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Form 8-K TIER REIT INC For: Mar 26

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March 26, 2015 2:17 PM EDT
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 26, 2015

TIER REIT, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
000-51293
 
68-0509956
(State or other jurisdiction of incorporation
or organization)
 
(Commission File Number)
 
 
(I.R.S. Employer
Identification No.)
 
17300 Dallas Parkway, Suite 1010, Dallas, Texas
75248
(Address of principal executive offices)
(Zip Code)
 
(972) 931-4300
(Registrant’s telephone number, including area code)
 
None
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))





 




Item 7.01    Regulation FD.

On March 26, 2015, TIER REIT, Inc., a Maryland corporation (which may be referred to herein as the “Registrant,” “we,” “our” or “us”), first used the presentation attached hereto as Exhibit 99.1 in connection with a conference call with stockholders and financial advisors to review fourth quarter 2014 results. The information included in Item 7.01 of this Current Report on Form 8-K, including Exhibit 99.1, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

The presentation materials include information about Modified Funds from Operations (“MFFO”) and Same Store Cash Net Operating Income (“Same Store Cash NOI”). In order to derive MFFO, we begin with Funds from Operations (“FFO”), which is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper on Funds From Operations” as net income (loss), computed in accordance with accounting principles generally accepted in the United State of America (“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 joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries, and noncontrolling interests.

Since FFO was promulgated, several new accounting pronouncements have been issued, such that management, industry investors and analysts have considered the presentation of FFO alone to be insufficient to evaluate operating performance.  Accordingly, in addition to FFO, we use MFFO, as defined by the Investment Program Association (“IPA”).  The IPA definition of MFFO excludes from FFO the following items:

(1)
acquisition fees and expenses;
(2)
straight-line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;
(5)
impairment charges on real estate related assets to the extent not already excluded from net income in the calculation of FFO, such as impairments of non-depreciable properties, loans receivable, and equity and debt investments;
(6)
gains or losses from the early extinguishment of debt;
(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities, and other derivative holdings except where the trading of such instruments is a fundamental attribute of our operations;
(8)
gains or losses related to fair value adjustments for interest rate swaps and other derivatives not qualifying for hedge accounting, foreign exchange holdings, and other securities;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.
    
 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 and impairment charges for other real estate related assets are excluded in the calculation of MFFO as described above, impairments reflect a decline in the value of the applicable property that we may not recover.

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles 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. As a result, we believe that the use of MFFO, together with the required GAAP presentation, provides a more complete understanding of our performance because it excludes the adjustments in FFO and MFFO outlined above. Factors that impact MFFO include fixed costs, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on debt financing, and operating expenses. When compared period over period, MFFO reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development

1


activities, general and administrative expenses, and interest costs that are not immediately apparent from net income. We believe fluctuations in MFFO are indicative of changes and potential changes in operating activities.
Accordingly, we believe that MFFO can be a useful metric to assist management, stockholders, and analysts in assessing the sustainability of operating performance. MFFO is also more comparable in evaluating our performance over time. We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry and is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies that do not have a similar level of involvement in acquisition activities or are not similarly affected by impairments and other non-operating charges. By providing MFFO, we believe we are presenting useful information that assists stockholders in better aligning their analysis with management’s analysis of long-term, core operating activities.
MFFO should neither 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 MFFO as an historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. MFFO 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 MFFO. MFFO is a non-GAAP measurement and should be reviewed in connection with other GAAP measurements. Our MFFO attributable to common stockholders as presented may not be comparable to amounts calculated by other REITs that do not define FFO in accordance with the current NAREIT definition or MFFO in accordance with the current IPA definition or that interpret the definitions differently.


2


The following section presents our calculations of FFO attributable to common stockholders and MFFO attributable to common stockholders for the three months ended December 31, 2014 and 2013 (in thousands, except per share amounts): 

 
Three Months Ended
 
December 31, 2014
 
December 31, 2013
Net income
$
47,809

 
$
25,025

Net loss attributable to noncontrolling interests
(77
)
 
(21
)
Accretion of Series A Convertible Preferred Stock
(1,926
)
 
—

Adjustments (1):
 

 
 

Real estate depreciation and amortization from consolidated properties
37,181

 
39,608

Real estate depreciation and amortization from unconsolidated properties
1,307

 
1,677

Impairment of depreciable real estate
4,940

 
—

Gain on sale of depreciable real estate asset
(86,195
)
 
(50,947
)
Noncontrolling interest (OP units and vested restricted stock units) share of above adjustments
68

 
14

FFO attributable to common stockholders
3,107

 
15,356

Adjustments (1)(2):
 
 
 
Acquisition expense
86

 
—

Straight-line rent adjustment
(3,141
)
 
(890
)
Amortization of above- and below-market rents, net
(1,244
)
 
(1,974
)
Loss on early extinguishment of debt
14,616

 
1,934

Noncontrolling interest (OP units and vested restricted stock units) share of above adjustments
(17
)
 
1

MFFO attributable to common stockholders
$
13,407

 
$
14,427

 
 
 
 
Weighted average common shares outstanding - basic
299,264

 
299,192

Weighted average common shares outstanding - diluted (3)
299,976

 
299,653

 
 
 
 
Net income per common share - basic and diluted (3)
$
0.15

 
$
0.08

FFO per common share - basic and diluted
$
0.01

 
$
0.05

MFFO per common share - basic and diluted
$
0.04

 
$
0.05

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

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

Same Store Cash NOI presented by us may not be comparable to Same Store Cash NOI reported by other REITs that do not define Same Store Cash NOI exactly as we do. We believe that in order to facilitate a clear understanding of our operating results, Same Store Cash NOI should be examined in conjunction with net income (loss) as presented in our condensed consolidated financial statements and notes thereto. Same Store Cash NOI should not be considered as an alternative 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.

The table below presents our Same Store Cash NOI with a reconciliation to net income for the three months ended December 31, 2014 and 2013 (in thousands). The same store properties for this comparison consist of 31 properties and 10.9 million square feet.
 
 
 
 
Three Months Ended
 
 
 
 
December 31, 2014
 
December 31, 2013
Same Store Revenue:
 
Rental revenue
 
$
72,304

 
$
68,939

 
 
Less:
 
 
 
 
 
 
  Straight-line rent revenue adjustment
 
(2,256
)
 
(717
)
 
 
  Amortization of above- and below-market rents, net
 
(1,070
)
 
(1,232
)
 
 
  Lease termination fees
 
(542
)
 
(52
)
 
 
 
 
68,436

 
66,938

Same Store Expenses:
 
 
   Property operating expenses (less tenant improvement demolition costs)
 
23,276

 
21,722

 
 
   Real estate taxes
 
9,659

 
10,716

 
 
   Property management fees
 
2,132

 
2,156

 
Property Expenses
 
35,067

 
34,594

 
 
 
 
 
Same Store Cash NOI
 
$
33,369

 
$
32,344

 
 
 
 
 
 
 
Reconciliation of net income to Same Store Cash NOI
 
 
 
 
 
Net income
 
$
47,809

 
$
25,025

 
 
Adjustments to reconcile net income to Same Store Cash NOI:
 
 
 
 
 
 
  Interest expense
 
16,499

 
20,100

 
 
  Asset impairment losses
 
4,940

 
—

 
 
  Tenant improvement demolition costs
 
157

 
673

 
 
  General and administrative
 
5,156

 
4,360

 
 
  Acquisition expense
 
86

 
—

 
 
  Depreciation and amortization
 
31,016

 
29,408

 
 
  Interest and other income
 
(82
)
 
(467
)
 
 
  Loss on early extinguishment of debt
 
426

 
1,605

 
 
  Provision (benefit) for income taxes
 
(73
)
 
104

 
 
  Equity in earnings of investments
 
(522
)
 
(24,479
)
 
 
  Income from discontinued operations
 
(67,877
)
 
(21,982
)
 
 
  Net operating income of non same store properties
 
(298
)
 
(2
)
 
 
  Straight-line rent revenue adjustment
 
(2,256
)
 
(717
)
 
 
  Amortization of above- and below-market rents, net
 
(1,070
)
 
(1,232
)
 
 
  Lease termination fees
 
(542
)
 
(52
)
Same Store Cash NOI
 
$
33,369

 
$
32,344

 
 
Quarter over Quarter change
 
3.2
%
 
 


Item 9.01.    Financial Statements and Exhibits.
(d)     Exhibits.
99.1 TIER REIT, Inc. – Fourth Quarter 2014 Conference Call Presentation



3


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:  March 26, 2015
By:
/s/ Telisa Webb Schelin
 
 
Telisa Webb Schelin
 
 
Senior Vice President – Legal, General Counsel & Secretary




4


Exhibit Index

Exhibit Number
 
Description
99.1
 
TIER REIT, Inc. – Fourth Quarter 2014 Conference Call Presentation


5

1 Fourth Quarter 2014 Conference Call March 26, 2015

 
2 Forward-Looking Statements This presentation contains forward-looking statements, including discussion and analysis of the financial condition of us and our subsidiaries and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. 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. We intend that such forward-looking statements be subject to the safe harbor provisions created by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution you not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this presentation. 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.

 
3 Factors that could cause actual results to differ materially from any forward-looking statements made in the presentation include but are not limited to:  market and economic challenges 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 business;  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. The forward-looking statements should be read in light of these and other risk factors identified in the “Risk Factors” section of our 2014 Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission. Forward-Looking Statements

 
4 2014 Key Areas of Focus  Lease the portfolio and increase occupancy  Sharpen our geographic focus  Mitigate interest rate and refinancing risk  Redeploy capital

 
5  Increased occupancy from a low of 85.2% at March 31, 2014 to 88.0%, exceeding our target of 87.8%  Sold City Hall Plaza, exiting Manchester, New Hampshire, and 222 South Riverside Plaza, one of two remaining properties in Chicago, Illinois  Addressed approximately $300 million of the $1.2 billion of 2015 and 2016 debt maturities  Completed a new $475 million credit facility, effectively fixing the rate on the $250 million term component at 3.7% for a 5-year term and increasing annual cash flow by approximately $3.7 million  Reduced leverage (net debt/estimated real estate value) from 53.7% at December 31, 2013 to 49.3% at December 31, 2014, and reduced weighted average cost of debt from 5.63% to 5.33% over the same period  Redeployed capital through the acquisition of 5950 Sherry Lane, located in the Preston Center submarket of Dallas, Texas 2014 Highlights

 
6 Core markets Non-core markets Portfolio Markets Operating properties 31 Square feet 10.8 million Markets 15 Note: Excludes properties expected to be sold in early 2015, and includes our pro rata ownership share of unconsolidated properties

 
7 Portfolio Markets 39.9% 60.1% 71.7% 28.3% Core Markets Non-core Markets As of 12/31/14(1) Pro forma 3/31/15(1)(2) (1) Measured by annualized fourth quarter 2014 net operating income generated by office properties owned at December 31, 2014 (2) Pro forma for completion of properties expected to be sold in early 2015 (Includes our pro rata ownership share of unconsolidated properties)

 
8 Leasing Success 2014 Leasing Results  Increased occupancy to 88.0% at year end from a low of 85.2% at March 31, 2014  927,000 square feet of new leases  1,298,000 square feet of renewal leases  264,000 square feet of expansion leases  October 2013, tenant occupying entire building gave notice to downsize  Determined that single user was best use for building  December 2013, leased 57% of building to Bristol Myers with option to expand  August 2014, Bristol Myers leased balance of building  Evaluating development options on adjacent owned land 5104 Eisenhower Tampa, FL  August 2012, a 200,000 SF tenant vacated, reducing occupancy from 97% to 65%  Subsequently completed 166,000 SF of leasing, increasing occupancy to 92%  Rental rates during re-leasing increased 30%, from $20/SF NNN to $26/SF NNN The Terrace Austin, TX  August 2012, a 199,000 SF tenant vacated, reducing occupancy from 97% to 63%  Subsequently invested $900,000 in various property upgrades  Successfully increased occupancy to 93% Loop Central Houston, TX

 
9 $414 $826 $140 $4 $0 $142 $0 $557 $139 $3 $250 $140 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2015 2016 2017 2018 2019 Thereafter Progress on Debt Maturities 1/1/14 versus Pro Forma ( In Million s) Note: Reflects our share of consolidated and unconsolidated property debt Outstanding debt maturities as of January 1, 2014 Pro forma debt maturities upon the completion of pending sale transactions and planned loan repayments

 
10 Fourth Quarter 2014 Highlights  Sold 222 South Riverside Plaza in Chicago, IL (1.2 million SF)  Consideration received included $247.0 million and the conveyance of 5950 Sherry Lane, Dallas, TX (valued at $62.6 million)  Diluted MFFO for the quarter was $0.04 per common share  Same store cash NOI was $33.4 million, an increase of $1.0 million, or 3.2%, as compared to fourth quarter 2013  Increased occupancy by 106 basis points to 88.0% and leased 634,000 SF

 
11 Fourth Quarter 2014 Highlights (continued)  Entered into a new senior secured credit facility that could provide borrowings of up to $475.0 million:  $250.0 million term loan matures December 18, 2019, and a $225.0 million revolving line of credit matures December 18, 2018, with a one-year extension option  Entered into two interest rate swap agreements for total combined notional amount of $250.0 million to effectively fix 30-day LIBOR at approximately 1.69%  Paid off $90.9 million in debt on United Plaza (Philadelphia, PA) and 250 West Pratt (Baltimore, MD)

 
12 2015 Key Areas of Focus  Dispose of remaining properties outside target markets  Continue to recycle capital into target markets  Further strengthen the balance sheet and position the Company for an investment grade rating  Continue to increase portfolio occupancy  Internalize property management and administrative services  Reinstate stockholder distribution Our accomplishments during 2014 and prior years have enabled us to pursue a listing of the company’s common stock on a national securities exchange during 2015. As we complete the transformation of the Company into a premier office REIT, we have identified six key areas of focus for 2015:

 
13 Playback Information  An audio link for a playback of today’s call will be on our website at www.tierreit.com/ir  Today’s presentation has been filed with the SEC on Form 8-K and is available on our website at www.tierreit.com/ir under the heading SEC Filings  Save the date! TIER REIT’s first quarter conference call will be held on Thursday, May 14, 2015. Please check our website for details, and sign up at www.tierreit.com/ir for conference call information and other timely communications

 
14 Questions 1325 G Street Washington, D.C. The Terrace Austin, TX Burnett Plaza Fort Worth, TX Three Eldridge Place Houston, TX FOUR40 Chicago, IL Colorado Building Washington, D.C. BriarLake Plaza Houston, TX Bank of America Plaza Charlotte, NC

 
15 Playback Information  An audio link for a playback of today’s call will be on our website at www.tierreit.com/ir  Today’s presentation has been filed with the SEC on Form 8-K and is available on our website at www.tierreit.com/ir under the heading SEC Filings  Save the date! TIER REIT’s first quarter conference call will be held on Thursday, May 14, 2015. Please check our website for details, and sign up at www.tierreit.com/ir for conference call information and other timely communications

 

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