SEGMENT INFORMATION | 12. SEGMENT INFORMATION During the year ended December 31, 2015, the Company managed its portfolio within seven segments: (1) Pennsylvania Suburbs, (2) Philadelphia Central Business District (CBD), (3) Metropolitan Washington, D.C., (4) New Jersey/Delaware, (5) Richmond, Virginia, (6) Austin, Texas and (7) California. As a result of the Och-Ziff Sale that occurred on February 4, 2016, the Company narrowed its segments to five segments: (1) Pennsylvania Suburbs, (2) Philadelphia Central Business District (“CBD”), (3) Metropolitan Washington, D.C. and (4) Austin, Texas and (5) Other. The Och-Ziff Sale disposed of the entire Richmond, Virginia segment. Subsequent to the Och-Ziff Sale, the segments previously defined as New Jersey/Delaware and California are now being managed as a consolidated segment entitled “Other,” as these geographies no longer provide a significant revenue contribution. The Pennsylvania Suburbs segment includes properties in Chester, Delaware, and Montgomery counties in the Philadelphia suburbs. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Metropolitan Washington, D.C. segment includes properties in the District of Columbia, Northern Virginia and southern Maryland. The Austin, Texas segment includes properties in the City of Austin, Texas. The Other segment includes properties in Burlington and Camden counties in New Jersey, properties in New Castle County in the state of Delaware, and properties in the City of Oakland and City of Concord in California. The corporate group is responsible for cash and investment management, development of certain real estate properties during the construction period, and certain other general support functions. Land held for development and construction in progress are transferred to operating properties by region upon completion of the associated construction or project. The following tables provide selected asset information and results of operations of the Company's reportable segments (in thousands): Real estate investments, at cost: September 30, 2016 December 31, 2015 Philadelphia CBD (a) $ 1,321,079 $ 1,157,667 Pennsylvania Suburbs 1,011,490 1,019,280 Metropolitan Washington, D.C. (b) 999,549 1,129,206 Austin, Texas (c) 146,794 164,518 Other (d), (e) 207,427 222,329 $ 3,686,339 $ 3,693,000 Assets held for sale (f), (g) 16,916 794,588 Operating Properties $ 3,703,255 $ 4,487,588 Corporate Construction-in-progress $ 249,183 $ 268,983 Land held for development $ 155,297 $ 130,479 (a) The increase primarily relates to the office component of the FMC Tower at Cira Centre South being placed into service during the second quarter of 2016. See Note 3, "Real Estate Investments," (b) The decrease primarily relates to the sale of Herndon Metro Plaza I & II. See Note 3, "Real Estate Investments," (c) The decrease primarily relates to a building from the Broadmoor Austin portfolio being placed into redevelopment during the three-month period ended June 30, 2016. (d) The decrease primarily relates to the sale of the office property at 1120 Executive Boulevard in Mount Laurel, New Jersey and the held for sale classification of Oakland Lot B in Oakland, California. See Note 3, "Real Estate Investments," (e) As a result of the Och-Ziff Sale that occurred on February 4, 2016, the Company narrowed its segments to five segments: (1) Pennsylvania Suburbs, (2) Philadelphia Central Business District (“CBD”), (3) Metropolitan Washington, D.C. and (4) Austin, Texas and (5) Other. The Och-Ziff Sale disposed of the entire Richmond, Virginia segment. Subsequent to the Och-Ziff Sale, the segments previously defined as New Jersey/Delaware and California are now being managed as a consolidated segment entitled “Other,” as these geographies no longer provide a significant revenue contribution. Accordingly, the chief operating decision maker revised the management structure, reallocated resources, and is assessing business operations of the five segments as of January 1, 2016. ( f ) As of December 31, 2015, the office property located at 2970 Market Street in Philadelphia, Pennsylvania commonly known as 30 th "Real Estate Investments," ( g ) As of December 31, 2015, the 58 properties associated with the series of related transactions with Och-Ziff Real Estate were classified as held for sale on the consolidated balance sheets. On February 4, 2016, the Company completed a series of transactions, resulting in the disposition of the properties. See Note 3, “Real Estate Investments,” Real Estate Investments None of the above aforementioned sales or properties classified as held for sale are considered significant dispositions under the accounting guidance for discontinued operations. Net operating income (in thousands): Three-month periods ended September 30, 2016 2015 Total revenue Operating expenses (a) Net operating income (loss) Total revenue Operating expenses (a) Net operating income Philadelphia CBD $ 50,744 $ (19,071 ) $ 31,673 $ 52,203 $ (18,750 ) $ 33,453 Pennsylvania Suburbs 35,763 (11,247 ) 24,516 39,507 (14,004 ) 25,503 Metropolitan Washington, D.C. 24,251 (9,900 ) 14,351 27,587 (10,792 ) 16,795 Austin, Texas (b) 8,726 (3,523 ) 5,203 8,533 (2,625 ) 5,908 Other (c) 8,526 (4,837 ) 3,689 24,275 (12,061 ) 12,214 Corporate (d) 1,684 (2,739 ) (1,055 ) 480 (386 ) 94 Operating Properties $ 129,694 $ (51,317 ) $ 78,377 $ 152,585 $ (58,618 ) $ 93,967 Nine-month periods ended September 30, 2016 2015 Total revenue Operating expenses (a) Net operating income Total revenue Operating expenses (a) Net operating income Philadelphia CBD $ 148,496 $ (58,102 ) $ 90,394 $ 157,595 $ (56,587 ) $ 101,008 Pennsylvania Suburbs 107,971 (36,982 ) 70,989 118,407 (41,286 ) 77,121 Metropolitan Washington, D.C. 76,881 (29,567 ) 47,314 81,947 (33,197 ) 48,750 Austin, Texas (b) 25,123 (9,689 ) 15,434 11,999 (4,993 ) 7,006 Other (c) 30,328 (17,513 ) 12,815 76,129 (38,238 ) 37,891 Corporate (d) 4,578 (4,460 ) 118 2,562 (1,364 ) 1,198 Operating Properties $ 393,377 $ (156,313 ) $ 237,064 $ 448,639 $ (175,665 ) $ 272,974 (a) Includes property operating expense, real estate taxes and third party management expense. (b) On June 22, 2015 the Company acquired the remaining 50.0% interest in Broadmoor Austin Associates. As such, the Company has seven wholly owned properties in its Austin, Texas business segment at June 30, 2016. In addition, net operating income for the three and nine months ended September 30, 2016 and 2015 includes management fees and related expenses for services provided by the Company to the Austin Venture (c) See footnote (e) to the “Real estate investments, at cost” table above for further information regarding this segment. (d) Increase in revenue and operating expenses primarily relates to the third party management operations of the Subaru Headquarters Development and third party management of the MAP Venture. Unconsolidated real estate ventures (in thousands): Investment in real estate ventures, at equity Equity in income (loss) of real estate ventures As of Three-month periods ended September 30, Nine-month periods ended September 30, September 30, 2016 December 31, 2015 2016 2015 2016 2015 Philadelphia CBD (a) $ 48,904 $ 44,089 $ (453 ) $ (186 ) $ (473 ) $ (636 ) Pennsylvania Suburbs 15,025 16,408 (170 ) (120 ) 410 (142 ) Metropolitan Washington, D.C. (b) 140,219 118,422 (5,287 ) (343 ) (6,068 ) (572 ) MAP Venture (c) 22,503 - (1,010 ) - (2,608 ) - Other (d) 1,554 1,657 227 173 715 669 Austin, Texas (e) 53,957 60,428 (561 ) (617 ) (1,299 ) (1,154 ) Total $ 282,162 $ 241,004 $ (7,254 ) $ (1,093 ) $ (9,323 ) $ (1,835 ) (a) Net increase of investment of $4.8 million primary relates to the evo at Cira real estate venture. See Note 4, “ Investment in Unconsolidated Real Estate Ventures, (b) On August 31, 2016, the Company terminated its lease for the regional management and leasing office at 3141 Fairview Park Drive, located in Falls Church, Virginia. Accordingly, the Company no longer has any continuing involvement with 3141 Fairview Park Drive and recorded the partial sale under the full accrual method of accounting. As a result, the Company deconsolidated net assets of $45.6 million, a mortgage loan of $20.6 million and a financing liability of $12.4 million related to the property from its consolidated balance sheet and recorded a $12.6 million equity method investment to the Company’s Brandywine - AI Venture LLC, in which the Company owns a 50% interest. See Note 4, “Investment in Unconsolidated Real Estate Ventures,” (c) The MAP Venture represents a joint venture formed between the Company and MAP Ground Lease Holdings LLC, an affiliate of Och-Ziff Capital Management Group, LLC, on February 4, 2016. See Note 4 “ Investment in Unconsolidated Real Estate Ventures, (d) See footnote (e) to the “Real estate investments, at cost” table above for further information regarding this segment. (e) Investment in real estate ventures does not include the $1.1 million negative investment balance in one real estate venture as of December 31, 2015, which is included in other liabilities. The Company disposed of its interest in this venture during the three-month period ended March 31, 2016. See Note 4, " Investment in Unconsolidated Real Estate Ventures Net operating income (“NOI”) is a non-GAAP financial measure defined as total revenue less property operating expenses, real estate taxes and third party management expenses. Segment NOI includes revenue, real estate taxes and property operating expenses directly related to operation and management of the properties owned and managed within the respective geographical region. Segment NOI excludes property level depreciation and amortization, revenue and expenses directly associated with third party real estate management services, expenses associated with corporate administrative support services, and inter-company eliminations. NOI also does not reflect general and administrative expenses, interest expenses, real estate impairment losses, depreciation and amortization costs, capital expenditures and leasing costs. Trends in development and construction activities that could materially impact the Company’s results from operations are also not reflected in NOI. All companies may not calculate NOI in the same manner. NOI is the measure that is used by the Company to evaluate the operating performance of its real estate assets by segment. The Company also believes that NOI provides useful information to investors regarding its financial condition and results of operations because it reflects only those income and expenses recorded at the property level. The Company believes that net income, as defined by GAAP, is the most appropriate earnings measure. The following is a reconciliation of consolidated NOI to consolidated net income, as defined by GAAP (in thousands): Three-month periods ended September 30, Nine-month periods ended September 30, 2016 2015 2016 2015 Consolidated net operating income $ 78,377 $ 93,967 $ 237,064 $ 272,974 Less: Interest expense (20,814 ) (27,900 ) (64,334 ) (83,971 ) Interest expense - amortization of deferred financing costs (645 ) (1,010 ) (2,063 ) (3,377 ) Interest expense - financing obligation (156 ) (296 ) (679 ) (906 ) Depreciation and amortization (46,956 ) (58,314 ) (142,736 ) (160,355 ) General and administrative expenses (5,515 ) (6,127 ) (20,711 ) (21,554 ) Equity in loss of real estate ventures (7,254 ) (1,093 ) (9,323 ) (1,835 ) Provision for impairment - - (13,069 ) (2,508 ) Loss on early extinguishment of debt - - (66,590 ) - Plus: Interest income 291 126 970 1,189 Tax credit transaction income - 11,853 - 11,853 Net gain (loss) on disposition of real estate (104 ) 6,083 114,625 16,673 Net gain on sale of undepreciated real estate 188 3,019 188 3,019 Net gain from remeasurement of investment in a real estate venture - - - 758 Net gain on Real Estate Venture transactions 10,472 - 19,529 - Net income $ 7,884 $ 20,308 $ 52,871 $ 31,960 |