7: Impairment or Disposal of Long-Lived Assets

In 2017, the Company initiated a strategic shift whereby it plans to divest of its remaining suburban office properties. In the third quarter of 2018, the Company updated its strategy whereby it plans to divest of all of its remaining office properties. The Company determined that the strategic shift would have a major effect on its operations and financial results. As such, properties sold or those that meet the criteria to be classified as held for sale within the new corporate strategy were classified within discontinued operations. Consistent with the held for sale criteria these properties are expected to be sold within one year. As the result of the classification within discontinued operations, the in-service assets and liabilities of this portfolio are required to be presented as held for sale for all prior periods presented in our Consolidated Balance Sheets. Operating results pertaining to these properties were reclassified to discontinued operations for all prior periods presented in our Consolidated Statements of Comprehensive Income.

The following table illustrates the number of sold or held for sale properties included in, or excluded from, discontinued operations:



	Held for Sale as of September 30, 2018	Sold during the nine months ended September 30, 2018	Sold during the year ended December 31, 2017	Total
Properties included in discontinued operations	13	28	2	43
Properties included in continuing operations	1	2	8	11
Properties sold or classified as held for sale	14	30	10	54

The properties held for sale with operating results in discontinued operations as of September 30, 2018 were located in the following reportable segments: Eight properties in Southeastern PA, three properties in Florida and two properties in DC Metro.

A summary of the results of operations for the properties classified as discontinued operations is as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Revenues	$	14,013		$	22,066		$	45,511		$	64,184
Operating expenses	(3,239		)	(6,834		)	(11,099		)	(21,783		)
Depreciation and amortization	(295		)	(4,828		)	(4,444		)	(13,907		)
Impairment expense	—			(5,714		)	—			(5,714		)
Interest and other income	10			47			37			98
Interest expense	(1,396		)	(1,612		)	(4,749		)	(4,936		)
Income from discontinued operations before gain on property dispositions	9,093			3,125			25,256			17,942
Gain on property dispositions	94,878			—			184,689			—
Income from discontinued operations	103,971			3,125			209,945			17,942
Noncontrolling interest - operating partnership	(2,423		)	(73		)	(4,892		)	(420		)
Income from discontinued operations available to common shareholders	$	101,548		$	3,052		$	205,053		$	17,522

Interest expense has been allocated to discontinued operations. The allocation of interest expense to discontinued operations was based on the ratio of net assets sold and held for sale included in discontinued operations to the sum of total net assets plus consolidated debt.

Capital expenditures on a cash basis related to properties within discontinued operations for the three and nine months ended September 30, 2018 were $759,000 and $5.4 million, respectively, and $14.0 million and $46.4 million, respectively, for the same periods in 2017.

Assets Held for Sale

As of September 30, 2018, 14 properties were classified as held for sale, of which 13 properties met the criteria to be classified within discontinued operations and one property was classified within continuing operations.

The following table illustrates aggregate balance sheet information for all held for sale properties (in thousands):



	September 30, 2018									December 31, 2017
	Included in Continuing Operations			Included in Discontinued Operations			Total			Included in Continuing Operations			Included in Discontinued Operations			Total
Land and land improvements	$	1,301		$	111,517		$	112,818		$	3,476		$	152,708		$	156,184
Buildings and improvements	5,638			222,983			228,621			80,738			471,628			552,366
Development in progress	—			—			—			—			45,035			45,035
Land held for development	10,227			—			10,227			863			—			863
Accumulated depreciation	(1,546		)	(67,821		)	(69,367		)	(11,785		)	(172,604		)	(184,389		)
Deferred financing and leasing costs, net	58			4,433			4,491			2,210			14,914			17,124
Other assets	165			7,236			7,401			5,137			18,291			23,428
Total assets held for sale	$	15,843		$	278,348		$	294,191		$	80,639		$	529,972		$	610,611

Total liabilities held for sale	$	191		$	3,795		$	3,986		$	1,153		$	13,129		$	14,282

Impairment Charges - Real Estate Assets

The Company recorded $26.0 million of impairment charges during the nine months ended September 30, 2018. There were no such charges during the three months ended September 30, 2018. This charge was related to the Camden Waterfront project located in Camden, New Jersey and reported in the Company's Philadelphia reportable segment. We continually evaluate under generally accepted accounting principles the recoverability of the carrying value of our total investment in the Camden Waterfront project. Factors considered in evaluating the carrying value of this project include probability weighted projections of future cash flows, which are influenced by management’s judgments regarding the site configuration, absorption rates and timing of future fee development projects, the amount, timing and sunset provisions of government incentives aimed at inducing office users to relocate to Camden, and general market conditions affecting demand for office space in Camden. As a result of changes to management’s estimates of probability weighted future cash flow impacted by the above-described factors during the second quarter of 2018, the Company concluded that an indicator of impairment exists and the Company may not recover the carrying value of its investment in the Camden Waterfront project. As such, the Company recorded the impairment charge in the second quarter of 2018. The impairment charge is equal to the amount by which we estimate the carrying value of our total investment in the Camden Waterfront project exceeds the current estimated fair value of our investment.

The Company recorded $9.7 million in impairment charges for the three and nine months ended September 30, 2017. These charges were related to an operating property and land located in the Company's Houston reporting segment.

The Company determined these impairments based on third party offer prices and quoted offer prices for comparable transactions which are Level 2 and Level 3 inputs, respectively, according to the fair value hierarchy established in ASC 820.

The Company has applied reasonable estimates and judgments in evaluating each of its properties and land held for development and has determined that there are no additional valuation adjustments necessary at September 30, 2018. Should external or internal circumstances change requiring the need to shorten the holding periods or adjust the estimated future cash flows of the Company’s assets, the Company could be required to record additional impairment charges in the future.