REAL ESTATE INVESTMENTS

As of September 30, 2015 and December 31, 2014, the gross carrying value of the Company’s Properties was as follows (in thousands):



	September 30, 2015		December 31, 2014
Land	$	658,280	$	669,635
Building and improvements	3,438,563		3,409,303
Tenant improvements	532,380		524,754
	4,629,223		4,603,692
Assets held for sale - real estate investments (a)	74,706		27,436
Total	$	4,703,929	$	4,631,128


(a)	Real estate investments related to assets held for sale above represents gross real estate assets and does not include accumulated depreciation or other assets on the balance sheets of the properties held for sale.

Acquisitions

On August 11, 2015, the Company acquired a 2.7 acre parcel of land containing a vacant office building, located at 9 Presidential Boulevard, Bala Cynwyd, Pennsylvania, for $4.1 million with available corporate funds. The Company intends to demolish the vacant building and develop the property but has not yet determined the timing and cost of construction for the project as of September 30, 2015. The Company accounted for this transaction as an asset acquisition.

On July 7, 2015, the Company acquired a 0.8 acre parcel of land located at 2100 Market Street in Philadelphia, Pennsylvania for $18.8 million. The Company funded $16.8 million of the purchase price with available corporate funds and the remaining $2.0 million of the purchase price was deferred until the earlier of the commencement of development or 24 months from settlement. The Company accounted for this transaction as an asset acquisition and capitalized a nominal amount of acquisition related costs and other costs as part of land inventory on its consolidated balance sheet. In connection with the purchase agreement, if certain land parcels adjacent to 2100 Market Street are acquired from unaffiliated third parties, the Company may be required to pay additional consideration to the seller of 2100 Market Street. The unaffiliated third parties are not party to this transaction and any land parcels acquired will be acquired in arms length transactions. The amount of additional consideration, if any, is contingent on the purchase price of the adjacent land parcels and cannot be determined at this time. The Company has not yet determined the timing and cost of construction for the project as of September 30, 2015.

On June 22, 2015, through a series of transactions with International Business Machines ("IBM"), the Company acquired the remaining 50.0% interest in Broadmoor Austin Associates, consisting of seven office buildings and the 66.0 acre underlying land parcel located in Austin, Texas, for an aggregate purchase price of $211.4 million. The office buildings contain 1,112,236 net rentable square feet of office space and were 100.0% occupied as of June 30, 2015. The Company funded the cost of the acquisition with an aggregate cash payment of $143.8 million, consisting of $81.0 million from available corporate funds and $62.8 million previously held in escrow related to a Section 1031 like-kind exchange. Part of the cash payment was used at closing to repay, at no repayment penalty, the remaining $51.2 million of secured debt. The Company incurred $0.2 million of acquisition related costs that are classified within general and administrative expenses.

The Company previously accounted for its 50.0% non-controlling interest in Broadmoor Austin Associates under the equity method of accounting. As a result of acquiring IBM's remaining 50.0% common interest in Broadmoor Austin Associates, the Company obtained control of Broadmoor Austin Associates and the Company's existing investment balance was remeasured based on fair value of the underlying properties acquired and the existing distribution provisions under the relevant partnership agreement. As a result, the Company recorded a $0.8 million gain on remeasurement.

The Company has treated its acquisition of the 50.0% ownership interest in Broadmoor Austin Associates as a business combination and allocated the purchase price to the tangible and intangible assets and liabilities. The Company utilized a number of sources in making estimates of fair values for purposes of allocating the purchase price to tangible and intangibles assets acquired and intangible liabilities assumed. The purchase price has been allocated as follows (in thousands):



	June 22, 2015
Building, land and improvements	$	163,271
Land inventory	6,045
Intangible assets acquired (a)	50,637
Below market lease liabilities assumed (b)	(8,600		)
	$	211,353

Return of existing equity method investment	(67,261		)
Net working capital assumed	(271		)
Total cash payment at settlement	$	143,821


(a)	Weighted average amortization period of 4.0 years.


(b)	Weighted average amortization period of 1.5 years.

The unaudited pro forma information below summarizes the Company’s combined results of operations for the three and nine-month periods ended September 30, 2015 and 2014, respectively, as though the acquisition of Broadmoor Austin Associates was completed on January 1, 2014. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods (in thousands except for per share amounts).



	Three-month periods ended				Nine-month periods ended
	September 30,				September 30,
	2015		2014		2015		2014
Pro forma revenue	$	152,585	$	149,951	$	455,141	$	459,722
Pro forma income from continuing operations	20,308		11,525		35,954		15,914
Pro forma net income available to common shareholders	18,346		9,607		30,305		11,332

Earnings per common share from continuing operations:
Basic -- as reported	$	0.11	$	0.05	$	0.18	$	0.05
Basic -- as pro forma	$	0.11	$	0.07	$	0.20	$	0.10

Diluted -- as reported	$	0.11	$	0.05	$	0.18	$	0.05
Diluted -- as pro forma	$	0.11	$	0.07	$	0.20	$	0.10

Earnings per common share:
Basic -- as reported	$	0.10	$	0.04	$	0.15	$	0.02
Basic -- as pro forma	$	0.10	$	0.06	$	0.17	$	0.07

Diluted -- as reported	$	0.10	$	0.04	$	0.15	$	0.02
Diluted -- as pro forma	$	0.10	$	0.06	$	0.17	$	0.07

The Company wholly owned the Broadmoor Austin properties at September 30, 2015, and as such, no pro forma adjustments were necessary during three-month period ended September 30, 2015. For the three-month periods ended September 30, 2015 and 2014, there were no acquisition related costs related to the transaction. For the nine-month period ended September 30, 2014, $0.2 million of acquisition related costs are included as if the transaction occurred January 1, 2014.

On April 9, 2015, the Company acquired the leasehold interest in a 0.4 acre land parcel at 405 Colorado Street located in the central business district of Austin, Texas for $2.6 million. The property is currently being operated as a surface parking lot with the intent to develop the site into an office property. The Company has not yet determined the timing and cost of construction for the project as of September 30, 2015. The Company accounted for this transaction as an asset acquisition.

On April 6, 2015, the Company acquired a 0.8 acre parcel of land, located at 25 M Street Southeast, Washington, D.C. for $20.3 million. The Company funded the cost of this acquisition with available corporate funds. The Company capitalized $0.3 million of acquisition related costs and these costs are included as part of land inventory on the Company's consolidated balance sheet. On May 12, 2015, the Company subsequently contributed the land parcel into a newly formed real estate venture known as 25 M Street Holdings, LLC (“25 M Street”), a joint venture between the Company and Jaco 25 M Investors, LLC (“Akridge”), an unaffiliated third party, with the intent to construct a 271,000 square foot Class A office property. The Company holds a 95.0% ownership interest in 25 M Street and Akridge contributed $1.0 million in cash for its 5.0% ownership interest in 25 M Street. The $1.0 million contribution from Akridge was distributed to the Company. 25 M Street is consolidated within the Company's financial statements. See Note 4, "Investment in Unconsolidated Real Estate Ventures," for further information. The partners of the venture have not determined the timing and cost of construction for the project as of September 30, 2015.

On April 2, 2015, the Company acquired, from an unaffiliated third party, a property comprised of a parking garage with 330 parking spaces and mixed-use space totaling 14,404 rentable square feet located at 618 Market Street in Philadelphia, Pennsylvania for an aggregate fair value of $19.4 million. The property is currently fully operational. The purchase price includes contingent consideration, recorded at fair value and payable to the seller upon commencement of development, totaling $1.6 million, and cash of $17.8 million.

The Company has treated the acquisition of 618 Market Street as a business combination and allocated the purchase price to the tangible and intangible assets. The Company utilized a number of sources in making estimates of fair values for purposes of allocating the purchase price to tangible and intangibles assets acquired. The Company allocated $19.2 million to building, land and improvements and $0.2 million to intangible assets.

The fair value of contingent consideration was determined using a probability weighted discounted cash flow model. The significant inputs to the discounted cash flow model was the discount rate and weighted probability scenarios. As the inputs are unobservable, the Company determined the inputs used to value this liability falls within Level 3 for fair value reporting. As of September 30, 2015, there was no significant changes to the inputs and the liability remains within Level 3 for fair value reporting.

Dispositions

The Company sold the following office properties during the nine-month period ended September 30, 2015 (dollars in thousands).



Disposition Date	Property/Portfolio Name	Location	Number of Properties	Rentable Square Feet	Sale Price		Gain/(Loss) On Sale (a)
September 29, 2015	1000 Howard Boulevard	Mt. Laurel, NJ	1	105,312	$	16,500	$	4,823
August 13, 2015	Bay Colony	Wayne, PA	4	247,294	37,500		288
August 11, 2015	741 First Avenue	King of Prussia, PA	1	77,184	4,900		372
June 10, 2015	100 Gateway Centre Parkway	Richmond, VA	1	74,991	4,100		—		(b)
April 24, 2015	Christina / Delaware Corporate Centers	Newark, DE / Wilmington, DE	5	485,182	50,125		1,797
April 9, 2015	Lake Merritt Tower	Oakland, CA	1	204,336	65,000		—		(c)
January 8, 2015	Atrium I / Libertyview	Mt. Laurel, NJ / Cherry Hill, NJ	2	221,405	28,300		9,040
Total Dispositions			15	1,415,704	$	206,425	$	16,320	(d)


(a)	Gain/(Loss) on Sale is net of closing and other transaction related costs.


(b)	The Company recorded an impairment loss of $0.8 million for 100 Gateway Centre Parkway during the second quarter of 2015. As such, there was no gain/(loss) at disposition for this property.


(c)	The Company recorded an impairment loss of $1.7 million for Lake Merritt Tower at March 31, 2015. As such, there was no gain/(loss) at disposition for this property. Sales proceeds were deposited in escrow under Section 1031 of the Internal Revenue Code and applied to purchase the Broadmoor Austin portfolio. Refer to Broadmoor Austin Associates acquisition summary, above, for further details.


(d)	Total gain/(loss) on sale does not include a deferred gain of $0.5 million related to a prior sale and $0.1 million in losses associated with prior sales.

The Company sold the following land parcels during the nine-month period ended September 30, 2015 (dollars in thousands).



Disposition Date	Property/Portfolio Name	Location	Number of Parcels	Acres	Sale Price		Gain/(Loss) on Sale
September 1, 2015	7000 Midlantic	Mt. Laurel, NJ	1	3.5	$	2,200	$	(169	)
August 31, 2015	Four Points	Austin, TX	1	8.6	2,500		71
August 25, 2015	Two Kaiser Plaza	Oakland, CA	1	1.0	11,100		3,117
Total Dispositions			3	13.1	$	15,800	$	3,019

The sales of properties referenced above do not represent a strategic shift that has a major effect on the Company's operations and financial results. The operating results of these properties remain classified within continuing operations for all periods presented.

As a result of selling $206.4 million of real estate as of September 30, 2015, the Company increased its current year business plan disposition target to $400.0 million. The Company is exploring the disposition of several properties, individually or as a portfolio, during the remainder of 2015 in alignment with its business plan. As of September 30, 2015, the Company has not entered into agreements, other than the six properties categorized as held for sale, to sell additional properties nor can we provide assurance as to any/or which properties for which a sale might be realized. Accordingly, the Company has prepared undiscounted cash flow analyses for the relevant properties based upon several reasonably possible scenarios and the estimated likelihood of each scenario occurring. These estimated probability weighted undiscounted cash flows exceed the carrying values for the properties, and, therefore, no impairment charge has been recorded at September 30, 2015. Significant estimates were made in the determination of the future undiscounted cash flows, including expected future rents and operating expenses, holding periods, cash proceeds at the end of the estimated holding period and the probability of the various reasonably possible scenarios. Changes to estimates made by management for certain properties, including those related to holding periods, may result in the recognition of impairment losses, and such amounts could be material to the Company’s results of operations.

Impairments Measured at Fair Value on a Non-recurring Basis

During the nine-month period ended September 30, 2015, the Company recognized $2.5 million in impairment charges on properties sold to reduce the carrying value of the properties to their sales price in connection with the anticipated disposition. The fair value measurement related to these impairment charges was determined by the respective sales agreement. As the sales price is unobservable, the Company determined that the significant input used to value these real estate investments falls within Level 3 for fair value reporting.

Held for Sale

As of September 30, 2015, the Company entered into an agreement of sale for six suburban New Jersey properties containing 560,147 rentable square feet for an anticipated sales price of $56.5 million. The properties have been designated as held for sale in accordance with applicable accounting standards for long lived assets. At such date, the fair value less the costs of sale exceed carrying value of the property and, as a result, no impairment loss was recognized. The fair value measurement was based on the sales agreement. As the sales price is unobservable, the Company determined that the significant inputs used to value these real estate investments falls within Level 3 for fair value reporting.

The disposal of the properties referenced above do not represent a strategic shift that has a major effect on the Company's operations and financial results. Accordingly, the operating results of these properties remain classified within continuing operations for all periods presented.