PACIFIC OFFICE PROPERTIES TRUST, INC. - FORM 10-Q

Attached files

file	filename
EX-10.3 - EXHIBIT 10.3 - PACIFIC OFFICE PROPERTIES TRUST, INC.	ex103shidlerindemnification.htm
EX-32.1 - EXHIBIT 32.1 - PACIFIC OFFICE PROPERTIES TRUST, INC.	ex321-2016930.htm
EX-31.1 - EXHIBIT 31.1 - PACIFIC OFFICE PROPERTIES TRUST, INC.	ex311-2016930.htm
EX-10.2 - EXHIBIT 10.2 - PACIFIC OFFICE PROPERTIES TRUST, INC.	ex102panambuildingpsa.htm
EX-10.1 - EXHIBIT 10.1 - PACIFIC OFFICE PROPERTIES TRUST, INC.	ex101loanagreement.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016



¨	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: 1-9900

PACIFIC OFFICE PROPERTIES TRUST, INC.

(Exact name of registrant as specified in its charter)



Maryland	86-0602478
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

841 Bishop Street, Suite 1700

Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code): (808) 521-7444

(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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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 (check one):



Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 8, 2016 there were issued and outstanding 3,941,142 shares of Class A Common Stock, par value $0.0001 per share; 100 shares of Class B Common Stock, par value $0.0001 per share; and 2,410,839 shares of Senior Common Stock, par value $0.0001 per share.

PACIFIC OFFICE PROPERTIES TRUST, INC.

TABLE OF CONTENTS

FORM 10-Q



	Page No.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	41

PART II – OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3. Defaults Upon Senior Securities	42
Item 4. Mine Safety Disclosures	42
Item 5. Other Information	42
Item 6. Exhibits	42
Signature	44

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited).

Pacific Office Properties Trust, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)



	September 30, 2016			December 31, 2015
ASSETS	(unaudited)
Investments in real estate, net	$	193,525		$	197,860
Cash and cash equivalents	2,358			3,817
Restricted cash	13,062			4,465
Rents and other receivables, net	903			971
Deferred rents	3,982			3,690
Intangible assets, net	5,517			5,988
Prepaid expenses	2,182			260
Goodwill	37,665			37,665
Investments in unconsolidated joint ventures	899			913
Total assets	$	260,093		$	255,629

LIABILITIES AND EQUITY (DEFICIT)
Liabilities:
Mortgage and other loans, net	$	299,761		$	290,720
Unsecured notes payable to current and former related parties	32,433			29,433
Accounts payable and other liabilities	43,999			40,797
Accrued interest payable to current and former related parties (Note 8)	18,140			15,627
Acquired below-market leases, net	3,068			3,242
Total liabilities	397,401			379,819

Commitments and contingencies (Note 9)
Equity (cumulative deficit):
Preferred Stock, $0.0001 par value per share, 100,000,000 shares authorized, one share of Proportionate Voting Preferred Stock issued and outstanding at September 30, 2016 and December 31, 2015	—			—
Senior Common Stock, $0.0001 par value per share (liquidation preference $10 per share, $24,108 as of September 30, 2016 and December 31, 2015) 40,000,000 shares authorized, 2,410,839 shares issued and outstanding at September 30, 2016 and December 31, 2015	21,459			21,459
Class A Common Stock, $0.0001 par value per share, 599,999,900 shares authorized, 3,941,142 shares issued and outstanding at September 30, 2016 and December 31, 2015	185			185
Class B Common Stock, $0.0001 par value per share, 100 shares authorized, issued and outstanding at September 30, 2016 and December 31, 2015	—			—
Additional paid-in capital	110			110
Cumulative deficit	(177,754		)	(174,888		)
Total stockholders’ equity (deficit)	(156,000		)	(153,134		)
Non-controlling interests:
Preferred unitholders in the Operating Partnership	127,268			127,268
Common unitholders in the Operating Partnership	(108,576		)	(98,324		)
Total equity (deficit)	(137,308		)	(124,190		)
Total liabilities and equity (deficit)	$	260,093		$	255,629

See accompanying notes to consolidated financial statements.

Pacific Office Properties Trust, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)



	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
Revenue
Rental	$	5,116		$	5,326		$	15,861		$	15,621
Tenant reimbursements	4,190			4,210			12,775			12,527
Parking	1,572			1,532			4,780			4,419
Other	53			84			263			219
Total revenue	10,931			11,152			33,679			32,786
Expenses
Rental property operating	6,551			6,467			18,798			18,882
General and administrative	473			481			1,313			1,280
Depreciation and amortization	2,609			2,714			7,833			8,054
Interest	5,347			5,193			15,681			15,377
Total expenses	14,980			14,855			43,625			43,593

Loss from continuing operations before equity in net income (loss) of unconsolidated joint ventures	(4,049		)	(3,703		)	(9,946		)	(10,807		)
Equity in net income (loss) of unconsolidated joint ventures	(56		)	625			(157		)	557
Loss from continuing operations	(4,105		)	(3,078		)	(10,103		)	(10,250		)
Discontinued operations:
Income (loss) from discontinued operations before loss on sale of property	—			2			—			(28		)
Loss on sale of property	—			—			—			(156		)
Income (loss) from discontinued operations	—			2			—			(184		)

Net loss	(4,105		)	(3,076		)	(10,103		)	(10,434		)
Net (income) loss attributable to non-controlling interests:
Preferred unitholders in the Operating Partnership	(568		)	(568		)	(1,704		)	(1,704		)
Common unitholders in the Operating Partnership	3,993			3,189			10,252			10,511
Net loss attributable to non-controlling interests	3,425			2,621			8,548			8,807

Net loss attributable to common stockholders before dividends paid and accrued on Senior Common Stock	(680		)	(455		)	(1,555		)	(1,627		)
Dividends paid and accrued on Senior Common Stock	(436		)	(436		)	(1,311		)	(1,311		)
Net loss attributable to common stockholders	$	(1,116	)	$	(891	)	$	(2,866	)	$	(2,938	)

Loss per common share:
Loss from continuing operations	$	(0.29	)	$	(0.23	)	$	(0.73	)	$	(0.74	)
Loss from discontinued operations	—			—			—			(0.01		)
Net loss per common share - basic and diluted	$	(0.29	)	$	(0.23	)	$	(0.73	)	$	(0.75	)

Weighted average number of common shares outstanding - basic and diluted	3,941,242			3,941,242			3,941,242			3,941,242

See accompanying notes to consolidated financial statements.

Pacific Office Properties Trust, Inc. Consolidated Statements of Cash Flows (in thousands and unaudited)

	For the nine months ended September 30,
	2016			2015
Operating activities
Net loss	$	(10,103	)	$	(10,434	)
Loss from discontinued operations	—			(184		)
Loss from continuing operations	(10,103		)	(10,250		)
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating activities - continuing operations:
Depreciation and amortization	7,833			8,054
Gain on the sale of property	(55		)	—
Deferred rent	(261		)	(25		)
Deferred ground rents	931			1,531
Interest amortization	3,151			2,402
Below-market lease amortization	(174		)	(174		)
Equity in net loss of unconsolidated joint ventures	157			(557		)
Bad debt expense	49			10
Changes in operating assets and liabilities:
Restricted cash for operating activities	(1,381		)	823
Rents and other receivables	(12		)	(113		)
Other assets	(1,922		)	(1,008		)
Accounts payable and other liabilities	426			(519		)
Net cash (used in) provided by operating activities - continuing operations	(1,361		)	174
Net cash used in operating activities - discontinued operations	—			(139		)
Net cash (used in) provided by operating activities	(1,361		)	35

Investing activities
Additions to and improvement of real estate	(2,989		)	(3,596		)
Distributions from unconsolidated joint ventures	—			875
Contributions to unconsolidated joint ventures	(143		)	(10		)
Net sales proceeds from the sale of property	111			8,552
Payment of leasing commissions	(599		)	(923		)
Change in restricted cash used for capital expenditures	(7,215		)	(460		)
Net cash (used in) provided by investing activities	(10,835		)	4,438

Pacific Office Properties Trust, Inc. Consolidated Statements of Cash Flows, continued (in thousands and unaudited)

	For the nine months ended September 30,
	2016			2015

Financing activities
Repayment of mortgage notes payable	(266,000		)	(6,295		)
Proceeds from mortgage notes payable	280,500			—
Borrowing from related party	3,000			—
Security deposits	(47		)	16
Financing costs	(6,061		)	—
Senior Common Stock dividends	(655		)	(655		)
Net cash provided by (used in) financing activities	10,737			(6,934		)

Decrease in cash and cash equivalents	(1,459		)	(2,461		)
Cash and cash equivalents at beginning of period	3,817			6,904
Cash and cash equivalents at end of period	$	2,358		$	4,443


Supplemental cash flow information
Interest paid	$	12,659		$	13,059

Supplemental disclosure of non-cash investing and financing activities
Accrued dividends and distributions	$	2,360		$	2,360
Change in accrued capital expenditures	$	(505	)	$	336

See accompanying notes to consolidated financial statements.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements

(unaudited)

1. Organization and Ownership and Presentation

Pacific Office Properties -

The terms “Pacific Office Properties,” “us,” “we,” and “our” as used in this Quarterly Report on Form 10-Q refer to Pacific Office Properties Trust, Inc., a Maryland corporation (the “Company”), and its subsidiaries and joint ventures. Through our controlling interest in Pacific Office Properties, L.P. (the “Operating Partnership”), of which we are the sole general partner, and the subsidiaries of the Operating Partnership, we own and operate primarily institutional-quality office properties in Hawaii. We operate in a manner that permits us to satisfy the requirements for taxation as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”).

We are externally advised by Shidler Pacific Advisors, LLC (“Shidler Pacific Advisors”), an entity that is owned and controlled by Jay H. Shidler (“Mr. Shidler”), our Chairman of the Board. Lawrence J. Taff, our President, Chief Executive Officer, Chief Financial Officer and Treasurer, also serves as President of Shidler Pacific Advisors. Shidler Pacific Advisors is responsible for the day-to-day operation and management of the Company, including management of our wholly-owned properties.

Through our Operating Partnership, as of September 30, 2016, we owned three office properties comprising 1.2 million rentable square feet, and were partners with third parties in three joint ventures holding two office properties, comprising four buildings and 0.8 million rentable square feet, and a sports club associated with our City Square property in Phoenix, Arizona. Our ownership interest percentage in each of these joint ventures is 5.0%. As of September 30, 2016, our property portfolio included office buildings in Honolulu and Phoenix.

Basis of Presentation

The accompanying consolidated financial statements and related disclosures included herein are presented in accordance with United States generally accepted accounting principles (“GAAP”) and include the account balances and transactions of consolidated subsidiaries, which are wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The adoption of Accounting Standards Update No. 2015-02, Consolidation (Topic 810), Amendments to the Consolidation Analysis, did not have a material impact on our basis of presentation. Our Operating Partnership was determined to be a variable interest entity because certain of its limited partners do not have substantive kick-out or participating rights. Although we are the primary beneficiary of the Operating Partnership due to our controlling operational and financial interests in the Operating Partnership, the presentation of our consolidated financial statements and disclosures were not impacted because the Operating Partnership was already consolidated in the Company’s financial statements.

Certain amounts in the consolidated balance sheets for the prior period have been reclassified to conform to the current period presentation pursuant to the adoption of Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs with no corresponding effect on the previously reported consolidated results of operations, or financial position of the Company. See “Mortgage and Other Loans” in Note 2 for more discussion on the adoption of this pronouncement.

We have also prepared the accompanying unaudited consolidated financial statements in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X and, consequently, they do not include all of the annual disclosures required by GAAP. Reference is made to our Annual Report on Form 10-K for the year ended December 31, 2015 for additional disclosures, including a summary of our significant accounting policies. There have been no changes to our significant accounting policies during the nine months ended September 30, 2016. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal and recurring items, except as otherwise noted, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for the nine months ended September 30, 2016 are not necessarily indicative of future results.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies

Use of Estimates in Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

Liquidity

Our business is capital intensive and our ability to maintain our operations depends on our cash flow from operations and our ability to raise additional capital on acceptable terms. Our primary focus is to preserve and generate cash.

We expect to meet our short-term liquidity and capital requirements primarily through existing cash on hand, net cash provided by rental activities, distributions from joint ventures and/or asset dispositions. We expect to meet our long-term capital requirements through net cash provided by operating activities, borrowings under our revolving credit facility (if available), refinancing of existing debt or through other available investment and financing activities, including the contribution of existing wholly-owned assets to joint ventures (partial sell-down of equity interests in wholly-owned assets), asset dispositions and/or additional secured or unsecured debt financings. In January 2015, we completed the sale of our Clifford Center property, located in Honolulu, Hawaii, to an unaffiliated third party. The net proceeds from the sale of the Clifford Center property, after repaying the related mortgage loans and transaction-related expenses, were approximately $2.1 million. We may also consider strategic alternatives, including a sale, merger, other business combination or recapitalization, of the Company.

In August 2016, we entered into (1) a new loan agreement, the proceeds of which were used to repay in full the existing mortgage loans that were scheduled to mature on various dates in 2016 and (2) a purchase and sale agreement to sell our Pan Am Building property, located in Honolulu, Hawaii. The completion of the sale transaction is scheduled to occur no later than August 13, 2018, but is not expected to occur prior to the first quarter of 2018. See Note 7 for more discussion on the new loan agreement and Note 11 for more discussion on the contemplated sale of our Pan Am Building.

In September 2016, we issued a promissory note in the principal amount of $3.0 million to Shidler Equities, L.P., a Hawaii limited partnership controlled by Mr. Shidler (“Shidler LP”), in consideration of a loan in that amount made by Shidler LP to the Operating Partnership. See Note 8 for more discussion on the new promissory note.

We are focused on ensuring our properties are operating as efficiently as possible. We have taken steps to identify opportunities to reduce discretionary operating costs wherever possible and at the same time maintaining the quality of our buildings and the integrity of our management services. We have no employees and rely upon our advisor to provide substantially all of our day-to-day management. We believe that Shidler Pacific Advisors can provide adequate personnel resources, at lower cost to us, for our current and prospective business. Effective January 1, 2015, Shidler Pacific Advisors agreed to reduce the corporate management fee payable by us from $0.21 million per quarter to $0.18 million per quarter.

Capital expenditures fluctuate in any given period, subject to the nature, extent and timing of improvements required to maintain our properties. Leasing costs also fluctuate in any given period, depending upon such factors as the type of property, the term of the lease, the type of lease and overall market conditions. Our costs for capital expenditures and leasing fall into two categories: (1) amounts that we are contractually obligated to spend and (2) discretionary amounts. As of September 30, 2016, we had cash reserves of $7.7 million to fund capital expenditures and leasing costs, of which we were obligated to spend $2.1 million through 2017.

As of September 30, 2016, our total consolidated debt (which includes our mortgage and other loans with a carrying value of $299.8 million and our unsecured promissory notes with a carrying value of $32.4 million) was $332.2 million, with a weighted average interest rate of 4.85% and a weighted average remaining term of 2.51 years.

As of September 30, 2016, we had a fully-drawn $25.0 million unsecured credit facility scheduled to mature on December 31, 2016. We also had promissory notes payable to certain current and former affiliates in the aggregate outstanding principal

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

amount of $32.4 million (together with accrued and unpaid interest of $18.1 million) scheduled to mature the earlier of (i) December 31, 2016 (or, if later, the maturity date of indebtedness under the Operating Partnership’s credit facility with First Hawaiian Bank, but in any event not later than December 31, 2017) and (ii) the date on which the Operating Partnership has fully satisfied, or is released from, any liability under the Indemnification Agreement, dated as of September 2, 2009 (as subsequently amended), between the Operating Partnership and Shidler LP.

While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. While we believe that access to future sources of significant cash will be challenging, we believe that we will have access to some of the liquidity sources identified above, and that those sources will be sufficient to meet our near-term liquidity needs.

Investments in Real Estate

We account for acquisitions of real estate utilizing the purchase method and, accordingly, the results of operations of acquired properties are included in our results of operations from the respective dates of acquisition.

Investments in real estate properties are stated at cost, less accumulated depreciation, amortization and impairment. Our wholly-owned properties, all of which were contributed to us at the time of our formation transactions in 2008, are stated at their historical net cost basis in an amount attributable to the ownership interests in such properties owned by Mr. Shidler prior to the formation transactions. Additions to land, buildings and improvements, furniture, fixtures and equipment and construction in progress are recorded at cost.

Transaction costs related to acquisitions are expensed. Costs associated with developing space for its intended use are capitalized and amortized over their estimated useful lives, commencing at the later of the improvement completion date or the lease commencement date.

Estimates of future cash flows and other valuation techniques are used to allocate the acquisition cost of acquired properties among land, buildings and improvements, and identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired below-market leases, and acquired above- and below-market ground leases.

The fair values of real estate assets acquired are determined on an “as-if-vacant” basis. The “as-if-vacant” fair value is allocated to land, and where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information obtained in connection with the acquisition of the property.

Fair value is assigned to below-market leases based on the difference between (a) the contractual amounts to be paid by the tenant based on the existing lease and (b) management’s estimate of current market lease rates for the corresponding in-place leases, over the remaining terms of the in-place leases. Capitalized below-market lease amounts are reflected in “Acquired below-market leases, net,” in the consolidated balance sheets and are amortized as an increase in rental revenue over the remaining initial non-cancellable lease terms plus the terms of any below-market fixed rate renewal options that are considered bargain renewal options. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance, net of the security deposit, of the related intangible is written off.

Fair value is also assigned to tenant relationships. Capitalized tenant relationship amounts are included in “Intangible assets, net” in the accompanying consolidated balance sheets and are amortized to “Depreciation and amortization” in the accompanying consolidated statements of operations. Amounts are amortized over the remaining terms of the respective leases even if a tenant vacates prior to the contractual termination of the lease. An adjustment to tenant relationship amounts occurs should the property experience an impairment loss.

The aggregate value of other acquired intangible assets consists of acquired in-place leases. The fair value allocated to acquired in-place leases consists of a variety of components including, but not necessarily limited to: (a) the value associated

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

with avoiding the cost of originating the acquired in-place lease (i.e. the market cost to execute a lease, including leasing commissions and legal fees, if any); (b) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period (i.e. real estate taxes, insurance and other operating expenses); (c) the value associated with lost rental revenue from existing leases during the assumed lease-up period; and (d) the value associated with any other inducements to secure a tenant lease. The value assigned to acquired in-place leases is amortized over the remaining lives of the related leases.

We record the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested for impairment at a level of reporting referred to as a reporting unit on an annual basis, during the fourth quarter of each calendar year, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. See “Goodwill” below. An impairment loss for an asset group is allocated to the long-lived assets of the group on a pro-rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset shall not reduce the carrying amount of that asset below its fair value. A description of our testing policy is set forth in “Impairment of Long-Lived Assets” below.

Impairment of Long-Lived Assets

In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment, we assess the potential for impairment of our long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicate that the recorded carrying value might not be fully recoverable. Indicators of potential impairment include significant decreases in occupancy levels and/or rental rates or a change in strategy that results in a decreased holding period. We determine whether impairment in value has occurred by comparing the estimated future cash flows, undiscounted and excluding interest, expected from the use and eventual disposition of the asset to its carrying value. If the undiscounted cash flows do not exceed the carrying value, the real estate or intangible carrying value is reduced to fair value and impairment loss is recognized. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. No impairment charges for our wholly-owned properties were recorded for the three and nine month periods ended September 30, 2016 or 2015.

Investments in Unconsolidated Joint Ventures

Our investments in joint ventures are accounted for under the equity method of accounting because we exercise significant influence over, but do not control, our joint ventures. Our joint venture partners have substantive participating rights, including approval of and participation in setting operating budgets. Accordingly, we have determined that the equity method of accounting is appropriate for our investments in joint ventures.

Investments in unconsolidated joint ventures are initially recorded at cost and are subsequently adjusted for our proportionate equity in the net income or net loss of the joint ventures, contributions made to, or distributions received from, the joint ventures and other adjustments. We record distributions of operating profit from our investments in unconsolidated joint ventures as part of cash flows from operating activities and distributions related to a capital transaction, such as a refinancing transaction or sale, as investing activities in the consolidated statements of cash flows.

We evaluate all investments in accordance with the guidance of FASB Accounting Standards Update No. 2015-02, Consolidation (Topic 810), Amendments to the Consolidation Analysis, which we adopted on January 1, 2016 and which requires us to re-evaluate our joint venture investments to determine whether or not the joint ventures are variable interest entities (“VIEs”) and if they are VIEs, whether or not we are determined to be the primary beneficiary. We would consolidate a VIE if it is determined that we are the primary beneficiary. We use qualitative analyses to determine whether we are the primary beneficiary of a VIE. Consideration of various factors could include, but is not limited to, the purpose and design of the VIE, risks that the VIE was designed to create and pass through, the form of our ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, our ability to participate in policy making decisions, and the rights of the other investors to participate in the decision making process and to replace the manager and/or liquidate the venture, if applicable. Under the amended standards, our joint ventures were determined to be VIEs based on our inability to control the joint ventures due to our lack of substantive kick-out and participating rights over our joint venture partners; however, we are not the primary beneficiaries of these VIEs because we lack the power to direct the activities of the joint

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

ventures and do not have rights to significant financial benefits from each of our joint ventures. As of September 30, 2016, our maximum exposure to loss with respect to this arrangement is limited to the $0.9 million carrying value of our investments in the unconsolidated joint ventures.

Impairment of Investments in Unconsolidated Joint Ventures

Our investment in unconsolidated joint ventures is subject to a periodic impairment review and is considered to be impaired when a decline in fair value is judged to be other-than-temporary. An investment in an unconsolidated joint venture that we identify as having an indicator of impairment is subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write down the investment to its estimated fair value. No impairment charges were recorded in our investments in unconsolidated joint ventures for the three and nine month periods ended September 30, 2016 or 2015.

Discontinued Operations

The revenue, expenses, impairment and/or gain on sale of operating properties that meet the applicable criteria of FASB Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity are reported as discontinued operations in the consolidated statement of operations. A gain on sale, if any, is recognized in the period the property is disposed of.

In determining whether to report the results of operations, impairment and/or gain on sale of operating properties as discontinued operations, we evaluate whether the property that has been disposed of by sale, disposed of other than by sale or is classified as held for sale represents a strategic shift that has or will have a major effect on our operations and financial results. A strategic shift could include the disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity.

We classify properties as held for sale when certain criteria set forth in the Long-Lived Assets Classified as Held for Sale Subsections of FASB ASC 360, Property, Plant and Equipment, are met, including when we receive cash deposits towards the purchase of our properties. At that time, we present the non-cash assets and liabilities of the property held for sale separately in our consolidated balance sheets. We cease recording depreciation and amortization expense at the time a property is classified as held for sale. Properties held for sale are reported at the lower of their carrying amount or their 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. In January 2015, we completed the sale of the Clifford Center property, and accordingly, the associated assets and liabilities had been removed from our consolidated balance sheet as of December 31, 2015 and the results of its operations before the sale, including post-closing activities since the sale, for the three and nine month periods ended September 30, 2015 are included in “Discontinued operations” in the accompanying consolidated statements of operations.

In August 2016, we entered into a purchase and sale agreement to sell our Pan Am Building property, located in Honolulu, Hawaii. The completion of the sale transaction is scheduled to occur no later than August 13, 2018, but is not expected to occur prior to the first quarter of 2018. Because the sale of the Pan Am Building is not expected to be completed within the next 12 months, the property does not meet the held for sale criteria of FASB ASC 360 and as a result, is classified as held for use in the accompanying consolidated balance sheets as of September 30, 2016. We will continue to own and operate the property until the completion of the sale.

Goodwill

We record the excess cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested for impairment on an annual basis during the fourth quarter of each calendar year, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

reporting unit is the operating segment, or a business that is one level below the operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The reporting unit’s fair value is calculated as the discounted future cash flows based on management’s best estimate of the applicable capitalization and discount rates. If the carrying value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. An impairment charge is recognized as a charge against income equal to the excess of the carrying value of goodwill over its implied value on the date of the impairment. Factors that may cause goodwill to be impaired include, but may not be limited to, a sustained decline in our stock price and the occurrence, or sustained existence, of adverse economic conditions or decreased cash flow from our properties.

We consider our wholly-owned properties one reporting unit due to similar geographic and economic characteristics. As of September 30, 2016, goodwill of our wholly-owned properties amounted to $37.7 million. We wrote off approximately $1.4 million of goodwill associated with the sale of the Clifford Center property in January 2015.

Revenue Recognition

The following four criteria must be met before we recognize revenue and gains:


•	persuasive evidence of an arrangement exists;


•	the delivery has occurred or services rendered;


•	the fee is fixed and determinable; and


•	collectability is reasonably assured.

All of our tenant leases are classified as operating leases. For all leases with scheduled rent increases or other adjustments, minimum rental income is recognized on a straight-line basis over the terms of the related leases. Straight-line rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents and this amount is included in “Deferred rents” on the accompanying consolidated balance sheets. The straight line rent adjustment included in “Rental revenues” in the accompanying consolidated statements of operations was $0.14 million and $0.10 million for the three months ended September 30, 2016 and 2015, respectively, and $0.26 million and $(0.01) million for the nine months ended September 30, 2016 and 2015, respectively. Reimbursements from tenants for real estate taxes, excise taxes and other recoverable operating expenses are recognized as revenues in the period the applicable costs are incurred.

Capitalized below-market lease amounts are amortized as an increase to rental revenue over the remaining initial non-cancellable lease terms plus the terms of any below-market fixed rate renewal options that are considered bargain renewal options.

We have leased space to certain tenants under non-cancellable operating leases, which provide for percentage rents based upon tenant revenues. Percentage rental income is recorded in “Rental revenues” in the accompanying consolidated statements of operations.

Rental revenue from parking operations and month-to-month leases or leases with no scheduled rent increases or other adjustments is recognized on a monthly basis when earned.

Lease termination fees, which are included in “Other” revenues of the accompanying consolidated statements of operations, are recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants.

“Other” revenue on the accompanying consolidated statements of operations generally includes income incidental to our operations and is recognized when earned.

Tenant Receivables

Tenant receivables are recorded and carried at the amount billable per the applicable lease agreement, less any allowance for doubtful accounts. An allowance for doubtful accounts is made when collection of the full amounts is no longer considered probable. Tenant receivables are included in “Rents and other receivables, net,” in the accompanying consolidated balance sheets. If a tenant fails to make contractual payments beyond any allowance, we may recognize bad debt expense in future

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

periods equal to the amount of unpaid rent. We take into consideration factors including historical termination, default activity and current economic conditions to evaluate the level of reserve necessary. We had an allowance for doubtful accounts of $0.3 million, as of both September 30, 2016 and December 31, 2015.

We had a total of $1.8 million of lease security available in security deposits, as of both September 30, 2016 and December 31, 2015.

Cash and Cash Equivalents

We consider all short-term cash investments with maturities of three months or less when purchased to be cash equivalents. Restricted cash is excluded from cash and cash equivalents due to its restriction on withdrawal or use.

We maintain cash balances in various financial institutions. At times, the amounts of cash held in financial institutions may exceed the maximum amount insured by the Federal Deposit Insurance Corporation. We do not believe that we are exposed to any significant credit risk on our cash and cash equivalents.

Restricted Cash

Restricted cash primarily includes tenant security deposits and escrow accounts for real property taxes, insurance, capital expenditures, tenant improvements, ground lease payments and leasing commissions held by our lenders.

Mortgage and Other Loans

Mortgage and other loans assumed upon acquisition of related real estate properties are stated at estimated fair value upon their respective dates of assumption, net of unamortized discounts or premiums and deferred loan fees to their outstanding contractual balances. Amortization of discount and the accretion of premiums on mortgage and other loans assumed upon acquisition of related real estate properties are recognized from the date of assumption through their contractual maturity date using the straight line method, which approximates the effective interest method. Deferred loan fees include fees and costs incurred in conjunction with long-term financings and are amortized over the terms of the related debt using a method that approximates the effective interest method. Beginning January 1, 2016, deferred loan fees are included in “Mortgage and other loans, net” for both periods presented, in the accompanying consolidated balance sheets, in accordance with the adoption of Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. Prior to adoption, deferred loan fees were included with prepaid expenses and classified as “Other assets, net” in the accompanying consolidated balance sheets. Amortization of deferred loan fees is included in “Interest” in the accompanying consolidated statements of operations.

Repairs, Maintenance and Major Improvements

The costs of ordinary repairs and maintenance are included when incurred in “Rental property operating” expenses in the accompanying consolidated statements of operations. Major improvements that extend the life of an asset are capitalized and depreciated over the remaining useful life of the asset. Our lenders have required us to maintain reserve accounts for the funding of future repairs and capital expenditures, and the balances of these accounts are included in “Restricted cash” on the accompanying consolidated balance sheets.

Leasing Commissions

Leasing commissions are capitalized and amortized on a straight line basis over the life of the related lease. The payment of leasing commissions is included in “Investing activities” on the accompanying consolidated statements of cash flows because we believe that paying leasing commissions for good tenants is a prudent investment in increasing the value of our income-producing assets.

Depreciation and Amortization

Depreciation and amortization are computed using the straight-line method for financial reporting purposes. Buildings and improvements are depreciated over their estimated useful lives which range from five to 42 years. Tenant improvement

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

costs recorded as capital assets are depreciated over the shorter of the tenant’s remaining lease term or the life of the improvement. Furniture, fixtures and equipment are depreciated over three to seven years. Properties that are acquired that are subject to ground leases are depreciated over the lesser of the useful life or the remaining life of the related leases as of the date of assumption of the lease.

Non-Controlling Interests

We account for non-controlling interests in accordance with FASB ASC 810, Consolidation. In accordance with FASB ASC 810, we report non-controlling interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent stockholders’ equity. Net income attributable to non-controlling interests is presented as a reduction from net income in calculating net income available to common stockholders on the statement of operations. Acquisitions or dispositions of non-controlling interests that do not result in a change of control are accounted for as equity transactions. In addition, FASB ASC 810 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. In accordance with FASB ASC 480-10, Distinguishing Liabilities from Equity, non-controlling interests that are determined to be redeemable are carried at their redemption value as of the balance sheet date and reported as temporary equity. We periodically evaluate individual non-controlling interests for the ability to continue to recognize the non-controlling interest as permanent equity in the consolidated balance sheets. Any non-controlling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made, the resulting adjustment is recorded in the consolidated statement of operations. See Note 10 for a more detailed discussion.

Preferred Units

The Class A convertible preferred units of the Operating Partnership (“Preferred Units”) have fixed rights to distributions at an annual rate of 2% of their liquidation preference of $25 per Preferred Unit. Accordingly, income or loss of the Operating Partnership is allocated among the general partner interest and limited partner common interests after taking into consideration distribution rights allocable to the Preferred Units.

Earnings (Loss) per Share

We present both basic and diluted earnings (loss) per share (“EPS”). Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during each period.

Diluted EPS is computed by dividing net income (loss) available to common stockholders for the period by the weighted average number of common shares that would have been outstanding for the period, assuming the issuance of common shares for all potentially dilutive common shares outstanding during such period.

Income Taxes

We have elected to be taxed as a REIT under the Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT taxable income to our stockholders. Also, at least 95% of gross income in any year must be derived from qualifying sources. We intend to adhere to these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate level federal income tax on taxable income that we distribute currently to our stockholders. However, we may be subject to certain state and local taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income, if any. Management believes that we have distributed and will continue to distribute a sufficient majority of our taxable income, if any, in the form of dividends and distributions to our stockholders and unit holders. Accordingly, we have not recognized any provision for income taxes.

The Company is subject to the provisions of FASB ASC 740, Income Taxes which prescribes a more-likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company evaluates the need for income tax accruals in accordance with ASC 740.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 establishes that companies may recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We do not expect the adoption of this pronouncement to have a material effect on our consolidated financial statements or disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”) which provides guidance on when and how entities should assess their ability to continue as a going concern and related footnote disclosures. Under ASU 2014-15, management is required to perform annual and interim assessments of an entity’s ability to continue as a going concern within one year after the financial statement issuance date. Certain disclosures are required if there are conditions present that raise substantial doubt about an entity’s ability to continue as a going concern during this period. This pronouncement is effective for annual reporting periods ending after December 15, 2016, including interim reporting periods within that reporting period. We are currently assessing the impact that this standard will have on our consolidated financial statements and disclosures.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810), Amendments to the Consolidation Analysis (“ASU 2015-02”) which modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. We adopted this standard on January 1, 2016. The adoption of this pronouncement did not have a material effect on our consolidated financial statements or disclosures.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU 2015-03 is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. We adopted this standard on January 1, 2016. The adoption of this pronouncement changed the presentation of our debt issuance costs, which we refer to as deferred loan fees and are currently included in “Mortgage and other loans, net” in the accompanying consolidated balance sheets. Prior to the adoption of ASU 2015-03, deferred loan fees amounting to $0.2 million as of December 31, 2015 were recorded in ”Other assets, net” in the accompanying consolidated balance sheets.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842): Section A - Leases: Amendments to the FASB Accounting Standards Codification; Section B - Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification; and Section C - Background Information and Basis for Conclusions (“ASU 2016-02”). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact of adopting the new leases standard on our consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”). ASU No. 2016-15 provides specific guidance on eight cash flow classification issues, including how debt prepayments or debt extinguishment costs and distributions received from equity method investees are presented. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

Early adoption of ASU 2016-15 as of its issuance is permitted. We are currently assessing the impact that this standard will have on our consolidated financial statements.

3. Investments in Real Estate, net

Our investments in real estate, net, at September 30, 2016 (unaudited), and at December 31, 2015, are summarized as follows (in thousands):



	September 30, 2016			December 31, 2015
Land and land improvements	$	33,763		$	33,819
Building and building improvements	197,020			196,168
Tenant improvements	33,758			32,389
Construction in progress	4,686			5,263
Furniture, fixtures and equipment	1,391			1,377
Investments in real estate	270,618			269,016
Less: accumulated depreciation	(77,093		)	(71,156		)
Investments in real estate, net	$	193,525		$	197,860

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

4. Intangible Assets and Acquired Below-Market Leases, net

Our identifiable intangible assets and acquired below-market leases, net, at September 30, 2016 (unaudited), and at December 31, 2015, are summarized as follows (in thousands):



	September 30, 2016			December 31, 2015
Acquired leasing commissions:
Gross amount	$	7,163		$	7,499
Accumulated amortization	(3,921		)	(4,073		)
Acquired leasing commissions, net	3,242			3,426

Acquired leases in place:
Gross amount	5,271			5,290
Accumulated amortization	(5,162		)	(5,175		)
Acquired leases in place, net	109			115

Acquired tenant relationship costs:
Gross amount	9,254			9,254
Accumulated amortization	(9,008		)	(8,776		)
Acquired tenant relationship costs, net	246			478

Acquired other intangibles:
Gross amount	3,074			3,077
Accumulated amortization	(1,154		)	(1,108		)
Acquired other intangibles, net	1,920			1,969

Intangible assets, net	$	5,517		$	5,988

Acquired below-market leases:
Gross amount	$	6,552		$	6,556
Accumulated amortization	(3,484		)	(3,314		)
Acquired below-market leases, net	$	3,068		$	3,242

5. Investments in Unconsolidated Joint Ventures

At September 30, 2016, we were partners with third parties in three joint ventures, holding two office properties, comprised of four buildings and 0.8 million rentable square feet. One of our joint ventures also owns a sports club associated with our City Square property in Phoenix, Arizona. Our ownership interest percentage in each of these joint ventures is 5.0%.

We account for our investments in joint ventures under the equity method of accounting.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

The following tables summarize financial information for our unconsolidated joint ventures (in thousands and unaudited):



	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
Revenues:
Rental	$	2,138		$	2,850		$	6,518		$	9,585
Other	892			976			2,447			2,665
Total revenues	3,030			3,826			8,965			12,250
Expenses:
Rental operating	2,603			3,036			7,399			8,650
Depreciation and amortization	826			982			2,539			3,263
Interest	717			2,021			2,157			4,031
Other	—			10			—			10
Total expenses	4,146			6,049			12,095			15,954
Loss before gain on sale of property	(1,116		)	(2,223		)	(3,130		)	(3,704		)
Gain on sale of property	—			14,550			—			14,550
Net income (loss)	$	(1,116	)	$	12,327		$	(3,130	)	$	10,846

Equity in net income (loss) of unconsolidated joint ventures	$	(56	)	$	625		$	(157	)	$	557



	September 30, 2016		December 31, 2015
Investment in real estate, net	$	55,442	$	56,321
Other assets	11,154		9,938
Total assets	$	66,596	$	66,259

Mortgage and other loans	$	46,250	$	45,575
Other liabilities	2,307		2,416
Total liabilities	$	48,557	$	47,991

Investments in unconsolidated joint ventures	$	899	$	913

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

6. Accounts Payable and Other Liabilities

Accounts payable and other liabilities at September 30, 2016 (unaudited), and at December 31, 2015, consist of the following (in thousands):



	September 30, 2016		December 31, 2015
Accounts payable	$	837	$	276
Interest payable	823		953
Deferred revenue	1,383		918
Security deposits	1,793		1,840
Deferred straight-line ground rent	19,599		18,669
Accrued distributions attributable to Preferred Units	13,068		11,363
Accrued expenses	5,789		6,107
Asset retirement obligations	707		671
Total accounts payable and other liabilities	$	43,999	$	40,797

7. Mortgage and Other Loans

The following table sets forth a summary of our mortgage and other loans, net of discount and deferred loan fees, at September 30, 2016 (unaudited), and at December 31, 2015 (in thousands). The interest rate of each loan is fixed unless otherwise indicated in the footnotes to the table:



Property	September 30, 2016			December 31, 2015			Interest Rate	Maturity Date
Consolidated property loan	$	280,500		$	—		(1)	8/11/2019
Pan Am Building	—			60,000			6.17%	8/11/2016
Waterfront Plaza	—			100,000			6.37%	9/11/2016
Waterfront Plaza	—			11,000			6.37%	9/11/2016
Davies Pacific Center	—			95,000			5.86%	11/11/2016
Subtotal	280,500			266,000
Revolving line of credit	25,000			25,000			(2)	12/31/2016
Outstanding principal balance	305,500			291,000
Less: unamortized discount, net	—			(122		)
Less: unamortized deferred loan fees, net	(5,739		)	(158		)
Mortgage and other loans, net	$	299,761		$	290,720

(1)

The loan is subject to monthly interest payments bearing interest at a floating rate per annum equal to the One-Month LIBOR Rate plus 4.5% and monthly partial principal payments based on the availability of cash after making required distributions for operating costs and reserves pursuant to a payment waterfall and other terms and conditions under the new loan agreement and a balloon remaining principal payment at maturity. The LIBOR portion of the interest rate is subject to a floor of 0.50% and a cap of 3.0%, pursuant to an interest rate cap agreement. As of September 30, 2016, the applicable One-Month LIBOR Rate was 0.519%.

(2)

Amounts borrowed under the revolving line of credit require monthly interest only payments at a fluctuating annual rate equal to the effective rate of interest paid by the lender on time certificates of deposit, plus 1.00% and a balloon principal payment at maturity. As of September 30, 2016, the effective rate of interest paid by the lender on time certificates of deposit was 0.10%. See “Revolving Line of Credit” below.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

In August 2016, our wholly-owned subsidiaries entered into a new loan agreement, the proceeds of which were used to repay in full the existing mortgage loans that were scheduled to mature at various dates commencing August 11, 2016 through November 11, 2016 and to fund leasing and capital expenditure reserves. The new loan agreement contains customary covenants including, among other things, restrictions on the ability to incur additional indebtedness, transfer or dispose of assets, create liens and make certain investments. Our obligations under the new loan agreement are secured by mortgages on the leasehold and fee (as applicable) interests in all of our wholly-owned properties as well as assignments of all leases, rents, contracts, revenues, permits and service agreements with respect to the properties and ownership interests in all equity interests and accounts of the borrowers. The loan is non-recourse to our Operating Partnership, except for customary recourse carve-outs for borrower misconduct and environmental liabilities. The recourse liability for borrower misconduct and environmental liabilities was guaranteed by Mr. Shidler. Our Operating Partnership has agreed to indemnify Mr. Shidler to the extent of his guaranty liability.

In connection with the new loan agreement, in August 2016, we entered into a Purchase and Sale Agreement to sell our Pan Am Building property, located in Honolulu, Hawaii, to one of the lenders under the new loan agreement, for cash consideration of $78.5 million. The completion of the sale transaction is scheduled to occur no later than August 13, 2018, but is not expected to occur prior to the first quarter of 2018. In the event the sale of the Pan Am Building property does not close on or prior to August 13, 2018 due to a default by the buyer, we have the right to tender a deed to the Pan Am Building property to the other lenders under the new loan agreement, subject to the mortgage and the assignment of leases on the Pan Am Building property, in which case the principal amount of the new loan agreement would be reduced by $78.5 million.

Revolving Line of Credit

We are party to a Credit Agreement (the “FHB Credit Facility”) with First Hawaiian Bank (the “Lender”) which provides us with a revolving line of credit in the maximum principal amount of $25.0 million and has a maturity date of December 31, 2016. Amounts borrowed under the FHB Credit Facility bear interest at a fluctuating annual rate equal to the effective rate of interest paid by the lender on time certificates of deposit, plus 1.00%. We are permitted to use the proceeds of the line of credit for working capital and general corporate purposes, consistent with our real estate operations and for such other purposes as the Lender may approve. As of September 30, 2016 and December 31, 2015, we had outstanding borrowings of $25.0 million under the FHB Credit Facility. During each of the three month periods ended September 30, 2016 and 2015, we recognized $0.1 million in interest to the Lender. During each of the nine month periods ended September 30, 2016 and 2015, we recognized $0.2 million in interest to the Lender.

As security for the FHB Credit Facility, as amended, Shidler LP has pledged to the Lender a certificate of deposit in the principal amount of $25.0 million. As a condition to this pledge, the Operating Partnership and Shidler LP entered into an indemnification agreement pursuant to which the Operating Partnership agreed to indemnify Shidler LP from any losses, damages, costs and expenses incurred by Shidler LP in connection with the pledge. In addition, to the extent that all or any portion of the certificate of deposit is withdrawn by the Lender and applied to the payment of principal, interest and/or charges under the FHB Credit Facility, the Operating Partnership agreed to pay to Shidler LP interest on the withdrawn amount at a rate of 7.0% per annum from the date of the withdrawal until the date of repayment in full by the Operating Partnership to Shidler LP. Pursuant to this indemnification agreement, as amended, the Operating Partnership also agreed to pay to Shidler LP an annual fee of 2.0% of the entire $25.0 million principal amount of the certificate of deposit. During each of the three month periods ended September 30, 2016 and 2015, we recognized $0.1 million in interest to Shidler LP for the annual fee. During each of the nine month periods ended September 30, 2016 and 2015, we recognized $0.4 million in interest to Shidler LP for the annual fee. As of September 30, 2016, we have accrued approximately $0.3 million of interest payments owed to Shidler LP for this annual fee included in “Accrued interest payable to current and former related parties” in the accompanying consolidated balance sheets.

The FHB Credit Facility contains various customary covenants, including covenants relating to disclosure of financial and other information to the Lender, maintenance and performance of our material contracts, our maintenance of adequate insurance, payment of the Lender’s fees and expenses, and other customary terms and conditions.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

8. Unsecured Notes Payable to Current and Former Related Parties

At September 30, 2016 and December 31, 2015, we had promissory notes payable by the Operating Partnership to certain current and former affiliates in the aggregate outstanding principal amounts of $32.4 million and $29.4 million, respectively.

In 2008, we issued $21.1 million of promissory notes as consideration for having funded certain capital improvements prior to the completion of our formation transactions and upon the exercise of an option granted to us by POP Venture, LLC, a Delaware limited liability company controlled by Mr. Shidler (“Venture”), and its affiliates as part of our formation transactions in 2008. The promissory notes accrue interest at a rate of 7%, per annum, with interest payable quarterly, subject to the Operating Partnership’s right to defer the payment of interest for any or all periods until the date of maturity. The promissory notes were originally scheduled to mature on various dates commencing on March 19, 2013 through August 31, 2013, but the Operating Partnership elected to extend the maturity for one additional year. The maturity date of the promissory notes has subsequently been extended to be coterminous with the maturity of the promissory note issued in September 2016 (as described below).

In February 2014, we issued to certain current and former affiliates additional promissory notes in the aggregate principal amount of $8.3 million to settle claims under tax protection agreements relating to the sale of our First Insurance Center property in 2012. See “Tax Protection Arrangements” in Note 9 for additional information. These promissory notes accrue interest at a rate of 5% per annum, with interest payable quarterly, subject to the Operating Partnership’s right to defer the payment of interest for any or all periods until the date of maturity, and were originally scheduled to mature on December 31, 2015. The maturity date of these promissory notes has subsequently been extended to be coterminous with the maturity of the promissory note issued in September 2016 (as described below).

In September 2016, we issued a promissory note in the principal amount of $3.0 million to Shidler LP in consideration of a loan in that amount made by Shidler LP to the Operating Partnership. The promissory note accrues interest at a rate of 5% per annum, with interest payable quarterly, subject to the Operating Partnership’s right to defer the payment of interest for any or all periods until the date of maturity. The stated maturity date for the promissory note is the earlier of (i) December 31, 2016 (or, if later, the maturity date of indebtedness under the Operating Partnership’s credit facility with First Hawaiian Bank, but in any event not later than December 31, 2017) and (ii) the date on which the Operating Partnership has fully satisfied, or is released from, any liability under the Indemnification Agreement, dated as of September 2, 2009 (as subsequently amended), between the Operating Partnership and Shidler LP.

The maturity of the Operating Partnership’s promissory notes will accelerate upon the occurrence of an underwritten public offering of at least $75 million of the Company’s common stock, the sale of all or substantially all of the Company’s assets or the merger or consolidation of the Company with another entity, and specific to the promissory notes issued in February 2014, under certain circumstances in the event that the Operating Partnership has fully satisfied or is released from liability under its indemnification agreement with Shidler LP relating to the security pledged by Shidler LP in support of the FHB Credit Facility. The promissory notes are unsecured obligations of the Operating Partnership and (except for the September 2016 note) are subordinated to borrowings under the FHB Credit Facility and our indemnification obligations to Shidler LP in connection with its pledge in support of the FHB Credit Facility.

For the period from March 20, 2008 through September 30, 2016, interest payments on these unsecured notes payable have been deferred with the exception of $0.3 million which was related to the notes exchanged for shares of common stock in 2009. At September 30, 2016 and December 31, 2015, $18.1 million and $15.6 million, respectively, of accrued interest attributable to these promissory notes is included in the accompanying consolidated balance sheets.

9. Commitments and Contingencies

Minimum Future Ground Rents

We hold a long-term ground leasehold interest in our Waterfront Plaza property. The Waterfront Plaza ground lease expires December 31, 2060. The annual rental obligation has fixed increases at 5-year intervals until it resets on January 1, 2036, 2041, 2046, 2051, and 2056 to an amount equal to the greater of (i) 8.0% of the fair market value of the land or (ii) the ground rent payable for the prior period.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

Contingencies

From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance, subject to deductibles and other customary limitations on recoveries. We believe that the ultimate settlement of these actions will not have a material adverse effect on our consolidated financial position and results of operations or cash flows.

Concentration of Credit Risk

Our operating wholly-owned properties are located in Honolulu. Our operating properties owned in joint ventures are located in Honolulu and Phoenix. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate. As of September 30, 2016, no single tenant accounts for 10% or more of our total annualized base rents. We perform credit evaluations on new tenants by requesting and reviewing their financial statements and recent tax returns. During the terms of our leases, we monitor the credit quality of our tenants by reviewing the timeliness of their lease payments. In addition, we may review financial statements, operating statements and/or performance of other financial covenants as allowed for under their lease.

Financial instruments that subject us to credit risk consist primarily of cash, accounts receivable and deferred rents receivable. We maintain our cash and cash equivalents and restricted cash on deposit with what management believes are relatively stable financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to the maximum amount; and, to date, we have not experienced any losses on our invested cash. Restricted cash held by our lenders is maintained in escrow accounts at a major financial institution.

Conditional Asset Retirement Obligations

We record a liability for a conditional asset retirement obligation, defined as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within a company’s control, when the fair value of the obligation can be reasonably estimated. Depending on the age of the construction, certain properties in our portfolio may contain non-friable asbestos. If these properties undergo major renovations or are demolished, certain environmental regulations are in place, which specify the manner in which the asbestos, if present, must be handled and disposed. Based on our evaluation of the physical condition and attributes of certain of our properties, we recorded conditional asset retirement obligations related to asbestos removal. As of September 30, 2016 and December 31, 2015, the liability in our consolidated balance sheets for conditional asset retirement obligations was $0.7 million as of both dates. The accretion expense for the three and nine month periods ended September 30, 2016 and 2015 was not significant.

Waterfront Plaza Ground Lease

We are subject to a surrender clause under the Waterfront Plaza ground lease that provides the lessor with the right to require us, at our own expense, to raze and remove all improvements from the leased land, contingent on the lessor’s decision at the time the ground lease expires on December 31, 2060. Accordingly, as of September 30, 2016 and December 31, 2015, the liability in our consolidated balance sheets for this asset retirement obligation was $0.5 million and $0.4 million, respectively. The accretion expense for the three and nine month periods ended September 30, 2016 and 2015 was not significant.

Environmental Matters

We follow the policy of monitoring our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our financial condition, results of operations, and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability other than our conditional asset retirement obligations that we believe would require additional disclosure or the recording of a loss contingency.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

Capital Commitments

We are required by certain leases and other contractual obligations to complete tenant and building improvements. As of September 30, 2016, we had cash reserves of $7.7 million to fund capital expenditures and leasing costs, of which we were obligated to spend $2.1 million through 2017. We anticipate that our reserves, as well as other sources of liquidity, including existing cash on hand, our cash flows from operations, financing and investing activities will be sufficient to fund our capital expenditure obligations.

Tax Protection Arrangements

A sale of any of our wholly-owned properties that would not provide continued tax deferral to Venture is contractually restricted until March 2018, which is 10 years after the closing of the transaction related to such properties. In addition, we have agreed that, during such 10-year period, we will not prepay or defease any mortgage indebtedness of such properties, other than in connection with a concurrent refinancing with non-recourse mortgage debt of an equal or greater amount and subject to certain other restrictions. Furthermore, if any such sale or defeasance is foreseeable, we are required to notify Venture and to cooperate with it in considering strategies to defer or mitigate the recognition of gain under the Code by any of the equity interest holders of the recipient of the Operating Partnership units.

In June 2012, we completed the sale of our fee and leasehold interests in our First Insurance Center property, located in Honolulu, Hawaii, to an unaffiliated third party. As a result of the sale, certain contract parties claimed they were entitled to a make-whole cash payment under tax protection agreements relating to the property. During the third quarter of 2013, we held settlement discussions with certain claimants regarding these tax protection agreements and accrued $8.7 million for such liability as of December 31, 2013. In February 2014, we issued $8.3 million of subordinated promissory notes in settlement of the majority of such claims (see Note 8), and paid cash settlements totaling approximately $0.4 million in settlement of the remainder of such claims. Each party receiving a promissory note or cash payment released us from any other claims under the tax protection agreements arising out of the sale of the First Insurance Center property and the foreclosure of our Sorrento Technology Center property in January 2012, as applicable.

In January 2015, we completed the sale of our fee and leasehold interests in our Clifford Center property, located in Honolulu, Hawaii, to an unaffiliated third party for aggregate consideration of $8.9 million. No tax indemnity liability arose under the tax protection agreements in connection with this sale because the sale of the Clifford Center property resulted in a tax loss.

Indemnities

The mortgage debt outstanding under our new loan agreement is non-recourse to our Operating Partnership, except for customary recourse carve-outs for borrower misconduct and environmental liabilities. The recourse liability for borrower misconduct and environmental liabilities was guaranteed by Mr. Shidler. Our Operating Partnership has agreed to indemnify Mr. Shidler to the extent of his guaranty liability. In management’s judgment, it would be unlikely for us to incur any material liability under these indemnities that would have a material adverse effect on our financial condition, results of operations or cash flows.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

10. Equity (Deficit) and Earnings (Loss) per Share

Total Equity (Deficit)

The changes in total equity (deficit) for the period from December 31, 2015 to September 30, 2016 (unaudited) are shown below (in thousands):



	Pacific Office Properties Trust, Inc.			Non-controlling interest - Preferred			Non-controlling interest - Common			Total
Balance at December 31, 2015	$	(153,134	)	$	127,268		$	(98,324	)	$	(124,190	)
Net income (loss)	(1,555		)	1,704			(10,252		)	(10,103		)
Dividends and distributions	(1,311		)	(1,704		)	—			(3,015		)
Balance at September 30, 2016	$	(156,000	)	$	127,268		$	(108,576	)	$	(137,308	)

Stockholders’ Equity (Deficit)

Our Class A Common Stock (which is quoted in the OTCQB tier of the OTC Marketplace) and our Class B Common Stock are identical in all respects, except that in the event of liquidation the Class B Common Stock will not be entitled to any portion of our net assets, which would, if any, be allocated and distributed to the holders of the Class A Common Stock. Shares of our Class A Common Stock and Class B Common Stock vote together as a single class and each share is entitled to one vote on each matter to be voted upon by our stockholders. Dividends on the Class A Common Stock and Class B Common Stock are payable at the discretion of our Board of Directors.

Our Senior Common Stock ranks senior to our Class A Common Stock and Class B Common Stock with respect to dividends and distribution of amounts upon liquidation. It has a $10.00 per share (plus accrued and unpaid dividends) liquidation preference. Subject to the preferential rights of any future series of preferred shares, holders of Senior Common Stock are entitled to receive, when and as authorized by the Company’s Board of Directors, and declared by us, cumulative cash dividends in an amount per share equal to a minimum of $0.725 per share per annum, payable monthly. Dividends on the Senior Common Stock are cumulative and accrue to the extent not declared or paid by us. Should the dividend payable on the Class A Common Stock exceed the rate of $0.20 per share per annum, the Senior Common Stock dividend would increase by 25% of the amount by which the Class A Common Stock dividend exceeds $0.20 per share per annum. Holders of Senior Common Stock have the right to vote on all matters presented to stockholders as a single class with holders of the Class A Common Stock, the Class B Common Stock and the Company’s outstanding share of Proportionate Voting Preferred Stock (as discussed below). Each share of the Company’s Class A Common Stock, the Class B Common Stock and the Senior Common Stock is entitled to one vote on each matter to be voted upon by the Company’s stockholders. Shares of Senior Common Stock may be exchanged, at the option of the holder, for shares of Class A Common Stock after the fifth anniversary of the issuance of such shares of Senior Common Stock. The exchange ratio is to be calculated using a value for our Class A Common Stock based on the average of the trailing 30-day closing price of the Class A Common Stock on the date the shares are submitted for exchange, but in no event less than $1.00 per share, and a value for the Senior Common Stock of $10.00 per share. Unless full cumulative dividends on the Senior Common Stock have been paid for all past dividend periods, we may not repurchase or redeem any shares of Senior Common Stock (or Class A Common Stock) unless all outstanding shares of Senior Common Stock are simultaneously repurchased or redeemed. As of September 30, 2016 and December 31, 2015, we had a total of 2,410,839 shares of Senior Common Stock issued and outstanding. We terminated our continuous public offering of Senior Common Stock in February 2011 and do not expect to issue any additional shares of Senior Common Stock.

General Partnership Interest

The Company’s general partnership interest in the Operating Partnership is denominated in a number of Common Units equal to the number of shares of our Class A Common Stock and Class B Common Stock outstanding. Our general partnership interest includes the right to participate in distributions of the Operating Partnership to holders of Common Units in a percentage equal to the quotient obtained by dividing (a) the number of shares of our Class A Common Stock and Class B Common Stock outstanding by (b) the sum of shares of our Class A Common Stock and Class B Common Stock outstanding

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

plus the number of shares of our Class A Common Stock for which the outstanding Common Units of the Operating Partnership may be redeemed. We also hold a number of Senior Common Units corresponding to the number of shares of Senior Common Stock outstanding, which entitle us to receive distributions from the Operating Partnership in an amount per Senior Common Unit equal to the per share dividend payable to holders of our Senior Common Stock.

Non-controlling Interests

Non-controlling interests include the interests in the Operating Partnership that are not owned by the Company, which amounted to all of the Preferred Units and 78.16% of the Common Units outstanding as of September 30, 2016. During the three and nine months ended September 30, 2016 and 2015, no Common Units or Preferred Units were redeemed or issued. As of September 30, 2016, 46,698,532 shares of our Class A Common Stock were reserved for issuance upon redemption of outstanding Common Units and Preferred Units.

The Common Units issued upon the completion of our formation transactions on March 19, 2008 are designated as Class B Common Units, which are redeemable by the holder on a one-for-one basis for shares of Class A Common Stock or a new class of Common Units, designated as Class C Common Units, which have no redemption rights, as elected by a majority of our independent directors. All other outstanding Common Units are designated as Class A Common Units, which are redeemable by the holders on a one-for-one basis for shares of Class A Common Stock or cash, as elected by a majority of our independent directors. Each Preferred Unit is convertible by the holder into 7.1717 Class B Common Units, but not before the date we consummate an underwritten public offering (of at least $75 million) of our common stock. Class B Common Units received upon conversion of Preferred Units will not be redeemable by the holder as described above for a period of one year after the date of conversion from Preferred Units to Class B Common Units.

The Preferred Units have fixed rights to annual distributions at an annual rate of 2% of their liquidation preference of $25 per Preferred Unit and priority over Common Units in the event of a liquidation of the Operating Partnership. At September 30, 2016, the cumulative unpaid distributions attributable to Preferred Units were $13.1 million. We anticipate continuing to accrue these distributions.

Common Units of all classes and Preferred Units of the Operating Partnership do not have any right to vote on any matters presented to our stockholders. We have outstanding one share of Proportionate Voting Preferred Stock, which is held by Pacific Office Holding, Inc., a corporation owned by Mr. Shidler and certain of our current and former executive officers and other affiliates. The Proportionate Voting Preferred Stock has no dividend rights and minimal rights to distributions in the event of liquidation, but it entitles its holder to vote on all matters for which the holders of Class A Common Stock are entitled to vote. The Proportionate Voting Preferred Stock entitles its holder to cast a number of votes equal to the total number of shares of Class A Common Stock issuable upon redemption for shares of the Class B Common Units and Preferred Units issued in connection with the completion of our formation transactions on March 19, 2008. This number will decrease to the extent that these Class B Common Units are redeemed for shares of Class A Common Stock in the future, but will not increase in the event of future unit issuances by the Operating Partnership. As of September 30, 2016, that share of Proportionate Voting Preferred Stock represented 88% of our voting power. Pacific Office Holding, Inc. has agreed to cast its Proportionate Voting Preferred Stock votes on any matter in direct proportion to votes that are cast by limited partners of our Operating Partnership holding the Class B Common Units and Preferred Units issued in the formation transactions.

As of September 30, 2016, Venture owned 46,173,693 shares of our Class A Common Stock assuming that all Operating Partnership units were fully redeemed for shares on such date, notwithstanding the restrictions on redemption noted above. Assuming the immediate redemption of all the Operating Partnership units held by Venture, Venture and its related parties control 91.5% of the total voting power in the Company.

Earnings (Loss) per Share

We present both basic and diluted earnings (loss) per share (“EPS”). Basic EPS is computed by dividing net income or loss attributable to common stockholders by the weighted average number of shares of Class A Common Stock and Class B Common Stock outstanding during each period. Diluted EPS is computed by dividing net income or loss attributable to common stockholders for the period by the number of shares of Class A Common Stock and Class B Common Stock that would have been outstanding assuming the issuance of shares of Class A Common Stock for all potentially dilutive shares

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

of Class A Common Stock outstanding during each period. Net income or loss in the Operating Partnership is allocated in accordance with the Partnership Agreement among our general partner and limited partner Common Unit holders in accordance with their weighted average ownership percentages in the Operating Partnership of 21.84% and 78.16%, respectively, as of September 30, 2016, after taking into consideration the priority distributions allocated to the limited partner preferred unit holders in the Operating Partnership.

The following is the basic and diluted loss per share (in thousands, except share and per share amounts, and unaudited):



	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
Net loss attributable to common stockholders - basic and diluted⁽¹⁾	$	(1,116	)	$	(891	)	$	(2,866	)	$	(2,938	)

Weighted average number of common shares	3,941,242			3,941,242			3,941,242			3,941,242
Potentially dilutive common shares⁽²⁾	—			—			—			—
Weighted average number of common shares outstanding - basic and diluted	3,941,242			3,941,242			3,941,242			3,941,242
Net loss per common share - basic and diluted	$	(0.29	)	$	(0.23	)	$	(0.73	)	$	(0.75	)

(1)

For each of the three month periods ended September 30, 2016 and 2015, net loss attributable to common stockholders includes $0.6 million of priority allocation to Preferred Unit holders. For each of the nine month periods ended September 30, 2016 and 2015, net loss attributable to common stockholders includes $1.7 million of priority allocation to Preferred Unit holders. These allocations are included in non-controlling interests in the consolidated statements of operations. The Company continues to accrue the distributions but does not anticipate paying the distributions in the near term. See below for additional detail.

(2)

For each of the three and nine month periods ended September 30, 2016 and 2015, 14,101,004 shares of Class A Common Stock which may be issued upon redemption of Common Units, 32,597,528 shares of Class A Common Stock which may be issued upon conversion of Preferred Units and subsequent redemption, and 2,410,839 shares of Senior Common Stock were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our net loss position;

Refer to “Non-controlling Interests” and “Stockholders’ Equity (Deficit)” in this footnote for the redemption and conversion terms and conditions of the Preferred Units and Senior Common Stock.

Dividends and Distributions

For each of the three month periods ended September 30, 2016 and 2015, we paid an aggregate of $0.2 million, and for each of the nine month periods ended September 30, 2016 and 2015, we paid an aggregate of $0.7 million, in cash dividends to holders of our Senior Common Stock, representing an amount equal to half the dividends accruing for such periods at the stated annualized rate of 7.25% of the original issue price of $10.00 per share. Dividends declared for each month during such periods were paid on or about the 15^th day of the following month. We believe that paying these dividends at less than the full stated annualized rate is in the best interests of the Company and its stockholders as it preserves a greater amount of our cash in order to fund required leasing and capital improvements for our properties with the goal of maximizing the value of our properties. The difference between the stated dividend and the paid dividend on our outstanding shares of Senior Common Stock will accrue until paid in full, and amounted to $3.1 million in aggregate as of September 30, 2016. Our board of directors has authorized daily dividends on the Senior Common Stock at half the stated annualized rate through November 2016.

Amounts accumulated for distribution to stockholders and Operating Partnership unit holders are invested primarily in interest-bearing accounts which are consistent with our intention to maintain our qualification as a REIT. At September 30, 2016, the cumulative unpaid distributions attributable to Preferred Units were $13.1 million, which we do not anticipate to pay in 2016.

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

Dividends declared and accrued on the Senior Common Stock are included in “Cumulative deficit” in the accompanying consolidated balance sheets. Accrued distributions on Preferred Units are included in “Non-controlling interests” in the accompanying consolidated balance sheets.

11. Disposition Activity

Disposition of Unconsolidated Joint Venture Investments

In September 2015, the Valencia Corporate Center property, located in Los Angeles, California, was sold to an unaffiliated third party. Net proceeds from the sale of the property, which was owned by one of our unconsolidated joint ventures, were used to repay the mortgage note payable and other transaction related expenses, and then distributed to the members of the joint venture, including us.

Sale of Property

In June 2016, we completed the sale of our fee interest in a vacant parcel of land, located in Phoenix, Arizona, to an unaffiliated third party. As a result of the sale, we recognized a gain of $0.1 million for the nine month period ended September 30, 2016, which is included in “Other” revenues in the accompanying consolidated statements of operations.

Sale of Clifford Center

In January 2015, we completed the sale of our fee and leasehold interests in our Clifford Center property, located in Honolulu, Hawaii, to an unaffiliated third party for aggregate consideration of $8.9 million. Accordingly, the associated assets and liabilities have been removed from our consolidated balance sheet as of December 31, 2015 and the results of its operations before the sale, including post-closing activities since the sale, for the three and nine month periods ended September 30, 2015 are included in “Discontinued operations” in the accompanying consolidated statements of operations.

The following table summarizes the operating results of the Clifford Center property that comprise loss from discontinued operations for the three and nine months ended September 30, 2015 (in thousands):



	For the three months ended September 30, 2015			For the nine months ended September 30, 2015
Revenue	$	1		$	131
Expenses	(1		)	159
Income (loss) from discontinued operations before loss on sale of property	2			(28		)
Loss on sale of property	—			(156		)
Income (loss) from discontinued operations	$	2		$	(184	)

Pan Am Building Sale

In August 2016, we entered into a Purchase and Sale Agreement to sell our Pan Am Building property, located in Honolulu, Hawaii, to Don Quijote (USA) Co., Ltd. (“Don Quijote”), one of the lenders under the new loan agreement, for cash consideration of $78.5 million. The completion of the sale transaction is scheduled to occur no later than August 13, 2018, but is not expected to occur prior to the first quarter of 2018. Because the sale of the Pan Am Building is not expected to be completed within the next 12 months, the property is classified as held for use in the accompanying consolidated balance sheets as of September 30, 2016 and we will continue to own and operate the property until the completion of the sale.

Net proceeds from the sale of the property will be used to prepay, in part, the principal amount of the new loan agreement, without subject to a spread maintenance prepayment premium, pursuant to the new loan agreement. In the event the sale of the Pan Am Building property does not close on or prior to August 13, 2018 due to a default by Don Quijote, we have

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

the right to tender a deed to the Pan Am Building property to the lenders under the new loan agreement, subject to the Mortgage and the Assignment of Leases on the Pan Am Building property, in which case the principal amount of the new loan agreement would be reduced by $78.5 million.

12. Related Party Transactions

We are externally advised by Shidler Pacific Advisors, an entity that is owned and controlled by Mr. Shidler. Shidler Pacific Advisors is responsible for the day to day operations and management of the Company, including management of our wholly-owned properties. For its services, Shidler Pacific Advisors earned a corporate management fee of $0.2 million per quarter, which is reflected in “General and administrative” expenses in the accompanying consolidated statements of operations for the three and nine month periods ended September 30, 2016 and 2015, and property management fees of 2.5% to 3.0% of the rental cash receipts collected by the wholly-owned properties, and related fees; however, such property management and related fees are required to be consistent with prevailing market rates for similar services provided on an arms-length basis in the area in which the subject property is located.

The fees that were earned by Shidler Pacific Advisors for services relating to property management, corporate management, construction management and other services are summarized in the table below (in thousands and unaudited):



	For the three months ended September 30,				For the nine months ended September 30,
	2016		2015		2016		2015
Property management	$	507	$	467	$	1,467	$	1,390
Corporate management	175		175		525		525
Construction management and other	7		27		115		75
Total	$	689	$	669	$	2,107	$	1,990

Shidler Pacific Advisors leases space from us at certain of our wholly-owned properties for building management and corporate offices. The rents from these leases totaled $0.1 million for each of the three month periods ended September 30, 2016 and 2015, and $0.4 million for each of the nine month periods ended September 30, 2016 and 2015. At September 30, 2016, we have $0.3 million owed to Shidler Pacific Advisors included in “Accounts payable and other liabilities” in the accompanying consolidated balance sheets.

During each of the three month periods ended September 30, 2016 and 2015, we recognized $0.1 million in interest to Shidler LP for the annual fee related to its security pledge for the FHB Credit Facility. During each of the nine month periods ended September 30, 2016 and 2015, we recognized $0.4 million in interest to Shidler LP for this annual fee. As of September 30, 2016, we have accrued approximately $0.3 million of interest payments owed to Shidler LP for this annual fee included in “Accrued interest payable to current and former related parties” in the accompanying consolidated balance sheets. See Note 7 for more discussion on the FHB Credit Facility, including the security pledge made by Shidler LP.

The mortgage debt outstanding under our new loan agreement is non-recourse to our Operating Partnership, except for customary recourse carve-outs for borrower misconduct and environmental liabilities. The recourse liability for borrower misconduct and environmental liabilities was guaranteed by Mr. Shidler. Our Operating Partnership has agreed to indemnify Mr. Shidler to the extent of his guaranty liability. See Note 9 for additional discussion on these indemnities.

At September 30, 2016 and December 31, 2015, $18.1 million and $15.6 million, respectively, of accrued interest attributable to unsecured notes payable to current and former related parties is included in the accompanying consolidated balance sheets. See Note 8 for a detailed discussion on these unsecured notes payable.

13. Fair Value of Financial Instruments

We are required to disclose fair value information about all financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate fair value. We measure and disclose the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources

Pacific Office Properties Trust, Inc.

Notes to Consolidated Financial Statements (continued)

independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels as follows:

Level 1 - using quoted prices in active markets for identical assets or liabilities.

Level 2 - using quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.

Level 3 - using unobservable inputs that reflect an entity’s own assumptions that market participants would use when pricing of the asset or liability, to the extent observable inputs are not available.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The fair market value of debt is determined using the trading price of public debt or a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile, including the Company’s non-performance risk (Level 3). Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts for cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and other liabilities approximate fair value because of the short-term nature of these instruments. We calculate the fair value of our mortgage and other loans by using available market information and discounted cash flows analyses based on borrowing rates we believe we could obtain with similar terms and maturities. Because the valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate. Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The carrying value of the unsecured related party notes approximates its fair value due to the short-term maturity of these liabilities. The carrying value of the revolving line of credit borrowings approximates its fair value since the borrowings bear interest at a variable market rate.

At September 30, 2016, the carrying value (excluding accrued interest and unamortized deferred loan fees) and estimated fair value of the mortgage and other loans were $305.5 million and $306.3 million, respectively. At December 31, 2015, the carrying value (excluding accrued interest and unamortized discount and deferred loan fees) and estimated fair value of the mortgage and other loans were $291.0 million and $289.8 million, respectively.

Pacific Office Properties Trust, Inc.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the other sections of this Quarterly Report on Form 10-Q, including the consolidated financial statements and the related notes thereto that appear in Item 1 of this Quarterly Report on Form 10-Q. Historical results set forth in the consolidated financial statements included in Item 1 and this Section should not be taken as indicative of our future operations.

Note Regarding Forward-Looking Statements

Our disclosure and analysis in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which include information relating to future events, future financial performance, strategies, expectations, risks and uncertainties. From time to time, we also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. These forward-looking statements include, without limitation, statements regarding: projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements regarding strategic transactions such as mergers or acquisitions or a possible dissolution of the Company; and statements of management’s goals and objectives and other similar expressions. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Words such as “believe,” “assume,” “may,” “will,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “strive” and similar expressions, as well as statements in future tense, identify forward-looking statements.

Certain matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements. The risks and uncertainties inherent in such statements may cause actual future events or results to differ materially and adversely from those described in the forward-looking statements.

We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. These factors include the risks and uncertainties described in “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 and the updates to those risk factors described in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.

Overview

We are an externally advised REIT that owns and operates primarily institutional-quality office properties in Hawaii. As of September 30, 2016, we owned three office properties, comprising 1.2 million rentable square feet, and were partners with third parties in three joint ventures holding two office properties, comprising four buildings and 0.8 million rentable square feet, and a sports club associated with our City Square property in Phoenix, Arizona. Our ownership interest percentage in each of these joint ventures is 5.0%. As of September 30, 2016, our property portfolio included office buildings in Honolulu and Phoenix.

Our advisor is Shidler Pacific Advisors, LLC (“Shidler Pacific Advisors”), an entity that is owned and controlled by Jay H. Shidler, our Chairman of the Board. Lawrence J. Taff, our President, Chief Executive Officer, Chief Financial Officer and Treasurer, also serves as President of Shidler Pacific Advisors. Shidler Pacific Advisors is responsible for the day-to-day operation and management of the Company, including management of our wholly-owned properties.

We maintain a website at www.pacificofficeproperties.com. The information on or accessible through our website is not part of this Quarterly Report on Form 10-Q. Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available without charge on our website or upon

Pacific Office Properties Trust, Inc.

request to us. In addition, our Code of Business Conduct and Ethics is available without charge on our website or upon request to us. Amendments to, or waivers from, our Code of Business Conduct and Ethics that apply to our executive officers will be posted to our website. We also post or otherwise make available on our website from time to time other information that may be of interest to our investors.

Critical Accounting Policies

This discussion and analysis of the historical financial condition and results of operations is based upon the accompanying consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses in the reporting period. Actual amounts may differ from these estimates and assumptions. These estimates have been evaluated on an ongoing basis, based upon information currently available and on various assumptions that management believes are reasonable as of the date hereof. In addition, other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of the results of operations and financial conditions to those of other companies.

In addition, we identified certain critical accounting policies that affect our more significant estimates and assumptions used in preparing our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015. We have not made any material changes to those policies during the period covered by this Quarterly Report on Form 10-Q.

Results of Operations

Our results of operations for the three and nine month periods ended September 30, 2016 and 2015 include the results of our wholly-owned properties (Waterfront Plaza, Davies Pacific Center and Pan Am Building) and our equity in the net income (loss) of our unconsolidated joint ventures. Discontinued operations reflects the net results of operations of the Clifford Center property, which was sold in January 2015. The impact on our results of operations from sales of unconsolidated joint venture properties was not material.

Overview

As of September 30, 2016, our wholly-owned properties were 85.7% leased, with approximately 160,300 square feet available, under a total of 326 leases. As of that date, 4.9% of our leased square footage was scheduled to expire during 2016 and another 13.6% of our leased square footage was scheduled to expire during 2017.

As of December 31, 2015, our wholly-owned properties were 88.0% leased, with approximately 136,200 square feet available, under a total of 327 leases. As of that date, 16.0% of our leased square footage was scheduled to expire during 2016 and another 12.6% of our leased square footage was scheduled to expire during 2017.

Pacific Office Properties Trust, Inc.

The following table summarizes the changes in vacant space for our wholly-owned properties for the three and nine month periods ended September 30, 2016 (in rentable square feet):



	For the three months ended September 30, 2016	For the nine months ended September 30, 2016
Vacant space available at the beginning of the period	151,939	136,236
Expired or terminated during the period⁽¹⁾	46,460	151,828
Square footage adjustments and exclusions⁽²⁾	5,378	17,696
Total space available for lease	203,777	305,760
New leases	3,213	21,914
Renewed leases	40,311	123,593
Total space leased during the period	43,524	145,507
Vacant space available at the end of the period	160,253	160,253

___________________________


(1)	Includes leases that expired on the last day of the prior period.


(2)	Includes adjustments for remeasured square footage, right-to-use leases and month-to-month storage leases.

We receive income primarily from rental revenue (including tenant reimbursements) from our office properties and, to a lesser extent, from our parking revenues. Our office properties are typically leased to tenants with good credit for terms ranging from two to 20 years. We perform credit evaluations on new tenants by requesting and reviewing their financial statements and recent tax returns. During the terms of our leases, we monitor the credit quality of our tenants by reviewing the timeliness of their lease payments. In addition, we may review financial statements, operating statements and/or performance of other financial covenants as allowed for under their lease.

Pacific Office Properties Trust, Inc.

Comparison of the three months ended September 30, 2016 to

the three months ended September 30, 2015 (in thousands)



	2016			2015			$ Change			% Change
Revenue:
Rental	$	5,116		$	5,326		$	(210	)	(3.9	)%
Tenant reimbursements	4,190			4,210			(20		)	(0.5	)%
Parking	1,572			1,532			40			2.6	%
Other	53			84			(31		)	(36.9	)%
Total revenue	10,931			11,152			(221		)	(2.0	)%
Expenses:
Rental property operating	6,551			6,467			84			1.3	%
General and administrative	473			481			(8		)	(1.7	)%
Depreciation and amortization	2,609			2,714			(105		)	(3.9	)%
Interest	5,347			5,193			154			3.0	%
Total expenses	14,980			14,855			125			0.8	%
Loss from continuing operations before equity in net income (loss) of unconsolidated joint ventures	(4,049		)	(3,703		)	(346		)	9.3	%
Equity in net income (loss) of unconsolidated joint ventures	(56		)	625			(681		)	(109.0	)%
Loss from continuing operations	(4,105		)	(3,078		)	(1,027		)	33.4	%
Income from discontinued operations	—			2			(2		)	(100.0	)%

Net loss	$	(4,105	)	$	(3,076	)	$	(1,029	)	33.5	%

Revenues

Rental revenue. Total rental revenue decreased by $0.2 million, or 3.9%, primarily due to a decrease in rental revenues at Waterfront Plaza as a result of a negotiated lease incentive for a tenant ($0.1 million) in the current year and at Pan Am Building related to a tenant who vacated its leased premises in the prior year ($0.1 million).

Tenant reimbursements. Total tenant reimbursements decreased by an insignificant amount compared to the prior year period.

Parking revenue. Total parking revenue increased by an insignificant amount compared to the prior year period.

Other revenue. Total other revenue decreased by an insignificant amount compared to the prior year period.

Expenses

Rental property operating expenses. Total rental property operating expenses increased by $0.1 million, or 1.3%, primarily due to an increase in real property taxes resulting from increased property values of our wholly-owned properties.

General and administrative expense. Total general and administrative expenses decreased by an insignificant amount compared to the prior year period.

Depreciation and amortization expense. Total depreciation and amortization expenses decreased by $0.1 million, or 3.9%, primarily due to assets being fully depreciated at Davies Pacific Center.

Interest expense. Total interest expense increased by $0.2 million, or 3.0%, primarily due to increases in loan amortization fees related to the new loan attributable to Davies Pacific Center ($0.1 million), Pan Am Building ($0.1 million) and

Pacific Office Properties Trust, Inc.

Waterfront Plaza ($0.1 million) and an increase in accrued interest on the unsecured notes payable to current and former related parties ($0.1 million), partially offset by decreases in interest expense due to the lower interest rate of the new loan attributable to Davies Pacific Center ($0.1 million) and Waterfront Plaza ($0.1 million).

Equity in net income (loss) of unconsolidated joint ventures

Equity in net income (loss) of unconsolidated joint ventures decreased by $0.7 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The decrease is primarily attributable to the sale of the Valencia Corporate Center property in September 2015.

Income from discontinued operations

For the three months ended September 30, 2015, discontinued operations reflect post-closing activities related to the sale of the Clifford Center property in January 2015.

Comparison of the nine months ended September 30, 2016 to

the nine months ended September 30, 2015 (in thousands)



	2016			2015			$ Change			% Change
Revenue:
Rental	$	15,861		$	15,621		$	240		1.5	%
Tenant reimbursements	12,775			12,527			248			2.0	%
Parking	4,780			4,419			361			8.2	%
Other	263			219			44			20.1	%
Total revenue	33,679			32,786			893			2.7	%
Expenses:
Rental property operating	18,798			18,882			(84		)	(0.4	)%
General and administrative	1,313			1,280			33			2.6	%
Depreciation and amortization	7,833			8,054			(221		)	(2.7	)%
Interest	15,681			15,377			304			2.0	%
Total expenses	43,625			43,593			32			0.1	%
Loss from continuing operations before equity in net income (loss) of unconsolidated joint ventures	(9,946		)	(10,807		)	861			(8.0	)%
Equity in net income (loss) of unconsolidated joint ventures	(157		)	557			(714		)	(128.2	)%
Loss from continuing operations	(10,103		)	(10,250		)	147			(1.4	)%
Discontinued operations:
Loss from discontinued operations before loss on sale of property	—			(28		)	28			(100.0	)%
Loss on sale of property	—			(156		)	156			(100.0	)%
Loss from discontinued operations	—			(184		)	184			(100.0	)%

Net loss	$	(10,103	)	$	(10,434	)	$	331		(3.2	)%

Revenues

Rental revenue. Total rental revenue increased by $0.2 million, or 1.5%, primarily due to a significant tenant at Waterfront Plaza who leased additional space since the prior year period ($0.1 million) and new leases at Waterfront Plaza in the current year period ($0.3 million), partially offset by a decrease in rental revenues at Pan Am Building attributable to a tenant who vacated its leased premises in the prior year period ($0.2 million).

Pacific Office Properties Trust, Inc.

Tenant reimbursements. Total tenant reimbursements increased by $0.2 million, or 2.0%, primarily due to an increase in tenant recoveries for common area maintenance expenses at Waterfront Plaza compared to the prior year period.

Parking revenue. Total parking revenue increased by $0.4 million, or 8.2%, primarily due to an increase in parking rates at Waterfront Plaza.

Other revenue. Total other revenue increased by an insignificant amount compared to the prior year period.

Expenses

Rental property operating expenses. Total rental property operating expenses decreased by $0.1 million, or 0.4%, primarily due to a decrease in electricity expenses at Waterfront Plaza compared to the prior year period.

General and administrative expense. Total general and administrative expenses increased by an insignificant amount compared to the prior year period.

Depreciation and amortization expense. Total depreciation and amortization expenses decreased by $0.2 million, or 2.7%, primarily due to assets being fully depreciated at Davies Pacific Center.

Interest expense. Total interest expense increased by $0.3 million, or 2.0%, primarily due to increases in loan amortization fees related to the new loan attributable to Davies Pacific Center ($0.1 million), Pan Am Building ($0.1 million) and Waterfront Plaza ($0.1 million) and an increase in accrued interest on the unsecured notes payable to current and former related parties ($0.2 million), partially offset by decreases in interest expense due to the lower interest rate of the new loan attributable to Davies Pacific Center ($0.1 million) and Waterfront Plaza ($0.1 million).

Equity in net income (loss) of unconsolidated joint ventures

Equity in net income (loss) of unconsolidated joint ventures decreased by $0.7 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is primarily attributable to the sale of the Valencia Corporate Center property in September 2015.

Loss from discontinued operations before loss on sale of property

For the nine months ended September 30, 2015, discontinued operations reflect the net results of operations of the Clifford Center property prior to its sale in January 2015, as well as post-closing activities since the sale.

Loss on sale of property

We recognized a loss related to the sale of our Clifford Center property in January 2015.

Cash Flows

Net cash used in operating activities for the Company for the nine months ended September 30, 2016 was $1.4 million compared to net cash provided by operating activities of $0.04 million for the nine months ended September 30, 2015. The decrease was primarily the result of an increase in funds deposited to our restricted cash reserve accounts for operating activities ($2.2 million), as compared to the prior year period, pursuant to certain provisions of our new mortgage loan agreement entered into in August 2016, partially offset by an increase in accounts payables ($0.9 million) as compared to the prior year period.

Net cash used in investing activities for the Company for the nine months ended September 30, 2016 was $10.8 million compared to net cash provided by investing activities of $4.4 million for the nine months ended September 30, 2015. The decrease was primarily the result of net proceeds from the sale of our Clifford Center property in January 2015 ($8.4 million) and an increase in funds deposited to our restricted cash reserve accounts used for capital expenditures ($6.8 million), as

Pacific Office Properties Trust, Inc.

compared to the prior year period, pursuant to certain provisions of our new mortgage loan agreement entered into in August 2016.

Net cash provided by financing activities was $10.7 million for the nine months ended September 30, 2016 compared to net cash used in financing activities of $6.9 million for the nine months ended September 30, 2015. The increase was primarily due to proceeds from the our new mortgage loan ($280.5 million) and borrowings from a related party ($3.0 million) in the current year period, partially offset by an increase in financing costs ($6.1 million) related to our new mortgage loan and repayments of our previous mortgage debt with the proceeds of the new loan ($259.7 million) compared to the prior year period.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income. As discussed further below, however, we did not declare dividends on our Class A Common Stock during fiscal 2015 and 2014, and we do not currently expect to declare dividends on our Class A Common Stock during fiscal 2016.

Pacific Office Properties Trust, Inc.

Actual and Potential Sources of Liquidity

Listed below are our actual and potential sources of liquidity in the near term:


•	Unrestricted and restricted cash on hand;


•	Net cash flow generated from operations;


•	Distributions from joint ventures; and/or


•	Asset dispositions.

These sources are essential to our short-term liquidity and financial position, and we cannot assure you that we will be able to successfully access them. If we are unable to generate adequate cash from these sources, we will have liquidity-related problems and may be exposed to significant risks. For a further discussion of such risks, see Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 and the updates to those risk factors described in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.

Unrestricted and restricted cash on hand

As of September 30, 2016, we had $2.4 million in unrestricted cash and cash equivalents. In addition, we had restricted cash balances of $13.1 million. A summary of our restricted cash reserves is as follows (in thousands):



	September 30, 2016
Leasing and capital expenditure reserves	$	7,720
Ground lease reserves	—
Tax, insurance and other working capital reserves	1,117
Collateral accounts	2,432
Tenant security deposits	1,793
Total restricted cash	$	13,062

The leasing and capital expenditure, ground lease, tax, insurance and other working capital reserves and collateral accounts are held in restricted accounts by our lenders in accordance with the terms of our mortgage loan. These restricted cash accounts are expected to fund (1) anticipated leasing expenditures (primarily commissions and tenant improvement costs) for existing and prospective tenants, (2) non-recurring discretionary capital expenditures, (3) payments for properties subject to ground leases, (4) property taxes and insurance and (5) other obligations. We maintain our tenant security deposits in a separate account at our financial institution.

Net cash flow generated from operations

Our cash flows from operations depend significantly on market rents and the ability of our tenants to make rental payments. While we believe the diversity and high credit quality of our tenants help mitigate the risk of a significant interruption of our cash flows from operations, the challenging Honolulu office market conditions that we are continuing to experience, the potential for an increase in interest rates, or the possibility of a downturn or return to recessionary conditions could adversely impact our operating cash flows. Competition to attract and retain high credit-quality tenants remains intense. At the same time, a significant number of our leases at our properties are scheduled to expire over the next several years, and the capital requirements necessary to maintain our current occupancy levels, including payment of leasing commissions, tenant concessions, and anticipated leasing expenditures, could increase. As such, we will continue to closely monitor our tenant renewals, rental rates, competitive market conditions and our cash flows.

Distributions from joint ventures

We are currently partners with third parties in three joint ventures, holding two office properties comprising four buildings, and a sports club associated with one of the office properties. Distributions from our joint ventures depend significantly on our joint ventures’ ability to generate positive cash flow from their rental operations or the sale of one or

Pacific Office Properties Trust, Inc.

more office properties or buildings held by our joint ventures. Our joint ventures’ ability to successfully manage the operations or identify, negotiate and close sale transactions on acceptable terms or at all is uncertain.

Asset dispositions

In the near term or longer term, we may seek to raise additional capital by selling some or all of our existing wholly-owned assets, but we have a limited number of assets that could be sold to generate net cash proceeds and our ability to do so on acceptable terms or at all is highly uncertain. Moreover, a sale of any of our wholly-owned properties that would not provide continued tax deferral to POP Venture, LLC, a Delaware limited liability company controlled by Mr. Shidler, which we refer to as Venture, is contractually restricted until March 19, 2018. These restrictions on the sale of such properties may prevent us from selling the properties or may adversely impact the terms available to us upon a disposition. In addition, we have agreed that, until March 19, 2018, we will not prepay or defease any mortgage indebtedness of such properties, other than in connection with a concurrent refinancing with non-recourse mortgage debt of an equal or greater amount and subject to certain other restrictions. Furthermore, if any such sale or defeasance is foreseeable, we are required to notify Venture and to cooperate with it in considering strategies to defer or mitigate the recognition of gain under the Code. These contractual obligations may limit our future operating flexibility and compel us to take actions or enter into transactions that we otherwise would not undertake. If we fail to comply with any of these requirements, we may be liable for a make-whole cash payment to Venture, the cost of which could be material and could adversely affect our liquidity.

As a result of the sale of our First Insurance Center property in June 2012, certain contract parties holding ownership interests in the contributor of First Insurance claimed they were entitled to a make-whole cash payment under tax protection agreements relating to the property. In February 2014, we issued subordinated promissory notes in the aggregate amount of $8.3 million in settlement of the majority of such claims, and paid cash settlements totaling approximately $0.4 million in settlement of the remainder of such claims. Each party receiving a promissory note or cash payment released us from any other claims under the tax protection agreements arising out of the sale of the First Insurance Center property and the foreclosure of our Sorrento Technology Center property in January 2012, as applicable. See “Indebtedness - Subordinated Promissory Notes” below for additional information regarding the terms of these promissory notes.

In January 2015, we completed the sale of our fee and leasehold interests in our Clifford Center property, located in Honolulu, Hawaii, to an unaffiliated third party for aggregate consideration of $8.9 million. No tax indemnity liability arose under the tax protection agreements in connection with this sale because the sale of the Clifford Center property resulted in a tax loss.

In August 2016, we entered into a Purchase and Sale Agreement to sell our Pan Am Building property, located in Honolulu, Hawaii, to a third party buyer for cash consideration of $78.5 million. The completion of the sale transaction is scheduled to occur no later than August 13, 2018, but is not expected to occur prior to the first quarter of 2018. See Note 7 for more discussion on the new loan agreement and Note 11 for the contemplated sale of our Pan Am Building.

Actual and Potential Uses of Liquidity

The following are the actual and potential uses of our cash in the near term. There may be other uses of our cash that are unexpected (and that are not identified below):


•	Property operating and corporate expenses;


•	Capital expenditures (including building and tenant improvements and leasing commissions);


•	Debt service and financing costs; and/or


•	Dividends or other distributions to stockholders and distributions to limited partners of our Operating Partnership.

Property operating and corporate expenses

Pacific Office Properties Trust, Inc.

resources, at lower cost to us, for our current and prospective business. Effective January 1, 2015, Shidler Pacific Advisors agreed to reduce the corporate management fee payable by us from $0.21 million per quarter to $0.18 million per quarter.

Capital expenditures (including building and tenant improvements and leasing commissions)

The following table summarizes tenant improvement and leasing commission costs related to new and renewed leases of our wholly-owned properties:



	For the nine months ended September 30, 2016
	New Leases		Renewed Leases		Total Leases
Square feet	21,914		123,593		145,507
Tenant improvement costs per square foot⁽¹⁾	$	11.53	$	4.85	$	5.85
Leasing commission costs per square foot	7.09		3.05		3.66
Total tenant improvement and leasing commission costs per square foot	$	18.62	$	7.90	$	9.51

___________________________


(1)	Based on the negotiated tenant improvement cost budget at the time of lease execution, which may be incurred in a subsequent year and different than actual costs incurred.

Debt service and financing costs

In August 2016, we entered into a new loan agreement, the proceeds of which were used to repay in full the existing mortgage loans that were scheduled to mature on various dates in 2016. See Note 7 for more discussion on the new loan agreement.

Our revolving credit facility is scheduled to mature on December 31, 2016. We intend to work with the lender of our credit facility to extend the maturity date, but there can be no assurance that we will be successful in doing so. The maturity date of the promissory notes payable to certain current and former affiliates are also scheduled to mature on December 31, 2016 or, if later, the maturity date of our revolving credit facility, but in any event not later than December 31, 2017.

Dividends or other distributions to stockholders and distributions to limited partners of our Operating Partnership

Because we conduct substantially all of our operations through our Operating Partnership, our ability to pay dividends or other distributions (including liquidating distributions) to our stockholders depends almost entirely on distributions received on our interests in our Operating Partnership, the payment of which depends in turn on our ability to operate profitably and generate cash flow from our operations. Our ability to pay dividends or other distributions to holders of our Class A Common Stock depends on our Operating Partnership’s ability first to satisfy its obligations to its creditors and

Pacific Office Properties Trust, Inc.

preferred unitholders (including us with respect to the outstanding Senior Common Units of our Operating Partnership, and then to the holder of the outstanding Preferred Units of our Operating Partnership) and then to make distributions to us with respect to our general partnership interest. Our Operating Partnership may not make distributions to the holders of its outstanding Common Units (including us with respect to our general partnership interest) unless full cumulative distributions have been paid on its outstanding Senior Common Units and Preferred Units, and we may not pay dividends on our Class A Common Stock unless full cumulative dividends have been paid on our outstanding Senior Common Stock.

We did not declare a dividend on our Class A Common Stock during 2015, and do not currently expect to declare a dividend on our Class A Common Stock in 2016. Furthermore, our Operating Partnership did not pay a distribution with respect to its outstanding Preferred Units or Common Units during 2015, and does not expect to do so for 2016. As noted above, unless full cumulative distributions have been paid on the outstanding Senior Common Units and Preferred Units, our Operating Partnership may not pay a distribution on its outstanding Common Units (including us with respect to our general partnership interest), which effectively means that we will be unable to pay dividends or other distributions on our Class A Common Stock unless and until all cumulative dividends and distributions have been paid with respect to the Senior Common Stock and the Preferred Units.

Amounts accumulated for distribution to stockholders and Operating Partnership unitholders are invested primarily in interest-bearing accounts which are consistent with our intention to maintain our qualification as a REIT. At September 30, 2016, the cumulative unpaid distributions attributable to Preferred Units were $13.1 million, which we do not anticipate to pay in 2016.

We cannot provide any assurance as to when, or if, we will pay the accrued dividends on the Senior Common Stock or resume the payment of dividends at the full stated annualized rate, or if we will continue to pay dividends on the Senior Common Stock at half the stated annualized rate or at all. Any dividends or other distributions we pay in the future will depend upon our legal and contractual restrictions, including the provisions of the Senior Common Stock, as well as actual results of operations, economic conditions, debt service requirements and other factors. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For a further discussion of such risks, see Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 and the updates to those risk factors described in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.

Pacific Office Properties Trust, Inc.

Indebtedness

Mortgage and Other Loans

The following table sets forth information relating to our borrowings with respect to our consolidated property loan and our revolving line of credit as of September 30, 2016:



	Amount			Maturity Date
Consolidated property loan⁽¹⁾	$	280,500		8/11/2019
Revolving line of credit⁽²⁾	25,000			12/31/2016
Outstanding principal balance	305,500
Less: unamortized deferred loan fees, net	(5,739		)
Mortgage and other loans, net	$	299,761

___________________________

(1)

The loan is subject to monthly interest payments bearing interest at a floating rate per annum equal to the One-Month LIBOR Rate plus 4.5% and monthly partial principal payments based on the availability of cash after making required distributions for operating costs and reserves pursuant to a payment waterfall and other terms and conditions under the new loan agreement. The loan may be prepaid in whole prior to its maturity date, subject to a spread maintenance prepayment premium and by providing a 30-day prepayment notice and complying with certain prepayment conditions. As of September 30, 2016, the applicable One-Month LIBOR Rate was 0.519%.

(2)

Revolving Line of Credit

We are party to a Credit Agreement, referred to as the FHB Credit Facility, with First Hawaiian Bank, or the Lender, which provides us with a revolving line of credit in the maximum principal amount of $25.0 million and has a maturity date of December 31, 2016. Amounts borrowed under the FHB Credit Facility bear interest at a fluctuating annual rate equal to the effective rate of interest paid by the Lender on time certificates of deposit, plus 1.00%. We are permitted to use the proceeds of the line of credit for working capital and general corporate purposes, consistent with our real estate operations

Pacific Office Properties Trust, Inc.

and for such other purposes as the Lender may approve. As of September 30, 2016 and December 31, 2015, we had outstanding borrowings of $25.0 million under the FHB Credit Facility.

Subordinated Promissory Notes

In 2008, we issued $21.1 million of promissory notes as consideration for having funded certain capital improvements prior to the completion of our formation transactions and upon the exercise of an option granted to us by Venture and its affiliates as part of our formation transactions in 2008. The promissory notes accrue interest at a rate of 7%, per annum, with interest payable quarterly, subject to the Operating Partnership’s right to defer the payment of interest for any or all periods until the date of maturity. The promissory notes were originally scheduled to mature on various dates commencing on March 19, 2013 through August 31, 2013, but the Operating Partnership elected to extend the maturity for one additional year. The maturity date of the promissory notes has subsequently been extended to be coterminous with the maturity of the promissory note issued in September 2016 (as described below).

In February 2014, we issued to certain current and former affiliates additional promissory notes in the aggregate principal amount of $8.3 million to settle claims under tax protection agreements relating to the sale of our First Insurance Center property in 2012. See “Tax Protection Arrangements” in Note 9 for additional information. These promissory notes accrue interest at a rate of 5% per annum, with interest payable quarterly, subject to the Operating Partnership’s right to defer the payment of interest for any or all periods until the date of maturity, and were originally scheduled to mature on December 31, 2015. The maturity date of the promissory notes has subsequently been extended to be coterminous with the maturity of the promissory note issued in September 2016 (as described below).

Pacific Office Properties Trust, Inc.

the September 2016 note) are subordinated to borrowings under the FHB Credit Facility and our indemnification obligations to Shidler LP in connection with its pledge in support of the FHB Credit Facility.

For the period from March 20, 2008 through September 30, 2016, interest payments on these promissory notes have been deferred with the exception of $0.3 million which was related to notes exchanged for shares of common stock in 2009. At September 30, 2016 and December 31, 2015, $18.1 million and $15.6 million, respectively, of accrued interest attributable to these promissory notes is included in the accompanying consolidated balance sheets.

Off-Balance Sheet Arrangements

Inflation

We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. Because the majority of our leases require tenants to pay most operating expenses, including real estate taxes, utilities, insurance, and increases in common area maintenance expenses, we do not believe our exposure to increases in costs and operating expenses resulting from inflation is material. Furthermore, the majority of our existing leases contain contractual annual rental rate increases, which will at least partially offset the effect of inflation on our operating results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures -

As required by Rule 13a-15(b) of the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2016, the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting -

There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Pacific Office Properties Trust, Inc.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, are expected by us to have a material effect on our business, financial condition or results of operation if determined adversely to us.

Item 1A. Risk Factors.

Important factors that could cause our actual results to be materially different from the forward-looking statements include the risks factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. There have been no material changes to the risk factors set forth in those reports. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition and results of operations.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Pacific Office Properties Trust, Inc.



Exhibit No.		Description

3.1		Articles of Amendment and Restatement of the Company (previously filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 001-09900) and incorporated herein by reference).

3.2		Articles Supplementary of the Company dated November 20, 2009 (previously filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 001-09900) and incorporated herein by reference).

3.3		Articles of Amendment of the Company dated November 20, 2009 (previously filed as Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 001-09900) and incorporated herein by reference).

3.4		Articles of Amendment of the Company dated January 5, 2010 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 5, 2010 (File No. 001-09900) and incorporated herein by reference).

3.5		Articles Supplementary of Board of Directors Reclassifying and Designating a series of common stock as Senior Common Stock, dated March 4, 2010 (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed March 9, 2010 (File No. 001-09900) and incorporated herein by reference).

3.6		Certificate of Correction to Articles Supplementary, dated April 30, 2010 (previously filed as Exhibit 3.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 001-09900) and incorporated herein by reference).

3.7		Articles of Amendment of the Company dated November 1, 2010 (previously filed as Exhibit 3.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (File No. 001-09900) and incorporated herein by reference).

3.8		Articles of Amendment of the Company dated May 21, 2012 (previously filed as Exhibit 3.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 001-09900) and incorporated herein by reference).

3.9		Amended and Restated Bylaws dated December 20, 2010 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 27, 2010 (File No. 001-09900) and incorporated herein by reference).

4.1		Subordinated Promissory Note dated September 30, 2016 (previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed October 6, 2016 (File No. 001-09900) and incorporated herein by reference).

10.1		Loan Agreement, dated August 11, 2016, among Davies Pacific, LLC, Pan Am I, LLC, Pan Am II, LLC, Pan Am III, LLC, Pan Am IV, LLC, Waterfront A, LLC, Waterfront B, LLC, Waterfront C, LLC, Waterfront D, LLC, Waterfront E, LLC, Goldman Sachs Specialty Lending Group, L.P., Don Quijote (USA) Co., Ltd., Don Quijote Holdings Co., Ltd., and Special Situations Investing Group II, LLC (Filed herewith).

10.2		Purchase and Sale Agreement, dated August 11, 2016, among Pan Am I, LLC, Pan Am II, LLC, Pan Am III, LLC, Pan Am IV, LLC and Don Quijote (USA) Co., Ltd. (Filed herewith).

10.3		Indemnification Agreement, dated as of August 11, 2016, between Pacific Office Properties, L.P. and Jay H. Shidler. (Filed herewith.)

10.4		Third Amendment to Subordinated Promissory Notes, dated as of September 30, 2016, among Pacific Office Properties, L.P. and the holders named therein (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 6, 2016 (File No. 001-09900) and incorporated herein by reference).

31.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith.)

101		Interactive Data File. (Filed herewith.)

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.



		PACIFIC OFFICE PROPERTIES TRUST, INC.


Date:	November 9, 2016	By:	/s/ Lawrence J. Taff
			Lawrence J. Taff
			Chief Executive Officer and Chief Financial Officer
			(Principal Executive Officer and Principal Financial Officer)

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PACIFIC OFFICE PROPERTIES TRUST, INC. Reports

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