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Form 10-Q TIER REIT INC For: Jun 30

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August 5, 2015 4:06 PM EDT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
 
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended June 30, 2015
OR 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  _________ to _________                    
Commission File Number: 001-37512
TIER REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
68-0509956
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer
Identification No.)
 
17300 Dallas Parkway, Suite 1010, Dallas, Texas 75248
(Address of principal executive offices)
(Zip code)
 
(972) 483-2400
(Registrant’s telephone number, including area code) 
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý
 
As of July 20, 2015, TIER REIT, Inc. had 50,063,414 shares of common stock, $.0001 par value, outstanding.



TIER REIT, INC.
FORM 10-Q
Quarter Ended June 30, 2015
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I
FINANCIAL INFORMATION
Item 1.                                 Financial Statements
TIER REIT, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 
June 30, 2015
 
December 31, 2014
Assets
 

 
 

Real estate
 

 
 

Land
$
167,231

 
$
286,430

Land held for development
6,377

 
—

Buildings and improvements, net
1,314,765

 
1,482,336

Total real estate
1,488,373

 
1,768,766

Cash and cash equivalents
153,158

 
31,442

Restricted cash
29,620

 
35,324

Accounts receivable, net
71,877

 
83,380

Prepaid expenses and other assets
31,890

 
7,129

Investments in unconsolidated entities
44,780

 
39,885

Deferred financing fees, net
13,292

 
10,783

Lease intangibles, net
76,469

 
94,690

Other intangible assets, net
10,284

 
2,144

Assets associated with real estate held for sale
—

 
137,640

Total assets
$
1,919,743

 
$
2,211,183

Liabilities and equity
 

 
 

Liabilities
 

 
 

Notes payable
$
1,030,224

 
$
1,194,085

Accounts payable
2,192

 
2,790

Payables to related parties
794

 
2,041

Accrued liabilities
64,794

 
77,375

Acquired below-market leases, net
12,773

 
16,984

Distributions payable
9,028

 
—

Other liabilities
24,981

 
21,405

Obligations associated with real estate held for sale
—

 
108,343

Total liabilities
1,144,786

 
1,423,023

Commitments and contingencies


 


Series A Convertible Preferred Stock
4,626

 
4,626

Equity
 

 
 

Preferred stock, $.0001 par value per share; 17,490,000 shares authorized, none outstanding
—

 
—

Convertible stock, $.0001 par value per share; 1,000 shares authorized, none outstanding
—

 
—

Common stock, $.0001 par value per share; 382,499,000 shares authorized, 49,871,776 and 49,877,350 shares issued and outstanding at June 30, 2015, and December 31, 2014, respectively (1)
5

 
5

Additional paid-in capital (1)
2,645,825

 
2,645,927

Cumulative distributions and net loss attributable to common stockholders
(1,878,611
)
 
(1,862,555
)
Accumulated other comprehensive income (loss)
799

 
(788
)
Stockholders’ equity
768,018

 
782,589

Noncontrolling interests
2,313

 
945

Total equity
770,331

 
783,534

Total liabilities and equity
$
1,919,743

 
$
2,211,183

_________________
(1) Amounts have been adjusted retroactively to reflect a one-for-six reverse stock split effected June 2, 2015.
See Notes to Condensed Consolidated Financial Statements.

3


TIER REIT, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Rental revenue
$
70,038

 
$
71,234

 
$
145,857

 
$
141,294

Expenses
 

 
 

 
 

 
 

Property operating expenses
20,877

 
23,283

 
46,056

 
48,634

Interest expense
15,460

 
16,818

 
31,982

 
33,414

Real estate taxes
10,198

 
10,276

 
21,842

 
20,256

Property management fees
2,105

 
2,128

 
4,437

 
4,251

Asset impairment losses
—

 
—

 
132

 
8,225

General and administrative
19,470

 
4,606

 
25,884

 
9,301

Depreciation and amortization
31,081

 
29,182

 
61,103

 
58,103

Total expenses
99,191

 
86,293

 
191,436

 
182,184

Interest and other income
141

 
96

 
286

 
344

Loss on early extinguishment of debt
(21,412
)
 
—

 
(21,448
)
 
—

Loss from continuing operations before income taxes, equity in operations of investments, and gain on sale of assets
(50,424
)
 
(14,963
)
 
(66,741
)
 
(40,546
)
Benefit (provision) for income taxes
(1,338
)
 
59

 
(1,262
)
 
(9
)
Equity in operations of investments
69

 
795

 
312

 
883

Loss from continuing operations before gain on sale of assets
(51,693
)
 
(14,109
)
 
(67,691
)
 
(39,672
)
Discontinued operations
 

 
 

 
 

 
 

Income (loss) from discontinued operations
(121
)
 
(3,191
)
 
1,369

 
(7,285
)
Gain on sale of discontinued operations
6,077

 
—

 
14,683

 
—

Income (loss) from discontinued operations
5,956

 
(3,191
)
 
16,052

 
(7,285
)
Gain on sale of assets
44,564

 
—

 
44,564

 
—

Net loss
(1,173
)
 
(17,300
)
 
(7,075
)
 
(46,957
)
Noncontrolling interests in continuing operations
33

 
20

 
60

 
57

Noncontrolling interests in discontinued operations
(11
)
 
1

 
(28
)
 
7

Net loss attributable to common stockholders
$
(1,151
)
 
$
(17,279
)
 
$
(7,043
)
 
$
(46,893
)
Basic and diluted weighted average common shares outstanding (1)
49,893,330

 
49,877,350

 
49,892,390

 
49,874,423

Basic and diluted income (loss) per common share: (1)
 

 
 

 
 

 
 

Continuing operations
$
(0.14
)
 
$
(0.28
)
 
$
(0.46
)
 
$
(0.79
)
Discontinued operations
0.12

 
(0.07
)
 
0.32

 
(0.15
)
Basic and diluted loss per common share
$
(0.02
)
 
$
(0.35
)
 
$
(0.14
)
 
$
(0.94
)
 
 
 
 
 
 
 
 
Distributions declared per common share (1)
$
0.18

 
$
—

 
$
0.18

 
$
—

 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders:
 

 
 

 
 

 
 

Continuing operations
$
(7,096
)
 
$
(14,089
)
 
$
(23,067
)
 
$
(39,615
)
Discontinued operations
5,945

 
(3,190
)
 
16,024

 
(7,278
)
Net loss attributable to common stockholders
$
(1,151
)
 
$
(17,279
)
 
$
(7,043
)
 
$
(46,893
)
Comprehensive income (loss):
 

 
 

 
 

 
 

Net loss
$
(1,173
)
 
$
(17,300
)
 
$
(7,075
)
 
$
(46,957
)
Other comprehensive income: unrealized gain on interest rate derivatives
6,146

 
—

 
1,590

 
—

Comprehensive income (loss)
4,973

 
(17,300
)
 
(5,485
)
 
(46,957
)
Comprehensive loss attributable to noncontrolling interests
11

 
21

 
29

 
64

Comprehensive income (loss) attributable to common stockholders
$
4,984

 
$
(17,279
)
 
$
(5,456
)
 
$
(46,893
)
_________________
(1) Amounts have been adjusted retroactively to reflect a one-for-six reverse stock split effected June 2, 2015.

See Notes to Condensed Consolidated Financial Statements.

4


TIER REIT, Inc.
Condensed Consolidated Statements of Changes in Equity
(in thousands)
(unaudited)
 
 
 
 
 
 
 
Cumulative
Distributions
and
Net Loss Attributable to Common Stockholders
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
Common Stock (1)
 
Additional
 
 
 
 
 
 
 
Number
 
Par
 
Paid-in
 
 
 
Noncontrolling Interests
 
Total Equity
 
of Shares
 
Value
 
Capital (1)
 
 
 
 
Six months ended June 30, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2015
49,877

 
$
5

 
$
2,645,927

 
$
(1,862,555
)
 
$
(788
)
 
$
945

 
$
783,534

Net loss
—

 
—

 
—

 
(7,043
)
 
—

 
(32
)
 
(7,075
)
Unrealized gain on interest rate derivatives
—

 
—

 
—

 
—

 
1,587

 
3

 
1,590

Share based compensation, net
26

 
—

 
740

 
—

 
—

 
87

 
827

Redemption of common stock
(31
)
 
—

 
(842
)
 
—

 
—

 
—

 
(842
)
Contributions by noncontrolling interest
—

 
—

 
—

 
—

 
—

 
1,325

 
1,325

Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Common stock ($0.18 per share) (1)
—

 
—

 
—

 
(9,011
)
 
—

 
—

 
(9,011
)
   Series A Convertible Preferred Stock
   ($0.18 per share) (1)
—

 
—

 
—

 
(2
)
 
—

 
—

 
(2
)
   Noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(15
)
 
(15
)
Balance at June 30, 2015
49,872

 
$
5

 
$
2,645,825

 
$
(1,878,611
)
 
$
799

 
$
2,313

 
$
770,331

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2014
49,865

 
$
5

 
$
2,646,766

 
$
(1,847,039
)
 
$
—

 
$
827

 
$
800,559

Net loss
—

 
—

 
—

 
(46,893
)
 
—

 
(64
)
 
(46,957
)
Share based compensation, net
12

 
—

 
449

 
—

 
—

 
74

 
523

Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(33
)
 
(33
)
Balance at June 30, 2014
49,877

 
$
5

 
$
2,647,215

 
$
(1,893,932
)
 
$
—

 
$
804

 
$
754,092

 _________________
(1) Amounts have been adjusted retroactively to reflect a one-for-six reverse stock split effected June 2, 2015.

















See Notes to Condensed Consolidated Financial Statements.


5


TIER REIT, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
Cash flows from operating activities
 

 
 

Net loss
$
(7,075
)
 
$
(46,957
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Asset impairment losses
132

 
8,225

Gain on sale of assets
(44,564
)
 
—

Gain on sale of discontinued operations
(14,683
)
 
—

Loss on early extinguishment of debt
546

 
—

Amortization of restricted shares and units
1,099

 
665

Depreciation and amortization
61,103

 
69,742

Amortization of lease intangibles
(478
)
 
19

Amortization of above- and below-market rent
(2,522
)
 
(2,263
)
Amortization of deferred financing and mark-to-market costs
1,763

 
1,362

Equity in operations of investments
(312
)
 
(883
)
Ownership portion of management and financing fees from unconsolidated companies
221

 
243

Distributions from investments
569

 
211

Change in accounts receivable
(3,613
)
 
(2,088
)
Change in prepaid expenses and other assets
818

 
(1,203
)
Change in lease commissions
(10,320
)
 
(6,676
)
Change in other lease intangibles
(376
)
 
(743
)
Change in accounts payable
(144
)
 
(1,424
)
Change in accrued liabilities
(17,535
)
 
(6,220
)
Change in other liabilities
3,198

 
441

Change in payables to related parties
(1,092
)
 
(146
)
Cash provided by (used in) operating activities
(33,265
)
 
12,305

 
 
 
 
Cash flows from investing activities
 

 
 

Escrow deposits
(20,000
)
 
—

Return of investments
631

 
749

Purchase of ground lease
(7,200
)
 
—

Purchases of real estate
(6,781
)
 
—

Investments in unconsolidated entities
(7,818
)
 
—

Capital expenditures for real estate
(39,477
)
 
(35,200
)
Capital expenditures for real estate under development
(2,555
)
 
(17,088
)
Proceeds from sale of discontinued operations
59,713

 
—

Proceeds from sale of assets
392,648

 
—

Change in restricted cash
5,704

 
2,315

Cash provided by (used in) investing activities
374,865

 
(49,224
)
 
 
 
 
Cash flows from financing activities
 

 
 

Financing costs
(5,094
)
 
(38
)
Proceeds from notes payable
576,990

 
15,859

Payments on notes payable
(790,981
)
 
(35,314
)
Payments on capital lease obligations
(12
)
 
(17
)
Redemptions of common stock
(842
)
 
—

Transfer of common stock
(270
)
 
(141
)
Distributions to noncontrolling interests
—

 
(33
)
Contributions from noncontrolling interests
325

 
—

Cash used in financing activities
(219,884
)
 
(19,684
)
 
 
 
 
Net change in cash and cash equivalents
121,716

 
(56,603
)
Cash and cash equivalents at beginning of period
31,442

 
57,786

Cash and cash equivalents at end of period
$
153,158

 
$
1,183


See Notes to Condensed Consolidated Financial Statements.

6


TIER REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
1.             Business
 
Organization
 
TIER REIT, Inc. is a self-managed, Dallas, Texas-based real estate investment trust focused primarily on owning and operating high quality, attractive, well-managed, commercial office properties located in strategic markets throughout the United States. As used herein, “TIER REIT,” “TIER,” the “Company,” “we,” “us” or “our” refers to TIER REIT, Inc. and its subsidiaries unless the context otherwise requires. TIER’s investment strategy is to acquire, develop, and operate a portfolio of best-in-class office properties in select markets across the U.S. that consistently lead the nation in population and office-using employment growth. TIER REIT was incorporated in June 2002 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes.  As of June 30, 2015, we owned interests in 31 operating office properties, one recently developed non-operating office property, and one retail property, located in 16 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 owning substantially all of Tier OP.

On June 2, 2015, we filed articles of amendment to our charter to effect a one-for-six reverse stock split of our existing common stock. The par value of our common stock remained at $0.0001, and we recorded an adjustment to the common stock value with an offset to additional paid-in-capital to reflect the change for all periods presented. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), all share information presented has been retroactively adjusted to reflect the reverse stock split.

As we disclosed in a Current Report on Form 8-K filed on March 25, 2015, our board of directors authorized us to pursue a listing of our common stock on a national securities exchange, and on July 23, 2015, we listed our shares of common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “TIER.”
 
2.             Basis of Presentation and Significant Accounting Policies
 
Interim Unaudited Financial Information
 
The accompanying condensed consolidated financial statements have been prepared in accordance with 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, 2014, which was filed with the Securities and Exchange Commission (“SEC”) on March 11, 2015.  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, 2015, and December 31, 2014, and condensed consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for the periods ended June 30, 2015 and 2014, 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, 2015, and December 31, 2014, and our results of operations and our cash flows for the periods ended June 30, 2015 and 2014.  These adjustments are of a normal recurring nature.

As discussed in Note 3, “New Accounting Pronouncements,” effective January 1, 2015, we adopted the Financial Accounting Standards Board (“FASB”) guidance that changes the criteria for reporting a discontinued operation. This adoption impacts the comparability of our financial statements as disposals of individual operating properties will generally no longer qualify as discontinued operations.

    
 


7

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.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.
 
Real Estate
 
As of June 30, 2015, and December 31, 2014, the cost basis and accumulated depreciation and amortization related to our consolidated real estate properties and related lease intangibles were as follows (in thousands): 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired Above-Market Leases
 
Acquired Below-Market Leases
 
 
Buildings and Improvements
 
Other Lease Intangibles
 
 
as of June 30, 2015
 
 
 
 
Cost
 
$
1,837,135

 
$
174,223

 
$
8,979

 
$
(54,317
)
Less: accumulated depreciation and amortization
 
(522,370
)
 
(99,373
)
 
(7,360
)
 
41,544

Net
 
$
1,314,765

 
$
74,850

 
$
1,619

 
$
(12,773
)
 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired Above-Market Leases
 
Acquired Below-Market Leases
 
 
Buildings and Improvements
 
Other Lease Intangibles
 
 
as of December 31, 2014
 
 
 
 
Cost
 
$
2,039,765

 
$
215,913

 
$
11,785

 
$
(59,605
)
Less: accumulated depreciation and amortization
 
(557,429
)
 
(123,242
)
 
(9,766
)
 
42,621

Net
 
$
1,482,336

 
$
92,671

 
$
2,019

 
$
(16,984
)
 
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 2015 to an ending date of December 2030.  Anticipated amortization associated with the acquired lease intangibles for each of the following five years is as follows (in thousands):
July - December 2015
$
1,612

2016
$
1,998

2017
$
1,387

2018
$
555

2019
$
426

 
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 third party broker valuation estimates, 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

8

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 Investment Officer, and Chief Accounting Officer 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, 2015 and 2014, we recorded non-cash impairment charges including amounts recognized in discontinued operations totaling approximately $0.1 million and $8.2 million, respectively, related to the impairment of consolidated real estate assets.  The impairment loss recorded in 2015 related to final estimated closing costs incurred in connection with the disposition of One and Two Chestnut Place. The impairment loss recorded in 2014 related to an asset assessed for impairment due to a change in management’s estimate of the intended hold period.
 
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, 2015 or 2014.

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, 2015, and December 31, 2014 (in thousands):
 
June 30,
2015
 
December 31,
2014
Straight-line rental revenue receivable
$
66,858

 
$
73,266

Tenant receivables
7,071

 
10,165

Non-tenant receivables
1,027

 
1,150

Allowance for doubtful accounts
(3,079
)
 
(1,201
)
Total
$
71,877

 
$
83,380

 
Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets include escrow deposits for the purchase of properties that we have contracted to acquire, our derivative assets, deferred tax assets and prepaid directors’ and officers’ insurance, as well as prepaid insurance, prepaid real estate taxes, utility and other deposits of the properties we consolidate.


9

Deferred Financing Fees, net

The following is a summary of our deferred financing fees as of June 30, 2015, and December 31, 2014 (in thousands):
 
June 30,
2015
 
December 31,
2014
Cost
$
23,941

 
$
24,704

Less: accumulated amortization
(10,649
)
 
(13,921
)
Net
$
13,292

 
$
10,783


 
Other Intangible Assets, net
 
Other intangible assets consist of ground leases on certain of our properties. As of June 30, 2015, and December 31, 2014, the cost basis and accumulated amortization related to our consolidated other intangibles assets were as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Cost
$
11,177

 
$
2,978

Less: accumulated amortization
(893
)
 
(834
)
Net
$
10,284

 
$
2,144

 
We amortize the value of other intangible assets to expense over their estimated remaining useful lives which have ending dates ranging from December 2032 to December 2044.  Anticipated amortization associated with other intangible assets for each of the following five years is as follows (in thousands):
July - December 2015
$
198

2016
$
397

2017
$
397

2018
$
397

2019
$
397

 
Real Estate Held for Sale
 
We classify properties as held for sale when certain criteria are met, in accordance with GAAP.  At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that property.  Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.  In the event that a property classified as held for sale no longer meets the criteria for held for sale classification, the property is reclassified as held for use at the lower of the fair value or the depreciated basis as if the property had continued to be used. At June 30, 2015, we had no properties classified as real estate held for sale. At December 31, 2014, we had three properties classified as real estate held for sale, one of which was reclassified to held for use in June 2015.

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.  The total net increase to rental revenues due to straight-line rent adjustments for three months ended June 30, 2015 and 2014, was approximately $4.3 million and $1.4 million, respectively.  The total net increase to rental revenues due to straight-line rent adjustments for six months ended June 30, 2015 and 2014, was approximately $7.1 million and $2.9 million, respectively. Our rental revenue also includes amortization of acquired above- and below-market leases.  The total net increase to rental revenues due to the amortization of acquired above- and below-market leases for the three months ended June 30, 2015 and 2014, was approximately $1.3 million and $1.1 million, respectively. The total net increase to rental revenues due to the amortization of acquired above- and below-market leases for six months ended June 30, 2015 and 2014, was approximately $2.5 million and $2.3 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, 2015 and 2014, we recognized lease termination fees of approximately $0.1 million and $0.7 million, respectively. For the six months ended June 30, 2015 and 2014, we recognized lease

10

termination fees of approximately $0.7 million and $0.9 million, respectively. Each of the amounts presented above include rental revenue amounts recognized in discontinued operations. 

Income Taxes
 
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and have qualified as a REIT since the year ended December 31, 2004.  The Company is generally not subject to federal income taxes to the extent we distribute our REIT taxable income to our stockholders currently each year and we meet certain other organizational and operational requirements.  In addition to the Company, our business is conducted through our operating partnership, Tier OP, and various subsidiaries, including limited liability companies, partnerships, and corporations elected to be treated as taxable REIT subsidiaries.  The Company and its subsidiaries are subject to state and local income taxes on operations located in states, cities, and other jurisdictions that impose an income tax.  In addition, our taxable REIT subsidiaries are subject to federal, state, and local income taxes at regular corporate tax rates.

As of June 30, 2015, we have deferred tax liabilities of approximately $2.5 million and deferred tax assets, net of related valuation allowances, of approximately $2.4 million related to various state taxing jurisdictions.  At December 31, 2014, we had deferred tax liabilities of approximately $2.9 million and deferred tax assets, net of related valuation allowances, of approximately $2.5 million related to various state taxing jurisdictions.

Noncontrolling Interests

Noncontrolling interests consists of our third-party partners’ proportionate share of equity in certain consolidated real estate properties, limited partnership units issued to third parties, and restricted stock units issued to our independent directors.

3.            New Accounting Pronouncements
 
In April 2014, FASB issued guidance that changes the criteria for reporting a discontinued operation. Under the new guidance, only a disposal of a component that represents a major strategic shift of an organization qualifies for discontinued operations reporting. The guidance also requires expanded disclosures about discontinued operations and new disclosures in regards to individually significant disposals that do not qualify for discontinued operations reporting. This guidance is effective for the first interim or annual period beginning on or after December 15, 2014.  Upon our adoption of this guidance on January 1, 2015, sales of our individual operating properties generally no longer qualify as discontinued operations. However, properties sold or initially classified as held for sale prior to January 1, 2015 will continue to be reported as discontinued operations. Properties that were held for sale prior to January 1, 2015, that are reclassified to held for use after January 1, 2015, will be reported as continuing operations.
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 as of December 31, 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 June 2014, the FASB issued an update which 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. We do not believe the adoption of this guidance will have a material impact on our financial statements.
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 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

11

permitted and may be applied either prospectively or retrospectively. We do not believe the adoption of this guidance will 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. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
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. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. We do not believe the adoption of this guidance will have a material impact on our financial statements.
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 “prepaid expenses and other assets” and “other liabilities” on our condensed consolidated balance sheets.


12

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, 2015, and December 31, 2014 (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, 2015
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Assets
 
$
3,087

 
$
—

 
$
3,087

 
$
—

Liabilities
 
$
(2,286
)
 
$
—

 
$
(2,286
)
 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Liabilities
 
$
(789
)
 
$
—

 
$
(789
)
 
$
—


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, 2015, we recorded additional impairment losses of approximately $0.1 million for a property that was impaired at December 31, 2014, and was sold in 2015. During the year ended December 31, 2014, we also recorded impairment losses for a property classified as held for sale. The following table summarizes those assets which were measured at fair value and impaired during 2015 and 2014 (in thousands):

 
 
 
 
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, 2015
 
 

 
 

 
 

 
 

 
 

Real estate
 
$
11,489

 
$
—

 
$
11,489

 
$
—

 
$
(132
)
 
 
 
 
 
 
 
 
 
 
 
for the year ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
Real estate (1)
 
$
11,489

 
$
—

 
$
11,489

 
$
—

 
$
(4,940
)
Real estate held for sale (2)
 
$
42,000

 
$
—

 
$
—

 
$
42,000

 
$
(8,225
)
_______________
(1) Recorded in the quarter ended December 31, 2014.
(2) Recorded in the quarter ended March 31, 2014.

Financial Instruments not Reported at Fair Value
 
Financial instruments held at June 30, 2015, and December 31, 2014, 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.



13

Carrying amounts and the related estimated fair value of our notes payable as of June 30, 2015, and December 31, 2014, are as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
Notes payable
$
1,030,224

 
$
1,036,873

 
$
1,194,085

 
$
1,216,991

Notes payable associated with real estate held for sale
$
—

 
$
—

 
$
97,257

 
$
95,011

 
5.           Real Estate Activities

Acquisitions
On June 24, 2015, we acquired a 95% interest in a ground lease of 0.81 acres, including an existing building, to be used for future development located in the central business district of Austin, Texas (“208 Nueces Street”). The purchase price for our interest was $7.5 million. Substantially all of the purchase price was allocated to a ground lease intangible that will be amortized over the initial term of the lease which ends in December 2044. The lease has a renewal option to extend the term through December 2113.
On June 25, 2015, we acquired a 95% interest in 4.0 acres of vacant land to be used for future development located in the Legacy Town Center submarket of Plano, Texas, (“Legacy Land”). The purchase price for our interest was $6.2 million.     
On July 23, 2015, we acquired various interests in a mixed-use development located in Austin, Texas, (“The Domain”) for a contract purchase price of approximately $201.1 million. We previously paid an escrow deposit of $20.0 million on this acquisition which is included in “prepaid expenses and other assets” on our condensed consolidated balance sheet. On July 24, 2015, we sold parcels of land acquired in this acquisition to an unrelated third-party for approximately $22.0 million.

Sales of Real Estate Reported in Continuing Operations

The following table presents our sale of real estate for the six months ended June 30, 2015, that is reported in continuing operations (in thousands):
 
 
Date of Disposal
 
 
 
Rentable Square Footage
 
Contract Sales Price
 
Proceeds from Sale
Property Name
 
 
Location
 
 
 
One and Two Chestnut Place
 
3/6/2015
 
Worcester, MA
 
218

 
$
14,000

 
$
11,631

United Plaza
 
4/23/2015
 
Philadelphia, PA
 
617

 
114,554

 
114,983

1650 Arch Street
 
4/23/2015
 
Philadelphia, PA
 
553

 
76,290

 
76,573

1325 G Street (1) (2)
 
6/30/2015
 
Washington, D.C.
 
307

 
152,000

 
145,541

Colorado Building (1)
 
6/30/2015
 
Washington, D.C.
 
128

 
50,000

 
43,920

 
 
 
 
 
 
1,823

 
$
406,844

 
$
392,648

____________________
(1) On June 30, 2015, our 1325 G Street and Colorado Building properties were each sold to entities in which we acquired a noncontrolling 10% interest and the properties were deconsolidated.
(2) In connection with the sale of this property, approximately $100.0 million of proceeds from sale were used to pay off debt secured by the property.
 
The following table presents net income (loss) related to these properties for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net income (loss) from properties sold in 2015 and included in continuing operations
$
170

 
$
(1,038
)
 
$
211

 
$
(3,198
)


14

Sales of Real Estate Reported in Discontinued Operations

As discussed in Note 3, “New Accounting Pronouncements,” we adopted the provisions of the FASB guidance regarding the reporting of discontinued operations on January 1, 2015. The following presents our sales of real estate during the six months ended June 30, 2015, and the year ended December 31, 2014, that are reported as discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive income (loss) because they were sold or classified as held for sale on or before December 31, 2014 (in thousands):
 
 
Date of Disposal
 
 
 
Rentable Square Footage
 
Contract Sales Price
 
Proceeds from Sale
Property Name
 
 
Location
 
 
 
for the six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
250 West Pratt (1)
 
3/19/2015
 
Baltimore, MD
 
368

 
$
63,500

 
$
55,229

Fifth Third Center (1) (2)
 
4/7/2015
 
Cleveland, OH
 
508

 
52,750

 
4,484

 
 
 
 
 
 
876

 
$
116,250

 
$
59,713

 
 
 
 
 
 
 
 
 
 
 
for the year ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
City Hall Plaza
 
9/16/2014
 
Manchester, NH
 
210

 
$
19,750

 
$
19,130

222 South Riverside Plaza (3)
 
12/19/2014
 
Chicago, IL
 
1,184

 
 
 
223,670

 
 
 
 
 
 
1,394

 
 
 
$
242,800

_____________
(1) These properties were held for sale at December 31, 2014, and the operations were classified as discontinued operations.
(2) Proceeds from sale are reduced by approximately $47.1 million of debt that was assumed by the purchaser.
(3) The contract sales price for the 222 South Riverside Plaza property was approximately $247.0 million in cash, excluding transaction costs, credits, prorations, and adjustments, plus the conveyance of the 5950 Sherry Lane property in Dallas, Texas.

The table below summarizes the results of operations for each of the 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 months ended June 30, 2015 and 2014 (in thousands). This includes properties sold or held for sale on or before December 31, 2014, and excludes a property that was held for sale at December 31, 2014, and then reclassified to held for use in 2015.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Rental revenue
$
(124
)
 
$
13,790

 
$
4,566

 
$
27,404

Expenses
 

 
 

 
  

 
  

Property operating expenses
22

 
3,833

 
1,723

 
8,359

Interest expense
44

 
4,517

 
720

 
9,002

Real estate taxes
(83
)
 
2,293

 
633

 
4,869

Property management fees
14

 
398

 
121

 
816

Depreciation and amortization
—

 
5,938

 
—

 
11,639

Total expenses
(3
)
 
16,979

 
3,197

 
34,685

Other expense
—

 
2

 
—

 
4

Income (loss) from discontinued operations
$
(121
)
 
$
(3,191
)
 
$
1,369

 
$
(7,285
)
    
Real Estate Held for Sale

As of December 31, 2014, we had three properties classified as held for sale and the operations of each of those properties were classified as discontinued operations at that time. As of June 30, 2015, two of those properties have been sold, and the other property was reclassified to held for use. In connection with the property reclassified to held for use, approximately $1.3 million in depreciation and amortization was recorded to adjust the depreciated basis to be as if the property had continued to be used during the period it was held for sale. As of June 30, 2015, we had no properties classified as held for sale.


15

The major classes of assets and obligations associated with real estate held for sale as of December 31, 2014, are as follows (in thousands): 
 
December 31, 2014
Land
$
10,977

Buildings and improvements, net of approximately $38.0 million in accumulated depreciation
108,891

Accounts receivable and other assets, net of approximately $0.1 million in allowance for doubtful accounts
7,290

Lease intangibles, net of approximately $15.5 million in accumulated amortization
10,482

Assets associated with real estate held for sale
$
137,640

 
 
Notes payable
$
97,257

Acquired below-market leases, net of approximately $3.2 million in accumulated amortization
1,513

Other liabilities
9,573

   Obligations associated with real estate held for sale
$
108,343



6.             Investments in Unconsolidated Entities
 
Investments in unconsolidated entities consist of our noncontrolling interests in certain properties. On June 30, 2015, we sold our previously wholly-owned Colorado Building and 1325 G Street properties each to separate entities in which we own 10% noncontrolling interests. The following is a summary of our investments in unconsolidated entities as of June 30, 2015, and December 31, 2014 (in thousands):

 
Ownership Interest
 
 
 
 
 
June 30,
2015
 
December 31, 2014
 
June 30,
2015
 
December 31,
2014
Wanamaker Building
60%
 
60%
 
$
37,977

 
$
38,609

Paces West
10%
 
10%
 
1,161

 
1,276

Colorado Building
10%
 
100%
 
1,030

 
—

1325 G Street
10%
 
100%
 
4,612

 
—

Total
 
 
 
 
$
44,780

 
$
39,885

 
For the three months ended June 30, 2015 and 2014, we recorded approximately $0.1 million and $0.8 million in equity in operations of investments, respectively.  For the six months ended June 30, 2015 and 2014, we recorded approximately $0.3 million and $0.9 million in equity in operations of investments, respectively. Our equity in operations of investments for the three and six months ended June 30, 2015 and 2014, represents our proportionate share of the combined earnings and losses from these investments for the period of our ownership. For the six months ended June 30, 2015 and 2014, we recorded approximately $1.2 million and $1.0 million of distributions from our investments in unconsolidated entities, respectively. 

7.             Real Estate Under Development
 
We capitalize interest, property taxes, insurance, and direct construction costs on our real estate under development, which includes the development of a new commercial office building at Two BriarLake Plaza in Houston, Texas (“Two BriarLake Plaza”).  For the six months ended June 30, 2015, we capitalized a total of approximately $5.2 million for the development of Two BriarLake Plaza, including approximately $0.6 million in interest.  For the six months ended June 30, 2014, we capitalized a total of approximately $17.6 million for the development of Two BriarLake Plaza, including approximately $1.2 million in interest.  We completed the major construction activity of Two BriarLake Plaza in the third quarter of 2014, and the property was classified within “land” and “buildings and improvements, net” on our condensed consolidated balance sheet at that time. Tenant improvements are ongoing and the building is not yet held as fully available for occupancy. We have a construction loan that provides up to $66.0 million in available borrowings for the development. As of June 30, 2015, approximately $53.9 million has been drawn on the loan.  





16

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, 2015. The notional values provide an indication of the extent of our involvement in these instruments at June 30, 2015, 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” and “other liabilities” on our condensed consolidated balance sheets, as of June 30, 2015, and December 31, 2014 (in thousands):
Derivatives designated as hedging instruments:
Derivative Assets
 
Derivative Liabilities
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
 
Interest rate swaps
$
3,087

 
$
—

 
$
(2,286
)
 
$
(789
)
 
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, 2015 and 2014 (in thousands):
 
Derivatives in Cash Flow Hedging Relationship
 
Gain (loss) recognized in OCI on derivative
(effective portion)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Interest rate swaps
$
6,146

 
$
—

 
$
1,590

 
$
—

 
 
Amount reclassified from OCI into income (effective portion)
 
For the Three Months Ended
 
For the Six Months Ended
Location
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Interest expense (1)
$
809

 
$
—

 
$
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.
    
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 $7.0 million will be reclassified as an increase to interest expense.


17

As of June 30, 2015, 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 $2.5 million.  As of June 30, 2015, we have not posted any collateral related to these agreements.  If we had breached any of these provisions at June 30, 2015, we could have been required to settle our obligations under the agreements at the termination value of approximately $2.5 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 was approximately $1.0 billion in principal amount at June 30, 2015, and was secured by real estate assets with a carrying value of approximately $1.4 billion as of June 30, 2015. As of June 30, 2015, 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 $53.9 million from borrowings on our construction loan for Two BriarLake Plaza. As of June 30, 2015, the stated annual interest rates on our outstanding notes payable, excluding mezzanine financing, ranged from 3.04% to 6.09%. We had mezzanine financing on one property with a stated annual interest rate of 9.80%. As of June 30, 2015, the weighted average stated interest rate for our consolidated notes payable is approximately 4.47%.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of June 30, 2015, we believe we were in compliance with the covenants under each of our loan agreements, and our notes payable had maturity dates that range from December 2015 to June 2022.
 
The following table summarizes our notes payable as of June 30, 2015 (in thousands):
Principal payments due in:
 
July - December 2015
$
44,909

2016
238,525

2017
130,021

2018
1,622

2019
251,723

Thereafter
363,396

Unamortized premium
28

Total
$
1,030,224


Credit Facility
 
Through our operating partnership, Tier OP, we have a secured credit agreement providing for total borrowings of up to $750.0 million. The facility consists of a $250.0 million term loan, a $275.0 million term loan, and a $225.0 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 45 basis points to 260 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.  Draws under the credit facility are secured by a perfected first priority lien and security interest in a collateral pool that consists of eleven properties owned by certain of our subsidiaries as of June 30, 2015. As of June 30, 2015, we had approximately $525.0 million in borrowings outstanding under the term loans, and no borrowings outstanding under the revolving line of credit with an additional $66.0 million of borrowings available under the facility as a whole. Additional availability may be made available to us upon inclusion of any of our other unencumbered properties in the collateral pool. As of June 30, 2015, the weighted average stated interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.46%.
 



18


10.          Equity

On June 2, 2015, we filed articles of amendment to our charter to effect a one-for-six reverse stock split of our existing common stock. All share and per share information presented below has been retroactively adjusted to reflect the impact of the reverse stock split.

Series A Convertible Preferred Stock

As of June 30, 2015, we had outstanding 10,000 shares of Series A participating, voting, convertible preferred stock (the “Series A Convertible Preferred Stock”) to Behringer Harvard REIT I Services Holdings, LLC. The redemption value of these shares at June 30, 2015, was approximately $4.6 million based on our most recent estimated per share value of our common stock of $26.88 as of October 30, 2014. 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. The determination of the number of shares of our common stock to be issued as a result of the conversion of the Series A Convertible Preferred Stock  generally will amount to 10% of the excess of (a) the Conversion Company Value, as defined in the Articles Supplementary, which is based on the average daily closing price of our common stock for a 30-day trading period beginning 180 days after our listing date over (b) the Effective Date Value of our common stock, as defined in the Articles Supplementary. The Effective Date Value is based on a share price of approximately $25.95 per share. As a result, if the average daily closing price of our common stock for the 30-day trading period beginning 180 days after our listing date is less than $25.95 per share, then no shares of common stock will be issued. Assuming the Conversion Company Value was based on the closing price of our common stock as of August 3, 2015 ($17.45), no shares of common stock would be issued.
    
Limited Partnership Units
 
At June 30, 2015, Tier OP had 72,097 units of limited partnership interest held by third parties.  These units of limited partnership interest are convertible into an equal number of shares of our common stock.

Stock Plans
 
Our 2005 Incentive Award Plan allowed for equity-based incentive awards to be granted to our Employees and Key Personnel (as defined in the plan) as detailed below:

Stock options. As of June 30, 2015, 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 $40.13 per share. These options have a maximum term of 10 years and were exercisable one year after the date of grant.  The options were anti-dilutive to earnings per share for each period presented.
 
Restricted stock units. We have outstanding restricted stock units 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 August 2015 to June 2019. Expense is measured at the grant date based on the estimated fair value of the award and is recognized over the vesting period. The restricted stock units were anti-dilutive to earnings per share for each period presented. The following is a summary of the number of restricted stock units outstanding as of June 30, 2015 and 2014:
 
2015
 
2014
Outstanding at the beginning of the year
13,841

 
6,235

Issued
—

 
5,952

Forfeited (1)
(2
)
 
—

Converted
(2,078
)
 
—

Outstanding at June 30 (2)
11,761

 
12,187

_____________
(1) Reflects fractional shares that were forfeited on June 2, 2015.
(2) As of June 30, 2015, 4,156 restricted stock units are vested.



19

Restricted stock. We have outstanding restricted stock held by employees. Restrictions on these shares 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, 2015 and 2014:
 
2015
 
2014
Outstanding at the beginning of the year
118,563

 
70,554

Issued (1)
106,811

 
75,011

Forfeited (2)
(10
)
 
(9,364
)
Restrictions lapsed (3)
(33,726
)
 
(17,638
)
Outstanding at June 30
191,638

 
118,563

_____________
(1) Shares issued in 2015 had a grant price of $26.88 per share. Shares issued in 2014 had a grant price of $25.20 per share.
(2) 2015 reflects fractional shares that were forfeited on June 2, 2015.
(3) 10,063 and 5,599 of these shares were surrendered in 2015 and 2014, respectively, to pay withholding taxes.

Distributions
In April 2015, our board of directors authorized a distribution payable to stockholders of record as of June 30, 2015, which was paid on July 8, 2015. The declared distribution rate was equal to $0.18 per share of common stock.
The following table reflects the distributions declared for our common stock, Series A Convertible Preferred Stock, and noncontrolling interests during the six months ended June 30, 2015 and 2014 (in thousands). Distributions to noncontrolling interests in 2014 included distributions made to third-party members related to certain non-wholly-owned real estate properties.
 
 
 
Common
 Stockholders
 
Preferred Stockholders
 
Noncontrolling
Interests
 
Total
 
 
 
2015
 
 
 
 
 
 
 
1st Quarter
$
—

 
$
—

 
$
—

 
$
—

2nd Quarter
9,028

 
9,011

 
2

 
15

Total
$
9,028

 
$
9,011

 
$
2

 
$
15

 
 
 
 
 
 
 
 
2014
 

 
 

 
 

 
 

1st Quarter
$
33

 
$
—

 
$
—

 
$
33

2nd Quarter
—

 
—

 
—

 
—

Total
$
33

 
$
—

 
$
—

 
$
33



11.              Related Party Arrangements
 
We previously purchased certain administrative services from BHT Advisors, LLC (“BHT Advisors”), such as human resources, shareholder services, and information technology. Effective June 30, 2015, we terminated the administrative services agreement and now perform each of these services internally. We also have paid, and will continue to pay, BHT Advisors acquisition fees related to the development of Two BriarLake Plaza. Upon notice of termination, we paid BHT Advisors approximately $2.7 million, which represents 0.75 times the gross amount of all service charges payable with respect to such terminated services for the trailing 12-month period ending with the last full month prior to the delivery of notice of termination.

HPT Management Services, LLC (“HPT Management”) previously provided property management services for our properties. Effective June 30, 2015, we internalized the management of our properties and we exercised our buyout option, whereupon (1) we acquired and assumed certain assets and certain liabilities of HPT Management and (2) HPT Management irrevocably waived the non-solicitation and non-hire provisions of the management agreement with respect to certain persons, including employees of HPT Management providing property management functions on our behalf. We paid HPT Management approximately $7.5 million, which represents 0.8 times the gross amount of all management and oversight fees earned by HPT

20

Management under the management agreement for the trailing 12-month period ending with the last full month prior to delivery of the notice.

Current board members, Messrs. Robert S. Aisner and M. Jason Mattox, serve as officers and are partial owners of the ultimate parent entity of BHT Advisors and HPT Management.
    
The following is a summary of the related party fees and costs we incurred with BHT Advisors and HPT Management during the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
BHT Advisors, acquisition fees
$
81

 
$
195

 
$
181

 
$
402

BHT Advisors, cost of services provided
592

 
514

 
1,242

 
1,154

BHT Advisors, termination fee
2,706

 
—

 
2,706

 
—

HPT Management, property and construction management fees
2,402

 
2,788

 
5,272

 
5,582

HPT Management, reimbursement of costs and expenses
3,736

 
4,760

 
7,992

 
9,257

HPT Management, buyout fee
7,494

 
—

 
7,494

 
—

    Total
$
17,011

 
$
8,257

 
$
24,887

 
$
16,395

 
 
 
 
 
 
 
 
Expensed
$
16,616

 
$
7,760

 
$
23,932

 
$
15,403

Capitalized to real estate under development
—

 
195

 
—

 
402

Capitalized to buildings and improvements, net
395

 
302

 
955

 
590

    Total
$
17,011

 
$
8,257

 
$
24,887

 
$
16,395


At June 30, 2015, and December 31, 2014, we had payables to related parties of approximately $0.8 million and $2.0 million, respectively, consisting primarily of expense reimbursements payable to BHT Advisors and property management fees payable to HPT Management. 

12.          Commitments and Contingencies
 
As of June 30, 2015, we had commitments of approximately $42.8 million for future tenant improvements, leasing commissions, and completing renovations.
 
We have Employment Agreements (collectively, the “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 the Company had terminated all of these agreements without cause as of June 30, 2015, we would have recognized approximately $11.6 million in additional compensation expense.



21

13.          Supplemental Cash Flow Information
 
Supplemental cash flow information is summarized below for the six months ended June 30, 2015 and 2014 (in thousands):
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
Interest paid, net of amounts capitalized
$
31,668

 
$
39,664

Income taxes paid
$
936

 
$
848

 
 
 
 
Non-cash investing activities:
 

 
 

Property and equipment additions in accounts payable and accrued liabilities
$
13,295

 
$
22,089

  Amortization of deferred financing fees in building and improvements, net
$
165

 
$
—

 
 
 
 
Non-cash financing activities:
 

 
 

Mortgage notes assumed by purchaser
$
47,074

 
$
—

  Financing costs in accrued liabilities and payables to related parties
$
55

 
$
—

  Unrealized gain on interest rate derivatives
$
1,590

 
$
—

Accrual for distributions declared
$
9,028

 
$
—

Contributions from noncontrolling interests
$
1,000

 
$
—

 


22


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto.
Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of TIER REIT, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, our ability to address debt maturities and fund our capital requirements, our intentions to sell certain properties, the value of our assets, our anticipated capital expenditures, the amount and timing of any anticipated future cash distributions to our stockholders, and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “objectives,” “strategies,” “goals,” and variations of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 11, 2015, and the factors described below:
•
market disruptions and economic conditions experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;
•
our ability to renew expiring leases and lease vacant spaces at favorable rates or at all;
•
the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their businesses; 
•
the availability of cash flow from operating activities to fund distributions and capital expenditures;
•
our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets or otherwise to fund our future capital needs;
•
our ability to strategically acquire or dispose of assets on favorable terms, or at all;
•
our level of debt and the terms and limitations imposed on us by our debt agreements;
•
our ability to retain our executive officers and other key personnel;
•
conflicts of interest and competing demands faced by certain of our directors;
•
unfavorable changes in laws or regulations impacting our business or our assets; and
•
factors that could affect our ability to qualify as a real estate investment trust for federal income tax purposes.
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.
Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no significant changes to our critical accounting policies since December 31, 2014.

23


Overview
As of June 30, 2015, we owned interests in 31 operating office properties with approximately 11.9 million rentable square feet. We also owned a recently developed non-operating office property with approximately 334,000 rentable square feet and a retail property with approximately 79,000 square feet.  Our properties are located in 16 markets throughout the United States. Substantially all of our business is conducted through our operating partnership, Tier Operating Partnership LP (“Tier OP”). 
As an owner of real estate, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for office space at our properties. After undergoing pervasive and fundamental disruptions, the financial and real estate markets have generally stabilized, but only after suffering negative and significant impacts, including extensive job losses and limited availability of credit. Further, performance in commercial office real estate is generally predicated on a sustained pattern of office-using job growth, and as a result of only modest growth, it has trailed the general economy. We believe office-using job growth is now in the recovery phase. The uncertainty about continued economic recovery has also impacted, and may continue to impact, our tenants’ businesses. For example, tenants may be reluctant to make long-term lease commitments and many are focused on using less space per employee. Recently, the volatility of oil prices has had a significant impact on the Houston market, where leasing activity has slowed. In the current economic climate, we continue to follow a disciplined approach to managing our operations.
Listing on NYSE and Tender Offer
On July 23, 2015, we listed our shares of common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “TIER.” We believe that listing on the NYSE best positions us to maximize stockholder value over the long term by giving us access to potential additional capital for future growth and provides an opportunity for liquidity to those stockholders who may desire to sell their shares.
In connection with the NYSE listing, we commenced a modified “Dutch Auction” tender offer to purchase for cash up to $50.0 million of our shares of common stock. Under the terms of the tender offer, we intend to select the lowest price, not greater than $21.00 nor less than $19.00 per share, net to the tendering stockholders in cash, less any applicable withholding taxes and without interest, which would enable us to purchase the maximum number of shares having an aggregate purchase price not exceeding $50 million (or such lesser amount if less than $50.0 million of shares of common stock are tendered after giving effect to any shares of common stock withdrawn).  We intend to fund the purchase price for shares of common stock accepted for payment pursuant to the tender offer, and related fees and expenses, from available cash and/or borrowings under our existing credit facility.
Important Information and Where to Find It
The foregoing information and other information in this Quarterly Report on Form 10-Q regarding the tender offer is for informational purposes only and is neither an offer to buy nor the solicitation of an offer to sell any securities of the Company. The full details of the tender offer, including complete instructions on how to tender shares, are included in the Offer to Purchase, the Letter of Transmittal, and other related materials, which we have distributed to stockholders and have filed with the SEC. Stockholders are urged to carefully read the Offer to Purchase, the Letter of Transmittal, and other related materials, as they contain important information, including the terms and conditions of the tender offer. Stockholders may obtain free copies of the Offer to Purchase, the Letter of Transmittal, and other related materials that we filed with the SEC on the SEC's website at www.sec.gov or by calling Georgeson Inc., the information agent for the tender offer at (800) 457-0759 (toll free) or by email at [email protected]. Questions and requests for assistance by retail stockholders may be directed to Georgeson Inc. at (800) 457-0759 (toll free); questions and requests for assistance by institutional stockholders may be directed to J.P. Morgan Securities LLC at (877) 371-5947 (toll free) or Wells Fargo Securities, LLC at (877) 450-7515 (toll free), the dealer managers for the tender offer. In addition, stockholders may obtain free copies of our filings with the SEC from the Company's website at www.tierreit.com/ir.

2015 Objectives
At the beginning of the year, we identified six key objectives for 2015: (1) dispose of properties outside target markets; (2) recycle capital into target markets; (3) strengthen the balance sheet; (4) increase portfolio occupancy; (5) internalize property management and administrative services; and (6) reinstate distributions. The following discussion describes our 2015 objectives and our activities in connection with these objectives.
Dispose of Properties Outside Target Markets
To date in 2015, we have sold properties located in Baltimore, Maryland; Worcester, Massachusetts; Cleveland, Ohio; and Philadelphia, Pennsylvania, and reduced our presence in Washington, D.C. When we believe property and market conditions are advantageous to us, we intend to continue to reduce our exposure in one or more of our remaining non-strategic markets.

24


Recycle Capital into Target Markets

We are currently identifying opportunities to build scale in targeted markets and focusing on best-in-class properties for long-term value creation. For example, in December 2014 we completed an exchange transaction with an institutional property investor in which we sold 222 South Riverside Plaza located in Chicago, Illinois, in exchange for cash and the conveyance of 5950 Sherry Lane located in the Preston Center submarket of Dallas, Texas. In June 2015, we acquired interests in a ground lease and a land parcel to be used for future development, the first being located in the central business district of Austin, Texas, and the second located in the Legacy Town Center submarket of Plano, Texas (a suburb of Dallas). On July 23, 2015, we acquired various interests in a mixed-use development located in Austin, Texas (“The Domain”), for a contract purchase price of approximately $201.1 million. On July 24, 2015, we sold parcels of land acquired in this acquisition to an unrelated third-party for approximately $22.0 million.
 
Strengthen the Balance Sheet

As of June 30, 2015, including our share of the debt maturing at our unconsolidated subsidiaries, we have approximately $47.5 million and $237.4 million of debt maturing in 2015 and 2016, respectively. Current interest rates for borrowings on commercial office properties are lower than our average interest rates, and with the potential for rising interest rates, one of our objectives for 2015 has been to mitigate a portion of the interest rate and refinancing risks associated with this debt by (1) managing our capital resources to provide us the equity for refinancing strategic properties and the ability to unencumber non-strategic properties in anticipation of future sale, (2) pre-paying debt obligations in order to secure new long-term financing (as we did during the first half of 2015 by paying off approximately $243.0 million of debt that was scheduled to mature later in 2015 and approximately $375.8 million of debt that was scheduled to mature in 2016, and securing a new $275.0 million term loan that matures in June 2022) and/or to facilitate property dispositions, and (3) selling certain non-strategic properties and reducing our debt obligations, as we did by selling several properties in the first half of 2015.

Increase Portfolio Occupancy

Our portfolio occupancy was approximately 89.0% for our 31 operating office properties owned as of June 30, 2015, which excludes one recently developed non-operating office property and one retail property, and includes our share of four unconsolidated properties. As of June 30, 2015, we have approximately 405,000 square feet of scheduled lease expirations in 2015 at our operating office properties, and we will continue to focus on leasing with the objective of driving internal growth by increasing occupancy as we seek to re-lease space upon lease expirations. If free rent concessions moderate and our occupancy increases, we would expect our operations to provide increased cash flow in future periods.
The following table sets forth information regarding our leasing activity for the three and six months ended June 30, 2015:
Three months ended June 30, 2015
Renewal
 
Expansion
 
New
 
Total
Square feet leased
622,000

 
91,000

 
144,000

 
857,000

Weighted average lease term (in years)
7.3

 
7.9

 
8.0

 
7.5

Increase (decrease) in weighted average net rental rates per square foot per year (1)
$
(0.91
)
 
$
(1.20
)
 
$
1.13

 
$
(0.60
)
% increase (decrease) in net rental rates per square foot per year
(5
)%
 
(9
)%
 
8
 %
 
(3
)%
Leasing cost per square foot per year (2)
$
3.94

 
$
4.09

 
$
6.72

 
$
4.45

 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
 
 
 
 
Square feet leased
759,000

 
159,000

 
255,000

 
1,173,000

Weighted average lease term (in years)
6.7

 
7.3

 
8.0

 
7.1

Increase (decrease) in weighted average net rental rates per square foot per year (1)
$
(0.81
)
 
$
1.14

 
$
(0.28
)
 
$
(0.44
)
% increase (decrease) in weighted average net rental rates per square foot per year
(4
)%
 
8
 %
 
(2
)%
 
(2
)%
Leasing cost per square foot per year (2)
$
3.81

 
$
5.01

 
$
7.04

 
$
4.68

_________________
(1) Weighted average net rental rates are calculated as the fixed base rental amount paid by a tenant under the terms of their related lease agreements, less any portion of that base rent used to offset real estate taxes, utility charges, and other operating expenses incurred in connection with the leased space, weighted for the relative square feet under the lease.
(2)
Includes tenant improvements and leasing commissions.

25


Internalize Property Management and Administrative Services

On April 1, 2015, we delivered a buyout notice to HPT Management Services, LLC (“HPT Management”), exercising our buyout option and proposing a closing to occur on June 30, 2015, pursuant to our property management agreement with HPT Management. On June 30, 2015, the closing of the buyout option occurred, and we made a payment of approximately $7.5 million to HPT Management. However, we anticipate future reconciliations of property management fees and construction management fees payable to HPT Management related to two of our properties. In connection with the closing of the buyout option, the property management agreement with HPT Management was terminated, HPT Management irrevocably waived certain non-solicitation and non-hire provisions, and we hired all of HPT Management’s property management personnel providing services to us.

On April 1, 2015, we delivered notice of termination to BHT Advisors, LLC (“BHT Advisors”) terminating all administrative services provided by BHT Advisors to us under the administrative services agreement to be effective June 30, 2015.  On June 30, 2015, the termination of the administrative services became effective, and we made a termination payment of approximately $2.7 million to BHT Advisors.  BHT Advisors no longer provide services to us, such as human resources, shareholder services, or information technology, each of which is now performed internally.

We expect these actions to result in increased future cash flow through a reduction in property management and external administrative-related expenses, resulting in overall saving of approximately $6.5 million annually, although we can provide no assurance any level of savings will occur.

Reinstate Distributions

On April 30, 2015, our board of directors authorized a distribution which was paid on July 8, 2015, to stockholders of record on June 30, 2015 and on July 30, 2015, our board of directors authorized a distribution payable on October 8, 2015 to stockholders of record as of September 30, 2015. The declared distribution for each quarter equals $0.18 per share of common stock. These amounts have been adjusted for the one-for-six reverse stock split that occurred on June 2, 2015. Distributions are authorized at the discretion of our board of directors based on its analysis of numerous factors, including but not limited to our forthcoming cash needs and our financial condition, and there is no assurance that distributions will continue or at any particular rate or timing. The Company’s goal is to establish a sustainable quarterly distribution payable from cash provided by operations. However, all or a portion of the distribution may constitute a return of capital.

Reverse Stock Split

In preparation for listing our common stock on the NYSE, we filed articles of amendment to our charter to effect a one-for-six reverse stock split of our existing common stock on June 2, 2015. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder of record who held any fractional share of our common stock as of the close of business on June 2, 2015, received a cash payment equal to the fractional share held by such stockholder multiplied by $26.88, which resulted in an aggregate payment to our stockholders holding fractional shares of approximately $0.8 million.
Results of Operations

The term “same store” in the discussion below includes our consolidated operating properties owned and operated for the entirety of the current and comparable periods. During the year ended December 31, 2014, we disposed of two consolidated properties and we had three properties held for sale as of December 31, 2014. The results of operations for each of these disposed properties and two of the held for sale properties have been reclassified to discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014, and are excluded from the discussions below. One property held for sale at December 31, 2014, was reclassified to held for use on June 1, 2015, and is included in the discussions below. The results of operations of properties sold or initially classified as held for sale in 2015, as well as our recently developed non-operating office property, Two BriarLake Plaza, our one retail property, and our recently acquired property, 5950 Sherry Lane, are included in the discussion below.
Three months ended June 30, 2015, as compared to the three months ended June 30, 2014
Rental Revenue.  Rental revenue for the three months ended June 30, 2015, was approximately $70.0 million as compared to approximately $71.2 million for the three months ended June 30, 2014, a $1.2 million decrease. Our non-same store properties had a decrease of approximately $2.8 million in rental revenue, primarily due to the sale of properties in 2015. Our same store properties had an increase of approximately $1.6 million, primarily due to an increase in occupancy resulting in an increase in revenue of approximately $0.7 million, an increase in rental rates resulting in an increase in rental revenue of approximately $0.5

26


million, and increases in other revenue of approximately $0.4 million. These increases were partially offset by an increase in free rent concessions resulting in a decrease to rental revenue of approximately $1.5 million.
Property Operating Expenses. Property operating expenses for the three months ended June 30, 2015, were approximately $20.9 million as compared to approximately $23.3 million for the three months ended June 30, 2014, a $2.4 million decrease. Our non-same store properties had a decrease of approximately $1.5 million, primarily due to the sale of properties in 2015. Our same store properties had a decrease of approximately $0.9 million, primarily due to lower bad debt expense.
Interest Expense.  Interest expense for the three months ended June 30, 2015, was approximately $15.5 million as compared to approximately $16.8 million for the three months ended June 30, 2014, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties and our credit facility. The $1.3 million decrease was primarily due to lower overall borrowings due to the payoff of debt and lower overall interest rates.

Real Estate Taxes.  Real estate taxes from our consolidated real estate properties for the three months ended June 30, 2015, were approximately $10.2 million as compared to approximately $10.3 million for the three months ended June 30, 2014, a $0.1 million decrease. Our non-same store properties had a decrease of approximately $0.6 million, primarily due to the sale of properties in 2015. Our same store properties had an increase of approximately $0.5 million primarily due to higher property tax rates and value assessments at certain properties and timing of prior year tax refunds.

General and Administrative.  General and administrative expenses for the three months ended June 30, 2015, were approximately $19.5 million as compared to approximately $4.6 million for the three months ended June 30, 2014, and were comprised of corporate general and administrative expenses including directors’ and officers’ insurance premiums, audit and tax fees, legal fees, costs related to our efforts in pursuit of listing our common stock on the NYSE, acquisition expenses, other administrative expenses, reimbursement of certain expenses to BHT Advisors, and buyout and termination fees paid to HPT Management and BHT Advisors. The $14.9 million increase is primarily due to the approximately $10.2 million in buyout and termination fees (combined) paid to HPT Management and BHT Advisors, costs related to our efforts in pursuit of listing our common stock on the NYSE of approximately $2.5 million, acquisition expense of approximately $0.8 million, and increased payroll costs.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended June 30, 2015, was approximately $31.1 million as compared to approximately $29.2 million for the three months ended June 30, 2014, a $1.9 million increase. Our non-same store properties had a decrease of approximately $0.8 million, primarily due to the sale of properties in 2015. Our same store properties had an increase of approximately $2.7 million primarily due to increased amortization related to tenant improvements and leasing commissions and additional depreciation for a property that was previously held for sale.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt for the three months ended June 30, 2015, was approximately $21.4 million and was primarily comprised of defeasance costs related to early payoffs of debt. We had no loss on early extinguishment of debt for the three months ended June 30, 2014.
Benefit (Provision) for Income Taxes. Provision for income taxes for the three months ended June 30, 2015, was approximately $1.3 million, primarily due to taxes related to the sale of certain properties. We had a benefit for income taxes of approximately $0.1 million for the three months ended June 30, 2014.
Gain on Sale of Assets. We had approximately $44.6 million in gain on sale assets for the three months ended June 30, 2015 related to our sales of 1650 Arch and United Plaza and our partial sales of 1325 G Street and the Colorado Building. We had no gain on sale of assets for the three months ended June 30, 2014.
Six months ended June 30, 2015, as compared to the six months ended June 30, 2014
Rental Revenue.  Rental revenue for the six months ended June 30, 2015, was approximately $145.9 million as compared to approximately $141.3 million for the six months ended June 30, 2014, a $4.6 million increase. Our non-same store properties had an increase of approximately $0.8 million in rental revenue, primarily due to the acquisition of 5950 Sherry Lane and the development of Two BriarLake Plaza. Our same store properties had an increase of approximately $3.8 million, primarily due to an increase in rental rates resulting in an increase in revenue of approximately $2.8 million, an increase in occupancy resulting in an increase in rental revenue of approximately $1.3 million, and increases in other revenue of approximately $2.2 million. These increases were partially offset by an increase in free rent concessions resulting in a decrease to rental revenue of approximately $2.5 million.

27


Property Operating Expenses. Property operating expenses for the six months ended June 30, 2015, were approximately $46.1 million as compared to approximately $48.6 million for the six months ended June 30, 2014, a $2.5 million decrease. Our non-same store properties had a decrease of approximately $1.5 million, primarily due to the sale of properties in 2015. Our same store properties had a decrease of approximately $1.0 million, primarily due to lower tenant improvement demolition costs and lower bad debt expense.
Interest Expense.  Interest expense for the six months ended June 30, 2015, was approximately $32.0 million as compared to approximately $33.4 million for the six months ended June 30, 2014, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties and our credit facility. The $1.4 million decrease was primarily due to lower overall borrowings due to the payoff of debt and lower overall interest rates, partially offset by an increase in amortization of deferred financing fees related to our new credit facility.
Asset Impairment Losses. We had approximately $0.1 million in asset impairment losses for the six months ended June 30, 2015, as compared to approximately $8.2 million in asset impairment losses for the six months ended June 30, 2014. The impairment loss recorded in 2015 related to final estimated closing costs incurred in connection with the disposition of One and Two Chestnut Place. The impairment loss recorded in 2014 related to an asset assessed for impairment due to a change in management’s estimate of the intended hold period.
General and Administrative Expenses.  General and administrative expenses for the six months ended June 30, 2015, were approximately $25.9 million as compared to approximately $9.3 million for the six months ended June 30, 2014, and were comprised of corporate general and administrative expenses including directors’ and officers’ insurance premiums, audit and tax fees, legal fees, costs related to our efforts in pursuit of listing our common stock on the NYSE, acquisition expenses, other administrative expenses, reimbursement of certain expenses to BHT Advisors, and buyout and termination fees paid to HPT Management and BHT Advisors.  The $16.6 million increase in general and administrative expenses is primarily due to the approximately $10.2 million in buyout and termination fees (combined) paid to HPT Management and BHT Advisors, costs related to our efforts in pursuit of listing our common stock on the NYSE of approximately $3.0 million, acquisition expense of approximately $0.8 million, and increased payroll costs.
Depreciation and Amortization Expense. Depreciation and amortization expense for the six months ended June 30, 2015, was approximately $61.1 million as compared to approximately $58.1 million for the six months ended June 30, 2014, a $3.0 million increase. Our non-same store properties had an increase of approximately $1.0 million primarily due to the acquisition of 5950 Sherry Lane and the development of Two BriarLake Plaza. Our same store properties had an increase of approximately $2.0 million primarily due to increased amortization related to tenant improvements and leasing commissions.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt for the six months ended June 30, 2015, was approximately $21.4 million and was primarily comprised of defeasance costs related to early payoffs of debt. We had no loss on early extinguishment of debt for the six months ended June 30, 2014.
Gain on Sale of Assets. We had approximately $44.6 million in gain on sale assets for the six months ended June 30, 2015 related to our sales of 1650 Arch and United Plaza and our partial sales of 1325 G Street and the Colorado Building. We had no gain on sale of assets for the six months ended June 30, 2014.

Cash Flow Analysis
Six months ended June 30, 2015, as compared to six months ended June 30, 2014
Cash used in operating activities was approximately $33.3 million for the six months ended June 30, 2015. Cash provided by operating activities for the six months ended June 30, 2014, was approximately $12.3 million. The approximately $45.6 million change is attributable to (1) the timing of receipt of revenues and payment of expenses which resulted in approximately $7.7 million more net cash outflows from working capital assets and liabilities in 2015 compared to 2014; (2) approximately $34.6 million less cash received from the results of our consolidated real estate property operations, including discontinued operations, net of interest expense and general and administrative expenses, including costs associated with listing on the NYSE and termination fees and buyout fees paid to BHT Advisors and HPT Management, respectively; and (3) an increase in cash paid for lease commissions and other lease intangibles of approximately $3.3 million. 
Cash provided by investing activities for the six months ended June 30, 2015, was approximately $374.9 million and was primarily comprised of proceeds from the sale of properties of approximately $452.4 million and changes in restricted cash of approximately $5.7 million, partially offset by monies used to fund capital expenditures for existing real estate and real estate under development of approximately $41.0 million and purchases of real estate, a ground lease, investments in unconsolidated

28


entities, and escrow deposits for anticipated real estate purchases of approximately $41.8 million. Cash used in investing activities for the six months ended June 30, 2014, was approximately $49.2 million and was primarily comprised of monies used to fund capital expenditures for existing real estate and real estate under development.
Cash used in financing activities for the six months ended June 30, 2015, was approximately $219.9 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable. Cash used in financing activities for the six months ended June 30, 2014, was approximately $19.7 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable.
Funds from Operations (“FFO”)
    
Historical cost accounting for real estate assets in accordance with principles generally accepted in the United States of America (“GAAP”) implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient for evaluating operating performance.  FFO is a non-GAAP financial measure that is widely recognized as a measure of a REIT’s operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper on Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated entities which resulted from measurable decreases in the fair value of the depreciable real estate held by the unconsolidated entity), plus depreciation and amortization of real estate assets, and after related adjustments for unconsolidated entities and noncontrolling interests.  The determination of whether impairment charges have been incurred is based partly on anticipated operating performance and hold periods.  Estimated undiscounted cash flows from a property, derived from estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows are taken into account in determining whether an impairment charge has been incurred.  While impairment charges for depreciable real estate are excluded from net income (loss) in the calculation of FFO as described above, impairments reflect a decline in the value of the applicable property which we may not recover.
    
We believe that the use of FFO, together with the required GAAP presentations, is helpful in understanding our operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairments of depreciable real estate assets, and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Factors that impact FFO include fixed costs, yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on debt financing, and operating expenses.

FFO should not be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.  Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected.  FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO.  FFO is a non-GAAP measurement and should be reviewed in connection with other GAAP measurements.  Our FFO attributable to common stockholders as presented may not be comparable to amounts calculated by other REITs that do not define FFO in the same way that we do.
     
The following section presents our calculations of FFO attributable to common stockholders for the three and six months ended June 30, 2015 and 2014, and provides additional information related to our FFO attributable to common stockholders.
    
    

29


The table below is presented in thousands, except per share amounts: 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net loss
$
(1,173
)
 
$
(17,300
)
 
$
(7,075
)
 
$
(46,957
)
Net loss attributable to noncontrolling interests
22

 
21

 
32

 
64

Adjustments (1) (2):
 

 
 

 
 

 
 

Real estate depreciation and amortization
32,448

 
36,398

 
63,757

 
72,321

Impairment of depreciable real estate assets
—

 
—

 
132

 
8,225

Gain on sale of depreciable real estate
(50,641
)
 
—

 
(59,247
)
 
—

Taxes associated with sale of depreciable real estate
1,264

 
—

 
1,264

 
—

Noncontrolling interests (OP units and vested restricted stock units) share of above adjustments
29

 
(53
)
 
(10
)
 
(117
)
FFO attributable to common stockholders
$
(18,051
)
 
$
19,066

 
$
(1,147
)
 
$
33,536

Weighted average common shares outstanding - basic
49,893

 
49,877

 
49,892

 
49,874

Weighted average common shares outstanding - diluted (3)
49,893

 
49,937

 
49,892

 
50,001

Net loss per common share - basic and diluted (3)
$
(0.02
)
 
$
(0.35
)
 
$
(0.14
)
 
$
(0.94
)
FFO per common share - basic and diluted
$
(0.36
)
 
$
0.38

 
$
(0.02
)
 
$
0.67

_____________
(1)
Reflects the adjustments of continuing operations, as well as discontinued operations.
(2)
Includes adjustments for unconsolidated properties and noncontrolling interests.
(3)
There are no dilutive securities for purposes of calculating the net loss per common share.

Three months ended June 30, 2015, as compared to the three months ended June 30, 2014
FFO attributable to common stockholders for the three months ended June 30, 2015, was a negative of approximately $18.1 million as compared to a positive of approximately $19.1 million for the three months ended June 30, 2014, a decrease of approximately $37.2 million.  The disposition of properties that are now included in discontinued operations resulted in a decrease of $2.9 million. A decrease in FFO attributable to common stockholders from continuing operations of approximately $34.3 million primarily related to the following factors:
•loss on early extinguishment of debt of approximately $21.4 million; and
•
an increase in general and administrative expenses of approximately $14.9 million, primarily due to approximately $10.2 million of aggregate termination and buyout fees paid to BHT Advisors and HPT Management, $2.5 million of costs associated with our listing on the NYSE, and acquisition expense of approximately $0.8 million;
partially offset by:
•
an increase in property net operating income of approximately $1.3 million; and
•
lower interest expense of approximately $1.3 million.
Six months ended June 30, 2015, as compared to the six months ended June 30, 2014
FFO attributable to common stockholders for the six months ended June 30, 2015, was a negative of approximately $1.1 million as compared to a positive of approximately $33.5 million for the six months ended June 30, 2014, a decrease of approximately $34.6 million.  The disposition of properties that are now included in discontinued operations resulted in a decrease of approximately $3.0 million. The decrease in FFO attributable to common stockholders from continuing operations of approximately $31.6 million primarily related to the following factors:
•
loss on early extinguishment of debt of approximately $21.4 million;
•
an increase in general and administrative expenses of approximately $16.6 million, primarily due to approximately $10.2 million of aggregate termination and buyout fees paid to BHT Advisors and HPT Management, $3.0 million of costs associated with our listing on the NYSE, and acquisition expense of approximately $0.8 million;
    

30


partially offset by:
•an increase in property net operating income of approximately $5.4 million; and
•
lower interest expense of approximately $1.4 million.
For a more detailed discussion of the changes in the factors listed above, refer to “Results of Operations” beginning on page 26.

Same Store GAAP Net Operating Income and Same Store Cash Net Operating Income (“Same Store GAAP NOI” and “Same Store Cash NOI”)

Same Store GAAP NOI is equal to rental revenue, less lease termination fee income, property operating expenses (excluding tenant improvement demolition costs), real estate taxes, and property management expenses for our same store properties and is considered a non-GAAP financial measure. Same Store Cash NOI is equal to Same Store GAAP NOI less non-cash revenue items including straight-line rent adjustments and the amortization of above- and below-market rent. The same store properties include our consolidated operating properties owned and operated for the entirety of the current and comparable periods.  We view Same Store GAAP NOI and Same Store Cash NOI as important measures of the operating performance of our properties because they allow us to compare operating results of consolidated properties owned and operated for the entirety of the current and comparable periods and therefore eliminate variations caused by acquisitions or dispositions during the periods under review.

Same Store GAAP NOI and Same Store Cash NOI presented by us may not be comparable to Same Store GAAP NOI or Same Store Cash NOI reported by other REITs that do not define Same Store GAAP NOI or Same Store Cash NOI exactly as we do. We believe that in order to facilitate a clear understanding of our operating results, Same Store GAAP NOI and Same Store Cash NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements and notes thereto. Same Store GAAP NOI and Same Store Cash NOI should not be considered as alternatives to net income (loss) as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions.

31


The table below presents our Same Store GAAP NOI and Same Store Cash NOI with a reconciliation to net income (loss) for the three and six months ended June 30, 2015 and 2014 (in thousands). The same store properties for this comparison consist of 26 properties and 9.3 million square feet.
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Same Store Revenue:
 
 
 
 
 
Rental revenue
$
60,706

 
$
59,102

 
$
120,968

 
$
117,189

 
 
Less:
 
 
 
 
 
 
 
 
 
  Lease termination fees
(125
)
 
(576
)
 
(670
)
 
(696
)
 
 
 
60,581

 
58,526

 
120,298

 
116,493

 
 
 
 
 
 
 
 
 
 
Same Store Expenses:
 
 
 
 
 
 
   Property operating expenses (less tenant improvement demolition costs)
18,063

 
18,731

 
37,503

 
37,608

 
 
   Real estate taxes
9,164

 
8,634

 
18,382

 
17,351

 
 
   Property management fees
1,891

 
1,788

 
3,825

 
3,578

 
Property Expenses
29,118

 
29,153

 
59,710

 
58,537

Same Store GAAP NOI
31,463

 
29,373

 
60,588

 
57,956

 
 
Less:
 
 
 
 
 
 
 
 
 
  Straight-line rent revenue adjustment
(2,673
)
 
(875
)
 
(2,969
)
 
(2,067
)
 
 
  Amortization of above- and below-market rents, net
(1,192
)
 
(926
)
 
(2,275
)
 
(1,895
)
Same Store Cash NOI
$
27,598

 
$
27,572

 
$
55,344

 
$
53,994

 
 
 
 
 
 
 
 
 
 
Reconciliation of net loss to Same Store GAAP NOI and Same Store Cash NOI
 
 
 
 
 
 
 
 
Net loss
$
(1,173
)
 
$
(17,300
)
 
$
(7,075
)
 
$
(46,957
)
 
 
Adjustments:
 
 
 
 
 
 
 
 
 
  Interest expense
15,460

 
16,818

 
31,982

 
33,414

 
 
  Asset impairment losses
—

 
—

 
132

 
8,225

 
 
  Tenant improvement demolition costs
—

 
245

 
52

 
989

 
 
  General and administrative
18,657

 
4,606

 
25,069

 
9,301

 
 
  Acquisition expense
813

 
—

 
815

 
—

 
 
  Depreciation and amortization
31,081

 
29,182

 
61,103

 
58,103

 
 
  Interest and other income
(141
)
 
(96
)
 
(286
)
 
(344
)
 
 
  Loss on early extinguishment of debt
21,412

 
—

 
21,448

 
—

 
 
  Provision (benefit) for income taxes
1,338

 
(59
)
 
1,262

 
9

 
 
  Equity in operations of investments
(69
)
 
(795
)
 
(312
)
 
(883
)
 
 
  (Income) loss from discontinued operations
121

 
3,191

 
(1,369
)
 
7,285

 
 
  Gain on sale of discontinued operations
(6,077
)
 
—

 
(14,683
)
 
—

 
 
  Gain on sale of assets
(44,564
)
 
—

 
(44,564
)
 
—

 
 
  Net operating income of non-same store properties
(5,270
)
 
(5,843
)
 
(12,316
)
 
(10,490
)
 
 
  Lease termination fees
(125
)
 
(576
)
 
(670
)
 
(696
)
Same Store GAAP NOI
31,463

 
29,373

 
$
60,588

 
$
57,956

 
 
  Straight-line rent revenue adjustment
(2,673
)
 
(875
)
 
(2,969
)
 
(2,067
)
 
 
  Amortization of above- and below-market rents, net
(1,192
)
 
(926
)
 
(2,275
)
 
(1,895
)
Same Store Cash NOI
$
27,598

 
$
27,572

 
$
55,344

 
$
53,994


Same Store GAAP NOI increased approximately $2.1 million, or 7.1%, during the three months ended June 30, 2015, as compared to the three months ended June 30, 2014. Same Store Cash NOI during the three months ended June 30, 2015, had no significant change compared to the three months ended June 30, 2014. Same Store GAAP NOI increased approximately $2.6 million, or 4.5%, during the six months ended June 30, 2015, as compared to the six months ended June 30, 2014. Same Store Cash NOI increased approximately $1.4 million, or 2.5%, during the six months ended June 30, 2015, as compared to the six months ended June 30, 2014.

For a more detailed discussion of certain of the changes in the factors listed above, refer to “Results of Operations” beginning on page 26.


32

Liquidity and Capital Resources 
    
As of June 30, 2015, we had cash and cash equivalents of approximately $153.2 million and restricted cash of approximately $29.6 million.  We also have a credit facility with a borrowing capacity of $750.0 million (as described in more detail below). As of June 30, 2015, we had approximately $525.0 million drawn and had the ability to additionally borrow approximately $66.0 million under the credit facility as a whole. Additional availability may be made available to us upon inclusion of any of our other unencumbered properties in the collateral pool.

Our expected actual and potential short and long-term liquidity sources are, among others, cash and cash equivalents, restricted cash, revenue from our properties, proceeds from available borrowings under our credit facility and additional secured or unsecured debt financings and refinancings, and proceeds from the sales of properties in connection with our efforts to sharpen our geographic focus. We believe our recent listing on the NYSE will facilitate supplementing these sources by selling equity or debt securities of the Company if and when we believe appropriate to do so.
 
We may also seek to generate capital by contributing one or more of our existing assets to a joint venture with a third party. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved. Our ability to successfully identify, negotiate, and complete joint venture transactions on acceptable terms or at all is highly uncertain.

Generally, our operating cash needs are property operating expenses, general and administrative expenses, payment of principal and interest on our outstanding indebtedness, including repaying or refinancing our outstanding indebtedness as it matures (approximately $47.5 million and $237.4 million of debt matures in 2015 and 2016, respectively), capital improvements to our properties, including commitments for future tenant improvements, property acquisitions, and distributions to our stockholders. We will also need to pay the cash purchase price, and related fees and expenses, in connection with our up to $50.0 million modified “Dutch Auction” tender offer, which we commenced on July 23, 2015. We intend to fund the purchase price for shares of common stock accepted for payment pursuant to the tender offer, and related fees and expenses, from available cash and/or borrowings under our credit facility.
  
At projected operating levels, we anticipate we have adequate capital resources and liquidity to meet our short-term and long-term liquidity requirements.

Notes Payable

Our notes payable was approximately $1.0 billion in principal amount at June 30, 2015, and was secured by real estate assets with a carrying value of approximately $1.4 billion as of June 30, 2015. As of June 30, 2015, 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 $53.9 million from borrowings on our construction loan for Two BriarLake Plaza. As of June 30, 2015, the stated annual interest rates on our outstanding notes payable, excluding mezzanine financing, ranged from 3.04% to 6.09%. We had mezzanine financing on one property with a stated annual interest rate of 9.80%. As of June 30, 2015, the weighted average stated interest rate for our consolidated notes payable is approximately 4.47%.

Credit Facility
 
Through our operating partnership, Tier OP, we have a secured credit agreement providing for total borrowings of up to $750.0 million. The facility consists of a $250.0 million term loan, a $275.0 million term loan, and a $225.0 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 45 basis points to 260 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.  Draws under the credit facility are secured by a perfected first priority lien and security interest in a collateral pool that consists of eleven properties owned by certain of our subsidiaries as of June 30, 2015. As of June 30, 2015, we had approximately $525.0 million in borrowings outstanding under the term loans and no borrowings outstanding under the revolving line of credit with an additional $66.0 million of borrowings available under the facility as a whole. Additional availability may be made available to us upon inclusion of any of our other unencumbered properties in the collateral pool. As of June 30,

33

2015, the weighted average stated interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.46%.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of June 30, 2015, we believe we were in compliance with the covenants under each of our loan agreements, and our notes payable had maturity dates that range from December 2015 to June 2022.
Distributions
Distributions are authorized at the discretion of our board of directors based on its analysis of numerous factors, including but not limited to our performance over the previous period, expectations of performance over future periods, forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand and general financial condition. The board’s decisions are also influenced, in substantial part, by the requirements necessary to maintain our REIT status.

In April 2015, our board of directors authorized a distribution payable to stockholders of record as of June 30, 2015, which was paid on July 8, 2015. The declared distribution rate was equal to $0.18 per share of common stock, which equated to approximately $9.0 million paid to our common stockholders.
 
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate changes primarily as a result of our debt used to acquire properties. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we borrow primarily at fixed rates or variable rates with what we believe are the lowest margins available at the time and in some cases, the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We have entered into derivative financial instruments to mitigate our interest rate risk on certain financial instruments and as a result have effectively fixed the interest rate on certain of our variable rate debt. As of June 30, 2015, we had approximately $578.9 million of debt that bears interest at a variable rate. Approximately $525.0 million of this variable rate debt has been effectively fixed through the use of interest rate swaps.
A 100 basis point increase in interest rates on our variable rate debt would result in a net increase in total annual interest incurred of approximately $0.5 million. A 100 basis point decrease in interest rates on our variable rate debt would result in a net decrease in total annual interest incurred of approximately $0.1 million. A 100 basis point increase in interest rates on our variable rate debt would result in a net increase in the fair value of our interest rate swaps of approximately $27.1 million. A 100 basis point decrease in interest rates on our variable rate debt would result in a net decrease in the fair value of our interest rate swaps of approximately $27.9 million.
We do not have any foreign operations and thus we are not directly exposed to foreign currency fluctuations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated as of June 30, 2015, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of June 30, 2015, were effective for the purpose of ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 

34

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2015, in connection with the termination of administrative services previously provided by BHT Advisors, we acquired a new license for the software related to accounting for our fixed assets. This is the same software that was previously used by BHT Advisors, and the data was transferred. While we believe there was no significant change in internal control that resulted from this change, there are inherent risks associated with implementing software changes. We believe the internal controls over financial reporting continue to be designed appropriately and operate effectively over this new software. There were no other changes in internal control over financial reporting that occurred during the quarter ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

35


PART II
OTHER INFORMATION
Item 1. Legal Proceedings.

We are not party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.

Except to the extent updated below or previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014.
There is no assurance that an active market will develop for our shares of common stock or regarding the prices at which our shares may trade.

Our shares of common stock were listed on the NYSE on July 23, 2015. Listing on the NYSE does not ensure that an active market will develop for our common stock. It is possible that the daily trading volumes for our common stock may be relatively small compared to other publicly traded securities. Accordingly, no assurance can be given as to (1) the likelihood that an active market for the stock will develop, (2) the liquidity of any such market, (3) the ability of our stockholders to sell their common stock or (4) the price that our stockholders may obtain for their common stock. Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. We cannot predict the prices at which our shares will trade.

Because we have a large number of stockholders and our common stock was not listed on a national securities exchange prior to July 23, 2015, there may be significant pent-up demand to sell our shares. Significant sales of our common stock, or the perception that significant sales of such shares could occur, may cause the market price of our common stock to decline significantly.

Prior to July 23, 2015, our common stock was not listed on any national securities exchange, and the ability of stockholders to liquidate their investments was limited. A large volume of sales of shares of our common stock could decrease the prevailing market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our shares are not affected, the mere perception of the possibility of these sales could depress the market price of our common stock and have a negative effect on our ability to raise capital in the future. In addition, anticipated downward pressure on our common stock price due to actual or anticipated sales of common stock from this market overhang could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the market price of our common stock to decline.

We recently commenced a self-tender offer, which could burden our liquidity resources and may not prove to be the best use of our capital.

In connection with the listing of our common stock on the NYSE on July 23, 2015, we commenced a tender offer (subject to all appropriate filings with the SEC) to purchase outstanding shares of our common stock. Although we may purchase up to $50.0 million of common stock in the self-tender offer at a purchase price not greater than $21.00 nor less than $19.00 per share, we can provide no assurance regarding the ultimate size of such tender offer or the purchase price in connection with such tender offer. The price that we pay for shares in the tender offer may be dilutive and may not be the best use of our capital. The actual amount of cash needed to fund the self-tender offer will depend on how many stockholders elect to tender. We may choose to fund the tender offer and all related fees and expenses with available cash and/or borrowings available under our existing credit facility. This use of our cash and borrowings will burden our liquidity and will prevent us from using the cash or borrowings for other opportunities, such as new investments, distributions or paying down debt.






36


The availability, timing, and amount of any cash distributions are uncertain.
On July 30, 2015, our board of directors authorized a distribution payable on October 8, 2015 to stockholders of record as of September 30, 2015. In addition, on April 30, 2015, our board of directors authorized a distribution, which was paid on July 8, 2015, to stockholders of record as of June 30, 2015. Prior to the declaration of such distributions, our board of directors previously determined on December 19, 2012, to cease paying distributions. One of our objectives for 2015 is to reinstate sustainable quarterly distributions payable from cash provided by operations. We can provide no assurance, however, regarding the availability, timing or amount of any cash distributions. Distributions are authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition and other factors that our board deems relevant. Our board also considers the requirements necessary to maintain our REIT status under the Internal Revenue Code of 1986, as amended. We can provide no assurance that sufficient funds will be available to pay distributions on a regular basis or at all.
The market price and trading volume of our common stock may be volatile.

The trading price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

•
actual or anticipated variations in our quarterly operating results or dividends;
•
changes in our earnings estimates;
•
publication of research reports about us or the real estate industry;
•
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
•
changes in market valuations of similar companies;
•
adverse market reaction to any additional debt we incur in the future;
•
additions or departures of key management personnel;
•
actions by institutional stockholders;
•
speculation in the press or investment community;
•
the realization of any of the other risk factors presented in our Annual Report on Form 10-K or in our other public filings;
•
the extent of investor interest in our securities;
•
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate based companies;
•
our underlying asset value;
•
investor confidence in the stock and bond markets generally;
•
changes in tax laws;
•
future equity issuances or the perception that such equity issuances may occur;
•
failure to meet earnings estimates;
•
failure to maintain our status as a REIT; and
•
general market and economic conditions.

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

The following table includes information regarding purchases of our common stock made by us during the second quarter ended June 30, 2015. These purchases represent fractional shares of common stock purchased in connection with the one-for-six reverse stock split that occurred on June 2, 2015.

37


 
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Maximum number of shares that may yet be purchased under the plans or programs
April 2015
 
—
 
—
 
not applicable
 
not applicable
May 2015
 
—
 
—
 
not applicable
 
not applicable
June 2015
 
31,319
 
$26.88
 
not applicable
 
not applicable

Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
    
On July 30, 2015, our board of directors determined that the 2015 annual meeting of stockholders will be held on December 3, 2015 (the “Annual Meeting”).

The date of mailing of the proxy materials in connection with the Annual Meeting has advanced by more than 30 days from the anniversary of the mailing date of the proxy materials for our 2014 annual meeting of stockholders. Accordingly, in accordance with our bylaws, the deadline for receipt of nominations by stockholders of candidates for director or proposals of other business by stockholders not intended to be included in our proxy materials has been set at August 10, 2015. Such nominations or other proposals must comply with the requirements set forth in our bylaws.

In accordance with Rule 14a-5(f) and Rule 14a-8(e) under the Securities Exchange Act of 1934, as amended, the deadline for receipt of stockholder proposals for inclusion in our proxy statement for the Annual Meeting pursuant to Rule 14a-8 has been set at August 10, 2015. Stockholder proposals must comply with all of the applicable requirements set forth in the rules and regulations of the SEC, including Rule 14a-8.

Nominations and other stockholder proposals must be submitted in writing and addressed to: Corporate Secretary, TIER REIT, Inc., 17300 Dallas Parkway, Suite 1010, Dallas, Texas.
Item 6. Exhibits.
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

38


SIGNATURE 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
TIER REIT, INC.
Dated: August 5, 2015
By:
/s/ James E. Sharp
 
 
James E. Sharp
 
 
Chief Accounting Officer
 
 
(Principal Accounting Officer)

39


Index to Exhibits
Exhibit Number
 
Description
3.1
 
Ninth Articles of Amendment and Restatement (previously filed and incorporated by reference to Form 8-K filed on June 28, 2011)
3.2
 
Articles Supplementary (previously filed and incorporated by reference to Form 8-K filed on September 6, 2012)
3.3
 
Articles of Amendment of the Company (previously filed and incorporated by reference to Form 8-K filed on June 25, 2013)
3.4
 
Second Articles of Amendment to Ninth Articles of Amendment and Restatement of TIER REIT, Inc., effective as of June 2, 2015 (previously filed and incorporated by reference to Form 8-K filed on June 3, 2015)
3.5
 
Third Articles of Amendment to Ninth Articles of Amendment and Restatement of TIER REIT, Inc., effective as of June 2, 2015 (previously filed and incorporated by reference to Form 8-K filed on June 3, 2015)
10.1
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Scott W. Fordham (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.2
 
Second Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Dallas E. Lucas (previously filed and incorporated by reference to Form 8-K filed on February 2, 2015)
10.3
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and William J. Reister (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.4
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Telisa Webb Schelin (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.5
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and James E. Sharp (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.6
 
Amended and Restated Credit Agreement, dated as of June 30, 2015, by and among Tier Operating Partnership LP, as Borrower; TIER REIT, Inc., as Parent; the Financial Institutions party thereto and their assignees as Lenders; Wells Fargo Bank, National Association, as Administrative Agent; Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Bookrunners; JPMorgan Chase Bank, N.A., as Syndication Agent; and U.S. Bank National Association and Fifth Third Bank as Co-Documentation Agents (previously filed and incorporated by reference to Form 8-K filed on July 20, 2015)
10.7
 
Amended and Restated Guaranty, dated as of June 30, 2015, by TIER REIT, Inc. and the subsidiary guarantors identified on the signature pages thereto in favor of Wells Fargo Bank, National Association in its capacity as Administrative Agent for the Lenders under the Credit Agreement (previously filed and incorporated by reference to Form 8-K filed on July 20, 2015)
31.1
 
Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
31.2
 
Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
32.1*
 
Section 1350 Certifications (furnished herewith)
99.1
 
First Amendment to Amended and Restated Credit Agreement, dated as of July 20, 2015, by and among Tier Operating Partnership LP as Borrower; TIER REIT, Inc. as Parent; certain subsidiaries of TIER REIT, Inc. signatory thereto; and Wells Fargo Bank National Association as Administrative Agent (previously filed and incorporated by reference to Form 8-K filed on July 20, 2015)
101
 
The following financial information from TIER REIT, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith)
 _______________________________________________________________

*                 In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certification will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.




40


Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
 
I, Scott W. Fordham, certify that:
 
1.              I have reviewed this quarterly report on Form 10-Q of TIER REIT, Inc.;
 
2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.              The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)         Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.              The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Dated this 5th day of August, 2015
/s/ Scott W. Fordham
 
Scott W. Fordham
 
Chief Executive Officer




Exhibit 31.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
 
I, Dallas E. Lucas, certify that:
 
1.              I have reviewed this quarterly report on Form 10-Q of TIER REIT, Inc.;
 
2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.              The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)         Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.              The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Dated this 5th day of August, 2015
/s/ Dallas E. Lucas
 
Dallas E. Lucas
 
Chief Financial Officer





Exhibit 32.1
 
SECTION 1350 CERTIFICATIONS
 
This Certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
The undersigned, who are the Chief Executive Officer and Chief Financial Officer of TIER REIT, Inc. (the “Company”), hereby certifies as follows:
 
The Quarterly Report on Form 10-Q of the Company (the “Report”), which accompanies this Certificate, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and all information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated this 5th day of August, 2015
/s/ Scott W. Fordham
 
Scott W. Fordham
 
Chief Executive Officer
 
 
 
 
Dated this 5th day of August, 2015
/s/ Dallas E. Lucas
 
Dallas E. Lucas
 
Chief Financial Officer



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