STOCK-BASED COMPENSATION

As of December 31, 2018, 1,587,625 shares were available for issuance under the Company’s 2015 Incentive Award Plan (the “Plan”).

Option grants are issued with an exercise price equal to the closing price of stock on the date of grant. Unless otherwise determined by the Compensation, Nominating and Governance Committee (“CNG Committee”) at the time of grant, options shall vest ratably over a four-year period beginning on the date of grant. Each option will be exercisable once it has vested. Options are exercisable at such times and subject to such terms as determined by the CNG Committee, but under no circumstances may be exercised if such exercise would cause a violation of the ownership limit in the Company’s charter. Options expire 10 years from the date of grant. Beginning in 2017, the CNG Committee decided to the replace stock options granted to executives with performance based stock units for executive compensation. See the "Performance-Based Stock Units" section below.

Also as defined under the terms of the Plan, restricted stock grants may be awarded. The stock grants are subject to a vesting period over which the restrictions are released and the stock certificates are given to the grantee. During the performance or vesting period, the grantee is not permitted to sell, transfer, pledge, encumber or assign shares of restricted stock granted under the Plan; however, the grantee has the ability to vote the shares and receive nonforfeitable dividends paid on shares. Unless otherwise determined by the CNG Committee at the time of grant, the forfeiture and transfer restrictions on the shares lapse over a four-year period beginning on the date of grant.

Option Grants

A summary of stock option activity is as follows:



Options	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value as of December 31, 2018
Outstanding at December 31, 2015	572,629		$	24.42
Granted	35,800		85.99
Exercised	(97,855	)	14.75
Outstanding at December 31, 2016	510,574		$	30.60
Exercised	(38,418	)	32.94
Outstanding at December 31, 2017	472,156		$	30.41
Exercised	(54,575	)	21.45
Outstanding at December 31, 2018	417,581		$	31.58	2.78	$24,597

Vested and Expected to Vest	416,567		$	31.46	2.77	$24,587
Ending Exercisable	377,292		$	26.72	2.35	$24,057

The aggregate intrinsic value in the table above represents the total value (the difference between the Company’s closing stock price on the last trading day of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2018. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

The weighted average fair value of stock options granted in 2016, was $20.30. There were no options granted in 2018 or 2017. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:



			For the Year Ended December 31,
			2016
Expected volatility			37.0%
Dividend yield			3.6%
Risk-free interest rate			1.3%
Average expected term (years)			5

The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the estimated life of the option. The Company uses actual historical data to calculate the expected price volatility, dividend yield and average expected term. The forfeiture rate, which is estimated at a weighted-average of 7.4% of unvested options outstanding as of December 31, 2018, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates.

A summary of stock options outstanding and exercisable as of December 31, 2018, is as follows:



	Options Outstanding				Options Exercisable
Exercise Price	Shares	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$6.22 - $6.22	139,250	0.13	$	6.22	139,250	$	6.22
$11.59 - $11.59	20,080	1.13	11.59		20,080	11.59
$12.21 - $12.21	77,400	1.18	12.21		77,400	12.21
$19.6 - $28.79	29,469	2.65	23.56		29,469	23.56
$38.4 - $38.4	10,360	4.14	38.4		10,360	38.40
$47.5 - $47.5	17,687	5.13	47.5		17,687	47.50
$65.36 - $65.36	20,395	6.15	65.36		15,297	65.36
$65.45 - $65.45	17,140	6.13	65.45		12,345	65.45
$73.52 - $73.52	50,000	6.58	73.52		37,500	73.52
$85.99 - $85.99	35,800	7.15	85.99		17,904	85.99
	417,581	2.78	$	31.58	377,292	$	26.72

The Company recorded compensation expense relating to outstanding options of $570, $649 and $729 in general and administrative expense for the years ended December 31, 2018, 2017 and 2016, respectively. Total cash received for the years ended December 31, 2018, 2017 and 2016, related to option exercises was $1,169, $1,266 and $1,444, respectively. At December 31, 2018, there was $344 of total unrecognized compensation expense related to non-vested stock options under the Plan. That cost is expected to be recognized over a weighted-average period of 0.72 years. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore, the amount of unrecognized compensation expense at December 31, 2018 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the statement of operations.

Common Stock Granted to Employees and Directors

The Company recorded $10,606, $8,072 and $7,316 of expense in general and administrative expense in its statement of operations related to restricted stock awards granted to employees and directors for the years ended December 31, 2018, 2017 and 2016, respectively. The forfeiture rate, which is estimated at a weighted-average of 10.2% of unvested awards outstanding as of December 31, 2018, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimates. At December 31, 2018 there was $10,870 of total unrecognized compensation expense related to non-vested restricted stock awards under the Plan. That cost is expected to be recognized over a weighted-average period of 2.00 years. The fair value of common stock awards is determined based on the closing trading price of the Company’s common stock on the grant date.

A summary of the Company’s employee and director share grant activity is as follows:



Restricted Stock Grants	Shares		Weighted-Average Grant-Date Fair Value
Unreleased at December 31, 2015	318,409		$	55.75
Granted	119,931		87.61
Released	(128,808	)	50.05
Cancelled	(9,947	)	67.36
Unreleased at December 31, 2016	299,585		$	70.57
Granted	95,392		74.49
Released	(120,323	)	63.95
Cancelled	(8,179	)	77.25
Unreleased at December 31, 2017	266,475		$	74.76
Granted	85,066		86.14
Released	(116,656	)	72.38
Cancelled	(11,771	)	80.96
Unreleased at December 31, 2018	223,114		$	80.02

Performance-based Stock Units

In 2017, the CNG Committee changed its compensation for executives to issue performance-based stock units (the "PSUs") as a replacement for stock option awards. The PSUs granted to executives represent the right to earn shares of the Company's common stock. These awards have two financial performance components: (1) the Company's core FFO performance ("FFO Target"), and (2) the Company's total stockholder return relative to the performance of a defined group of peers ("TSR Target"). Each of these performance components are weighted 50% and are measured over the performance period, which is defined as the three-year period ending December 31 from the year of grant. At the end of the performance period, the financial performance components are reviewed to determine the number of shares actually granted to executives, which can be as low as zero shares and up to a maximum of two shares issued for each PSU. A summary of the PSU activity is as follows:



Performance-Based Stock Units	Units	Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2016	—	$	—
Granted	30,071	83.84
Unvested at December 31, 2017	30,071	$	83.84
Granted	28,735	96.19
Unvested at December 31, 2018	58,806	$	89.87

The Company estimated the fair value of the PSUs as of the grant date, using the closing trading price of the Company's common stock on the grant date to value the FFO Target portion. A Monte Carlo simulation model was used to calculate the fair value of the TSR Target portion of the PSUs, using the following assumptions:



	For the Year Ended December 31,
	2018	2017
Intrinsic value	$5,321	$2,630
Compensation cost	$1,873	$840
Risk-free rate	2.37%	1.62%
Volatility	22.6%	21.4%
Expected term (in years)	2.9	2.8
Dividend yield	—%	—%
Unrecognized compensation cost	$2,739	$1,681
Term over which unrecognized compensation cost recognized	2	2

Under the terms of the PSUs, dividends for the entire measurement period are paid in cash when the shares are issued, so a dividend yield of zero was used. The valuation model applied in this calculation utilizes subjective assumptions that could potentially change over time, including the probabilities associated with achieving the FFO Targets (categorized within Level 3 of the fair value hierarchy). Therefore, the amount of unrecognized compensation expense at December 31, 2018 noted above does not necessarily represent the expense that will ultimately be realized by the Company in the statement of operations.