Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business
Organization
TIER REIT, Inc. is a self-managed, Dallas-based real estate investment trust focused on delivering outsized stockholder return through stock price appreciation and dividend growth while offering unparalleled tenant service. As used herein, “TIER REIT,” the “Company,” “we,” “us,” or “our” refers to TIER REIT, Inc. and its subsidiaries unless the context otherwise requires. TIER REIT’s investment strategy is to acquire, develop, and operate a portfolio of best-in-class office properties in select U.S. markets that consistently lead the nation in both population and office-using employment growth. Within these markets, we target TIER
1
submarkets, which are primarily urban and amenity-rich locations. TIER REIT was incorporated in June 2002 as a Maryland corporation and has elected to be treated, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes. As of
June 30, 2016
, we owned interests in
32
operating office properties,
two
non-operating properties, and
one
development property, located in
13
markets throughout the United States.
Substantially all of our business is conducted through Tier Operating Partnership LP (“Tier OP”), a Texas limited partnership. Our wholly-owned subsidiary, Tier GP, Inc., a Delaware corporation, is the sole general partner of Tier OP. Our direct and indirect wholly-owned subsidiaries, Tier Business Trust, a Maryland business trust, and Tier Partners, LLC, a Delaware limited liability company, are limited partners that together with Tier GP, Inc. own all of Tier OP.
2. Basis of Presentation and Significant Accounting Policies
Interim Unaudited Financial Information
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission (“SEC”) on February 16, 2016. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated balance sheets as of
June 30, 2016
, and
December 31, 2015
, and condensed consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for the periods ended
June 30, 2016
and
2015
, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our financial position as of
June 30, 2016
, and
December 31, 2015
, and our results of operations and our cash flows for the periods ended
June 30, 2016
and
2015
. These adjustments are of a normal recurring nature.
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.
Reclassification
Certain amounts previously reflected in the prior year condensed consolidated balance sheet and condensed consolidated statement of cash flows have been reclassified to conform to our 2016 presentation. The
December 31, 2015
, condensed consolidated balance sheet reflects the single line “accounts payable and accrued liabilities” that was previously presented on
two
lines “accounts payable” (approximately
$0.8 million
) and “accrued liabilities” (approximately
$70.8 million
). In addition, the June 30, 2015, condensed consolidated statement of cash flows reflects within the operating section the single line “change in accounts payable and accrued liabilities” that was previously presented on
two
lines “change in accounts payable” (approximately
$0.1 million
) and “change in accrued liabilities” (approximately
$17.5 million
). These reclassifications had no effect on the previously reported total liabilities or cash used in operating activities.
Summary of Significant Accounting Policies
Described below are certain of our significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q. Please see our consolidated financial statements and notes thereto included in Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.
Principles of Consolidation and Basis of Presentation
Our condensed consolidated financial statements include our accounts, the accounts of variable interest entities (“VIEs”), if any, in which we are the primary beneficiary, and the accounts of other subsidiaries over which we have control. VIEs, as defined by GAAP, are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. Interests in entities acquired are evaluated based on applicable GAAP guidance which requires the consolidation of VIEs in which we are deemed to be the primary beneficiary. We adopted new accounting guidance on January 1, 2016, and certain of our entities were determined to be VIEs under the new guidance. While this determination under the new guidance did not impact the conclusions regarding consolidation of these entities, we have included additional disclosures relating to these entities. The determination of the primary beneficiary requires management to make significant estimates and judgments about our rights, obligations, and economic interests in such entities as well as the same of the other owners. For entities in which we have less than a controlling financial interest or entities with respect to which we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. If the interest is in an entity that is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.
All inter-company transactions, balances, and profits have been eliminated in consolidation.
Real Estate
As of
June 30, 2016
, and
December 31, 2015
, the cost basis and accumulated depreciation and amortization related to our consolidated depreciable real estate properties and related lease intangibles were as follows (in thousands):
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Lease Intangibles
|
|
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Acquired Above-Market Leases
|
|
Acquired Below-Market Leases
|
|
|
Buildings and Improvements
|
|
Other Lease Intangibles
|
|
|
as of June 30, 2016
|
|
|
|
|
Cost
|
|
$
|
1,643,191
|
|
|
$
|
138,703
|
|
|
$
|
5,052
|
|
|
$
|
(44,122
|
)
|
Less: accumulated depreciation and amortization
|
|
(534,936
|
)
|
|
(71,501
|
)
|
|
(3,916
|
)
|
|
35,161
|
|
Net
|
|
$
|
1,108,255
|
|
|
$
|
67,202
|
|
|
$
|
1,136
|
|
|
$
|
(8,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Lease Intangibles
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|
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Acquired Above-Market Leases
|
|
Acquired Below-Market Leases
|
|
|
Buildings and Improvements
|
|
Other Lease Intangibles
|
|
|
as of December 31, 2015
|
|
|
|
|
Cost
|
|
$
|
1,914,664
|
|
|
$
|
164,636
|
|
|
$
|
5,383
|
|
|
$
|
(52,744
|
)
|
Less: accumulated depreciation and amortization
|
|
(566,464
|
)
|
|
(82,476
|
)
|
|
(3,995
|
)
|
|
40,810
|
|
Net
|
|
$
|
1,348,200
|
|
|
$
|
82,160
|
|
|
$
|
1,388
|
|
|
$
|
(11,934
|
)
|
We amortize the value of in-place leases, in-place tenant improvements, and in-place leasing commissions to expense over the initial term of the respective leases. The tenant relationship values are amortized to expense over the tenants’ respective initial lease terms and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense. The estimated remaining average useful lives for acquired lease intangibles range from an ending date of July 2016 to an ending date of March 2024.
Anticipated amortization associated with acquired lease intangibles for each of the following five years is as follows (in thousands):
|
|
|
|
|
July 2016 - December 2016
|
$
|
1,822
|
|
2017
|
$
|
1,926
|
|
2018
|
$
|
1,108
|
|
2019
|
$
|
1,002
|
|
2020
|
$
|
1,092
|
|
Impairment of Real Estate-Related Assets
For our consolidated real estate assets, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset including its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted cash flows and also exceeds the fair value of the asset, we recognize an impairment loss to adjust the carrying amount of the asset to its estimated fair value. Our process to estimate the fair value of an asset involves using bona fide purchase offers or the expected sales price of an executed sales agreement, which would be considered Level 1 or Level 2 assumptions within the fair value hierarchy. To the extent that this type of third party information is unavailable, we estimate projected cash flows and a risk-adjusted rate of return that we believe would be used by a third party market participant in estimating the fair value of an asset. This is considered a Level 3 assumption within the fair value hierarchy. These projected cash flows are prepared internally by the Company’s asset management professionals and are updated quarterly to reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer, Chief Accounting Officer, and Managing Director - Asset Management review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions which are consistent with market data or with assumptions that would be used by a third party market participant and assume the highest and best use of the real estate investment. For the
six months ended June 30, 2016
and
2015
, we recorded non-cash impairment charges totaling approximately
$4.8 million
and
$0.1 million
, respectively, related to the impairment of consolidated real estate assets. The impairment losses recorded in 2016 relate to an asset assessed for impairment due to a change in management’s estimate of the intended hold period. The impairment loss recorded in 2015 related to final estimated closing costs incurred in connection with the disposition of a property that was impaired in 2014.
For our unconsolidated real estate assets, at each reporting date we compare the estimated fair value of our investment to the carrying amount. An impairment charge is recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline. We had
no
impairment charges related to our investments in unconsolidated entities for the
six months ended June 30, 2016
and
2015
.
In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition (the intended hold period) and sales price for each property, the estimated future cash flows of each property during our estimated ownership period, and for unconsolidated investments, the estimated future distributions from the investment. A change in these estimates and assumptions could result in understating or overstating the carrying amount of our investments which could be material to our financial statements.
We undergo continuous evaluations of property level performance, credit market conditions, and financing options. If our assumptions regarding the cash flows expected to result from the use and eventual disposition of our properties decrease or our expected hold periods decrease, we may incur future impairment charges on our real estate-related assets. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.
Accounts Receivable, net
The following is a summary of our accounts receivable as of
June 30, 2016
, and
December 31, 2015
(in thousands):
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|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Straight-line rental revenue receivable
|
$
|
63,951
|
|
|
$
|
73,420
|
|
Tenant receivables
|
4,977
|
|
|
5,972
|
|
Non-tenant receivables
|
582
|
|
|
1,549
|
|
Allowance for doubtful accounts
|
(3,182
|
)
|
|
(4,713
|
)
|
Total
|
$
|
66,328
|
|
|
$
|
76,228
|
|
Our allowance for doubtful accounts is an estimate based on management’s evaluation of accounts where it has determined that a tenant may not meet its financial obligations. In these situations, management uses its judgment, based on the facts and circumstances, and records a reserve for that tenant against amounts due to reduce the receivable to an amount it believes is collectible. These reserves are reevaluated and adjusted as additional information becomes available.
Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of our noncontrolling interests in properties. We account for these investments using the equity method of accounting in accordance with GAAP. We use the equity method of accounting when we have significant influence, but not control, of the decision-making involved in the operating and financial decisions of these investments and thereby have some responsibility to create a return on our investment. The equity method of accounting requires these investments to be initially recorded at cost and subsequently increased (decreased) for our share of net income (loss), including eliminations for our share of inter-company transactions, and increased (decreased) for contributions (distributions). To the extent that we contribute assets to an unconsolidated entity, our investment in the unconsolidated entity is recorded at our cost basis in the assets that were contributed to the entity. To the extent that our cost basis is different than the basis reflected at the entity level, the basis difference is generally amortized over the life of the related asset and included in our share of equity in operations of investments.
For unconsolidated investments that have properties under development, we capitalize interest expense to our investment basis using our weighted average interest rate of consolidated debt. Capitalization begins when we are engaged in the activities necessary to get the property ready for its intended use. We cease capitalization when the development is completed and ready for its intended use or if the intended use changes such that capitalization is no longer appropriate. For the
six months ended June 30, 2016
, we capitalized interest expense of approximately
$0.3 million
for an unconsolidated entity with property under development, which is included in our investments from unconsolidated entities on our condensed consolidated balance sheet. For the
six months ended June 30, 2015
, we had
no
capitalized interest expense associated with unconsolidated entities.
Other Intangible Assets, net
Other intangible assets consist of below-market ground leases on properties where a third party owns and has leased the underlying land to us. As of
June 30, 2016
, and
December 31, 2015
, the cost basis and accumulated amortization related to our consolidated other intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Cost
|
$
|
11,177
|
|
|
$
|
11,177
|
|
Less: accumulated amortization
|
(1,290
|
)
|
|
(1,091
|
)
|
Net
|
$
|
9,887
|
|
|
$
|
10,086
|
|
Revenue Recognition
We recognize rental income generated from all leases of consolidated real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. Each of the amounts presented below include rental revenue amounts recognized in discontinued operations. The total net increase to rental revenue due to straight-line rent adjustments for the
three months ended June 30, 2016
and
2015
, was approximately
$1.3 million
and
$4.3 million
, respectively. The total net increase to rental revenue due to straight-line rent adjustments for the
six months ended June 30, 2016
and
2015
, was
approximately
$3.8 million
and
$7.1 million
, respectively. When a tenant exceeds its tenant improvement allowance, this amount is reimbursed to us and recorded as a deferred rent liability, which is recognized as rental revenue over the life of the lease. The total net increase to rental revenue due to this deferred rent for the
three months ended June 30, 2016
and
2015
, was approximately
$0.9 million
and
$0.6 million
, respectively. The total net increase to rental revenue due to this deferred rent for the
six months ended June 30, 2016
and
2015
, was approximately
$1.9 million
and
$1.0 million
, respectively. Our rental revenue also includes amortization of acquired above- and below-market leases. The total net increase to rental revenue due to the amortization of acquired above- and below-market leases for the
three months ended June 30, 2016
and
2015
, was approximately
$1.1 million
and
$1.3 million
, respectively. The total net increase to rental revenue due to the amortization of acquired above- and below-market leases for the
six months ended June 30, 2016
and
2015
, was approximately
$2.5 million
and
$2.5 million
, respectively. Revenues relating to lease termination fees are recognized on a straight-line basis amortized from the time that a tenant’s right to occupy the leased space is modified through the end of the revised lease term. For the
three months ended June 30, 2016
and
2015
, we recognized lease termination fees of approximately
$0.7 million
and
$0.1 million
, respectively. For the
six months ended June 30, 2016
and
2015
, we recognized lease termination fees of approximately
$1.3 million
and
$0.7 million
, respectively.
3. New Accounting Pronouncements
Newly Adopted Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“FASB”) issued an update that clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. The compensation expense related to such awards will be delayed until it becomes probable that the performance target will be met. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted, and may be applied either prospectively or retrospectively. The adoption of this guidance on January 1, 2016, did not have a material impact on our financial statements.
In January 2015, the FASB issued guidance simplifying income statement presentation by eliminating the concept of extraordinary items. An entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted and may be applied either prospectively or retrospectively. The adoption of this guidance on January 1, 2016, did not have a material impact on our financial statements.
In February 2015, the FASB issued updated guidance related to accounting for consolidation of certain legal entities. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted. Under the updated guidance, companies are required to evaluate whether they should consolidate certain legal entities under a revised consolidation model. All legal entities are subject to reevaluation under the revised consolidation model that modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. A full or modified retrospective method of adoption is allowed. We adopted this guidance using the modified retrospective method on January 1, 2016, which did not have a material impact on our financial statements, but additional disclosures are required and have been included in these notes to condensed consolidated financial statements related to certain of our entities that were determined to be a VIE.
In April 2015, the FASB issued guidance related to accounting for debt issuance costs. The guidance simplifies presentation by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability, consistent with the presentation of debt discounts or premiums. In August 2015, the FASB further clarified this guidance to state that an entity may elect to continue to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not any outstanding borrowings exist on the line-of-credit. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. The adoption and retrospective application of this guidance on January 1, 2016, changed the classification of certain deferred financing fees on our balance sheet, but it did not otherwise have an impact on our financial statements. As of December 31, 2015, approximately
$8.9 million
in net deferred financing costs were reclassified from deferred financing fees and netted against our notes payable. As of December 31, 2015, approximately
$3.1 million
in net deferred financing fees associated with the revolving line of credit remained as an asset on the balance sheet.
New Accounting Pronouncements to be Adopted
In May 2014, the FASB issued guidance to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted only as of annual reporting
periods beginning after December 15, 2016. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
In August 2014, the FASB issued guidance regarding management’s responsibility in evaluating whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We do not believe the adoption of this guidance will have a material impact on our disclosures.
In February 2016, the FASB issued updated guidance which sets out revised principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The guidance requires lessees to recognize assets and liabilities for operating leases with lease terms greater than twelve months on the balance sheet. The guidance further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. New disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases are also required. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted and is required to be adopted using the modified retrospective approach. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
In March 2016, the FASB issued guidance which will affect accounting for certain aspects of share-based payments for employees. The guidance requires income statement recognition of income tax effects of the awards when the awards vest or are settled. The guidance also changes the employers’ accounting for forfeitures as well as for an employee’s use of shares to satisfy their income tax withholding obligations. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
In March 2016, the FASB issued amended guidance which simplifies the accounting for equity method investments by removing the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
4. Fair Value Measurements
Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the fair value hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the fair value hierarchy) has been established.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Derivative financial instruments
We use derivative financial instruments, such as interest rate swaps, to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
We incorporate credit valuation adjustments (“CVAs”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the CVAs associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, we have assessed the significance of the impact of the CVAs on the overall valuation of our derivative positions and have determined that they are not significant. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. Unrealized gains or losses on derivatives are recorded in accumulated other comprehensive income (loss) (“OCI”) within equity at each measurement date. Our derivative financial instruments are included in “other liabilities” on our condensed consolidated balance sheets.
The following table sets forth our financial liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of
June 30, 2016
, and
December 31, 2015
(in thousands).
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|
|
|
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|
|
|
|
|
|
|
|
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Basis of Fair Value Measurements
|
|
|
|
|
Quoted Prices In Active Markets for Identical Items (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Total Fair Value
|
|
|
|
Description
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
(21,219
|
)
|
|
$
|
—
|
|
|
$
|
(21,219
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
(3,866
|
)
|
|
$
|
—
|
|
|
$
|
(3,866
|
)
|
|
$
|
—
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Impairment of Real Estate Related Assets
We have recorded non-cash impairment charges related to a reduction in the fair value of certain of our assets. The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets or by obtaining third party broker valuation estimates, bona fide purchase offers, or the expected sales price of an executed sales agreement.
During the
six months ended June 30, 2016
, we recorded impairment losses of approximately
$4.8 million
for a property assessed for impairment due to changes in management’s estimate of the intended hold period. During the year ended
December 31, 2015
, we recorded impairment losses of approximately
$0.1 million
for final estimated closing costs incurred in connection with the disposition of a property which was impaired at December 31, 2014, and sold in 2015.
The following table summarizes those assets which were measured at fair value and impaired during 2016 and 2015 (in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Fair Value Measurements
|
|
|
Description
|
|
Fair Value
of Assets at Impairment
|
|
Quoted Prices
In Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Losses
|
for the six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
5,488
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,488
|
|
|
$
|
(4,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
for the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
11,489
|
|
|
$
|
—
|
|
|
$
|
11,489
|
|
|
$
|
—
|
|
|
$
|
(132
|
)
|
The following table sets forth quantitative information about the unobservable inputs (Level 3) of our real estate that was recorded at fair value as of the date of its impairment in 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Assets at Impairment
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Value
|
Real estate on which impairment losses were recognized
|
|
$
|
5,488
|
|
|
Discounted Cash Flow
|
|
Discount rate
|
|
9.0%
|
|
|
|
|
|
|
Terminal capitalization rate
|
|
7.5%
|
Financial Instruments not Reported at Fair Value
Financial instruments held at
June 30, 2016
, and
December 31, 2015
, but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable, payables to related parties, accrued liabilities, distributions payable, and other liabilities. With the exception of notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for notes payable have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the fair value hierarchy.
Carrying amounts of our notes payable and the related estimated fair value as of
June 30, 2016
, and
December 31, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
Notes payable
|
$
|
909,605
|
|
|
$
|
914,277
|
|
|
$
|
1,080,425
|
|
|
$
|
1,084,625
|
|
Less: unamortized debt issuance costs
|
(8,310
|
)
|
|
|
|
(8,854
|
)
|
|
|
Notes payable, net
|
$
|
901,295
|
|
|
|
|
$
|
1,071,571
|
|
|
|
5. Real Estate Activities
Sales of Real Estate Reported in Continuing Operations
On March 1, 2016, we sold our Lawson Commons property to an unrelated third-party for a contract sales price of approximately
$68.4 million
, resulting in proceeds from sale of approximately
$60.9 million
. Lawson Commons is located in St. Paul, Minnesota, and contains approximately
436,000
rentable square feet.
On June 17, 2016, we sold our FOUR40 property to an unrelated third-party for a contract sales price of approximately
$191.0 million
, resulting in proceeds from sale of approximately
$189.1 million
. FOUR40 is located in Chicago, Illinois, and contains approximately
1.0 million
rentable square feet. We are entitled to an additional payment of up to
$12.5 million
subject to future performance of the property.
Properties sold in 2016 and 2015 and included in continuing operations contributed a loss of approximately
$0.8 million
and
$1.4 million
to our net loss for the
three months ended June 30, 2016
and
2015
, respectively. Properties sold in 2016 and 2015, and included in continuing operations, contributed a loss of approximately
$1.4 million
and
$3.1 million
to our net loss for the
six months ended June 30, 2016
and
2015
, respectively.
Sales of Real Estate Reported in Discontinued Operations
No
properties sold in 2016 have been classified as discontinued operations. The table below summarizes the results of operations for properties that have been classified as discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and six month periods ended June 30, 2015 (in thousands). This includes
two
properties that were held for sale at December 31, 2014 and sold in 2015.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2015
|
|
Six Months Ended
June 30, 2015
|
Rental revenue
|
$
|
(124
|
)
|
|
$
|
4,566
|
|
Expenses
|
|
|
|
|
|
Property operating expenses
|
22
|
|
|
1,723
|
|
Interest expense
|
44
|
|
|
720
|
|
Real estate taxes
|
(83
|
)
|
|
633
|
|
Property management fees
|
14
|
|
|
121
|
|
Total expenses
|
(3
|
)
|
|
3,197
|
|
Income (loss) from discontinued operations
|
(121
|
)
|
|
1,369
|
|
Gain on sale of discontinued operations
|
6,077
|
|
|
14,683
|
|
Discontinued operations
|
$
|
5,956
|
|
|
$
|
16,052
|
|
6.
Investments in Unconsolidated Entities
We participate in real estate ventures for the purpose of acquiring and developing office properties in which we may or may not have a controlling financial interest. Our investments in unconsolidated entities consist of our noncontrolling interests in certain properties that are accounted for using the equity method of accounting.
The following is a summary of our investments in unconsolidated entities as of
June 30, 2016
, and
December 31, 2015
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
|
|
Investment Balance
|
Entity Name
|
|
Property
|
June 30,
2016
|
|
December 31, 2015
|
|
June 30,
2016
|
|
December 31,
2015
|
1301 Chestnut Associates, L.P. (1)
|
|
Wanamaker Building
|
60.00
|
%
|
|
60.00
|
%
|
|
$
|
43,726
|
|
|
$
|
42,898
|
|
Domain Junction LLC (2) (3)
|
|
Domain 2 & 7
|
49.84
|
%
|
|
49.84
|
%
|
|
10,937
|
|
|
26,588
|
|
Domain Junction 8 Venture LLC (2) (3)
|
|
Domain 8
|
50.00
|
%
|
|
50.00
|
%
|
|
17,749
|
|
|
14,193
|
|
COLDC 54 Holdings, LLC (3)
|
|
Colorado Building
|
10.00
|
%
|
|
10.00
|
%
|
|
878
|
|
|
949
|
|
GSTDC 72 Holdings, LLC (3)
|
|
1325 G Street
|
10.00
|
%
|
|
10.00
|
%
|
|
4,316
|
|
|
4,370
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
77,606
|
|
|
$
|
88,998
|
|
_________________
(1) All major decisions for this entity require a vote of
70%
(and in some instances
75%
) of the ownership group.
(2) All major decisions for this entity are made by the other owner.
(3) We have evaluated our investments in unconsolidated entities in order to determine if they are VIEs. Based on our assessment, we have identified each of these entities as a VIE, but we are not the primary beneficiary, as we do not have the power to direct the activities that most significantly impact the economic performance of these entities. For these VIEs in which we are not deemed to be the primary beneficiary, we continue to account for them using the equity method. The maximum amount of exposure to loss with respect to these VIEs is the carrying amount of our investment. Additionally, we are required to fund up to
$0.3 million
in additional capital contributions to the Domain Junction 8 Venture LLC for the development of Domain 8. At
June 30, 2016
, these VIEs have total assets of approximately
$330.2 million
and total liabilities of approximately
$230.9 million
, as outlined in the summarized balance sheets presented below.
The summarized balance sheets of our unconsolidated entities as of as of
June 30, 2016
, and
December 31, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of June 30, 2016
|
|
Total
|
|
Wanamaker
|
|
Other
(50% or less owned entities)
|
Real estate, net
|
|
$
|
396,381
|
|
|
$
|
127,402
|
|
|
$
|
268,979
|
|
Real estate intangibles, net
|
|
50,044
|
|
|
11,234
|
|
|
38,810
|
|
Cash, cash equivalents and restricted cash
|
|
23,815
|
|
|
12,350
|
|
|
11,465
|
|
Other assets
|
|
21,919
|
|
|
10,973
|
|
|
10,946
|
|
Total assets
|
|
$
|
492,159
|
|
|
$
|
161,959
|
|
|
$
|
330,200
|
|
|
|
|
|
|
|
|
Notes payable, net
|
|
$
|
285,851
|
|
|
$
|
73,818
|
|
|
$
|
212,033
|
|
Accounts payable
|
|
10,183
|
|
|
510
|
|
|
9,673
|
|
Other liabilities
|
|
14,888
|
|
|
5,668
|
|
|
9,220
|
|
Equity
|
|
181,237
|
|
|
81,963
|
|
|
99,274
|
|
Total liabilities and equity
|
|
$
|
492,159
|
|
|
$
|
161,959
|
|
|
$
|
330,200
|
|
|
|
|
|
|
|
|
Company’s share of equity
|
|
$
|
70,449
|
|
|
$
|
49,178
|
|
|
$
|
21,271
|
|
Basis differences (1)
|
|
7,157
|
|
|
(5,452
|
)
|
|
12,609
|
|
Carrying value of the Company’s investment in unconsolidated entities
|
|
$
|
77,606
|
|
|
$
|
43,726
|
|
|
$
|
33,880
|
|
____________________
|
|
(1)
|
This amount represents the aggregate difference between our historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differences occur from impairment of investments and upon the transfer of assets that were previously owned by us into a joint venture. In addition, certain acquisition, transaction and other costs, including capitalized interest, may not be reflected in the net assets at the joint venture level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31, 2015
|
|
Total
|
|
Wanamaker
|
|
Other
(50% or less owned entities)
|
Real estate, net
|
|
$
|
379,646
|
|
|
$
|
128,358
|
|
|
$
|
251,288
|
|
Real estate intangibles, net
|
|
54,470
|
|
|
12,087
|
|
|
42,383
|
|
Cash, cash equivalents and restricted cash
|
|
23,814
|
|
|
12,819
|
|
|
10,995
|
|
Other assets
|
|
16,796
|
|
|
8,851
|
|
|
7,945
|
|
Total assets
|
|
$
|
474,726
|
|
|
$
|
162,115
|
|
|
$
|
312,611
|
|
|
|
|
|
|
|
|
Notes payable, net
|
|
$
|
246,500
|
|
|
$
|
75,124
|
|
|
$
|
171,376
|
|
Accounts payable
|
|
8,187
|
|
|
21
|
|
|
8,166
|
|
Other liabilities
|
|
19,144
|
|
|
6,386
|
|
|
12,758
|
|
Equity
|
|
200,895
|
|
|
80,584
|
|
|
120,311
|
|
Total liabilities and equity
|
|
$
|
474,726
|
|
|
$
|
162,115
|
|
|
$
|
312,611
|
|
|
|
|
|
|
|
|
Company’s share of equity
|
|
$
|
81,982
|
|
|
$
|
48,350
|
|
|
$
|
33,632
|
|
Basis differences (1)
|
|
7,016
|
|
|
(5,452
|
)
|
|
12,468
|
|
Carrying value of the Company’s investment in unconsolidated entities
|
|
$
|
88,998
|
|
|
$
|
42,898
|
|
|
$
|
46,100
|
|
________________
|
|
(1)
|
This amount represents the aggregate difference between our historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differences occur from impairment of investments and upon the transfer of assets that were previously owned by us into a joint venture. In addition, certain acquisition, transaction and other costs, including capitalized interest, may not be reflected in the net assets at the joint venture level.
|
Our equity in operations of investments represents our proportionate share of the combined earnings and losses of our investments for the period of our ownership. The summarized statements of operations of our unconsolidated entities for the three months ended
June 30, 2016
and 2015, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
Total
|
|
Wanamaker
|
|
Other
(50% or less owned entities) (1)
|
Revenue
|
|
$
|
14,866
|
|
|
$
|
6,842
|
|
|
$
|
8,024
|
|
Income from continuing operations
|
|
$
|
1,323
|
|
|
$
|
1,045
|
|
|
$
|
278
|
|
Net income
|
|
$
|
1,323
|
|
|
$
|
1,045
|
|
|
$
|
278
|
|
Company’s share of net income from continuing operations
|
|
$
|
818
|
|
|
$
|
627
|
|
|
$
|
191
|
|
Basis differences and elimination of inter-entity fees
|
|
5
|
|
|
135
|
|
|
(130
|
)
|
Equity in operations of investments
|
|
$
|
823
|
|
|
$
|
762
|
|
|
$
|
61
|
|
________________
(1) Includes combined earnings and losses for Domain 2&7, Domain 8, Colorado Building, and 1325 G Street.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
|
Total
|
|
Wanamaker
|
|
Other
(50% or less owned entities) (1)
|
Revenue
|
|
$
|
10,207
|
|
|
$
|
6,663
|
|
|
$
|
3,544
|
|
Income (loss) from continuing operations
|
|
$
|
(3,779
|
)
|
|
$
|
640
|
|
|
$
|
(4,419
|
)
|
Net income (loss)
|
|
$
|
(3,779
|
)
|
|
$
|
640
|
|
|
$
|
(4,419
|
)
|
Company’s share of net income (loss) from continuing operations
|
|
$
|
(58
|
)
|
|
$
|
384
|
|
|
$
|
(442
|
)
|
Basis differences and elimination of inter-entity fees
|
|
127
|
|
|
125
|
|
|
2
|
|
Equity in operations of investments
|
|
$
|
69
|
|
|
$
|
509
|
|
|
$
|
(440
|
)
|
_______________
(1) Includes combined earnings and losses for Colorado Building, 1325 G Street, and Paces West, a property in which we owned a
10%
interest during the three months ended June 30, 2015. Paces West was sold on November 30, 2015. Colorado Building and 1325 G Street were included as unconsolidated entities beginning on June 30, 2015.
Our equity in operations of investments represents our proportionate share of the combined earnings and losses of our investments for the period of our ownership. The summarized statements of operations of our unconsolidated entities for the six months ended
June 30, 2016
and 2015, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
Total
|
|
Wanamaker
|
|
Other
(50% or less owned entities) (1)
|
Revenue
|
|
$
|
28,459
|
|
|
$
|
13,147
|
|
|
$
|
15,312
|
|
Income (loss) from continuing operations
|
|
$
|
1,155
|
|
|
$
|
1,879
|
|
|
$
|
(724
|
)
|
Net income (loss)
|
|
$
|
1,155
|
|
|
$
|
1,879
|
|
|
$
|
(724
|
)
|
Company’s share of net income from continuing operations
|
|
$
|
1,244
|
|
|
$
|
1,128
|
|
|
$
|
116
|
|
Basis differences and elimination of inter-entity fees
|
|
(6
|
)
|
|
255
|
|
|
(261
|
)
|
Equity in operations of investments
|
|
$
|
1,238
|
|
|
$
|
1,383
|
|
|
$
|
(145
|
)
|
_____________________
(1) Includes combined earnings and losses for Domain 2&7, Domain 8, Colorado Building, and 1325 G Street.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2015
|
|
Total
|
|
Wanamaker
|
|
Other
(50% or less owned entities)(1)
|
Revenue
|
|
$
|
19,689
|
|
|
$
|
12,954
|
|
|
$
|
6,735
|
|
Income (loss) from continuing operations
|
|
$
|
(3,875
|
)
|
|
$
|
911
|
|
|
$
|
(4,786
|
)
|
Net income (loss)
|
|
$
|
(3,875
|
)
|
|
$
|
911
|
|
|
$
|
(4,786
|
)
|
Company’s share of net income (loss) from continuing operations
|
|
$
|
68
|
|
|
$
|
547
|
|
|
$
|
(479
|
)
|
Basis differences and elimination of inter-entity fees
|
|
244
|
|
|
241
|
|
|
3
|
|
Equity in operations of investments
|
|
$
|
312
|
|
|
$
|
788
|
|
|
$
|
(476
|
)
|
_______________
(1) Includes combined earnings and losses for Colorado Building, 1325 G Street, and Paces West, a property in which we owned a
10%
interest during the six months ended June 30, 2015. Paces West was sold on November 30, 2015. Colorado Building and 1325 G Street were included as unconsolidated entities beginning on June 30, 2015.
7.
Real Estate Under Development
When we are engaged in activities to get a potential development ready for its intended use, we capitalize interest, property taxes, insurance, ground lease payments, and direct construction costs. For the
six months ended June 30, 2016
, we capitalized a total of approximately
$3.8 million
, including approximately
$0.1 million
in interest. For the
six months ended June 30, 2015
, we capitalized a total of approximately
$5.2 million
, including approximately
$0.6 million
in interest. These costs are classified as real estate under development on our condensed consolidated balance sheets until such time that the development is complete.
8. Derivative Instruments and Hedging Activities
We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of our operations. 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 have used interest rate swaps as part of our interest rate risk management strategy. Our interest rate swaps involve the receipt of variable-rate amounts from counterparties in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Our hedging strategy of entering into interest rate swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.
The following table summarizes the notional values of our derivative financial instruments (in thousands) as of
June 30, 2016
. The notional values provide an indication of the extent of our involvement in these instruments at
June 30, 2016
, but do not represent exposure to credit, interest rate, or market risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type/Description
|
|
Notional Value
|
|
Index
|
|
Strike Rate
|
|
Effective Date
|
|
Maturity Date
|
Interest rate swap - cash flow hedge
|
|
$
|
125,000
|
|
|
one-month LIBOR
|
|
1.6775
|
%
|
|
12/31/14
|
|
10/31/19
|
Interest rate swap - cash flow hedge
|
|
$
|
125,000
|
|
|
one-month LIBOR
|
|
1.6935
|
%
|
|
04/30/15
|
|
10/31/19
|
Interest rate swap - cash flow hedge
|
|
$
|
125,000
|
|
|
one-month LIBOR
|
|
1.7615
|
%
|
|
06/30/15
|
|
05/31/22
|
Interest rate swap - cash flow hedge
|
|
$
|
150,000
|
|
|
one-month LIBOR
|
|
1.7695
|
%
|
|
06/30/15
|
|
05/31/22
|
The table below presents the fair value of our derivative financial instruments, included in “other liabilities” on our condensed consolidated balance sheets, as of
June 30, 2016
, and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
Derivative Liabilities
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Interest rate swaps
|
$
|
(21,219
|
)
|
|
$
|
(3,866
|
)
|
The tables below present the effect of the change in fair value of derivative financial instruments in our condensed consolidated statements of operations and comprehensive income (loss) for the
six months ended June 30, 2016
and
2015
(in thousands):
Derivatives in Cash Flow Hedging Relationship
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in OCI on derivatives
(effective portion)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2016
|
|
June 30, 2015
|
|
June 30, 2016
|
|
June 30, 2015
|
Interest rate swaps
|
$
|
(2,532
|
)
|
|
$
|
6,146
|
|
|
$
|
(15,412
|
)
|
|
$
|
1,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income
(effective portion)
|
|
Three Months Ended
|
|
Six Months Ended
|
Location
|
June 30, 2016
|
|
June 30, 2015
|
|
June 30, 2016
|
|
June 30, 2015
|
Interest expense (1)
|
$
|
1,707
|
|
|
$
|
809
|
|
|
$
|
3,429
|
|
|
$
|
1,280
|
|
______________
|
|
(1)
|
Increases in fair value as a result of accrued interest associated with our swap transactions are recorded in accumulated OCI and subsequently reclassified into income. Such amounts are shown net in the statements of changes in equity and offset dollar for dollar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in income on derivatives
(ineffective portion and amount excluded from effectiveness testing)
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Location
|
June 30, 2016
|
|
June 30, 2015
|
|
June 30, 2016
|
|
June 30, 2015
|
|
Interest expense (1)
|
$
|
1,941
|
|
|
$
|
—
|
|
|
$
|
1,941
|
|
|
$
|
—
|
|
_____________
|
|
(1)
|
Represents the portion of the change in fair value of our interest rate swaps attributable to the mismatch between an interest rate floor on our hedged debt and no floor on the index rate in our interest rate swaps which causes hedge ineffectiveness.
|
Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt. During the next twelve months, we estimate that approximately
$6.5 million
will be reclassified as an increase to interest expense.
As of
June 30, 2016
, the fair value of our derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was approximately
$22.1 million
. As of
June 30, 2016
, we have not posted any collateral related to these agreements. If we had breached any of these provisions at
June 30, 2016
, we could have been required to settle our obligations under the agreements at the termination value of approximately
$22.1 million
.
We have agreements with our derivative counterparties that contain provisions where if we default on any of our indebtedness for at least
30
days, during which time such default has not been remedied, and in all cases provided that the aggregate amount of all such default is not less than
$10.0 million
for recourse debt or
$75.0 million
for non-recourse debt, then we could also be declared in default on our derivative obligations.
9.
Notes Payable
Our notes payable, net were approximately
$901.3 million
at
June 30, 2016
. Approximately
$333.7 million
of these notes payable, net were secured by real estate assets with a carrying value of approximately
$333.0 million
as of
June 30, 2016
. As of
June 30, 2016
, all of our outstanding debt was fixed rate debt (or effectively fixed rate debt, through the use of interest rate swaps), with the exception of approximately
$50.0 million
from certain borrowings under our credit facility. As of
June 30, 2016
, the stated annual interest rates on our outstanding debt, excluding mezzanine financing, ranged from
1.96%
to
6.09%
. We had mezzanine financing on
one
property with a stated annual interest rate of
9.80%
. As of
June 30, 2016
, the effective weighted average interest rate for our consolidated debt is approximately
4.27%
. For our loan that is in default and detailed below, we incur a default interest rate that is 500 basis points higher than the stated interest rate, which resulted in an overall effective weighted average interest rate of approximately
4.54%
as of June 30, 2016, for our consolidated debt and an increase in interest expense for the six months ended
June 30, 2016
, of approximately
$1.2 million
. We anticipate, although we can provide no assurance,
that when the property to which such loan relates is sold, or if ownership of this property is conveyed to the lender, the default interest will be forgiven.
Our loan agreements generally require us to comply with certain reporting and financial covenants. As of
June 30, 2016
, we were in default on a non-recourse property loan with an outstanding balance of approximately
$48.7 million
secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately
$34.8 million
as of
June 30, 2016
. A receiver was appointed for this property in March 2016. The loan had an original maturity date of July 2016, and we are currently working with the lender to dispose of this property on their behalf. As of
June 30, 2016
, other than the default discussed above, we believe we were in compliance with the covenants under each of our loan agreements, including our credit facility.
Our consolidated debt has maturity dates that range from July 2016 to June 2022. The following table provides information regarding the timing of principal payments of our notes payable, net as of
June 30, 2016
(in thousands):
|
|
|
|
|
Principal payments due in:
|
|
July 2016 - December 2016
|
$
|
112,951
|
|
2017
|
130,021
|
|
2018
|
1,622
|
|
2019
|
301,723
|
|
2020
|
1,814
|
|
Thereafter
|
361,474
|
|
Less: unamortized debt issuance costs (1)
|
(8,310
|
)
|
Notes payable, net
|
$
|
901,295
|
|
________________
(1) Excludes approximately
$3.0 million
of unamortized debt issuance costs associated with the revolving line of credit because these costs are presented as an asset on our condensed consolidated balance sheets.
Subsequent to
June 30, 2016
, approximately
$62.8 million
of secured debt due in November 2016 was repaid.
As discussed in Note 3, on January 1, 2016, we adopted the new accounting standard on deferred debt issuance costs. As of
June 30, 2016
, and December 31, 2015, approximately
$8.3 million
and
$8.9 million
, respectively, of unamortized deferred debt issuance costs associated with our debt are presented on the condensed consolidated balance sheets netted against the notes payable. As of
June 30, 2016
, and December 31, 2015, unamortized deferred debt issuance costs of approximately
$3.0 million
and
$3.1 million
, respectively, associated with the revolving line of credit under our credit facility, discussed below, continue to be presented as an asset on the condensed consolidated balance sheets. Deferred debt issuance costs are recorded at cost and amortized to interest expense using a straight-line method that approximates the effective interest method over the anticipated life of the related debt.
Credit Facility
We have a credit agreement through our operating partnership, Tier OP. In March 2016, the available borrowings under the credit facility were increased, and as a result of meeting certain financial covenants, the credit facility was converted from secured to unsecured and now provides for total borrowings of up to
$860.0 million
, subject to our compliance with certain financial covenants. The facility consists of a
$300.0 million
term loan, a
$275.0 million
term loan, and a
$285.0 million
revolving line of credit. The first term loan matures on December 18, 2019. The second term loan matures on June 30, 2022. The revolving line of credit matures on December 18, 2018, and can be extended
one
additional year subject to certain conditions and payment of an extension fee. The annual interest rate on the credit facility is equal to either, at our election, (1) the “base rate” (calculated as the greatest of (i) the agent’s “prime rate”; (ii)
0.5%
above the Federal Funds Effective Rate; or (iii) the LIBOR Market Index Rate plus
1.0%
) plus the applicable margin or (2) LIBOR for an interest period of
one
,
three
, or
six
months plus the applicable margin. The applicable margin will be determined based on the ratio of total indebtedness to total asset value and ranges from 35 basis points to 250 basis points. We have entered into interest rate swap agreements to hedge interest rates on
$525.0 million
of these borrowings to manage our exposure to future interest rate movements. All amounts owed are guaranteed by us and certain subsidiaries of Tier OP. As of
June 30, 2016
, we had approximately
$575.0 million
in borrowings outstanding under the term loans, and
no
borrowings outstanding under the revolving line of credit with the ability, subject to our most restrictive financial covenants, to borrow an additional approximately
$126.4 million
under the facility as a whole. As of
June 30, 2016
, the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately
3.33%
.
10.
Equity
Series A Convertible Preferred Stock
As of December 31, 2015, we had
10,000
shares of Series A participating, voting, convertible preferred stock (the “Series A Convertible Preferred Stock”) outstanding. In connection with the listing of our common stock on the NYSE on July 23, 2015, an automatic conversion of the Series A Convertible Preferred Stock was triggered with the number of shares to be issued not determinable until March 2, 2016, based on the Conversion Company Value, as defined in the Articles Supplementary. On March 2, 2016, based on the Conversion Company Value,
no
shares of common stock were issued, and the shares of Series A Convertible Preferred Stock were canceled.
Stock Plans
Our 2015 Equity Incentive Plan allows for and our 2005 Incentive Award Plan allowed for equity-based incentive awards to be granted to our employees, non-employee directors, and key persons as detailed below:
Stock options.
As of
June 30, 2016
, we had outstanding options held by our independent directors to purchase
12,495
shares of our common stock at a weighted average exercise price of approximately
$40.13
per share. These options are all fully vested and have expiration dates that range from July 2018 to June 2022. The options were anti-dilutive to earnings per share for each period presented.
Restricted stock units.
We have outstanding restricted stock units (“RSUs”) held by our independent directors. These units vest
13 months
after the grant date. Subsequent to vesting, the restricted stock units will be converted to an equivalent number of shares of common stock upon the earlier to occur of the following events or dates: (i) separation from service for any reason other than cause; (ii) a change in control of the Company; (iii) death; or (iv) specific dates chosen by the independent directors that range from January 2017 to December 2020. Expense is measured at the grant date based on the estimated fair value of the award and is recognized over the vesting period.
The following is a summary of the number of outstanding RSUs held by our independent directors as of
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
Units
|
|
Weighted Average Price per unit
|
|
Units
|
|
Weighted Average Price per unit
|
Outstanding at the beginning of the year
|
28,705
|
|
|
$
|
18.29
|
|
|
13,841
|
|
|
$
|
24.69
|
|
Issued
|
18,275
|
|
|
$
|
15.05
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
|
(2
|
)
|
|
$
|
24.82
|
|
Converted
|
(7,725
|
)
|
|
$
|
19.96
|
|
|
(2,078
|
)
|
|
$
|
24.06
|
|
Outstanding at the end of the period (1)
|
39,255
|
|
|
$
|
16.45
|
|
|
11,761
|
|
|
$
|
24.80
|
|
_____________
(1) As of
June 30, 2016
,
6,046
RSUs are vested.
On January 26, 2016,
111,063
restricted stock units were issued to employees with a grant price of
$15.26
per unit. These restricted stock units vest on December 31, 2018, at which time they will be converted into a number of shares of common stock, which could range from
zero
shares to
222,126
shares, based on our annualized total stockholder return (“TSR”) percentage as compared to
three
metrics: our TSR on a predetermined absolute basis, the TSR of the constituent companies of the NAREIT Office Index (unweighted), and the TSR of a select group of peer companies. Expense is measured at the grant date, based on the estimated fair value of the award (
$19.18
per unit) as determined by a Monte Carlo simulation based model using the following assumptions:
|
|
|
|
Assumption
|
|
Value
|
Expected volatility
|
|
24%
|
Risk-free interest rate
|
|
1.15%
|
Expected term
|
|
35 months
|
Expected dividend yield
|
|
4.5%
|
Restricted stock units were anti-dilutive to earnings per share for each period presented.
Restricted stock.
We have outstanding restricted stock held by employees. For restricted stock issued in 2016, restrictions lapse one-third on each of December 30, 2016, 2017, and 2018. For restricted stock issued in December 2015, restrictions lapse one-third on the grant date, one-third one year after the grant date, and one-third two years after the grant date. For restricted stock issued prior to December 2015, restrictions lapse in
25%
increments annually over the
four
-year period following the grant date. Compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the service period based on a tiered lapse schedule and estimated forfeiture rates. The restricted stock was anti-dilutive to earnings per share for each period presented.
The following is a summary of the number of shares of restricted stock outstanding as of
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
Shares
|
|
Weighted Average Price per share
|
|
Shares
|
|
Weighted Average Price per share
|
Outstanding at the beginning of the year
|
281,905
|
|
|
$
|
22.46
|
|
|
118,563
|
|
|
$
|
24.73
|
|
Issued
|
119,523
|
|
|
$
|
15.19
|
|
|
106,811
|
|
|
$
|
26.88
|
|
Forfeiture
|
(8,406
|
)
|
|
$
|
19.98
|
|
|
(10
|
)
|
|
$
|
25.30
|
|
Restrictions lapsed
|
(59,673
|
)
|
|
$
|
25.64
|
|
|
(33,726
|
)
|
|
$
|
24.65
|
|
Outstanding at the end of the period
|
333,349
|
|
|
$
|
19.34
|
|
|
191,638
|
|
|
$
|
25.94
|
|
For the three months ended
June 30, 2016
and
2015
, we recognized a total of approximately
$1.1 million
and
$0.6 million
, respectively, for compensation expense related to the amortization of all of the equity-based incentive awards outlined above. For the six months ended
June 30, 2016
and
2015
, we recognized a total of approximately
$2.0 million
and
$1.1 million
, respectively, for compensation expense related to the amortization of all of the equity-based incentive awards outlined above. As of
June 30, 2016
, the total remaining compensation cost on unvested awards was approximately
$5.8 million
, with a weighted average remaining contractual life of approximately
1.8
years.
Distributions
Our board of directors reinstated quarterly cash distributions in the second quarter of 2015 at
$0.18
per share of common stock and has authorized cash distributions in the same amount for each quarter since that time. Distributions declared for each quarter were paid in the subsequent quarter.
The following table reflects the distributions declared for our common stock, Series A Convertible Preferred Stock, and noncontrolling interests (OP units and vested restricted stock units) during the six months ended
June 30, 2016
and for the year ended December 31, 2015 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stockholders
|
|
Preferred Stockholders
|
|
Noncontrolling
Interests
|
|
Total
|
|
|
|
2016
|
|
|
|
|
|
|
|
1st Quarter
|
$
|
8,600
|
|
|
$
|
8,594
|
|
|
$
|
—
|
|
|
$
|
6
|
|
2nd Quarter
|
8,601
|
|
|
8,594
|
|
|
—
|
|
|
7
|
|
Total
|
$
|
17,201
|
|
|
$
|
17,188
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2nd Quarter
|
9,028
|
|
|
9,011
|
|
|
2
|
|
|
15
|
|
3rd Quarter
|
8,556
|
|
|
8,539
|
|
|
2
|
|
|
15
|
|
4th Quarter
|
8,596
|
|
|
8,576
|
|
|
2
|
|
|
18
|
|
Total
|
$
|
26,180
|
|
|
$
|
26,126
|
|
|
$
|
6
|
|
|
$
|
48
|
|
11. Commitments and Contingencies
As of
June 30, 2016
, we had commitments of approximately
$31.7 million
for future tenant improvements and leasing commissions.
We have employment agreements with
five
of our executive officers. The term of each employment agreement ends on July 15, 2018, provided that the term will automatically continue for an additional
one
-year period unless either party provides
60
days written notice of non-renewal prior to the expiration of the initial term. The agreements provide for lump sum payments and an immediate lapse of restrictions on compensation received under the long-term incentive plan upon termination of employment without cause. As a result, in the event we terminated all of these agreements without cause as of
June 30, 2016
, we would have recognized approximately
$13.6 million
in related compensation expense.
12. Supplemental Cash Flow Information
Supplemental cash flow information is summarized below for the
six months ended June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30, 2016
|
|
June 30, 2015
|
Interest paid, net of amounts capitalized
|
$
|
19,742
|
|
|
$
|
31,668
|
|
Income taxes paid
|
$
|
1,964
|
|
|
$
|
936
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
Property and equipment additions in accounts payable and accrued liabilities
|
$
|
12,016
|
|
|
$
|
13,295
|
|
Amortization of deferred financing fees in building and improvements, net
|
$
|
—
|
|
|
$
|
165
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
Cancellation of Series A Convertible Preferred Stock
|
$
|
2,700
|
|
|
$
|
—
|
|
Mortgage notes assumed by purchaser
|
$
|
—
|
|
|
$
|
47,074
|
|
Financing costs in accounts payable and accrued liabilities
|
$
|
—
|
|
|
$
|
55
|
|
Unrealized gain on interest rate derivatives
|
$
|
—
|
|
|
$
|
1,590
|
|
Unrealized loss on interest rate derivatives
|
$
|
15,412
|
|
|
$
|
—
|
|
Accrual for distributions declared
|
$
|
8,602
|
|
|
$
|
9,028
|
|
Contributions from noncontrolling interests
|
$
|
—
|
|
|
$
|
1,000
|
|