Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business
Organization
TIER REIT, Inc. is a publicly traded (NYSE: TIER), self-managed, Dallas-based real estate investment trust focused on owning quality, well-managed commercial office properties in dynamic markets throughout the U.S. 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 vision is to be the premier owner and operator of best-in-class office properties in TIER
1
submarkets, which are primarily higher density and amenity-rich locations within select, high-growth metropolitan areas that offer a walkable experience to various amenities. Our mission is to provide unparalleled,
TIER
ONE
Property Services to our tenants and outsized total return through stock price appreciation and dividend growth to our stockholders. 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, 2018
, we owned interests in
18
operating office properties,
one
non-operating property, and
three
development properties. Our operating properties are located in
six
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, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on February 12, 2018. 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, 2018
, and
December 31, 2017
, and condensed consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for the periods ended
June 30, 2018
and
2017
, 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, 2018
, and
December 31, 2017
, and our results of operations and our cash flows for the periods ended
June 30, 2018
and
2017
. These adjustments are of a normal recurring nature.
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.
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 pursuant to the rules and regulations of the SEC. Please see our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for a complete listing of our significant accounting policies.
Real Estate
The following is a summary of our buildings and improvements and related lease intangibles as of
June 30, 2018
, and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Intangibles
|
|
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Acquired Above-Market Leases
|
|
Acquired Below-Market Leases
|
|
|
Buildings and Improvements
|
|
Other Lease Intangibles
|
|
|
as of June 30, 2018
|
|
|
|
|
Cost
|
|
$
|
1,642,748
|
|
|
$
|
173,283
|
|
|
$
|
4,857
|
|
|
$
|
(61,205
|
)
|
Less: accumulated depreciation and amortization
|
|
(482,475
|
)
|
|
(67,405
|
)
|
|
(4,677
|
)
|
|
35,295
|
|
Net
|
|
$
|
1,160,273
|
|
|
$
|
105,878
|
|
|
$
|
180
|
|
|
$
|
(25,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Intangibles
|
|
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
Acquired Above-Market Leases
|
|
Acquired Below-Market Leases
|
|
|
Buildings and Improvements
|
|
Other Lease Intangibles
|
|
|
as of December 31, 2017
|
|
|
|
|
Cost
|
|
$
|
1,514,544
|
|
|
$
|
146,926
|
|
|
$
|
4,857
|
|
|
$
|
(50,399
|
)
|
Less: accumulated depreciation and amortization
|
|
(453,126
|
)
|
|
(60,298
|
)
|
|
(4,438
|
)
|
|
32,457
|
|
Net
|
|
$
|
1,061,418
|
|
|
$
|
86,628
|
|
|
$
|
419
|
|
|
$
|
(17,942
|
)
|
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 2018 to an ending date of November 2027.
Anticipated amortization associated with acquired lease intangibles for each of the following five years is as follows (in thousands):
|
|
|
|
July 2018 - December 2018
|
3,594
|
|
2019
|
7,119
|
|
2020
|
6,274
|
|
2021
|
5,025
|
|
2022
|
4,323
|
|
Hurricane Harvey
In August 2017, One & Two Eldridge Place and Three Eldridge Place (collectively known as the “Eldridge Properties”), located in Houston, Texas, experienced flood-related damage as a result of Hurricane Harvey and its aftermath. By early January 2018, all of the properties were fully operational. We carry comprehensive property, casualty, flood, and business interruption insurance that we anticipate will cover our losses at the properties, subject to a deductible. In the third quarter of 2017, we recognized approximately
$15.0 million
for the write-off of the net book value of damaged assets, and we have incurred approximately
$11.4 million
of restoration expenses from August 2017 through June 2018.
The write-off of the net book value of damaged assets and the restoration expenses incurred have been fully offset by an estimated insurance recovery. Since we determined receipt of insurance proceeds is probable, the estimated insurance recovery is recorded as a receivable and is included in “accounts receivable, net” on our condensed consolidated balance sheets. Through
June 30, 2018
, we have received approximately
$7.1 million
of this insurance recovery.
To the extent that insurance proceeds ultimately exceed the net book value of damaged assets plus the restoration expenses incurred, the excess (net of the deductible) will be reflected as income in the period insurance proceeds are received or when receipt is deemed probable to occur.
During the three and
six months ended June 30, 2018
, we provided rent abatements of approximately
$0.8 million
and $
4.7 million
, respectively, to tenants as a result of Hurricane Harvey. These abatements were a reduction to “rental revenue” on our condensed consolidated statements of operations and comprehensive income (loss) for the three and
six months ended June 30, 2018
. For the three and six months ended June 30, 2018, these rent abatements were offset by approximately
$0.4 million
and
$3.7 million
, respectively, of business interruption insurance proceeds (net of estimated saved expenses). We anticipate we will receive remaining business interruption insurance proceeds in subsequent quarters.
Cash, Cash Equivalents, and Restricted Cash
We consider investments in highly-liquid money market funds or investments with original maturities of three months or less to be cash equivalents. Restricted cash includes restricted money market accounts, as required by our lenders or by leases, for anticipated tenant improvements, property taxes and insurance, certain tenant security deposits, and additional loan security reserves.
The following is a summary of our total cash, cash equivalents, and restricted cash as presented in our statements of cash flows for the
six months ended June 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
June 30,
2017
|
Cash and cash equivalents
|
$
|
8,359
|
|
|
$
|
28,763
|
|
Restricted cash
|
14,086
|
|
|
10,953
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
22,445
|
|
|
$
|
39,716
|
|
Accounts Receivable, net
The following is a summary of our accounts receivable as of
June 30, 2018
, and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Straight-line rental revenue receivable
|
$
|
53,674
|
|
|
$
|
57,372
|
|
Insurance receivable
|
19,717
|
|
|
18,826
|
|
Tenant receivables
|
6,217
|
|
|
4,221
|
|
Non-tenant receivables
|
1,564
|
|
|
893
|
|
Allowance for doubtful accounts
|
(417
|
)
|
|
(183
|
)
|
Total
|
$
|
80,755
|
|
|
$
|
81,129
|
|
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 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, 2018
and 2017, we capitalized interest expense of approximately
$0.6 million
and
$0.7 million
, respectively, for unconsolidated entities with properties under development, which is included in our investments in unconsolidated entities on our condensed consolidated balance sheets.
Noncontrolling Interests
Noncontrolling interests consists of our third-party partners’ proportionate share of equity in certain consolidated real estate properties and restricted stock units issued to our independent directors.
Revenue Recognition
Our rental revenue primarily consists of revenue generated from leases. 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.
For contracts with customers (as defined by GAAP), we recognize revenue when we transfer promised goods or services to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our revenue from contracts with customers primarily consists of parking income, development fee income, and gain on sale of assets.
Parking income
- Parking income is primarily generated (1) through contractual arrangements with management companies that operate our parking garages and remit the monthly revenue collected to us or (2) directly through tenant leases. Revenue is recognized at a point in time upon the performance of services. Accounts receivable are recorded for services provided in advance of receiving payment. Management applies judgment in determining whether we are the principal or agent in those arrangements with management companies. We report revenue and expenses from these arrangements on a gross basis since we control the fulfillment of the promise to provide the service.
Development fee income
- We serve as a development manager for development projects owned by unconsolidated entities in which we have an ownership interest. Development fees are paid monthly and structured based on costs that approximate the percentage of construction completed. Our performance obligation is therefore satisfied over time, and we recognize development fee income based on progress of the developments.
Gain on sale of assets
- Upon the disposition of a property, we recognize a gain or loss at a point in time when we determine control of the underlying asset has been transferred to the buyer. Our performance obligation is generally satisfied at closing of the transaction. Any continuing involvement is analyzed as a separate performance obligation in the contract and a portion of the sales price is allocated to each performance obligation. When the performance obligation related to the continuing involvement is satisfied, the sales price allocated to it is recognized. There is significant judgment applied to estimate the amount of any variable consideration identified within the sales price and assess its probability of occurrence based on current market information, historical transactions, and forecasted information that is reasonably available.
3. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
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. Lease contracts are excluded from this revenue recognition criteria; however, the sale of real estate is required to follow the new model. Expanded quantitative and qualitative disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers are required under the guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years, or full retrospective, and one requiring prospective application of the new standard with disclosure of results under old standards, or modified retrospective. We adopted this guidance on January 1, 2018, using the modified retrospective approach applied to those contracts which were not completed as of January 1, 2018. The most material potential impact from adoption relates to how revenue is recognized for sales of real estate with continuing involvement. Prior to the adoption, profit for such sales transactions was recognized and then reduced by the maximum exposure to loss related to the nature of the continuing involvement at the time of sale. Under the new guidance, any continuing involvement must be analyzed as a separate performance obligation in the contract and a portion of the sales price allocated to each performance obligation. When the performance obligation related to the continuing involvement is satisfied, the sales price allocated to it is recognized. Upon adoption, we recorded a cumulative-effect adjustment to decrease opening cumulative distributions and net loss attributable to common stockholders by approximately
$1.5 million
. The adjustment represents a gain on sale that was deferred under the
previous guidance. We determined since control of the underlying asset was transferred to the buyer at closing of the transaction, the gain was recognizable at the time of sale. Our internal controls with respect to accounting for real estate sales have been updated accordingly. The adoption of this guidance resulted in no other changes with respect to the timing of revenue recognition or internal controls related to our other revenue from contracts with customers which include primarily parking income and development fee income. The additional disclosures required under the guidance related to our revenue from contracts with customers are provided in Footnote 12.
In August 2016, the FASB issued amended guidance on the classification of certain cash receipts and payments in the statement of cash flows. Of the eight types of cash flows discussed in the new standard, the classification of debt prepayment and debt extinguishment costs as financing outflows impact our financial statements as these items were previously reflected as operating outflows. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We adopted this guidance on January 1, 2018, and the condensed consolidated statement of cash flows for the six months ended June 30, 2017, reflects the reclassification of approximately
$0.4 million
of payments for debt extinguishment costs from cash provided by operating activities to cash used in financing activities.
In February 2017, the FASB issued updated guidance that clarifies the scope of asset derecognition guidance, adds guidance for partial sales of nonfinancial assets, and clarifies recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this guidance on January 1, 2018, did not have a material impact on our financial statements or disclosures.
In May 2017, the FASB issued updated guidance on applying modification accounting to changes in the terms or conditions of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this guidance on January 1, 2018, did not have a material impact on our financial statements or disclosures.
In August 2017, the FASB issued updated guidance to simplify the application of hedge accounting, increase transparency as to the scope and results of hedging programs, and result in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. The transition guidance provides the option of early adoption using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. We early adopted this guidance using the modified retrospective approach on January 1, 2018, and recorded a cumulative-effect adjustment to increase accumulated other comprehensive income with a corresponding increase to cumulative distributions and net loss attributable to common stockholders of approximately
$0.8 million
to eliminate hedge ineffectiveness income previously recognized.
New Accounting Pronouncements to be Adopted
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 modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. The guidance also makes changes to lessor accounting and reporting, specifically the classification of lease components and non-lease components, such as services provided to tenants. New disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases are also required. In July 2018, the FASB issued updated guidance that provides lessors a practical expedient to not separate non-lease components from associated lease components when certain criteria are met. The combined component is accounted for under the revenue standard if the non-lease component is the predominant component of the combined component; otherwise, the combined component is accounted for as an operating lease in accordance with the new leases standard. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted and was initially required to be adopted using the modified retrospective approach. However, the updated guidance also provides a transition option that allows entities to apply the standard at the adoption date and recognize a cumulative-effect adjustment to opening retained earnings in the period of adoption. We expect to adopt this guidance effective January 1, 2019, and elect to apply the transition option and the practical expedients provided by this standard. Upon adoption, we will recognize a lease liability and a right-of-use asset for operating leases where we are the lessee, such as ground leases and office equipment leases.
In June 2016, the FASB issued amended guidance which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance as this will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Financial assets that are measured at amortized cost will be required to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the
amortized cost basis. Generally, the pronouncement requires a modified retrospective method of adoption. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
4. Real Estate Activities
Sales of Real Estate
The following table presents our sales of real estate for the
six months ended June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Name
|
|
Date of Sale
|
|
Location
|
|
Rentable Square Footage
|
|
Contract Sale Price
|
|
Proceeds from Sale
|
500 East Pratt
|
|
02/13/18
|
|
Baltimore, MD
|
|
280
|
|
|
$
|
60,000
|
|
|
$
|
56,528
|
|
Centreport Office Center
|
|
02/22/18
|
|
Fort Worth, TX
|
|
133
|
|
|
12,696
|
|
|
12,421
|
|
Loop Central
|
|
03/27/18
|
|
Houston, TX
|
|
575
|
|
|
72,982
|
|
|
71,978
|
|
|
|
|
|
|
|
988
|
|
|
$
|
145,678
|
|
|
$
|
140,927
|
|
Properties that have been sold contributed income of less than
$0.1 million
and approximately
$0.8 million
to our net loss for the three and six months ended June 30, 2018, respectively. Properties that have been sold contributed income of approximately
$1.8 million
and
$3.5 million
to our net income for the three and six months ended June 30, 2017, respectively. These amounts exclude any gains on the sales of these properties.
Acquisitions of Real Estate
On January 4, 2018, we acquired a
96.5%
initial economic interest in Domain Point for a contract purchase price of approximately
$73.8 million
(at
100%
). We own a
90%
interest in the entity that owns Domain Point. Domain Point is located in Austin, Texas, adjacent to our other Domain office properties and includes
two
buildings with
240,000
rentable square feet (combined). Assets acquired and liabilities assumed were recorded at their relative fair values and include lease intangible assets of approximately
$9.3 million
and acquired below-market leases of approximately
$2.8 million
. The estimated remaining average useful lives for these acquired lease intangibles range from an ending date of September 2018 to an ending date of April 2022.
On March 30, 2018, we acquired the remaining
50%
interest in Domain Junction 8 Venture LLC, the entity that owns Domain 8, increasing our ownership interest in this property to
100%
, for a contract purchase price of approximately
$92.8 million
, which includes the assumption of approximately
$44.9 million
in mortgage debt. As a result of obtaining a controlling interest in the entity, we recognized a gain of approximately
$11.1 million
from the remeasurement of our previously held equity interest at fair value. Assets acquired and liabilities assumed were recorded at their relative fair values upon consolidation of the property, and include lease intangible assets of approximately
$21.3 million
and acquired below-market leases of approximately
$8.3 million
. The estimated remaining average useful lives for these acquired lease intangibles range from having an ending date of May 2025 to an ending date of November 2027.
Real Estate Held for Sale
We had
no
properties held for sale as of
June 30, 2018
. 500 East Pratt (sold in February 2018) was held for sale as of December 31, 2017. The major classes of assets and obligations associated with real estate held for sale as of December 31, 2017, were as follows (in thousands):
|
|
|
|
|
|
December 31, 2017
|
Buildings and improvements, net of approximately $29.0 million in accumulated depreciation
|
$
|
45,396
|
|
Accounts receivable and other assets
|
3,335
|
|
Lease intangibles, net of approximately $5.6 million in accumulated amortization
|
2,830
|
|
Other intangible assets, net of approximately $1.2 million in accumulated amortization
|
1,787
|
|
Assets associated with real estate held for sale
|
$
|
53,348
|
|
|
|
Acquired below-market leases, net of approximately $1.3 million in accumulated amortization
|
$
|
364
|
|
Other liabilities
|
1,990
|
|
Obligations associated with real estate held for sale
|
$
|
2,354
|
|
5.
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, 2018
, we capitalized a total of approximately
$43.4 million
, including approximately
$1.8 million
of interest. For the
six months ended June 30, 2017
, we capitalized a total of approximately
$8.9 million
, which included approximately
$0.6 million
of interest. These costs are classified as real estate under development on our condensed consolidated balance sheets until such time that the development is complete.
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, 2018
, and
December 31, 2017
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
|
|
Unconsolidated
Investment Balance
|
Entity Name
|
|
Property
|
|
June 30,
2018
|
|
December 31, 2017
|
|
June 30,
2018
|
|
December 31,
2017
|
Domain Junction 8 Venture LLC (1)(2)
|
|
Domain 8
|
|
100.00
|
%
|
|
50.00
|
%
|
|
$
|
—
|
|
|
$
|
882
|
|
208 Nueces Street, LLC (2)
|
|
Third + Shoal
|
|
47.50
|
%
|
|
47.50
|
%
|
|
31,714
|
|
|
30,970
|
|
Total (3)
|
|
|
|
`
|
|
|
|
|
|
$
|
31,714
|
|
|
$
|
31,852
|
|
_________________
|
|
(1)
|
On March 30, 2018, we acquired the unrelated third party’s
50%
interest in Domain Junction 8 Venture LLC increasing our ownership interest to
100%
, and this property was consolidated.
|
|
|
(2)
|
We evaluate our investments in unconsolidated entities in order to determine if they are variable interest entities (“VIEs”). Based on our assessment, we 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 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 and any debt guaranteed by us. As of
June 30, 2018
, and
December 31, 2017
, Tier OP guaranteed
25%
and
50%
, respectively, of the construction loan of 208 Nueces Street, LLC, as discussed below in “Guarantees.” At
June 30, 2018
, our VIEs have total assets of approximately
$108.8 million
and total liabilities of approximately
$54.3 million
. At
December 31, 2017
, our VIEs had total assets of approximately
$172.3 million
and total liabilities of approximately
$125.1 million
.
|
|
|
(3)
|
Our investments in unconsolidated entities at
June 30, 2018
, and
December 31, 2017
, include basis adjustments that total approximately
$5.8 million
and
$9.4 million
, respectively. These amounts represent the aggregate difference between our historical cost basis and our equity 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, capitalized interest and certain acquisition, transaction, and other costs 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 and in 2017, includes combined gains on the sales of 1325 G Street and the Colorado Building of approximately
$6.7 million
. For the
three months ended June 30, 2018
and 2017, we recorded
no
income and approximately
$6.6 million
of income, respectively, for our share of equity in operations from our investments in unconsolidated entities. For the six months ended June 30, 2018 and 2017, we recorded income of approximately
$0.3 million
and approximately
$6.3 million
, respectively, for our share of equity in operations from our investments in unconsolidated entities.
Guarantees
The unconsolidated entities in which we have investments generally finance their activities with a combination of partner equity and debt financing. In 2017, 208 Nueces Street, LLC entered into a construction loan for the development of Third + Shoal, in which Tier OP guaranteed up to
50%
of the outstanding principal balance. This percentage is reduced when certain conditions in the guarantee agreement are met, and as of
June 30, 2018
, this percentage was
25%
. The guarantee, which extends to October 2021 when the loan matures, includes a project completion guarantee and a payment guarantee covering a percentage of the outstanding loan.
Additionally, there is a recourse carve-out agreement in which Tier OP guarantees the entire outstanding balance of the loan in addition to any related losses that may arise from certain violations of the joint venture’s contractual agreements, including “bad boy acts.” In these situations, we have an indemnity and contribution agreement with our partners where each partner has indemnified the other for any recourse liability resulting from claims triggered by that partner.
As of
June 30, 2018
, 208 Nueces Street, LLC has a loan commitment of approximately
$103.8 million
, of which, if the full amount of the debt obligation was borrowed, we estimate approximately
$26.0 million
is our maximum exposure related to the payment guarantee. As of
June 30, 2018
, the outstanding balance of the construction loan for 208 Nueces Street, LLC was approximately
$44.7 million
, of which we estimate approximately
$11.2 million
is our maximum exposure related to the payment guarantee. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners. We believe that, as of
June 30, 2018
, in the event we become legally obligated to perform under the payment guarantee, the collateral in 208 Nueces Street, LLC should be sufficient to repay the obligation. If it is not, we and our partners would need to contribute additional capital to the venture.
7.
Notes Payable, net
Our notes payable, net were approximately
$886.3 million
as of
June 30, 2018
. Approximately
$279.2 million
of these notes payable, net were secured by real estate assets with a carrying value of approximately
$398.8 million
as of
June 30, 2018
. As of
June 30, 2018
, 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
$172.7 million
. As of
June 30, 2018
, the stated annual interest rates on our outstanding debt, ranged from approximately
3.16%
to
6.09%
. As of
June 30, 2018
, the effective weighted average interest rate for our debt is approximately
3.91%
. 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 for our debt of approximately
4.19%
as of
June 30, 2018
, and additional interest expense of approximately
$1.2 million
for the
six months ended June 30, 2018
. 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, 2018
, we were in default on a non-recourse property loan with an outstanding balance of approximately
$48.2 million
secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately
$31.6 million
as of
June 30, 2018
. 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 its behalf, although there can be no assurance regarding such disposition.
As of
June 30, 2018
, 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.
Excluding debt already matured as detailed above, our outstanding debt has maturity dates that range from June 2020 to January 2025. The following table provides information regarding the timing of principal payments of our notes payable, net, as of
June 30, 2018
(in thousands):
|
|
|
|
|
Principal payments due in:
|
|
July 2018 - December 2018
|
$
|
48,917
|
|
2019
|
1,589
|
|
2020
|
91,403
|
|
2021
|
72,402
|
|
2022
|
308,000
|
|
Thereafter
|
366,000
|
|
Less: unamortized debt issuance costs (1)
|
(2,051
|
)
|
Notes payable, net
|
$
|
886,260
|
|
________________
|
|
(1)
|
Excludes approximately
$3.2 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.
|
Credit Facility
We have a credit agreement through our operating partnership, Tier OP, that provides for total unsecured borrowings of up to
$900.0 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
$325.0 million
revolving line of credit. The
$300.0 million
term loan matures on January 17, 2025. The
$275.0 million
term loan matures on June 30, 2022. The revolving line of credit matures on January 18, 2022, 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 10 basis points to 235 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, 2018
, we had approximately
$575.0 million
in borrowings outstanding under the term loans, and
$33.0 million
in borrowings outstanding under the revolving line of credit with the ability, subject to our most restrictive financial covenants, to borrow an additional approximately
$209.4 million
under the facility as a whole. As of
June 30, 2018
, the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately
3.46%
.
8. 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 “prepaid expenses and other assets” on our condensed consolidated balance sheets.
The following table sets forth our financial assets and liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of
June 30, 2018
, and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
12,467
|
|
|
$
|
—
|
|
|
$
|
12,467
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
5,045
|
|
|
$
|
—
|
|
|
$
|
5,045
|
|
|
$
|
—
|
|
Financial Instruments not Reported at Fair Value
Financial instruments held at
June 30, 2018
, and
December 31, 2017
, but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable and accrued liabilities, 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, 2018
, and
December 31, 2017
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
Notes payable
|
$
|
888,311
|
|
|
$
|
891,216
|
|
|
$
|
801,339
|
|
|
$
|
805,786
|
|
Less: unamortized debt issuance costs
|
(2,051
|
)
|
|
|
|
(6,801
|
)
|
|
|
Notes payable, net
|
$
|
886,260
|
|
|
|
|
$
|
794,538
|
|
|
|
9. 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, 2018
. The notional values provide an indication of the extent of our involvement in these instruments at
June 30, 2018
, 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 “prepaid expenses and other assets” on our condensed consolidated balance sheets, as of
June 30, 2018
, and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments:
|
Derivative Assets
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
|
Interest rate swaps
|
$
|
12,467
|
|
|
$
|
5,045
|
|
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 three and
six months ended June 30, 2018
and
2017
(in thousands):
Derivatives in Cash Flow Hedging Relationship
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in OCI on derivatives
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2018
|
|
June 30, 2017
|
|
June 30, 2018
|
|
June 30, 2017
|
Interest rate swaps
|
$
|
1,984
|
|
|
$
|
(1,301
|
)
|
|
$
|
7,422
|
|
|
$
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income
|
|
Three Months Ended
|
|
Six Months Ended
|
Location
|
June 30, 2018
|
|
June 30, 2017
|
|
June 30, 2018
|
|
June 30, 2017
|
Interest expense (1)
|
$
|
(259
|
)
|
|
$
|
953
|
|
|
$
|
(100
|
)
|
|
$
|
2,199
|
|
______________
|
|
(1)
|
Increases (decreases) 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 condensed consolidated statements of changes in equity and offset dollar for dollar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense presented in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in which the effects of cash flow hedges are recorded
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Location
|
June 30, 2018
|
|
June 30, 2017
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Interest expense
|
$
|
8,369
|
|
|
$
|
8,235
|
|
|
$
|
16,478
|
|
|
$
|
17,015
|
|
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
$3.5 million
will be reclassified as a decrease to interest expense.
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 defaults 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.
10. Commitments and Contingencies
As of
June 30, 2018
, we had commitments of approximately
$17.2 million
for future building improvements, tenant improvements, and leasing commissions.
We have employment agreements with our
five
named executive officers. The term of each employment agreement ends on February 10, 2020, 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, 2018
, we would have recognized approximately
$14.3 million
in related compensation expense.
11.
Equity
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:
Restricted stock units held by independent directors.
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) July 2019. Expense is measured at the grant date based on the estimated fair value of the award and is recognized over the vesting period. Any forfeitures of awards are recognized as they occur.
The following is a summary of the number of outstanding RSUs held by our independent directors as of
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Units
|
|
Weighted Average Price per unit
|
|
Units
|
|
Weighted Average Price per unit
|
Outstanding at the beginning of the year
|
19,672
|
|
|
$
|
17.03
|
|
|
39,255
|
|
|
$
|
16.45
|
|
Issued
|
12,910
|
|
|
$
|
23.24
|
|
|
19,672
|
|
|
$
|
17.03
|
|
Converted
|
(19,672
|
)
|
|
$
|
17.03
|
|
|
(29,307
|
)
|
|
$
|
16.92
|
|
Outstanding at the end of the period (1)
|
12,910
|
|
|
$
|
23.24
|
|
|
29,620
|
|
|
$
|
16.38
|
|
_____________
|
|
(1)
|
As of
June 30, 2018
,
none
of the RSUs held by our independent directors are vested.
|
Restricted stock units held by employees.
We have outstanding RSUs held by employees. These units vest from December 2018 to December 2020 at which time the units will be converted into a number of shares of common stock, which could range from
zero
shares to
200%
of the issued number of units. The actual number of shares of common stock issued will be 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.
The following is a summary of the number of outstanding RSUs held by our employees as of
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Units
|
|
Weighted Average Price per unit
|
|
Units
|
|
Weighted Average Price per unit
|
Outstanding at the beginning of the year
|
208,620
|
|
|
$
|
16.59
|
|
|
111,063
|
|
|
$
|
15.26
|
|
Issued
|
129,188
|
|
|
$
|
17.24
|
|
|
97,557
|
|
|
$
|
18.10
|
|
Outstanding at the end of the period
|
337,808
|
|
|
$
|
16.84
|
|
|
208,620
|
|
|
$
|
16.59
|
|
Compensation cost is measured at the grant date, based on the estimated fair value of the award (ranging from
$16.80
per unit to
$20.95
per unit) as determined by a Monte Carlo simulation-based model using the assumptions outlined in the table below. Any forfeitures of awards are recognized as they occur.
|
|
|
|
Assumption
|
|
Value
|
Expected volatility
|
|
24% - 26%
|
Risk-free interest rate
|
|
1.15% - 2.37%
|
Expected term
|
|
35 months
|
Expected dividend yield
|
|
3.7% - 4.5%
|
Restricted stock.
We have outstanding restricted stock held by employees. Restrictions on outstanding shares lapse based on various lapse schedules and range from December 2018 to December 2020. 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. Any forfeitures of awards are recognized as they occur.
The following is a summary of the number of shares of restricted stock outstanding as of
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Shares
|
|
Weighted Average Price per share
|
|
Shares
|
|
Weighted Average Price per share
|
Outstanding at the beginning of the year
|
180,791
|
|
|
$
|
20.47
|
|
|
246,805
|
|
|
$
|
20.74
|
|
Issued
|
125,558
|
|
|
$
|
17.24
|
|
|
121,860
|
|
|
$
|
17.88
|
|
Forfeitures
|
(4,914
|
)
|
|
$
|
17.10
|
|
|
(20,089
|
)
|
|
$
|
17.53
|
|
Restrictions lapsed
|
(41,062
|
)
|
|
$
|
26.23
|
|
|
(57,553
|
)
|
|
$
|
25.64
|
|
Outstanding at the end of the period
|
260,373
|
|
|
$
|
18.07
|
|
|
291,023
|
|
|
$
|
18.79
|
|
For the
three months ended June 30, 2018
and
2017
, we recognized a total of approximately
$1.2 million
and
$1.0 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, 2018
and
2017
, we recognized a total of approximately
$2.2 million
and
$1.9 million
, respectively, for compensation expense related to the amortization of all of the equity-based incentive awards outlined above. As of
June 30, 2018
, the total remaining compensation cost on unvested awards was approximately
$5.9 million
, with a weighted average remaining contractual life of approximately
1.4
years.
ATM Program
On May 10, 2017, we established an at-the-market equity offering program (the “ATM Program”) pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to
$125.0 million
in amounts and at times as we determine from time to time. We have no obligation to sell any of such shares. Actual sales will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of our common stock, our determinations of the appropriate sources of funding for the Company, and potential uses of funding available to us. We intend to use the net proceeds from the offering of such shares, if any, for general corporate purposes, which may include future acquisitions, development, and repayment of indebtedness, including borrowings under our credit facility.
During the three months ended
June 30, 2018
, we issued
901,300
shares of common stock under the ATM Program, generating proceeds of approximately
$20.9 million
, net of approximately
$0.3 million
of commissions and approximately
$0.1 million
of issuance costs. Subsequent to June 30, 2018, we issued
1,940,251
shares of common stock under the ATM Program, generating proceeds of approximately
$44.8 million
, net of approximately
$0.6 million
of commissions and approximately
$0.2 million
of issuance costs.
12. Revenue
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. The total net increase to rental revenue due to straight-line rent adjustments for the
three months ended June 30, 2018
and
2017
, was approximately
$0.8 million
and
$2.0 million
, respectively. The total net increase to rental revenue due to straight-line rent adjustments for the
six months ended June 30, 2018
and
2017
, was approximately
$1.3 million
and
$3.8 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, 2018
and
2017
, was approximately
$0.4 million
and
$0.4 million
, respectively. The total net increase to rental revenue due to this deferred rent for the
six months ended June 30, 2018
and
2017
, was approximately
$0.8 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, 2018
and
2017
, was approximately
$1.7 million
and
$0.9 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, 2018
and
2017
, was approximately
$2.9 million
and
$1.8 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, 2018
and
2017
, we recognized lease termination fees of approximately
$0.4 million
and
$0.1 million
, respectively. For the
six months ended June 30, 2018
and
2017
, we recognized lease termination fees of approximately
$0.7 million
and
$0.2 million
, respectively.
Included in our rental revenue is parking income of approximately
$2.3 million
and
$2.0 million
for the
three months ended June 30, 2018
and 2017, respectively, and
$4.6 million
and
$3.9 million
for the
six months ended June 30, 2018
and 2017, respectively, which represents revenue from contracts with customers. Gain (loss) on sale of assets, which also represents revenue from contracts with customers, was a loss of approximately
$0.1 million
and a gain of approximately
$1.3 million
for the
three months ended June 30, 2018
and 2017, respectively, and gains of approximately
$11.9 million
and
$92.0 million
for the
six months ended June 30, 2018
and 2017, respectively. We had
no
significant development fee income for the three or
six months ended June 30, 2018
. We had development fee income of approximately
$0.2 million
for the three and six months ended June 30, 2017.
Accounts receivables from contracts with customers were approximately
$0.9 million
and
$0.6 million
as of
June 30, 2018
and December 31, 2017, respectively.
13. Net Income (Loss) per Common Share
Net income (loss) per common share is calculated using the two-class method, which requires the allocation of undistributed net income between common and participating stockholders. All outstanding restricted stock awards containing rights to non-forfeitable distributions are considered participating securities for this calculation. In periods of net loss, no loss is allocated to participating securities because our participating securities do not have a contractual obligation to share in our losses.
The following table reflects the calculation of basic and diluted net income (loss) per common share for the three and
six months ended June 30, 2018
and
2017
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
June 30, 2018
|
|
June 30, 2017
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(8,277
|
)
|
|
$
|
4,031
|
|
|
$
|
113
|
|
|
$
|
102,202
|
|
Less: net income allocated to participating securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(611
|
)
|
Numerator for basic net income (loss) per share
|
|
$
|
(8,277
|
)
|
|
$
|
4,031
|
|
|
$
|
113
|
|
|
$
|
101,591
|
|
Add: undistributed net income allocated to participating securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
506
|
|
Less: undistributed net income re-allocated to participating securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(504
|
)
|
Numerator for diluted net income (loss) per share (1)
|
|
$
|
(8,277
|
)
|
|
$
|
4,031
|
|
|
$
|
113
|
|
|
$
|
101,593
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
47,684
|
|
|
47,536
|
|
|
47,665
|
|
|
47,524
|
|
Effect of dilutive securities
|
|
—
|
|
|
339
|
|
|
812
|
|
|
204
|
|
Weighted average common shares outstanding - diluted
|
|
47,684
|
|
|
47,875
|
|
|
48,477
|
|
|
47,728
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
(0.17
|
)
|
|
$
|
0.08
|
|
|
$
|
0.00
|
|
|
$
|
2.14
|
|
Diluted net income (loss) per common share
|
|
$
|
(0.17
|
)
|
|
$
|
0.08
|
|
|
$
|
0.00
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
Securities excluded from weighted average common shares outstanding-diluted because their effect would be anti-dilutive
|
|
992
|
|
|
29
|
|
|
17
|
|
|
29
|
|
_______________
|
|
(1)
|
In periods where there is no undistributed net income to allocate to participating securities, the treasury stock method is used to calculate dilutive securities.
|
14. Supplemental Cash Flow Information
Supplemental cash flow information is summarized below for the
six months ended June 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30, 2018
|
|
June 30, 2017
|
Interest paid, net of amounts capitalized
|
$
|
14,211
|
|
|
$
|
12,695
|
|
Income taxes paid
|
$
|
758
|
|
|
$
|
403
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
Property and equipment additions in accounts payable and accrued liabilities
|
$
|
17,382
|
|
|
$
|
7,816
|
|
Liabilities assumed through the purchase of real estate
|
$
|
7,028
|
|
|
$
|
3,267
|
|
Escrow deposits applied to purchase of real estate
|
$
|
21,350
|
|
|
$
|
14,000
|
|
Escrow deposit applied to purchase of real estate from noncontrolling interest
|
$
|
150
|
|
|
$
|
—
|
|
Sale of real estate and lease intangibles to unconsolidated joint venture
|
$
|
—
|
|
|
$
|
13,804
|
|
Acquisition of controlling interest in unconsolidated entity
|
$
|
927
|
|
|
$
|
9,770
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
Mortgage notes assumed (1)
|
$
|
89,733
|
|
|
$
|
146,000
|
|
Unrealized gain on interest rate derivatives
|
$
|
7,422
|
|
|
$
|
768
|
|
_________________
|
|
(1)
|
The approximately
$89.7 million
mortgage notes assumed during the
six months ended June 30, 2018
, includes approximately
$44.9 million
of debt assumed when we acquired the remaining
50.00%
interest in our Domain 8 property, and approximately
$44.9 million
of debt associated with our previously held
50.00%
unconsolidated interest in the Domain 8 property. Domain 8 was consolidated during the
six months ended June 30, 2018
. The approximately
$146.0 million
mortgage notes assumed during the
six months ended June 30, 2017
, includes approximately
$66.0 million
of debt assumed when we acquired Legacy Union One, approximately
$40.1 million
of debt assumed when we acquired the remaining
50.16%
interest in our Domain 2 and Domain 7 properties, and approximately
$39.9 million
of debt associated with our previously held
49.84%
unconsolidated interest in the Domain 2 and Domain 7 properties. Domain 2 and Domain 7 were consolidated during the
six months ended June 30, 2017
.
|