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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - THOMAS PROPERTIES GROUP INCtpgiex-31133112.htm
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EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - THOMAS PROPERTIES GROUP INCtpgiex-31233112.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________________
Form 10-Q
_________________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
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 0-50854
________________________________________________________________________
Thomas Properties Group, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________________________________________
Delaware
 
20-0852352
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
515 South Flower Street, Sixth Floor,
Los Angeles, CA
 
90071
(Address of principal executive offices)
 
(Zip Code)
(213) 613-1900
Registrant’s telephone number, including area code

____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:


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  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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  x    No  o

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  o
  
 
  
 
  
Accelerated filer  x
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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
    
Class
  
Outstanding at May 8, 2012
Common Stock, $.01 par value per share
  
37,294,994




THOMAS PROPERTIES GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2012
TABLE OF CONTENTS
 
 
Page No.
FINANCIAL INFORMATION
 
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
ITEM 1A.
ITEM 4.
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
 
 
 


2


PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
March 31, 2012
 
December 31, 2011
ASSETS
 
 
 
Investments in real estate:
 
 
 
Land and improvements
$
33,077

 
$
33,077

Land and improvements—development properties
80,332

 
80,254

Buildings and improvements
311,770

 
308,692

Tenant improvements
39,577

 
39,004

Total investments in real estate
464,756

 
461,027

Less accumulated depreciation
(118,254
)
 
(115,571
)
Investments in real estate, net
346,502

 
345,456

Condominium units held for sale
44,657

 
45,217

Investments in unconsolidated real estate entities
530

 
8,834

Cash and cash equivalents, unrestricted
80,280

 
79,320

Restricted cash
6,605

 
10,616

Rents and other receivables, net
1,844

 
1,903

Receivables from unconsolidated real estate entities
4,057

 
2,918

Deferred rents
18,627

 
17,866

Deferred leasing and loan costs, net
11,553

 
12,283

Other assets, net
21,147

 
17,465

Assets associated with land held for sale

 
1,107

Total assets
$
535,802

 
$
542,985

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage loans
$
288,887

 
$
289,523

Accounts payable and other liabilities, net
29,566

 
32,443

Prepaid rent and deferred revenue
3,605

 
3,019

Obligations associated with land held for sale

 
27

Total liabilities
322,058

 
325,012

Commitments and Contingencies (Note 9)

 

Equity:
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or
  outstanding as of March 31, 2012 and December 31, 2011

 

Common stock, $.01 par value, 225,000,000 shares authorized, 37,294,994 and
  37,094,995 shares issued and outstanding as of March 31, 2012 and December 31,
  2011, respectively
373

 
371

Limited voting stock, $.01 par value, 20,000,000 shares authorized,12,313,331 shares
   issued and outstanding as of March 31, 2012 and December 31, 2011
123

 
123

Additional paid-in capital
208,812

 
208,473

Retained deficit and dividends, including $21 and $20 of other comprehensive
   income as of March 31, 2012 and December 31, 2011, respectively
(59,155
)
 
(55,472
)
Total stockholders’ equity
150,153

 
153,495

Noncontrolling interests:
 
 
 
Unitholders in the Operating Partnership
51,873

 
52,983

Partners in consolidated real estate entities
11,718

 
11,495

Total noncontrolling interests
63,591

 
64,478

Total equity
213,744

 
217,973

Total liabilities and equity
$
535,802

 
$
542,985

See accompanying notes to consolidated financial information.

3


THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
 
 
Three months ended March 31,
 
2012
 
2011
Revenues:
 
 
 
Rental
$
7,846

 
$
7,312

Tenant reimbursements
5,421

 
6,329

Parking and other
740

 
802

Investment advisory, management, leasing and development services
931

 
811

Investment advisory, management, leasing and development services —
   unconsolidated real estate entities
4,102

 
4,661

Reimbursement of property personnel costs
1,511

 
1,532

Condominium sales
919

 
480

Total revenues
21,470

 
21,927

Expenses:
 
 
 
Property operating and maintenance
6,264

 
6,587

Real estate and other taxes
1,920

 
1,887

Investment advisory, management, leasing and development services
2,994

 
3,029

Reimbursable property personnel costs
1,511

 
1,532

Cost of condominium sales
672

 
334

Interest
4,238

 
4,664

Depreciation and amortization
3,510

 
3,393

General and administrative
4,239

 
3,930

Total expenses
25,348

 
25,356

Interest income
5

 
13

Equity in net income (loss) of unconsolidated real estate entities
(22
)
 
(694
)
Income (loss) before income taxes and noncontrolling interests
(3,895
)
 
(4,110
)
Benefit (provision) for income taxes
(43
)
 
(96
)
Net income (loss)
(3,938
)
 
(4,206
)
Noncontrolling interests’ share of net (income) loss:
 
 
 
Unitholders in the Operating Partnership
1,041

 
1,076

Partners in consolidated real estate entities
(223
)
 
(155
)
 
818

 
921

TPGI share of net income (loss)
$
(3,120
)
 
$
(3,285
)
Income (loss) per share-basic and diluted
$
(0.09
)
 
$
(0.09
)
Dividends paid per common share
$
0.015

 
$

Weighted average common shares outstanding—basic and diluted
36,737,276

 
36,534,505

See accompanying notes to consolidated financial information.


4


THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
(Unaudited)
 
Three months ended
 
March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(3,938
)
 
$
(4,206
)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
    operating activities:
 
 
 
Gain on sale of condominiums
(247
)
 
(146
)
Equity in net (income) loss of unconsolidated real estate entities
22

 
694

Deferred rents
(267
)
 
(63
)
Deferred taxes (and interest on unrecognized benefits)
26

 
50

Deferred interest
25

 
231

Depreciation and amortization expense
3,510

 
3,393

Amortization of loan costs
160

 
202

Non-cash amortization of share-based compensation
460

 
361

Distributions from operations of unconsolidated real estate entities
250

 

Changes in operating assets and liabilities:
 
 
 
Rents and other receivables
55

 
(262
)
Receivables from unconsolidated real estate entities
(1,139
)
 
692

Deferred leasing costs
(1,040
)
 
(202
)
Other assets
(5,487
)
 
(4,818
)
Accounts payable and other liabilities
(1,890
)
 
(3,900
)
Prepaid rent and deferred revenue
580

 
605

Net cash provided by (used in) operating activities
(8,920
)
 
(7,369
)
Cash flows from investing activities:
 
 
 
Expenditures for improvements to real estate
(2,686
)
 
(1,503
)
Proceeds from sale of condominiums
759

 
432

Proceeds from sale of real estate
1,107

 

Return of capital from unconsolidated real estate entities
8,932

 
968

Contributions to unconsolidated real estate entities
(902
)
 

Net cash provided by (used in) investing activities
7,210

 
(103
)
Cash flows from financing activities:
 
 
 
Contributions by noncontrolling interests

 
370

Payment of dividends to common stockholders and distributions to limited partners
(750
)
 

Principal payments of mortgage loans
(924
)
 
(848
)
Proceeds from mortgage loans
263

 
468

Change in restricted cash
4,081

 
4,721

Net cash provided by (used in) financing activities
2,670

 
4,711

Net increase (decrease) in cash and cash equivalents
960

 
(2,761
)
Cash and cash equivalents at beginning of year
79,320

 
42,363

Cash and cash equivalents at end of period
$
80,280

 
$
39,602


See accompanying notes to consolidated financial information.

5


THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Tabular amounts in thousands, except share and per share amounts)



1.
Organization and Description of Business
The terms “Thomas Properties”, “us”, “we”, “our” and "the Company" as used in this report refer to Thomas Properties Group, Inc. ("TPGI") together with our Operating Partnership, Thomas Properties Group, L.P. (the “Operating Company” or "TPG").

We own, manage, lease, acquire and develop real estate, consisting primarily of office properties and related parking
garages, located in Southern California; Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas
and Austin, Texas.

We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering (the “Offering”). Our operations are carried on through our Operating Partnership of which we are the sole general partner. The Operating Partnership holds our direct and indirect interest in real estate properties, and it carries on our investment advisory, property management, leasing and real estate development operations. As of March 31, 2012, we held a 74.7% interest in the Operating Partnership which we consolidate, as we have control over the major decisions of the Operating Partnership.
















[space intentionally left blank]



















6

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of March 31, 2012, we were invested in the following real estate properties:

Property
 
Type
 
Location
Consolidated properties:
 
 
 
 
One Commerce Square
 
High-rise office
 
Philadelphia Central Business District, Pennsylvania (“PCBD”)
Two Commerce Square
 
High-rise office
 
PCBD
Murano
 
Residential condominiums held for sale
 
PCBD
2100 JFK Boulevard
 
Undeveloped land;
Residential/Office/Retail
 
PCBD
Four Points Centre
 
Suburban office; Undeveloped land; Office/Retail/Research and Development/Hotel/Residential
 
Austin, Texas
Campus El Segundo
 
Developable land; Site infrastructure complete; Office/Retail/ Research and Development/Hotel
 
El Segundo, California
 
 
 
 
 
Unconsolidated properties:
 
 
 
 
2121 Market Street
 
Residential and retail
 
PCBD
TPG/CalSTRS, LLC (“TPG/CalSTRS”):
 
 
City National Plaza
 
High-rise office
 
Los Angeles Central Business District, California
Reflections I
 
Suburban office
 
Reston, Virginia
Reflections II
 
Suburban office
 
Reston, Virginia
San Felipe Plaza
 
High-rise office
 
Houston, Texas
CityWestPlace
 
Suburban office and undeveloped land
 
Houston, Texas
Fair Oaks Plaza
 
Suburban office
 
Fairfax, Virginia
 
 
 
 
 
TPG-Austin Portfolio Syndication Partners JV, LP (“Austin Portfolio Joint Venture”):
San Jacinto Center
 
High-rise office
 
Austin Central Business District, Texas, (“ACBD”)
Frost Bank Tower
 
High-rise office
 
ACBD
One Congress Plaza
 
High-rise office
 
ACBD
One American Center
 
High-rise office
 
ACBD
300 West 6th Street
 
High-rise office
 
ACBD
Research Park Plaza I & II
 
Suburban Office
 
Austin, Texas
Park Centre
 
Suburban Office
 
Austin, Texas
Great Hills Plaza
 
Suburban Office
 
Austin, Texas
Stonebridge Plaza II
 
Suburban Office
 
Austin, Texas
Westech 360 I-IV
 
Suburban Office
 
Austin, Texas

2.
Summary of Significant Accounting Policies
Interim Financial Data
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. The interim financial statements should be

7

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions are subjective and affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Principles of Consolidation
We evaluate each entity to determine if the entity is deemed a variable interest entity ("VIE"), and if the Company is the primary beneficiary of the VIE based on whether the Company has both (i) the power to direct those matters that most significantly impacted the activities of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE, including management agreements. When an entity is not deemed to be a VIE, the Company considers the provisions of the accounting standards to determine whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. The Company consolidates (i) entities that are VIEs and of which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs and controlled by the Company and in which the limited partners neither have the ability to dissolve the entity or remove the Company without cause nor any substantive participating rights.

The equity method of accounting is utilized to account for investments in real estate entities that are VIEs and of which the Company is not deemed to be the primary beneficiary and entities that are non-VIEs which the Company does not control, but over which the Company has the ability to exercise significant influence. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
The 25% preferred equity interests in One Commerce Square and Two Commerce Square (beginning December 2010), owned by Brandywine Operating Partnership LP ("Brandywine") are reflected under the "Noncontrolling Interests" caption on our consolidated balance sheets. Our interest in these two partnerships is a variable interest, which we consolidate because we are considered to be the primary beneficiary.
We also consolidate our Murano residential condominium project which we control. Our unaffiliated partner's interest is reflected in our consolidated balance sheets under the "Noncontrolling Interests" caption. After full repayment of the Murano mortgage loan, which has a balance of $15.1 million at March 31, 2012, net proceeds from the project will be distributed, to the extent available, as follows:
i.
First, to the Company as repayment of our first priority capital and a return on such capital, which has a balance of $13.0 million as of March 31, 2012;
ii.
Second, to the Company and our partner equally for repayment of second priority capital and a return on such capital. The Company's share of this tranche is $1.5 million as of March 31, 2012;
iii.
Third, the next $3.0 million to be split equally between the Company and our partner;
iv.
Fourth, to the Company for repayment of our original preferred equity contribution and a return on such capital, which has a balance of $28.2 million as of March 31, 2012;
v.
Fifth, the next $3.0 million to be split equally between the Company and our partner;
vi.
Sixth, to TPGI for repayment of the final half of the original preferred equity contribution, which has a balance of $8.2 million as of March 31, 2012; and
vii.
Any residual amounts will be allocated to the Company and our partner 73% and 27%, respectively.

Refer to Note 3 for discussion of the TPG/CalSTRS joint venture and the Austin Portfolio Joint Venture , which were determined to be variable interest entities for which we are not considered the primary beneficiary.
Impairment of Long-Lived Assets
We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Assets held for sale are reported at the lower of the carrying amount or fair value, less costs to sell. We record the Murano condominium units at the lower of cost or estimated fair value as the condominium units meet the held for sale criteria of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 360, “Property, Plant, and

8

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Equipment.”
We use the equity method of accounting to account for investments in real estate entities over which we have significant influence, but not control over major decisions. In these situations, the unit of account for measurement purposes is the equity investment and not the real estate. Accordingly, if our joint venture investments meet the other-than-temporary criteria of FASB ASC 323, “Investments—Equity Method and Joint Ventures”, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of our investment.
We did not record an impairment for any long-lived assets during the three months ended March 31, 2012 and 2011.
Dispositions
In January 2012, we closed on the sale of a 4,800 square foot retail site at Four Points Centre. As of December 31, 2011, the carrying value of the property of $1.1 million comprises the caption labeled "Assets associated with land held for sale" on our consolidated balance sheets, and is equal to the ultimate net proceeds received.
Development Activities
Costs associated with the development and construction of a real estate project are capitalized on our consolidated balance sheets. In addition, interest, loan fees, real estate taxes, and general and administrative expenses that are directly associated with and incremental to our development activities and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress, including the pre-development and lease-up phases. Once the development and construction of the building shell is completed, the costs capitalized to construction in progress are transferred to operating properties. Cumulative capitalized interest as of March 31, 2012 and December 31, 2011, is $17.0 million and $17.1 million, respectively. There was no interest capitalized for the three months ended March 31, 2012 and 2011.
Revenue Recognition - Condominium Sales
We have one high-rise condominium project, Murano, for which we use the deposit method of accounting to recognize sales revenue and costs. Under the provisions of FASB ASC 360-20, “Property, Plant and Equipment” subsection “Real Estate and Sales”, revenue and costs for projects are recognized when all parties are bound by the terms of the contract, all consideration has been exchanged, any permanent financing for which the seller is responsible has been arranged and all conditions precedent to closing have been performed. This results in profit from the sale of condominium units recognized at the point of settlement as compared to the point of sale. Revenue is recognized on the contract price of individual units. Total estimated costs, net of impairment charges, are allocated to individual units which have closed on a relative value basis. Total estimated revenue and construction costs are reviewed periodically, and any change is applied to current and future periods.
Earnings (Loss) Per Share
The computation of basic income (loss) per share is based on net income (loss) and the weighted average number of shares of our common stock outstanding during the period. The computation of diluted income (loss) per share includes the assumed exercise of outstanding stock options and the effect of the vesting of restricted stock and incentive units that have been granted to employees in connection with stock based compensation, all calculated using the treasury stock method. In accordance with FASB ASC 260-10-45, “Earnings Per Share”, the Company's unvested restricted stock and unvested incentive units are considered to be participating securities and are included in the computation of earnings per share to calculate a two class earnings per share. We only present the earnings per share attributable to the common shareholders. See Note 5 - Income (Loss) Per Share and Dividends Declared.
Recent Accounting Pronouncements
Changes to U.S. generally accepted accounting principles (“GAAP”) are established by the FASB in the form of accounting standards updates ("ASU"s) to the FASB's Accounting Standards Codification. We consider the applicability and impact of all ASUs. Newly issued ASUs not previously disclosed are not listed below as they are expected to have no impact on our consolidated financial position and results of operations, because either the ASU is not applicable or the impact is expected to be immaterial.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards” ("ASU No. 2011-04"). ASU No. 2011-04 provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of this update

9

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

did not have a material impact on our financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” ("ASU No. 2011-05"). ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. It requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05” ("ASU No. 2011-12"), to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not have any transactions resulting in reportable comprehensive income (loss).
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation of activity associated with real estate held for disposition disclosed in Note 3.

3.
Unconsolidated Real Estate Entities
The unconsolidated real estate entities include our share of the entities that own 2121 Market Street, the TPG/CalSTRS properties and the Austin Portfolio Joint Venture properties. TPG/CalSTRS owns the following properties as of March 31, 2012:
City National Plaza (acquired January 2003)
Reflections I (acquired October 2004)
Reflections II (acquired October 2004)
San Felipe Plaza (acquired August 2005)
CityWestPlace land (acquired June 2006)
CityWestPlace (acquired June 2006)
Fair Oaks Plaza (acquired January 2007)
The following properties were disposed by TPG/CalSTRS during the fourth quarter of 2011 or in the case of Brookhollow Central, the first quarter of 2012:
Four Falls Corporate Center (acquired March 2005, disposed of October 2011)
Oak Hill Plaza (acquired March 2005, disposed of October 2011)
Walnut Hill Plaza (acquired March 2005, disposed of October 2011)
2500 CityWest and two adjacent land parcels (acquired August 2005, disposed of November 2011)
Brookhollow Central I, II and III (acquired August 2005, disposed of January 2012)
Centerpointe I and II (acquired January 2007, disposed of December 2011)
TPG/CalSTRS also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties that were acquired in June 2007:
San Jacinto Center
Frost Bank Tower
One Congress Plaza
One American Center
300 West 6th Street
Research Park Plaza I & II
Park Centre
Great Hills Plaza
Stonebridge Plaza II
Westech 360 I-IV
Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of March 31, 2012.

10

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
2121 Market Street
50.00
%
TPG/CalSTRS:
 
Austin Portfolio Joint Venture Properties
6.25
%
City National Plaza
7.94
%
All properties, excluding Austin Portfolio Joint Venture and City National Plaza
25.00
%

Investments in unconsolidated real estate entities as of March 31, 2012 and December 31, 2011 are as follows (in thousands):
 
March 31,
2012
 
December 31,
2011
TPG/CalSTRS
$
(3,842
)
 
$
3,499

Austin Portfolio Joint Venture
7,149

 
7,873

Total TPG/CalSTRS and Austin Portfolio Joint Venture
3,307

 
11,372

2121 Market Street
(2,777
)
 
(2,538
)
Total investment in unconsolidated real estate entities
$
530

 
$
8,834


The following is a summary of the investment in unconsolidated real estate entities for the three months ended March 31, 2012 (in thousands):
 
Investment balance, December 31, 2011
$
8,834

Contributions
902

Equity in net loss of unconsolidated real estate entities
(22
)
Distributions
(9,182
)
Other
(2
)
Investment balance, March 31, 2012
$
530

 
TPG/CalSTRS was formed to acquire office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be positively impacted by introduction of new capital and/or management.
The total capital commitment to the joint venture was $511.7 million as of March 31, 2012, of which approximately $24.0 million and $13.6 million was unfunded by CalSTRS and us, respectively.
A buy-sell provision may be exercised by either CalSTRS or us. Under this provision, the initiating party sets a price for its interest in the joint venture, and the other party has a specified time to elect to either buy the initiating party's interest or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has a buy-out option to purchase our interest in the joint venture. The buyout price is based upon a 3% discount to the appraised fair market value.
In January 2012, we completed the sale of Brookhollow Central I, II and III in Houston, Texas. TPG/CalSTRS received net proceeds from this transaction of $30.6 million, after closing costs and repayment of mortgage debt, of which TPG's share was $7.7 million. During the fourth quarter of 2011, TPG/CalSTRS recorded a $7.8 million impairment charge to reduce the book value of the property to the net sales proceeds. TPG's share of the impairment charge was $1.9 million.
In connection with the provisions of ASC 810, TPG/CalSTRS and the Austin Portfolio Joint Venture are deemed to be variable interest entities for which we are not considered to be the primary beneficiary. In connection with the TPG/CalSTRS joint venture, CalSTRS and TPG acting together are considered to have the power to direct the activities of the joint venture that most significantly impact the joint venture economic performance and therefore neither TPG nor CalSTRS is considered to be the primary beneficiary. We determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the TPG/CalSTRS venture agreement requires unanimous approval by the two members.

11

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In connection with the Austin Portfolio Joint Venture, TPG/CalSTRS is not considered to be the primary beneficiary due to the fact that the power to direct the activities of the joint venture is shared among multiple unrelated parties such that no one party has the power to direct the activities that most significantly impact the joint venture's economic performance. In connection with the Austin Portfolio Joint Venture, we determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the Austin Portfolio Joint Venture partnership agreement requires either unanimous or majority approval of decisions by the respective partners.
As of March 31, 2012, our total maximum exposure to loss to TPG/CalSTRS and the Austin Portfolio Joint Venture is:
(1)
Our equity investment in the various properties controlled by TPG/CalSTRS and the Austin Portfolio Joint Venture as of March 31, 2012, which was $3.3 million, as presented earlier in this note.
(2)
The potential loss of future fee revenues which we earn in connection with the management and leasing agreements with the various properties controlled by the respective joint ventures. As of March 31, 2012, we had total receivables of $1.3 million and $1.2 million related to TPG/CalSTRS and the Austin Portfolio Joint Venture, respectively. TPG/CalSTRS earns an annual administration fee payable quarterly from the Austin Portfolio Joint Venture (or the “APJV Partnership”) based on 0.50% per annum times the aggregate capital contributions made to the APJV Partnership by all partners, and the funded amount of the priority credit facility (the “Senior Priority Financing”). TPG receives 50% of this amount. If the Senior Priority Financing is not repaid in full on or before the June 1, 2012 maturity date, then CalSTRS and TPG shall repay an affiliate of Lehman Brothers Holdings, Inc. (“Lehman”), which holds a limited partner interest in the APJV Partnership, the lesser of (a) the unpaid balance of the Senior Priority Financing owed to Lehman and (b) the amount of all administration fees paid to TPG/CalSTRS with respect to the capital contribution made by Lehman and the portion of the Senior Priority Financing advanced by Lehman or any affiliate. We estimate TPG's share of any such payment to be approximately $0.9 million.
(3)
Unfunded capital commitment to the TPG/CalSTRS joint venture was $13.6 million as of March 31, 2012. There were no unfunded capital commitments to the Austin Portfolio Joint Venture as of March 31, 2012. We and our partners in the Austin Portfolio Joint Venture have funded $60.0 million of Senior Priority Financing, which together with accrued interest has a balance of $77.1 million as of March 31, 2012, and is senior to the Austin Portfolio bank loan. Our share of the funding and accrued interest was $4.8 million, and is accounted for as equity. The funds advanced under the Senior Priority Facility have a first priority mortgage lien on three of the Austin buildings and a first priority right to payment on a pledge of the equity interests in the other seven Austin buildings owned by the Austin Partnership.
    

12

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Following is summarized financial information for the unconsolidated real estate entities as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 (in thousands):

Summarized Balance Sheets
 
March 31,
2012
 
December 31, 2011
 
 (Unaudited)
 
 (Audited)
ASSETS
 
 
 
Investments in real estate, net
$
1,817,310

 
$
1,830,868

Receivables including deferred rents, net
86,225

 
86,037

Deferred leasing and loan costs, net
95,988

 
98,213

Other assets
40,272

 
53,623

Assets associated with real estate held for disposition
359

 
72,652

Total assets
$
2,040,154

 
$
2,141,393

LIABILITIES AND OWNERS’ EQUITY
 
 
 
Mortgage and other secured loans
$
1,683,605

 
$
1,680,881

Below market rents, net
31,220

 
34,305

Other liabilities
62,190

 
76,747

Liabilities associated with real estate held for disposition
1,444

 
42,141

Total liabilities
1,778,459

 
1,834,074

Owners’ equity:
 
 
 
Thomas Properties, including $1 and $1 of other comprehensive loss as of
   March 31, 2012 and December 31, 2011, respectively
6,223

 
15,267

Other owners, including $14 and $21 of other comprehensive loss as of March 31, 2012
   and December 31, 2011, respectively
255,472

 
292,052

Total owners' equity
261,695

 
307,319

Total liabilities and owners’ equity
$
2,040,154

 
$
2,141,393

Summarized Statements of Operations
(unaudited)
 
Three months ended
 
March 31,
 
2012
 
2011
Revenues
$
69,404

 
$
67,495

Expenses:
 
 
 
Operating and other expenses
35,543

 
32,981

Interest expense
25,879

 
24,160

Depreciation and amortization
23,097

 
23,384

     Total expenses
84,519

 
80,525

Income (loss) from continuing operations
(15,115
)
 
(13,030
)
Income (loss) associated with real estate held for disposition
182

 
(1,787
)
Net income (loss)
$
(14,933
)
 
$
(14,817
)
Thomas Properties’ share of net loss, prior to intercompany eliminations
$
(1,218
)
 
$
(1,415
)
Intercompany eliminations
1,196

 
721

Equity in net income (loss) of unconsolidated real estate entities
$
(22
)
 
$
(694
)


13

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in the preceding summarized balance sheets as of March 31, 2012 and December 31, 2011, are the following balance sheets of TPG/CalSTRS, LLC (in thousands) (unaudited):
 
 
March 31, 2012
 
December 31, 2011
 
 
 
 
ASSETS
 
 
 
Investments in real estate, net
$
798,249

 
$
804,961

Receivables including deferred rents, net
64,418

 
64,595

Investments in unconsolidated real estate entities
38,868

 
41,278

Deferred leasing and loan costs, net
53,438

 
55,417

Other assets
24,123

 
23,643

Assets associated with real estate held for disposition
359

 
72,652

Total assets
$
979,455

 
$
1,062,546

LIABILITIES AND MEMBERS’ EQUITY
 
 
 
Mortgage and other secured loans
$
768,118

 
$
768,188

Other liabilities
36,558

 
42,296

Liabilities associated with real estate held for disposition
1,444

 
42,141

Total liabilities
806,120

 
852,625

Members’ equity:
 
 
 
Thomas Properties, including $1 and $1 of other comprehensive loss as of
   March 31, 2012 and December 31, 2011, respectively
8,342

 
17,137

CalSTRS, including $3 and $4 of other comprehensive loss as of March 31, 2012 and December 31, 2011, respectively
164,993

 
192,784

Total members’ equity
173,335

 
209,921

Total liabilities and members’ equity
$
979,455

 
$
1,062,546

 

14

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Following is summarized financial information by real estate entity for the three months ended March 31, 2012 and 2011 (in thousands):
 
Three months ended March 31, 2012
 
2121 Market
Street
 
TPG/
CalSTRS,
LLC
 
Austin
Portfolio
Properties
 
Eliminations
 
Total
Revenues (1)
$
1,074

 
$
41,331

 
$
26,999

 
$

 
$
69,404

Expenses:
 
 
 
 
 
 
 
 
 
Operating and other expenses
538

 
22,460

 
13,151

 
(606
)
 
35,543

Interest expense
280

 
11,424

 
14,876

 
(701
)
 
25,879

Depreciation and amortization
254

 
11,606

 
11,237

 

 
23,097

     Total expenses
1,072

 
45,490

 
39,264

 
(1,307
)
 
84,519

Income (loss) from continuing operations
2

 
(4,159
)
 
(12,265
)
 
1,307

 
(15,115
)
Equity in net loss of unconsolidated real estate entities

 
(2,411
)
 

 
2,411

 

Income (loss) associated with real estate held for
   disposition

 
182

 

 

 
182

Net income (loss)
$
2

 
$
(6,388
)
 
$
(12,265
)
 
$
3,718

 
$
(14,933
)
Thomas Properties’ share of net income (loss)
$
1

 
$
(452
)
 
$
(767
)
 
$

 
$
(1,218
)
Intercompany eliminations
1,196

Equity in net loss of unconsolidated real estate entities
$
(22
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2011
 
2121 Market
Street
 
TPG/
CalSTRS,
LLC
 
Austin
Portfolio
Properties
 
Eliminations
 
Total
Revenues (1)
$
1,016

 
$
39,806

 
$
26,835

 
$
(162
)
 
$
67,495

Expenses:
 
 
 
 
 
 
 
 
 
Operating and other expenses
351

 
20,405

 
12,655

 
(430
)

32,981

Interest expense
291

 
11,342

 
12,999

 
(472
)
 
24,160

Depreciation and amortization
226

 
11,580

 
11,578

 

 
23,384

     Total expenses
868

 
43,327

 
37,232

 
(902
)
 
80,525

Income (loss) from continuing operations
148

 
(3,521
)
 
(10,397
)
 
740

 
(13,030
)
Equity in net (loss) income of unconsolidated real
   estate entities

 
(1,939
)
 

 
1,939

 

Income(loss) associated with real estate held for
disposition

 
(1,787
)
 

 

 
(1,787
)
Net income (loss)
$
148

 
$
(7,247
)
 
$
(10,397
)
 
$
2,679

 
$
(14,817
)
Thomas Properties’ share of net income (loss)
$
74

 
$
(839
)
 
$
(650
)
 
$

 
$
(1,415
)
Intercompany eliminations
721

Equity in net income of unconsolidated real estate entities
$
(694
)
 
 
 
 
 
 
 
 
 
 

________________________
(1)
Total includes interest income of $11 and $15 for the three months ended March 31, 2012, and 2011, respectively.



15

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.
Mortgage Loans
A summary of the outstanding mortgage loans as of March 31, 2012 and December 31, 2011 is as follows (in thousands). None of these loans are recourse to us, except that we have guaranteed the Campus El Segundo mortgage loan, partially guaranteed the Four Points Centre mortgage loan, under which our liability is currently limited to a maximum of $11.3 million, and provided a limited guaranty for the Murano mortgage loan. See footnote 5 to the table below for further details regarding the Murano limited guaranty. In connection with some of the loans listed in the table below, our operating partnership is subject to customary non-recourse carve out obligations.
 
 
 
 
 
Outstanding Debt
 
Maturity Date
 
Maturity Date
at End of
Extension
Options
Secured Debt
 
Interest Rate at March 31, 2012
 
As of March 31, 2012
 
As of December 31, 2011
 
One Commerce Square mortgage
   loan (1)
 
5.67%
 
$
128,113

 
$
128,529

 
1/6/2016
 
1/6/2016
Two Commerce Square mortgage
    loan (2)
 
6.30%
 
106,987

 
107,112

 
5/9/2013
 
5/9/2013
Campus El Segundo mortgage loan (3)
 
LIBOR + 3.75%
 
14,500

 
14,500

 
10/31/2012
 
10/31/2014
Four Points Centre mortgage
   loan (4)
 
LIBOR + 3.50%
 
24,196

 
23,908

 
7/31/2012
 
7/31/2014
Murano mortgage loan (5)
 
LIBOR + 3.75%
 
15,091

 
15,474

 
12/15/2013
 
12/15/2013
Total secured debt
$
288,887

 
$
289,523


 
 
 
_________________________
(1)
The mortgage loan may be defeased, and is subject to yield maintenance payments for any prepayments prior to October 2015.
(2)
Prior to March 9, 2013, the borrower may defease the entire loan. On or after March 9, 2013, the borrower may prepay the loan, which matures on May 9, 2013.
(3)
The interest rate as of March 31, 2012 was 4.00% per annum. The loan has two one-year extension options remaining, subject to our compliance with certain covenants, with a final maturity date of October 31, 2014 if all extension options are exercised. A payment of up to $2.5 million is due at the time of each extension in order that the loan balance not exceed $12.0 million and $9.5 million at October 31, 2013 and October 31, 2014, respectively. We have guaranteed this loan. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of March 31, 2012.
(4)
The interest rate as of March 31, 2012 was 3.75% per annum. The loan has two one-year extension options at our election subject to certain conditions. As of March 31, 2012, $6.5 million is available to be drawn to fund tenant improvement costs and certain other project costs related to two office buildings. The first option to extend is subject to a 75% loan-to-value ratio and a minimum debt yield of 8.0%, among other things. The second option to extend is subject to a 75% loan-to-value ratio, executed leases representing at least 90% of the net rentable area, and a minimum debt yield, among other things. If the loan-to-value ratio or the minimum debt yield is not met, we can pay down the principal balance in an amount sufficient to satisfy the requirement. The debt yield is calculated by dividing the net operating income of the property by the outstanding principal balance of the loan. As of March 31, 2012, the property had a net operating loss. We have guaranteed completion of the tenant improvements and 46.5% of the balance of the outstanding principal balance and interest payable on the loan, which results in a maximum guarantee of $11.3 million as of March 31, 2012. Upon the occurrence of certain events, our maximum liability as guarantor will be reduced to 31.5% of all sums payable under this loan, and upon the occurrence of further events, our maximum liability as guarantor will be reduced to 25% of all sums payable under the loan. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of March 31, 2012. We have also provided additional collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to the office buildings.
(5)
The interest rate as of March 31, 2012 was 4.00% per annum. The loan is scheduled to mature on December 15, 2013. On each June 30th and December 31st through and including June 30, 2013, the loan is subject to a maximum balance. On June 30, 2012 and December 31, 2012, the next amortization dates, we will be required to make a rebalancing payment if the outstanding principal amount on such dates exceed $12.9 million and $8.6 million, respectively. Additionally, repayment of this loan is being made with proceeds from the sales of condominium units. TPG gave the lender a limited guaranty which (i) guarantees repayment of the loan in the event of certain bankruptcy events affecting the borrower, (ii)

16

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

guarantees payment of the lender's damages from customary “bad boy” actions of the borrower or TPG (such as fraud, physical waste of the property, misappropriation of funds and similar bad acts); and (iii) guarantees payment of the amount, if any, by which the loan balance at the time exceeds 80% of the bulk sale value of the collateral upon an acceleration of the loan triggered by a borrower default.
The loan agreements for One Commerce Square and Two Commerce Square require that all receipts collected from these properties be deposited in lockbox accounts under the control of the lenders to fund reserves such as capital improvements, taxes, insurance, leasing commissions, debt service and operating expenditures. Included in restricted cash on our consolidated balance sheets at March 31, 2012 and December 31, 2011, are lockbox, reserve funds and/or security deposits as follows (in thousands):
 
March 31, 2012
 
December 31, 2011
One Commerce Square
$
3,083

 
$
5,471

Two Commerce Square
3,248

 
5,030

Murano
274

 
115

Restricted cash - consolidated properties
$
6,605

 
$
10,616


As of March 31, 2012, subject to certain extension options exercisable by the Company, principal payments due for the secured outstanding debt are as follows (in thousands):
     
 
Amount Due at
Original Maturity
Date
 
Amount Due at
Maturity Date
After Exercise of
Extension Options
2012
$
40,315

 
$
4,119

2013
123,483

 
125,983

2014
1,884

 
35,580

2015
1,996

 
1,996

2016
121,209

 
121,209

Thereafter

 


$
288,887

 
$
288,887



5.
Income (Loss) per Share and Dividends Declared
Basic earnings per share is calculated based on dividends declared on common shares and other participating securities (“distributed earnings”) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accrued during the respective period. Participating securities include restricted stock, incentive units and stock options. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding securities. Basic earnings per common share and participating securities, including restricted stock, incentive units and stock options, represent the summation of the distributed and undistributed earnings per common share and participating security divided by the total weighted average number of common shares outstanding and the total weighted average number of participating securities outstanding during the respective periods. We only present the earnings per share attributable to the common shareholders.
Net losses, after deducting the dividends to participating securities, are allocated in full to the common shares since the participating security holders do not have an obligation to share in the losses, based on the contractual rights and obligations of the participating securities. Because we incurred losses for the three months ended March 31, 2012 and 2011, all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding.
Our board of directors declared and paid a quarterly dividend to common stockholders in the three months ended March 31, 2012 of $0.015 per common share. There was no such dividend in the three months ended March 31, 2011.
The following is a summary of the elements used in calculating basic and diluted loss per share for the three months ended March 31, 2012 and 2011 (in thousands except share and per share amounts):
 

17

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Three months ended March 31,
 
2012

2011
Net income (loss) attributable to common shares
$
(3,120
)
 
$
(3,285
)
Dividends to participating securities:
 
 
 
Unvested restricted stock
(8
)
 

Unvested incentive units
(1
)
 

Net income (loss) attributable to common shares, net of dividends to
  participating securities
$
(3,129
)
 
$
(3,285
)
Weighted average common shares outstanding—basic
36,737,276

 
36,534,505

Weighted average common shares outstanding—diluted
36,737,276

 
36,534,505

Income (loss) per share—basic and diluted
$
(0.09
)
 
$
(0.09
)
Dividends declared per share
$
0.015

 
$


The following is a summary of elements that were anti-dilutive due to our net loss position and thereby excluded from the calculation of basic and diluted loss per share for the three months ended March 31, 2012 and 2011 (in thousands):
 
 
March 31, 2012
 
March 31, 2011
Nonvested restricted stock units
 
519

 
448

Vested incentive units
 
291

 
249

Nonvested incentive units
 
69

 
111


6.
Equity
Common Stock and Operating Partnership Units
The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of our common stock vote together as a single class with holders of our limited voting stock on those matters upon which the holders of limited voting stock are entitled to vote. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably any dividends when, if, and as may be declared by the board of directors out of funds legally available for dividend payments. An Operating Partnership unit and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. An Operating Partnership unit may be redeemed by the holder in exchange for cash or shares of common stock at our election, on a one-for-one basis. As of March 31, 2012 and December 31, 2011, we held a 74.7% interest in the Operating Partnership.
Limited Voting Stock
Each Operating Partnership unit issued in connection with the formation of our Operating Partnership at the time of our initial public offering in 2004 was paired with one share of limited voting stock. Operating Partnership units issued under other circumstances, including upon the conversion of incentive units granted under the Incentive Plan, are not paired with shares of limited voting stock. These shares of limited voting stock are not transferable separate from the limited partnership units they are paired with, and each Operating Partnership unit is redeemable together with one share of limited voting stock by its holder for cash, or, at our election, one share of our common stock. Each share of limited voting stock entitles its holder to one vote on the election of directors, certain extraordinary transactions, including a merger or sale of our Company, and amendments to our certificate of incorporation. Shares of limited voting stock are not entitled to any regular or special dividend payments or other distributions, including any dividends or other distributions declared or paid with respect to shares of our common stock or any other class or series of our stock, and are not entitled to receive any distributions in the event of liquidation or dissolution of our Company. Shares of limited voting stock have no class voting rights, except to the extent required by Delaware law. Any redemption of a unit in our Operating Partnership will be redeemed together with a share of limited voting stock in accordance with the redemption provisions of the Operating Partnership agreement, and the share of limited voting stock will be canceled and not subject to reissuance.
Incentive Partnership Units
We have issued a total of 1,377,714 incentive units as of March 31, 2012 to certain executives. Incentive units represent a profits interest in the Operating Partnership and generally will be treated as regular Operating Partnership units in the Operating

18

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Partnership and rank pari passu with the Operating Partnership units as to payment of distributions, including distributions of assets upon liquidation. Incentive units are subject to vesting, forfeiture and additional restrictions on transfer as may be determined by us as general partner of the Operating Partnership. The holder of an incentive unit has the right to convert all or a part of his vested incentive units into Operating Partnership units, but only to the extent of the incentive units’ economic capital account balance. As general partner, we may also cause any number of vested incentive units to be converted into Operating Partnership units to the extent of the incentive units’ economic capital account balance. We had 37,294,994 shares of common stock and 12,313,331 Operating Partnership units outstanding as of March 31, 2012, and 359,934 incentive units outstanding which were issued under our Incentive Plan. The share of the Company owned by the Operating Partnership unit holders is reflected as a separate component called noncontrolling interests in the equity section of our consolidated balance sheets.
Stock Compensation
We adopted the 2004 Equity Incentive Plan of Thomas Properties Group, Inc. as amended, (the “Incentive Plan”) effective upon the closing of our initial public offering and amended it in May 2007 and June 2008 to increase the shares reserved under the plan. The Incentive Plan provides incentives to our employees and is designed to attract, reward and retain personnel. We may issue up to 3,361,906 shares as either stock option awards, restricted stock awards or incentive unit awards of which 256,541, remain available for grant as of March 31, 2012, see table below for details. In addition, under our Non-Employee Directors Restricted Stock Plan (“the Non-Employee Directors Plan”) a total of 60,000 shares are reserved for grant, of which 29,065 remain available for grant.
 
March 31, 2012
Total awards authorized for issuance
3,361,906

Less:
 
Incentive unit grants
1,377,714

Restricted stock grants
1,168,267

Stock option awards, net of forfeitures
559,384

Awards available for grant
256,541


For more information on our stock incentive plan, please refer to the notes to the consolidated financial statements in our 2011 Annual Report on Form 10-K, which was filed with the SEC on March 9, 2012, and our proxy statement, which was filed with the SEC on April 30, 2012.
On February 1, 2012, we granted 199,999 restricted shares with a total fair market value of approximately $0.2 million. During the first quarter of 2011, we granted 151,601 restricted shares with a total fair market value of approximately $0.2 million and 74,378 incentive units with a total fair market value of approximately $0.1 million. For these grants, fifty percent of the restricted shares vest based on stock performance. The other fifty percent are discretionary vesting shares/units based on individual and Company goals, which are currently reserved and will be considered granted upon vesting.
During January 2012, 50,000 restricted shares subject to time vesting vested . During February 2012, 18,595 incentive units and 78,898 restricted shares subject to discretionary vesting were approved for vesting by the compensation committee of the board of directors.
Phantom Shares
During the first quarter of 2011, a Phantom Share Plan was approved by the compensation committee of the board of directors and adopted by the full board of directors, effective as of March 1, 2011. The purpose of the Plan is to reward and retain senior executive officers of the Company. This Plan is an incentive award plan that pays cash or, if the stockholders of the Company approve and authorize the issuance of additional shares, common stock. Generally, the recipient must still be employed with the Company to receive the cash or stock. There were 677,933 phantom shares granted under the plan in 2011 with a total grant date fair value of approximately $1.0 million. Each phantom share award vests upon the earlier of (i) ratably, one-third on each anniversary of the grant date, subject to achievement of (x) with respect to 50% of each award, a Company stock appreciation target rate of up to 12% pro-rated, and (y) with respect to 50% of each award, other goals determined by the Compensation Committee, in each case only to the extent that at or after such time the Company's stockholders have approved the issuance of sufficient shares of common stock under the Company's 2004 Equity Incentive Plan, as amended, or any successor thereto, to settle awards under the Plan in common stock, and (ii) the fifth anniversary of the grant date, subject to such grantee's continued employment with the Company and achievement of the Company and other goals. During the first quarter of 2012, an additional 437,950 phantom shares were granted under the plan with the same terms as the 2011 grants with

19

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

a total grant date fair value of approximately $0.9 million .
We have determined these grants should be treated as liability awards rather than equity awards in accordance with ASC 718 "Compensation - Stock Compensation", and as such, the obligation is reflected in the accounts payable and other liabilities caption on our consolidated balance sheet.
Compensation Expense
We recognized non-cash compensation expense and the related income tax benefit for the amortization of restricted stock and phantom stock grant expense as well as the remeasurement of the phantom stock awards at fair value for the three months ended March 31, 2012 and 2011 as follows (in thousands).
 
Three months ended March 31,
 
2012
 
2011
Restricted Stock and Stock Options:
 
 
 
Compensation expense
$
375

 
$
294

Income tax benefit
149

 
118

 
 
 
 
Phantom Shares:
 
 
 
Compensation expense
$
188

 
$
9

Income tax benefit
74

 
4


For the three months ended March 31, 2012 and 2011, a full valuation allowance was recorded against the income tax benefit.
Noncontrolling Interests
Noncontrolling interests on our consolidated balance sheets relate primarily to the partnership and incentive units in the Operating Partnership that are not owned by the Company. In conjunction with the formation of the Company, certain persons and entities contributing interests in properties to the Operating Partnership received Operating Partnership units. In addition, certain employees of the Operating Partnership have received incentive units in connection with services rendered or to be rendered to the Operating Partnership. Limited partners who have been issued incentive units have the right to require the Operating Partnership to redeem part or all of their incentive units upon vesting of the incentive units, if applicable. The Company may elect to acquire those incentive units in exchange for shares of the Company’s common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events, or pay cash based upon the fair market value of an equivalent number of shares of the Company’s common stock at the time of redemption.
The redemption value of the 359,934 outstanding incentive units not owned by the Company at March 31, 2012 was approximately $1.7 million based on the closing price of the Company’s common stock of $4.59 per share as of March 31, 2012.
A charge is recorded each period to the consolidated statements of income (loss) for the noncontrolling interests' proportionate share of the Company's net income (loss).
Equity is allocated between controlling and noncontrolling interests as follows (in thousands):
 
 
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2011
$
153,495

 
$
64,478

 
$
217,973

Net income (loss)
(3,120
)
 
(818
)
 
(3,938
)
Amortization of stock-based compensation
343

 
117

 
460

Dividends
(564
)
 
(186
)
 
(750
)
Offering expenses
(15
)
 

 
(15
)
Excess tax benefit due to restricted stock vesting

14

 

 
14

Balance, March 31, 2012
$
150,153

 
$
63,591

 
$
213,744


20

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


7.
Income Taxes
All operations are carried on through the Operating Partnership and its subsidiaries. The Operating Partnership is not subject to income tax and all of the taxable income, gains, losses, deductions, and credits are passed through to its partners. However, the Operating Partnership and some of its subsidiaries are subject to income taxes in the state of Texas. We are responsible for our share of the Operating Partnership's taxable income or loss allocated to us in accordance with the Operating Partnership’s Agreement of Limited Partnership. As of March 31, 2012, we held a 74.7% capital interest in the Operating Partnership. For the three months ended March 31, 2012, we were allocated a weighted average of 74.7% of the income and losses from the Operating Partnership.
Our effective tax rate for the three months ended March 31, 2012 was (1.09)%, compared to the federal statutory rate of 35%. The difference from the statutory rate is due primarily to income attributable to the non-controlling interests and the valuation allowance related to the Company's deferred tax assets for which no benefit could be provided due to their realization not meeting the “more-likely-than-not” threshold.
A net deferred tax asset, related solely to uncertain tax positions (see paragraph below regarding uncertainty in income taxes), is included in “other assets” on the Company's balance sheet. The Company's existing federal and state net operating loss carryforwards, which existed as of a deemed ownership change in 2007, are subject to a gross annual limitation under Internal Revenue Code Section 382 (“Section 382”), which is $9.9 million per year. The net operating loss carryforwards generated subsequent to the 2007 ownership change are not subject to the Section 382 limitation. As of December 31, 2011, the Company anticipates having net operating loss carryforwards of $17.9 million for federal purposes and $15.5 million for state purposes. The Company’s net operating loss carryforwards are subject to varying expirations from 2018 through 2031.
FASB ASC 740-10-30-17, “Accounting for Income Taxes,” requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years as the deferred income tax charges become currently deductible for tax reporting purposes. Due to uncertainty of future realization, we have recorded a valuation allowance in an amount by which the deferred tax assets exceed their liability for unrecognized tax benefits (see paragraph below regarding uncertainty in income taxes).
FASB ASC 740-10-25 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense, which for the three months ended March 31, 2012 was $12,000. We have not recorded any penalties with respect to unrecognized tax benefits. For the three months ended March 31, 2012, the Company has reported a decrease of $1.6 million to our unrecognized tax benefits. We do not anticipate any significant increases or decreases to the remaining amounts of the existing unrecognized tax benefits within the next twelve months, other than a reversal of accrued interest relating to unrecognized tax benefits for which the statute of limitations period will lapse during 2012.


8.
Fair Value of Financial Instruments

Our estimates of the fair value of financial instruments as of March 31, 2012 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy consists of three broad levels as follows:

1.Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities
2.Level 2 Inputs - Significant other observable inputs (can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as discounts and borrowing rates with similar terms and maturities)
3.Level 3 Inputs - Significant unobservable inputs (based on an entity's own assumptions, since there is little, if any, related market activity)

21

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The carrying amounts for cash and cash equivalents, restricted cash, rent and other receivables, accounts payable and other liabilities approximate fair value due to the short-term nature of these instruments.

The Company uses a discounted cash flow analysis to estimate the fair value of our mortgage loans. The inputs used in preparing the discounted cash flows include actual maturity dates and scheduled interest and principal payments as well as estimates for market loan-to-value ratios and discount rates. The discount rate, which is the most significant input, is estimated based on our knowledge of the market including discussions with market participants. As this input has more attributes of a Level 3 input than a Level 2 input, we classify it as such.

As of March 31, 2012 and December 31, 2011, the book and fair values of our mortgage loans were as follows (in thousands):

 
March 31, 2012
 
December 31, 2011
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Mortgage Loans
$
288,887

 
$
287,359

 
$
289,523

 
$
284,146


9.
Commitments and Contingencies
General
We have been named as a defendant in a number of lawsuits in the ordinary course of business. We believe that the
ultimate settlement of these suits will not have a material adverse effect on our financial position and results of operations.
A mortgage loan, with an outstanding balance of $17.7 million as of March 31, 2012, secured by a first trust deed on 2121 Market Street is guaranteed by our Operating Partnership and our co-general partner in the partnership that owns 2121 Market Street, up to a maximum amount of $3.3 million. 2121 Market Street is an unconsolidated real estate entity in which we have a 50% interest. See Note 4 for guarantees related to our consolidated debt.
Insurance
We maintain general liability insurance with limits of $200.0 million per occurrence and all risk property and rental value
insurance with limits of $1.3 billion per occurrence, with terrorism limits of $1.1 billion per occurrence, and flood insurance with a limit of $200.0 million per occurrence. Our California properties have earthquake insurance with coverage of $200.0 million per occurrence, subject to a deductible in the amount of 5% of the value of the affected property, up to a $200.0 million annual aggregate.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this report entitled “Risk Factors.”
When you read the financial statements and the information included in this report, you should be aware that our operations are significantly affected by both macro and micro economic forces. Our operations are directly affected by actual and perceived trends in various national and regional economic conditions that affect national and regional markets for commercial real estate services, including interest rates, the availability of credit to finance commercial real estate transactions, and the impact of tax laws affecting real estate. Periods of economic slowdown or recession, rising interest rates, tightening of the credit markets, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from investment advisory, property management, leasing and development fees.
Forward-Looking Statements

22


Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated and you should not rely on them as predictions of future events. Although information is based on our current estimates, forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Overview and Background
We are a full-service real estate operating company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. Our company’s primary areas of focus are the acquisition and ownership of interests in premier properties, property development and redevelopment, and investment and property management activities. We conduct our business through our Operating Partnership, of which we own 74.7% as of March 31, 2012 and have control over the major decisions of the Operating Partnership.

Factors That May Influence Future Results of Operations
The following is a summary of the more significant factors we believe may affect our results of operations. For a more detailed discussion regarding the factors that you should consider before making a decision to acquire shares of our common stock, see the information under the caption “Risk Factors” elsewhere in this report.
Rental income. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space, to lease currently available space as well as space in newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in the submarkets where our properties are located.
Los Angeles, Philadelphia, Austin, and Houston—Submarket Information. A significant portion of our income is derived from properties located in Los Angeles, Philadelphia, Austin and Houston. The market conditions in these submarkets have a significant impact on our results of operations.
Development. We continually evaluate the size, timing and scope of our development initiatives and, as necessary, sales activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. However, we may not be able to lease committed development properties at expected rental rates or within projected time frames or complete projects on schedule or within budgeted amounts. The occurrence of one or more of these events could adversely affect our financial condition, results of operations and cash flows. We currently have sole ownership interest in three development projects, Campus El Segundo, Four Points Centre and 2100 JFK Boulevard, as of March 31, 2012, in which we had incurred, on a consolidated basis, approximately $80.3 million of costs related to land acquisition, predevelopment and infrastructure that are reflected in "Land Improvements - Development Properties" on our consolidated balance sheet. To the extent that we do not proceed with projects as planned, development costs would need to be evaluated for impairment.

Results of Operations
The results of operations reflect the consolidation of the affiliates that own One Commerce Square, Two Commerce Square, Murano, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo and our investment advisory, property management, leasing and real estate development operations. The following properties are accounted for using the equity method of accounting (the date of acquisition is listed for each with the exception of 2121 Market Street whose date represents the year it was co-developed with our joint venture partner):

2121 Market Street (as of 2001)
City National Plaza (as of January 2003)
Reflections I (as of October 2004)
Reflections II (as of October 2004)
San Felipe Plaza (as of August 2005)
CityWestPlace (as of June 2006)
Fair Oaks Plaza (as of January 2007)
 
        

23


The following properties were disposed by TPG/CalSTRS during the fourth quarter of 2011 or, in the case of Brookhollow Central, the first quarter of 2012, and were accounted for using the equity method of accounting for the periods presented:
Four Falls Corporate Center (as of March 2005, disposed of October 2011)
Oak Hill Plaza (as of March 2005, disposed of October 2011)
Walnut Hill Plaza (as of March 2005, disposed of October 2011)
2500 CityWest (as of August 2005, disposed of November 2011)
2500 CityWest land (as of December 2005, disposed of November 2011)
Brookhollow Central I, II and III (as of August 2005, disposed of January 2012)
Centerpointe I & II (as of January 2007, disposed of December 2011)

TPG/CalSTRS, LLC also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties that were acquired in June 2007 (“Austin Portfolio Joint Venture Properties”):

San Jacinto Center
Frost Bank Tower
One Congress Plaza
One American Center
300 West 6th Street
Research Park Plaza I & II
Park Centre
Great Hills Plaza
Stonebridge Plaza II
Westech 360 I-IV

This information should be read in conjunction with the accompanying consolidated financial statements and notes included
elsewhere in this report.

Comparison of the three months ended March 31, 2012 to the three months ended March 31, 2011.
Overview

The main drivers of our consolidated results of operations are (1) two high-rise office towers, commonly referred to as
Commerce Square, located in Philadelphia, Pennsylvania, (2) Murano, a high-rise condominium project, also located in
Philadelphia, and (3) our investment advisory, management, leasing and development services business. The table below
reflects the change in leasing status of our three consolidated office properties from March 31, 2012 to March 31, 2011.
 
 
 
 
 
 
As of March 31,
 
 
 
 
 
 
2012
 
2011
 
 
Location
 
Rentable Square Feet
 
Percent Leased
 
Percent Leased
Consolidated Operating Properties:
 
 
 
 
 
 
 
 
One Commerce Square
 
Philadelphia, PA
 
942,866

 
95.7
%
 
88.2
%
Two Commerce Square
 
Philadelphia, PA
 
953,276

 
77.5
%
 
85.5
%
Four Points Centre
 
Austin, TX
 
193,862

 
31.5
%
 
24.6
%
 
 
 
 
2,090,004

 
 
 
 
We have sold 237 units at Murano as of March 31, 2012. Revenue from unit settlements increased from one unit settled in the three months ended March 31, 2011 to two units in 2012. Fee revenue from our investment advisory, management, leasing and development services business decreased $0.5 million or 9.1% for the three months ended March 31, 2012 compared to the same period for 2011. The decrease was primarily attributable to leasing commission revenues, advisor fee revenues and management fee revenues from our properties which were sold in 2011. Additionally, our net loss decreased by $0.2 million in 2012 due to a decrease in our share of loss of unconsolidated real estate entities due to the sale of a property by our TPG/CalSTRS joint venture in the quarter ended March 31, 2012.
Revenues

24


Total revenues decreased by approximately $0.4 million to $21.5 million for the three months ended March 31, 2012 from $21.9 million for the same period for 2011. The decrease was primarily due to $0.9 million decrease in tenant reimbursements due to billing adjustments in the prior year and a decrease of $0.6 million in investment advisory, management, leasing and development services for our unconsolidated real estate entities as a result of properties which were sold in 2011 and the current quarter. These decreases were offset by $0.5 million increase of rental revenue at Commerce Square due to new leases and an increase in condominium sales by $0.4 million resulting from one additional unit settling in the current period compared to the same period in the prior year.
Expenses
Total expenses decreased by approximately $0.1 million primarily as a result of the decreased interest expense of $0.5 million related to a lower interest rate due to the refinance of the Murano debt in the second quarter of 2011 as well as an amortizing principal balance, offset by the $0.4 million increase of costs related to the one additional condominium unit settled during the three months ended March 31, 2012 in comparison to the same period in 2011.
Equity in net income (loss) of unconsolidated real estate entities
Aggregate revenues for the unconsolidated real estate entities for the three months ended March 31, 2012 increased approximately $1.9 million or 2.8% to $69.4 million compared to $67.5 million for the three months ended March 31, 2011. The increase is primarily due to higher revenues within our TPG/CalSTRS joint venture resulting from increased occupancy and rental rates at City West Place and City National Plaza. Aggregate operating and other expenses for unconsolidated real estate entities increased by $2.5 million, or 7.6%, to $35.5 million for the three months ended March 31, 2012 compared to $33.0 million for three months ended March 31, 2011. The increase was due primarily to increases at City West Place, primarily for cafeteria expenses and HVAC repairs, and City National Plaza, primarily for contract cleaning, earthquake insurance, and parking operations. Interest expense increased by approximately $1.7 million, or 7.0%, to $25.9 million for the three months ended March 31, 2012 as compared to $24.2 million for the three months ended March 31, 2011. The increase was due primarily to higher interest rates and greater outstanding loan balances on the Austin Portfolio Bank Term Loan and the Austin Senior Secured Priority Facility. Income (loss) associated with real estate held for disposition increased by approximately $2.0 million, or 111.1%, to income of $0.2 million for the three months ended March 31, 2012 compared to a loss of $1.8 million for the three months ended March 31, 2011. Net income for the three months ended March 31, 2012 includes a partial month of operation results from Brookhollow, which was sold in January 2012. The net loss for the three months ended March 31, 2011 included a full year's operating results from 2500 City West Boulevard, Centerpointe and Brookhollow.

25


Set forth below is a summary of the combined financial information for the unconsolidated real estate entities, our share of net income (loss) and our equity in net income (loss), after intercompany eliminations, for three months ended March 31, 2012 and 2011 (in thousands):
 
2012
 
2011
Revenue
$
69,404

 
$
67,495

Expenses:
 

 
 
Operating and other expenses
35,543

 
32,981

Interest expense
25,879

 
24,160

Depreciation and amortization
23,097

 
23,384

Total expenses
84,519

 
80,525

Loss from continuing operations
(15,115
)
 
(13,030
)
Income (loss) associated with real estate held for disposition
182

 
(1,787
)
Net income (loss)
$
(14,933
)
 
$
(14,817
)
Thomas Properties’ share of net income (loss)
(1,218
)
 
(1,415
)
Intercompany eliminations
1,196

 
721

Equity in net income (loss) of unconsolidated real estate entities
$
(22
)
 
$
(694
)
Benefit (provision) for income taxes
Provision for income taxes decreased to $0.04 million for the three months ended March 31, 2012 from $0.1 million for the same period in 2011. This change is primarily due to interest on certain unrecognized tax benefits that no longer exist as of March 31, 2012.

Liquidity and Capital Resources
Analysis of liquidity and capital resources
As of March 31, 2012, we have unrestricted cash and cash equivalents of $80.3 million. We believe that we will have sufficient capital to satisfy our liquidity needs over the next 12 months through cash flows from operations. We expect to meet our long-term liquidity requirements, including debt service, property acquisitions and additional future development and redevelopment activity, through cash flow from operations, additional secured and unsecured long-term borrowings, dispositions of non-strategic assets, and the potential issuance of additional debt, or common or preferred equity securities, including convertible securities.
The only loans in our portfolio with maturity dates in 2012 without extension options are secured by properties held by unconsolidated real estate entities. Specifically, Research Park Plaza I and II and Stonebridge Plaza II, two properties located in suburban Austin, have loans maturing on June 9, 2012, totaling $51.5 million and $37.5 million, respectively, of which our share is $3.2 million and $2.3 million, respectively. We intend to extend or refinance these loans, which may require some level of additional capital. Additionally, there is a note payable to a former unaffiliated partner at City National Plaza of $19.8 million, of which our share is $1.6 million, due on July 1, 2012. We intend to satisfy our share of this obligation from our available cash.
We have $8.1 million of scheduled principal payments on consolidated debt in 2012. We believe that we have sufficient capital to satisfy these obligations when due.
As of March 31, 2012, we have unfunded capital commitments to TPG/CalSTRS of $13.6 million. We are obligated to fund tenant improvements and other capital improvements for properties that were acquired prior to June 1, 2007. We estimate we will fund approximately $2.2 million between 2012 and 2014 to satisfy our share of contractual obligations existing at March 31, 2012 for capital improvements, tenant improvements and leasing commissions.
Our board of directors declared quarterly cash dividends to common stockholders of $0.015 per common share, which were paid in December 2011 and March 2012. Additionally, on May 3, 2012, our board of directors declared a cash dividend to common stockholders of $0.015 per common share payable on June 1, 2012 to the stockholders of record as of the close of business on May 18, 2012. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. With respect to our joint venture properties, we do not solely control decision making with respect to these properties, and may not be able to obtain monies from these properties even if funds are available for distribution to us. In addition, we may enter future financing arrangements that contain restrictions on our use of cash generated from our properties. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors.

26



Development
We own interests in three development projects, Campus El Segundo, Four Points Centre and 2100 JFK Boulevard. TPG/CalSTRS owns one development site, CityWestPlace, which is comprised of 25 acres. If we decide to develop any of these land holdings, we anticipate seeking to mitigate our development risk by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. The amount and timing of costs associated with our development projects is inherently uncertain due to market and economic conditions. We presently intend to fund development expenditures primarily through construction and permanent financing.
Leasing, Tenant Improvement and Capital Needs
In addition to our development projects, our One Commerce Square and Two Commerce Square properties require capital maintenance and expenditures for leasing commissions and tenant improvement costs. The level of these expenditures varies from year to year based on several factors, including lease expirations. There are commitments to incur expenditures of approximately $7.7 million in capital improvements, tenant improvements, and leasing commissions for Commerce Square collectively, during 2012 through 2013. Additionally, we expect to expend additional amounts in connection with a value-enhancement program at Commerce Square. During November 2010, subsidiaries of TPG and Brandywine entered into two partnership arrangements with respect to our One Commerce Square and Two Commerce Square properties. Brandywine has contributed capital of $6.5 million as of March 31, 2012, with the balance to be contributed by December 31, 2012, totaling $25 million of preferred equity in return for a 25% limited partnership interest in each property. The preferred equity will be invested in the value-enhancement program designed to increase rental rates and occupancy at Commerce Square, and to also fund the $7.7 million of existing commitments described above.
Annual capital expenditures may fluctuate in response to the nature, extent and timing of improvements required to maintain our properties. Tenant improvements and leasing costs may also fluctuate depending upon other factors, including the type of property involved, the existing tenant base, terms of leases, types of leases, the involvement of leasing agents and overall market conditions.
Contractual Obligations
A summary of our contractual obligations at March 31, 2012 is as follows (in thousands):
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
 
Total
Regularly scheduled
   principal payments
$
8,094

 
$
1,946

 
$
1,884

 
$
1,996

 
$

 
$

 
$
13,920

Balloon payments due at
  maturity (1)(2)(3)(4)
38,696

 
115,062

 

 

 
121,209

 

 
274,967

Interest payments—fixed
   rate debt (5)
10,662

 
10,055

 
7,135

 
7,024

 
591

 

 
35,467

Interest payments—variable
   rate debt (5)

 

 

 

 

 

 

Capital commitments (6)
1,989

 
371

 
21

 

 
79

 
236

 
2,696

Operating lease (7)
243

 
335

 
122

 

 

 

 
700

Obligations associated with
   uncertain tax positions (8)

 

 

 

 

 

 

Total
$
59,684

 
$
127,769

 
$
9,162

 
$
9,020

 
$
121,879

 
$
236

 
$
327,750

 _________________________
(1)
Included within these balloon payments is $106.4 million due under the Two Commerce Square mortgage loan, which matures on May 9, 2013. We intend to extend or refinance this mortgage loan at maturity.
(2)
Included within these balloon payments are amounts due under the Four Points Centre construction loan, which matures on July 31, 2012 with two one-year extension options subject to certain conditions. We have provided a guarantee for a portion of principal and interest payable. We have also provided collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings. The first option to extend is subject to a 75% loan-to-value ratio and a minimum debt yield of 8.0%, among other things. If these requirements are not met, we can pay down the principal balance in an amount sufficient to satisfy these requirements. The debt yield is calculated by dividing the net operating income of the property by the outstanding principal balance of the loan. Through March 31, 2012, the property has been generating net operating losses. We paid down the principal amount of the loan by $2.0 million during 2011. The loan has an unfunded balance of $6.5 million which is available to fund any remaining

27


project costs. The interest rate on the loan is LIBOR plus 3.50% per annum. The balance of the loan as of March 31, 2012 was $24.2 million.
(3)
The Murano mortgage loan has a balance of $15.1 million as of March 31, 2012. The loan bears interest at the one-month LIBOR plus 3.75% and the interest rate as of March 31, 2012 was 4.0% per annum. The loan is scheduled to mature on December 15, 2013. On each June 30th and December 31st through and including June 30, 2013, the loan is required to be reduced to a stated maximum balance. On June 30, 2012 and December 31, 2012, the next amortization dates, we will be required to make a rebalancing payment if the outstanding principal amount on such dates exceed $12.9 million and $8.6 million, respectively. Repayment of this loan is being made with proceeds from the sales of condominium units. TPG is subject to a limited guaranty which (i) guarantees repayment of the loan in the event of certain bankruptcy events affecting the borrower, (ii) guarantees payment of the lender's damages from customary “bad boy” actions of the borrower or TPG (such as fraud, physical waste of the property, misappropriation of funds and similar bad acts); and (iii) guarantees payment of the amount, if any, by which the loan balance exceeds 80% of the bulk sale value of the collateral upon an acceleration of the loan triggered by a borrower default.
(4)
The Campus El Segundo mortgage loan has a balance of $14.5 million as of March 31, 2012. The loan is scheduled to mature on October 31, 2012 with two one-year extension options remaining, subject to our compliance with certain covenants, with a final maturity date of October 31, 2014. The interest rate as of March 31, 2012 was 4.0% per annum. A payment of up to $2.5 million is due at the time of each extension in order that the loan balance not exceed $12.0 million and $9.5 million at October 31, 2013 and October 31, 2014, respectively. We have guaranteed this loan. We have agreed to certain financial covenants on this loan as the guarantor, with which we were in compliance as of March 31, 2012.
(5)
As of March 31, 2012, 81.4% of our debt was at contractually fixed rates ranging from 5.67% to 6.30%. The information in the table above reflects our projected interest obligations for the fixed-rate payments based on the contractual interest rates and scheduled maturity dates. The remaining 18.6% of our debt bears interest at variable rates based on LIBOR plus a spread that ranges from 3.50% to 3.75%. The interest payments on the variable rate debt have not been reported in the table above because we cannot reasonably determine the future interest obligations on our variable rate debt as we cannot predict what LIBOR rates will be in the future. As of March 31, 2012, one-month LIBOR was 0.24%.
(6)
Capital commitments of our Company and consolidated subsidiaries include approximately $7.7 million of tenant improvements and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square, of which $3.7 million is expected to be paid in 2012. The full amount will be funded by our partner, Brandywine, through preferred equity contributions and is not reflected on the Contractual Obligations table. Additionally, our Company and consolidated subsidiaries have capital commitments of approximately $0.2 million of tenant improvements and leasing commissions for certain tenants in Four Points Centre of which the entire amount is expected to be paid in 2012. We have an unfunded capital commitment of $13.6 million to our TPG/CalSTRS joint venture, of which we estimate we will fund $1.8 million in 2012 for contractual obligations existing as of March 31, 2012. We are not obligated to fund our share for the acquisition of any new project, but we are obligated to fund tenant improvements and other capital improvements for projects that were acquired prior to June 1, 2007.
(7)
Represents the future minimum lease payments on our operating lease for our corporate office at City National Plaza, which expires in May 2014. The table does not reflect available extension options.
(8)
The obligations associated with uncertain tax positions in the table above should represent amounts associated with uncertain tax positions related to temporary book-tax differences. However, reasonable estimates cannot be made about the amount and timing of payment, if any, for these obligations. As of March 31, 2012, $12.1 million of unrecognized tax benefits have been recorded as liabilities in accordance with FASB ASC 740, and we are uncertain as to if and when such amounts may be settled. Additionally, as of March 31, 2012, there is $0.3 million of accrued interest recorded with respect to such unrecognized tax benefits. We have not recorded any penalties with respect to unrecognized tax benefits.




28


Off-Balance Sheet Arrangements—Indebtedness of Unconsolidated Real Estate Entities
As of March 31, 2012, our Company had investments in entities owning unconsolidated properties with stated ownership percentages ranging from 6.25% to 50%. We account for these investments using the equity method of accounting.
The table below summarizes the outstanding debt for these properties as of March 31, 2012 (in thousands). None of these loans are recourse to us other than as noted in footnote 2 below. Some of the loans listed in the table below subject TPG/CalSTRS to customary non-recourse carve out obligations.
 
Interest Rate at March 31, 2012
 
Principal
Amount
 
Maturity
Date
 
Maturity
Date at End of
Extension Options
City National Plaza
 
 
 
 
 
 
 
 
 
Mortgage loan
 
 
5.90
%
 
$
350,000

 
7/1/2020
 
7/1/2020
Note payable to former partner (1)
 
 
5.75
%
 
19,758

 
7/1/2012
 
7/1/2012
CityWestPlace
 
 
 
 
 
 
 
 
 
Mortgage loan - Buildings I & II
 
 
6.16
%
 
120,132

 
7/6/2016
 
7/6/2016
Mortgage loan - Buildings III & IV
 
 
5.03
%
 
95,000

 
3/5/2020
 
3/5/2020
San Felipe Plaza
 
 
 
 
 
 
 
 
 
Mortgage loan
 
 
4.78
%
 
110,000

 
12/1/2018
 
12/1/2018
2121 Market Street mortgage loan (2)
 
 
6.05
%
 
17,715

 
8/1/2033
 
8/1/2033
Reflections I mortgage loan
 
 
5.23
%
 
20,854

 
4/1/2015
 
4/1/2015
Reflections II mortgage loan
 
 
5.22
%
 
8,687

 
4/1/2015
 
4/1/2015
Fair Oaks Plaza
 
 
5.52
%
 
44,300

 
2/9/2017
 
2/9/2017
Austin Portfolio Joint Venture Properties:
 
 
 
 
 
 
 
 
 
San Jacinto Center
 
 
 
 
 
 
 
 
 
Mortgage loan-Note A
 
 
6.05
%
 
43,000

 
6/11/2017
 
6/11/2017
Mortgage loan-Note B
 
 
6.05
%
 
58,000

 
6/11/2017
 
6/11/2017
Frost Bank Tower
 
 
 
 
 
 
 
 
 
Mortgage loan-Note A
 
 
6.06
%
 
61,300

 
6/11/2017
 
6/11/2017
Mortgage loan-Note B
 
 
6.06
%
 
88,700

 
6/11/2017
 
6/11/2017
One Congress Plaza
 
 
 
 
 
 
 
 
 
Mortgage loan-Note A
 
 
6.08
%
 
57,000

 
6/11/2017
 
6/11/2017
Mortgage loan-Note B
 
 
6.08
%
 
71,000

 
6/11/2017
 
6/11/2017
One American Center
 
 
 
 
 
 
 
 
 
Mortgage loan-Note A
 
 
6.03
%
 
50,900

 
6/11/2017
 
6/11/2017
Mortgage loan-Note B
 
 
6.03
%
 
69,100

 
6/11/2017
 
6/11/2017
300 West 6th Street
 
 
6.01
%
 
127,000

 
6/11/2017
 
6/11/2017
Research Park Plaza I & II (3)(4)
 
 
 
 
 
 
 
 
 
Senior mortgage loan
LIBOR
+
0.55
%
 
23,560

 
6/9/2012
 
6/9/2012
Mezzanine loan
LIBOR
+
2.01
%
 
27,940

 
6/9/2012
 
6/9/2012
Stonebridge Plaza II (3)(4)
 
 
 
 
 
 
 
 
 
Senior mortgage loan
LIBOR
+
0.63
%
 
19,800

 
6/9/2012
 
6/9/2012
Mezzanine loan
LIBOR
+
1.76
%
 
17,700

 
6/9/2012
 
6/9/2012
Austin Portfolio Bank Term Loan (5)
LIBOR
+
3.25
%
 
124,972

 
6/1/2013
 
6/1/2013
Austin Senior Priority Financing (6)
10% to 20%
 
 
77,067

 
6/1/2012
 
6/1/2012
Total outstanding debt of all unconsolidated properties
 
 
 
 
$
1,703,485

 
 
 
 

The 30 day LIBOR rate for the loans above was 0.24% at March 31, 2012, except for the Austin Bank Term Loan (see footnotes 6 and 7).
_________________________
(1)
During the second quarter of 2009, TPG/CalSTRS redeemed a 15% membership interest held by a noncontrolling owner in the City National Plaza partnership. The redemption price of $19.8 million was financed with a promissory note issued by the former partner and due in 2012. The former partner may extend the maturity date to January 4, 2016 with respect to $0.5 million or more of the principal amount of this promissory note.
(2)
The 2121 Market Street mortgage loan is prepayable without penalty after May 1, 2013, at which date the outstanding principal amount of this loan will be approximately $17.2 million. The interest rate will increase to the greater of 8.1% or

29


the treasury rate plus 2.0% on August 1, 2013. Any amounts over the initial interest rate may be deferred to the extent excess cash is not available to make such payments. Provided there is no deferred interest, the loan balance will be fully amortized on August 1, 2033, the maturity date of the loan. The loan is guaranteed by our Operating Partnership and our co-general partner in the partnership that owns 2121 Market Street, up to a maximum amount of $3.3 million.
(3)
The partnership that owns each property has purchased interest rate cap agreements for the funded portion of these loans.
(4)
The borrower intends to extend or refinance these loans, which may require some level of additional capital.
(5)
The margin above LIBOR on the bank term loan is subject to adjustment under certain circumstances. Effective January 1, 2012, the margin was increased by 2.5% due to non-compliance with financial covenants. The interest resulting from this margin adjustment is payable in-kind, and therefore, increases the outstanding principal amount of the bank term loan. As of March 31, 2012, the adjusted interest rate was 6.0%. The term loan is secured by mortgages on three of the Austin Portfolio Joint Venture properties and a pledge of equity interests in the remaining seven Austin Portfolio Joint Venture properties. These mortgage liens and equity pledges also secure the Austin Senior Priority Facility, which has a priority right to repayment ahead of the Austin Portfolio Bank Term Loan. The LIBOR rate is calculated as a Eurodollar Option Loan. Subsequent to March 31, 2012, the lender funded $9.0 million to the Austin Portfolio Joint Venture in the form of a protective advance to mitigate the effects of a cash deficit. The protective advance bears interest at 20% per annum, which is paid current.
(6)
We and our partners in the Austin Portfolio have funded $60.0 million of senior priority financing, which together with accrued interest has a balance of $77.1 million as of March 31, 2012, and is senior to the Austin Portfolio bank loan. Our share of the funding and accrued interest was $4.8 million, and is accounted for as equity. The Austin Senior Priority Financing bears interest at 10% per annum on the first $24 million, 15% per annum on the next $12 million and 20% per annum on the last $24 million. Accrued interest as of March 31, 2012, was $17.1 million. The facility matures on June 1, 2012. In the event of a maturity default, the exercise of remedies would require the consent of at least two of the three partners/lenders.

Cash Flows
Comparison of three months ended March 31, 2012 to three months ended March 31, 2011
Cash and cash equivalents were $80.3 million and $39.6 million as of March 31, 2012 and 2011, respectively. The comparison between the two periods is summarized below:
 
Three months ended March 31,
 
2012
 
2011
 
Increase
(Decrease)
 
(in thousands)
Net cash provided by (used in) operating activities
$
(8,920
)
 
$
(7,369
)
 
$
(1,551
)
Net cash provided by (used in) investing activities
7,210

 
(103
)
 
7,313

Net cash provided by (used in) financing activities
2,670

 
4,711

 
(2,041
)
Net increase in cash and cash equivalents
960

 
(2,761
)
 
3,721

Cash and cash equivalents at beginning of year
79,320

 
42,363

 
36,957

Cash and cash equivalents at end of period
$
80,280

 
$
39,602

 
$
40,678


Our cash flows from operating activities are primarily dependent upon the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, revenues generated and collected from our investment advisory, management, leasing and development services and the level of operating expenses and other general and administrative costs. Net cash used in operating activities was $8.9 million for the three months ended March 31, 2012, which represented an increase of $1.6 million from the net cash used in operations of $7.4 million for the three months ended March 31, 2011. This was primarily due to an increase of $1.8 million in accounts receivable from our unconsolidated real estate entities due to an increase in lease commissions receivable, as well as increased intercompany amounts due from our Austin Portfolio Joint Venture properties, as of March 31, 2012 offset by a decrease in net loss of $0.3 million for the three months ended March 31, 2012 compared to three months ended March 31, 2011.

Our net cash generated by or used in investing activities is generally impacted by the sale of condominium units at Murano, contributions and distributions related to our investments in unconsolidated real estate entities, the funding of development and redevelopment projects and recurring and non-recurring capital expenditures. Net cash provided by investing activities increased by $7.3 million to $7.2 million for the three months ended March 31, 2012 compared to $0.1 million used in

30


investing activities for the three months ended 2011. The increase was primarily due to higher distributions from our unconsolidated real estate entities of $8.0 million, primarily due to the sale of our Brookhollow property during the current quarter. This was offset by $0.9 million increase in contributions to our unconsolidated real estate entities during the three months ended March 31, 2012 with no corresponding contribution during 2011.

Our net cash provided by or used in financing activities is generally impacted by our borrowings, and capital activities net of dividends and distributions paid to common stockholders and non-controlling interests. Net cash provided by financing activities decreased by $2.0 million to $2.7 million for the three months ended March 31, 2012 compared to $4.7 million provided by financing activities for the three months ended March 31, 2011. The decrease was primarily a result of dividends paid in the amount of $0.8 million during the three months ended March 31, 2012, with no corresponding amount in the comparable quarter. Additionally, the change in restricted cash decreased by $0.6 million due to the release of capital reserve funds related to Two Commerce Square during the three months ended March 31, 2011 with no corresponding amounts during 2012. There was also no contributions from our noncontrolling interest partners during the current year as compared to a contribution of $0.4 million during the prior year. Furthermore, there was a decrease of $0.2 million of proceeds from mortgage loans from $0.5 million during three months ended March 31, 2011 to $0.3 million in three months ended March 31, 2012 and an increase in principal payments on mortgage loans of $0.1 million during the three months ended March 31, 2012 partially due to one additional condominium unit settlement in the current year.

Inflation
Substantially all of our office leases provide for tenants to reimburse us for increases in real estate taxes and operating expenses related to the leased space at the applicable property. In addition, many of the leases provide for increases in fixed base rent. We believe that inflationary increases in real estate taxes and operating expenses may be partially offset by the contractual rent increases and expense reimbursements as described above. We have one multi-family residential rental property, which is located in the Philadelphia central business district and subject to short-term leases. Inflationary increases can often be offset by increased rental rates; however, a weak economic environment may restrict our ability to raise rental rates.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A primary market risk faced by our Company is interest rate risk. Our strategy is to match as closely as possible the expected holding periods and income streams of our assets with the terms of our debt. In general, we use floating rate debt on assets with higher growth prospects and less stability to their income streams. Correspondingly, with respect to stabilized assets with lower growth rates, we will generally use longer-term fixed-rate debt. As of March 31, 2012, our Company had $53.8 million of outstanding consolidated floating rate debt, which is not subject to an interest rate cap.
The unconsolidated real estate entities have total debt of $1.7 billion, of which $214.0 million bears interest at floating rates. As of March 31, 2012, interest rate caps have been purchased for $89.0 million of the floating rate loans.
Our fixed and variable rate consolidated long-term debt at March 31, 2012 consisted of the following (in thousands):
 
Year of Maturity
Fixed Rate
 
Variable
Rate
 
Total
2012
$
1,619

 
$
38,696

 
$
40,315

2013
108,392

 
15,091

 
123,483

2014
1,884

 

 
1,884

2015
1,996

 

 
1,996

2016
121,209

 

 
121,209

Thereafter

 

 

Total
$
235,100

 
$
53,787

 
$
288,887

Weighted average interest rate
5.95
%
 
3.89
%
 
5.57
%
We utilize sensitivity analyses to assess the potential effect on interest costs of our variable rate debt. At March 31, 2012, our variable rate long-term debt represents 18.6% of our total long-term debt. If interest rates were to increase by 75 basis points, or by approximately 19.3% of the weighted average variable rate at March 31, 2012, the net impact would be increased interest costs of $0.4 million per year.
As of March 31, 2012, the estimated fair value of our mortgage loans aggregates $287.4 million, compared to the aggregate carrying value of $288.9 million.


31



ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b), promulgated by the SEC under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rules 13a-15(f) or 15(d)-15(f) under the Exchange Act that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II. OTHER INFORMATION

ITEM 1A.
RISK FACTORS
Risks Related to Our Business and Our Properties
We generate a significant portion of our revenues from our joint venture and our separate account management agreements with CalSTRS, and if we were to lose these relationships, our financial results would be significantly negatively affected.
Our joint venture and separate account management agreement relationships with CalSTRS provide us with substantial fee revenues. For the three months ended March 31, 2012, approximately 20.2% of our revenue has been derived from fees earned from these relationships.
We cannot assure you that our joint venture and separate account management relationships with CalSTRS will continue, and, if they do not, we may not be able to replace these relationships with other strategic alliances that would provide comparable revenues. Our interest in the TPG/CalSTRS joint venture is subject to a buy-sell provision, which permits CalSTRS to purchase our interest in TPG/CalSTRS at any time. Under the buy-sell provision either our Operating Partnership or CalSTRS can initiate a buy-out of the other's interest at any time by delivering a notice to the other specifying a purchase price for all the joint venture's assets; the other venture partner then has the option to sell its joint venture interest or purchase the interest of the initiating venture partner. The purchase price is based on what each venture partner would receive on liquidation if the joint venture's assets were sold for the specified price and the joint venture's liabilities paid and the remaining assets distributed to the joint venture partners.
In addition, upon the occurrence of certain events of default by the Operating Partnership under the joint venture agreement or related management, development service and leasing agreements, upon bankruptcy of our Operating Partnership, or upon the death or disability of either James A. Thomas, our Chairman, President and CEO, or John R. Sischo, our Co-Chief Operating Officer, or the failure of either of them to devote the necessary time to perform their duties (unless replaced by an individual approved by CalSTRS) (each, a “Buyout Default”), CalSTRS may elect to purchase our joint venture interest based on a three percent discount to the appraised fair market value at the time of the Buyout Default.

32


The joint venture agreement with CalSTRS also prohibits any transfer of securities of the Company or limited partnership units in our Operating Partnership that would result in Mr. Thomas, his immediate family and any entities controlled thereby owning less than 30% of our securities entitled to vote for the election of directors; provided, that in connection with the issuance of additional Company shares in one or more public offerings, Mr. Thomas, his immediate family and controlled entities may reduce their collective ownership interest to no less than 10% of the total common shares and Operating Partnership units and no less than 15.0 million shares and Operating Partnership units on a collective basis.
Most of our fee arrangements under our separate account relationship with CalSTRS are terminable on 30 days' notice. Termination of either our joint venture or separate account relationship with CalSTRS would adversely affect our revenue and profitability and our ability to achieve our business plan by reducing our fee income and access to co-investment capital to acquire additional properties. 
Our joint venture investments may be adversely affected by our lack of control or input on decisions or shared decision-making authority or disputes with our co-venturers.
Many of our operating properties are owned through a joint venture or partnership with other parties. As a result, we do not exercise sole decision-making authority regarding such joint venture properties, including with respect to cash distributions or the sale of such properties. Furthermore, we may co-invest in the future through other partnerships, joint ventures or other entities, acquiring non-controlling interests or sharing responsibility for managing the affairs of a property, partnership or joint venture. Investments in partnerships, joint ventures, funds or other entities may, under certain circumstances, involve risks, including partners who may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. These investments may also have the risk of impasses on significant decisions, because neither we nor our partner or co-venturer would have full control over the partnership or joint venture. Future disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their full time and effort on our business. In addition, under the principles of agency and partnership law, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers, such as if a partner or co-venturer became bankrupt and defaulted on its reimbursement and contribution obligations to us, subjecting the property owned by the partnership or joint venture to liabilities in excess of those contemplated by the partnership or joint venture agreement, or incurred debts or liabilities on behalf of the partnership or joint venture in excess of the authority granted by the partnership or joint venture agreement. In some joint ventures or other investments we make, if the entity in which we invest is a limited partnership, we have acquired and may acquire in the future all or a portion of our interest in such partnership as a general partner. In such event, we may be liable for all the liabilities of the partnership, although we attempt to limit such liability to our investment in such partnership by investing through a subsidiary.
Our joint venture partners have rights under our joint venture agreements that could adversely affect us.
As of March 31, 2012, we held interests in 16 of our properties through TPG/CalSTRS, 10 of which are held indirectly through TPG/CalSTRS' interest in the Austin Portfolio Joint Venture. TPG/CalSTRS requires a unanimous vote of the joint venture's management committee on certain major decisions, including approval of annual business plans and budgets, financings and refinancings, and additional capital calls not in compliance with an approved annual plan. The management committee currently consists of two members appointed by CalSTRS and one member appointed by the Operating Partnership. All other decisions, including sales of properties, are made based upon a majority decision of the management committee. Thus CalSTRS has the ability to control certain decisions for the joint venture that may result in an outcome contrary to our interests. The Operating Partnership has the responsibility and authority to carry out day to day management of the joint venture and to implement the annual plans approved by the management committee. In addition to CalSTRS' ability to control certain decisions relating to the joint venture, our joint venture agreement with CalSTRS includes provisions negotiated for the benefit of CalSTRS that could adversely affect us. Unless otherwise determined by the management committee of the joint venture, we are required to use diligent efforts to sell each joint venture property generally within five years of that property reaching stabilization, except that the holding period for Reflections I and Reflections II will be separately determined by the joint venture management committee. With respect to these two properties, we are required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period. We have a right of first offer to purchase a joint venture property upon a required sale at a price we propose, and if CalSTRS accepts our offer we must close within 90 days. If we do not exercise the right of first offer and we subsequently fail to effect a sale by the end of the specified holding period, CalSTRS has the right to assume control of the sale process. This may require us to sell one or more of our assets at an inopportune time, or for prices that are lower than could be achieved if we had more flexibility in the timing for effecting sales.
In June 2007, a wholly-owned subsidiary of TPG/CalSTRS entered into a partnership agreement and syndication agreement with an affiliate of Lehman Brothers Inc. (“Lehman”) in relation to the Austin Portfolio Joint Venture. As of March 31, 2012, one-third of the Lehman affiliate's original 75% equity interest in the Austin Portfolio Joint Venture had been

33


sold to an unrelated institutional investor and the Lehman affiliate held 50% of the equity in the Austin Portfolio Joint Venture. The Lehman affiliate has the right to reduce or eliminate certain fees and payments otherwise payable to TPG/CalSTRS under the partnership agreement. The Lehman affiliate has certain approval rights with respect to major decisions of the Austin Portfolio Joint Venture, although the TPG/CalSTRS subsidiary is in charge of operating, leasing and managing the Austin Portfolio Joint Venture assets within approved budgets and guidelines.
The major decision approval rights of the Lehman affiliate include, but are not limited to, the right to approve annual business plans and budgets, financings and refinancings, sales of properties, additional capital calls not in compliance with an approved annual plan, and agreements with affiliates. The other limited partner in the Austin Portfolio Joint Venture also has approval rights over some of these major decisions.
In addition, the Lehman affiliate can require the sale of one Central Business District asset and one suburban asset by the Austin Portfolio Joint Venture at any time after June 1, 2011; further, the Lehman affiliate can require the sale of the balance of the Austin Portfolio Joint Venture assets after June 1, 2012, in each case subject to a right of first offer in favor of the other partners in the Austin Portfolio Joint Venture. The limited partners also have the right to remove the general partner under certain circumstances. These rights could adversely affect TPG/CalSTRS and us.
In November 2010, our subsidiaries entered into amended and restated partnership agreements and contribution agreements with subsidiaries of Brandywine Operating Partnership, L.P., a Delaware limited partnership (“Brandywine”), with respect to our One Commerce Square and Two Commerce Square buildings in Philadelphia, Pennsylvania. Brandywine contributed capital, and committed to additional capital contributions to the existing owners of the buildings, in return for a 25% limited partnership interest in each building. Our wholly-owned subsidiaries are the general partners of the Commerce Square partnerships, with authority to manage and carry out the day to day business of the partnerships, subject only to approval by Brandywine of certain specified major decisions, including approval of certain capital budgets, leasing budgets and leasing guidelines, financing or refinancing of each building, and certain major leases. We retained sole approval over the operating budgets and other decisions that are not major decisions. Brandywine has the right to purchase all of the Company's interest in each of the buildings subject to the retention of a nominal interest by the Company with an allocation of mortgage debt for a minimum of five years, which right is exercisable between October 31, 2016 and April 30, 2017. The exercise of such call right triggers certain rights and obligations of the Company, including the right to elect to market our interests in the buildings to third parties to achieve a price for our interests that we deem to be acceptable. If the Company deems a third party bid for our interests to be acceptable, then under certain conditions Brandywine will have a right of first refusal to purchase our interests for the same price and terms offered by the third party. If Brandywine does not exercise, or does not have, such right of first refusal, and if we elect to sell our interests in Commerce Square to a third party, Brandywine has a right to “piggyback” on such sale and sell its interests in Commerce Square to the third party on the same terms. We retain, as general partner, the right to sell the Commerce Square buildings at any time, but Brandywine has certain rights to acquire our interests in Commerce Square in lieu of such a sale of the buildings to a third party, as long as we receive the same amount we would have received on a sale to a third party. Finally, on or after the 10th anniversary of the admission of Brandywine as a partner, either the Company or Brandywine may elect to cause the sale of the Commerce Square buildings and dissolve the partnerships, which will give the other party the right to trigger a buy-sell procedure for the purchase of the electing partner's interest in the partnerships.
We may not receive funding from our joint venture partners in connection with proposed acquisitions, which could adversely affect our growth.
We have entered into, and may enter into in the future, certain joint venture acquisition arrangements with third parties in which we identify potential acquisition properties on behalf of the joint venture, and a portion (in some cases, a substantial portion) of the capital required for each project would be funded by our joint venture partners. Although our joint venture partners have committed to fund property acquisitions, such joint venture partners may decide not to fund a particular or any potential acquisition properties for any number of reasons, including such entities may not have the capital necessary to fund projects at the time of the proposed acquisition. Accordingly, if we identify potential acquisition opportunities in the future for these programs, we may not receive approval and/or funding from joint venture partners, notwithstanding any prior commitments for funding. If we do not make any acquisitions under existing or future joint ventures, it could adversely affect our ability to grow our business in accordance with our business plan.
We depend on significant tenants, and their failure to pay rent could seriously harm our operating results and financial condition.
As of March 31, 2012, the 20 largest tenants for properties in which we held an ownership interest collectively leased 36.2% of the rentable square feet of space at properties in which we hold an ownership interest, representing 41.7% of the total annualized rent generated by these properties.
Any of our tenants may experience a downturn in its business, which may weaken such tenant's financial condition. As a result, tenants may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its

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