10-K 1 tierreitinc10-k2016.htm 10-K Document
                                                

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-K 
(Mark One)
 
ý      Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
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.)
 
 
 
5950 Sherry Lane, Suite 700, Dallas, Texas
 
75225
(Address of principal executive offices)
 
(Zip Code)
(972) 483-2400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, $.0001 par value per share
 
New York Stock Exchange
 
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
 
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 ý
 
Accelerated filer o
 
 
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
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
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $726.8 million, computed by reference to the closing price of our common stock on the New York Stock Exchange of $15.33 per share.
 
As of February 1, 2017, the registrant had 47,819,115 shares of common stock outstanding.
 


DOCUMENTS INCORPORATED BY REFERENCE 

Portions of the registrant’s Definitive Proxy Statement, relating to its 2017 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K to the extent stated herein. The Registrant intends to file such Definitive Proxy Statement with the Securities and Exchange Commission not later than 120 days after the end of its 2016 fiscal year.



TIER REIT, Inc.
FORM 10-K
Year Ended December 31, 2016
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
Item 15.

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Forward-Looking Statements 

Certain statements in this Annual Report on Form 10-K 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, our intentions with respect to development activity, 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,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “opportunities,” “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 due to a variety of risks and uncertainties, including but not limited to the factors listed and described under “Risk Factors” in this Annual Report on Form  10-K 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;
the availability and terms of financing, including the impact of higher interest rates on the cost and/or availability of financing;
our ability to strategically acquire, develop, 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;
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 Annual Report on Form 10-K 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.


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PART I
 
Item 1.                    Business.
 
General
 
TIER REIT, Inc. is a self-managed, Dallas-based real estate investment trust focused on delivering outsized stockholder return through stock price appreciation and dividend growth while offering unparalleled tenant service. As used herein, “TIER REIT,” the “Company,” “we,” “us,” or “our” refers to TIER REIT, Inc. and its subsidiaries unless the context otherwise requires. TIER REIT’s investment strategy is to acquire, develop, and operate a portfolio of best-in-class office properties in select U.S. markets that consistently lead the nation in both population and office-using employment growth. Within these markets, we target TIER1 submarkets, which are primarily urban and amenity-rich locations. TIER REIT was incorporated in June 2002 as a Maryland corporation and has elected to be treated, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes.

Substantially all of our business is conducted through Tier Operating Partnership LP (“Tier OP”), a Texas limited partnership. Our wholly-owned subsidiary, Tier GP, Inc., a Delaware corporation, is the sole general partner of Tier OP. Our direct and indirect wholly-owned subsidiaries, Tier Business Trust, a Maryland business trust, and Tier Partners, LLC, a Delaware limited liability company, are limited partners that together with Tier GP, Inc. own all of Tier OP. 

As of December 31, 2016, we owned interests in 29 operating office properties, one non-operating property, and one development property located in 13 markets throughout the United States. Our corporate offices are located at 5950 Sherry Lane, Suite 700, Dallas, Texas 75225, and our telephone number is (972) 483-2400.    

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 per share, 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.

On July 23, 2015, we listed our shares of common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “TIER.”
Business Strategy

Our strategy is straightforward. Our vision is to be the premier owner and operator of best-in-class office properties in select submarkets within high-growth metropolitan areas. We focus on vibrant cities with local GDP and population growth above the national average and amenity-rich submarkets (“TIER1 submarkets”) that appeal to dynamic corporate users and highly educated, in-demand employees. Our mission is to provide unparalleled, TIER ONE Property Services to our tenants and outsized total return through stock price appreciation and dividend growth to our stockholders, although there can be no assurance of any such appreciation or growth.

Six years ago, our story was told in 36 markets across the United States. As of December 31, 2016, we owned properties in 13 markets, with the primary focus on our seven target growth markets of Austin, Dallas, Houston, Atlanta, Charlotte, Nashville, and Denver.

2017 Key Objectives

As we enter 2017, we have substantially completed the strengthening phase of our strategic plan, which has been our focus for the past two years, and have begun the recycling phase, which will reallocate our capital and efforts from properties outside our target growth markets to new opportunities inside them. Through prudent development and strategic acquisitions, we will seek to increase our influence and concentration within TIER1 submarkets, enhance the overall quality and reduce the average age of our portfolio, and position the Company for growth.

Our business strategy for 2017 is comprised of the following four objectives: (1) substantially complete portfolio repositioning while balancing relative market concentration; (2) manage capital expenditures to sustain dividend coverage; (3) maintain portfolio occupancy despite known challenges in the Houston market; and (4) continue our robust investor relations program.


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Substantially Complete Portfolio Repositioning While Balancing Market Concentration
Provided capital market conditions remain advantageous, during 2017, we will work to exit four or more non-target markets yielding between $300 million and $400 million of proceeds that will be allocated to highly-selective strategic investment opportunities. Exiting these properties will allow us to substantially complete our portfolio repositioning and provide capital to reinvest into our target markets.

We will seek to invest between $100 million and $225 million in target growth markets through a combination of prudent development and our strategic acquisition efforts. We will continue the execution of our build-to-core development program, with the intent of placing into production one or more select parcels of land strategically located within our TIER1 submarkets. Additionally, we will remain disciplined as we seek to acquire additional properties that specifically align with our strategy, provide a competitive edge within TIER1 submarkets, and demonstrate a clear path to long-term value creation for our stockholders.

Manage Capital Expenditures to Sustain Dividend Coverage
We intend to actively manage our capital expenditures with the objective of balancing leasing capital and competitive building improvements that we believe are important to maintain and/or create value with the goal of full and sustainable dividend coverage. We expect our recycling efforts will allow us to manage our capital expenditures by: (1) enhancing the overall quality of the portfolio; (2) reducing the average age of our real estate assets; and (3) leveraging the existing property management team, thereby resulting in operating efficiencies within each market.

Maintain Portfolio Occupancy Despite Known Challenges in the Houston Market
We are focused on maintaining occupancy across our portfolio despite upcoming known tenant vacancies in our Houston portfolio. The leasing environment remains strong in the majority of our markets, though risks exist in the following areas: (1) the pending known tenant move-out of approximately 111,000 square feet in our properties located in the energy corridor of Houston, Texas; and (2) general exposure to the Houston market that continues to be hampered by low oil prices, recent office deliveries, and sublease space. Despite the downside exposure from the known upcoming tenant vacancies in Houston, and the Houston market generally, we estimate the total portfolio should be between 88% and 90% occupied as of December 31, 2017.

Continue Our Robust Investor Relations Progran
We believe our best-in-class, Class A office portfolio, focused investment strategy, in-house expertise, and our belief that we will be able to generate significant value through our reinvestment efforts in build-to-core developments and strategic acquisitions are attractive to institutional investors and differentiate us from other office REITs. To this end, we will continue a robust investor relations program that will communicate our strategy to a broad audience of institutional investors.

Competition

We are subject to significant competition in seeking tenants for our properties.  The competition for creditworthy tenants is intense, and we have been required to provide rent concessions, incur charges for tenant improvements, and provide other inducements at a high level.  Without these inducements, we may not be able to continue to lease vacant space timely, or at all, which would adversely impact our results of operations.  We also compete with sellers of similar properties when we sell properties, which may result in our receiving lower proceeds from the sale, or which may result in our not being able to sell such properties due to the lack of an acceptable investment return.  Further, we may compete with other developers and buyers who are interested in properties we may acquire or develop, which may result in an increase in the amount that we would pay for such properties or may result in us ultimately not being able to acquire or develop such properties.  Some of our competitors, including larger REITs, have greater financial resources than we do and generally may be able to accept more risk. They also may enjoy competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.

Regulations and Environmental Matters

Our properties and operations are subject to various federal, state, and local laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, requirements related to access and use by disabled persons, environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts such as increased motor vehicle activity.  We believe that we have all permits and approvals necessary under current law to operate our properties.

As an owner of real estate, we are subject to various environmental laws of federal, state, and local governments. Compliance with existing laws has not had a material adverse effect on our capital expenditures, earnings, or competitive position, and management does not believe it will have such an impact in the future.  However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on our properties.

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Employees

As of December 31, 2016, we had 113 employees.

Financial Information About Industry Segments

Our current business consists of owning, acquiring, developing, operating, investing in, and disposing of real estate assets.  We internally evaluate operating performance on an individual property level and view each of our real estate assets as one individual operating segment. However, all of our properties are aggregated into one reportable segment as they have similar economic characteristics.

Available Information

We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, in each case including exhibits, and all amendments to those reports with the Securities and Exchange Commission (“SEC”).  Copies of our filings with the SEC may be obtained from our website at www.tierreit.com or from the SEC’s website at www.sec.gov.  Access to these filings is free of charge.  We are not incorporating any information from our website into this Form 10-K. 

Item 1A. Risk Factors.

The factors described below represent what we believe are our principal risks. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate. The occurrence of any of the risks discussed below could have a material adverse effect on our business, financial condition, results of operations, and the market price of our common stock and could affect our ability to pay distributions in any future periods. Our stockholders may be referred to as “you” or “your” in this Item 1A, “Risk Factors” section.

Risks Related to Our Business and Operations

Market disruptions may adversely impact many aspects of our operating results and operating condition.

The financial markets have been highly variable, and oil prices have declined dramatically over the past few years. The availability of debt financing secured by commercial real estate is subject to tightened underwriting standards, and interest rates have been increasing, leading to widening credit spreads, all of which may lead to a slowdown in the U.S. economy as a whole, or impact real estate investments in some of the following ways:

the financial condition of our tenants may be adversely affected, which may result in us having to reduce rental rates in order to retain tenants;

an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors could delay our efforts to collect rent and any past due balances under the relevant leases, and ultimately could preclude collection of these sums;

our ability to borrow on terms and conditions that we find acceptable may be limited, which could result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders or pursue acquisition opportunities, among other things, and increase our interest expense;

the value of certain of our real estate assets may decrease below the amounts we paid for them, which would limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by these assets; and

the value and liquidity of short-term investments, if any, could be reduced as a result of the dislocation of the markets for our short-term investments and increased volatility in market rates for these investments or other factors.

For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our investments.


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We cannot predict the impact future actions by regulators or government bodies, including the U.S. Federal Reserve, will have on real estate debt markets or on our business, and any such actions may negatively impact us.

Regulators and U.S. government bodies have a major impact on our business. The U.S. Federal Reserve is a major participant in, and its actions significantly impact, the commercial real estate debt markets. For example, quantitative easing, a program implemented by the U.S. Federal Reserve to keep long-term interest rates low and stimulate the U.S. economy, had the effect of reducing the difference between short-term and long-term interest rates. However, the U.S. Federal Reserve ended the latest round of quantitative easing and has raised interest rates. Rising interest rates increase the cost of borrowing, which could limit our flexibility. This may result in future acquisitions by us generating lower overall economic returns and increasing the costs associated with refinancing current debt, which could potentially reduce future cash flow available for distribution. We cannot predict or control the impact future actions by regulators or government bodies, such as the U.S. Federal Reserve, will have on our business. For example, it is difficult to predict future legislation, regulation, and actions under the new presidential administration.

Economic conditions may adversely affect our income, and we could be subject to risks associated with acquiring real estate assets.

U.S. and international financial markets have been highly variable. The effects of financial market volatility may persist particularly as financial institutions continue to restructure their businesses and capital structures in response to new or enhanced regulatory requirements, all of which could impact the availability of credit and overall economic activity as a whole.

In addition, we are subject to the risks generally incident to the ownership of real estate assets. For example, even though we may purchase assets at a discount from historical cost or market value due to, among other things, substantial deferred maintenance or poorly structured financing of the real estate or debt instruments underlying the assets, or we may currently own properties with similar factors, there is no assurance that we will be able to overcome these factors. All of these factors could further decrease the value of real estate assets.

Further, fluctuations in market conditions make judging the future performance of these assets difficult. The real estate assets we own or may acquire may substantially decline in value, which would, among other things, negatively impact our ability to finance or refinance debt secured by these assets or earn positive returns on these assets, and may require us to write down or impair the value of these assets, which would have a negative impact on our results of operations and ability to pay or sustain distributions.

Our ongoing strategy depends, in part, upon future acquisitions and development, and we may not be successful in identifying and consummating these transactions.

A part of our business strategy contemplates strategic expansion through the acquisition and development of institutional quality office properties. We may not be successful in identifying suitable properties or other assets or in consummating these transactions on satisfactory terms, or at all. We would likely need access to capital in order to fund any of these types of transactions. There is no assurance we would have access to capital on acceptable terms and conditions, or at all.

Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significant capital resources such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies, and pension funds. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated.

Development and construction projects are subject to significant risks, including the risks that such projects are more costly than anticipated and that we may not successfully complete and operate developed properties.

We may, from time to time, develop and construct new properties or redevelop existing properties. In doing so, we will be subject to the risks and uncertainties associated with construction and development including the environmental concerns of governmental entities or community groups and our builder’s ability to control construction costs or to build in conformity with plans, specifications, and timetables. The builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance also may be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction also could give tenants the right to terminate preconstruction leases for space at a newly developed project. We may incur additional risks when we make periodic progress payments or other advances to builders prior to completion of construction. These and other such factors can result in increased costs of a project or loss of

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our investment. We may expend significant time and money on projects that are never completed, our construction costs, including labor and materials, may be higher than estimated, and we may be unable to obtain financing on favorable terms or at all. In addition, we are subject to normal lease-up risks relating to newly constructed projects or re-developed projects, and occupancy and rental rates at a newly-completed property may not meet our expectations. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer. We may also invest in unimproved real property. Returns from development of unimproved properties also are subject to additional risks and uncertainties such as those associated with rezoning.

Leases representing approximately 7% of the rentable area within our operating office properties (excluding our held for sale properties) are scheduled to expire in 2017. We may be unable to renew leases or lease vacant space at favorable rates or at all.

As of December 31, 2016, leases representing approximately 7% of the rentable area within our operating office properties (excluding our held for sale properties) were scheduled to expire in 2017. We may be unable to extend or renew any of the expiring leases, or we may be able to re-lease these spaces only at rental rates equal to or below the expiring rental rates. We also may not be able to lease space which is currently not occupied on acceptable terms and conditions, if at all. In addition, some of our tenants have leases that include early termination provisions that permit the lessee to terminate all or a portion of its lease with us after a specified date or upon the occurrence of certain events with little or no liability to us. We may be required to offer substantial rent abatements, tenant improvements, early termination rights, or below-market renewal options to retain these tenants or attract new ones. Portions of our properties may remain vacant for extended periods of time. Further, some of our leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate. If we are unable to obtain new rental rates that are on average comparable to our asking rents across our portfolio, then our ability to increase cash flow will be negatively impacted.

We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants and are uncertain of the sources of, and may be unable to obtain funding for, all of our future capital needs.

We require capital on an ongoing basis to fund tenant improvements, leasing commissions, and capital expenditures. Specifically, we may be required to expend substantial funds to improve or refurbish leasable space either to retain existing tenants or to attract new tenants. We expect that, upon the expiration of leases at our properties, we may be required to make rent or other concessions to tenants; accommodate requests for renovations, build-to-suit remodeling, and other improvements; or provide additional services to our tenants. As a result, we may have to pay for significant leasing costs or tenant improvements in order to retain tenants whose leases are expiring or to attract new tenants. The reserves we have established for capital improvements may not be sufficient, which would require us to seek funds from other sources. Moreover, certain reserves required by lenders are designated for specific uses and may not be available to use for tenant improvements. Our ability to fund future property capital needs may depend on our ability to borrow, to raise capital, including through the disposition of certain of our assets or interests in assets or equity offerings, or to generate additional cash flow from operations. There can be no assurance that any of these sources will be available, and some of these strategies pose additional risks. For example, if we sell assets, it will likely have the effect of reducing cash flow from operating activities. Alternatively, if we decide to raise capital by offering shares of common or preferred stock, or any other securities that are convertible into, exercisable, or exchangeable for our capital stock, the issuance could have the effect of diluting the proportionate equity interest and voting power of our existing stockholders. Ultimately, if we are unable to fund our capital needs, we may be required to, among other things, defer necessary improvements to our properties, which may cause the properties to suffer from a greater risk of obsolescence or a decline in value, or we may experience decreased cash flow as a result of non-renewals by tenants upon expiration of their leases or fewer tenants being attracted to a property. If this happens, we may not be able to maintain expiring rental rates for the affected properties.

We face significant competition in the leasing market, which may decrease or prevent increases in the occupancy and rental rates of our properties.

We own properties located in metropolitan cities and suburban markets in the United States. We compete with numerous developers, owners, and operators of office properties, many of which own properties similar to, and in the same market areas as, our properties. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to attract new tenants and retain existing tenants when their leases expire. Also, as our competitors develop additional office properties in locations near our properties, there will likely be increased competition for creditworthy

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tenants which may require us to make capital improvements to properties that we would not have otherwise made or further reduce rents.

We depend on tenants for our revenue, and accordingly, lease terminations and tenant defaults could adversely affect the income produced by our properties.

The success of our investments materially depends on the financial stability of our tenants, many of which are financial, legal and other professional firms and many of whom may experience a change in their business at any time. Economic conditions have adversely affected in the past, and could adversely affect in the future, one or more of our tenants. As a result, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments when due or declare bankruptcy. Any of these actions could result in the termination of the tenants’ leases, or expiration of existing leases without renewal, and the loss of rental income attributable to the terminated or expired leases. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our property. Specifically, a bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by a tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.

One of our balance sheet strategies involves the disposition of properties; however, we may be unable to sell a property on acceptable terms and conditions, or at all.

One of our balance sheet strategies is to sell or otherwise dispose of certain properties. We believe it makes economic sense to do so in today’s market in certain instances, such as when we believe there is strong investment interest in a market, when we believe the value of the leases in place at a property will significantly decline over the remaining lease term, when we believe we have limited or no equity in a property that secures debt with a near- term maturity, when we do have equity in a property but the projected returns do not justify further investment, or when we believe the equity in a property can be redeployed in the portfolio in order to achieve better returns or strategic goals. However, certain market conditions generally, and property specific issues such as vacancies and lease terminations, could negatively affect the value of our investment properties and therefore reduce our ability to sell or otherwise dispose of these properties on acceptable terms or at all. In addition, the “prohibited transaction” rules (discussed below) may limit our ability to sell properties without adversely affecting returns to our stockholders. Real estate investments generally, and in particular large office properties like those that we own, often cannot be sold quickly, particularly when coupled with a debt assumption. Furthermore, properties that we have owned for a significant period of time may have a low tax basis. If we were to dispose of any of these properties in a taxable transaction, we may be required, under provisions of the Internal Revenue Code of 1986, as amended (the “Code”), applicable to REITs, to distribute a significant amount of the taxable gain, if any, to our stockholders and this could, in turn, impact our cash flow. In addition, purchase options and rights of first refusal held by tenants or partners in joint ventures may also limit our ability to sell certain properties. All of these factors limit our ability to effectuate this particular balance sheet strategy.

If we sell properties and provide financing to purchasers, defaults by the purchasers would decrease our cash flows and limit our ability to make distributions.

In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our liquidity and results of operations. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or the reinvestment of proceeds in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced, or otherwise disposed.

Our indebtedness may adversely affect our financial health and operating flexibility.

As of December 31, 2016, we had total outstanding indebtedness of approximately $826.8 million, excluding debt of our unconsolidated entities, of which approximately $107.2 million has matured or will mature before the end of 2018, after the repayment of certain debt subsequent to December 31, 2016. As a result of our indebtedness, we are required to use a material

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portion of our cash flow to pay principal and interest on our debt, which limits the cash flow available for other purposes. In addition, we may not generate sufficient cash flow after debt service to, among other things, fund capital expenditures and pay distributions. Our level of debt and the limitations imposed on us by our debt agreements, including our credit facility agreement, could have significant adverse consequences to us, regardless of our ability to refinance or extend our debt, including:

limiting our ability to borrow additional amounts for, among other things, working capital, capital expenditures, debt service requirements, execution of our business plan, or other purposes;

limiting our ability to use operating cash flow in other areas of our business or to pay distributions;

increasing our vulnerability to general adverse economic and industry conditions;

limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in governmental regulation;

limiting our ability to fund capital expenditures, tenant improvements, and leasing commissions; and

limiting our ability or increasing the costs to refinance our indebtedness.

We have experienced net losses attributable to our common stockholders, and we may experience future losses.

We had net losses attributable to our common stockholders of approximately $29.4 million, $32.1 million and $17.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. If we incur net losses in the future or such losses increase, our financial condition, results of operations, cash flow, and our ability to service our indebtedness and pay distributions to our stockholders will be materially and adversely affected.

Economic, regulatory, and socio-economic changes that impact the real estate market generally or that could affect patterns of use of commercial office space may cause our operating results to suffer and decrease the value of our real estate properties.

If our properties do not generate income sufficient to meet operating expenses, debt service, and capital expenditures, it is unlikely we could continue to pay distributions to our stockholders. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes, and maintenance costs) that generally do not decline even if the income from the property has declined. The following factors, among others, may adversely affect the operating performance and long- or short-term value of our properties:

changes in the national, regional, and local economic climates, particularly in markets in which we have a concentration of properties;

local office submarket conditions such as changes in the supply of, or demand for, space in properties similar to those that we own within a particular area;

changes in the patterns of office use due to technological advances which may make telecommuting more prevalent;

the attractiveness of our properties to potential tenants;

changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive or otherwise reduce returns to stockholders;

the financial stability of our tenants, including bankruptcies, financial difficulties, or lease defaults by our tenants;

changes in operating costs and expenses, including costs for maintenance, insurance and real estate taxes, and our ability to control rents in light of such changes;

the need to periodically fund the costs to repair, renovate, and re-lease space;

earthquakes, tornadoes, hurricanes, and other natural disasters; civil unrest, terrorist acts, or acts of war; and public health emergencies, including the spread of infectious diseases, such as Ebola, any of which may result in uninsured or underinsured losses;

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changes in, or increased costs of compliance with, governmental regulations, including those governing usage, zoning, the environment, and taxes; and

changes in accounting standards.

Any of these factors may cause a decrease in the value of our real estate properties.

The geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas.

In addition to general, regional, and national economic conditions, our operating results are impacted by the economic conditions of the specific markets in which we have concentrations of properties. Properties located in Houston, Texas, generated approximately 28.7% of our consolidated rental revenue from continuing operations for the year ended December 31, 2016. For properties located in Houston, Texas, leases scheduled to expire in 2017 and 2018 represent approximately 2.6% and 0.5%, respectively, of our total occupied square feet as of December 31, 2016. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect our property revenue, and hence, net operating income.

A significant number of our properties are located in or near energy producing and energy dependent regions, and if energy prices remain depressed or continue to decline, our financial results could be negatively impacted.

We have a substantial number of properties that are located in or near energy producing and energy dependent regions. In particular, we have five operating properties with approximately 2.2 million rentable square feet located in Houston, Texas, that comprised approximately $69.7 million, or 28.7%, of our consolidated rental revenue from continuing operations for the year ended December 31, 2016. The Houston area is heavily dependent upon the energy sector. The prices of oil and gas declined dramatically during 2015 and have been volatile over the past few years. Depressed prices have had a significant adverse impact on the Houston economy, and companies in the oil and gas industries, including our tenants and prospective tenants. If these conditions persist, our tenants and prospective tenants will likely curtail their level of operations, reduce the size of their workforces, and otherwise experience significant adverse impacts. In addition, a decline in the oil and gas industries would likely adversely affect companies, including our tenants and prospective tenants, in businesses that service or supply the oil and gas industries as well as businesses, including our tenants and prospective tenants, in unrelated industries located in areas like Houston that have benefited from the economic expansion generated by previous robust growth driven in part by higher oil prices. A prolonged period of low oil or gas prices or other factors negatively impacting the energy industry could have an adverse impact on our ability to maintain the occupancy of our Houston properties or could cause us to lease space at rates below current in place rents or at rates below the rates at which we have leased space in our Houston properties over the prior year. In addition, a prolonged period of low oil or gas prices or other factors negatively impacting the energy industry could have an adverse impact on the ability of our energy tenants to pay rent or could cause them to vacate their premises prior to, or at the conclusion of, their lease terms. Any such events could have a significant adverse impact on our financial condition and results of operations. In addition, factors negatively impacting the energy industry could reduce the market values of our Houston properties which could reduce our net asset value and adversely affect our financial condition and results of operations.

We may be adversely affected by trends in the office real estate industry.

Some businesses are rapidly evolving to increasingly permit employee telecommuting, flexible work schedules, open workplaces, and teleconferencing. These practices enable businesses to reduce their space requirements. A continuation of the movement towards these practices could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates, and property valuations.

An oversupply of space in any of our markets could cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, or at all.

Undeveloped land in some of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York, Chicago, Boston, San Francisco, and Los Angeles. As a result, even during times of positive economic growth, our competitors could construct new buildings that would compete with our properties. Any such increase in supply could result in lower occupancy and rental rates in our portfolio.


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A concentration of our investments in any one property class may leave our profitability vulnerable to a downturn in that sector.

Substantially all of our properties are institutional quality office properties. As a result, we are subject to risks inherent in operating a single type of property. Any downturn in the office sector may have a material adverse effect on our financial condition and results of operations.

Adverse market and economic conditions may adversely affect us and could cause us to recognize impairment charges on real estate assets.

We continually monitor events and changes in circumstances that could indicate that the carrying value of our real estate related assets may not be recoverable. When indicators of potential impairment are present which indicate that the carrying value of our real estate related assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be recovered through the estimated future undiscounted cash flows expected to be generated over the life of the asset including its eventual disposition. In the event that the carrying value exceeds the estimated future undiscounted cash flows and also exceeds the fair value of the asset, we adjust the real estate related assets to fair value and recognize an impairment charge.

Projections of expected future cash flows require management to make assumptions to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property’s fair value and, therefore, could result in the misstatement of the carrying value of our real estate and related lease intangible assets and our net income.

Adverse market and economic conditions and market volatility may make it difficult to value our real estate assets. As a result of adverse market and economic conditions, there may be significant uncertainty in the valuation, or in the stability of, the cash flows, discount rates, and other factors related to such assets that could result in a substantial decrease in their value. We may be required to recognize additional asset impairment charges in the future.

If we lose or are unable to obtain key personnel, our ability to implement our business and investment strategies and key objectives could be delayed or hindered.

Our ability to achieve our strategies and objectives depends, to a significant degree, upon the continued contributions of our executive officers and our other key personnel. The employment agreements that we have with our executive officers are terminable upon notice, and we cannot guarantee that we will retain our executive officers. We believe that our future success depends, in large part, on our ability to retain and hire highly-skilled managerial and operating personnel. Competition for persons with managerial and operational skills is intense, and we cannot assure you that we will be successful in retaining or attracting skilled personnel. If we lose or are unable to obtain the services of our executive officers and other key personnel, or do not establish or maintain the necessary strategic relationships, our ability to implement our business and investment strategies and key objectives could be delayed or hindered, and our operations and financial results could suffer.

Competition for skilled personnel could increase labor costs.

We compete with various other companies in attracting and retaining qualified and skilled personnel. We depend on our ability to attract and retain skilled management personnel who are responsible for the day-to-day operations of our company. Competitive pressures may require that we enhance our pay and benefits package to compete effectively for such personnel. We may not be able to offset such added costs by increasing the rates we charge our tenants. If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business and operating results could be harmed.

Compensation awards to our management may not be tied to or correspond with our financial results or the price per share of our common stock.

The compensation committee of our board of directors is responsible for overseeing our compensation and employee benefit plans and practices, including our executive compensation plans and our incentive compensation and equity-based compensation plans. Our compensation committee has significant discretion in structuring compensation packages and may make compensation decisions based on competitive market practices or any number of other factors. As a result, compensation awards may not be tied to or correspond with financial results at our company or the price per share of our common stock.

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Our use of joint ventures may limit our flexibility with jointly owned investments.
 
In appropriate circumstances, we intend to acquire, develop, and recapitalize properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. We currently have joint ventures that are not consolidated within our financial statements. Our participation in joint ventures is subject to the risks that:
we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop, finance, or operate a property and could lead to the sale of either party’s ownership interest or the property;
we may not have sole decision-making authority with respect to the joint venture which could prevent us from taking actions that are in our best interests;

our joint ventures may be subject to debt and any refinancing of such debt may require equity capital calls;

our joint venture partners may default on their obligations necessitating that we fulfill their obligations ourselves;

our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of the development, sale, or refinancing of a property;

our joint venture partners may be structured differently than us for tax purposes and this could create conflicts of interest;

our joint venture partners may take actions that are not within our control, which could jeopardize our qualification as a REIT or the tax status of the joint venture, requiring us to pay taxes or subjecting properties owned by the joint venture to liabilities greater than those contemplated by the terms of the joint venture agreements;

our joint venture partners may have competing interests in our markets that could create conflicts of interest; and

our joint ventures may be unable to repay any amounts that we may loan to them.

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available for our operations or to pay distributions or make additional investments.

We have diversified our cash and cash equivalents between several banking institutions in an attempt to minimize exposure to any one of these entities. However, the Federal Deposit Insurance Corporation, or “FDIC,” generally only insures limited amounts per depositor per insured bank. We have cash and cash equivalents and restricted cash deposited in interest bearing accounts at certain financial institutions exceeding these federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose the portion of our deposits that exceed the federally insured levels. The loss of our deposits would reduce the amount of cash we have available for our operations, to pay distributions, or to make additional investments.

We face risks associated with short-term liquid investments.

From time to time, we have significant cash balances that we invest in a variety of short-term investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments may include (either directly or indirectly):

direct obligations issued by the U.S. Treasury;

obligations issued or guaranteed by the U.S. government or its agencies;

taxable municipal securities;

obligations (including certificates of deposits) of banks and thrifts;

commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by corporations and banks;

repurchase agreements collateralized by corporate and asset-backed obligations;

both registered and unregistered money market funds; and

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other highly rated short-term securities.

Investments in these securities and funds are not insured against loss of principal. Under certain circumstances we may be required to redeem all or part of our investment or our right to redeem some or all of our investment may be delayed or suspended. In addition, there is no guarantee that our investments in these securities or funds will be redeemable at par value. A decline in the value of our investment or a delay or suspension of our right to redeem may have a material adverse effect on our results of operations or financial condition.

An increase in real estate taxes may decrease our income from properties.

Generally, from time to time our property taxes will increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes results in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass the tax increases through to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income and our cash available to pay distributions, if any.

We may suffer uninsured losses or losses in excess of insured limits relating to real property or pay excessively expensive premiums for insurance coverage.

Although we attempt to ensure that all of our properties are adequately insured to cover casualty losses, there are certain types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution, or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders generally insist that specific coverage against terrorism be purchased by commercial property owners as a condition for providing mortgage, bridge, or mezzanine loans. We cannot be certain that this coverage will continue to be available, or available at reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. We may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for any losses we may suffer. In addition, other than any capital reserve we may establish, we will have limited sources of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that those reserves will be sufficient.

Should one of our insurance carriers become insolvent, we would be adversely affected.

We carry several different lines of insurance placed with several large insurance carriers. If any one of our large insurance carriers were to become insolvent, any outstanding claims would be at risk for collection. Further, in such an event, we would be forced to replace the existing insurance coverage with another suitable carrier, possibly at unfavorable rates or terms.

Future terrorist attacks, military conflicts, and global unrest could have a material adverse effect on general economic conditions, consumer confidence, and market liquidity.

Terrorist attacks, ongoing and future military conflicts, and the continued global unrest may affect commodity prices and interest rates, among other things. An increase in interest rates may increase our cost of borrowing, leading to a reduction in our earnings. An increase in the price of oil will also cause an increase in our operating costs, which may not be reimbursed by our tenants. Also, terrorist acts could result in significant damages to, or loss of, our properties or the value thereof.

We and the tenants of the properties in which we have an interest may be unable to obtain adequate insurance coverage on acceptable economic terms for losses resulting from acts of terrorism. Our lenders may require that we carry terrorism insurance even if we do not believe this insurance is necessary or cost effective. We may also be prohibited under the applicable lease from passing all or a portion of the cost of such insurance through to our tenants. Should an act of terrorism result in an uninsured loss or a loss in excess of insured limits we could lose capital invested in a property as well as the anticipated future revenues from a property while remaining obligated for any mortgage indebtedness or other financial obligations related to the property.

Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.

We have significant investments in large metropolitan markets that have been or may be in the future the targets of actual or threatened terrorism attacks. As a result, some tenants in these markets may choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be perceived to be less likely targets of future terrorist activity.

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This could result in an overall decrease in the demand for office space in these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease our properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or indirectly damage our properties, both physically and financially, or cause losses that materially exceed our insurance coverage. As a result of the foregoing, our ability to generate revenues and the value of our properties could decline materially.

Some of our properties are concentrated in regions that are particularly susceptible to extreme weather or natural disasters.

Certain of our properties are located in geographical areas, such as Florida and Texas, that are regularly impacted by extreme weather and natural disasters, including, but not limited to, earthquakes, winds, floods, hurricanes, and fires. Natural disasters in these areas may cause damage to our properties beyond the scope of our insurance coverage, thus requiring us to make substantial expenditures to repair these properties and resulting in a loss of revenues from these properties. Further, several of these properties are located near the coast and are exposed to more severe weather than our properties located inland. Elements such as salt water and humidity in these areas can increase or accelerate wear on the properties’ weatherproofing and mechanical, electrical, and other systems, and cause mold issues over time. As a result, we may incur operating costs and expenditures for capital improvements at these properties in excess of those normally anticipated.

We face possible risks associated with the physical effects of climate change.

We cannot predict the rate at which climate change will progress. However, the physical effects of climate change could have a material adverse effect on our properties, operations, and business. To the extent that climate change impacts changes in weather patterns, some of our properties could experience increases in storm intensity and rising sea levels. Over time, these conditions could result in declining demand for space at our properties or result in our inability to operate the buildings at all. Climate change may also have indirect effects on our business by increasing the cost of, or availability of, property insurance on terms we find acceptable, increasing the cost of energy, and increasing the cost of snow removal at our properties. There can be no assurance that climate change will not have a material adverse effect on our properties, operations, or business.

Security breaches through cyber-attacks, cyber-intrusions, or otherwise, could disrupt our IT networks and related systems.

Risks associated with security breaches, whether through cyber-attacks or cyber-intrusions over the Internet, malware, computer viruses, attachments to e-mails, or otherwise, against persons inside our organization, persons with access to systems inside our organization, the U.S. government, financial markets or institutions, or major businesses, including tenants, could disrupt or disable networks and related systems, other critical infrastructures, and the normal operation of business. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber-terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. Even though we may not be specifically targeted, cyber-attacks on the U.S. government, financial markets, financial institutions, or other major businesses, including tenants, could disrupt our normal business operations and networks, which may in turn have a material adverse impact on our financial condition and results of operations.

IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations. They also may be critical to the operations of certain of our tenants. Although we believe we will be able to maintain the security and integrity of these types of networks and related systems, or implement various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. While, to date, we are not aware that we have experienced any significant cyber-attacks or cyber-intrusions, we may not be able to anticipate or implement adequate security barriers or other preventive measures. A security breach or other significant disruption involving our IT networks and related systems could:

disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants;

result in misstated financial reports, violations of loan covenants, missed reporting deadlines, and/or missed permitting deadlines;


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result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;

result in the unauthorized access to, and destruction, loss, theft, misappropriation, or release of proprietary, confidential, sensitive, or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive, or otherwise harmful purposes and outcomes;

result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;

require significant management attention and resources to remedy any damages that result;

subject us to claims for breach of contract, damages, credits, penalties, or termination of leases or other agreements; or

damage our reputation among our tenants and stockholders generally.

Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition, and cash flows.

The cost of complying with environmental and other governmental laws and regulations may adversely affect us, and we may become subject to liability relating to environmental matters.

All real property and the operations conducted on real property are subject to federal, state, and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation, and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. We also are required to comply with various local, state, and federal fire, health, life-safety, and similar regulations. Some of these laws and regulations may impose joint and several liability on tenants or owners for the costs of investigating or remediating contaminated properties. These laws and regulations often impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The cost of removing or remediating could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.

Environmental laws and regulations also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require substantial expenditures by us. Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Third parties may seek recovery from owners of real properties for personal injury or property damage associated with exposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require material expenditures by us. For example, various federal, state, and local laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency, and waste management. We are not aware of any such existing requirements that we believe will have a material impact on our current operations. However, future requirements could increase the costs of maintaining or improving our existing properties or developing new properties.

Our costs associated with complying with the Americans with Disabilities Act may affect cash available for our operations, to pay distributions, or to make additional investments.

Our real properties are generally subject to the Americans with Disabilities Act of 1990, as amended (the “Act”). Under the Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Act has separate compliance requirements for “public accommodations” and “commercial facilities” generally requiring that buildings and services be made accessible and available to people with disabilities. The Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We attempt to acquire properties that comply with the Act or any relevant law or regulation of a foreign jurisdiction or place the burden on the seller or other third party, such as a tenant, to ensure compliance with those laws or regulations. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner.



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We may from time to time be subject to litigation that may negatively impact our cash flow, financial condition, results of operations and market price of our common stock.

We may from time to time be a defendant in lawsuits and regulatory proceedings relating to our business. Such litigation and proceedings may result in defense costs, settlements, fines, or judgments against us, some of which may not be covered by insurance. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such litigation or proceedings. An unfavorable outcome could negatively impact our cash flow, financial condition, results of operations, and trading price of our common stock. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

We may be subject to other possible liabilities.

Our properties may be subject to other risks related to current or future laws, including laws benefiting disabled persons, state or local laws relating to zoning, construction, fire and life safety requirements, and other matters. These laws may require significant property modifications in the future and could result in the levy of fines against us. In addition, although we believe that we adequately insure our properties, we are subject to the risk that our insurance may not cover all of the costs to restore a property that is damaged by a fire or other catastrophic events, including acts of war or, as mentioned above, terrorism.

Our failure to maintain effective internal control over financial reporting could have a material adverse effect on our business and our operating results.

Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards may be modified, supplemented or amended from time to time, we may be required to disclose such failure and our financial reporting may not be relied on by most stockholders. Moreover, effective internal control, particularly related to revenue recognition, is necessary for us to produce reliable financial reports and to maintain our qualification as a REIT and is important in helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, our REIT qualification could be jeopardized, and stockholders could lose confidence in our reported financial information.

Risks Related to Financing

Our borrowings may increase our business risks.

Principal and interest payments reduce cash that would otherwise be available for other purposes. Further, incurring mortgage debt increases the risk of loss because (1) loss in investment value is generally borne entirely by the borrower until such time as the investment value declines below the principal balance of the associated debt and (2) defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. We have experienced defaults resulting in our having to transfer properties to the respective lenders, and may do so again if our asset values do not support the underlying loans. For federal income tax purposes, a foreclosure generally is treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. From time to time, we provide full or partial guarantees to lenders of mortgage debt to our indirect subsidiaries that own our properties. When we guarantee debt on behalf of an entity that owns one of our properties, we are thus responsible to the lender for satisfaction of the debt if it is not paid by the entity. To date, we have not been required to fund any of the guarantees that we have provided. If any mortgages contain cross-collateralization or cross-default provisions there is a risk that more than one real property may be affected by a default.

We may not be able to refinance or repay our indebtedness.

We may not be able to refinance or repay our existing indebtedness. Previously, we have faced significant challenges refinancing our debt due to (1) the reduced value of our real estate assets; (2) limited cash flow from operating activities; (3) our debt level; (4) the cost and terms of new or refinanced indebtedness; and (5) material changes in lending parameters, including lower loan-to-value ratios.


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Failure to refinance or extend our debt as it comes due or a failure to satisfy the conditions and requirements of that debt would likely result in an event of default and potentially the loss of the property or properties securing the debt. We have experienced defaults or events of default on previous indebtedness, which has required us to either restructure the debt in a way that is supported by the underlying values of the property or properties collateralizing the debt or to purchase or pay off the debt at a discount. In certain instances, we were unable to repay or restructure our indebtedness, or to purchase or pay it off at a discount, and the lender accelerated the debt and/or foreclosed on the property or properties securing the debt. We have experienced this result with several properties where we ultimately allowed the lender to foreclose or transferred the underlying properties to the lender pursuant to deeds-in-lieu of foreclosure, thus losing our entire investment in these properties.

Existing loan agreements contain, and future financing arrangements will likely contain, restrictive covenants relating to our operations.

We are subject to certain restrictions pursuant to the restrictive covenants of our outstanding indebtedness, which may affect our distribution and operating policies and our ability to incur additional debt. Our credit facility, for example, restricts us from paying any distributions, other than as required to maintain our REIT qualification, in excess of 95% of funds from operations as defined by National Association of Real Estate Investment Trusts (“NAREIT”). In addition, a breach of the financial and operating covenants in our debt agreements, including our credit facility agreement, could cause a default and accelerate payment under these agreements which could have a material adverse effect on our results of operations and financial condition. Specifically, violating the covenants contained in our credit facility agreement would likely result in us incurring higher finance costs and fees or an acceleration of the maturity date of advances under the credit facility agreement.

Interest-only indebtedness may increase our risk of default.

We have obtained, and continue to incur interest on interest-only mortgage indebtedness. Of our approximately $826.8 million of outstanding debt as of December 31, 2016, approximately $692.8 million currently requires interest-only payments. During the interest-only period the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan, and the principal balance of the mortgage loan is not being reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period we will be required either to make scheduled payments of principal and interest or to make a lump-sum or “balloon” payment at maturity. These required monthly or balloon principal payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan and will otherwise reduce the funds available for other purposes, including funding capital expenditures or any future distributions to our stockholders.

Increases in interest rates could increase the amount of our debt payments.
As of December 31, 2016, we had approximately $634.0 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. Thus, we are potentially exposed to increases in costs in a rising interest rate environment. Increased payments will reduce the funds available for other purposes including funding capital expenditures or distributions to our stockholders. In addition, if rising interest rates cause us to need additional capital to repay indebtedness, we may be forced to sell one or more of our properties or investments in real estate at times which may result in losses, or not permit us to realize the return on the investments we would have otherwise realized.

To hedge against interest rate fluctuations, we use derivative financial instruments, which will subject us to various risks.

From time to time we may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets and investments in collateralized mortgage-backed securities. Derivative instruments include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options, or repurchase agreements. Our actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time. There is no assurance that our hedging activities will have a positive impact on our results of operations or financial condition. We might be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.

To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we are exposed to credit risk, basis risk, and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under,

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the derivative contract. Further, the REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. We may be unable to manage these risks effectively.

We may enter into derivative contracts that could expose us to contingent liabilities in the future.

Derivative financial instruments may require us to fund cash payments upon the early termination of a derivative agreement caused by an event of default or other early termination event. The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. In addition, some of these derivative arrangements may require that we maintain specified percentages of cash collateral with the counterparty to fund potential liabilities under the derivative contract. We may have to make cash payments in order to maintain the required percentage of collateral with the counterparty. These economic losses would be reflected in our results of operations, and our ability to fund these obligations would depend on the liquidity of our respective assets and access to capital at the time.

Volatility in the financial markets and challenging economic conditions could adversely affect our ability to obtain debt financing on attractive terms and our ability to service any future indebtedness that we may incur.

If the overall cost of borrowing increases, either by increases in the index rates or by increases in lender spreads, the increased cost may result in future refinancing or acquisitions generating lower overall economic returns. Disruptions in the debt markets negatively impact our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets. We may not be able to borrow monies on terms and conditions that we find acceptable or at all. In addition, we may find it costly to refinance indebtedness which is maturing.

Further, economic conditions could negatively impact commercial real estate fundamentals and may cause declines in our occupancy and rental rates as well as in the overall value of our real estate assets.

Risks Related to Our Common Stock

There is no assurance that an active market will develop and be sustained 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 and be sustained, (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.

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 distributions;

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;


19



actions by institutional stockholders;

speculation in the press or investment community;

the realization of any of the other risk factors presented in this 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, economic, and political conditions.

The availability, timing, and amount of any cash distributions are uncertain.

Our board of directors reinstated quarterly cash distributions beginning in the second quarter of 2015, at $0.18 per share per quarter, and authorized cash distributions in the same amount for each quarter since that time. We anticipate that the board of directors will continue to consider authorizing a quarterly distribution payable from cash anticipated to be 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 Code.

Our business and operations could be adversely affected if we are subject to stockholder activism, which could cause us to incur significant expense and impact the market price of our common stock.

In recent years, proxy contests and other forms of stockholder activism have been directed against numerous public companies. Stockholder activism, including potential proxy contests, could result in substantial costs and divert the attention of our management and our board of directors and resources from our business. Activist campaigns can create perceived uncertainties as to our future direction, strategy or leadership and may result in the loss of potential business opportunities and harm our ability to attract new investors, tenants, joint venture partners and employees. In addition, we may be required to incur significant legal fees and other expenses related to any activist stockholder matters. Further, the market price of our common stock could be subject to significant fluctuation or otherwise be adversely affected by the events, risks, and uncertainties of any stockholder activism.


20



Risks Related to Our Organization and Structure

Stockholders have limited control over changes in our policies and operations, and our investment and business strategies and objectives may not be successful.

Our board of directors determines our major policies, including those regarding investment and business policies and strategies, financing, growth, debt capitalization, REIT qualification, and distributions. Our board of directors may amend or revise certain of these and other policies without a vote of the stockholders. In addition, there is no assurance that we will be able to successfully implement our investment or business strategies, including our strategies and objectives for 2017.

Your percentage interest in TIER REIT, Inc. will be reduced if we issue additional shares.

Existing stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 400,000,000 shares of capital stock of which 382,499,000 shares are designated as common stock, 1,000 shares are designated as convertible stock, and 17,500,000 shares are designated as preferred stock. Subject to any preferential rights in favor of any class of preferred stock, our board of directors may increase the number of authorized shares of capital stock that we have the authority to issue or increase or decrease the number of shares of equity stock of any class or series of stock designated. Shares may be issued in the discretion of our board of directors. The percentage of our outstanding shares owned by stockholders at the time of any issuance will likely be reduced if we (1) issue or sell additional shares of our common stock in the future; (2) sell securities that are convertible into shares of our common stock; (3) issue shares of our common stock in a private offering of securities; (4) issue shares of our common stock upon the exercise of the options granted to our independent directors or upon issuance of restricted stock or other awards under our 2015 Equity Incentive Plan or our 2005 Incentive Award Plan to our independent directors, employees, or consultants; or (5) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of Tier OP. In addition, the partnership agreement for Tier OP contains provisions that would allow, under certain circumstances, other entities to merge into, or cause the exchange or conversion of their interest for interests of, Tier OP. Because the limited partnership interests of Tier OP may be exchanged for shares of our common stock, any merger, exchange or conversion between Tier OP and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, therefore reducing the number of outstanding shares owned by our other stockholders. Further, our board of directors could authorize the issuance of stock with terms and conditions that subordinate the rights of the current holders of our common stock or have the effect of delaying, deferring, or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a liquidity event for our stockholders.

A limit on the number of shares a person may own may discourage a takeover.

Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person or group may own more than 9.8% of our outstanding common or preferred stock, in value or number of shares, whichever is more restrictive. This restriction may have the effect of delaying, deferring, or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might otherwise provide stockholders with a liquidity event.

Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the holder becomes an “interested stockholder.” These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An “interested stockholder” is defined as:

any person who beneficially owns 10% or more of the voting power of the then outstanding voting stock of the corporation; or

an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.


21



A person is not an interested stockholder under the statute if our board of directors approved, in advance, the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, our board may condition its approval on compliance, at or after the time of approval, with any terms and conditions determined by the board.

After the expiration of the five-year period described above, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock of the corporation; and

two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority voting requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. Maryland law also permits various exemptions from these provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

Maryland law limits the ability of a third party to buy a large stake in us and exercise voting power in electing directors.

Maryland law contains a second statute that may also have an anti-takeover effect. This statute, known as the Control Share Acquisition Act, provides that persons or entities owning “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights with respect to those shares except to the extent approved by a vote of two-thirds of the corporation’s disinterested stockholders. Shares of stock owned by the acquirer, by officers, or by employees who are directors of the corporation, are not considered disinterested for these purposes. “Control shares” are shares of stock that, taken together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:

one-tenth or more but less than one-third of all voting power;

one-third or more but less than a majority of all voting power; or

a majority or more of all voting power.

Control shares do not include shares of stock the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions. The Control Share Acquisition Act does not apply to (1) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (2) acquisitions approved or exempted by our charter or bylaws. Our bylaws exempt any acquisition by any person of shares of our common stock from the Control Share Acquisition Act.

Our rights, and the rights of our stockholders, to recover claims against our officers and directors are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interest and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property, or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter and bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for any claim or liability to which they may become subject or which they may incur by reason of their service as directors or officers, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property, or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law, which could reduce our and our

22



stockholders’ recovery from these persons if they act in a negligent or grossly negligent manner. In addition, we may be obligated to fund the defense costs incurred by our officers and directors in some cases.

Federal Income Tax Risks

Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions.

We elected to be taxed as a REIT commencing with our 2004 tax year. In order for us to remain qualified as a REIT, we must satisfy certain requirements set forth in the Code and maintain other facts and circumstances that are not entirely within our control.

Our qualification as a REIT depends upon our ability to meet, through investments, actual operating results, distributions, and satisfaction of specific stockholder rules, the various tests imposed by the Code. While we intend to structure our activities in a manner designed to satisfy all of these requirements, we cannot assure you that we will satisfy the REIT requirements in the future because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. In addition, new legislation, new regulations, administrative interpretations, or court decisions could significantly change the tax laws with respect to qualifying as a REIT or the federal income tax consequences of qualifying as a REIT. In the future, we may determine that it is in our best interests to hold one or more of our properties through one or more subsidiaries that elect to be taxed as REITs. If any of these subsidiaries fail to qualify as a REIT for federal income tax purposes, then we may also fail to qualify as a REIT for federal income tax purposes.

If we fail to qualify as a REIT for any taxable year, then unless certain relief provisions apply, we will face serious tax consequences that could substantially reduce the funds available for payment of distributions for each of the years involved because:

we would not be allowed to deduct distributions paid to stockholders when computing our taxable income and we would no longer be required to make distributions to our stockholders;

we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

we would become subject to additional state income tax provisions and owe greater amounts of state income tax on our taxable income;

we would be disqualified from being taxed as a REIT for the four years following the year during which we failed to qualify, unless entitled to relief under certain statutory provisions; and

we may be required to borrow additional funds during unfavorable market conditions or sell some of our assets in order to pay corporate tax obligations.

If we fail to qualify as a REIT but are eligible for certain relief provisions then we may retain our status as a REIT but may be required to pay a penalty tax, which could be substantial.

Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and sell properties through taxable
REIT subsidiaries, each of which would diminish the return to our stockholders.

It is possible that one or more sales of our properties may be “prohibited transactions” under provisions of the Code. If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property held primarily for sale to customers in the ordinary course of business), all profit that we derive from such sale would be subject to a 100% penalty tax. While the Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax, we cannot assure you that we can in all cases comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business.

Alternatively, if we dispose of property through a taxable REIT subsidiary (“TRS”), then such a sale may not be treated as a prohibited transaction. However, there may be circumstances that prevent us from using a TRS in a transaction that does not qualify for the safe harbor or circumstances where it may not be clear whether the TRS or the REIT would be treated as the seller for U.S. federal income tax purposes. Additionally, even if it is possible to effect a property disposition through a TRS, we may

23



decide to forgo the use of a TRS in a transaction that does not meet the safe harbor requirements based on our own internal analysis, the opinion of counsel, or the opinion of other tax advisors that the disposition should not be subject to the 100% penalty tax. In cases where a property disposition is not effected (or is not treated as being effected) through a TRS, the IRS might successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net income from the sale of such property will be payable as a tax and none of the net proceeds from such sale will be available for investment by us or distribution to our stockholders. Moreover, we may then owe additional state income taxes.

Though a sale of the property by a TRS likely would eliminate the danger of the application of the 100% penalty tax, the TRS itself would be subject to tax at the federal level, and very likely at the state and local levels as well, on the gain realized by it from the sale of the property as well as on the income earned while the property is operated by the TRS. This tax obligation would diminish the amount of the proceeds from the sale of such property that would be distributable to our stockholders. As a result, the amount available for distribution to our stockholders would be substantially less than if the REIT had not operated and sold such property through the TRS and such transaction was not successfully characterized by the IRS as a prohibited transaction.

As a REIT, the value of the non-mortgage securities we hold in our TRSs generally may not exceed 25% of the total value of our assets at the end of any calendar quarter through December 31, 2017, and may not exceed 20% of the total value of our assets at the end of any calendar quarter thereafter. If the IRS were to determine that the value of our interests in all of our TRSs exceeded this limit at the end of any calendar quarter, then we would fail to qualify as a REIT. If we determine it to be in our best interests to own a substantial number of our properties through one or more TRSs, then it is possible that the IRS may conclude that the value of our interests in our TRSs exceeds 25% or 20%, as applicable, of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of our gross income with respect to any year may, in general, be from sources other than certain real estate-related assets. Distributions paid to us from a TRS are typically considered to be non-real estate income. Therefore, we may fail to qualify as a REIT if distributions from all of our TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of our gross income with respect to such year.

Certain fees paid to us may affect our REIT status.

Certain income received by us may not qualify as income from rental of real property for REIT qualification purposes and could be characterized by the IRS as non-qualifying income for purposes of satisfying the “income tests” required for REIT qualification. If any of our income were, in fact, treated as non-qualifying, and if the aggregate of such non-qualifying income in any taxable year ever exceeded 5% of our gross revenues for such year (or 5% of any REIT subsidiaries), we could lose our REIT status for that taxable year and the four taxable years following the year of losing our REIT status. In addition, if income from services we perform for our tenants is determined to be impermissible by the IRS and if that amount exceeds 1% of the property’s gross revenues, then all gross revenues from that property will be deemed non-qualifying income for purposes of the 5% amount mentioned above. For example, a property with $9.0 million of gross revenue that has $90,000 or more of impermissible tenant services would render all $9.0 million of gross revenue as non-qualifying income and thus could then cause us to lose our REIT status.

If any of our partnerships or limited liability companies are recharacterized by the IRS as taxable corporations, our REIT status would be threatened and the income of such entities would be subject to tax at corporate rates.

If any partnership, limited liability company, or other subsidiary entity that we intend to be classified as a partnership or disregarded entity for U.S. federal income tax purposes (including, without limitation, Tier OP and any underlying property owner) is recharacterized by the IRS as a taxable corporation, this may result in our losing REIT status. In addition, the entity would be subject to tax as a corporation, thereby reducing distributions from such entity we ultimately receive.

In certain circumstances, we may be subject to federal and state income taxes as a REIT which would reduce our cash available to pay distributions.

Even if we maintain our status as a REIT, we may yet become subject to federal income taxes and related state taxes.

For example:

We are subject to tax on any undistributed income. We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year plus amounts retained for which federal income tax was paid are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.

24




If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.

If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax.

We will be subject to a 100% penalty tax on certain amounts if the economic arrangements between our tenants, our taxable REIT subsidiaries, and us are not comparable to similar arrangements among unrelated parties.

State laws may change so as to begin taxing REITs.

Legislative or regulatory action could adversely affect stockholders.

Changes to the tax laws are likely to occur, and these changes may adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets.

The more favorable rates applicable to regular corporate dividends could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the value of our stock. However, as a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our stockholders, and we thus expect to avoid the “double taxation” to which other corporations are typically subject. Stockholders and potential investors should consult their own tax advisors regarding the applicable tax rates that apply to them.

It is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed, for federal income tax purposes, as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.

We face possible state and local tax audits.

Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but are subject to certain state and local taxes. In the normal course of business, certain entities through which we own real estate have undergone tax audits. In some instances there is no controlling precedent or interpretive guidance on the specific point at issue. Collectively, tax deficiency notices received to date have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our financial condition and results of operations.

Item 1B.                 Unresolved Staff Comments.
 
None.

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Item 2.                    Properties.
 
General
 
As of December 31, 2016, we owned interests in 29 operating office properties, one non-operating property, and one development property located in 13 markets throughout the United States.  As of December 31, 2016, the operating office properties are approximately 90.7% leased to tenants.  In the aggregate, the operating office properties represent approximately 10.1 million rentable square feet.  The average effective rent per square foot for the operating office properties is approximately $27.19 per square foot.  Average effective rent per square foot represents 12 times the sum of (1) the monthly contractual amounts for base rent and (2) the pro rata 2016 budgeted operating expense reimbursements, each as of December 31, 2016, related to leases in place as of December 31, 2016, as reduced for free rent and excluding any scheduled future rent increases, divided by the total square footage under commenced leases as of December 31, 2016.

As of December 31, 2016, all of our properties were consolidated with and into the accounts of our operating partnership, except for six properties which are accounted for using the equity method.  As of December 31, 2016, approximately 12% of our consolidated properties are encumbered by property debt. 

The following information applies to all of our operating office properties:
 
we believe, although there can be no assurance that, all of our properties are adequately covered by insurance and suitable for their intended purposes;

we have no current commitments for any material renovations, improvements, or development of our properties, except in accordance with planned budgets;
 
our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and
 
depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the buildings, improvements, and related assets.


26



The following table presents certain additional information about our properties as of December 31, 2016:
 
Property Name
 
Location
 
Date Acquired
 
Approximate
Rentable Square Footage (in thousands)
 
Approximate % Leased
 
Our
Ownership Interest
 
Ownership Type
 
 
Operating office properties
 
 
 
 
 
 
 
 
 
 
 
The Terrace Office Park
 
Austin, TX
 
06/2006
 
619

 
93.7
%
 
100.00
%
 
fee title
 
Domain 2 (1) (2)
 
Austin, TX
 
07/2015
 
115

 
100.0
%
 
49.84
%
 
joint venture
 
Domain 3
 
Austin, TX
 
07/2015
 
179

 
100.0
%
 
100.00
%
 
fee title
 
Domain 4
 
Austin, TX
 
07/2015
 
153

 
100.0
%
 
100.00
%
 
fee title
 
Domain 7 (1) (2)
 
Austin, TX
 
07/2015
 
222

 
100.0
%
 
49.84
%
 
joint venture
 
5950 Sherry Lane
 
Dallas, TX
 
12/2014
 
197

 
87.8
%
 
100.00
%
 
fee title
 
Burnett Plaza
 
Ft. Worth, TX
 
02/2006
 
1,025

 
86.0
%
 
100.00
%
 
fee title
 
Centreport Office Center
 
Ft. Worth, TX
 
06/2007
 
133

 
100.0
%
 
100.00
%
 
fee title
 
Loop Central
 
Houston, TX
 
12/2007
 
575

 
83.3
%
 
100.00
%
 
fee title
 
One & Two Eldridge Place
 
Houston, TX
 
12/2006
 
519

 
92.7
%
 
100.00
%
 
fee title
 
One BriarLake Plaza
 
Houston, TX
 
09/2008
 
502

 
94.6
%
 
100.00
%
 
fee title
 
Two BriarLake Plaza
 
Houston, TX
 
12/2009-09/2014
 
333

 
67.9
%
 
100.00
%
 
fee title
 
Three Eldridge Place
 
Houston, TX
 
12/2006-11/2009
 
305

 
80.3
%
 
100.00
%
 
fee title
 
Buena Vista Plaza (3)
 
Burbank, CA
 
07/2005
 
115

 
100.0
%
 
100.00
%
 
fee title
 
Eisenhower I
 
Tampa, FL
 
12/2007
 
130

 
100.0
%
 
100.00
%
 
fee title
 
Bank of America Plaza
 
Charlotte, NC
 
10/2006
 
891

 
91.8
%
 
100.00
%
 
fee title
 
Plaza at MetroCenter
 
Nashville, TN
 
12/2007
 
361

 
90.9
%
 
100.00
%
 
fee title
 
Wanamaker Building (1) (4)
 
Philadelphia, PA
 
12/2007
 
1,390

 
97.4
%
 
60.00
%
 
joint venture
 
Three Parkway
 
Philadelphia, PA
 
10/2006
 
561

 
84.8
%
 
100.00
%
 
fee title
 
1325 G Street (1)
 
Washington, D.C.
 
11/2005
 
307

 
74.2
%
 
10.00
%
 
joint venture
 
Colorado Building (1)
 
Washington, D.C.
 
08/2004-12/2008
 
128

 
84.6
%
 
10.00
%
 
joint venture
 
Forum Office Park
 
Louisville, KY
 
12/2007
 
328

 
97.6
%
 
100.00
%
 
fee title
 
One Oxmoor Place (5)
 
Louisville, KY
 
12/2007
 
135

 
99.3
%
 
100.00
%
 
fee title
 
Steeplechase Place (5)
 
Louisville, KY
 
12/2007
 
77

 
80.5
%
 
100.00
%
 
fee title
 
Lakeview (5)
 
Louisville, KY
 
12/2007
 
76

 
82.9
%
 
100.00
%
 
fee title
 
Hunnington (5)
 
Louisville, KY
 
12/2007
 
62

 
85.5
%
 
100.00
%
 
fee title
 
500 E. Pratt
 
Baltimore, MD
 
12/2007
 
280

 
92.9
%
 
100.00
%
 
leasehold
 
Woodcrest Corporate Center
 
Cherry Hill, NJ
 
01/2006
 
333

 
99.1
%
 
100.00
%
 
fee title
 
111 Woodcrest
 
Cherry Hill, NJ
 
11/2007
 
53

 
84.9
%
 
100.00
%
 
fee title
 
Total operating office properties
 
 
 
 
 
10,104

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-operating property
 
 
 
 
 
 
 
 
 
 
 
Fifth Third Center (6)
 
Columbus, OH
 
12/2007
 
331

 
55.4
%
 
100.00
%
 
fee title
 
Total properties
 
 
 
 
 
10,435

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Development property
 
 
 
 
 
 
 
 
 
 
 
 
 
Domain 8 (50%) (1)
 
Austin, TX
 
 
 
291

 
95.1
%
 
50.00
%
 
joint venture
 
 
 
 
 
 
 
 
 
 
 
 
 
 
________________
(1)    This property is accounted for under the equity method as of December 31, 2016.
(2)    Subsequent to December 31, 2016, we acquired the remaining 50.16% interest in these properties.
(3)
This property was sold subsequent to December 31, 2016. Management did not commit to a plan to sell until January 2017 when the plan was approved by the Board of Directors; therefore, the property was not classified as held for sale as of December 31, 2016.
(4) Subsequent to December 31, 2016, we sold substantially all of our noncontrolling investment in this property.
(5)    This property is held for sale as of December 31, 2016.
(6)    The non-recourse loan on Fifth Third Center is currently in default and we are working with the lender to dispose of this office property on their behalf.


27



Lease Expirations
 
The following table sets forth a 10-year schedule of the lease expirations for leases in place at our operating office properties (excluding held for sale properties) as of December 31, 2016 (square footage and dollar amounts are in thousands): 
 
Year of Lease Expiration
 
Number of Leases Expiring (1)
 
Rentable
Square Feet
Expiring
 
Annualized
Rent (2)
 
Percentage of Rentable Square Feet
 
Percentage of Annualized Expiring Rent
 
 
 
2017
 
66
 
565
 
$17,387
 
7%
 
7%
 
2018
 
47
 
392
 
$11,384
 
5%
 
5%
 
2019
 
54
 
1,070
 
$32,985
 
12%
 
13%
 
2020
 
41
 
945
 
$30,028
 
11%
 
12%
 
2021
 
53
 
650
 
$21,617
 
8%
 
9%
 
2022
 
25
 
630
 
$20,305
 
7%
 
8%
 
2023
 
23
 
799
 
$27,159
 
9%
 
11%
 
2024
 
13
 
629
 
$23,817
 
7%
 
10%
 
2025
 
21
 
295
 
$7,974
 
3%
 
3%
 
2026
 
22
 
893
 
$33,364
 
10%
 
13%
__________________________
(1)
Leases with an expiration on the last day of the year are considered leased at the last day of the year (i.e., expiring on the first day of the following year).
(2)
Represents the cash rental rate of base rents, including tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights.  Tenant reimbursements generally include payment of real estate taxes, operating expenses, and common area maintenance and utility charges.

Item 3.                    Legal Proceedings.
 
We are not currently party to, and none of our properties is currently subject to, any material legal proceedings. From time to time, we are a party to various claims and legal proceedings that arise in the ordinary course of business.
Item 4.                    Mine Safety Disclosures.
     None.

28



PART II

Item 5.                 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Our common stock is traded on the NYSE under the symbol “TIER.” As of February 1, 2017, we had 47,819,115 shares of common stock outstanding, including 303,593 shares of restricted stock for which restrictions have not yet lapsed, held by a total of approximately 16,000 stockholders of record. The number of holders of record does not include individuals or entities that beneficially own shares that are held of record by a broker or clearing agency. We listed our stock on the NYSE on July 23, 2015, and began paying distributions on July 8, 2015. On February 1, 2017, the last reported sales price of our shares of common stock on the NYSE was $18.23. The following table sets forth the quarterly high and low sales price per share of common stock reported on the NYSE for the indicated periods and the distributions declared by us with respect to each such period.
 
Share Price High
 
Share Price Low
 
Distributions declared per share of common stock
First Quarter 2016
$15.60
 
$12.52
 
$0.18
Second Quarter 2016
$16.66
 
$13.29
 
$0.18
Third Quarter 2016
$17.81
 
$15.07
 
$0.18
Fourth Quarter 2016
$17.44
 
$14.06
 
$0.18
 
 
 
 
 
 
Second Quarter 2015
N/A
 
N/A
 
$0.18
Third Quarter 2015
$19.50
 
$13.60
 
$0.18
Fourth Quarter 2015
$16.82
 
$14.07
 
$0.18

Distributions
 
We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2004.  As a REIT, we must distribute at least 90% of our REIT taxable income to our stockholders annually.  Our board of directors reinstated quarterly cash distributions in the second quarter of 2015 at $0.18 per share of common stock and authorized cash distributions in the same amount for each subsequent quarter. Distributions declared for each quarter were paid in the subsequent quarter. We have paid all or a portion of these distributions from cash provided by operating activities, cash on hand, borrowings, and proceeds from the sales of assets. Of the amounts distributed by us in 2016 and 2015, 100% represented a return of capital. 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. Further, we are subject to certain restrictions pursuant to covenants in connection with our outstanding indebtedness, which may affect our distribution policies and our ability to pay distributions.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information regarding our equity compensation plans as of December 31, 2016:
Plan Category
 
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights (1)
 
Weighted-average
exercise price of
outstanding options,
warrants and rights (2)
 
Number of securities remaining
available for future issuance
under equity compensation
plans
Equity compensation plans approved by security holders - 2015 Equity Incentive Plan
 
70,230

 
N/A
 
2,429,770

Equity compensation plans approved by security holders - 2005 Incentive Award Plan
 
14,376

 
$40.13
 

Equity compensation plans not approved by security holders
 
N/A

 
N/A
 
N/A

Total
 
84,606

 
$40.13
 
2,429,770

__________________
(1)
Includes restricted stock units issued to independent directors and a target number of restricted stock units granted to employees under our long-term incentive program, which are subject to vesting based on our total stockholder return on an absolute basis during a measurement period.
(2)
Restricted stock units are not included in the weighted-average exercise price calculation because there is no exercise price associated with restricted stock units.

29



Share Performance Graph
    
The SEC requires us to present a chart comparing the cumulative total shareholder return on our shares of common stock with the cumulative total shareholder return of (i) a broad equity index and (ii) a published industry or peer group index. The following chart compares the cumulative total shareholder return for the shares of common stock with the cumulative shareholder return of companies on (i) the S&P 500 Index (ii) the Russell 2000 Index and (iii) the SNL U.S. REIT Equity Index as provided by SNL Financial for the period beginning July 23, 2015, (the date our shares of common stock were listed on the NYSE) and ending December 31, 2016, and assumes an investment of $100 has been made in shares of our common stock and in each index on July 23, 2015, with reinvestment of all distributions. The historical information set forth below is not necessarily indicative of future performance.
tierreitinc_chart-51682a01.jpg
 
Period Ending
Index
07/23/15

9/30/2015

12/31/2015

3/31/2016

6/30/2016

9/30/2016

12/31/2016

TIER REIT, Inc.
$
100.00

$
81.68

$
82.81

$
76.46

$
88.28

$
89.93

$
102.37

S&P 500
$
100.00

$
91.74

$
98.20

$
99.52

$
101.96

$
105.89

$
109.94

Russell 2000
$
100.00

$
88.68

$
91.87

$
90.47

$
93.90

$
102.40

$
111.44

SNL U.S. REIT Equity
$
100.00

$
97.50

$
104.79

$
111.15

$
119.27

$
117.79

$
114.10




30



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 quarter ended December 31, 2016. These purchases represent the shares of common stock surrendered by employees to us to satisfy such employees’ minimum tax withholding obligations in connection with the lapse of restrictions on shares of restricted common stock.
 
 
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
October 2016
 
 
 
not applicable
 
not applicable
November 2016
 
 
 
not applicable
 
not applicable
December 2016
 
22,872
 
$17.39
 
not applicable
 
not applicable





31



Item 6.                                                           Selected Financial Data.
 
The following data should be read in conjunction with our audited consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data presented below has been derived from our audited consolidated financial statements (in thousands, except number of properties and per share amounts).
 
As of December 31
 
2016
 
2015
 
2014
 
2013
 
2012
Total assets (1)
 
$
1,552,540

 
$
1,864,891

 
$
2,203,802

 
$
2,429,491

 
$
3,111,133

 
 
 
 
 
 
 
 
 
 
 
Notes payable, net (1)
 
$
826,783

 
$
1,071,571

 
$
1,186,704

 
$
1,483,633

 
$
2,093,219

Other liabilities
 
105,241

 
115,501

 
228,938

 
142,599

 
227,829

Series A Convertible Preferred Stock
 

 
2,700

 
4,626

 
2,700

 
2,700

Stockholders’ equity
 
618,546

 
673,617

 
782,589

 
799,732

 
781,757

Noncontrolling interests (2)
 
1,970

 
1,502

 
945

 
827

 
5,628

Total liabilities and equity (1)
 
$
1,552,540

 
$
1,864,891

 
$
2,203,802

 
$
2,429,491

 
$
3,111,133

 
Year Ended December 31
 
2016
 
2015
 
2014
 
2013
 
2012
Rental revenue
 
$
242,818

 
$
282,365

 
$
288,067

 
$
289,071

 
$
296,701

 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations before gain on sale or transfer of assets
 
(51,629
)
 
(95,430
)
 
(74,855
)
 
(57,083
)
 
(163,114
)
Discontinued operations (3)
 

 
16,790

 
59,327

 
56,964

 
2,670

Gain on sale or transfer of assets
 
22,176

 
44,477

 

 
16,102

 
8,083

Net income (loss)
 
(29,453
)
 
(34,163
)
 
(15,528
)
 
15,983

 
(152,361
)
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interests in continuing operations
 
36

 
159

 
132

 
60

 
227

Noncontrolling interests in discontinued operations
 

 
(30
)
 
(120
)
 
(491
)
 
33

Dilution (accretion) of Series A Convertible Preferred Stock
 

 
1,926

 
(1,926
)
 

 

Net income (loss) attributable to common stockholders
 
$
(29,417
)
 
$
(32,108
)
 
$
(17,442
)
 
$
15,552

 
$
(152,101
)
 
 
 
 
 
 
 
 
 
 
 
Cash provided by (used in) operating activities
 
$
51,303

 
$
(3,880
)
 
$
25,140

 
$
45,151

 
$
48,534

Cash provided by investing activities (4)
 
$
230,137

 
$
200,242

 
$
138,952

 
$
424,609

 
$
63,959

Cash used in financing activities
 
$
(282,007
)
 
$
(240,168
)
 
$
(204,831
)
 
$
(451,557
)
 
$
(135,842
)
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted income (loss) per common share
 
 

 
 

 
 

 
 

 
 

Continuing operations
 
$
(0.62
)
 
$
(1.00
)
 
$
(1.54
)
 
$
(0.82
)
 
$
(3.11
)
Discontinued operations
 

 
0.34

 
1.19

 
1.13

 
0.05

Basic and diluted income (loss) per common share
 
$
(0.62
)
 
$
(0.66
)
 
$
(0.35
)
 
$
0.31

 
$
(3.06
)
 
 
 
 
 
 
 
 
 
 
 
Distributions declared to common stockholders per share
 
$
0.72

 
$
0.54

 
$

 
$

 
$
0.54

 
 
 
 
 
 
 
 
 
 
 
Number of properties (5)
 
30

 
36

 
37

 
38

 
50

Total rentable square feet (5)
 
10,435

 
12,381

 
14,304

 
15,501

 
20,189

_________________________
(1)
Reflects our January 1, 2016, adoption of Financial Accounting Standards Board (“FASB”) guidance that requires retrospective reclassification of certain deferred financing fees from an asset to a deduction to notes payable.         
(2)
Noncontrolling interests reflect the proportionate interest not owned by us of certain of our real estate properties, limited partnership interests in Tier OP held by third parties, and restricted stock units issued to our independent directors.
(3)
Effective January 1, 2015, we adopted 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 generally no longer qualify as discontinued operations.
(4)
Reflects our December 31, 2016, adoption of FASB guidance that requires that a statement of cash flows explain the change during the period in cash, cash equivalents, and amounts generally described as restricted cash. This guidance is applied retrospectively and changes our cash provided by investing activities, which were previously reported (in thousands) as: 2015 - $224,854; 2014 - $153,347; 2013 - $454,446; and 2012 - $84,981.
(5)
Reflects all properties owned at the end of each year. This number includes properties held for sale and excludes properties under development.

32




Item 7.                                                           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 consolidated financial statements and the notes thereto.

Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.  Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
 
Real Estate
 
Prior to the adoption of new accounting guidance clarifying the definition of a business on October 1, 2016 (discussed further below), upon the acquisition of real estate properties, we recognized the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values.  The acquisition date was the date on which we obtained control of the real estate property.  The assets acquired and liabilities assumed consisted of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities, and asset retirement obligations.  Identified intangible assets generally consisted of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships.  Identified intangible liabilities generally consisted of below-market leases.  Goodwill was recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired.  Likewise, a bargain purchase gain was recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree was less than the fair value of the identifiable net assets acquired.  Acquisition-related costs were expensed in the period incurred.

In January 2017, the FASB issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values rather than their fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted, including for interim or annual periods for which financial statements have not yet been issued. As we had not issued any financial statements for the fourth quarter of 2016, we early adopted this guidance on October 1, 2016, with no material impact on our financial statements or disclosures. As a result, we modified our accounting policy on October 1, 2016, to record the entirety of the asset acquisitions of real property and related intangible assets and liabilities at their relative fair values once we have determined the fair value of each of these assets and liabilities. In addition, goodwill and bargain purchase gains are not recognized in connection with an asset acquisition. We continue to determine the individual fair values of assets and liabilities acquired in the same manner as discussed below.
 
The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings.  Land values are derived from appraisals or other relevant market information available to us, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants.  The value of buildings is depreciated over the estimated useful life of generally 25 years using the straight-line method.
 
We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.
 
We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual

33



amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases.  We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.
 
The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions.  In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance, and other operating expenses, as well as lost rental revenue during the expected lease-up period based on current market conditions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees, and tenant improvements, as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.
 
Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

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 initial term 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 intangibles related to that tenant would be charged to expense.
 
In allocating the purchase price of each of our properties, management makes assumptions and uses various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets, discount rates used to determine present values, market rental rates per square foot, and the period required to lease the property up to its occupancy at acquisition as if it were vacant.  Many of these estimates are obtained from independent third party appraisals.  However, management is responsible for the source and use of these estimates.  A change in these estimates and assumptions could result in the various categories of our real estate assets and/or related intangibles being overstated or understated which could result in an overstatement or understatement of depreciation and/or amortization expense and/or rental revenue.  These variances could be material to our financial statements. 
    
Impairment of Real Estate Related Assets
 
For our consolidated real estate assets, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted cash flows and also exceeds the fair value of the asset, we recognize an impairment loss to adjust the carrying amount of the asset to its estimated fair value. Our process to estimate the fair value of an asset involves using bona fide purchase offers or the expected sales price of an executed sales agreement, which would be considered Level 1 or Level 2 assumptions within the fair value hierarchy. To the extent that this type of third-party information is unavailable, we estimate projected cash flows and a risk-adjusted rate of return that we believe would be used by a third party market participant in estimating the fair value of an asset. This is considered a Level 3 assumption within the fair value hierarchy. These projected cash flows are prepared internally by the Company’s asset management professionals and are updated quarterly to reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer, Chief Accounting Officer, and Managing Director - Asset Management review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions which are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the real estate investment. For the years ended December 31, 2016, 2015 and 2014, we recorded impairment charges of approximately $9.0 million, $0.1 million, and $13.2 million, respectively, related to the impairment of consolidated

34



real estate assets, including discontinued operations.  The impairment losses recorded were primarily related to assets assessed for impairment due to changes in management’s estimates of the intended hold periods for certain of our properties.

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 years ended December 31, 2016, 2015 and 2014.
 
In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition 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.

Overview

As of December 31, 2016, we owned interests in 29 operating office properties totaling approximately 10.1 million rentable square feet, one non-operating property totaling approximately 331,000 square feet, and one development property that will consist of approximately 291,000 rentable square feet.  As of December 31, 2015, we owned interests in 34 operating office properties with approximately 12.0 million rentable square feet, two non-operating properties totaling 410,000 square feet and one development property.
     
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. While many real estate markets have generally stabilized since the pervasive and fundamental disruptions associated with the last recession that created extensive job losses and limited availability of credit to businesses, the financial markets have been highly variable, and oil prices declined dramatically in 2015 and have been volatile in recent years. 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 annual growth and tenants focused on using less space per employee, it has trailed the general economy. 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. In the current economic climate, we continue to follow a disciplined approach to managing our operations.
Review of 2016 Objectives
We identified five key objectives for 2016: (1) increase institutional ownership in shares of our common stock; (2) dispose of non-strategic properties; (3) reduce our leverage; (4) manage capital expenditures; and (5) increase portfolio occupancy while also addressing short- and mid-term lease expirations.

Increase Institutional Ownership in Shares of our Common Stock
We believe our transformation from a collection of assets to a premier office REIT, along with our best-in-class, Class A office portfolio, focused investment strategy, opportunities for outsized growth, and in-house expertise, are attractive to institutional investors and differentiate us from other office REITs. To this end, during 2016, we embarked upon a robust investor relations program to communicate our strategy to a broad audience of institutional investors and will continue to do so.

Dispose of Non-Strategic Properties
We continue to dispose of properties located outside of target growth markets when we believe market conditions are advantageous to us. During 2016, we sold Lawson Commons, located in St. Paul, Minnesota; FOUR40, located in Chicago, Illinois; the Hurstbourne Business Center, located in Louisville, Kentucky; and 801 Thompson, located in Rockville, Maryland. Exiting these properties has allowed us to further sharpen our geographic focus and de-lever our balance sheet. We anticipate future dispositions of properties will provide capital to further de-lever the balance sheet and to recycle into our target growth markets. We can provide no assurance that we will sell any of the remaining properties located outside our target growth markets

35



on terms favorable to us, or at all, or on the timing we expect. We can also provide no assurance regarding the specific uses of any net proceeds.

Reduce our Leverage
Substantial progress was made in 2015 to create a more flexible capital structure, balance our debt maturities, lower our leverage, and reduce our weighted average borrowing costs. We continued this progress in 2016 by transitioning our $860.0 million credit facility from secured to unsecured. We also utilized proceeds from the sale of properties to further reduce our leverage, as we did with proceeds from the sales of Lawson Commons, FOUR40, the Hurstbourne Business Center, and 801 Thompson. During 2016, we repaid (without penalty) approximately $296.0 million of debt ahead of scheduled maturity dates.
Manage Capital Expenditures
We continue to actively manage capital expenditures with the objective of balancing leasing capital and building improvements with our ability to meet customer demands and achieve our leasing objectives. We believe our long-term strategy of acquiring and developing best-in-class strategic properties within our target growth markets will allow us to better manage our capital expenditures by: (1) increasing total operating cash flow; (2) sustaining the overall quality of our portfolio; and (3) leveraging the existing property management team, thereby resulting in operating efficiencies within each market.

Increase Portfolio Occupancy and Address Short- to Mid-term Lease Expirations

Leasing was a key area of focus for us during 2016 as we worked to increase occupancy. As of December 31, 2016, occupancy of our operating office properties was approximately 90.7%, an increase of 100 basis points from December 31, 2015. The sales of properties increased our occupancy by 170 basis points, which was partially offset by a decrease in occupancy of 70 basis points from our remaining operating portfolio. While we increased occupancy, we have also been focused on addressing short-term lease expirations and certain mid-term lease expirations to lock in recent market rental rate growth while reducing lease rollover exposure throughout the portfolio.

The following table sets forth information regarding leasing activity for our operating office properties, including our ownership share of unconsolidated properties, for the year ended December 31, 2016:
 
Renewal
 
Expansion
 
New
 
Total
Square feet leased
554,000

 
211,000

 
414,000

 
1,179,000

Weighted average lease term (in years)
4.0

 
7.6

 
6.8

 
5.6

Increase in weighted average net rental rates per square foot per year (1)
$1.33
 
$1.67
 
$3.31
 
$2.11
% increase in rental rates per square foot per year
10
%
 
13
%
 
19
%
 
14
%
Leasing cost per square foot per year (2)
$3.51
 
$3.57
 
$5.94
 
$4.51
_________________
(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. Increase reflects change in net rental rates from the lease previously occupying the specific space.
(2)    Includes tenant improvements and leasing commissions.

Results of Operations
    
The results of operations of our consolidated operating and non-operating properties are included in the discussion below, and include properties sold in 2016 and 2015 that were not held for sale as of December 31, 2014, for our period of ownership. Properties disposed of prior to 2015, and properties sold in 2015 that were held for sale as of December 31, 2014, have been reclassified to discontinued operations in the accompanying consolidated statements of operations and comprehensive loss for all periods presented and are excluded from the discussions below. Effective January 1, 2015, we adopted new accounting 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 after January 1, 2015, generally no longer qualify as discontinued operations. The term “same store” in the discussion below includes our consolidated operating office properties owned and operated for the entirety of the two periods being compared and excludes the four properties held for sale as of December 31, 2016.






36



Comparison of the year ended December 31, 2016, to the year ended December 31, 2015

Rental Revenue.  Rental revenue for the year ended December 31, 2016, was approximately $242.8 million as compared to approximately $282.4 million for the year ended December 31, 2015, a $39.6 million decrease. Our non-same store properties had a decrease of approximately $37.7 million in rental revenue due to a decrease of approximately $46.0 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by an increase of approximately $6.3 million from acquired properties and an increase of approximately $2.0 million from our recently developed office property. Our same store properties had a decrease of approximately $1.9 million, primarily as a result of a decrease in occupancy resulting in a decrease in rental revenue of approximately $2.6 million, a decrease in contribution to revenue from the amortization of above- and below-market rents, net, of approximately $2.1 million, and a decrease in lease termination fee income of approximately $2.0 million. These decreases were partially offset by an increase of approximately $1.8 million due to less write-offs of straight-line rent revenue, an increase of approximately $1.7 million due to greater property operating expense reimbursements from tenants in 2016 primarily related to property tax refunds received and repaid to tenants in 2015, and an increase in rental rates resulting in an increase in revenue of approximately $1.5 million.

Property Operating Expenses. Property operating expenses for the year ended December 31, 2016, were approximately $72.6 million as compared to approximately $89.2 million for the year ended December 31, 2015, a $16.6 million decrease. Our non-same store properties had a decrease of approximately $17.6 million due to a decrease of approximately $18.2 million from the sale (or held for sale classification) of properties in 2016 and 2015 and a decrease of approximately $0.2 million from our recently developed office property, partially offset by an increase of approximately $0.8 million from acquired properties. Our same store properties had an increase of approximately $1.0 million, primarily due to higher repair and maintenance expense and higher bad debt expense, partially offset by lower utility expenses.

Interest Expense.  Interest expense for the year ended December 31, 2016, was approximately $43.3 million as compared to approximately $57.5 million for the year ended December 31, 2015, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our credit facility, our notes payable associated with our consolidated real estate properties, and interest rate swap agreements. The $14.2 million decrease was primarily due to lower overall interest rates (a weighted average effective interest rate of approximately 3.94% at December 31, 2016, as compared to approximately 5.34% as of January 1, 2015) which reduced our interest expense by approximately $10.1 million, lower overall borrowings which reduced our interest expense by approximately $4.5 million, approximately $0.9 million of decreased amortization of deferred financing costs, and approximately $0.6 million in 2016 interest rate hedge ineffectiveness income, partially offset by an increase of approximately $1.5 million in default interest in 2016 related to our non-recourse loan on Fifth Third Center property located in Columbus, Ohio, and an approximately $0.4 million reduction in capitalized interest.
Property Management Fees. Property management fees for the year ended December 31, 2016, were approximately $0.9 million as compared to approximately $5.0 million for the year ended December 31, 2015, a $4.1 million decrease, primarily due to the internalization of the management of our properties that were formerly externally managed.

Asset Impairment Losses.  We had approximately $9.0 million in asset impairment losses for the year ended December 31, 2016, related to assets assessed for impairment due to a change in management’s estimate of the intended hold periods. We had approximately $0.1 million in asset impairment losses for the year ended December 31, 2015, related to final estimated closing costs incurred in connection with the disposition of One and Two Chestnut Place.
 
General and Administrative.  General and administrative expenses for the year ended December 31, 2016, were approximately $23.6 million as compared to approximately $44.9 million for the year ended December 31, 2015, and were comprised of corporate general and administrative expenses including payroll costs, directors’ and officers’ insurance premiums, audit and tax fees, legal fees, corporate office rent, and other administrative expenses.  The $21.3 million decrease is primarily due to approximately $10.3 million of costs incurred in 2015, and not incurred in 2016, related to the buyout and termination fees paid to HPT Management Services, LLC (“HPT Management”) and BHT Advisors, LLC (“BHT Advisors”) in connection with our 2015 property management and administrative services internalization, approximately $5.5 million in costs related to our 2015 tender offer and listing of our common stock on the NYSE, approximately $1.5 million of 2015 acquisition expense, 2016 cost reductions in insurance and other administrative expenses of approximately $3.3 million, and approximately $0.7 million of reduced corporate rent expense.

Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 2016, was approximately $111.8 million as compared to approximately $122.7 million for the year ended December 31, 2015, a $10.9 million decrease. Our non-same store properties had a decrease of approximately $13.5 million primarily due to a decrease of approximately $18.7 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by an increase of approximately $3.5 million from acquired properties and an increase of approximately $1.7 million from our recently developed

37



office property. Our same store properties had an increase of approximately $2.6 million primarily due to increased amortization related to tenant improvements and leasing commissions.

Loss on Early Extinguishment of Debt. We had no loss on early extinguishment of debt for the year ended December 31, 2016. Loss on early extinguishment of debt for the year ended December 31, 2015, was approximately $21.5 million and was primarily comprised of defeasance costs related to early payoffs of debt.

Equity in Operations of Investments.  Equity in operations of investments for the year ended December 31, 2016, was approximately $2.6 million as compared to approximately $4.0 million for the year ended December 31, 2015, and was comprised of our share of the earnings and losses of unconsolidated investments.  The $1.4 million decrease was primarily due to the 2015 gain on sale of Paces West, a property that was sold in November 2015, partially offset by increased earnings of our unconsolidated entities.

Gain on Sale of Assets.  We had approximately $22.2 million in gain on sale of assets for the year ended December 31, 2016, primarily related to our sales of Lawson Commons, FOUR40, and the Hurstbourne Business Center. We had approximately $44.5 million in gain on sale of assets for the year ended December 31, 2015, primarily related to our sales of 1650 Arch and United Plaza and our partial sales of 1325 G Street and the Colorado Building.

Comparison of the year ended December 31, 2015, to the year ended December 31, 2014

Rental Revenue.  Rental revenue for the year ended December 31, 2015, was approximately $282.4 million as compared to approximately $288.1 million for the year ended December 31, 2014, a $5.7 million decrease. Our non-same store properties had a decrease of approximately $11.8 million in rental revenue due to a decrease of approximately $30.5 million from the sale of properties in 2015, partially offset by an increase of approximately $18.7 million from properties acquired or developed during 2015 and 2014. Our same store properties had an increase of approximately $6.1 million, primarily due to an increase in rental rates resulting in an increase in revenue of approximately $3.3 million, an increase in occupancy resulting in an increase in rental revenue of approximately $2.4 million, an increase in straight-line rent adjustments of approximately $1.9 million, increases in lease termination income of approximately $1.3 million, and an increase in contribution to revenue from the amortization of above- and below-market rents, net, of approximately $1.2 million. These increases were partially offset by an increase in free rent concessions resulting in a decrease to rental revenue of approximately $4.0 million.

Property Operating Expenses. Property operating expenses for the year ended December 31, 2015, were approximately $89.2 million as compared to approximately $95.5 million for the year ended December 31, 2014, a $6.3 million decrease primarily related to our non-same store properties due to a decrease of approximately $12.0 million from the sale of properties in 2015 partially offset by an increase of approximately $5.7 million from properties acquired or developed during 2015 and 2014.
 
Interest Expense.  Interest expense for the year ended December 31, 2015, was approximately $57.5 million as compared to approximately $67.4 million for the year ended December 31, 2014, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our credit facility, our notes payable associated with our consolidated real estate properties, and interest rate swap agreements.  The $9.9 million decrease was primarily due to lower overall borrowings which reduced our interest expense by approximately $4.3 million, and lower overall interest rates (a weighted average effective interest rate of approximately 4.10% at December 31, 2015, as compared to approximately 5.34% at December 31, 2014), which reduced our interest expense by approximately $7.3 million, partially offset by approximately $1.0 million of default interest related to our non-recourse loan on our Fifth Third Center property located in Columbus, Ohio, and other increases of approximately $0.7 million, primarily due an increase in amortization of deferred financing fees primarily related to our new credit facility.
Property Management Fees. Property management fees for the year ended December 31, 2015, were approximately $5.0 million as compared to approximately $8.7 million for the year ended December 31, 2014, a $3.7 million decrease, primarily due to the internalization of the management of our properties that were formerly externally managed.
 
Asset Impairment Losses.  We had approximately $0.1 million in asset impairment losses for the year ended December 31, 2015, related to final estimated closing costs incurred in connection with the disposition of One and Two Chestnut Place. We had approximately $13.2 million asset impairment losses for the year ended December 31, 2014 related to assets assessed for impairment due to a change in management’s estimate of the intended hold period.

General and Administrative.  General and administrative expenses for the year ended December 31, 2015, were approximately $44.9 million as compared to approximately $19.1 million for the year ended December 31, 2014, and were comprised of corporate general and administrative expenses, including payroll costs, directors’ and officers’ insurance premiums,

38



audit and tax fees, legal fees, costs related to our tender offer and the listing of our common stock on the NYSE, corporate office rent, acquisition expenses, other administrative expenses, reimbursement of certain expenses to our former advisor, and termination and buyout fees paid to HPT Management and BHT Advisors in connection with our 2015 property management and administrative services internalization.  The approximately $25.8 million increase is primarily due to approximately $10.3 million related to the termination and buyout fees paid in connection with our 2015 property management and administrative services internalization, increased payroll costs of approximately $6.8 million (primarily due to increased stock-based compensation of approximately $3.6 million, increased bonuses of approximately $1.5 million, and the internalization of administrative and property management functions), costs related to the tender offer and the listing of our common stock on the NYSE of approximately $5.5 million, increased acquisition expense of approximately $1.4 million, an increase in legal expenses of approximately $0.8 million, and an increase to corporate rent expense of approximately $0.4 million due to the early move-out and relocation of our corporate offices.
  
Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 2015, was approximately $122.7 million as compared to approximately $119.7 million for the year ended December 31, 2014, a $3.0 million increase. Our non-same store properties had a decrease of approximately $1.2 million due to approximately $11.3 million from the sale of properties in 2015 partially offset by an increase of approximately $10.1 million from properties acquired or developed in 2015 and 2014. Our same store properties had an increase of approximately $4.4 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 year ended December 31, 2015, was approximately $21.5 million and was primarily comprised of defeasance costs related to early payoffs of debt. Loss on early extinguishment of debt for the year ended December 31, 2014, was approximately $0.4 million and was primarily comprised of write-off of deferred financing fees related to the early payoffs of debt.

Equity in Operations of Investments.  Equity in operations of investments for the year ended December 31, 2015, was approximately $4.0 million as compared to approximately $1.8 million for the year ended December 31, 2014, and was comprised of our share of the earnings and losses of unconsolidated investments. The $2.2 million increase was primarily due to a gain on the sale of Paces West of approximately $3.4 million partially offset by losses that occurred at 1325 G Street and the Colorado Building, two properties that were wholly owned prior to June 30, 2015.

Gain on Sale of Assets.  We had approximately $44.5 million in gain on sale of assets for the year ended December 31, 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 year ended December 31, 2014. Effective January 1, 2015, we adopted new accounting 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 generally no longer qualify as discontinued operations. This results in approximately $27.5 million of gain on sale of assets in continuing operations in 2015 that would have been reflected in discontinued operations prior to adoption.

Cash Flow Analysis

Effective December 31, 2016, we early adopted FASB guidance that requires the statement of cash flows to explain the change during the period in cash, cash equivalents, and amounts generally described as restricted cash. This guidance is applied retrospectively and changes our previously reported amount of cash provided by investing activities.
    
Comparison of the year ended December 31, 2016, to the year ended December 31, 2015
 
Cash provided by operating activities was approximately $51.3 million for the year ended December 31, 2016, as compared to cash used in operating activities of approximately $3.9 million for the year ended December 31, 2015.  The $55.2 million increase is primarily attributable to (1) the timing of receipt of revenues and payment of expenses which resulted in approximately $7.8 million more net cash inflows from working capital assets and liabilities in 2016 compared to 2015; (2) approximately $40.7 million primarily due to more cash received from the results of our real estate property operations, including discontinued operations, net of interest expense, general and administrative expenses including costs associated with our 2015 listing on the NYSE, and termination fees and buyout fees paid in connection with our 2015 internalization of property management services and administrative services; and (3) a decrease in cash paid for lease commissions and other lease intangibles of approximately $6.7 million.
 
Cash provided by investing activities for the year ended December 31, 2016, was approximately $230.1 million and was primarily comprised of proceeds from the sale of properties of approximately $295.5 million and return of investments of approximately $17.3 million primarily due to proceeds received from a loan that was refinanced, partially offset by monies used to fund capital expenditures for existing real estate and real estate under development of approximately $59.7 million, escrow

39



deposits of approximately $19.0 million related to anticipated real estate acquisitions, and approximately $4.0 million related to development activities at an unconsolidated property. During the year ended December 31, 2015, cash provided by investing activities was approximately $200.2 million and was primarily comprised of proceeds from the sale of properties of approximately $493.4 million, partially offset by purchases of real estate, a ground lease, and investments in unconsolidated entities of approximately $224.6 million and monies used to fund capital expenditures for existing real estate and real estate under development of approximately $73.4 million.
 
Cash used in financing activities for the year ended December 31, 2016, was approximately $282.0 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $247.2 million and distributions of approximately $34.4 million. During the year ended December 31, 2015, cash used in financing activities was approximately $240.2 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $169.7 million, redemption of common stock primarily related to our tender offer of $50.8 million, and distributions of approximately $17.6 million.

Comparison of the year ended December 31, 2015, to the year ended December 31, 2014
 
Cash used in operating activities was approximately $3.9 million for the year ended December 31, 2015, as compared to cash provided by operating activities approximately $25.1 million for the year ended December 31, 2014.  The $29.0 million decrease is primarily attributable to (1) approximately $36.6 million of  fees paid primarily related to loans defeased (approximately $20.9 million), the termination and buyout fees paid in connection with our 2015 property management and administrative services internalization (approximately $10.2 million), and our tender offer and listing on the NYSE (approximately $5.5 million); and (2) the timing of receipt of revenues and payment of expenses that resulted in approximately $10.1 million more net cash outflows from working capital assets and liabilities in 2015 compared to 2014; partially offset by approximately $13.2 million primarily due to more cash received from the results of our real estate property operations, including discontinued operations, net of interest expense and general and administrative expenses not identified in (1) above; and a decrease in cash paid for lease commissions and other lease intangibles of approximately $4.5 million.

Cash provided by investing activities for the year ended December 31, 2015, was approximately $200.2 million and was primarily comprised of proceeds from the sale of properties of approximately $493.4 million, partially offset by purchases of real estate, a ground lease, and investments in unconsolidated entities of approximately $224.6 million and monies used to fund capital expenditures for existing real estate and real estate under development of approximately $73.4 million.  During the year ended December 31, 2014, cash provided by investing activities was approximately $139.0 million and was primarily comprised of proceeds from the sale of properties of approximately $242.8 million, partially offset by monies used to fund capital expenditures for existing real estate and real estate under development of approximately $106.0 million.

Cash used in financing activities for the year ended December 31, 2015, was approximately $240.2 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $169.7 million, redemption of common stock primarily related to our tender offer of $50.8 million, and distributions of approximately $17.6 million. During the year ended December 31, 2014, cash used in financing activities was approximately $204.8 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable.

Inflation
 
The majority of our leases contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate taxes, and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate.
Funds from Operations (“FFO”)
    
Historical cost accounting for real estate assets in accordance with 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 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

40



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 that 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.

We also evaluate FFO, excluding certain items. The items excluded relate to certain non-operating activities or certain non-recurring activities that create significant FFO volatility. We believe it is useful to evaluate FFO excluding these items because it provides useful information in analyzing comparability between reporting periods and in assessing the sustainability of our operating performance.

FFO and FFO, excluding certain items, should not be considered as alternatives to net income (loss), or as indicators of our liquidity, nor are they 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 and FFO, excluding certain items, as historical operating performance measures since an impairment charge indicates that operating performance has been permanently affected.  FFO and FFO, excluding certain items, are non-GAAP measurements and should be reviewed in connection with other GAAP measurements.  Our FFO and FFO, excluding certain items, 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 interpret it differently, or that identify and exclude different items related to non-operating activities or certain non-recurring activities.              
    
    

41



The following section presents our calculations of FFO (as defined by NAREIT) attributable to common stockholders and FFO attributable to common stockholders, excluding certain items, for the years ended December 31, 2016, 2015 and 2014, (in thousands, except per share amounts): 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Net loss
 
$
(29,453
)
 
$
(34,163
)
 
$
(15,528
)
Net loss attributable to noncontrolling interests
 
36

 
129

 
12

Dilution (accretion) of Series A Convertible Preferred Stock
 

 
1,926

 
(1,926
)
Adjustments (1):
 
 
 
 
 
 

Real estate depreciation and amortization from consolidated properties
 
111,122

 
122,230

 
143,168

Real estate depreciation and amortization from unconsolidated properties
 
8,258

 
6,985

 
5,161

Real estate depreciation and amortization - noncontrolling interests
 
(6
)
 
(20
)
 

Impairment of depreciable real estate assets
 
8,977

 
132

 
13,165

Gain on sale of depreciable real estate
 
(22,236
)
 
(63,263
)
 
(90,221
)
Taxes associated with sale of depreciable real estate
 
(88
)
 
1,259

 

Noncontrolling interests
 
(78
)
 
(116
)
 
(117
)
FFO attributable to common stockholders
 
76,532

 
35,099

 
53,714

Acquisition expenses
 

 
1,863

 
90

Severance charges
 
1,025

 

 

Tender offer and listing costs
 

 
5,526

 
104

Interest rate hedge ineffectiveness income (2)
 
(572
)
 

 

Loss on early extinguishment of debt
 

 
21,606

 
15,562

Default interest (3)
 
2,468

 
980

 

BHT Advisors termination fee and HPT Management buyout fee
 

 
10,301

 

Noncontrolling interests
 
(2
)
 
(70
)
 
(25
)
Accretion (dilution) of Series A Convertible Preferred Stock
 

 
(1,926
)
 
1,926

FFO attributable to common stockholders, excluding certain items
 
$
79,451

 
$
73,379

 
$
71,371

 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
47,406

 
48,960

 
49,876

Weighted average common shares outstanding - diluted (4)
 
47,819

 
49,148

 
50,001

Net loss per common share - basic and diluted (4)
 
$
(0.62
)
 
$
(0.66
)
 
$
(0.35
)
FFO per common share - diluted
 
$
1.60

 
$
0.71

 
$
1.07

FFO, excluding certain items, per common share - diluted
 
$
1.66

 
$
1.49

 
$
1.43

____________
(1)
Reflects the adjustments of continuing operations, as well as discontinued operations.
(2)
Interest rate swaps are adjusted to fair value through other comprehensive income (loss). However, because our interest rate swaps do not have a LIBOR
floor while the hedged debt is subject to a LIBOR floor, the portion of the change in fair value of our interest rate swaps attributable to this mismatch is reclassified to interest rate hedge ineffectiveness income within “interest expense” on our consolidated statements of operations and comprehensive loss.
(3)
We have a non-recourse loan in default which subjects us to incur default interest at a rate that is 500 basis points higher than the stated interest rate. Although there can be no assurance, we anticipate that when this property is sold or when ownership of this property is conveyed to the lender, this default interest will be forgiven.
(4) There are no dilutive securities for purposes of calculating net loss per common share.

For a more detailed discussion of certain changes in the factors listed above, refer to “Results of Operations” beginning on page 36.


42



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

Same Store 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 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 operating office properties not held for sale and owned and operated for the entirety of both periods being compared and include our comparable ownership percentage in each period for properties in which we own an unconsolidated interest that is accounted for using the equity method.  We view Same Store 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 properties owned and operated for the entirety of both periods being compared and therefore eliminate variations caused by acquisitions or dispositions during such periods.

Same Store NOI and Same Store Cash NOI presented by us may not be comparable to Same Store NOI or Same Store Cash NOI reported by other REITs that do not define Same Store 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 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 NOI and Same Store Cash NOI should not be considered as an indicator of our ability to make distributions, as alternatives to net income (loss) as an indication of our performance, or as measures of cash flows or liquidity.
 

43



The table below presents our Same Store NOI and Same Store Cash NOI with a reconciliation to net loss for the years ended December 31, 2016 and 2015 (in thousands). As of December 31, 2016, we owned interests in 29 operating office properties totaling approximately 10.1 million square feet. The same store properties for the comparisons below consist of 20 operating properties and approximately 7.8 million square feet. Our four held for sale properties, as well as five operating properties (Two BriarLake Plaza, Domain 2, Domain 3, Domain 4, and Domain 7), have been excluded from our same store results below because we did not own these properties or they were not fully operational during the entirety of each of the years ended December 31, 2016 and 2015.
 
 
 
Year Ended December 31,
 
 
 
2016
 
2015
Same Store Revenue:
 
Rental revenue
$
188,228

 
$
190,059

 
 
Less:
 
 
 
 
 
  Lease termination fees
(1,443
)
 
(3,471
)
 
 
 
186,785

 
186,588

 
 
 
 
 
 
Same Store Expenses:
 
 
Property operating expenses (less tenant improvement demolition costs)
53,337

 
52,782

 
 
Real estate taxes
27,786

 
25,069

 
 
Property management fees
517

 
3,208

 
Property Expenses
81,640

 
81,059

Same Store NOI - consolidated properties
105,145

 
105,529

Same Store NOI - unconsolidated properties (at ownership %)
10,273

 
9,736

Same Store NOI
$
115,418

 
$
115,265

 
 
 
 
Increase in Same Store NOI
0.1
%
 
 
 
 
 
 
Same Store NOI - consolidated properties
$
105,145

 
$
105,529

 
 
Less:
 
 
 
 
 
  Straight-line rent revenue adjustment
(4,951
)
 
(6,187
)
 
 
  Amortization of above- and below-market rents, net
(3,357
)
 
(5,486
)
Same Store Cash NOI - consolidated properties
96,837

 
93,856

Same Store Cash NOI - unconsolidated properties (at ownership %)
9,264

 
8,787

Same Store Cash NOI
$
106,101

 
$
102,643

 
 
 
 
Increase in Same Store Cash NOI
3.4
%
 
 
 
 
 
 
Reconciliation of net loss to Same Store NOI and Same Store Cash NOI
 
 
 
 
Net loss
$
(29,453
)
 
$
(34,163
)
 
 
Adjustments:
 
 
 
 
 
  Interest expense
43,257

 
57,454

 
 
  Asset impairment losses
8,977

 
132

 
 
  Tenant improvement demolition costs
722

 
358

 
 
  General and administrative
23,649

 
44,941

 
 
  Depreciation and amortization
111,830

 
122,731

 
 
  Interest and other income
(1,169
)
 
(810
)
 
 
  Loss on early extinguishment of debt

 
21,502

 
 
  Provision for income taxes
655

 
1,507

 
 
  Equity in operations of investments
(2,569
)
 
(3,982
)
 
 
  Income from discontinued operations

 
(1,407
)
 
 
  Gain on sale of discontinued operations

 
(15,383
)
 
 
  Gain on sale of assets
(22,176
)
 
(44,477
)
 
 
  Net operating income of non-same store properties
(27,135
)
 
(39,403
)
 
 
  Lease termination fees
(1,443
)
 
(3,471
)
 
 
Same Store NOI - unconsolidated properties (at ownership %)
10,273

 
9,736

Same Store NOI
115,418

 
115,265

 
 
  Straight-line rent revenue adjustment
(4,951
)
 
(6,187
)
 
 
  Amortization of above- and below-market rents, net
(3,357
)
 
(5,486
)
 
 
Cash NOI adjustments - unconsolidated properties (at ownership %)
(1,009
)
 
(949
)
Same Store Cash NOI
$
106,101

 
$
102,643


For a more detailed discussion of certain changes in the factors listed above, refer to “Results of Operations” beginning on page 36.

44



The table below presents our Same Store NOI and Same Store Cash NOI with a reconciliation to net loss for the years ended December 31, 2015 and 2014 (in thousands). As of December 31, 2015, we owned interests in 34 operating office properties totaling approximately 12.0 million square feet. The same store properties for the comparison below consist of 28 operating office properties and approximately 9.8 million square feet. Six operating office properties (Two BriarLake Plaza, Domain 2, Domain 3, Domain 4, Domain 7, and 5950 Sherry Lane) have been excluded from our same store results below because we did not own these properties or they were not fully operational during the entirety of each of the years ended December 31, 2015 and 2014.
 
 
 
Year Ended December 31,
 
 
 
2015
 
2014
Same Store Revenue:
 
Rental revenue
$
237,872

 
$
231,747

 
 
Less:
 
 
 
 
 
  Lease termination fees
(3,471
)
 
(2,157
)
 
 
 
234,401

 
229,590

 
 
 
 
 
 
Same Store Expenses:
 
 
Property operating expenses (less tenant improvement demolition costs)
73,204

 
71,987

 
 
Real estate taxes
33,634

 
34,379

 
 
Property management fees
4,013

 
7,041

 
Property Expenses
110,851

 
113,407

Same Store NOI - consolidated properties
123,550

 
116,183

Same Store NOI - unconsolidated properties (at ownership %)
9,736

 
10,021

Same Store NOI
$
133,286

 
$
126,204

 
 
 
 
Increase in Same Store NOI
5.6
%
 
 
 
 
 
 
 
Same Store NOI - consolidated properties
$
123,550

 
$
116,183

 
 
Less:
 
 
 
 
 
  Straight-line rent revenue adjustment
(6,127
)
 
(4,248
)
 
 
  Amortization of above- and below-market rents, net
(4,992
)
 
(3,814
)
Same Store Cash NOI consolidated properties
112,431

 
108,121

Same Store Cash NOI - unconsolidated properties (at ownership %)
8,787

 
9,069

Same Store Cash NOI
$
121,218

 
$
117,190

 
 
 
 
Increase in Same Store Cash NOI
3.4
%
 
 
 
 
 
 
Reconciliation of net loss to Same Store NOI and Same Store Cash NOI
 
 
 
 
Net loss
$
(34,163
)
 
$
(15,528
)
 
 
Adjustments:
 
 
 
 
 
  Interest expense
57,454

 
67,374

 
 
  Asset impairment losses
132

 
13,165

 
 
  Tenant improvement demolition costs
358

 
1,644

 
 
  General and administrative
44,941

 
19,058

 
 
  Depreciation and amortization
122,731

 
119,670

 
 
  Interest and other income
(810
)
 
(513
)
 
 
  Loss on early extinguishment of debt
21,502

 
426

 
 
  Provision (benefit) for income taxes
1,507

 
(28
)
 
 
  Equity in operations of investments
(3,982
)
 
(1,836
)
 
 
  (Income) loss from discontinued operations
(1,407
)
 
30,894

 
 
  Gain on sale of discontinued operations
(15,383
)
 
(90,221
)
 
 
  Gain on sale of assets
(44,477
)
 

 
 
  Net operating income of non-same store properties
(21,382
)
 
(25,765
)
 
 
  Lease termination fees
(3,471
)
 
(2,157
)
 
 
Same Store NOI - unconsolidated properties (at ownership %)
9,736

 
10,021

Same Store NOI
133,286

 
126,204

 
 
  Straight-line rent revenue adjustment
(6,127
)
 
(4,248
)
 
 
  Amortization of above- and below-market rents, net
(4,992
)
 
(3,814
)
 
 
Cash NOI adjustments - unconsolidated properties (at ownership %)
(949
)
 
(952
)
Same Store Cash NOI
$
121,218

 
$
117,190


For a more detailed discussion of certain changes in the factors listed above, refer to “Results of Operations” beginning on page 36.

45



Liquidity and Capital Resources 
General
    
As of December 31, 2016, we had cash and cash equivalents of approximately $14.9 million and restricted cash of approximately $7.5 million.  We also have a credit facility with a borrowing capacity of $860.0 million (as described in more detail below). As of December 31, 2016, under the credit facility, we had approximately $634.0 million of outstanding borrowings and had the ability, subject to our most restrictive financial covenants, to borrow an additional approximately $164.5 million.

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 listing on the NYSE in 2015 will facilitate supplementing these sources by selling equity or debt securities of the Company in the future 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 principal liquidity needs are operating and administrative expenses, payment of principal and interest on our outstanding indebtedness, including repaying or refinancing our outstanding indebtedness as it matures, capital improvements to our properties, including commitments for future tenant improvements, property developments, property acquisitions, and distributions to our stockholders. As of December 31, 2016, approximately $179.3 million of debt, including our share of debt at our unconsolidated properties, has matured or matures before the end of 2018. Subsequent to December 31, 2016, approximately $58.8 million of this debt was repaid (without penalty), and we expect to pay off the remaining $120.5 million with cash provided by operating activities, proceeds from the dispositions of properties, borrowings under our credit facility, or other refinancings, although there can be no assurance regarding such repayment.