Equity Commonwealth(EQC) - 2024 Q4 - Annual Report

Part I Business Equity Commonwealth (EQC) is an internally managed REIT that has transitioned to a complete wind-down and liquidation, focusing on asset sales and shareholder distributions following a November 2024 Plan of Sale approval - The company is an internally managed and self-advised Real Estate Investment Trust (REIT) operating as an UPREIT through its Operating Trust[13] - Since 2014, the company has executed a disposition strategy, completing over $7.6 billion in sales. After evaluating over 100 potential investment opportunities without consummating a transaction, the Board determined to wind-down the business[15][16] - On November 12, 2024, shareholders approved the Plan of Sale and Dissolution, authorizing the company to sell its remaining properties, wind-down affairs, and distribute net proceeds to shareholders[18] - In 2024, EQC paid the liquidation preference for its Series D Preferred Shares, made an initial cash liquidating distribution of $19.00 per common share, and sold three of its four remaining properties[19][29] - As of December 31, 2024, the company held one property, $160.5 million in cash and cash equivalents, and had no debt. The final property was sold on February 25, 2025, leaving no remaining properties[21][22] - The company's employee count has been significantly reduced to 22 full-time employees as of December 31, 2024, down from 66 in 2015, reflecting the decrease in its property portfolio[23] Risk Factors The company faces significant risks primarily related to its Plan of Sale, including distribution uncertainty, potential shareholder liability, and the risk of losing REIT status, alongside environmental, cybersecurity, and structural risks Risk Factors Related to Plan of Sale This section outlines risks associated with the liquidation plan, including uncertain distribution amounts, potential shareholder liability, Board termination rights, and the risk of losing REIT status - The actual amount and timing of liquidating distributions are uncertain and may be lower than estimates due to unexpected liabilities, expenses, or changes in market conditions[38] - Shareholders could be held liable for company obligations to the extent of distributions received if the company fails to make adequate provisions for creditors[40] - The Board of Trustees retains the authority to modify or terminate the Plan of Sale without further shareholder approval under certain circumstances[41] - The process of liquidation may cause the company to fail to qualify as a REIT, which would subject it to corporate-level income tax and substantially reduce funds available for distribution[42][44] - The company faces a risk of a 100% excise tax on net income from "prohibited transactions," which are sales of property held primarily for sale to customers in the ordinary course of business[46] Risks Related to Our Business This section details operational risks, including potential environmental liabilities from formerly owned properties, cybersecurity threats to IT systems, and the need for effective internal controls - The company may be liable for costs and damages from environmental contamination (e.g., hazardous substances, asbestos, or mold) at properties it formerly owned, as such liability can be imposed regardless of fault[56][60][61] - The company relies on information technology for its operations, and any material failure, inadequacy, or security breach could interrupt operations, damage its reputation, and result in liability claims[62] Risks Related to Our Securities This section discusses risks affecting the company's securities, including cash holdings subject to loss, stock price volatility, and reduced liquidity due to planned NYSE delisting - As of December 31, 2024, the company held $160.5 million in cash and cash equivalents, which are subject to risk of loss, declining interest rates, and are mostly uninsured by the FDIC[63] - The company's common shares will be voluntarily delisted from the NYSE in the future as part of the Plan of Sale, which may reduce liquidity and the value of the investment[54] Risks Related to Our Organization and Structure This section covers risks inherent in the company's corporate structure, including ownership limitations, anti-takeover provisions, reliance on Operating Trust distributions, and limited liability for trustees and officers - The declaration of trust prohibits any shareholder from owning more than 9.8% of outstanding shares, which, along with other provisions, may deter or prevent a change in control[67] - As a holding company in an UPREIT structure, EQC relies on distributions from its Operating Trust to meet its obligations and make liquidating distributions to shareholders[76] - The company's declaration of trust and bylaws limit the liability of trustees and officers for money damages, except in cases of willful misfeasance, bad faith, gross negligence, or reckless disregard of duty[77] Risks Related to Our Taxation as a REIT This section details the significant risk of failing to maintain REIT qualification, which would incur U.S. federal income tax and reduce distributions, and the challenge of meeting gross income tests with large cash holdings - Failure to qualify as a REIT would subject the company to U.S. federal income tax at regular corporate rates, significantly reducing cash available for shareholder distributions[84][86] - Even if REIT qualification is maintained, the company may face other tax liabilities, including a 100% tax on net income from "prohibited transactions"[89] - Due to the Plan of Sale and large cash holdings, the company may be required to take steps to comply with the 75% gross income test for REITs, which could adversely affect cash flow[90] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[93] Cybersecurity The company maintains a cybersecurity program overseen by the Audit Committee, implementing protective measures and reporting no material past incidents - The cybersecurity program is overseen by the Board's Audit Committee and managed day-to-day by the IT department[94][95][100] - Cybersecurity measures include hardware and software security, periodic system testing by third parties, vendor IT system verification, and employee security awareness training[96] - The company does not believe any past cybersecurity threats or incidents have materially affected its business, results of operations, or financial condition[99] Properties As of December 31, 2024, the company owned one property, which was subsequently sold in February 2025, leaving no remaining real estate assets - As of December 31, 2024, the company owned one property, 1225 Seventeenth Street in Denver, Colorado[105] - The last remaining property was sold on February 25, 2025. The company now has no remaining properties[105] Legal Proceedings The company is not currently involved in any litigation expected to have a material adverse effect - The company is not currently involved in any litigation, nor is any threatened, that would have a material adverse effect on the Company[106] Mine Safety Disclosures This item is not applicable to the company - Not applicable[107] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities EQC's common shares trade on the NYSE, and in 2024, the company paid an initial liquidating distribution of $19.00 per share and settled preferred shares, with no common share repurchases - An initial cash liquidating distribution of $19.00 per common share was paid on December 6, 2024[112] - The estimated aggregate shareholder liquidating distribution was updated to a range of $20.55 to $20.70 per common share on February 27, 2025[112] - In November 2024, the company paid the liquidation preference of $123.3 million to holders of its Series D Preferred Shares, satisfying all obligations to these shareholders[116] - The company did not repurchase any common shares in 2024. As of December 31, 2024, $150.0 million remained available under the share repurchase program expiring June 30, 2025[120] Management's Discussion and Analysis of Financial Condition and Results of Operations The MD&A explains the company's financial condition and results, noting the adoption of liquidation basis accounting from November 1, 2024, and its focus on the Plan of Sale with sufficient cash and no debt Overview This section summarizes the company's strategic shift from asset dispositions and investment evaluations to a Plan of Sale and Dissolution, approved by shareholders in November 2024 - After a multi-year strategy of asset sales and evaluating new investments, the company's Board approved a Plan of Sale and Dissolution, which shareholders approved on November 12, 2024[129][131][132] Results of Operations The company's results of operations are not comparable to the prior year due to the November 1, 2024, adoption of liquidation basis accounting, with one property and $160.5 million in cash at year-end - The adoption of liquidation basis accounting as of November 1, 2024, makes the results of operations for the current year not comparable to the prior year[135] - As of December 31, 2024, the company had one property and $160.5 million in cash. The last property was sold in February 2025[135] Liquidity and Capital Resources As of December 31, 2024, the company had $160.5 million in cash and no debt, deemed sufficient for obligations and distributions, following an initial $19.00 per share payout - As of December 31, 2024, the company has $160.5 million of cash and cash equivalents and no debt outstanding[136] - An initial cash liquidating distribution of $19.00 per common share (totaling $2.0 billion) was paid on December 6, 2024[138] - The estimated aggregate shareholder liquidating distribution was updated to a range of $20.55 to $20.70 per common share as of February 27, 2025[138] Critical Accounting Policies The company's critical accounting policy is now the liquidation basis, adopted November 1, 2024, requiring asset adjustments to net realizable value and accrual of all estimated future costs and income - The company adopted the liquidation basis of accounting as of November 1, 2024, following shareholder approval of the Plan of Sale[147] - Under this basis, assets are adjusted to their estimated net realizable (liquidation) value, and the company accrues all costs and income expected to be incurred and earned through the completion of liquidation[146][148] - The liquidation value of the company's real estate was estimated based on a contractual purchase price for the property[152] Quantitative and Qualitative Disclosures About Market Risk The company does not believe it currently has significant exposure to market interest rate risks - The company does not believe it currently has any significant exposure to risks associated with market changes in interest rates[155] Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2024, confirmed by Ernst & Young LLP - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[158] - Management assessed internal control over financial reporting as effective as of December 31, 2024, using the COSO 2013 framework. This assessment was audited by Ernst & Young LLP, which issued an unqualified opinion[161][162] Other Information This section reports no Rule 10b5-1 trading arrangement changes and includes pro forma financial statements for the February 2025 sale of the last property for $132.5 million - The company agreed to sell its final property, 1225 Seventeenth Street in Denver, for a gross sale price of $132.5 million, with the transaction closing on February 25, 2025[166] Pro Forma Impact of Final Property Sale (as of Dec 31, 2024) | Account | Historical (in thousands) | Pro Forma (in thousands) | | :--- | :--- | :--- | | Real estate | $132,500 | $0 | | Cash and cash equivalents | $160,511 | $284,103 | | Total assets | $293,624 | $284,716 | | Net assets in liquidation | $178,855 | $175,975 | Part III Directors, Executive Officers and Corporate Governance This section provides biographical information for trustees and executive officers, outlining a corporate governance framework emphasizing shareholder alignment, independent directors, and annual elections - The report provides names, ages, positions, and detailed biographical information for the company's seven trustees and four executive officers[180][209] - The company highlights its strong corporate governance practices, including having 6 of 7 trustees as independent, a lead independent trustee, annual trustee elections, and having opted out of Maryland's business combination and control share acquisition statutes[217] - The Audit Committee is composed of three independent trustees, two of whom qualify as audit committee financial experts. The committee oversees financial reporting, internal controls, and the independent auditor[215][216] - The company maintains a Code of Business Conduct and Ethics applicable to all trustees, officers, and employees, which is available on its website[219][220] Executive Compensation This section details named executive officer compensation, aligning interests with shareholders during the wind-down, including base salary, discretionary cash bonuses, and cash-based long-term incentives, with a CEO-to-median-employee pay ratio of 17-to-1 Compensation Discussion and Analysis (CD&A) The CD&A explains the executive compensation program's design, aligning executive and shareholder interests during liquidation, with 2024 bonuses based on discretionary assessment and long-term incentives shifted to cash awards - The executive compensation program is designed to align executive interests with shareholders, reward performance, provide fair compensation, and retain executives during the wind-down process[231] - For fiscal year 2024, the Compensation Committee determined STIP cash bonuses based on a discretionary assessment of each executive's achievement of subjective performance goals, as the original corporate operational metrics were no longer valid due to the Plan of Sale[253] 2024 Annual Cash Incentive (STIP) Payouts | Named Executive Officer | Target Bonus | Actual Bonus Awarded | | :--- | :--- | :--- | | David A. Helfand | $1,482,000 | $2,156,969 | | William H. (Bill) Griffiths | $624,000 | $908,198 | | David S. Weinberg | $702,975 | $1,023,142 | | Orrin S. Shifrin | $618,618 | $900,364 | - Due to the termination of the company's S-8 registration statements, long-term incentive awards for 2024 performance (granted in January 2025) were made as cash-based awards instead of equity[289] 2025 Approved Base Salaries | Named Executive Officer | 2024 Base Salary | 2025 Base Salary | Percentage Change | | :--- | :--- | :--- | :--- | | David A. Helfand | $988,000 | $1,017,640 | 3% | | William H. (Bill) Griffiths | $624,000 | $642,720 | 3% | | David S. Weinberg | $702,975 | $724,064 | 3% | | Orrin S. Shifrin | $618,618 | $637,177 | 3% | Executive Compensation Tables This subsection presents tables detailing named executive officer compensation, including total compensation, plan-based awards, outstanding equity, stock vesting value, and potential severance payments 2024 Summary Compensation | Name | Title | Salary ($) | Bonus ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | David A. Helfand | CEO | 988,000 | 2,156,969 | 4,485,138 | 7,638,107 | | William H. (Bill) Griffiths | CFO | 624,000 | 908,198 | 1,013,730 | 2,553,928 | | David S. Weinberg | COO | 702,975 | 1,023,142 | 2,215,396 | 3,949,513 | | Orrin S. Shifrin | General Counsel | 618,618 | 900,364 | 1,351,615 | 2,878,597 | Value Realized on Stock Vesting in 2024 | Name | Value Realized on Vesting ($) | | :--- | :--- | | David A. Helfand | 2,842,837 | | William H. (Bill) Griffiths | 218,140 | | David S. Weinberg | 1,506,303 | | Orrin S. Shifrin | 919,022 | - The report includes a detailed table quantifying potential payments to NEOs upon termination or a change in control, assuming the event occurred on December 31, 2024[323][325] Pay Ratio and Trustee Compensation For 2024, the CEO-to-median-employee pay ratio was 17 to 1, and independent trustee compensation includes an annual $190,000 retainer split between cash and equity - The ratio of the CEO's 2024 total compensation ($7,638,107) to the median employee's total compensation ($440,037) is 17 to 1[328] Independent Trustee Annual Compensation Structure | Component | Amount ($) | | :--- | :--- | | Annual Cash Retainer | 70,000 | | Annual Equity Retainer | 120,000 | | Total Annual Retainer | 190,000 | | Lead Independent Trustee (Add'l) | 45,000 | | Audit Committee Chair (Add'l) | 25,000 | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters This section discloses beneficial ownership of common shares as of February 20, 2025, identifying all entities and individuals holding over 5%, including Indaba Capital Management, Weiss Asset Management, and Alberta Investment Management Corporation Beneficial Owners of More Than 5% (as of Feb 20, 2025) | Name of Beneficial Owner | Percent of All Shares | | :--- | :--- | | Indaba Capital Management, L.P. | 8.9% | | Weiss Asset Management LP | 8.8% | | Alberta Investment Management Corporation | 8.1% | | The Vanguard Group | 6.6% | | BlackRock, Inc. | 5.2% | - All named executive officers and trustees as a group beneficially own 2.1% of the company's outstanding common shares[342] Certain Relationships and Related Transactions, and Director Independence The company discloses its corporate headquarters lease from an EGI-associated entity, amended in April 2024, and standard indemnification agreements with trustees and officers - The company leases its corporate headquarters in Chicago from Two North Riverside Plaza Joint Venture Limited Partnership, an entity associated with Equity Group Investments (EGI), with which certain executives are affiliated[346] - In April 2024, the headquarters lease was amended to extend the term for two additional years through December 31, 2026, with an annual lease payment of approximately $0.4 million and an early termination option[351] - The company's Declaration of Trust and bylaws obligate it to indemnify present and former trustees and officers to the fullest extent permitted by Maryland law[355] Principal Accountant Fees and Services Ernst & Young LLP served as the independent auditor for 2024 and 2023, with all services pre-approved by the Audit Committee, and total fees increased in 2024 due to higher audit fees Accountant Fees (2023 vs 2024) | Fee Type | 2024 ($) | 2023 ($) | | :--- | :--- | :--- | | Audit fees | 1,052,135 | 664,250 | | All other fees | 3,600 | 3,600 | | Total fees | 1,055,735 | 667,850 | - All audit and non-audit services provided by Ernst & Young LLP in 2024 and 2023 were pre-approved by the Audit Committee[359] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including consolidated financial statements and corporate documents - This section provides a comprehensive list of all financial statements, schedules, and exhibits included with the Form 10-K filing[363][364] Financial Statements and Supplementary Data The financial statements include an unqualified audit opinion, reflecting the shift to liquidation basis accounting from November 1, 2024, showing $178.9 million in net assets and detailing the Plan of Sale, distributions, and final property sale Reports of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, noting the company's shift to liquidation basis accounting from November 1, 2024 - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements[375] - The audit report highlights the company's change to a liquidation basis of accounting for periods subsequent to October 31, 2024[376] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2024[383] Consolidated Financial Statements The financial statements reflect the company's transition to liquidation, showing $178.9 million in net assets as of December 31, 2024, a decrease from $2.39 billion in 2023 due to liquidating distributions and accrued costs Key Financial Position Data (in thousands) | | Dec 31, 2024 (Liquidation Basis) | Dec 31, 2023 (Going Concern Basis) | | :--- | :--- | :--- | | Total Assets | $293,624 | $2,425,041 | | Total Liabilities | $114,769 | $34,928 | | Net Assets / Total Equity | $178,855 | $2,390,113 | Statement of Changes in Net Assets (Liquidation Basis) - Nov 1 to Dec 31, 2024 (in thousands) | Item | Amount | | :--- | :--- | | Net assets in liquidation, beginning of period | $2,245,273 | | Net decrease in liquidation value | ($23,764) | | Liquidating distributions | ($2,042,654) | | Net assets in liquidation, end of period | $178,855 | Notes to Consolidated Financial Statements The notes provide critical context for the financial statements, detailing the Plan of Sale, liquidation accounting, estimated costs, property dispositions, significant shareholder distributions, share-based compensation, and the final property sale - Note 2: The Plan of Sale was approved by shareholders on November 12, 2024, authorizing the sale of all remaining properties and the wind-down of the company[414] - Note 3: The company adopted the liquidation basis of accounting as of November 1, 2024. Assets are adjusted to net realizable value, and future costs and revenues are accrued[423][424] - Note 6: During 2024, the company sold three properties (Bridgepoint Square, 206 East 9th Street, and 1250 H Street, NW) for a total gross sale price of $92.0 million[469] - Note 8: The company paid a $19.00 per common share initial liquidating distribution ($2.0 billion total) and paid off its Series D Preferred Shares for $123.3 million[480][487] - Note 16 (Subsequent Events): On February 25, 2025, the company sold its last remaining property, 1225 Seventeenth Street in Denver, for a gross sale price of $132.5 million[546]