TIER REIT INC - FORM 10-Q - November 4, 2015

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EX-32.1 - EXHIBIT 32.1 - TIER REIT INCtier-9302015xex321.htm
EX-31.1 - EXHIBIT 31.1 - TIER REIT INCtier-9302015xex311.htm
EX-31.2 - EXHIBIT 31.2 - TIER REIT INCtier-9302015xex312.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
 
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended September 30, 2015
OR 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  _________ to _________                    
Commission File Number: 001-37512
TIER REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
68-0509956
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer
Identification No.)
 
5950 Sherry Lane, Suite 700, Dallas, Texas 75225
(Address of principal executive offices)
(Zip code)
 
(972) 483-2400
(Registrant’s telephone number, including area code) 
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark 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 o
Non-accelerated filer x
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý
 
As of October 30, 2015, TIER REIT, Inc. had 47,431,296 shares of common stock, $.0001 par value, outstanding.



TIER REIT, INC.
FORM 10-Q
Quarter Ended September 30, 2015
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I
FINANCIAL INFORMATION
Item 1.                                 Financial Statements
TIER REIT, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 
September 30, 2015
 
December 31, 2014
Assets
 

 
 

Real estate
 

 
 

Land
$
184,318

 
$
286,430

Land held for development
44,834

 
—

Buildings and improvements, net
1,361,270

 
1,482,336

Total real estate
1,590,422

 
1,768,766

Cash and cash equivalents
7,769

 
31,442

Restricted cash
16,615

 
35,324

Accounts receivable, net
74,817

 
83,380

Prepaid expenses and other assets
22,875

 
7,129

Investments in unconsolidated entities
85,377

 
39,885

Deferred financing fees, net
12,826

 
10,783

Lease intangibles, net
85,869

 
94,690

Other intangible assets, net
10,185

 
2,144

Assets associated with real estate held for sale
—

 
137,640

Total assets
$
1,906,755

 
$
2,211,183

Liabilities and equity
 

 
 

Liabilities
 

 
 

Notes payable
$
1,089,629

 
$
1,194,085

Accounts payable
1,477

 
2,790

Payables to related parties
302

 
2,041

Accrued liabilities
72,719

 
77,375

Acquired below-market leases, net
13,321

 
16,984

Distributions payable
8,556

 
—

Other liabilities
30,642

 
21,405

Obligations associated with real estate held for sale
—

 
108,343

Total liabilities
1,216,646

 
1,423,023

Commitments and contingencies


 


Series A Convertible Preferred Stock
2,700

 
4,626

Equity
 

 
 

Preferred stock, $.0001 par value per share; 17,490,000 shares authorized, none outstanding
—

 
—

Convertible stock, $.0001 par value per share; 1,000 shares authorized, none outstanding
—

 
—

Common stock, $.0001 par value per share; 382,499,000 shares authorized, 47,241,851 and 49,877,350 shares issued and outstanding at September 30, 2015, and December 31, 2014, respectively (1)
5

 
5

Additional paid-in capital (1)
2,598,333

 
2,645,927

Cumulative distributions and net loss attributable to common stockholders
(1,902,927
)
 
(1,862,555
)
Accumulated other comprehensive loss
(10,148
)
 
(788
)
Stockholders’ equity
685,263

 
782,589

Noncontrolling interests
2,146

 
945

Total equity
687,409

 
783,534

Total liabilities and equity
$
1,906,755

 
$
2,211,183

_________________
(1) Amounts have been adjusted retroactively to reflect a one-for-six reverse stock split effected June 2, 2015.
See Notes to Condensed Consolidated Financial Statements.

3


TIER REIT, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Rental revenue
$
69,423

 
$
72,157

 
$
215,280

 
$
213,451

Expenses
 

 
 

 
 

 
 

Property operating expenses
21,290

 
22,464

 
67,346

 
71,098

Interest expense
12,765

 
16,706

 
44,747

 
50,120

Real estate taxes
9,670

 
11,272

 
31,512

 
31,528

Property management fees
342

 
2,229

 
4,779

 
6,480

Asset impairment losses
—

 
—

 
132

 
8,225

General and administrative
10,123

 
4,515

 
36,007

 
13,816

Depreciation and amortization
31,446

 
29,885

 
92,549

 
87,988

Total expenses
85,636

 
87,071

 
277,072

 
269,255

Interest and other income
267

 
88

 
553

 
432

Loss on early extinguishment of debt
(30
)
 
—

 
(21,478
)
 
—

Loss from continuing operations before income taxes, equity in operations of investments, and gain (loss) on sale of assets
(15,976
)
 
(14,826
)
 
(82,717
)
 
(55,372
)
Provision for income taxes
(36
)
 
(36
)
 
(1,298
)
 
(45
)
Equity in operations of investments
(159
)
 
431

 
153

 
1,314

Loss from continuing operations before gain (loss) on sale of assets
(16,171
)
 
(14,431
)
 
(83,862
)
 
(54,103
)
Discontinued operations
 

 
 

 
 

 
 

Income (loss) from discontinued operations
21

 
(5,975
)
 
1,390

 
(13,260
)
Gain on sale of discontinued operations
403

 
4,026

 
15,086

 
4,026

Discontinued operations
424

 
(1,949
)
 
16,476

 
(9,234
)
Gain (loss) on sale of assets
(85
)
 
—

 
44,479

 
—

Net loss
(15,832
)
 
(16,380
)
 
(22,907
)
 
(63,337
)
Noncontrolling interests in continuing operations
58

 
34

 
118

 
91

Noncontrolling interests in discontinued operations
(1
)
 
(9
)
 
(29
)
 
(2
)
Dilution of Series A Convertible Preferred Stock
1,926

 
—

 
1,926

 
—

Net loss attributable to common stockholders
$
(13,849
)
 
$
(16,355
)
 
$
(20,892
)
 
$
(63,248
)
Basic and diluted weighted average common shares outstanding (1)
48,842,711

 
49,877,350

 
49,538,652

 
49,875,410

Basic and diluted income (loss) per common share: (1)
 

 
 

 
 

 
 

Continuing operations
$
(0.29
)
 
$
(0.29
)
 
$
(0.75
)
 
$
(1.08
)
Discontinued operations
0.01

 
(0.04
)
 
0.33

 
(0.19
)
Basic and diluted loss per common share
$
(0.28
)
 
$
(0.33
)
 
$
(0.42
)
 
$
(1.27
)
 
 
 
 
 
 
 
 
Distributions declared per common share (1)
$
0.18

 
$
—

 
$
0.36

 
$
—

 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders:
 

 
 

 
 

 
 

Continuing operations
$
(14,272
)
 
$
(14,397
)
 
$
(37,339
)
 
$
(54,012
)
Discontinued operations
423

 
(1,958
)
 
16,447

 
(9,236
)
Net loss attributable to common stockholders
$
(13,849
)
 
$
(16,355
)
 
$
(20,892
)
 
$
(63,248
)
Comprehensive loss:
 

 
 

 
 

 
 

Net loss
$
(15,832
)
 
$
(16,380
)
 
$
(22,907
)
 
$
(63,337
)
Other comprehensive loss: unrealized loss on interest rate derivatives
(10,966
)
 
—

 
(9,376
)
 
—

Comprehensive loss
(26,798
)
 
(16,380
)
 
(32,283
)
 
(63,337
)
Comprehensive loss attributable to noncontrolling interests
76

 
25

 
105

 
89

Comprehensive loss attributable to common stockholders
$
(26,722
)
 
$
(16,355
)
 
$
(32,178
)
 
$
(63,248
)
_________________
(1) Amounts have been adjusted retroactively to reflect a one-for-six reverse stock split effected June 2, 2015.
See Notes to Condensed Consolidated Financial Statements.

4


TIER REIT, Inc.
Condensed Consolidated Statements of Changes in Equity
(in thousands)
(unaudited)
 
 
 
 
 
 
 
Cumulative
Distributions
and
Net Loss Attributable to Common Stockholders
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
Common Stock (1)
 
Additional
 
 
 
 
 
 
 
Number
 
Par
 
Paid-in
 
 
 
Noncontrolling Interests
 
Total Equity
 
of Shares
 
Value
 
Capital (1)
 
 
 
 
Nine months ended September 30, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2015
49,877

 
$
5

 
$
2,645,927

 
$
(1,862,555
)
 
$
(788
)
 
$
945

 
$
783,534

Net loss
—

 
—

 
—

 
(22,818
)
 
—

 
(89
)
 
(22,907
)
Unrealized loss on interest rate derivatives
—

 
—

 
—

 
—

 
(9,360
)
 
(16
)
 
(9,376
)
Share based compensation, net
28

 
—

 
1,321

 
—

 
—

 
11

 
1,332

Redemption of common stock
(2,663
)
 
—

 
(50,841
)
 
—

 
—

 
—

 
(50,841
)
Contributions by noncontrolling interest
—

 
—

 
—

 
—

 
—

 
1,325

 
1,325

Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Common stock ($0.36 per share) (1)
—

 
—

 
—

 
(17,550
)
 
—

 
—

 
(17,550
)
   Series A Convertible Preferred Stock
   ($0.36 per share) (1)
—

 
—

 
—

 
(4
)
 
—

 
—

 
(4
)
   Noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(30
)
 
(30
)
Dilution of Series A Convertible Preferred Stock
—

 
—

 
1,926

 
—

 
—

 
—

 
1,926

Balance at September 30, 2015
47,242

 
$
5

 
$
2,598,333

 
$
(1,902,927
)
 
$
(10,148
)
 
$
2,146

 
$
687,409

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2014
49,865

 
$
5

 
$
2,646,766

 
$
(1,847,039
)
 
$
—

 
$
827

 
$
800,559

Net loss
—

 
—

 
—

 
(63,248
)
 
—

 
(89
)
 
(63,337
)
Share based compensation, net
12

 
—

 
769

 
—

 
—

 
124

 
893

Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(37
)
 
(37
)
Balance at September 30, 2014
49,877

 
$
5

 
$
2,647,535

 
$
(1,910,287
)
 
$
—

 
$
825

 
$
738,078

 _________________
(1) Amounts have been adjusted retroactively to reflect a one-for-six reverse stock split effected June 2, 2015.
















See Notes to Condensed Consolidated Financial Statements.


5


TIER REIT, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
Cash flows from operating activities
 

 
 

Net loss
$
(22,907
)
 
$
(63,337
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Asset impairment losses
132

 
8,225

Gain on sale of assets
(44,479
)
 
—

Gain on sale of discontinued operations
(15,086
)
 
(4,026
)
Loss on early extinguishment of debt
598

 
26

Amortization of restricted shares and units
1,604

 
1,034

Depreciation and amortization
92,549

 
105,987

Amortization of lease intangibles
(963
)
 
50

Amortization of above- and below-market rent
(4,586
)
 
(2,990
)
Amortization of deferred financing and mark-to-market costs
2,644

 
2,149

Equity in operations of investments
(153
)
 
(1,314
)
Ownership portion of management and financing fees from unconsolidated companies
350

 
357

Distributions from investments
569

 
591

Change in accounts receivable
(6,647
)
 
(4,831
)
Change in prepaid expenses and other assets
1,275

 
(2,092
)
Change in lease commissions
(14,571
)
 
(14,407
)
Change in other lease intangibles
(470
)
 
(668
)
Change in accounts payable
(849
)
 
(2,492
)
Change in accrued liabilities
(8,830
)
 
(1,360
)
Change in other liabilities
2,113

 
1,436

Change in payables to related parties
(1,518
)
 
135

Cash provided by (used in) operating activities
(19,225
)
 
22,473

 
 
 
 
Cash flows from investing activities
 

 
 

Escrow deposits
(15,000
)
 
—

Return of investments
631

 
969

Purchase of ground lease
(7,200
)
 
—

Purchases of real estate
(163,184
)
 
—

Investments in unconsolidated entities
(34,773
)
 
(260
)
Capital expenditures for real estate
(55,339
)
 
(53,476
)
Capital expenditures for real estate under development
(2,555
)
 
(20,125
)
Proceeds from sale of discontinued operations
59,706

 
19,144

Proceeds from sale of assets
414,628

 
—

Change in restricted cash
18,709

 
65

Cash provided by (used in) investing activities
215,623

 
(53,683
)
 
 
 
 
Cash flows from financing activities
 

 
 

Financing costs
(5,678
)
 
(42
)
Proceeds from notes payable
715,905

 
45,922

Payments on notes payable
(870,471
)
 
(71,333
)
Payments on capital lease obligations
(12
)
 
(22
)
Redemptions of common stock
(50,842
)
 
—

Transfer of common stock
(270
)
 
(141
)
Distributions paid to Series A Convertible Preferred and common stockholders
(9,013
)
 
—

Distributions paid to noncontrolling interests
(15
)
 
(37
)
Contributions from noncontrolling interests
325

 
—

Cash used in financing activities
(220,071
)
 
(25,653
)
 
 
 
 
Net change in cash and cash equivalents
(23,673
)
 
(56,863
)
Cash and cash equivalents at beginning of period
31,442

 
57,786

Cash and cash equivalents at end of period
$
7,769

 
$
923


See Notes to Condensed Consolidated Financial Statements.

6


TIER REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
1.             Business
 
Organization
 
TIER REIT, Inc. is a self-managed, Dallas-based real estate investment trust focused on maximizing total return to stockholders through the combination of stock appreciation and income derived from a sustainable distribution. As used herein, “TIER REIT,” “TIER,” the “Company,” “we,” “us” or “our” refers to TIER REIT, Inc. and its subsidiaries unless the context otherwise requires. TIER’s investment strategy is to acquire, develop, and operate a portfolio of best-in-class office properties in select U.S. markets that consistently lead the nation in population and office-using employment growth. TIER REIT was incorporated in June 2002 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes.  As of September 30, 2015, we owned interests in 35 operating office properties, one recently developed non-operating office property, and one retail property, located in 16 markets throughout the United States.
 
Substantially all of our business is conducted through Tier Operating Partnership LP (“Tier OP”), a Texas limited partnership.  Our wholly-owned subsidiary, Tier GP, Inc., a Delaware corporation, is the sole general partner of Tier OP.  Our direct and indirect wholly-owned subsidiaries, Tier Business Trust, a Maryland business trust, and Tier Partners, LLC, a Delaware limited liability company, are limited partners owning substantially all of Tier OP.

On June 2, 2015, we filed articles of amendment to our charter to effect a one-for-six reverse stock split of our existing common stock. The par value of our common stock remained at $0.0001 per share, and we recorded an adjustment to the common stock value with an offset to additional paid-in-capital to reflect the change for all periods presented. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), all share information presented has been retroactively adjusted to reflect the reverse stock split.

On July 23, 2015, we listed our shares of common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “TIER.”
 
2.             Basis of Presentation and Significant Accounting Policies
 
Interim Unaudited Financial Information
 
The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission (“SEC”) on March 11, 2015.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
 
The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying condensed consolidated balance sheets as of September 30, 2015, and December 31, 2014, and condensed consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for the periods ended September 30, 2015 and 2014, have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our financial position as of September 30, 2015, and December 31, 2014, and our results of operations and our cash flows for the periods ended September 30, 2015 and 2014.  These adjustments are of a normal recurring nature.

As discussed in Note 3, “New Accounting Pronouncements,” effective January 1, 2015, we adopted the Financial Accounting Standards Board (“FASB”) guidance that changes the criteria for reporting a discontinued operation. This adoption impacts the comparability of our financial statements as disposals of individual operating properties will generally no longer qualify as discontinued operations.

We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.





7

Summary of Significant Accounting Policies
 
Described below are certain of our significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.
 
Real Estate
 
As of September 30, 2015, and December 31, 2014, the cost basis and accumulated depreciation and amortization related to our consolidated real estate properties and related lease intangibles were as follows (in thousands): 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired Above-Market Leases
 
Acquired Below-Market Leases
 
 
Buildings and Improvements
 
Other Lease Intangibles
 
 
as of September 30, 2015
 
 
 
 
Cost
 
$
1,904,508

 
$
162,122

 
$
5,382

 
$
(52,744
)
Less: accumulated depreciation and amortization
 
(543,238
)
 
(77,771
)
 
(3,864
)
 
39,423

Net
 
$
1,361,270

 
$
84,351

 
$
1,518

 
$
(13,321
)
 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired Above-Market Leases
 
Acquired Below-Market Leases
 
 
Buildings and Improvements
 
Other Lease Intangibles
 
 
as of December 31, 2014
 
 
 
 
Cost
 
$
2,039,765

 
$
215,913

 
$
11,785

 
$
(59,605
)
Less: accumulated depreciation and amortization
 
(557,429
)
 
(123,242
)
 
(9,766
)
 
42,621

Net
 
$
1,482,336

 
$
92,671

 
$
2,019

 
$
(16,984
)
 
We amortize the value of in-place leases, in-place tenant improvements, and in-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the tenants’ respective initial lease terms and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.  The estimated remaining average useful lives for acquired lease intangibles range from an ending date of October 2015 to an ending date of December 2030.  Anticipated amortization associated with the acquired lease intangibles for each of the following five years is as follows (in thousands):
October 2015 - December 2015
$
1,614

2016
$
5,203

2017
$
2,493

2018
$
1,194

2019
$
1,044

 
Accounts Receivable, net
 
The following is a summary of our accounts receivable as of September 30, 2015, and December 31, 2014 (in thousands):
 
September 30,
2015
 
December 31,
2014
Straight-line rental revenue receivable
$
69,788

 
$
73,266

Tenant receivables
6,693

 
10,165

Non-tenant receivables
2,136

 
1,150

Allowance for doubtful accounts
(3,800
)
 
(1,201
)
Total
$
74,817

 
$
83,380

 

8

Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets include escrow deposits for the purchase of properties that we have contracted to acquire, deferred tax assets and prepaid directors’ and officers’ insurance, as well as prepaid insurance, prepaid real estate taxes, and utility and other deposits of the properties we consolidate.

Deferred Financing Fees, net

The following is a summary of our deferred financing fees as of September 30, 2015, and December 31, 2014 (in thousands):
 
September 30,
2015
 
December 31,
2014
Cost
$
20,580

 
$
24,704

Less: accumulated amortization
(7,754
)
 
(13,921
)
Net
$
12,826

 
$
10,783


 Other Intangible Assets, net
 
Other intangible assets consist of ground leases on certain of our properties. As of September 30, 2015, and December 31, 2014, the cost basis and accumulated amortization related to our consolidated other intangibles assets were as follows (in thousands):
 
September 30,
2015
 
December 31,
2014
Cost
$
11,177

 
$
2,978

Less: accumulated amortization
(992
)
 
(834
)
Net
$
10,185

 
$
2,144

 
We amortize the value of other intangible assets to expense over their estimated remaining useful lives which have ending dates of December 2032 and December 2044.  Anticipated amortization associated with other intangible assets for each of the following five years is as follows (in thousands):
October 2015 - December 2015
$
99

2016
$
397

2017
$
397

2018
$
397

2019
$
397

 
Real Estate Held for Sale
 
We classify properties as held for sale when certain criteria are met, in accordance with GAAP.  At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that property.  Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.  In the event that a property classified as held for sale no longer meets the criteria for held for sale classification, the property is reclassified as held for use at the lower of the fair value or the depreciated basis as if the property had continued to be used. At September 30, 2015, we had no properties classified as real estate held for sale. At December 31, 2014, we had three properties classified as real estate held for sale, one of which was reclassified to held for use in June 2015.

Revenue Recognition
 
We recognize rental income generated from all leases of consolidated real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Each of the amounts presented below include rental revenue amounts recognized in discontinued operations.  The total net increase to rental revenues due to straight-line rent adjustments for the three months ended September 30, 2015 and 2014, was approximately $2.1 million and $0.4 million, respectively.  The total net increase to rental revenues due to straight-line rent adjustments for the nine months ended September 30, 2015 and 2014, was approximately $9.1 million and $3.3 million, respectively. Our rental revenue also includes amortization

9

of acquired above- and below-market leases.  The total net increase to rental revenues due to the amortization of acquired above- and below-market leases for the three months ended September 30, 2015 and 2014, was approximately $2.1 million and $0.7 million, respectively. The total net increase to rental revenues due to the amortization of acquired above- and below-market leases for the nine months ended September 30, 2015 and 2014, was approximately $4.6 million and $3.0 million, respectively. Revenues relating to lease termination fees are recognized on a straight-line basis amortized from the time that a tenant’s right to occupy the leased space is modified through the end of the revised lease term.  For the three months ended September 30, 2015 and 2014, we recognized lease termination fees of approximately $2.0 million and $1.0 million, respectively. For the nine months ended September 30, 2015 and 2014, we recognized lease termination fees of approximately $2.7 million and $2.0 million, respectively.

Income Taxes
 
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and have qualified as a REIT since the year ended December 31, 2004.  The Company is generally not subject to federal income taxes to the extent we distribute our REIT taxable income to our stockholders currently each year and we meet certain other organizational and operational requirements.  In addition to the Company, our business is conducted through our operating partnership, Tier OP, and various subsidiaries, including limited liability companies, partnerships, and corporations elected to be treated as taxable REIT subsidiaries.  The Company and its subsidiaries are subject to state and local income taxes on operations located in states, cities, and other jurisdictions that impose an income tax.  In addition, our taxable REIT subsidiaries are subject to federal, state, and local income taxes at regular corporate tax rates.

As of September 30, 2015, we have deferred tax liabilities of approximately $1.4 million and deferred tax assets, net of related valuation allowances, of approximately $1.3 million related to various state taxing jurisdictions.  At December 31, 2014, we had deferred tax liabilities of approximately $2.9 million and deferred tax assets, net of related valuation allowances, of approximately $2.5 million related to various state taxing jurisdictions.

Noncontrolling Interests

Noncontrolling interests consists of our third-party partners’ proportionate share of equity in certain consolidated real estate properties, limited partnership units issued to third parties, and restricted stock units issued to our independent directors.

3.            New Accounting Pronouncements
 
In April 2014, FASB issued guidance that changes the criteria for reporting a discontinued operation. Under the new guidance, only a disposal of a component that represents a major strategic shift of an organization qualifies for discontinued operations reporting. The guidance also requires expanded disclosures about discontinued operations and new disclosures in regards to individually significant disposals that do not qualify for discontinued operations reporting. This guidance is effective for the first interim or annual period beginning on or after December 15, 2014.  Upon our adoption of this guidance on January 1, 2015, sales of our individual operating properties generally no longer qualify as discontinued operations. However, properties sold or initially classified as held for sale prior to January 1, 2015, will continue to be reported as discontinued operations. Properties that were held for sale prior to January 1, 2015, that are reclassified to held for use after January 1, 2015, will be reported as continuing operations.
In May 2014, the FASB issued guidance to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted as of December 31, 2016. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
In June 2014, the FASB issued an update which clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. The compensation expense related to such awards will be delayed until it becomes probable that the performance target will be met. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted, and may be applied either prospectively or retrospectively. We do not believe the adoption of this guidance will have a material impact on our financial statements.
In August 2014, the FASB issued guidance regarding management’s responsibility in evaluating whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance

10

is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We do not believe the adoption of this guidance will have a material impact on our disclosures.
 In January 2015, the FASB issued guidance simplifying income statement presentation by eliminating the concept of extraordinary items. An entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted and may be applied either prospectively or retrospectively. We do not believe the adoption of this guidance will have a material impact on our financial statements.
In February 2015, the FASB issued updated guidance related to accounting for consolidation of certain legal entities. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.
In April 2015, the FASB issued guidance related to accounting for debt issuance costs. The guidance simplifies presentation by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability, consistent with the presentation of debt discounts or premiums. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. We do not believe the adoption of this guidance will have a material impact on our financial statements.
4.           Fair Value Measurements
 
Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the fair value hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the fair value hierarchy) has been established.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Derivative financial instruments
 
We use derivative financial instruments, such as interest rate swaps, to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. 
We incorporate credit valuation adjustments (“CVAs”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the CVAs associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties.  However, we have assessed the significance of the impact of the CVAs on the overall valuation of our derivative positions and have determined that they are not significant.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  Unrealized gains or losses on derivatives are recorded in accumulated other comprehensive income (loss) (“OCI”) within equity at each measurement date. Our derivative financial instruments are included in “prepaid expenses and other assets” and “other liabilities” on our condensed consolidated balance sheets.


11

The following table sets forth our financial liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of September 30, 2015, and December 31, 2014 (in thousands).
 
 
 
 
Basis of Fair Value Measurements
 
 
 
 
Quoted Prices In Active Markets for Identical Items (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
 
Total Fair Value
 
 
 
Description
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Liabilities
 
$
(10,165
)
 
$
—

 
$
(10,165
)
 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
Liabilities
 
$
(789
)
 
$
—

 
$
(789
)
 
$
—


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
Impairment of Real Estate Related Assets
 
We have recorded non-cash impairment charges related to a reduction in the fair value of certain of our assets.  The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets or by obtaining third party broker valuation estimates, bona fide purchase offers, or the expected sales price of an executed sales agreement. 

During the nine months ended September 30, 2015, we recorded additional impairment losses of approximately $0.1 million for final estimated closing costs incurred in connection with the disposition of One and Two Chestnut Place, which was impaired at December 31, 2014, and sold in 2015. During the year ended December 31, 2014, we also recorded impairment losses for a property classified as held for sale and assessed for impairment due to a change in management’s estimate of the intended hold period.

The following table summarizes those assets which were measured at fair value and impaired during 2015 and 2014 (in thousands):

 
 
 
 
Basis of Fair Value Measurements
 
 
Description
 
Fair Value
of Assets at Impairment
 
Quoted Prices
In Active
Markets for
Identical Items
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Losses
for the nine months ended September 30, 2015
 
 

 
 

 
 

 
 

 
 

Real estate (1)
 
$
11,489

 
$
—

 
$
11,489

 
$
—

 
$
(132
)
 
 
 
 
 
 
 
 
 
 
 
for the year ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
Real estate (2)
 
$
11,489

 
$
—

 
$
11,489

 
$
—

 
$
(4,940
)
Real estate held for sale (3)
 
$
42,000

 
$
—

 
$
—

 
$
42,000

 
$
(8,225
)
_______________
(1) Recorded in the quarter ended March 31, 2015.
(2) Recorded in the quarter ended December 31, 2014.
(3) Recorded in the quarter ended March 31, 2014.

Financial Instruments not Reported at Fair Value
 
Financial instruments held at September 30, 2015, and December 31, 2014, but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable, payables to related parties, accrued liabilities, distributions payable, and other liabilities.  With the exception of notes payable, the financial statement

12

carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for notes payable have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the fair value hierarchy.

Carrying amounts and the related estimated fair value of our notes payable as of September 30, 2015, and December 31, 2014, are as follows (in thousands):
 
September 30, 2015
 
December 31, 2014
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
Notes payable
$
1,089,629

 
$
1,097,260

 
$
1,194,085

 
$
1,216,991

Notes payable associated with real estate held for sale
$
—

 
$
—

 
$
97,257

 
$
95,011

 
5.           Real Estate Activities

Acquisitions
On June 24, 2015, we acquired a 95% interest in a ground lease of 0.81 acres, including an existing building, to be used for future development located in the central business district of Austin, Texas (“Third + Shoal”). The purchase price for our interest was $7.5 million. Substantially all of the purchase price was allocated to a ground lease intangible that will be amortized over the initial term of the lease which ends in December 2044. The lease has a renewal option to extend the term through December 2113.
On June 25, 2015, we acquired a 95% interest in 4.0 acres of vacant land to be used for future development located in the Legacy Town Center submarket of Plano, Texas (“Legacy Land”). The purchase price for our interest was $6.2 million.     
On July 23, 2015, we acquired various interests in real estate, both existing operating properties and unimproved land, located in Austin, Texas, (“The Domain”) for a contract purchase price of approximately $201.1 million which after applying purchase credits received, equates to approximately $198.2 million total consideration paid. The acquisition included two wholly-owned office buildings, interests in two additional office buildings, various tracts of land, approximately $22.0 million for parcels of land zoned for residential development (“Domain LMN”) and a deposit of approximately $15.0 million for an interest in a multifamily residential property (“Domain K”). On July 24, 2015, we sold Domain LMN to an unrelated third-party for approximately $22.0 million. On October 16, 2015, we completed the acquisition of Domain K for approximately $15.0 million and concurrently sold it to an unrelated third-party for approximately $15.0 million. Acquisition costs of approximately $0.7 million were expensed as incurred and are included in “general and administrative” in the accompanying condensed consolidated statements of operations.

The table below reflects total consideration transferred for the purchase of The Domain that was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values at the acquisition date. Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date. The table also provides information regarding assets sold subsequent to the acquisition as detailed above (in thousands):
 
Assets acquired and liabilities assumed
 
Assets sold subsequent to acquisition
 
Net
Land
$
17,093

 
$
—

 
$
17,093

Land held for development (1)
74,457

 
(22,000
)
 
52,457

Building and improvements
57,324

 
—

 
57,324

Prepaid expenses and other assets
15,000

 
(15,000
)
 
—

Lease intangibles
12,070

 
—

 
12,070

Investment in Domain 2 & 7
26,784

 
—

 
26,784

Accrued liabilities
(1,800
)
 
—

 
(1,800
)
Acquired below-market leases
(2,741
)
 
—

 
(2,741
)
Total
$
198,187

 
$
(37,000
)
 
$
161,187

___________________
(1) On August 28, 2015, we contributed a wholly-owned tract of land valued at approximately $14.0 million to an unconsolidated entity in which we own a 50% interest.


13

Our Condensed Consolidated Statements of Operations include the operations of The Domain for the period from July 23, 2015 (the date of acquisition) through September 30, 2015. The following summary presents the results of operations (in thousands) for the three and nine months ended September 30, 2015 and 2014, on an unaudited proforma basis, as if the acquisition of The Domain (and the acquisition of 5950 Sherry Lane, for a purchase price of approximately $62.6 million which occurred on December 19, 2014) had occurred on January 1, 2014. This proforma condensed consolidated financial information is presented for informational purposes only and does not purport to be indicative of what financial results would have been if the transactions reflected herein had occurred on the date set forth above or been in effect during the periods indicated, nor should it be viewed as indicative of our financial results in the future.
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Rental revenue
$
70,058

 
$
76,469

 
$
221,216

 
$
226,276

Loss from continuing operations
$
(16,075
)
 
$
(15,324
)
 
$
(41,113
)
 
$
(57,284
)
Net loss attributable to common stockholders
$
(13,668
)
 
$
(17,250
)
 
$
(22,622
)
 
$
(66,434
)
Basic and diluted weighted average common shares outstanding
48,843

 
49,877

 
49,539

 
49,875

Basic and diluted loss per common share
$
(0.28
)
 
$
(0.35
)
 
$
(0.46
)
 
$
(1.33
)

Sales of Real Estate Reported in Continuing Operations

The following table presents our sales of real estate for the nine months ended September 30, 2015, that are reported in continuing operations (in thousands):
 
 
Date of Sale
 
 
 
Rentable Square Footage
 
Contract Sales Price
 
Proceeds from Sale
Property Name
 
 
Location
 
 
 
One and Two Chestnut Place
 
03/06/15
 
Worcester, MA
 
218

 
$
14,000

 
$
11,631

United Plaza
 
04/23/15
 
Philadelphia, PA
 
617

 
114,554

 
114,983

1650 Arch Street
 
04/23/15
 
Philadelphia, PA
 
553

 
76,290

 
76,573

1325 G Street (1) (2)
 
06/30/15
 
Washington, D.C.
 
307

 
152,000

 
145,520

Colorado Building (1)
 
06/30/15
 
Washington, D.C.
 
128

 
50,000

 
43,921

Domain LMN
 
07/24/15
 
Austin, TX
 
—

 
22,000

 
22,000

 
 
 
 
 
 
1,823

 
$
428,844

 
$
414,628

__________________________
(1) On June 30, 2015, our 1325 G Street and Colorado Building properties were each sold to entities in which we acquired a noncontrolling 10% interest and the properties were deconsolidated.
(2) In connection with the sale of this property, approximately $100.0 million of proceeds from sale were used to pay off debt secured by the property.
 
The following table presents net income (loss) related to these properties for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Net income (loss) from properties sold in 2015 and included in continuing operations
$
22

 
$
(1,010
)
 
$
233

 
$
(4,208
)


14

Sales of Real Estate Reported in Discontinued Operations

As discussed in Note 3, “New Accounting Pronouncements,” we adopted the provisions of the FASB guidance regarding the reporting of discontinued operations on January 1, 2015. The following presents our sales of real estate during the nine months ended September 30, 2015, and the year ended December 31, 2014, that are reported as discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive loss because they were sold or classified as held for sale on or before December 31, 2014 (in thousands):
 
 
Date of Sale
 
 
 
Rentable Square Footage
 
Contract Sales Price
 
Proceeds from Sale
Property Name
 
 
Location
 
 
 
for the nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
250 West Pratt (A)
 
03/19/15
 
Baltimore, MD
 
368

 
$
63,500

 
$
55,220

Fifth Third Center (A) (B)
 
04/07/15
 
Cleveland, OH
 
508

 
52,750

 
4,486

 
 
 
 
 
 
876

 
$
116,250

 
$
59,706

 
 
 
 
 
 
 
 
 
 
 
for the year ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
City Hall Plaza
 
09/16/14
 
Manchester, NH
 
210

 
$
19,750

 
$
19,130

222 South Riverside Plaza
 
12/19/14
 
Chicago, IL
 
1,184

 
(C)
 
223,670

 
 
 
 
 
 
1,394

 
 
 
$
242,800

_____________
(A) These properties were held for sale at December 31, 2014, and the operations were classified as discontinued operations.
(B) Proceeds from sale are reduced by approximately $47.1 million of debt that was assumed by the purchaser.
(C) The contract sales price for the 222 South Riverside Plaza property was approximately $247.0 million in cash, excluding transaction costs, credits, prorations, and adjustments, plus the conveyance of the 5950 Sherry Lane property in Dallas, Texas, from the purchaser to us.

The table below summarizes the results of operations for each of the properties that have been classified as discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2014 (in thousands). This includes properties sold or held for sale on or before December 31, 2014, and excludes a property that was held for sale at December 31, 2014, and then reclassified to held for use in 2015.
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Rental revenue
$
27

 
$
12,742

 
$
4,593

 
$
40,146

Expenses
 

 
 

 
  

 
  

Property operating expenses
6

 
4,295

 
1,729

 
12,654

Interest expense
—

 
4,569

 
720

 
13,571

Real estate taxes
—

 
2,171

 
633

 
7,040

Property management fees
—

 
374

 
121

 
1,190

Depreciation and amortization
—

 
6,360

 
—

 
17,999

Total expenses
6

 
17,769

 
3,203

 
52,454

Loss on early extinguishment of debt
—

 
(946
)
 
—

 
(946
)
Other expense
—

 
(2
)
 
—

 
(6
)
Income (loss) from discontinued operations
21

 
(5,975
)
 
1,390

 
(13,260
)
Gain on sale of discontinued operations (1)
403

 
4,026

 
15,086

 
4,026

Discontinued operations
$
424

 
$
(1,949
)
 
$
16,476

 
$
(9,234
)
____________
(1) The gain recognized in the third quarter of 2015 reflects a deferred gain related to completion of certain renovations at a property that we sold in 2013.
    
Real Estate Held for Sale

As of December 31, 2014, we had three properties classified as held for sale and the operations of each of those properties were classified as discontinued operations at that time. As of September 30, 2015, two of those properties have been sold, and the other property was reclassified to held for use. In connection with the property reclassified to held for use, approximately $1.3 million in depreciation and amortization was recorded to adjust the depreciated basis to be as if the property had continued to be used during the period it was held for sale. As of September 30, 2015, we had no properties classified as held for sale.


15

The major classes of assets and obligations associated with real estate held for sale as of December 31, 2014, are as follows (in thousands): 
 
December 31, 2014
Land
$
10,977

Buildings and improvements, net of approximately $38.0 million in accumulated depreciation
108,891

Accounts receivable and other assets, net of approximately $0.1 million in allowance for doubtful accounts
7,290

Lease intangibles, net of approximately $15.5 million in accumulated amortization
10,482

Assets associated with real estate held for sale
$
137,640

 
 
Notes payable
$
97,257

Acquired below-market leases, net of approximately $3.2 million in accumulated amortization
1,513

Other liabilities
9,573

   Obligations associated with real estate held for sale
$
108,343


6.             Investments in Unconsolidated Entities
 
Investments in unconsolidated entities consist of our noncontrolling interests in certain properties. On June 30, 2015, we sold our previously wholly-owned Colorado Building and 1325 G Street properties each to separate entities in which we own 10% noncontrolling interests. On July 23, 2015, we acquired a 49.84% interest in Domain 2 and Domain 7 as part of our acquisition of The Domain. On August 28, 2015, we contributed Domain 8, a wholly-owned tract of land also acquired as a part of our acquisition of The Domain to an unconsolidated entity in which we own a 50% interest and began an office building development project on the site.

The following is a summary of our investments in unconsolidated entities as of September 30, 2015, and December 31, 2014 (in thousands):
 
Ownership Interest
 
 
 
 
 
September 30,
2015
 
December 31, 2014
 
September 30,
2015
 
December 31,
2014
Wanamaker Building (1)
60.00
%
 
60.00
%
 
$
38,304

 
$
38,609

Domain 2 & 7 (2)
49.84
%
 
—

 
26,937

 
—

Domain 8 (2)
50.00
%
 
—

 
14,002

 
—

Paces West
10.00
%
 
10.00
%
 
647

 
1,276

Colorado Building
10.00
%
 
100.00
%
 
1,007

 
—

1325 G Street
10.00
%
 
100.00
%
 
4,480

 
—

Total
 

 
 

 
$
85,377

 
$
39,885

_________________
(1) All major decisions for this entity require a vote of 70% (and in some instances 75%) of the ownership group.
(2) All major decisions for this entity are made by the other owner.

For the three months ended September 30, 2015 and 2014, we recorded a loss of approximately $0.2 million and income of approximately $0.4 million in equity in operations of investments, respectively.  For the nine months ended September 30, 2015 and 2014, we recorded income of approximately $0.2 million and $1.3 million in equity in operations of investments, respectively. Our equity in operations of investments for the three and nine months ended September 30, 2015 and 2014, represents our proportionate share of the combined earnings and losses from these investments for the period of our ownership. For the nine months ended September 30, 2015 and 2014, we recorded approximately $1.2 million and $1.6 million of distributions from our investments in unconsolidated entities, respectively. 

7.             Real Estate Under Development
 
We capitalize interest, property taxes, insurance, and direct construction costs on our real estate under development, which includes the development of a new commercial office building at Two BriarLake Plaza in Houston, Texas (“Two BriarLake Plaza”).  For the nine months ended September 30, 2015, we capitalized a total of approximately $6.3 million for the development of Two BriarLake Plaza, including approximately $0.9 million in interest.  For the nine months ended September 30, 2014, we capitalized a total of approximately $20.7 million for the development of Two BriarLake Plaza, including approximately $1.9

16

million in interest.  We completed the major construction activity of Two BriarLake Plaza in the third quarter of 2014, and the property was classified within “land” and “buildings and improvements, net” on our condensed consolidated balance sheet at that time. Tenant improvements are ongoing and the building is not yet held as fully available for occupancy. We have a construction loan that provides up to $66.0 million in available borrowings for the development. As of September 30, 2015, approximately $55.8 million has been drawn on the loan.  

8.              Derivative Instruments and Hedging Activities
 
We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of our operations.  Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements.  To accomplish this objective, we have used interest rate swaps as part of our interest rate risk management strategy.  Our interest rate swaps involve the receipt of variable-rate amounts from counterparties in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  Our hedging strategy of entering into interest rate swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.
 
The following table summarizes the notional values of our derivative financial instruments (in thousands) as of September 30, 2015. The notional values provide an indication of the extent of our involvement in these instruments at September 30, 2015, but do not represent exposure to credit, interest rate, or market risks.
Type/Description
 
Notional Value
 
Index
 
Strike Rate
 
Effective Date
 
Maturity Date
Interest rate swap - cash flow hedge
 
$
125,000

 
one-month LIBOR
 
1.6775
%
 
12/31/14
 
10/31/19
Interest rate swap - cash flow hedge
 
$
125,000

 
one-month LIBOR
 
1.6935
%
 
04/30/15
 
10/31/19
Interest rate swap - cash flow hedge
 
$
125,000

 
one-month LIBOR
 
1.7615
%
 
06/30/15
 
05/31/22
Interest rate swap - cash flow hedge
 
$
150,000

 
one-month LIBOR
 
1.7695
%
 
06/30/15
 
05/31/22

The table below presents the fair value of our derivative financial instruments, included in “other liabilities” on our condensed consolidated balance sheets, as of September 30, 2015, and December 31, 2014 (in thousands):
Derivatives designated as hedging instruments:
Derivative Liabilities
 
September 30,
2015
 
December 31,
2014
 
Interest rate swaps
$
(10,165
)
 
$
(789
)
 
The tables below present the effect of the change in fair value of derivative financial instruments in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Derivatives in Cash Flow Hedging Relationship
 
Gain (loss) recognized in OCI on derivative
(effective portion)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Interest rate swaps
$
(10,966
)
 
$
—

 
$
(9,376
)
 
$
—

 
Amount reclassified from OCI into income
 (effective portion)
 
Three Months Ended
 
Nine Months Ended
Location
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Interest expense (1)
$
2,061

 
$
—

 
$
3,341

 
$
—

____________
(1)
Increases in fair value as a result of accrued interest associated with our swap transactions are recorded in accumulated OCI and subsequently reclassified into income. Such amounts are shown net in the statements of changes in equity and offset dollar for dollar.
    

17

Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt. During the next twelve months, we estimate that approximately $7.1 million will be reclassified as an increase to interest expense.

As of September 30, 2015, the fair value of our derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was approximately $10.8 million.  As of September 30, 2015, we have not posted any collateral related to these agreements.  If we had breached any of these provisions at September 30, 2015, we could have been required to settle our obligations under the agreements at the termination value of approximately $10.8 million.

We have agreements with our derivative counterparties that contain provisions where if we default on any of our indebtedness for at least 30 days, during which time such default has not been remedied, and in all cases provided that the aggregate amount of all such default is not less than $10.0 million for recourse debt or $75.0 million for non-recourse debt, then we could also be declared in default on our derivative obligations.
    
9.          Notes Payable
 
Our notes payable was approximately $1.1 billion in principal amount at September 30, 2015, and was secured by real estate assets with a carrying value of approximately $1.4 billion as of September 30, 2015. As of September 30, 2015, all of our outstanding debt was fixed rate debt (or effectively fixed rate debt, through the use of interest rate swaps), with the exception of approximately $156.8 million from borrowings on our revolving line of credit and our construction loan for Two BriarLake Plaza. As of September 30, 2015, the stated annual interest rates on our outstanding notes payable, excluding mezzanine financing, ranged from 1.81% to 6.09%. We had mezzanine financing on one property with a stated annual interest rate of 9.80%. As of September 30, 2015, the effective weighted average interest rate for our consolidated notes payable is approximately 4.19%. For our loan that is in default and detailed below, we incur a default interest rate that is 500 basis points higher than the stated interest rate, which results in an overall effective weighted average interest rate of 4.53%.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of September 30, 2015, we were in default on a non-recourse property loan with an outstanding balance of approximately $49.1 million secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately $37.0 million as of September 30, 2015, and we anticipate that we will convey ownership of this property to the lender. As of September 30, 2015, other than the default discussed above, we believe we were in compliance with the covenants under each of our loan agreements, and our notes payable had maturity dates that range from January 2016 to June 2022. In October 2015, we paid off, without penalty, the approximately $46.8 million in debt that was scheduled to mature in January 2016.
 
The following table summarizes our notes payable as of September 30, 2015 (in thousands):
Principal payments due in: (1)
 
October 2015 - December 2015
$
1,418

2016
240,440

2017
130,021

2018
102,622

2019
251,723

Thereafter
363,396

Unamortized mark to market premium
9

Total
$
1,089,629

_________________
(1) An approximately $49.1 million non-recourse loan is in default and has a scheduled maturity date of July 2016, but as of September 30, 2015, we have received notification from the lender demanding immediate payment. The table above reflects this loan using the original maturity date. If the loan was shown payable as of October 1, 2015, the 2015 principal payments would increase by $48.9 million and the 2016 principal payments would decrease by $48.9 million.

Credit Facility
 
Through our operating partnership, Tier OP, we have a secured credit agreement providing for total borrowings of up to $750.0 million. The facility consists of a $250.0 million term loan, a $275.0 million term loan, and a $225.0 million revolving line of credit. The first term loan matures on December 18, 2019. The second term loan matures on June 30, 2022. The revolving line of credit matures on December 18, 2018, and can be extended one additional year subject to certain conditions and payment of an extension fee. The annual interest rate on the credit facility is equal to either, at our election, (1) the “base rate” (calculated

18

as the greatest of (i) the agent’s “prime rate”; (ii) 0.5% above the Federal Funds Effective Rate; or (iii) the LIBOR Market Index Rate plus 1.0%) plus the applicable margin or (2) LIBOR for an interest period of one, three, or six months plus the applicable margin.  The applicable margin will be determined based on the ratio of total indebtedness to total asset value and ranges from 45 basis points to 260 basis points.  We have entered into interest rate swap agreements to hedge interest rates on $525.0 million of these borrowings to manage our exposure to future interest rate movements. All amounts owed are guaranteed by us and certain subsidiaries of Tier OP.  Draws under the credit facility are secured by a perfected first priority lien and security interest in a collateral pool that consists of 14 properties owned by certain of our subsidiaries as of September 30, 2015. As of September 30, 2015, we had approximately $525.0 million in borrowings outstanding under the term loans, and approximately $101.0 million in borrowings outstanding under the revolving line of credit with an additional $66.3 million of borrowings available under the facility as a whole. Additional availability may be made available to us upon inclusion of any of our other unencumbered properties in the collateral pool. As of September 30, 2015, the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.24%.
 
10.          Equity

On June 2, 2015, we filed articles of amendment to our charter to effect a one-for-six reverse stock split of our existing common stock. All share and per share information presented below has been retroactively adjusted to reflect the impact of the reverse stock split.

Listing on NYSE and Tender Offer
On July 23, 2015, we listed our shares of common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “TIER.” We believe that listing on the NYSE best positions us to maximize stockholder value over the long term by giving us access to potential additional capital for future growth and provides an opportunity for liquidity to those stockholders who may desire to sell their shares.
In connection with the NYSE listing, we commenced a modified “Dutch Auction” tender offer to purchase for cash up to $50.0 million of our shares of common stock. The tender offer expired on August 19, 2015, with 2,631,578 shares tendered and accepted at $19.00 per share for an aggregate purchase price of approximately $50.0 million.
Series A Convertible Preferred Stock

As of September 30, 2015, we had outstanding 10,000 shares of Series A participating, voting, convertible preferred stock (the “Series A Convertible Preferred Stock”) to Behringer Harvard REIT I Services Holdings, LLC. In connection with the listing of our common stock on the NYSE on July 23, 2015, an automatic conversion of the Series A Convertible Preferred Stock was triggered. The determination of the number of shares of our common stock to be issued as a result of the conversion of the Series A Convertible Preferred Stock  generally will amount to 10% of the excess of (a) the Conversion Company Value, as defined in the Articles Supplementary, which is based on the average daily closing price of our common stock for a 30-day trading period beginning 180 days after our listing date over (b) the Effective Date Value of our common stock, as defined in the Articles Supplementary. The Effective Date Value is based on a share price of approximately $25.95 per share. As a result, if the average daily closing price of our common stock for the 30-day trading period beginning 180 days after our listing date is less than approximately $25.95 per share, then no shares of common stock will be issued. The closing price of our common stock on September 30, 2015 was $14.72. Assuming the Conversion Company Value was based on the September 30, 2015, closing price of our common stock, no shares of common stock would be issued. Based on the lower Conversion Company Value, the value of the Series A Convertible Preferred Stock was reduced by approximately $1.9 million to its initial valuation of $2.7 million as required under accounting guidance.

Limited Partnership Units
 
At September 30, 2015, Tier OP had 72,097 units of limited partnership interest held by third parties.  These units of limited partnership interest are convertible into an equal number of shares of our common stock at the option of the holders or the Company, or into cash in the Company’s sole and absolute discretion.


19

Stock Plans
 
Our 2005 Incentive Award Plan allowed for equity-based incentive awards to be granted to our Employees and Key Personnel (as defined in the plan) as detailed below:

Stock options. As of September 30, 2015, we had outstanding options held by our independent directors to purchase 12,495 shares of our common stock at a weighted average exercise price of $40.13 per share. These options have a maximum term of 10 years and were exercisable one year after the date of grant.  The options were anti-dilutive to earnings per share for each period presented.
 
Restricted stock units. We have outstanding restricted stock units held by our independent directors. These units vest 13 months after the grant date. Subsequent to vesting, the restricted stock units will be converted to an equivalent number of shares of common stock upon the earlier to occur of the following events or dates: (i) separation from service for any reason other than cause; (ii) a change in control of the Company; (iii) death; or (iv) specific dates chosen by the independent directors that range from June 2016 to June 2019. Expense is measured at the grant date based on the estimated fair value of the award and is recognized over the vesting period. The restricted stock units were anti-dilutive to earnings per share for each period presented.

The following is a summary of the number of restricted stock units outstanding as of September 30, 2015 and 2014:
 
2015
 
2014
Outstanding at the beginning of the year
13,841

 
6,235

Issued
—

 
7,606

Forfeited (1)
(2
)
 
—

Converted
(3,731
)
 
—

Outstanding at September 30 (2)
10,108

 
13,841

_____________
(1) Reflects fractional shares that were forfeited on June 2, 2015.
(2) As of September 30, 2015, 10,108 restricted stock units are vested.

Restricted stock. We have outstanding restricted stock held by employees. Restrictions on these shares lapse in 25% increments annually over the four-year period following the grant date.  Compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the service period based on a tiered lapse schedule and estimated forfeiture rates.  The restricted stock was anti-dilutive to earnings per share for each period presented.  

The following is a summary of the number of shares of restricted stock outstanding as of September 30, 2015 and 2014:
 
2015
 
2014
Outstanding at the beginning of the year
118,563

 
70,554

Issued (1)
106,811

 
75,011

Forfeited
(2,203
)
 
(9,364
)
Restrictions lapsed (2)
(33,726
)
 
(17,638
)
Outstanding at September 30
189,445

 
118,563

_____________
(1) Shares issued in 2015 had a grant price of $26.88 per share. Shares issued in 2014 had a grant price of $25.20 per share.
(2) 10,063 and 5,599 of these shares were surrendered in 2015 and 2014, respectively, to pay withholding taxes.

Distributions
Our board of directors reinstated quarterly cash distributions in the second quarter of 2015, at $0.18 per share of common stock and has authorized cash distributions in the same amount for each of the third and fourth quarters of 2015. Distributions declared for each quarter were or will be paid in the subsequent quarter.

20

The following table reflects the distributions declared for our common stock, Series A Convertible Preferred Stock, and noncontrolling interests during the nine months ended September 30, 2015 and 2014 (in thousands). Distributions to noncontrolling interests in 2014 included distributions made to third-party members related to certain non-wholly-owned real estate properties.
 
 
 
Common
 Stockholders
 
Preferred Stockholders
 
Noncontrolling
Interests
 
Total
 
 
 
2015
 
 
 
 
 
 
 
1st Quarter
$
—

 
$
—

 
$
—

 
$
—

2nd Quarter
9,028

 
9,011

 
2

 
15

3rd Quarter
8,556

 
8,539

 
2

 
15

Total
$
17,584

 
$
17,550

 
$
4

 
$
30

 
 
 
 
 
 
 
 
2014
 

 
 

 
 

 
 

1st Quarter
$
33

 
$
—

 
$
—

 
$
33

2nd Quarter
—

 
—

 
—

 
—

3rd Quarter
4

 
—

 
—

 
4

Total
$
37

 
$
—

 
$
—

 
$
37



11.              Related Party Arrangements
 
We previously purchased certain administrative services from BHT Advisors, LLC (“BHT Advisors”), such as human resources, shareholder services, and information technology. Effective June 30, 2015, we terminated the administrative services agreement and now perform each of these services internally. We also have paid, and will continue to pay, BHT Advisors acquisition fees related to the development of Two BriarLake Plaza. Upon notice of termination, we paid BHT Advisors approximately $2.7 million, which represents 0.75 times the gross amount of all service charges payable with respect to such terminated services for the trailing 12-month period ending with the last full month prior to the delivery of notice of termination.

HPT Management Services, LLC (“HPT Management”) previously provided property management services for substantially all of our properties. Effective June 30, 2015, we internalized the management of these properties and we exercised our buyout option, whereupon (1) we acquired and assumed certain assets and certain liabilities of HPT Management and (2) HPT Management irrevocably waived the non-solicitation and non-hire provisions of the management agreement with respect to certain persons, including employees of HPT Management providing property management functions on our behalf. We paid HPT Management approximately $7.5 million, which represents 0.8 times the gross amount of all management and oversight fees earned by HPT Management under the management agreement for the trailing 12-month period ending with the last full month prior to delivery of the notice. However, we anticipate future reconciliations of property management fees and construction management fees payable to HPT Management related to two of our properties.

Current board members, Messrs. Robert S. Aisner and M. Jason Mattox, serve as officers and are partial owners of the ultimate parent entity of BHT Advisors and HPT Management.     
    
    

21

The following is a summary of the related party fees and costs we incurred with BHT Advisors and HPT Management during the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
BHT Advisors, acquisition fees
$
15

 
$
85

 
$
196

 
$
487

BHT Advisors, cost of services provided
21

 
568

 
1,263

 
1,722

BHT Advisors, termination fee
—

 
—

 
2,706

 
—

HPT Management, property and construction management fees
—

 
2,919

 
5,272

 
8,501

HPT Management, reimbursement of costs and expenses
—

 
4,513

 
7,992

 
13,770

HPT Management, buyout fee
101

 
—

 
7,595

 
—

    Total
$
137

 
$
8,085

 
$
25,024

 
$
24,480

 
 
 
 
 
 
 
 
Expensed
$
122

 
$
7,647

 
$
24,054

 
$
23,050

Capitalized to real estate under development
—

 
85

 
—

 
487

Capitalized to buildings and improvements, net
15

 
353

 
970

 
943

    Total
$
137

 
$
8,085

 
$
25,024

 
$
24,480


At September 30, 2015, and December 31, 2014, we had payables to related parties of approximately $0.3 million and $2.0 million, respectively, consisting primarily of expense reimbursements payable to BHT Advisors and property management fees payable to HPT Management. 

12.          Commitments and Contingencies
 
As of September 30, 2015, we had commitments of approximately $35.8 million for future tenant improvements, leasing commissions, and completing renovations.
 
We have Employment Agreements (collectively, the “Employment Agreements”) with five of our executive officers.  The term of each Employment Agreement ends on July 15, 2018, provided that the term will automatically continue for an additional one-year period unless either party provides 60 days written notice of non-renewal prior to the expiration of the initial term.  The agreements provide for lump sum payments and an immediate lapse of restrictions on compensation received under the long-term incentive plan upon termination of employment without cause.  As a result, in the event the Company had terminated all of these agreements without cause as of September 30, 2015, we would have recognized approximately $10.6 million in additional compensation expense.


22

13.          Supplemental Cash Flow Information
 
Supplemental cash flow information is summarized below for the nine months ended September 30, 2015 and 2014 (in thousands):
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
Interest paid, net of amounts capitalized
$
42,764

 
$
60,526

Income taxes paid
$
977

 
$
904

 
 
 
 
Non-cash investing activities:
 

 
 

Property and equipment additions in accounts payable and accrued liabilities
$
11,382

 
$
23,061

  Amortization of deferred financing fees in building and improvements, net
$
240

 
$
—

Contribution of land to non wholly-owned entity
$
14,002

 
$
—

Liabilities assumed through the purchase of real estate
$
1,800

 
$
—

 
 
 
 
Non-cash financing activities:
 

 
 

Mortgage notes assumed by purchaser
$
47,074

 
$
—

  Dilution of Series A Convertible Preferred Stock
$
1,926

 
$
—

  Financing costs in accrued liabilities
$
33

 
$
7

  Unrealized loss on interest rate derivatives
$
9,376

 
$
—

Accrual for distributions declared
$
8,556

 
$
—

Contributions from noncontrolling interests
$
1,000

 
$
—

 


23


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto.
Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of TIER REIT, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, our ability to address debt maturities and fund our capital requirements, our intentions to sell certain properties, the value of our assets, our anticipated capital expenditures, the amount and timing of any anticipated future cash distributions to our stockholders, and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “objectives,” “strategies,” “goals,” and variations of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 11, 2015, and the factors described below:
•
market disruptions and economic conditions experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;
•
our ability to renew expiring leases and lease vacant spaces at favorable rates or at all;
•
the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their businesses; 
•
the availability of cash flow from operating activities to fund distributions and capital expenditures;
•
our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets or otherwise to fund our future capital needs;
•
our ability to strategically acquire or dispose of assets on favorable terms, or at all;
•
our level of debt and the terms and limitations imposed on us by our debt agreements;
•
our ability to retain our executive officers and other key personnel;
•
conflicts of interest and competing demands faced by certain of our directors;
•
unfavorable changes in laws or regulations impacting our business or our assets; and
•
factors that could affect our ability to qualify as a real estate investment trust for federal income tax purposes.
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.
Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no significant changes to our critical accounting policies since December 31, 2014.

24


Overview
As of September 30, 2015, we owned interests in 35 operating office properties with approximately 12.6 million rentable square feet. We also owned a recently developed non-operating office property with approximately 333,000 rentable square feet and a retail property with approximately 79,000 square feet.  Our properties are located in 16 markets throughout the United States. Substantially all of our business is conducted through our operating partnership, Tier Operating Partnership LP (“Tier OP”). 
As an owner of real estate, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for office space at our properties. Performance in commercial office real estate is generally predicated on a sustained pattern of office-using job growth, and as a result of only modest growth, it has trailed the general economy. We believe office-using job growth has occurred at a moderate pace over the past several years. Continued economic recovery, or the lack thereof, could impact our tenants’ businesses. For example, tenants may be reluctant to make long-term lease commitments and many are focused on using less space per employee. Recently, the volatility of oil prices has had a significant impact on the Houston market, where leasing activity has slowed. We continue to follow a disciplined approach to allocating our capital and managing our operations.
Listing on NYSE and Tender Offer
On July 23, 2015, we listed our shares of common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “TIER.” We believe that listing our stock on the NYSE has positioned us to maximize stockholder value over the long term by potentially giving us access to additional capital for future growth and provides an opportunity for liquidity to those stockholders who may desire to sell their shares.
In connection with the NYSE listing, we commenced a modified “Dutch Auction” tender offer to purchase for cash up to $50.0 million of our shares of common stock. The tender offer expired on August 19, 2015 with 2,631,578 shares tendered and accepted at $19.00 per share. The aggregate purchase price of approximately $50.0 million for shares of common stock accepted for payment pursuant to the tender offer, and related fees and expenses, was funded from available cash and borrowings under our existing credit facility.
2015 Objectives
At the beginning of the year, we identified six key objectives for 2015: (1) dispose of properties outside target markets; (2) recycle capital into target markets; (3) strengthen the balance sheet; (4) increase portfolio occupancy; (5) internalize property management and administrative services; and (6) reinstate distributions. The following discussion describes our 2015 objectives and our activities in connection with these objectives.
Dispose of Properties Outside Target Markets
To date in 2015, we have sold properties located in Baltimore, Maryland; Worcester, Massachusetts; Cleveland, Ohio; and Philadelphia, Pennsylvania, and reduced our presence in Washington, D.C. When we believe property and market conditions are advantageous to us, we intend to continue to reduce our exposure in one or more of our remaining non-strategic markets, including Philadelphia, Pennsylvania; St. Paul, Minnesota; Cherry Hill, New Jersey; Baltimore, Maryland; and Chicago, Illinois.

Recycle Capital into Target Markets

We are currently identifying opportunities to build scale in targeted markets and focusing on best-in-class properties for long-term value creation. For example, in December 2014, we completed an exchange transaction with an institutional property investor in which we sold 222 South Riverside Plaza located in Chicago, Illinois, in exchange for cash and the conveyance of 5950 Sherry Lane located in the Preston Center submarket of Dallas, Texas, from the purchaser to us. In June 2015, we acquired interests in a ground lease and a land parcel to be used for future development, the first being located in the central business district of Austin, Texas, and the second located in the Legacy Town Center submarket of Plano, Texas (a suburb of Dallas). On July 23, 2015, we acquired various interests in real estate, both existing operating properties and unimproved land, located in Austin, Texas, (“The Domain”) for a contract purchase price of approximately $201.1 million, which included two wholly-owned office buildings, interests in two additional office buildings, and various other tracts of land. The acquisition also included approximately $22.0 million for parcels of land zoned for residential development and a deposit of approximately $15.0 million for an interest in a multifamily residential property. On July 24, 2015, we sold the parcels of land that were zoned for residential development to an unrelated third-party for approximately $22.0 million. On October 16, 2015, we completed the acquisition of the interest in the multifamily residential property for approximately $15.0 million and then sold it to an unrelated third-party for approximately $15.0 million.



25


Strengthen the Balance Sheet

As of September 30, 2015, including our share of the debt maturing at our unconsolidated subsidiaries, we have approximately $262.8 million of debt maturing before the end of 2016. Current interest rates for borrowings on commercial office properties are lower than our average interest rates, and with the potential for rising interest rates, one of our objectives for 2015 has been to mitigate a portion of the interest rate and refinancing risks associated with this debt by (1) managing our capital resources to provide us the equity for refinancing strategic properties and the ability to unencumber non-strategic properties in anticipation of future sale, (2) pre-paying debt obligations in order to secure new long-term financing (as we have done thus far in 2015 by paying off approximately $285.5 million of debt that was scheduled to mature later in 2015 and approximately $428.6 million of debt (including our share of unconsolidated debt) that was scheduled to mature in 2016, and securing a $275.0 million term loan that matures in June 2022) and/or to facilitate property dispositions, and (3) disposing of certain non-strategic properties and reducing our debt obligations, as we have done and intend to do in 2015.

Increase Portfolio Occupancy

Our portfolio occupancy was approximately 89.4% for our 35 operating office properties owned as of September 30, 2015, which excludes one recently developed non-operating office property and one retail property, and includes our share of four unconsolidated operating properties. As of September 30, 2015, we have approximately 264,000 square feet of scheduled lease expirations in the remainder of 2015 at our operating office properties, and we will continue to focus on leasing with the objective of driving internal growth by increasing occupancy as we seek to re-lease space upon lease expirations. If free rent concessions continue to moderate and our occupancy and rental rates continue to increase, we would expect our operations to provide increased cash flow in future periods.
The following table sets forth information regarding our leasing activity for the three and nine months ended September 30, 2015:
Three months ended September 30, 2015
Renewal
 
Expansion
 
New
 
Total
Square feet leased
175,000

 
41,000

 
122,000

 
338,000

Weighted average lease term (in years)
6.9

 
3.0

 
7.9

 
6.8

Increase in weighted average net rental rates per square foot per year (1)
$
0.67

 
$
3.56

 
$
2.73

 
$
1.56

% increase in weighted average net rental rates per square foot per year
4
 %
 
23
%
 
17
%
 
10
%
Leasing cost per square foot per year (2)
$
4.30

 
$
4.92

 
$
5.94

 
$
5.02

 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
 
 
Square feet leased
934,000

 
200,000

 
377,000

 
1,511,000

Weighted average lease term (in years)
6.8

 
6.4

 
8.0

 
7.0

Increase (decrease) in weighted average net rental rates per square foot per year (1)
$
(0.53
)
 
$
1.65

 
$
0.70

 
$
0.01

% increase (decrease) in weighted average net rental rates per square foot per year
(3
)%
 
11
%
 
4
%
 
—

Leasing cost per square foot per year (2)
$
3.90

 
$
4.99

 
$
6.68

 
$
4.74

_________________
(1) Weighted average net rental rates are calculated as the fixed base rental amount paid by a tenant under the terms of their related lease agreements, less any portion of that base rent used to offset real estate taxes, utility charges, and other operating expenses incurred in connection with the leased space, weighted for the relative square feet under the lease.
(2)
Includes tenant improvements and leasing commissions.

Internalize Property Management and Administrative Services

On April 1, 2015, we delivered a buyout notice to HPT Management Services, LLC (“HPT Management”), exercising our buyout option and proposing a closing to occur on June 30, 2015, pursuant to our property management agreement with HPT Management. On June 30, 2015, the closing of the buyout option occurred, and we made a payment of approximately $7.5 million to HPT Management. However, we anticipate future reconciliations of property management fees and construction management fees payable to HPT Management related to two of our properties. In connection with the closing of the buyout option, the property management agreement with HPT Management was terminated, HPT Management irrevocably waived certain non-solicitation and non-hire provisions, and we hired all of HPT Management’s property management personnel providing services to us.

26


On April 1, 2015, we delivered notice of termination to BHT Advisors, LLC (“BHT Advisors”) terminating all administrative services provided by BHT Advisors to us under the administrative services agreement to be effective June 30, 2015.  On June 30, 2015, the termination of the administrative services became effective, and we made a termination payment of approximately $2.7 million to BHT Advisors.  BHT Advisors no longer provides services to us, such as human resources, shareholder services, or information technology, each of which is now performed internally.

We expect these actions to result in increased future cash flow through a reduction in property management and external administrative-related expenses, resulting in overall saving of approximately $6.5 million annually, although we can provide no assurance any level of savings will occur.

Reinstate Distributions

Our board of directors reinstated quarterly cash distributions beginning in the second quarter of 2015, at $0.18 per share per quarter, and authorized cash distributions of the same amount for each of the third and fourth quarters of 2015. We anticipate that the board of directors will continue to consider authorizing a quarterly distribution payable from cash anticipated to be provided by operations. Distributions declared prior to June 2, 2015, have been adjusted for the one-for-six reverse stock split that occurred on June 2, 2015. Distributions are authorized at the discretion of our board of directors based on its analysis of numerous factors, including but not limited to our forthcoming cash needs and our financial condition, and there is no assurance that distributions will continue or at any particular rate or timing. All or a portion of the distribution may constitute a return of capital.

Reverse Stock Split

In preparation for listing our common stock on the NYSE, we filed articles of amendment to our charter to effect a one-for-six reverse stock split of our existing common stock on June 2, 2015. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder of record who held any fractional share of our common stock as of the close of business on June 2, 2015, received a cash payment equal to the fractional share held by such stockholder multiplied by $26.88, which resulted in an aggregate payment to our stockholders holding fractional shares of approximately $0.8 million.
Results of Operations

The term “same store” in the discussion below includes our consolidated operating properties owned and operated for the entirety of the current and comparable periods. During the year ended December 31, 2014, we disposed of two consolidated properties and we had three properties held for sale as of December 31, 2014. The results of operations for each of these disposed properties and two of the held for sale properties have been reclassified to discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2014, and are excluded from the discussions below. One property held for sale at December 31, 2014, was reclassified to held for use on June 1, 2015, and is included in the discussions below. The results of operations of properties sold or initially classified as held for sale in 2015, as well as our recently developed non-operating office property, Two BriarLake Plaza, our one retail property, and our recently acquired consolidated operating properties are included in the discussion below.
Three months ended September 30, 2015, as compared to the three months ended September 30, 2014
Rental Revenue.  Rental revenue for the three months ended September 30, 2015, was approximately $69.4 million as compared to approximately $72.2 million for the three months ended September 30, 2014, a $2.8 million decrease. Our non-same store properties had a decrease of approximately $5.8 million in rental revenue due to a decrease of approximately $11.8 million from the sale of properties in 2015, partially offset by an increase of approximately $4.0 million from acquired properties and an increase of approximately $2.0 million from our recently developed non-operating office property. Our same store properties had an increase of approximately $3.0 million, primarily due to an increase in rental rates resulting in an increase in rental revenue of approximately $1.3 million, an increase in lease termination fee income of approximately $1.1 million, an increase in contribution to revenue from the amortization of above- and below-market rents, net, of approximately $0.9 million, an increase in straight-line rent adjustments of approximately $0.7 million, and an increase in occupancy resulting in an increase in revenue of approximately $0.4 million. These increases were partially offset by an increase in free rent concessions resulting in a decrease to rental revenue of approximately $1.2 million.
Property Operating Expenses. Property operating expenses for the three months ended September 30, 2015, were approximately $21.3 million as compared to approximately $22.5 million for the three months ended September 30, 2014, a $1.2 million decrease. Our non-same store properties had a decrease of approximately $2.3 million due to a decrease of approximately $4.4 million from the sale of properties in 2015, partially offset by an increase of approximately $1.4 million from acquired properties and an increase of approximately $0.7 million from our recently developed non-operating office property. Our same

27


store properties had an increase of approximately $1.1 million, primarily due to higher bad debt expense related to a single tenant that declared bankruptcy in February 2015 and higher general operational expenses.
Interest Expense.  Interest expense for the three months ended September 30, 2015, was approximately $12.8 million as compared to approximately $16.7 million for the three months ended September 30, 2014, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties and our credit facility. The $3.9 million decrease was primarily due to lower overall interest rates (an effective interest rate of approximately 4.19% at September 30, 2015, as compared to approximately 5.61% at September 30, 2014) which reduced our interest expense by approximately $3.0 million and lower overall borrowings which reduced our interest expense by approximately $1.5 million, partially offset by approximately $0.3 million of increased amortization of deferred financing fees and approximately $0.3 million of default interest.

Real Estate Taxes.  Real estate taxes from our consolidated real estate properties for the three months ended September 30, 2015, were approximately $9.7 million as compared to approximately $11.3 million for the three months ended September 30, 2014, a $1.6 million decrease. Our non-same store properties had a decrease of approximately $0.7 million due to a decrease of approximately $1.6 million from the sale of properties in 2015, partially offset by an increase of approximately $0.7 million from acquired properties and an increase of approximately $0.2 million from our recently developed non-operating office property. Our same store properties had a decrease of approximately $0.9 million primarily due to lower property tax rates and value assessments at certain properties and timing of prior year tax refunds.
Property Management Fees. Property management fees for the three months ended September 30, 2015, were approximately $0.3 million as compared to approximately $2.2 million for the three months ended September 30, 2014, a $1.9 million decrease, primarily due to the internalization of the management of our properties that were formerly managed by HPT Management.

General and Administrative.  General and administrative expenses for the three months ended September 30, 2015, were approximately $10.1 million as compared to approximately $4.5 million for the three months ended September 30, 2014, and were comprised of corporate general and administrative expenses including payroll costs, directors’ and officers’ insurance premiums, audit and tax fees, legal fees, costs related to the tender offer and the listing of our common stock on the NYSE, acquisition expenses, corporate office rent, and other administrative expenses. The $5.6 million increase is primarily due to costs related to the tender offer and the listing of our common stock on the NYSE of approximately $2.6 million, increased payroll costs of approximately $1.5 million, primarily due to the internalization of services previously provided by BHT Advisors and HPT Management, and includes increased bonuses of approximately $0.9 million, increased acquisition expense of approximately $0.6 million, and an increase to corporate rent expense of approximately $0.4 million, due to the early move-out and relocation of our corporate offices.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2015, was approximately $31.4 million as compared to approximately $29.9 million for the three months ended September 30, 2014, a $1.5 million increase. Our non-same store properties had a decrease of approximately $0.6 million due to a decrease of approximately $4.1 million from the sale of properties in 2015, partially offset by an increase of approximately $2.8 million from acquired properties and an increase of approximately $0.7 million from our recently developed non-operating office property. Our same store properties had an increase of approximately $2.1 million primarily due to increased amortization related to tenant improvements and leasing commissions.
Equity in Operations of Investments. Equity in operations on investments for the three months ended September 30, 2015, was a net loss of approximately $0.2 million as compared to approximately $0.4 million of net income for the three months ended September 30, 2014, and was comprised of our share of the earnings and losses of our unconsolidated investments. The $0.6 million decrease was primarily due to increased interest expense at Paces West due to the achievement of certain investment return thresholds on a participating mortgage.
Nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014
Rental Revenue.  Rental revenue for the nine months ended September 30, 2015, was approximately $215.3 million as compared to approximately $213.5 million for the nine months ended September 30, 2014, a $1.8 million increase. Our non-same store properties had a decrease of approximately $5.0 million in rental revenue due to a decrease of approximately $17.4 million from the sale of properties in 2015, partially offset by an increase of approximately $7.2 million from acquired properties and an increase of approximately $5.2 million from our recently developed non-operating office property. Our same store properties had an increase of approximately $6.8 million, primarily due to an increase in rental rates resulting in an increase in revenue of approximately $3.3 million, an increase in occupancy resulting in an increase in rental revenue of approximately $2.5 million, an increase in straight-line rent adjustments of approximately $1.6 million, an increase in contribution to revenue from the amortization

28


of above- and below-market rents, net, of approximately $1.3 million, increases in lease termination income of approximately $1.1 million, and an increase in other income of approximately $0.8 million. These increases were partially offset by an increase in free rent concessions resulting in a decrease to rental revenue of approximately $3.8 million.
Property Operating Expenses. Property operating expenses for the nine months ended September 30, 2015, were approximately $67.3 million as compared to approximately $71.1 million for the nine months ended September 30, 2014, a $3.8 million decrease. Our non-same store properties had a decrease of approximately $3.9 million due to a decrease of approximately $7.7 million from the sale of properties in 2015, partially offset by an increase of approximately $2.2 million from acquired properties and an increase of approximately $1.6 million from our recently developed non-operating office property.
Interest Expense.  Interest expense for the nine months ended September 30, 2015, was approximately $44.7 million as compared to approximately $50.1 million for the nine months ended September 30, 2014, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties and our credit facility. The $5.4 million decrease was primarily due to lower overall borrowings which reduced our interest expense by approximately $3.3 million, lower overall interest rates (an effective interest rate of approximately 4.19% at September 30, 2015, as compared to approximately 5.61% at September 30, 2014) which reduced our interest expense by approximately $3.2 million, partially offset by an increase in amortization of deferred financing fees related to our new credit facility of approximately $0.8 million and approximately $0.3 million of default interest.
Property Management Fees. Property management fees for the nine months ended September 30, 2015, were approximately $4.8 million as compared to approximately $6.5 million for the nine months ended September 30, 2014, a $1.7 million decrease, primarily due to the internalization of the management of our properties that were formerly managed by HPT Management.
Asset Impairment Losses. We had approximately $0.1 million in asset impairment losses for the nine months ended September 30, 2015, related to final estimated closing costs incurred in connection with the disposition of One and Two Chestnut Place. We had approximately $8.2 million in asset impairment losses for the nine months ended September 30, 2014, related to an asset assessed for impairment due to a change in management’s estimate of the intended hold period.
General and Administrative.  General and administrative expenses for the nine months ended September 30, 2015, were approximately $36.0 million as compared to approximately $13.8 million for the nine months ended September 30, 2014, and were comprised of corporate general and administrative expenses including payroll costs, directors’ and officers’ insurance premiums, audit and tax fees, legal fees, costs related to our tender offer and the listing of our common stock on the NYSE, corporate office rent, acquisition expenses, other administrative expenses, reimbursement of certain expenses to BHT Advisors, and buyout and termination fees paid to HPT Management and BHT Advisors.  The $22.2 million increase in general and administrative expenses is primarily due to approximately $10.3 million in fees related to the buyout of HPT Management and the termination of services from BHT Advisors, costs related to the tender offer and the listing of our common stock on the NYSE of approximately $5.6 million, increased payroll costs of approximately $3.0 million primarily due to the internalization of services previously provided by BHT Advisors and HPT Management, and includes increased bonuses of approximately $1.3 million, increased acquisition expense of approximately $1.4 million, and an increase to corporate rent expense of approximately $0.4 million, due to the early move-out and relocation of our corporate offices.
Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2015, was approximately $92.5 million as compared to approximately $88.0 million for the nine months ended September 30, 2014, a $4.5 million increase. Our non-same store properties had an increase of approximately $0.4 million due to an increase of approximately $5.2 million from acquired properties and an increase of approximately $1.7 million from our recently developed non-operating office property, partially offset by approximately $6.5 million from the sale of properties in 2015. Our same store properties had an increase of approximately $4.1 million primarily due to increased amortization related to tenant improvements and leasing commissions.
Equity in Operations of Investments. Equity in operations on investments for the nine months ended September 30, 2015, was approximately $0.2 million as compared to approximately $1.3 million for the three months ended September 30, 2014, and was comprised of our share of the earnings and losses of our unconsolidated investments. The $1.1 million decrease was primarily due to increased interest expense at Paces West due to the achievement of certain investment return thresholds on a participating mortgage and decreased earnings generated at our other unconsolidated properties.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt for the nine months ended September 30, 2015, was approximately $21.5 million and was primarily comprised of defeasance costs related to early payoffs of debt. We had no loss on early extinguishment of debt for the nine months ended September 30, 2014.

29


Gain on Sale of Assets. We had approximately $44.5 million in gain on sale assets for the nine months ended September 30, 2015 related to our sales of 1650 Arch and United Plaza and our partial sales of 1325 G Street and the Colorado Building. We had no gain on sale of assets for the nine months ended September 30, 2014.
Cash Flow Analysis
Nine months ended September 30, 2015, as compared to nine months ended September 30, 2014
Cash used in operating activities was approximately $19.2 million for the nine months ended September 30, 2015. Cash provided by operating activities for the nine months ended September 30, 2014, was approximately $22.5 million. The approximately $41.7 million change is primarily attributable to (1) the timing of receipt of revenues and payment of expenses which resulted in approximately $5.3 million more net cash outflows from working capital assets and liabilities in 2015 compared to 2014; and (2) approximately $36.5 million primarily due to less cash received from the results of our real estate property operations, including discontinued operations, net of interest expense, loan defeasance costs of approximately $20.9 million and general and administrative expenses, which include approximately $10.2 million of termination fees and buyout fees paid to BHT Advisors and HPT Management and approximately $5.0 million of costs paid associated with the tender offer and listing on the NYSE.
Cash provided by investing activities for the nine months ended September 30, 2015, was approximately $215.6 million and was primarily comprised of proceeds from the sale of properties of approximately $474.3 million and changes in restricted cash of approximately $18.7 million, partially offset by escrow deposits for anticipated real estate purchases, and purchases of real estate, a ground lease, and investments in unconsolidated entities of approximately $220.2 million, and monies used to fund capital expenditures for existing real estate and real estate under development of approximately $57.9 million. Cash used in investing activities for the nine months ended September 30, 2014, was approximately $53.7 million and was primarily comprised of monies used to fund capital expenditures for existing real estate and real estate under development of approximately $73.6 million, partially offset by proceeds from sale of properties of approximately $19.1 million.
Cash used in financing activities for the nine months ended September 30, 2015, was approximately $220.1 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $160.2 million, redemption of common stock primarily related to our tender offer of $50.8 million, and distributions of approximately $9.0 million. Cash used in financing activities for the nine months ended September 30, 2014, was approximately $25.7 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable.
Funds from Operations (“FFO”)
    
Historical cost accounting for real estate assets in accordance with principles generally accepted in the United States of America (“GAAP”) implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient for evaluating operating performance.  FFO is a non-GAAP financial measure that is widely recognized as a measure of a REIT’s operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper on Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated entities which resulted from measurable decreases in the fair value of the depreciable real estate held by the unconsolidated entity), plus depreciation and amortization of real estate assets, and after related adjustments for unconsolidated entities and noncontrolling interests.  The determination of whether impairment charges have been incurred is based partly on anticipated operating performance and hold periods.  Estimated undiscounted cash flows from a property, derived from estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred.  While impairment charges for depreciable real estate are excluded from net income (loss) in the calculation of FFO as described above, impairments reflect a decline in the value of the applicable property which we may not recover.
    
We believe that the use of FFO, together with the required GAAP presentations, is helpful in understanding our operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairments of depreciable real estate assets, and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Factors that impact FFO include fixed costs, yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on debt financing, and operating expenses.


30


FFO should not be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.  Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected.  FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO.  FFO is a non-GAAP measurement and should be reviewed in connection with other GAAP measurements.  Our FFO attributable to common stockholders as presented may not be comparable to amounts calculated by other REITs that do not define FFO in the same way that we do.
         
The following section presents our calculations of FFO (as defined by NAREIT) attributable to common stockholders for the three and nine months ended September 30, 2015 and 2014, and provides additional information related to our FFO attributable to common stockholders.
        
The table below is presented in thousands, except per share amounts: 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Net loss
$
(15,832
)
 
$
(16,380
)
 
$
(22,907
)
 
$
(63,337
)
Net loss attributable to noncontrolling interests
57

 
25

 
89

 
89

Dilution of Series A Convertible Preferred Stock
1,926

 
—

 
1,926

 
—

Adjustments (1) (2):
 

 
 

 
 

 
 

Real estate depreciation and amortization
33,111

 
37,520

 
96,868

 
109,841

Impairment of depreciable real estate
—

 
—

 
132

 
8,225

Gain on sale of depreciable real estate
(318
)
 
(4,026
)
 
(59,565
)
 
(4,026
)
Taxes associated with sale of depreciable real estate
(5
)
 
—

 
1,259

 
—

Noncontrolling interests (OP units and vested restricted stock units) share of above adjustments
(56
)
 
(68
)
 
(66
)
 
(185
)
FFO attributable to common stockholders
$
18,883

 
$
17,071

 
$
17,736

 
$
50,607

Weighted average common shares outstanding - basic
48,843

 
49,877

 
49,539

 
49,875

Weighted average common shares outstanding - diluted (3)
49,034

 
49,996

 
49,725

 
49,995

Net loss per common share - basic and diluted (3)
$
(0.28
)
 
$
(0.33
)
 
$
(0.42
)
 
$
(1.27
)
FFO per common share - basic and diluted
$
0.39

 
$
0.34

 
$
0.36

 
$
1.01

_____________
(1)
Reflects the adjustments of continuing operations, as well as discontinued operations.
(2)
Includes adjustments for unconsolidated properties and noncontrolling interests.
(3)
There are no dilutive securities for purposes of calculating the net loss per common share.

Three months ended September 30, 2015, as compared to the three months ended September 30, 2014
FFO attributable to common stockholders for the three months ended September 30, 2015, was approximately $18.9 million as compared to approximately $17.1 million for the three months ended September 30, 2014, an increase of approximately $1.8 million.  The disposition of properties that are now included in discontinued operations resulted in a decrease of $0.4 million. An increase in FFO attributable to common stockholders from continuing operations of approximately $2.2 million primarily related to the following factors:
•
lower interest expense of approximately $3.9 million;
•
dilution of the value of the Series A Convertible Preferred Stock of approximately $1.9 million; and
•an increase in property net operating income of approximately $1.9 million;
partially offset by:
•
an increase in general and administrative expenses of approximately $5.6 million primarily due to costs related to the tender offer and the listing of our common stock on the NYSE of approximately $2.6 million, increased payroll costs of approximately $1.5 million, primarily due to the internalization of services previously provided by BHT Advisors and HPT Management, and includes increased bonuses of approximately $0.9 million, increased acquisition expense of approximately $0.6 million, and an increase to corporate rent expense of approximately $0.4 million, due to the early move-out and relocation of our corporate offices.

31


Nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014
FFO attributable to common stockholders for the nine months ended September 30, 2015, was approximately $17.7 million as compared to approximately $50.6 million for the nine months ended September 30, 2014, a decrease of approximately $32.9 million.  The disposition of properties that are now included in discontinued operations resulted in a decrease of approximately $3.3 million. The decrease in FFO attributable to common stockholders from continuing operations of approximately $29.6 million primarily related to the following factors:
•
an increase in general and administrative expenses of approximately $22.2 million, primarily due to approximately $10.3 million in fees related to the buyout of HPT Management and the termination of services from BHT Advisors, costs related to the tender offer and the listing of our common stock on the NYSE of approximately $5.6 million, increased payroll costs of approximately $3.0 million primarily due to the internalization of services previously provided by BHT Advisors and HPT Management, and includes increased bonuses of approximately $1.3 million, increased acquisition expense of approximately $1.4 million, and an increase to corporate rent expense of approximately $0.4 million, due to the early move-out and relocation of our corporate offices; and
•
loss on early extinguishment of debt of approximately $21.5 million;
partially offset by:
•an increase in property net operating income of approximately $7.3 million;
•
lower interest expense of approximately $5.4 million; and
•
dilution of the value of the Series A Convertible Preferred Stock of approximately $1.9 million.
For a more detailed discussion of the changes in the factors listed above, refer to “Results of Operations” beginning on page 27.

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

Same Store GAAP NOI is equal to rental revenue, less lease termination fee income, property operating expenses (excluding tenant improvement demolition costs), real estate taxes, and property management expenses for our same store properties and is considered a non-GAAP financial measure. Same Store Cash NOI is equal to Same Store GAAP NOI less non-cash revenue items including straight-line rent adjustments and the amortization of above- and below-market rent. The same store properties include our operating properties owned and operated for the entirety of the current and comparable periods and include our current ownership percentage in each period for properties in which we own an unconsolidated interest.  We view Same Store GAAP NOI and Same Store Cash NOI as important measures of the operating performance of our properties because they allow us to compare operating results of properties owned and operated for the entirety of the current and comparable periods and therefore eliminate variations caused by acquisitions or dispositions during the periods under review.

Same Store GAAP NOI and Same Store Cash NOI presented by us may not be comparable to Same Store GAAP NOI or Same Store Cash NOI reported by other REITs that do not define Same Store GAAP NOI or Same Store Cash NOI exactly as we do. We believe that in order to facilitate a clear understanding of our operating results, Same Store GAAP NOI and Same Store Cash NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements and notes thereto. Same Store GAAP NOI and Same Store Cash NOI should not be considered as alternatives to net income (loss) as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions.

32


The table below presents our Same Store GAAP NOI and Same Store Cash NOI with a reconciliation to net loss for the three and nine months ended September 30, 2015 and 2014 (in thousands). The same store properties for this comparison consist of 30 operating properties and 10.2 million square feet. Five operating properties have been excluded from our same store results below including 5950 Sherry Lane, Domain 2, Domain 3, Domain 4, and Domain 7 because we did not own these properties during the three or nine months ended September 30, 2014.
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Same Store Revenue:
 
 
 
 
 
Rental revenue
$
63,394

 
$
60,331

 
$
184,362

 
$
177,520

 
 
Less:
 
 
 
 
 
 
 
 
 
  Lease termination fees
(2,018
)
 
(919
)
 
(2,688
)
 
(1,616
)
 
 
 
61,376

 
59,412

 
181,674

 
175,904

 
 
 
 
 
 
 
 
 
 
Same Store Expenses:
 
 
 
 
 
 
Property operating expenses (less tenant improvement demolition costs)
19,282

 
17,930

 
56,586

 
55,397

 
 
   Real estate taxes
8,731

 
9,638

 
27,112

 
26,989

 
 
   Property management fees
256

 
1,871

 
4,080

 
5,448

 
Property Expenses
28,269

 
29,439

 
87,778

 
87,834

Same Store GAAP NOI - consolidated properties
33,107

 
29,973

 
93,896

 
88,070

Same Store GAAP NOI - unconsolidated properties (at ownership %)
2,750

 
2,571

 
7,888

 
7,839

Same Store GAAP NOI
35,857

 
32,544

 
101,784

 
95,909

 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
  Straight-line rent revenue adjustment
(1,368
)
 
(618
)
 
(4,337
)
 
(2,684
)
 
 
  Amortization of above- and below-market rents, net
(1,476
)
 
(572
)
 
(3,750
)
 
(2,467
)
Same Store Cash NOI consolidated properties
30,263

 
28,783

 
85,809

 
82,919

Same Store Cash NOI - unconsolidated properties (at ownership %)
2,455

 
2,408

 
7,088

 
6,986

Same Store Cash NOI
$
32,718

 
$
31,191

 
$
92,897

 
$
89,905

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of net loss to Same Store GAAP NOI and Same Store Cash NOI
 
 
 
 
 
 
 
 
Net loss
$
(15,832
)
 
$
(16,380
)
 
$
(22,907
)
 
$
(63,337
)
 
 
Adjustments:
 
 
 
 
 
 
 
 
 
  Interest expense
12,765

 
16,706

 
44,747

 
50,120

 
 
  Asset impairment losses
—

 
—

 
132

 
8,225

 
 
  Tenant improvement demolition costs
106

 
244

 
312

 
1,424

 
 
  General and administrative
10,123

 
4,515

 
36,007

 
13,816

 
 
  Depreciation and amortization
31,446

 
29,885

 
92,549

 
87,988

 
 
  Interest and other income
(267
)
 
(88
)
 
(553
)
 
(432
)
 
 
  Loss on early extinguishment of debt
30

 
—

 
21,478

 
—

 
 
  Provision for income taxes
36

 
36

 
1,298

 
45

 
 
  Equity in operations of investments
159

 
(431
)
 
(153
)
 
(1,314
)
 
 
  (Income) loss from discontinued operations
(21
)
 
5,975

 
(1,390
)
 
13,260

 
 
  Gain on sale of discontinued operations
(403
)
 
(4,026
)
 
(15,086
)
 
(4,026
)
 
 
  (Gain) loss on sale of assets
85

 
—

 
(44,479
)
 
—

 
 
  Net operating income of non-same store properties
(3,102
)
 
(5,544
)
 
(15,371
)
 
(16,083
)
 
 
  Lease termination fees
(2,018
)
 
(919
)
 
(2,688
)
 
(1,616
)
 
 
Same store GAAP NOI unconsolidated properties (at ownership %)
2,750

 
2,571

 
7,888

 
7,839

Same Store GAAP NOI
35,857

 
32,544

 
101,784

 
95,909

 
 
  Straight-line rent revenue adjustment
(1,368
)
 
(618
)
 
(4,337
)
 
(2,684
)
 
 
  Amortization of above- and below-market rents, net
(1,476
)
 
(572
)
 
(3,750
)
 
(2,467
)
 
 
Cash NOI adjustments for unconsolidated properties (at ownership %)
(295
)
 
(163
)
 
(800
)
 
(853
)
Same Store Cash NOI
$
32,718

 
$
31,191

 
$
92,897

 
$
89,905


33


Same Store GAAP NOI for the three months ended September 30, 2015, was approximately $35.86 million as compared to approximately $32.54 million for the three months ended September 30, 2014, a $3.32 million increase, or 10.2%. Same Store Cash NOI for the three months ended September 30, 2015 was approximately $32.72 million as compared to approximately $31.19 million, a $1.53 million increase, or 4.9%. Same Store GAAP NOI for the nine months ended September 30, 2015, was approximately $101.78 million as compared to approximately $95.91 million for the nine months ended September 30, 2014, a $5.87 million increase, or 6.1%. Same Store Cash NOI for the nine months ended September 30, 2015 was approximately $92.90 million as compared to approximately $89.91 million, a $2.99 million increase, or 3.3%.

For a more detailed discussion of certain of the changes in the factors listed above, refer to “Results of Operations” beginning on page 27.
Liquidity and Capital Resources 
    
As of September 30, 2015, we had cash and cash equivalents of approximately $7.8 million and restricted cash of approximately $16.6 million.  We also have a credit facility with a borrowing capacity of $750.0 million (as described in more detail below). As of September 30, 2015, we had approximately $626.0 million drawn and had the ability to additionally borrow approximately $66.3 million under the credit facility as a whole. Additional availability may be made available to us upon inclusion of any of our other unencumbered properties in the collateral pool.

Our expected actual and potential short and long-term liquidity sources are, among others, cash and cash equivalents, restricted cash, revenue from our properties, proceeds from available borrowings under our credit facility and additional secured or unsecured debt financings and refinancings, and proceeds from the sales of properties in connection with our efforts to sharpen our geographic focus. We believe our recent listing on the NYSE will facilitate supplementing these sources by selling equity or debt securities of the Company if and when we believe appropriate to do so.
 
We may also seek to generate capital by contributing one or more of our existing assets to a joint venture with a third party. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved. Our ability to successfully identify, negotiate, and complete joint venture transactions on acceptable terms or at all is highly uncertain.

Generally, our operating cash needs are property operating expenses, general and administrative expenses, payment of principal and interest on our outstanding indebtedness, including repaying or refinancing our outstanding indebtedness as it matures, capital improvements to our properties, including commitments for future tenant improvements, property acquisitions, and distributions to our stockholders. As of September 30, 2015, approximately $262.8 million of debt, including our share of debt at our unconsolidated properties, matures before the end of 2016. In October 2015, approximately $52.2 million of this debt was paid off.
  
At projected operating levels, we anticipate we have adequate capital resources and liquidity to meet our short-term and long-term liquidity requirements.

Notes Payable

Our notes payable was approximately $1.1 billion in principal amount at September 30, 2015, and was secured by real estate assets with a carrying value of approximately $1.4 billion as of September 30, 2015. As of September 30, 2015, all of our outstanding debt was fixed rate debt (or effectively fixed rate debt, through the use of interest rate swaps), with the exception of approximately $156.8 million from borrowings on our revolving line of credit and the construction loan for Two BriarLake Plaza. As of September 30, 2015, the stated annual interest rates on our outstanding notes payable, excluding mezzanine financing, ranged from 1.81% to 6.09%. We had mezzanine financing on one property with a stated annual interest rate of 9.80%. As of September 30, 2015, the effective weighted average interest rate for our consolidated notes payable is approximately 4.19%. For our loan that is in default and detailed below, we incur a default interest rate that is 500 basis points higher than the stated interest rate, which results in an overall effective weighted average interest rate of 4.53%.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of September 30, 2015, we were in default on a non-recourse property loan with an outstanding balance of approximately $49.1 million secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately $37.0 million as of September 30, 2015, and we anticipate that we will convey ownership of this property to the lender. As of September 30, 2015, other than the default discussed above, we believe we were in compliance with the covenants under each of our loan agreements, and our notes payable had maturity dates that range from January 2016 to June 2022. In October 2015, we paid off, without penalty, the approximately $46.8 million in debt that was scheduled to mature in January 2016.

34


Credit Facility
 
Through our operating partnership, Tier OP, we have a secured credit agreement providing for total borrowings of up to $750.0 million. The facility consists of a $250.0 million term loan, a $275.0 million term loan, and a $225.0 million revolving line of credit. The first term loan matures on December 18, 2019. The second term loan matures on June 30, 2022. The revolving line of credit matures on December 18, 2018, and can be extended one additional year subject to certain conditions and payment of an extension fee. The annual interest rate on the credit facility is equal to either, at our election, (1) the “base rate” (calculated as the greatest of (i) the agent’s “prime rate”; (ii) 0.5% above the Federal Funds Effective Rate; or (iii) the LIBOR Market Index Rate plus 1.0%) plus the applicable margin or (2) LIBOR for an interest period of one, three, or six months plus the applicable margin.  The applicable margin will be determined based on the ratio of total indebtedness to total asset value and ranges from 45 basis points to 260 basis points.  We have entered into interest rate swap agreements to hedge interest rates on $525.0 million of these borrowings to manage our exposure to future interest rate movements. All amounts owed are guaranteed by us and certain subsidiaries of Tier OP.  Draws under the credit facility are secured by a perfected first priority lien and security interest in a collateral pool that consists of 14 properties owned by certain of our subsidiaries as of September 30, 2015. As of September 30, 2015, we had approximately $525.0 million in borrowings outstanding under the term loans and approximately $101.0 million borrowings outstanding under the revolving line of credit with an additional $66.3 million of borrowings available under the facility as a whole. Additional availability may be made available to us upon inclusion of any of our other unencumbered properties in the collateral pool. As of September 30, 2015, the effective weighted average stated interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.24%.
 
Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of numerous factors, including but not limited to our performance over the previous period, expectations of performance over future periods, forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand and general financial condition. The board’s decisions are also influenced, in substantial part, by the requirements necessary to maintain our REIT status.

Our board of directors reinstated quarterly cash distributions beginning in the second quarter of 2015, at $0.18 per share per quarter, and authorized cash distributions in the same amount for each of the third and fourth quarters of 2015. This equates to approximately $17.6 million paid to our common stockholders through October 8, 2015. Distributions declared prior to June 2, 2015, have been adjusted for the one-for-six reverse stock split that occurred on June 2, 2015. We anticipate that the board of directors will continue to consider authorizing a quarterly distribution payable from cash anticipated to be provided by operations. Distributions are authorized at the discretion of our board of directors based on its analysis of numerous factors, including but not limited to our forthcoming cash needs and our financial condition, and there is no assurance that distributions will continue or at any particular rate or timing. All or a portion of the distribution may constitute a return of capital.
 
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate changes primarily as a result of our debt used to acquire properties. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we borrow primarily at fixed rates or variable rates with what we believe are the lowest margins available at the time and in some cases, the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We have entered into derivative financial instruments to mitigate our interest rate risk on certain financial instruments and as a result have effectively fixed the interest rate on certain of our variable rate debt. As of September 30, 2015, we had approximately $681.8 million of debt that bears interest at a variable rate. Approximately $525.0 million of this variable rate debt has been effectively fixed through the use of interest rate swaps.
A 100 basis point increase in interest rates on our variable rate debt would result in a net increase in total annual interest incurred of approximately $1.6 million. A 100 basis point decrease in interest rates on our variable rate debt would result in a net decrease in total annual interest incurred of approximately $0.3 million. A 100 basis point increase in interest rates on our variable rate debt would result in a net increase in the fair value of our interest rate swaps of approximately $26.6 million. A 100 basis

35

point decrease in interest rates on our variable rate debt would result in a net decrease in the fair value of our interest rate swaps of approximately $26.6 million.
We do not have any foreign operations and thus we are not directly exposed to foreign currency fluctuations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated as of September 30, 2015, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2015, were effective for the purpose of ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2015, in connection with the termination of administrative services previously provided by BHT Advisors, we began using a new payroll processing provider and new associated software. While we believe there was no significant change in internal control that resulted from this change, there are inherent risks associated with implementing vendor and software changes. We believe the internal controls over financial reporting continue to be designed appropriately and operate effectively over this process. There were no other changes in internal control over financial reporting that occurred during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



36


PART II
OTHER INFORMATION
Item 1. Legal Proceedings.

We are not party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.

Except to the extent updated below or previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014.
There is no assurance that an active market will develop and be sustained for our shares of common stock or regarding the prices at which our shares may trade.

Our shares of common stock were listed on the NYSE on July 23, 2015. Listing on the NYSE does not ensure that an active market will develop for our common stock. It is possible that the daily trading volumes for our common stock may be relatively small compared to other publicly traded securities. Accordingly, no assurance can be given as to (1) the likelihood that an active market for the stock will develop and be sustained, (2) the liquidity of any such market, (3) the ability of our stockholders to sell their common stock or (4) the price that our stockholders may obtain for their common stock. Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. We cannot predict the prices at which our shares will trade.

Because we have a large number of stockholders and our common stock was not listed on a national securities exchange prior to July 23, 2015, there may be significant pent-up demand to sell our shares. Significant sales of our common stock, or the perception that significant sales of such shares could occur, may cause the market price of our common stock to decline significantly.

Prior to July 23, 2015, our common stock was not listed on any national securities exchange, and the ability of stockholders to liquidate their investments was limited. A large volume of sales of shares of our common stock could decrease the prevailing market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our shares are not affected, the mere perception of the possibility of these sales could depress the market price of our common stock and have a negative effect on our ability to raise capital in the future. In addition, anticipated downward pressure on our common stock price due to actual or anticipated sales of common stock from this market overhang could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the market price of our common stock to decline.

The availability, timing, and amount of any cash distributions are uncertain.
Our board of directors reinstated quarterly cash distributions beginning in the second quarter of 2015, at $0.18 per share per quarter, and authorized cash distributions in the same amount for each of the third and fourth quarters of 2015. We anticipate that the board of directors will continue to consider authorizing a quarterly distribution payable from cash anticipated to be provided by operations. We can provide no assurance, however, regarding the availability, timing or amount of any cash distributions. Distributions are authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition and other factors that our board deems relevant. Our board also considers the requirements necessary to maintain our REIT status under the Internal Revenue Code of 1986, as amended.

37


The market price and trading volume of our common stock may be volatile.

The trading price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

•
actual or anticipated variations in our quarterly operating results or dividends;
•
changes in our earnings estimates;
•
publication of research reports about us or the real estate industry;
•
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
•
changes in market valuations of similar companies;
•
adverse market reaction to any additional debt we incur in the future;
•
additions or departures of key management personnel;
•
actions by institutional stockholders;
•
speculation in the press or investment community;
•
the realization of any of the other risk factors presented in our Annual Report on Form 10-K or in our other public filings;
•
the extent of investor interest in our securities;
•
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate based companies;
•
our underlying asset value;
•
investor confidence in the stock and bond markets generally;
•
changes in tax laws;
•
future equity issuances or the perception that such equity issuances may occur;
•
failure to meet earnings estimates;
•
failure to maintain our status as a REIT; and
•
general market and economic conditions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table includes information regarding purchases of our common stock made by us during the third quarter ended September 30, 2015. These purchases represent the common stock purchased in connection with our tender offer.
 
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Maximum number of shares that may yet be purchased under the plans or programs
July 2015
 
—
 
—
 
not applicable
 
not applicable
August 2015
 
2,631,578
 
$19.00
 
2,631,578
 
not applicable
September 2015
 
—
 
—
 
not applicable
 
not applicable

Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.

38


Item 5. Other Information.
    
None.    
Item 6. Exhibits.
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

39


SIGNATURE 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
TIER REIT, INC.
Dated: November 4, 2015
By:
/s/ James E. Sharp
 
 
James E. Sharp
 
 
Chief Accounting Officer
 
 
(Principal Accounting Officer)

40


Index to Exhibits
Exhibit Number
 
Description
10.1
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Scott W. Fordham (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.2
 
Second Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Dallas E. Lucas (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.3
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and William J. Reister (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.4
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and Telisa Webb Schelin (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
10.5
 
Third Amendment to Employment Agreement, effective as of July 15, 2015, by and between TIER REIT, Inc. and Tier Operating Partnership LP and James E. Sharp (previously filed and incorporated by reference to Form 8-K filed on July 15, 2015)
31.1
 
Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
31.2
 
Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
32.1*
 
Section 1350 Certifications (furnished herewith)
99.1
 
First Amendment to Amended and Restated Credit Agreement, dated as of July 20, 2015, by and among Tier Operating Partnership LP as Borrower; TIER REIT, Inc. as Parent; certain subsidiaries of TIER REIT, Inc. signatory thereto; and Wells Fargo Bank National Association as Administrative Agent (previously filed and incorporated by reference to Form 8-K filed on July 20, 2015)
101
 
The following financial information from TIER REIT, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith)
 _______________________________________________________________

*                 In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certification will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

41

TIER REIT INC Reports