,694	100.0	%			$	169,361	100.0	%				179	3,617	100.0	%			$	119,307	100.0	%

Weighted average remaining lease term (in years):	Weighted average remaining lease term (in years):		7.1					6.0						Weighted average remaining lease term (in years):		8.2					7.8

(1)

Leased Square ~~footage~~Feet as of ~~June 30, 2018~~March 31, 2019 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. The ~~year expiring~~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.

(2)

Annualized rental revenue is annualized contractual rents from our tenants pursuant to leases which have commenced as of ~~June 30, 2018,~~March 31, 2019, plus estimated recurring expense ~~reimbursements; includes triple net lease rents and~~reimbursements. Annualized rental revenue 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. ~~Excludes the annualized rental revenue of space that is leased but not commenced.~~

A 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 ~~June 30, 2018,~~March 31, 2019, tenants representing 1.5% or more of our total annualized rental revenue were as follows (square feet in thousands):


Tenant	Tenant	Square Feet(1)	% of Total Square Feet(1)		% of Annualized Rental Revenue(2)		Weighted Average Remaining Lease Term	Tenant	Square Feet(1)	% of Total Leased Square Feet(1)		% of Annualized Rental Revenue(2)		Weighted Average Remaining Lease Term
1.	Expedia, Inc.	427	7.5	%	12.5	%	1.5	Expedia, Inc.(3)	427	11.8	%	18.2	%	0.8
2.	Flex Ltd.	1,051	18.5	%	6.5	%	11.5	Flex Ltd.	1,051	29.1	%	9.8	%	10.8
3.	Ballard Spahr LLP	219	3.8	%	5.0	%	11.6	Georgetown University(4)	240	6.6	%	5.8	%	0.5
4.	Georgetown University(3)	240	4.2	%	4.0	%	1.3	Beth Israel Deaconess Medical Center, Inc.	117	3.2	%	3.2	%	4.6
5.	Beth Israel Deaconess Medical Center, Inc.	117	2.1	%	2.2	%	5.0	Dana-Farber Cancer Institute, Inc.	77	2.1	%	3.0	%	10.4
6.	Dana-Farber Cancer Institute, Inc.	77	1.4	%	2.1	%	6.5	Equinor Energy Services, Inc.	77	2.1	%	2.7	%	4.8
7.	Alcan Corporation	71	1.2	%	1.8	%	4.8	BT Americas, Inc.	59	1.6	%	2.6	%	0.3
8.	BT Americas, Inc.	59	1.0	%	1.7	%	1.1	KPMG, LLP	66	1.8	%	2.2	%	3.9
9.	Equinor Energy Services, Inc.(4)	89	1.6	%	1.7	%	5.0	CBRE, Inc.	40	1.1	%	1.6	%	10.0
10.	KPMG, LLP	66	1.2	%	1.5	%	4.6	HNTB Corporation	52	1.4	%	1.5	%	8.2
11.								Boon Insurance Management Services, LP	53	1.5	%	1.5	%	2.3
	Total	2,416	42.5	%	39.0	%	7.4	Total	2,259	62.3	%	52.1	%	6.5


(1)	Total Leased Square ~~footage~~Feet as of ~~June 30, 2018~~March 31, 2019 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 ~~June 30, 2018,~~March 31, 2019, plus estimated recurring expense reimbursements; ~~includes triple net lease rents and~~ 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)	During the third quarter of 2018, an affiliate of Amazon.com, Inc. entered into a new 16-year lease for 429,012 square feet, including all of the Expedia, Inc. space. The lease commences in 2020.


(4)	Georgetown University's leased space includes 111,600 square feet that are sublet to another tenant. During the fourth quarter of 2017, the other tenant committed to lease this space through September 30, 2037. The lease commences on October 1, 2019.


~~(4)~~	~~Formerly known as Statoil Oil & Gas LP.~~

~~Financing Activities~~

On May 4, 2018, we redeemed at par the total $400.0 million outstanding under our 5-year and 7-year term loans and recognized a loss on early extinguishment of debt of $1.5 million from the write off of unamortized deferred financing fees.

Regulation FD Disclosures

We intend to 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.

RESULTS OF OPERATIONS

Three Months Ended ~~June 30, 2018,~~March 31, 2019, Compared to Three Months Ended ~~June 30, 2017~~March 31, 2018


	Comparable Properties Results(1)											Other Properties Results(2)						Consolidated Results											Comparable Properties Results(1)											Other Properties Results(2)						Consolidated Results
	Three Months Ended June 30,																												Three Months Ended March 31,
	2018			2017			$ Change			% Change		2018			2017			2018			2017			$ Change			% Change		2019			2018			$ Change			% Change		2019			2018			2019			2018			$ Change			% Change
	(dollars in thousands)																												(dollars in thousands)
Rental income	$	33,847		$	32,239		$	1,608		5.0	%	$	1,364		$	42,113		$	35,211		$	74,352		$	(39,141	)	(52.6	)%
Tenant reimbursements and other income	12,636			11,645			991			8.5	%	789			5,602			13,425			17,247			(3,822		)	(22.2	)%
Rental revenue(3)																													$	29,860		$	27,950		$	1,910		6.8	%	$	9,030		$	27,323		$	38,890		$	55,273		$	(16,383	)	(29.6	)%
Other revenue(3)																													2,847			2,801			46			1.6	%	15			514			2,862			3,315			(453		)	(13.7	)%
Operating expenses	(18,770		)	(16,866		)	(1,904		)	11.3	%	(751		)	(20,418		)	(19,521		)	(37,284		)	17,763			(47.6	)%	(11,336		)	(10,775		)	(561		)	5.2	%	(4,444		)	(13,824		)	(15,780		)	(24,599		)	8,819			(35.9	)%
Net operating income~~(3)~~(4)	$	27,713		$	27,018		$	695		2.6	%	$	1,402		$	27,297		29,115			54,315			(25,200		)	(46.4	)%	$	21,371		$	19,976		$	1,395		7.0	%	$	4,601		$	14,013		25,972			33,989			(8,017		)	(23.6	)%
Other expenses:
Depreciation and amortization	Depreciation and amortization																	13,021			23,922			(10,901		)	(45.6	)%	Depreciation and amortization																	8,585			13,903			(5,318		)	(38.3	)%
General and administrative	General and administrative																	11,222			11,960			(738		)	(6.2	)%	General and administrative																	12,096			13,339			(1,243		)	(9.3	)%
Loss on asset impairment	Loss on asset impairment																	—			18,428			(18,428		)	(100.0	)%	Loss on asset impairment																	—			12,087			(12,087		)	(100.0	)%
Total other expenses	Total other expenses																	24,243			54,310			(30,067		)	(55.4	)%	Total other expenses																	20,681			39,329			(18,648		)	(47.4	)%
Operating income																		4,872			5			4,867			97,340.0	%
Interest and other income, net	Interest and other income, net																	12,668			6,019			6,649			110.5	%	Interest and other income, net																	17,775			5,780			11,995			207.5	%
Interest expense																		(6,350		)	(14,863		)	8,513			(57.3	)%																		(4,206		)	(10,115		)	5,909			(58.4	)%
Loss on early extinguishment of debt	Loss on early extinguishment of debt																	(1,536		)	(63		)	(1,473		)	2,338.1	%	Loss on early extinguishment of debt																	—			(4,867		)	4,867			(100.0	)%
Gain on sale of properties, net	Gain on sale of properties, net																	26,937			3,136			23,801			759.0	%	Gain on sale of properties, net																	193,037			205,211			(12,174		)	(5.9	)%
Income (loss) before income taxes																		36,591			(5,766		)	42,357			(734.6	)%
Income tax benefit (expense)																		456			(45		)	501			(1,113.3	)%
Net income (loss)																		37,047			(5,811		)	42,858			(737.5	)%
Net (income) loss attributable to noncontrolling interest																		(14		)	2			(16		)	(800.0	)%
Net income (loss) attributable to Equity Commonwealth																		37,033			(5,809		)	42,842			(737.5	)%
Income before income taxes																													Income before income taxes																	211,897			190,669			21,228			11.1	%
Income tax expense																													Income tax expense																	(1,300		)	(3,007		)	1,707			(56.8	)%
Net income																																														210,597			187,662			22,935			12.2	%
Net income attributable to noncontrolling interest																													Net income attributable to noncontrolling interest																	(79		)	(63		)	(16		)	25.4	%
Net income attributable to Equity Commonwealth																													Net income attributable to Equity Commonwealth																	210,518			187,599			22,919			12.2	%
Preferred distributions																		(1,997		)	(1,997		)	—			—	%																		(1,997		)	(1,997		)	—			—	%
Net income (loss) attributable to Equity Commonwealth common shareholders																		$	35,036		$	(7,806	)	$	42,842		(548.8	)%
Net income attributable to Equity Commonwealth common shareholders																													Net income attributable to Equity Commonwealth common shareholders																	$	208,521		$	185,602		$	22,919		12.3	%


(1)	Comparable properties consist of 139 properties ~~(22~~(17 buildings) we owned continuously from ~~April~~January 1, ~~2017~~2018 to ~~June 30, 2018.~~March 31, 2019.


(2)	Other properties consist of properties sold or classified as held for sale as of the end of the period.

(3)

Certain reclassifications were made to conform the prior period to our presentation of the condensed consolidated statements of operations due to the impact of adopting ASU 2016-02. Amounts that were previously disclosed as "Tenant reimbursements and other income" are now included in "Rental revenue" and are no longer presented as a separate line item. Parking revenues that do not represent components of leases and were previously disclosed as "Rental income" are now included in "Other revenue." Subsequent to January 1, 2019, provisions for credit losses are included in "Rental revenue." Provisions for credit losses prior to January 1, 2019 were disclosed as "Operating expenses" and were not reclassified to conform prior periods to the current presentation.

(4)

We define net operating income, or NOI, as shown above, 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. We~~commissions and corporate level expenses. For a discussion of why we consider NOI to be an appropriate supplemental measure to net income ~~because it may help both investors and management to understand the operations~~as well as a reconciliation 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, operating income or cash flow from operating activities, determined in accordance with~~the most directly comparable financial measure under GAAP or as an indicator of our financial performance or liquidity, nor is this measure necessarily indicative of sufficient cash flow to fund all of our needs. This measure should be considered in conjunction with net income, net income attributable to Equity Commonwealth common shareholders, operating income and cash flow from operating activities as presented inreported on our consolidated financial statements, ~~of operations, consolidated statements of comprehensive income~~please see "- Liquidity and ~~consolidated statements of cash flows. Other REITs and real estate companies may calculate NOI differently than we do.~~Capital Resources - Property Net Operating Income (NOI)."

Rental ~~income.~~revenue. Rental ~~income~~revenue decreased ~~$39.1~~$16.4 million, or ~~52.6%~~29.6%, in the ~~2018~~2019 period, compared to the ~~2017~~2018 period, primarily due to the properties sold in ~~2018~~2019 and ~~2017.~~2018. Rental ~~income~~revenue increased ~~$1.6~~$1.9 million, or ~~5.0%~~6.8%, at the comparable properties primarily due to an increase in commenced ~~occupancy.~~occupancy, a $0.6 million increase in escalations resulting from the increase in commenced occupancy and an increase in real estate tax expense.

Rental ~~income~~revenue includes straight line rent adjustments totaling ~~$1.0~~$0.8 million in the ~~2018~~2019 period and ~~$4.5~~$1.5 million in the ~~2017~~2018 period, and net reductions for amortization of acquired real estate leases and assumed real estate lease obligations totaling ~~$(18,000)~~$(39,000) in the 2019 period and $0.1 million in the 2018 ~~period and $0.5 million in the 2017~~ period. Rental ~~income~~revenue also includes the recognition of lease termination fees totaling ~~$1.6~~$1.0 million in the 2018 ~~period and $0.8 million~~period. We did not recognize any lease termination fees in the ~~2017~~2019 period.

~~Tenant reimbursements and other income.~~Other revenue. ~~Tenant reimbursements and other income~~Other revenue, which primarily includes parking revenue, decreased ~~$3.8~~$0.5 million, or ~~22.2%~~13.7%, in the ~~2018~~2019 period, compared to the ~~2017~~2018 period, primarily due to the properties sold in ~~2018~~2019 and ~~2017. Tenant reimbursements and other income increased $1.0 million, or 8.5%,~~2018. Other revenue at the comparable properties ~~primarily due to an increase~~was $2.8 million in ~~escalations resulting from an increase in commenced occupancy and an increase in real estate tax expense.~~both periods.

Operating expenses. Operating expenses decreased ~~$17.8~~$8.8 million, or ~~47.6%~~35.9%, in the ~~2018~~2019 period, compared to the ~~2017~~2018 period, primarily due to the properties sold in ~~2018~~2019 and ~~2017.~~2018. Operating expenses increased ~~$1.9~~$0.6 million, or ~~11.3%~~5.2%, at the comparable properties primarily due to ana $0.5 million increase in real estate tax expense, ~~and an increase~~partially offset by a $0.3 million decrease in ~~maintenance and repair expenses.~~utility expense.

Depreciation and amortization. Depreciation and amortization decreased ~~$10.9~~$5.3 million, or ~~45.6%~~38.3%, in the ~~2018~~2019 period, compared to the ~~2017~~2018 period primarily due to properties sold in ~~2018~~2019 and ~~2017.~~2018.

General and administrative. General and administrative expenses decreased ~~$0.7~~$1.2 million, or ~~6.2%~~9.3%, in the ~~2018~~2019 period, compared to the ~~2017~~2018 period, primarily due to a ~~$0.4~~$1.5 million decrease in share-based compensation expense and a $0.2 million decrease in payroll expenses as a result of a staffing reduction, ~~and~~partially offset by a ~~$0.4~~$0.5 million ~~decrease~~increase in ~~share-based~~ compensation ~~expense.~~

~~Loss on asset impairment.~~ ~~We did not record any impairment charges in the 2018 period. In the 2017 period, we recorded impairment charges of~~ ~~$18.4 million~~expenses related to ~~a portfolio of five properties sold in July 2017 based upon the shortening of our expected period of ownership and updated market information in accordance with our impairment analysis procedures.~~

~~Operating income.~~ ~~Operating income increased $4.9~~severance from $1.8 million in the 2018 period ~~compared~~ to ~~the 2017~~ ~~period, primarily due to a decrease in the loss on asset impairment, partially offset by the properties sold in 2018 and 2017.~~

~~Interest and other income, net.~~ Interest and other income, net increased $6.6 million, or 110.5% in the 2018 period, compared to the 2017 period, primarily due to additional interest received on higher invested balances and higher average interest rates in 2018.

~~Interest expense.~~ Interest expense decreased $8.5 million, or 57.3%, in the 2018 period, compared to the 2017 period, primarily due to the prepayment of all $250.0 million of our 6.65% senior unsecured notes in July 2017, the prepayment of all $175.0 million of our 5.75% senior unsecured notes in March 2018 and the redemption at par of the total $400.0 million outstanding under our 5-year and 7-year term loans in May 2018.

~~Loss on early extinguishment of debt. The loss on early extinguishment of debt of $1.5~~$2.3 million in the 2018 period reflects the write off of unamortized deferred financing fees related to our redemption at par of the total $400.0 million outstanding under our 5-year and 7-year term loans. The loss on early extinguishment of debt of $0.1 million in the 2017 period reflects prepayment fees and the write off of unamortized deferred financing fees, net of the write off of an unamortized premium related to our repayment at par of $41.3 million of mortgage debt at Parkshore Plaza.

~~Gain on sale of properties, net.~~ ~~Gain on sale of properties, net increased $23.8 million in the 2018 period, as compared to the 2017~~2019 period. ~~Gain on sale of properties, net in the 2018 period primarily relates to the following (dollars in thousands):~~

Asset Gain on Sale
1601 Dry Creek Drive $ 26,992

~~Gain on sale of properties, net in the 2017 period relates to the following (dollars in thousands):~~

Asset Gain (Loss) on Sale
Parkshore Plaza $ (2,460 )
25 S. Charles Street (3,483 )
802 Delaware Avenue 9,079
$ 3,136

~~Income tax benefit (expense).~~ In the 2018 period we recorded income tax benefit of $0.5 million and in the 2017 period we recorded income tax expense of $45,000. The change in income taxes is primarily due to the adjustment of state and local apportionment factors based on the sales of properties.

~~Net (income) loss attributable to noncontrolling interest.~~ In 2018 and 2017, we granted LTIP Units to certain of our trustees and employees. The net income attributable to noncontrolling interest of $14,000 in the 2018 period and the net loss attributable to noncontrolling interest of $2,000 in the 2017 period relates to the allocation of net income or loss to the LTIP Unit holders.

~~RESULTS OF OPERATIONS~~

~~Six Months Ended June 30, 2018, Compared to Six Months Ended June 30, 2017~~

Comparable Properties Results(1) Other Properties Results(2) Consolidated Results
Six Months Ended June 30,
2018 2017 $ Change % Change 2018 2017 2018 2017 $ Change % Change
(dollars in thousands)
Rental income $ 66,248
$ 64,213
$ 2,035
3.2 % $ 12,512
$ 90,344
$ 78,760
$ 154,557
$ (75,797 ) (49.0 )%
Tenant reimbursements and other income 24,385
23,904
481
2.0 % 4,079
12,689
28,464
36,593
(8,129 ) (22.2 )%
Operating expenses (36,864 ) (34,490 ) (2,374 ) 6.9 % (7,256 ) (43,881 ) (44,120 ) (78,371 ) 34,251
(43.7 )%
Net operating income(3) $ 53,769
$ 53,627
$ 142
0.3 % $ 9,335
$ 59,152
63,104
112,779
(49,675 ) (44.0 )%
Other expenses:
Depreciation and amortization 26,924
50,837
(23,913 ) (47.0 )%
General and administrative 24,561
24,038
523
2.2 %
Loss on asset impairment 12,087
19,714
(7,627 ) (38.7 )%
Total other expenses 63,572
94,589
(31,017 ) (32.8 )%
Operating (loss) income (468 ) 18,190
(18,658 ) (102.6 )%
Interest and other income, net 18,448
10,391
8,057
77.5 %
Interest expense (16,465 ) (29,877 ) 13,412
(44.9 )%
Loss on early extinguishment of debt (6,403 ) (63 ) (6,340 ) 10,063.5 %
Gain on sale of properties, net 232,148
19,590
212,558
1,085.0 %
Income before income taxes 227,260
18,231
209,029
1,146.6 %
Income tax expense (2,551 ) (220 ) (2,331 ) 1,059.5 %
Net income 224,709
18,011
206,698
1,147.6 %
Net income attributable to noncontrolling interests (77 ) (6 ) (71 ) 1,183.3 %
Net income attributable to Equity Commonwealth 224,632
18,005
206,627
1,147.6 %
Preferred distributions (3,994 ) (3,994 ) —
— %
Net income attributable to Equity Commonwealth common shareholders $ 220,638
$ 14,011
$ 206,627
1,474.7 %


~~(1)~~	~~Comparable properties consist of 13 properties (22 buildings) we owned continuously from January 1, 2017 to June 30, 2018.~~


~~(2)~~	~~Other properties consist of properties sold or classified as held for sale as of the end of the period.~~


~~(3)~~	~~See Note 3 on page 24 for further information regarding NOI.~~

~~Rental income.~~Rental income decreased $75.8 million, or 49.0%, in the 2018 period, compared to the 2017 period, primarily due to the properties sold in 2018 and 2017. Rental income at the comparable properties increased $2.0 million, or 3.2%, primarily due to an increase in commenced occupancy.

Rental income includes increases for straight line rent adjustments totaling $2.6 million in the 2018 period and $8.9 million in the 2017 period, and net reductions for amortization of acquired real estate leases and assumed real estate lease obligations totaling $0.1 million in the 2018 period and $1.1 million in the 2017 period. Rental income also includes the recognition of lease termination fees totaling $2.5 million in the 2018 period and $2.5 million in the 2017 period.

~~Tenant reimbursements and other income.~~ Tenant reimbursements and other income decreased $8.1 million, or 22.2%, in the 2018 period, compared to the 2017 period, primarily due to the properties sold in 2018 and 2017. Tenant reimbursements and other income increased $0.5 million, or 2.0%, at our comparable properties primarily due to an increase in escalations resulting from an increase in commenced occupancy and an increase in real estate tax expense, partially offset by a decrease in utility expense.

~~Operating expenses.~~ Operating expenses decreased $34.3 million, or 43.7%, in the 2018 period, compared to the 2017 period, primarily due to the properties sold in 2018 and 2017. Operating expenses increased $2.4 million, or 6.9%, at the comparable properties primarily due to an increase in real estate tax expense.

~~Depreciation and amortization.~~ ~~Depreciation and amortization decreased $23.9 million, or 47.0%, in the 2018 period, compared to the 2017 period, primarily due to the properties sold in 2018 and 2017.~~

~~General and administrative.~~ General and administrative expenses increased $0.5 million, or 2.2%, in the 2018 period, compared to the 2017 period, primarily due to $1.7 million of compensation expenses in the 2018 period relating to a staffing reduction, partially offset by a $0.6 million decrease in share-based compensation expense and a $0.5 million decrease in payroll expenses as a result of the staffing reduction.

Loss on asset impairment. We recorded impairment charges of $12.1 million in the 2018 period related to 777 East Eisenhower Parkway and 97 Newberry Road, ~~and $19.7 million in the 2017 period related to 25 S. Charles Street and a portfolio of five properties sold in July 2017,~~ based upon the shortening of our expected period of ownership and updated market information in accordance with our impairment analysis procedures.

~~Operating (loss) income.~~ ~~Operating income decreased $18.7 million, or 102.6%,~~ We did not record any impairment charges in the ~~2018 period, compared to the 2017 period, primarily due to the properties sold in 2018 and 2017, partially offset by a decrease in the loss on asset impairment.~~2019 period.

Interest and other income, net. Interest and other income, net increased ~~$8.1~~$12.0 million, or 207.5% in the ~~2018~~2019 period, compared to the ~~2017~~2018 period, primarily due to $6.1 million of additional interest received on higher invested balances and higher average interest rates in ~~2018, partially offset by~~2019 and a $5.0 million loss on the sale of marketable ~~securities.~~securities in the 2018 period.

Interest expense. Interest expense decreased ~~$13.4~~$5.9 million, or ~~44.9%~~58.4%, in the ~~2018~~2019 period, compared to the ~~2017~~2018 period, primarily due to the ~~repayment of the $41.3 million mortgage debt at Parkshore Plaza~~prepayment in ~~April 2017, the prepayment of all $250.0 million of our 6.65% senior unsecured notes in July 2017, the prepayment~~March 2018 of all $175.0 million of our 5.75% senior unsecured notes ~~in March 2018 and~~due 2042, the redemption at par of the total $400.0 million outstanding under our 5-year and 7-year term loans in May ~~2018.~~2018, the termination of our credit agreement in December 2018 and a decrease in amortization of deferred financing fees.

Loss on early extinguishment of debt. The loss on early extinguishment of debt of ~~$6.4~~$4.9 million in the 2018 period reflects ~~the write off of unamortized deferred financing fees related to our redemption at par of the total $400.0 million outstanding under our 5-year and 7-year term loans and~~ the write off of unamortized deferred financing fees related to our repayment at par of our 5.75% senior unsecured notes due 2042. ~~The~~We did not record a loss on early extinguishment of debt ~~of $0.1 million~~ in the 2017 period reflects prepayment fees and the write off of unamortized deferred financing fees, net of the write off of an unamortized premium related to our repayment at par of $41.3 million of mortgage debt at Parkshore Plaza.2019 period.

Gain on sale of properties, net. Gain on sale of properties, net ~~increased $212.6~~decreased $12.2 million, or 5.9%, in the ~~2018~~2019 period, as compared to the ~~2017~~2018 period. Gain on sale of properties, net in the 2019 period primarily relates to the following (dollars in thousands):



Asset	Gain on Sale
1735 Market Street	$	192,985

Gain on sale of properties, net in the 2018 period primarily relates to the following (dollars in thousands):

Asset Gain on Sale
1600 Market Street $ 54,599
600 West Chicago Avenue 107,830
5073, 5075, & 5085 S. Syracuse Street 42,762
1601 Dry Creek Drive 26,992
$ 232,183

~~Gain on sale of properties, net in the 2017 period relates to the following (dollars in thousands):~~

Asset Gain (Loss) on Sale
111 Market Place $ (5,968 )
Cabot Business Park Land (57 )
Seton Center 22,479
Parkshore Plaza (2,460 )
25 S. Charles Street (3,483 )
802 Delaware Avenue 9,079
$ 19,590



Asset	Gain on Sale
1600 Market Street	$	54,599
600 West Chicago Avenue	107,830
5073, 5075, & 5085 S. Syracuse Street	42,762
	$	205,191

Income tax expense. Income tax expense ~~increased $2.3~~decreased $1.7 million, or 56.8% in the ~~2018~~2019 period, compared to the ~~2017~~2018 period, primarily due to ~~the~~a decrease in state and local taxes incurred upon the sale of properties.

Net income attributable to noncontrolling interest. In 2018 and 2017, we granted LTIP Units to certain of our trustees and employees. The net income attributable to noncontrolling interest of ~~$77,000~~$79,000 in the ~~2018~~2019 period and ~~$6,000~~$63,000 in the ~~2017~~2018 period relates to the allocation of net income to the LTIP Unit holders.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

As of ~~June 30, 2018,~~March 31, 2019, we had ~~$2.8~~$3.1 billion of cash and cash ~~equivalents and marketable securities.~~equivalents. We expect to use our cash balances, ~~and marketable securities,~~ cash flow from our operations and proceeds of any future property sales to fund our operations, repay debt, make distributions, repurchase our common shares, acquire assets or ~~entities,~~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 primarily upon our:

•ability to maintain or improve the occupancy of, and the rental rates at, our properties;

•ability to control operating and financing ~~cost~~expense increases at our properties; and

ability to purchase additional properties, ~~consistent with our office repositioning strategy,~~ which produce rents, less property operating expenses, in excess of our costs of acquisition capital.

Volatility in energy costs and real estate taxes may cause our future operating ~~costs~~expenses to fluctuate; however, the impact of these fluctuations is expected to be partially offset by the pass through of operating ~~costs~~expenses to our tenants pursuant to lease terms, although there can be no assurance that we will be able to successfully offset these ~~costs~~expenses or that doing so would not negatively impact our competitive position or business.

Cash flows provided by (used in) operating, investing and financing activities were ~~$23.9~~$12.8 million, ~~$800.5~~$663.0 million and ~~$(669.4)~~$(8.6) million, respectively, for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, and ~~$44.2~~$(0.4) million, ~~$(124.9)~~$751.6 million and ~~$(46.3)~~$(267.2) million, respectively, for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018. Changes in these three categories of our cash flows between ~~2018~~2019 and ~~2017~~2018 are primarily related to a decrease in property net operating income (as a result of property dispositions), an increase in interest income (as a result of additional interest received on higher invested balances and higher average interest rates in 2019), dispositions of properties, ~~purchase of marketable securities,~~ proceeds from sales and maturities of marketable securities, repayments of debt and repurchase of our common shares.

Our Investment and Financing Liquidity and Resources

In order to maintain financial flexibility, to fund potential acquisitions and to meet cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions and investments or pay operating or capital expenses, we maintain an unsecured revolving credit facility with a group of institutional lenders. Our credit agreement provides us with a $750.0 million unsecured revolving credit facility. The revolving credit facility has a scheduled maturity date of January 28, 2019, which maturity date may be extended for up to two additional periods of six months at our option subject to satisfaction of certain conditions and the payment of an extension fee of 7.5 basis points of the aggregate amount available under the revolving credit facility. On May 4, 2018, we redeemed at par the total $400.0 million outstanding under our 5-year and 7-year term loans.

Borrowings under our revolving credit facility currently bear interest at LIBOR plus a spread, which was 105 basis points as of June 30, 2018. We also pay a facility fee of 20 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate spread and the facility fee are subject to adjustment based upon changes to our credit ratings. We are allowed to borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of June 30, 2018, the interest rate payable on borrowings under our revolving credit facility was 3.14%. As of June 30, 2018, we had no balance outstanding under our revolving credit facility.

~~On March 7, 2018, we redeemed at par all $175.0 million of our 5.75% senior unsecured notes due 2042.~~

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we paid an aggregate of ~~$4.0~~$2.0 million of distributions on our series D preferred shares. On ~~July 12, 2018, we announced that~~April 11, 2019, our Board of Trustees declared a dividend of $0.40625 per series D preferred share, which ~~is expected to~~will be paid on ~~August~~May 15, ~~2018~~2019 to shareholders of record on ~~July 30, 2018.~~

April 29, 2019.

On March ~~15, 2017,~~14, 2018, our Board of Trustees authorized the repurchase of up to $150.0 million of our outstanding common shares over the twelve month period following the date of authorization. In March ~~2018,~~2019, this share repurchase authorization, of which ~~$81.0~~$130.9 million was not utilized, expired. On March ~~14, 2018,~~13, 2019, our Board of Trustees authorized the repurchase of up to an additional $150.0 million of our outstanding common shares over the twelve month period following the date of authorization. During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we ~~repurchased and retired 2,970,209~~did not repurchase any of our common shares ~~at a weighted average price of $29.67 per~~under our share ~~for a total investment of $88.1 million, of which $69.0 million was under the March 2017 authorization and $19.1 million was under the March 2018 authorization.~~repurchase program. The ~~$130.9~~$150.0 million of remaining authorization available under our share repurchase program as of ~~June 30, 2018~~March 31, 2019 is scheduled to expire on March ~~14, 2019.~~13, 2020.

Our outstanding debt maturities and weighted average interest rates as of ~~June 30, 2018,~~March 31, 2019, were as follows (dollars in thousands):

Scheduled Principal Payments During Period
Year Unsecured Fixed Rate Debt Secured Fixed Rate Debt Total(1) Weighted Average Interest Rate(2)
2018 $ —
$ 537
$ 537
5.7 %
2019 —
1,126
1,126
5.7 %
2020 250,000
1,189
251,189
5.9 %
2021 —
25,463
25,463
5.7 %
2022 —
663
663
5.7 %
2023 —
702
702
5.7 %
2024 —
743
743
5.7 %
2025 —
787
787
5.7 %
2026 —
204
204
5.7 %
2027 —
—
—
— %
Thereafter —
—
—
— %
$ 250,000
$ 31,414
$ 281,414
5.9 %



	Scheduled Principal Payments During Period
Year	Unsecured Fixed Rate Debt		Secured Fixed Rate Debt		Total(1)		Weighted Average Interest Rate(2)
2019	$	—	$	423	$	423	5.7	%
2020	250,000		597		250,597		5.9	%
2021	—		24,836		24,836		5.7	%
Thereafter	—		—		—		—	%
	$	250,000	$	25,856	$	275,856	5.9	%


(1)	Total debt outstanding as of ~~June 30, 2018,~~March 31, 2019, including net unamortized premiums and discounts and net unamortized deferred financing costs, was ~~$280,012.~~$274,977.


(2)	Weighted based on ~~current~~ contractual interest rates.

For further information about our indebtedness, see Note 5 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly ~~Report.~~Report on Form 10-Q.

~~When significant amounts are outstanding under our revolving credit facility, or as~~As the maturity dates of our ~~revolving credit facility and term debts~~debt approach, we ~~intend to~~may explore alternatives to repay amounts due. Such alternatives may include using our cash balances, incurring additional debt and issuing new equity securities, ~~extending the maturity of our revolving credit facility~~ and entering into a new revolving credit facility. We have an effective shelf registration statement that allows us to issue certain types of public securities on an expedited basis, but it does not apply to debt securities nor does it assure that there will be buyers for any such securities.

We believe that we will have access to various types of financings, including debt or equity offerings, to fund any future acquisitions and to pay our debts and other obligations as they become due. The completion and the costs of any future debt transactions will depend primarily upon market conditions and our credit ratings. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans and, in particular, whether we appear to have the ability to maintain our earnings, to space our 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 credit ratings or 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 six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ amounts capitalized at our properties, including properties sold or classified as held for sale, for tenant improvements, leasing costs and building improvements were as follows (amounts in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
Tenant improvements(1)	$	13,773	$	10,309	$	24,680	$	19,736	$	2,450	$	10,907
Leasing costs(2)	4,909		4,978		7,751		9,595		843		2,842
Building improvements(3)	2,936		7,315		4,887		12,100		1,256		1,951


(1)	Tenant improvements include capital expenditures to improve tenants’ spaces.


(2)	Leasing costs ~~primarily~~ include ~~brokerage~~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 ~~June 30, 2018,~~March 31, 2019, commitments made for expenditures in connection with leasing space at our properties, excluding leasing activity for assets during the quarter in which the asset was sold or classified as held for sale, were as follows (dollar and square foot measures in thousands):


	New Leases		Renewals		Total		New Leases		Renewals		Total
Rentable square feet leased during the period	189		103		292		13		95		108
Tenant improvements and leasing commissions	$	13,253	$	4,127	$	17,380	$	561	$	2,107	$	2,668
Tenant improvements and leasing commissions per rentable square foot	$	70.12	$	40.07	$	59.54	$	43.16	$	22.18	$	24.78
Weighted average lease term by square foot (years)	11.6		5.2		9.4		4.3		4.5		4.5
Total tenant improvements and leasing commissions per rentable square foot per year	$	6.03	$	7.75	$	6.36	$	10.02	$	4.96	$	5.56

Debt Covenants

Our unsecured debt obligations at ~~June 30, 2018~~March 31, 2019 were our publicly issued senior unsecured notes. Our public debt indenture and related supplements ~~and our credit agreement~~ contain a number of financial ratio covenants ~~which~~that generally restrict our ability to incur debts, in excess of calculated amounts ~~restrict our ability to make distributions under certain circumstances~~ and require us to maintain other financial ratios. At ~~June 30, 2018,~~March 31, 2019, we believe we were in compliance with all covenants under ~~both~~ our indenture and related ~~supplements, and under our credit agreement.~~supplements. In addition to our unsecured debt ~~obligations,~~obligation, we had ~~$32.0~~a $26.3 million (including net unamortized premiums and net unamortized deferred financing costs) of mortgage ~~notes~~note outstanding at ~~June 30, 2018.~~March 31, 2019.

None of our indenture and related supplements ~~our credit agreement,~~ or our mortgage ~~notes~~note contain provisions for acceleration or require us to provide collateral security which could be triggered by our debt ratings. ~~However, our senior debt rating is used to determine the interest rate and the fees payable under our credit agreement.~~

Off Balance Sheet Arrangements

As of ~~June 30, 2018,~~March 31, 2019, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no swaps or hedges as of ~~June 30, 2018.~~March 31, 2019.

Funds from Operations (FFO) and Normalized FFO

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, ~~(NAREIT).~~or NAREIT. NAREIT defines FFO as net income (loss), calculated in accordance with GAAP, excluding real estate depreciation and amortization, gains (or losses) from sales of depreciable property, impairment of depreciable real estate, and our portion of these items related to equity investees and non-controlling interests. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we exclude certain items that we view as nonrecurring or impacting comparability from period to period. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, net income attributable to Equity Commonwealth common shareholders ~~operating income~~ and cash flow from operating activities.

We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, net income attributable to Equity Commonwealth common shareholders ~~operating income~~ or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. These measures should be considered in conjunction with net income, net income attributable to Equity Commonwealth common shareholders ~~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 FFO and Normalized FFO differently than we do.

The following table provides a reconciliation of net income to FFO attributable to Equity Commonwealth common shareholders and unitholders and a calculation to Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Reconciliation to FFO:
Net income (loss)	$	37,047		$	(5,811	)	$	224,709		$	18,011
Net income													$	210,597		$	187,662
Real estate depreciation and amortization	12,717			23,619			26,320			50,235			8,277			13,603
Loss on asset impairment	—			18,428			12,087			19,714			—			12,087
Gain on sale of properties, net	(26,937		)	(3,136		)	(232,148		)	(19,590		)	(193,037		)	(205,211		)
FFO attributable to Equity Commonwealth	22,827			33,100			30,968			68,370			25,837			8,141
Preferred distributions	(1,997		)	(1,997		)	(3,994		)	(3,994		)	(1,997		)	(1,997		)
FFO attributable to Equity Commonwealth common shareholders and unitholders	$	20,830		$	31,103		$	26,974		$	64,376		$	23,840		$	6,144

Reconciliation to Normalized FFO:
FFO attributable to Equity Commonwealth common shareholders and unitholders	$	20,830		$	31,103		$	26,974		$	64,376		$	23,840		$	6,144
Lease value amortization	(18		)	518			80			1,091			(39		)	98
Straight line rent adjustments	(1,022		)	(4,543		)	(2,550		)	(8,930		)	(837		)	(1,528		)
Loss on early extinguishment of debt	1,536			63			6,403			63			—			4,867
Loss on sale of securities	—			—			4,987			—			—			4,987
Income taxes related to gains on property sales	(496		)	—			2,473			—
Income taxes related to gains on property sales, net													150			2,969
Normalized FFO attributable to Equity Commonwealth common shareholders and unitholders	$	20,830		$	27,141		$	38,367		$	56,600		$	23,114		$	17,537

Property Net Operating Income (NOI)

We use property net operating income, or NOI, to evaluate the performance of our properties. We define NOI as income from our real estate ~~operations~~ 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 ~~we believe~~ it ~~helps~~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 ~~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 common shareholders ~~operating income~~ and cash flow from operating activities as presented in our consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows. Other REITs and real estate companies may calculate NOI differently than we do.

A reconciliation of NOI to net income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ is as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Rental income	$	35,211		$	74,352		$	78,760		$	154,557
Tenant reimbursements and other income	13,425			17,247			28,464			36,593
Rental revenue													$	38,890		$	55,273
Other revenue													2,862			3,315
Operating expenses	(19,521		)	(37,284		)	(44,120		)	(78,371		)	(15,780		)	(24,599		)
NOI	$	29,115		$	54,315		$	63,104		$	112,779		$	25,972		$	33,989

NOI	$	29,115		$	54,315		$	63,104		$	112,779		$	25,972		$	33,989
Depreciation and amortization	(13,021		)	(23,922		)	(26,924		)	(50,837		)	(8,585		)	(13,903		)
General and administrative	(11,222		)	(11,960		)	(24,561		)	(24,038		)	(12,096		)	(13,339		)
Loss on asset impairment	—			(18,428		)	(12,087		)	(19,714		)	—			(12,087		)
Operating income (loss)	4,872			5			(468		)	18,190

Interest and other income, net	12,668			6,019			18,448			10,391			17,775			5,780
Interest expense	(6,350		)	(14,863		)	(16,465		)	(29,877		)	(4,206		)	(10,115		)
Loss on early extinguishment of debt	(1,536		)	(63		)	(6,403		)	(63		)	—			(4,867		)
Gain on sale of properties, net	26,937			3,136			232,148			19,590			193,037			205,211
Income (loss) from continuing operations before income taxes	36,591			(5,766		)	227,260			18,231
Income tax benefit (expense)	456			(45		)	(2,551		)	(220		)
Net income (loss)	$	37,047		$	(5,811	)	$	224,709		$	18,011
Income before income taxes													211,897			190,669
Income tax expense													(1,300		)	(3,007		)
Net income													$	210,597		$	187,662

Related Person Transactions

For information about our related person transactions and about the risks that may arise as a result of these related person transactions and relationships, see Note 1514 to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly ~~Report.~~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, ~~to the Company's~~in our Annual ~~Report on Form 10-K for the year ended December 31, 2017.~~Report.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to the ~~Securities~~ Exchange Act ~~of 1934, or the Exchange Act, Rules~~Rule 13a-15 and Rule 15d-15. Based upon that evaluation, our 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 ~~June 30, 2018~~March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings.

We are or may bebecome a party to various legal ~~proceedings that arise in the ordinary course of business.~~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 ~~our consolidated financial position or consolidated results of operations.~~the Company.

Item 1A. Risk Factors.

There have been no material changes to the risk factors relating to the Company disclosed in our ~~Form 10-K for the year ended December 31, 2017.~~Annual Report.

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

~~Not applicable.~~Surrender of Common Shares for Tax Withholding

During the three months ended March 31, 2019, certain of our employees surrendered common shares owned by them to satisfy their statutory tax withholding obligations in connection with the vesting of restricted common shares and restricted stock units.

The following table summarizes all of these repurchases during the three months ended March 31, 2019:



Period	Total Number of Shares Purchased(1)	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
January 2019	163,012	$	32.59	N/A	N/A
February 2019	—	$	—	N/A	N/A
March 2019	901	$	32.69	N/A	N/A
Total	163,913	$	32.59

(1) The number of shares repurchased represents common shares surrendered by certain of our employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares and restricted stock units of beneficial interest. With respect to these shares, the price paid per share is based on the closing price of our common shares as of the date of the determination of the statutory minimum federal and state tax obligations.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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	Third Amended and Restated Bylaws of the Company, adopted March 15, 2017. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.)

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 61/2% Series D Cumulative Convertible Preferred Share Certificate. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.)

4.3	Indenture, dated as of July 9, 1997, between the Company and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, File Number 001-09317.)

4.4	Supplemental Indenture No. 20, dated as of September 17, 2010, between the Company and U.S. Bank, relating to the Company’s 5.875% Senior Notes due 2020, including form thereof. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.)

10.1	Sale Agreement by and between EQC Operating Trust and EQC TRS, Inc. and Silverstein/Arden 1735 Market Holdco LP, dated January 29, 2019. (Incorporated by reference to the Company's Current Report on Form 8-K filed January 30, 2019.)

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.)

101.1	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2018,~~March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, ~~(Loss),~~ (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.)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



EQUITY COMMONWEALTH


By:	/s/ David A. Helfand
	David A. Helfand
	President and Chief Executive Officer
	Dated:	~~July 31, 2018~~April 30, 2019


By:	/s/ Adam S. Markman
	Adam S. Markman
	Executive Vice President, Chief Financial Officer and Treasurer
	Dated:	~~July 31, 2018~~April 30, 2019

3630



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net income (loss)	$	37,047		$	(5,811	)	$	224,709		$	18,011

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivative instruments	339			(108		)	456			(261		)
Unrealized gain on marketable securities	298			2,345			72			1,704
Total comprehensive income (loss)	37,684			(3,574		)	225,237			19,454
Comprehensive (income) loss attributable to the noncontrolling interest	(14		)	2			(77		)	(6		)
Total comprehensive income (loss) attributable to Equity Commonwealth	$	37,670		$	(3,572	)	$	225,160		$	19,448



Statement of Cash Flows for the Six Months Ended June 30, 2017	Originally Reported			Effect of Change			As Adjusted
Cash provided by operating activities	$	45,864		$	(1,708	)	$	44,156
Cash used in investing activities	(126,693		)	1,770			(124,923		)



	December 31, 2017
Real estate properties	$	76,066
Rents receivable	13,270
Other assets, net	8,352
Assets held for sale	$	97,688

Accounts payable and accrued expenses	$	1,021
Rent collected in advance	408
Security deposits	411
Liabilities related to properties held for sale	$	1,840



	June 30, 2018							December 31, 2017
	Amortized Cost		Unrealized Loss			Estimated Fair Value		Cost or Amortized Cost		Unrealized Gain, Net		Estimated Fair Value
Marketable securities	$	249,744	$	(1,469	)	$	248,275	$	276,567	$	361	$	276,928



	Amounts Reclassified from Cumulative Other Comprehensive Loss to Net Income (Loss)
Details about Cumulative Other Comprehensive Loss Components	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018		Affected Line Items in the Statement of Operations
Interest rate cap contract	$	29	$	79	Interest expense
Interest rate cap contract	293		293		Interest and other income, net
	$	322	$	372



		Fair Value as of
Interest Rate Derivative Designated as Hedging Instrument	Balance Sheet Location	June 30, 2018		December 31, 2017
Interest rate cap	Other assets	$	—	$	17



	2018
Fair value of RSUs granted	$	37.13
Expected term (years)	4
Expected volatility	—
Expected dividend yield	1.68		%
Risk-free rate	2.26		%



			Fair Value at June 30, 2018 Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements:
Marketable securities	$	248,275	$	248,275	$	—	$	—



	June 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Senior unsecured debt and mortgage notes payable	$	281,414	$	290,638	$	856,940	$	874,280



Asset	Gain (Loss) on Sale
Parkshore Plaza	$	(2,460	)
25 S. Charles Street	(3,483		)
802 Delaware Avenue	9,079
	$	3,136



Asset	Gain (Loss) on Sale
111 Market Place	$	(5,968	)
Cabot Business Park Land	(57		)
Seton Center	22,479
Parkshore Plaza	(2,460		)
25 S. Charles Street	(3,483		)
802 Delaware Avenue	9,079
	$	19,590