Tier Reit (TIER) 10-Q 2016 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from  _________ to _________                   

Commission File Number: 001-37512

TIER REIT, Inc.

(Exact name of registrant as specified in its charter)

Maryland	68-0509956
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5950 Sherry Lane, Suite 700, Dallas, Texas 75225

(Address of principal executive offices)

(Zip code)

(972) 483-2400

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o
(Do not check if a smaller reporting company)

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

As of October 31, 2016, TIER REIT, Inc. had 47,742,671 shares of common stock, $.0001 par value, outstanding.

TIER REIT, Inc.

FORM 10-Q

Quarter Ended September 30, 2016

PART I
FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Changes in Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
Signature		39

2

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

TIER REIT, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

	September 30, 2016			December 31, 2015
Assets
Real estate
Land	$	143,581		$	179,989
Land held for development	45,059			45,059
Buildings and improvements, net	1,048,194			1,348,200
Real estate under development	11,657			—
Total real estate	1,248,491			1,573,248
Cash and cash equivalents	51,466			12,248
Restricted cash	8,586			10,712
Accounts receivable, net	67,100			76,228
Prepaid expenses and other assets	5,540			6,712
Investments in unconsolidated entities	76,954			88,998
Deferred financing fees, net	2,698			3,111
Lease intangibles, net	62,936			83,548
Other intangible assets, net	9,888			10,086
Assets associated with real estate held for sale	37,026			—
Total assets	$	1,570,685		$	1,864,891
Liabilities and equity
Liabilities
Notes payable, net	$	837,920		$	1,071,571
Accounts payable and accrued liabilities	65,924			71,597
Payables to related parties	—			292
Acquired below-market leases, net	7,856			11,934
Distributions payable	8,602			8,596
Other liabilities	30,005			23,082
Obligations associated with real estate held for sale	1,394			—
Total liabilities	951,701			1,187,072
Commitments and contingencies
Series A Convertible Preferred Stock	—			2,700
Equity
Preferred stock, $.0001 par value per share; 17,500,000 and 17,490,000 shares authorized at September 30, 2016, and December 31, 2015, respectively, none outstanding	—			—
Convertible stock, $.0001 par value per share; 1,000 shares authorized, none outstanding	—			—
Common stock, $.0001 par value per share; 382,499,000 shares authorized, 47,412,705 and 47,362,372 shares issued and outstanding at September 30, 2016, and December 31, 2015, respectively	5			5
Additional paid-in capital	2,605,569			2,600,193
Cumulative distributions and net loss attributable to common stockholders	(1,971,588		)	(1,922,721		)
Accumulated other comprehensive loss	(16,662		)	(3,860		)
Stockholders’ equity	617,324			673,617
Noncontrolling interests	1,660			1,502
Total equity	618,984			675,119
Total liabilities and equity	$	1,570,685		$	1,864,891

See Notes to Condensed Consolidated Financial Statements.

3

TIER REIT, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Rental revenue	$	55,998		$	69,423		$	188,743		$	215,280
Expenses
Property operating expenses	16,315			21,290			56,605			67,346
Interest expense	9,005			12,765			34,692			44,747
Real estate taxes	8,350			9,670			28,843			31,512
Property management fees	210			342			720			4,779
Asset impairment losses	4,151			—			8,977			132
General and administrative	5,529			10,123			17,853			36,007
Depreciation and amortization	25,133			31,446			87,974			92,549
Total expenses	68,693			85,636			235,664			277,072
Interest and other income	248			267			866			553
Loss on early extinguishment of debt	—			(30		)	—			(21,478		)
Loss from continuing operations before income taxes, equity in operations of investments, and gain (loss) on sale of assets	(12,447		)	(15,976		)	(46,055		)	(82,717		)
Provision for income taxes	(4		)	(36		)	(467		)	(1,298		)
Equity in operations of investments	646			(159		)	1,884			153
Loss from continuing operations before gain (loss) on sale of assets	(11,805		)	(16,171		)	(44,638		)	(83,862		)
Discontinued operations
Income from discontinued operations	—			21			—			1,390
Gain on sale of discontinued operations	—			403			—			15,086
Discontinued operations	—			424			—			16,476
Gain (loss) on sale of assets	10,777			(85		)	21,526			44,479
Net loss	(1,028		)	(15,832		)	(23,112		)	(22,907		)
Noncontrolling interests in continuing operations	3			58			28			118
Noncontrolling interests in discontinued operations	—			(1		)	—			(29		)
Dilution of Series A Convertible Preferred Stock	—			1,926			—			1,926
Net loss attributable to common stockholders	$	(1,025	)	$	(13,849	)	$	(23,084	)	$	(20,892	)
Basic and diluted weighted average common shares outstanding	47,412,705			48,842,711			47,402,724			49,538,652
Basic and diluted earnings (loss) per common share:
Continuing operations	$	(0.02	)	$	(0.29	)	$	(0.49	)	$	(0.75	)
Discontinued operations	—			0.01			—			0.33
Basic and diluted loss per common share	$	(0.02	)	$	(0.28	)	$	(0.49	)	$	(0.42	)
Distributions declared per common share	$	0.18		$	0.18		$	0.54		$	0.36
Net income (loss) attributable to common stockholders:
Continuing operations	$	(1,025	)	$	(14,272	)	$	(23,084	)	$	(37,339	)
Discontinued operations	—			423			—			16,447
Net loss attributable to common stockholders	$	(1,025	)	$	(13,849	)	$	(23,084	)	$	(20,892	)
Comprehensive income (loss):
Net loss	$	(1,028	)	$	(15,832	)	$	(23,112	)	$	(22,907	)
Other comprehensive income (loss): unrealized income (loss) on interest rate derivatives	2,602			(10,966		)	(12,810		)	(9,376		)
Comprehensive income (loss)	1,574			(26,798		)	(35,922		)	(32,283		)
Comprehensive loss attributable to noncontrolling interests	1			76			36			105
Comprehensive income (loss) attributable to common stockholders	$	1,575		$	(26,722	)	$	(35,886	)	$	(32,178	)

See Notes to Condensed Consolidated Financial Statements.

4

TIER REIT, Inc.

Condensed Consolidated Statements of Changes in Equity

(in thousands)

(unaudited)

								Cumulative Distributions and Net Loss Attributable to Common Stockholders			Accumulated Other Comprehensive Loss
	Common Stock				Additional Paid-in Capital
	Number of Shares		Par value											Noncontrolling Interests			Total Equity
Nine months ended September 30, 2016
Balance at January 1, 2016	47,362		$	5	$	2,600,193		$	(1,922,721	)	$	(3,860	)	$	1,502		$	675,119
Net loss	—		—		—			(23,084		)	—			(28		)	(23,112		)
Unrealized loss on interest rate derivatives	—		—		—			—			(12,802		)	(8		)	(12,810		)
Share based compensation, net	51		—		2,676			—			—			189			2,865
Contributions by noncontrolling interest	—		—		—			—			—			25			25
Distributions declared:
Common stock ($0.54 per share)	—		—		—			(25,783		)	—			—			(25,783		)
Noncontrolling interests	—		—		—			—			—			(20		)	(20		)
Cancellation of Series A Convertible Preferred Stock	—		—		2,700			—			—			—			2,700
Balance at September 30, 2016	47,413		$	5	$	2,605,569		$	(1,971,588	)	$	(16,662	)	$	1,660		$	618,984
Nine months ended September 30, 2015
Balance at January 1, 2015	49,877		$	5	$	2,645,927		$	(1,862,555	)	$	(788	)	$	945		$	783,534
Net loss	—		—		—			(22,818		)	—			(89		)	(22,907		)
Unrealized loss on interest rate derivatives	—		—		—			—			(9,360		)	(16		)	(9,376		)
Share based compensation, net	28		—		1,321			—			—			11			1,332
Redemption of common stock	(2,663	)	—		(50,841		)	—			—			—			(50,841		)
Contributions by noncontrolling interests	—		—		—			—			—			1,325			1,325
Distributions declared:
Common stock ($0.36 per share)	—		—		—			(17,550		)	—			—			(17,550		)
Series A Convertible Preferred Stock ($0.36 per share)	—		—		—			(4		)	—			—			(4		)
Noncontrolling interests	—		—		—			—			—			(30		)	(30		)
Dilution of Series A Convertible Preferred Stock	—		—		1,926			—			—			—			1,926
Balance at September 30, 2015	47,242		$	5	$	2,598,333		$	(1,902,927	)	$	(10,148	)	$	2,146		$	687,409

See Notes to Condensed Consolidated Financial Statements.

5

TIER REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended
	September 30, 2016			September 30, 2015
Cash flows from operating activities
Net loss	$	(23,112	)	$	(22,907	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Asset impairment losses	8,977			132
Gain on sale of assets	(21,526		)	(44,479		)
Gain on sale of discontinued operations	—			(15,086		)
Loss on early extinguishment of debt	—			598
Loss on derivatives	407			—
Amortization of restricted shares and units	3,118			1,604
Depreciation and amortization	87,974			92,549
Amortization of lease intangibles	(1,806		)	(963		)
Amortization of above- and below-market rent	(3,399		)	(4,586		)
Amortization of deferred financing and mark-to-market costs	2,308			2,644
Equity in operations of investments	(1,884		)	(153		)
Ownership portion of management and construction management fees from unconsolidated companies	412			350
Distributions from investments	360			569
Change in accounts receivable	(4,188		)	(6,647		)
Change in prepaid expenses and other assets	248			1,275
Change in lease commissions	(8,337		)	(14,571		)
Change in other lease intangibles	(694		)	(470		)
Change in other intangible assets	(100		)	—
Change in accounts payable and accrued liabilities	(1,309		)	(9,679		)
Change in other liabilities	(1,415		)	2,113
Change in payables to related parties	—			(1,518		)
Cash provided by (used in) operating activities	36,034			(19,225		)
Cash flows from investing activities
Escrow deposits	—			(15,000		)
Return of investments	16,925			631
Purchase of ground lease	—			(7,200		)
Purchases of real estate	—			(163,184		)
Investments in unconsolidated entities	(3,771		)	(34,773		)
Capital expenditures for real estate	(34,823		)	(55,339		)
Capital expenditures for real estate under development	(5,766		)	(2,555		)
Proceeds from sale of discontinued operations	—			59,706
Proceeds from sale of assets	290,012			414,628
Change in restricted cash	2,176			18,709
Cash provided by investing activities	264,753			215,623
Cash flows from financing activities
Financing costs	(876		)	(5,678		)
Proceeds from notes payable	107,000			715,905
Payments on notes payable	(341,668		)	(870,471		)
Payments on capital lease obligations	—			(12		)
Redemptions of common stock	—			(50,842		)
Transfer of common stock	(253		)	(270		)
Distributions paid to Series A Convertible Preferred and common stockholders	(25,766		)	(9,013		)
Distributions paid to noncontrolling interests	(31		)	(15		)
Contributions from noncontrolling interests	25			325
Cash used in financing activities	(261,569		)	(220,071		)
Net change in cash and cash equivalents	39,218			(23,673		)
Cash and cash equivalents at beginning of period	12,248			31,442
Cash and cash equivalents at end of period	$	51,466		$	7,769

See Notes to Condensed Consolidated Financial Statements.

6

TIER REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.             Business

Organization

TIER REIT, Inc. is a self-managed, Dallas-based real estate investment trust focused on delivering outsized stockholder return through stock price appreciation and dividend growth while offering unparalleled tenant service. As used herein, “TIER REIT,” the “Company,” “we,” “us,” or “our” refers to TIER REIT, Inc. and its subsidiaries unless the context otherwise requires. TIER REIT’s investment strategy is to acquire, develop, and operate a portfolio of best-in-class office properties in select U.S. markets that consistently lead the nation in both population and office-using employment growth. Within these markets, we target TIER1 submarkets, which are primarily urban and amenity-rich locations. TIER REIT was incorporated in June 2002 as a Maryland corporation and has elected to be treated, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes. As of September 30, 2016, we owned interests in 30 operating office properties, one non-operating property, and one development property, located in 13 markets throughout the United States.

Substantially all of our business is conducted through Tier Operating Partnership LP (“Tier OP”), a Texas limited partnership. Our wholly-owned subsidiary, Tier GP, Inc., a Delaware corporation, is the sole general partner of Tier OP. Our direct and indirect wholly-owned subsidiaries, Tier Business Trust, a Maryland business trust, and Tier Partners, LLC, a Delaware limited liability company, are limited partners that together with Tier GP, Inc. own all of Tier OP. 

2.             Basis of Presentation and Significant Accounting Policies

Interim Unaudited Financial Information

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission (“SEC”) on February 16, 2016.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying condensed consolidated balance sheets as of September 30, 2016, and December 31, 2015, and condensed consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for the periods ended September 30, 2016 and 2015, have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our financial position as of September 30, 2016, and December 31, 2015, and our results of operations and our cash flows for the periods ended September 30, 2016 and 2015.  These adjustments are of a normal recurring nature.

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

Reclassification

Certain amounts previously reflected in the prior year condensed consolidated balance sheet and condensed consolidated statement of cash flows have been reclassified to conform to our 2016 presentation.  The December 31, 2015, condensed consolidated balance sheet reflects the single line “accounts payable and accrued liabilities” that was previously presented on two lines “accounts payable” (approximately $0.8 million) and “accrued liabilities” (approximately $70.8 million).  In addition, the September 30, 2015, condensed consolidated statement of cash flows reflects within the operating section the single line “change in accounts payable and accrued liabilities” that was previously presented on two lines “change in accounts payable” (approximately $0.9 million) and “change in accrued liabilities” (approximately $8.8 million).  These reclassifications had no effect on the previously reported total liabilities or cash used in operating activities.

7

Summary of Significant Accounting Policies

Described below are certain of our significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our consolidated financial statements and notes thereto included in Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.

Principles of Consolidation and Basis of Presentation

Our condensed consolidated financial statements include our accounts, the accounts of variable interest entities (“VIEs”), if any, in which we are the primary beneficiary, and the accounts of other subsidiaries over which we have control. VIEs, as defined by GAAP, are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability.  Interests in entities acquired are evaluated based on applicable GAAP guidance which requires the consolidation of VIEs in which we are deemed to be the primary beneficiary.  We adopted new accounting guidance on January 1, 2016, and certain of our entities were determined to be VIEs under the new guidance. While this determination under the new guidance did not impact the conclusions regarding consolidation of these entities, we have included additional disclosures relating to these entities. The determination of the primary beneficiary requires management to make significant estimates and judgments about our rights, obligations, and economic interests in such entities as well as the same of the other owners. For entities in which we have less than a controlling financial interest or entities with respect to which we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. If the interest is in an entity that is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.

All inter-company transactions, balances, and profits have been eliminated in consolidation. 

Real Estate

As of September 30, 2016, and December 31, 2015, the cost basis and accumulated depreciation and amortization related to our consolidated depreciable real estate properties and related lease intangibles were as follows (in thousands): 

				Lease Intangibles
				Assets						Liabilities
							Acquired Above-Market Leases			Acquired Below-Market Leases
	Buildings and Improvements			Other Lease Intangibles
as of September 30, 2016
Cost	$	1,564,994		$	129,330		$	5,005		$	(42,701	)
Less: accumulated depreciation and amortization	(516,800		)	(67,411		)	(3,988		)	34,845
Net	$	1,048,194		$	61,919		$	1,017		$	(7,856	)

				Lease Intangibles
				Assets						Liabilities
							Acquired Above-Market Leases			Acquired Below-Market Leases
	Buildings and Improvements			Other Lease Intangibles
as of December 31, 2015
Cost	$	1,914,664		$	164,636		$	5,383		$	(52,744	)
Less: accumulated depreciation and amortization	(566,464		)	(82,476		)	(3,995		)	40,810
Net	$	1,348,200		$	82,160		$	1,388		$	(11,934	)

We amortize the value of in-place leases, in-place tenant improvements, and in-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the tenants’ respective initial lease terms and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.  The estimated remaining average useful lives for acquired lease intangibles range from an ending date of October 2016 to an ending date of March 2024. 

8

Anticipated amortization associated with acquired lease intangibles for each of the following five years is as follows (in thousands):

October 2016 - December 2016	$	751
2017	$	1,813
2018	$	995
2019	$	1,002
2020	$	1,092

Impairment of Real Estate-Related Assets

For our consolidated real estate assets, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted cash flows and also exceeds the fair value of the asset, we recognize an impairment loss to adjust the carrying amount of the asset to its estimated fair value. Our process to estimate the fair value of an asset involves using bona fide purchase offers or the expected sales price of an executed sales agreement, which would be considered Level 1 or Level 2 assumptions within the fair value hierarchy. To the extent that this type of third-party information is unavailable, we estimate projected cash flows and a risk-adjusted rate of return that we believe would be used by a third party market participant in estimating the fair value of an asset. This is considered a Level 3 assumption within the fair value hierarchy. These projected cash flows are prepared internally by the Company’s asset management professionals and are updated quarterly to reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer, Chief Accounting Officer, and Managing Director - Asset Management review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions which are consistent with market data or with assumptions that would be used by a third party market participant and assume the highest and best use of the real estate investment. For the nine months ended September 30, 2016 and 2015, we recorded non-cash impairment charges totaling approximately $9.0 million and $0.1 million, respectively, related to the impairment of consolidated real estate assets.  The impairment losses recorded in 2016 primarily relate to assets assessed for impairment due to a change in management’s estimate of the intended hold periods. The impairment loss recorded in 2015 related to final estimated closing costs incurred in connection with the disposition of a property that was impaired in 2014.

For our unconsolidated real estate assets, at each reporting date we compare the estimated fair value of our investment to the carrying amount.  An impairment charge is recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.  We had no impairment charges related to our investments in unconsolidated entities for the nine months ended September 30, 2016 and 2015.

In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition (the intended hold period) and sales price for each property, the estimated future cash flows of each property during our estimated ownership period, and for unconsolidated investments, the estimated future distributions from the investment.  A change in these estimates and assumptions could result in understating or overstating the carrying amount of our investments which could be material to our financial statements.

We undergo continuous evaluations of property level performance, credit market conditions, and financing options.  If our assumptions regarding the cash flows expected to result from the use and eventual disposition of our properties decrease or our expected hold periods decrease, we may incur future impairment charges on our real estate-related assets.  In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.

9

Accounts Receivable, net

The following is a summary of our accounts receivable as of September 30, 2016, and December 31, 2015 (in thousands):

	September 30, 2016			December 31, 2015
Straight-line rental revenue receivable	$	64,385		$	73,420
Tenant receivables	5,130			5,972
Non-tenant receivables	581			1,549
Allowance for doubtful accounts	(2,996		)	(4,713		)
Total	$	67,100		$	76,228

Our allowance for doubtful accounts is an estimate based on management’s evaluation of accounts where it has determined that a tenant may not meet its financial obligations. In these situations, management uses its judgment, based on the facts and circumstances, and records a reserve for that tenant against amounts due to reduce the receivable to an amount it believes is collectible. These reserves are reevaluated and adjusted as additional information becomes available.

Investments in Unconsolidated Entities

Investments in unconsolidated entities consist of our noncontrolling interests in properties. We account for these investments using the equity method of accounting in accordance with GAAP. We use the equity method of accounting when we have significant influence, but not control, of the decision-making involved in the operating and financial decisions of these investments and thereby have some responsibility to create a return on our investment. The equity method of accounting requires these investments to be initially recorded at cost and subsequently increased (decreased) for our share of net income (loss), including eliminations for our share of inter-company transactions, and increased (decreased) for contributions (distributions). To the extent that we contribute assets to an unconsolidated entity, our investment in the unconsolidated entity is recorded at our cost basis in the assets that were contributed to the entity. To the extent that our cost basis is different than the basis reflected at the entity level, the basis difference is generally amortized over the life of the related asset and included in our share of equity in operations of investments.

For unconsolidated investments that have properties under development, we capitalize interest expense to our investment basis using our weighted average interest rate of consolidated debt. Capitalization begins when we are engaged in the activities necessary to get the property ready for its intended use. We cease capitalization when the development is completed and ready for its intended use or if the intended use changes such that capitalization is no longer appropriate. For the nine months ended September 30, 2016, we capitalized interest expense of approximately $0.5 million for an unconsolidated entity with property under development, which is included in our investments from unconsolidated entities on our condensed consolidated balance sheet. For the nine months ended September 30, 2015, we had no capitalized interest expense associated with unconsolidated entities.

Other Intangible Assets, net

Other intangible assets consist of below-market ground leases on properties where a third party owns and has leased the underlying land to us. As of September 30, 2016, and December 31, 2015, the cost basis and accumulated amortization related to our consolidated other intangible assets were as follows (in thousands):

	September 30, 2016			December 31, 2015
Cost	$	11,277		$	11,177
Less: accumulated amortization	(1,389		)	(1,091		)
Net	$	9,888		$	10,086

Revenue Recognition

We recognize rental income generated from all leases of consolidated real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Each of the amounts presented below include rental revenue amounts recognized in discontinued operations.  The total net increase to rental revenue due to straight-line rent adjustments for the three months ended September 30, 2016 and 2015, was approximately $0.3 million and $2.1 million, respectively.  The total net increase to rental revenue due to straight-line rent adjustments for the nine months ended September 30, 2016 and 2015,

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was approximately $4.1 million and $9.1 million, respectively. When a tenant exceeds its tenant improvement allowance, this amount is reimbursed to us and recorded as a deferred rent liability, which is recognized as rental revenue over the life of the lease. The total net increase to rental revenue due to this deferred rent for the three months ended September 30, 2016 and 2015, was approximately $0.6 million and $0.7 million, respectively. The total net increase to rental revenue due to this deferred rent for the nine months ended September 30, 2016 and 2015, was approximately $2.5 million and $1.8 million, respectively. Our rental revenue also includes amortization of acquired above- and below-market leases.  The total net increase to rental revenue due to the amortization of acquired above- and below-market leases for the three months ended September 30, 2016 and 2015, was approximately $0.9 million and $2.1 million, respectively. The total net increase to rental revenue due to the amortization of acquired above- and below-market leases for the nine months ended September 30, 2016 and 2015, was approximately $3.4 million and $4.6 million, respectively. Revenues relating to lease termination fees are recognized on a straight-line basis amortized from the time that a tenant’s right to occupy the leased space is modified through the end of the revised lease term.  For the three months ended September 30, 2016 and 2015, we recognized lease termination fees of approximately $0.3 million and $2.0 million, respectively. For the nine months ended September 30, 2016 and 2015, we recognized lease termination fees of approximately $1.6 million and $2.7 million, respectively.

3.            New Accounting Pronouncements

Newly Adopted Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (“FASB”) issued an update that clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. The compensation expense related to such awards will be delayed until it becomes probable that the performance target will be met. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted, and may be applied either prospectively or retrospectively. The adoption of this guidance on January 1, 2016, did not have a material impact on our financial statements.

In January 2015, the FASB issued guidance simplifying income statement presentation by eliminating the concept of extraordinary items. An entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted and may be applied either prospectively or retrospectively. The adoption of this guidance on January 1, 2016, did not have a material impact on our financial statements.

In February 2015, the FASB issued updated guidance related to accounting for consolidation of certain legal entities. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted. Under the updated guidance, companies are required to evaluate whether they should consolidate certain legal entities under a revised consolidation model. All legal entities are subject to reevaluation under the revised consolidation model that modifies the evaluation of whether limited partnerships and similar legal entities are 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. A full or modified retrospective method of adoption is allowed. We adopted this guidance using the modified retrospective method on January 1, 2016, which did not have a material impact on our financial statements, but additional disclosures are required and have been included in these notes to condensed consolidated financial statements related to certain of our entities that were determined to be a VIE.

In April 2015, the FASB issued guidance related to accounting for debt issuance costs. The guidance simplifies presentation by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability, consistent with the presentation of debt discounts or premiums. In August 2015, the FASB further clarified this guidance to state that an entity may elect to continue to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not any outstanding borrowings exist on the line-of-credit. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. The adoption and retrospective application of this guidance on January 1, 2016, changed the classification of certain deferred financing fees on our balance sheet, but it did not otherwise have an impact on our financial statements. As of December 31, 2015, approximately $8.9 million in net deferred financing costs were reclassified from deferred financing fees and netted against our notes payable. As of December 31, 2015, approximately $3.1 million in net deferred financing fees associated with the revolving line of credit remained as an asset on the balance sheet.

New Accounting Pronouncements to be Adopted

In May 2014, the FASB issued guidance to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Lease contracts will be excluded from this

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revenue recognition criteria; however, the sale of real estate will be required to follow the new model. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

In August 2014, the FASB issued guidance regarding management’s responsibility in evaluating whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We do not believe the adoption of this guidance will have a material impact on our disclosures.    

In February 2016, the FASB issued updated guidance which sets out revised principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The guidance requires lessees to recognize assets and liabilities for operating leases with lease terms greater than twelve months on the balance sheet. The guidance further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. New disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases are also required. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted and is required to be adopted using the modified retrospective approach.  Upon adoption, the Company will recognize a lease liability and a right-of-use asset for operating leases where it is the lessee, such as ground leases and office and equipment leases. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

In March 2016, the FASB issued guidance which will affect accounting for certain aspects of share-based payments for employees. The guidance requires income statement recognition of income tax effects of the awards when the awards vest or are settled. The guidance also changes the employers’ accounting for forfeitures as well as for an employee’s use of shares to satisfy their income tax withholding obligations. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

In March 2016, the FASB issued amended guidance which simplifies the accounting for equity method investments by removing the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

In June 2016, the FASB issued amended guidance which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance as this will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Financial assets that are measured at amortized cost will be required to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. Generally, the pronouncement requires a modified retrospective method of adoption. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

In August 2016, the FASB issued amended guidance on classification of certain cash receipts and payments in the statement of cash flows. Of the eight types of cash flows discussed in the new standard, we believe the classification of debt prepayment and debt extinguishment costs as financing outflows will impact the Company as these items are currently reflected as operating outflows. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted and is required to be applied retrospectively to all periods presented. We are currently evaluating the impact this guidance will have on our financial statements when adopted.

4.           Fair Value Measurements

Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that

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distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the fair value hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the fair value hierarchy) has been established.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative financial instruments

We use derivative financial instruments, such as interest rate swaps, to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. 

We incorporate credit valuation adjustments (“CVAs”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the CVAs associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties.  However, we have assessed the significance of the impact of the CVAs on the overall valuation of our derivative positions and have determined that they are not significant.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  Unrealized gains or losses on derivatives are recorded in accumulated other comprehensive income (loss) (“OCI”) within equity at each measurement date. Our derivative financial instruments are included in “other liabilities” on our condensed consolidated balance sheets.

The following table sets forth our financial liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of September 30, 2016, and December 31, 2015 (in thousands).

				Basis of Fair Value Measurements
				Quoted Prices In Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	Total Fair Value
Description
September 30, 2016
Derivative financial instruments:
Liabilities	$	(17,082	)	$	—	$	(17,082	)	$	—
December 31, 2015
Derivative financial instruments:
Liabilities	$	(3,866	)	$	—	$	(3,866	)	$	—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impairment of Real Estate Related Assets

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

During the nine months ended September 30, 2016, we recorded impairment losses of approximately $9.0 million for properties assessed for impairment due to changes in management’s estimate of the intended hold periods. During the year ended December 31, 2015, we recorded impairment losses of approximately $0.1 million for final estimated closing costs incurred in connection with the disposition of a property which was impaired at December 31, 2014, and sold in 2015.

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The following table summarizes those assets which were measured at fair value and impaired during 2016 and 2015 (in thousands):

			Basis of Fair Value Measurements
Description	Fair Value of Assets at Impairment		Quoted Prices In Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses
for the nine months ended September 30, 2016
Real estate held for sale (1)	$	9,309	$	—	$	4,570	$	4,739	$	(8,977	)
for the year ended December 31, 2015
Real estate	$	11,489	$	—	$	11,489	$	—	$	(132	)

_______________

(1) Fair value of real estate held for sale includes selling costs.     

The following table sets forth quantitative information about the unobservable inputs (Level 3) of our real estate that was recorded at fair value as of the date of its impairment in 2016 (in thousands):

	Fair Value of Assets at Impairment		Valuation Technique	Unobservable Input	Value
Real estate on which impairment losses were recognized	$	4,739	Discounted Cash Flow	Discount rate	12.0%
				Terminal capitalization rate	9.5%

Financial Instruments not Reported at Fair Value

Financial instruments held at September 30, 2016, and December 31, 2015, but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable, payables to related parties, accrued liabilities, distributions payable, and other liabilities.  With the exception of notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for notes payable have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the fair value hierarchy.

Carrying amounts of our notes payable and the related estimated fair value as of September 30, 2016, and December 31, 2015, are as follows (in thousands):

	September 30, 2016					December 31, 2015
	Carrying Amount			Fair Value		Carrying Amount			Fair Value
Notes payable	$	845,758		$	849,796	$	1,080,425		$	1,084,625
Less: unamortized debt issuance costs	(7,838		)			(8,854		)
Notes payable, net	$	837,920				$	1,071,571

5.           Real Estate Activities

Sales of Real Estate Reported in Continuing Operations

On March 1, 2016, we sold our Lawson Commons property for a contract sales price of approximately $68.4 million, resulting in proceeds from sale of approximately $60.9 million. Lawson Commons is located in St. Paul, Minnesota, and contains approximately 436,000 rentable square feet.

On June 17, 2016, we sold our FOUR40 property for a contract sales price of approximately $191.0 million, resulting in proceeds from sale of approximately $189.0 million. FOUR40 is located in Chicago, Illinois, and contains approximately 1.0 million rentable square feet. We are entitled to an additional payment of up to $12.5 million subject to future performance of the property.

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On September 30, 2016, we sold our Hurstbourne Business Center properties for a combined contract sales price of approximately $41.0 million, resulting in proceeds from sale of approximately $39.8 million. Hurstbourne Business Center is an approximately 418,000 square feet mixed use development located in Louisville, Kentucky, and is comprised of Hurstbourne Park and Hurstbourne Place, both office buildings, and Hurstbourne Plaza, a retail center.

Properties sold in 2016 and 2015 and included in continuing operations contributed income of approximately $0.2 million and a loss of approximately $2.3 million to our net loss for the three months ended September 30, 2016 and 2015, respectively. Properties sold in 2016 and 2015 and included in continuing operations contributed a loss of approximately $0.7 million and $5.1 million to our net loss for the nine months ended September 30, 2016 and 2015, respectively.

Real Estate Held for Sale

As of September 30, 2016, five of our properties (One Oxmoor Place, Steeplechase Place, Lakeview, Hunnington, and 801 Thompson) were each held for sale. On October 27, 2016, 801 Thompson was sold for a contract sales price of approximately $4.9 million. We had no properties held for sale as of December 31, 2015. The major classes of assets and obligations associated with real estate held for sale as of September 30, 2016, are as follows (in thousands):

	September 30, 2016
Land	$	6,893
Buildings and improvements, net	27,995
Accounts receivable and other assets, net	781
Lease intangibles, net	1,357
Assets associated with real estate held for sale	$	37,026
Acquired below-market leases, net	$	50
Accrued liabilities	794
Other liabilities	550
Obligations associated with real estate held for sale	$	1,394

Sales of Real Estate Reported in Discontinued Operations

No properties sold in 2016 have been classified as discontinued operations. The table below summarizes the results of operations for properties that have been classified as discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015 (in thousands). This includes two properties that were held for sale at December 31, 2014 and sold in 2015.

	Three Months Ended September 30, 2015		Nine Months Ended September 30, 2015
Rental revenue	$	27	$	4,593
Expenses
Property operating expenses	6		1,729
Interest expense	—		720
Real estate taxes	—		633
Property management fees	—		121
Total expenses	6		3,203
Income from discontinued operations	21		1,390
Gain on sale of discontinued operations	403		15,086
Discontinued operations	$	424	$	16,476

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6.Investments in Unconsolidated Entities

We participate in real estate ventures for the purpose of acquiring and developing office properties in which we may or may not have a controlling financial interest. Our investments in unconsolidated entities consist of our noncontrolling interests in certain properties that are accounted for using the equity method of accounting.

The following is a summary of our investments in unconsolidated entities as of September 30, 2016, and December 31, 2015 (dollar amounts in thousands):

		Ownership Interest				Investment Balance
Entity Name	Property	September 30, 2016		December 31, 2015		September 30, 2016		December 31, 2015
1301 Chestnut Associates, L.P. (1)	Wanamaker Building	60.00	%	60.00	%	$	44,229	$	42,898
Domain Junction LLC (2) (3)	Domain 2 & 7	49.84	%	49.84	%	10,163		26,588
Domain Junction 8 Venture LLC (2) (3)	Domain 8	50.00	%	50.00	%	17,921		14,193
COLDC 54 Holdings, LLC (3)	Colorado Building	10.00	%	10.00	%	770		949
GSTDC 72 Holdings, LLC (3)	1325 G Street	10.00	%	10.00	%	3,871		4,370
Total						$	76,954	$	88,998

_________________

(1) All major decisions for this entity require a vote of 70% (and in some instances 75%) of the ownership group.

(2) All major decisions for this entity are made by the other owner.

(3) We have evaluated our investments in unconsolidated entities in order to determine if they are VIEs. Based on our assessment, we have identified each of these entities as a VIE, but we are not the primary beneficiary, as we do not have the power to direct the activities that most significantly impact the economic performance of these entities. For these VIEs in which we are not deemed to be the primary beneficiary, we continue to account for them using the equity method. The maximum amount of exposure to loss with respect to these VIEs is the carrying amount of our investment. Additionally, we are required to fund up to $0.3 million in additional capital contributions to the Domain Junction 8 Venture LLC for the development of Domain 8. At September 30, 2016, these VIEs have total assets of approximately $342.6 million and total liabilities of approximately $250.1 million, as outlined in the summarized balance sheets presented below.

The summarized balance sheets of our unconsolidated entities as of as of September 30, 2016, and December 31, 2015, are as follows (in thousands):

as of September 30, 2016	Total		Wanamaker			Other  (50% or less owned entities)
Real estate, net	$	407,132	$	126,076		$	281,056
Real estate intangibles, net	50,413		10,776			39,637
Cash, cash equivalents and restricted cash	22,728		12,551			10,177
Other assets	21,978		10,227			11,751
Total assets	$	502,251	$	159,630		$	342,621
Notes payable, net	$	298,974	$	70,557		$	228,417
Accounts payable	12,855		1,007			11,848
Other liabilities	15,087		5,266			9,821
Equity	175,335		82,800			92,535
Total liabilities and equity	$	502,251	$	159,630		$	342,621
Company’s share of equity	$	69,740	$	49,680		$	20,060
Basis differences (1)	7,214		(5,451		)	12,665
Carrying value of the Company’s investment in unconsolidated entities	$	76,954	$	44,229		$	32,725

____________________

(1) This amount represents the aggregate difference between our historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differences occur from impairment of investments and upon the transfer of assets that were previously owned by us into a joint venture. In addition, certain acquisition, transaction and other costs, including capitalized interest, may not be reflected in the net assets at the joint venture level.

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as of December 31, 2015	Total		Wanamaker			Other  (50% or less owned entities)
Real estate, net	$	379,646	$	128,358		$	251,288
Real estate intangibles, net	54,470		12,087			42,383
Cash, cash equivalents and restricted cash	23,814		12,819			10,995
Other assets	16,796		8,851			7,945
Total assets	$	474,726	$	162,115		$	312,611
Notes payable, net	$	246,500	$	75,124		$	171,376
Accounts payable	8,187		21			8,166
Other liabilities	19,144		6,386			12,758
Equity	200,895		80,584			120,311
Total liabilities and equity	$	474,726	$	162,115		$	312,611
Company’s share of equity	$	81,982	$	48,350		$	33,632
Basis differences (1)	7,016		(5,452		)	12,468
Carrying value of the Company’s investment in unconsolidated entities	$	88,998	$	42,898		$	46,100

________________

(1) This amount represents the aggregate difference between our historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differences occur from impairment of investments and upon the transfer of assets that were previously owned by us into a joint venture. In addition, certain acquisition, transaction and other costs, including capitalized interest, may not be reflected in the net assets at the joint venture level.

Our equity in operations of investments represents our proportionate share of the combined earnings and losses of our investments for the period of our ownership. The summarized statements of operations of our unconsolidated entities for the three and nine months ended September 30, 2016 and 2015, are as follows (in thousands):

Three months ended September 30, 2016	Total			Wanamaker		Other (50% or less owned entities) (1)
Revenue	$	15,010		$	6,766	$	8,244
Income (loss) from continuing operations	$	665		$	837	$	(172	)
Gain on sale of real estate	1,000			—		1,000
Net income	$	1,665		$	837	$	828
Company’s share of income (loss) from continuing operations	$	587		$	502	$	85
Company’s share of gain on sale of real estate	60			—		60
Company’s share of net income	$	647		$	502	$	145
Basis differences and elimination of inter-entity fees	(1		)	128		(129		)
Equity in operations of investments	$	646		$	630	$	16

________________

(1) Includes combined earnings and losses for Domain 2&7, Domain 8, Colorado Building, 1325 G Street, and recognition of a previously deferred gain on the sale of Paces West, a property we sold on November 30, 2015.

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Three months ended September 30, 2015	Total			Wanamaker		Other (50% or less owned entities) (1)
Revenue	$	16,558		$	6,416	$	10,142
Income (loss) from continuing operations	$	(6,647	)	$	526	$	(7,173	)
Net income (loss)	$	(6,647	)	$	526	$	(7,173	)
Company’s share of net income (loss)	$	(298	)	$	315	$	(613	)
Basis differences and elimination of inter-entity fees	139			124		15
Equity in operations of investments	$	(159	)	$	439	$	(598	)

_______________

(1) Includes combined earnings and losses for Domain 2 & 7, Domain 8, Colorado Building, 1325 G Street, and Paces West, a property in which we owned a 10% interest during the three months ended September 30, 2015. Paces West was sold on November 30, 2015. Domain 2 & 7 and Domain 8 were included as unconsolidated entities beginning upon their acquisition on July 23, 2015.

Nine months ended September 30, 2016	Total			Wanamaker		Other (50% or less owned entities) (1)
Revenue	$	43,469		$	19,913	$	23,556
Income (loss) from continuing operations	$	1,820		$	2,716	$	(896	)
Gain on sale of real estate	1,000			—		1,000
Net income	$	2,820		$	2,716	$	104
Company’s share of income (loss) from continuing operations	$	1,831		$	1,630	$	201
Company’s share of gain on sale of real estate	60			—		60
Company’s share of net income	$	1,891		$	1,630	$	261
Basis differences and elimination of inter-entity fees	(7		)	383		(390		)
Equity in operations of investments	$	1,884		$	2,013	$	(129	)

_____________________

(1) Includes combined earnings and losses for Domain 2&7, Domain 8, Colorado Building, and 1325 G Street, and recognition of a previously deferred gain on the sale of Paces West, a property we sold on November 30, 2015.

Nine months ended September 30, 2015	Total			Wanamaker		Other (50% or less owned entities)(1)
Revenue	$	36,247		$	19,370	$	16,877
Income (loss) from continuing operations	$	(10,522	)	$	1,437	$	(11,959	)
Net income (loss)	$	(10,522	)	$	1,437	$	(11,959	)
Company’s share of net income (loss)	$	(230	)	$	862	$	(1,092	)
Basis differences and elimination of inter-entity fees	383			365		18
Equity in operations of investments	$	153		$	1,227	$	(1,074	)

_______________

(1) Includes combined earnings and losses for Domain 2 & 7, Domain 8, Colorado Building, 1325 G Street, and Paces West, a property in which we owned a 10% interest during the nine months ended September 30, 2016. Paces West was sold on November 30, 2015. Colorado Building and 1325 G Street were included as unconsolidated entities beginning on June 30, 2015. Domain 2 & 7 and Domain 8 were included as unconsolidated entities upon their acquisition on July 23, 2015.

7.Real Estate Under Development

When we are engaged in activities to get a potential development ready for its intended use, we capitalize interest, property taxes, insurance, ground lease payments, and direct construction costs. For the nine months ended September 30, 2016, we capitalized a total of approximately $7.8 million, including approximately $0.2 million in interest. For the nine months ended September 30, 2015, we capitalized a total of approximately $6.3 million, including approximately $0.9 million in interest. These costs are classified as real estate under development on our condensed consolidated balance sheets until such time that the development is complete.

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8.              Derivative Instruments and Hedging Activities

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of our operations.  Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements.  To accomplish this objective, we have used interest rate swaps as part of our interest rate risk management strategy.  Our interest rate swaps involve the receipt of variable-rate amounts from counterparties in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  Our hedging strategy of entering into interest rate swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.

The following table summarizes the notional values of our derivative financial instruments (in thousands) as of September 30, 2016. The notional values provide an indication of the extent of our involvement in these instruments at September 30, 2016, but do not represent exposure to credit, interest rate, or market risks.

Type/Description	Notional Value		Index	Strike Rate		Effective Date	Maturity Date
Interest rate swap - cash flow hedge	$	125,000	one-month LIBOR	1.6775	%	12/31/14	10/31/19
Interest rate swap - cash flow hedge	$	125,000	one-month LIBOR	1.6935	%	04/30/15	10/31/19
Interest rate swap - cash flow hedge	$	125,000	one-month LIBOR	1.7615	%	06/30/15	05/31/22
Interest rate swap - cash flow hedge	$	150,000	one-month LIBOR	1.7695	%	06/30/15	05/31/22

The table below presents the fair value of our derivative financial instruments, included in “other liabilities” on our condensed consolidated balance sheets, as of September 30, 2016, and December 31, 2015 (in thousands):

Derivatives designated as hedging instruments:	Derivative Liabilities
	September 30, 2016			December 31, 2015
Interest rate swaps	$	(17,082	)	$	(3,866	)

The tables below present the effect of the change in fair value of derivative financial instruments in our condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2016 and 2015 (in thousands):

Derivatives in Cash Flow Hedging Relationship

	Gain (loss) recognized in OCI on derivatives (effective portion)
	Three Months Ended					Nine Months Ended
	September 30, 2016		September 30, 2015			September 30, 2016			September 30, 2015
Interest rate swaps	$	2,602	$	(10,966	)	$	(12,810	)	$	(9,376	)

	Amount reclassified from OCI into income (effective portion)
	Three Months Ended				Nine Months Ended
Location	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Interest expense (1)	$	1,654	$	2,061	$	5,083	$	3,341

______________

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

	Amount recognized in income on derivatives  (ineffective portion and amount excluded from effectiveness testing)
	Three Months Ended					Nine Months Ended
Location	September 30, 2016			September 30, 2015		September 30, 2016		September 30, 2015
Interest expense (1)	$	(1,534	)	$	—	$	407	$	—

_____________

(1) Represents the portion of the change in fair value of our interest rate swaps attributable to the mismatch between an interest rate floor on our hedged debt and no floor on the index rate in our interest rate swaps which causes hedge ineffectiveness.     

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Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt. During the next twelve months, we estimate that approximately $5.5 million will be reclassified as an increase to interest expense.

As of September 30, 2016, the fair value of our derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was approximately $17.8 million.  As of September 30, 2016, we have not posted any collateral related to these agreements.  If we had breached any of these provisions at September 30, 2016, we could have been required to settle our obligations under the agreements at the termination value of approximately $17.8 million.

We have agreements with our derivative counterparties that contain provisions where if we default on any of our indebtedness for at least 30 days, during which time such default has not been remedied, and in all cases provided that the aggregate amount of all such default is not less than $10.0 million for recourse debt or $75.0 million for non-recourse debt, then we could also be declared in default on our derivative obligations.

9.Notes Payable

Our notes payable, net were approximately $837.9 million as of September 30, 2016. Approximately $269.9 million of these notes payable, net were secured by real estate assets with a carrying value of approximately $262.2 million as of September 30, 2016. As of September 30, 2016, all of our outstanding debt was fixed rate debt (or effectively fixed rate debt, through the use of interest rate swaps), with the exception of approximately $50.0 million from certain borrowings under our credit facility. As of September 30, 2016, the stated annual interest rates on our outstanding debt, excluding mezzanine financing, ranged from approximately 2.02% to 6.09%. We had mezzanine financing on one property with a stated annual interest rate of 9.80%. As of September 30, 2016, the effective weighted average interest rate for our consolidated debt is approximately 4.17%. For our loan that is in default and detailed below, we incur a default interest rate that is 500 basis points higher than the stated interest rate, which resulted in an overall effective weighted average interest rate of approximately 4.46% as of September 30, 2016, for our consolidated debt and an increase in interest expense for the nine months ended September 30, 2016, of approximately $1.9 million. We anticipate, although we can provide no assurance, that when the property to which such loan relates is sold, or if ownership of this property is conveyed to the lender, the default interest will be forgiven.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of September 30, 2016, we were in default on a non-recourse property loan with an outstanding balance of approximately $48.3 million secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately $34.0 million as of September 30, 2016. A receiver was appointed for this property in March 2016. The loan had an original maturity date of July 2016, and we are currently working with the lender to dispose of this property on their behalf. As of September 30, 2016, other than the default discussed above, we believe we were in compliance with the covenants under each of our loan agreements, including our credit facility.

Excluding debt already matured as detailed above, our consolidated debt has maturity dates that range from January 2017 to June 2022. The following table provides information regarding the timing of principal payments of our notes payable, net as of September 30, 2016 (in thousands):

Principal payments due in:
October 2016 - December 2016	$	49,104
2017	130,021
2018	1,622
2019	301,723
2020	1,814
Thereafter	361,474
Less: unamortized debt issuance costs (1)	(7,838		)
Notes payable, net	$	837,920

________________

(1) Excludes approximately $2.7 million of unamortized debt issuance costs associated with the revolving line of credit because these costs are presented as an asset on our condensed consolidated balance sheets.

Subsequent to September 30, 2016, we repaid (without penalty) approximately $70.0 million of secured debt that was due in January 2017.

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As discussed in Note 3, on January 1, 2016, we adopted the new accounting standard on deferred debt issuance costs. As of September 30, 2016, and December 31, 2015, approximately $7.8 million and $8.9 million, respectively, of unamortized deferred debt issuance costs associated with our debt are presented on the condensed consolidated balance sheets netted against the notes payable. As of September 30, 2016, and December 31, 2015, unamortized deferred debt issuance costs of approximately $2.7 million and $3.1 million, respectively, associated with the revolving line of credit under our credit facility, discussed below, continue to be presented as an asset on the condensed consolidated balance sheets. Deferred debt issuance costs are recorded at cost and amortized to interest expense using a straight-line method that approximates the effective interest method over the anticipated life of the related debt.

Credit Facility

We have a credit agreement through our operating partnership, Tier OP. In March 2016, the available borrowings under the credit facility were increased, and as a result of meeting certain financial covenants, the credit facility was converted from secured to unsecured and now provides for total borrowings of up to $860.0 million, subject to our compliance with certain financial covenants. The facility consists of a $300.0 million term loan, a $275.0 million term loan, and a $285.0 million revolving line of credit. The first term loan matures on December 18, 2019. The second term loan matures on June 30, 2022. The revolving line of credit matures on December 18, 2018, and can be extended one additional year subject to certain conditions and payment of an extension fee. The annual interest rate on the credit facility is equal to either, at our election, (1) the “base rate” (calculated as the greatest of (i) the agent’s “prime rate”; (ii) 0.5% above the Federal Funds Effective Rate; or (iii) the LIBOR Market Index Rate plus 1.0%) plus the applicable margin or (2) LIBOR for an interest period of one, three, or six months plus the applicable margin.  The applicable margin will be determined based on the ratio of total indebtedness to total asset value and ranges from 35 basis points to 250 basis points.  We have entered into interest rate swap agreements to hedge interest rates on $525.0 million of these borrowings to manage our exposure to future interest rate movements. All amounts owed are guaranteed by us and certain subsidiaries of Tier OP. As of September 30, 2016, we had approximately $575.0 million in borrowings outstanding under the term loans, and no borrowings outstanding under the revolving line of credit with the ability, subject to our most restrictive financial covenants, to borrow an additional approximately $137.3 million under the facility as a whole. As of September 30, 2016, the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.34%.

10.Equity

Series A Convertible Preferred Stock

As of December 31, 2015, we had 10,000 shares of Series A participating, voting, convertible preferred stock (the “Series A Convertible Preferred Stock”) outstanding. In connection with the listing of our common stock on the NYSE on July 23, 2015, an automatic conversion of the Series A Convertible Preferred Stock was triggered with the number of shares to be issued not determinable until March 2, 2016, based on the Conversion Company Value, as defined in the Articles Supplementary. As of September 30, 2015, the value of the Series A Convertible Preferred Stock was reduced from approximately $4.6 million to approximately $2.7 million, based on a lower estimated Conversion Company Value. On March 2, 2016, based on the Conversion Company Value, no shares of common stock were issued, and the shares of Series A Convertible Preferred Stock were canceled.

Stock Plans

Our 2015 Equity Incentive Plan allows for and our 2005 Incentive Award Plan allowed for equity-based incentive awards to be granted to our employees, non-employee directors, and key persons as detailed below:

Stock options. As of September 30, 2016, we had outstanding options held by our independent directors to purchase 8,330 shares of our common stock at a weighted average exercise price of approximately $40.13 per share. These options are all fully vested and have expiration dates that range from July 2018 to June 2022. The options were anti-dilutive to earnings per share for each period presented.

Restricted stock units.We have outstanding restricted stock units (“RSUs”) held by our independent directors. These units vest 13 months after the grant date. Subsequent to vesting, the restricted stock units will be converted to an equivalent number of shares of common stock upon the earlier to occur of the following events or dates: (i) separation from service for any reason other than cause; (ii) a change in control of the Company; (iii) death; or (iv) specific dates chosen by the independent directors that range from January 2017 to December 2020. Expense is measured at the grant date based on the estimated fair value of the award and is recognized over the vesting period.

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The following is a summary of the number of outstanding RSUs held by our independent directors as of September 30, 2016 and 2015:

	September 30, 2016				September 30, 2015
	Units		Weighted Average Price per unit		Units		Weighted Average Price per unit
Outstanding at the beginning of the year	28,705		$	18.29	13,841		$	24.69
Issued	18,275		$	15.05	—		$	—
Forfeited	—		$	—	(2	)	$	24.82
Converted	(7,725	)	$	19.96	(3,731	)	$	24.57
Outstanding at the end of the period (1)	39,255		$	16.45	10,108		$	24.73

_____________

(1) As of September 30, 2016, 6,046 RSUs held by our independent directors are vested.

On January 26, 2016, 111,063 RSUs were issued to employees with a grant price of $15.26 per unit. These units vest on December 31, 2018, at which time they will be converted into a number of shares of common stock, which could range from zero shares to 222,126 shares, based on our annualized total stockholder return (“TSR”) percentage as compared to three metrics: our TSR on a predetermined absolute basis, the TSR of the constituent companies of the NAREIT Office Index (unweighted), and the TSR of a select group of peer companies. Expense is measured at the grant date, based on the estimated fair value of the award ($19.18 per unit) as determined by a Monte Carlo simulation based model using the following assumptions:

Assumption	Value
Expected volatility	24%
Risk-free interest rate	1.15%
Expected term	35 months
Expected dividend yield	4.5%

RSUs were anti-dilutive to earnings per share for each period presented.

Restricted stock. We have outstanding restricted stock held by employees. For restricted stock issued in 2016, restrictions lapse one-third on each of December 30, 2016, 2017, and 2018. For restricted stock issued in December 2015, restrictions lapse one-third on the grant date, one-third one year after the grant date, and one-third two years after the grant date. For restricted stock issued prior to December 2015, restrictions lapse in 25% increments annually over the four-year period following the grant date.  Compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the service period based on a tiered lapse schedule and estimated forfeiture rates.  The restricted stock was anti-dilutive to earnings per share for each period presented.  

The following is a summary of the number of shares of restricted stock outstanding as of September 30, 2016 and 2015:

	September 30, 2016				September 30, 2015
	Shares		Weighted Average Price per share		Shares		Weighted Average Price per share
Outstanding at the beginning of the year	281,905		$	22.46	118,563		$	24.73
Issued	119,523		$	15.19	106,811		$	26.88
Forfeiture	(8,406	)	$	19.98	(2,203	)	$	25.64
Restrictions lapsed	(59,673	)	$	25.64	(33,726	)	$	24.65
Outstanding at the end of the period	333,349		$	19.34	189,445		$	25.95

For the three months ended September 30, 2016 and 2015, we recognized a total of approximately $1.1 million and $0.5 million, respectively, for compensation expense related to the amortization of all of the equity-based incentive awards outlined above. For the nine months ended September 30, 2016 and 2015, we recognized a total of approximately $3.1 million and $1.6 million, respectively, for compensation expense related to the amortization of all of the equity-based incentive awards outlined

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above. As of September 30, 2016, the total remaining compensation cost on unvested awards was approximately $4.8 million, with a weighted average remaining contractual life of approximately 1.7 years.

Distributions

Our board of directors reinstated quarterly cash distributions in the second quarter of 2015 at $0.18 per share of common stock and has authorized cash distributions in the same amount for each quarter since that time. Distributions declared for each quarter were paid in the subsequent quarter.

The following table reflects the distributions declared for our common stock, Series A Convertible Preferred Stock, and noncontrolling interests (OP units and vested restricted stock units) during the nine months ended September 30, 2016 and for the year ended December 31, 2015 (in thousands).

			Common  Stockholders		Preferred Stockholders		Noncontrolling Interests
	Total
2016
1st Quarter	$	8,600	$	8,594	$	—	$	6
2nd Quarter	8,601		8,594		—		7
3rd Quarter	8,602		8,595		—		7
Total	$	25,803	$	25,783	$	—	$	20
2015
1st Quarter	$	—	$	—	$	—	$	—
2nd Quarter	9,028		9,011		2		15
3rd Quarter	8,556		8,539		2		15
4th Quarter	8,596		8,576		2		18
Total	$	26,180	$	26,126	$	6	$	48

11.          Commitments and Contingencies

As of September 30, 2016, we had commitments of approximately $27.2 million for future tenant improvements and leasing commissions.

We have employment agreements with five of our executive officers.  The term of each employment agreement ends on July 15, 2018, provided that the term will automatically continue for an additional one-year period unless either party provides 60 days written notice of non-renewal prior to the expiration of the initial term.  The agreements provide for lump sum payments and an immediate lapse of restrictions on compensation received under the long-term incentive plan upon termination of employment without cause.  As a result, in the event we terminated all of these agreements without cause as of September 30, 2016, we would have recognized approximately $12.2 million in related compensation expense.

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12.          Supplemental Cash Flow Information

Supplemental cash flow information is summarized below for the nine months ended September 30, 2016 and 2015 (in thousands):

	Nine Months Ended
	September 30, 2016		September 30, 2015
Interest paid, net of amounts capitalized	$	29,904	$	42,764
Income taxes paid	$	2,001	$	977
Non-cash investing activities:
Property and equipment additions in accounts payable and accrued liabilities	$	10,698	$	11,382
Amortization of deferred financing fees in building and improvements, net	$	—	$	240
Contribution of land to non wholly-owned entity	$	—	$	14,002
Liabilities assumed through the purchase of real estate	$	—	$	1,800
Non-cash financing activities:
Cancellation of Series A Convertible Preferred Stock	$	2,700	$	—
Mortgage notes assumed by purchaser	$	—	$	47,074
Dilution of Series A Convertible Preferred Stock	$	—	$	1,926
Financing costs in accounts payable and accrued liabilities	$	—	$	33
Unrealized loss on interest rate derivatives	$	12,810	$	9,376
Accrual for distributions declared	$	8,602	$	8,556
Contributions from noncontrolling interests	$	—	$	1,000

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

The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of TIER REIT, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, our ability to address debt maturities and fund our capital requirements, our intentions to sell certain properties, the value of our assets, our anticipated capital expenditures, the amount and timing of any anticipated future cash distributions to our stockholders, and other matters.  Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “objectives,” “strategies,” “goals,” and variations of these words and similar expressions are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on February 16, 2016, and the factors described below:

• market disruptions and economic conditions experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;

• our ability to renew expiring leases and lease vacant spaces at favorable rates or at all;

• the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency, or a general downturn in their businesses; 

• the availability of cash flow from operating activities to fund distributions and capital expenditures;

• our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets, or otherwise to fund our future capital needs;

• the availability and terms of financing, including the impact of higher interest rates on the cost and/or availability of financing;

• our ability to strategically acquire or dispose of assets on favorable terms, or at all;

• our level of debt and the terms and limitations imposed on us by our debt agreements;

• our ability to retain our executive officers and other key personnel;

• unfavorable changes in laws or regulations impacting our business or our assets; and

• factors that could affect our ability to qualify as a real estate investment trust for federal income tax purposes.

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The January 1, 2016, adoption of new accounting guidance related to accounting for consolidation of certain legal entities as discussed in Note 2 to the condensed consolidated financial statements in this Quarterly

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Report on Form 10-Q did not have a material impact on our financial statements, but additional disclosures are required related to certain of our entities that were determined to be a VIE. There have been no other significant changes to our critical accounting policies since December 31, 2015.

Overview

As of September 30, 2016, we owned interests in 30 operating office properties with approximately 10.2 million rentable square feet, one non-operating property with approximately 331,000 rentable square feet, and one development property that will consist of approximately 291,000 rentable square feet. Our properties are located in 13 markets throughout the United States. The operations of properties sold in 2016 are included in our continuing operations for our period of ownership. Substantially all of our business is conducted through our operating partnership, Tier Operating Partnership LP (“Tier OP”). 

As an owner of real estate, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for office space at our properties. While we believe the operating fundamentals in the majority of our markets remain strong, as a result of job cuts in the energy sector, we expect that we will continue to experience downward pressure in the near term on rental revenue at our properties located in Houston, Texas. Further, performance in commercial office real estate is generally predicated on a sustained pattern of office-using job growth. While we have continued to see positive office-using job growth nationally, concerns over sustained economic growth may impact our tenants’ businesses, and tenants may be reluctant to make long-term lease commitments. In the current economic climate, we continue to follow a disciplined approach to managing our operations.

2016 Objectives

We identified five key objectives for 2016: (1) increase institutional ownership in shares of our common stock; (2) dispose of non-strategic properties; (3) reduce our leverage; (4) manage capital expenditures; and (5) increase portfolio occupancy while also addressing short- and mid-term lease expirations.

Increase Institutional Ownership in Shares of our Common Stock

We believe our transformation from a collection of assets to a premier office REIT, along with our high-quality, Class A office portfolio, focused investment strategy, opportunities for outsized growth, and in-house expertise, are attractive to institutional investors and differentiate us from other office REITs. To this end, during 2016, we have embarked upon a robust investor relations program to communicate our strategy to a broad audience of institutional investors.

Dispose of Non-Strategic Properties

We continue to dispose of properties located outside of target markets when we believe market conditions are advantageous to us. During the three months ended September 30, 2016, we sold the Hurstbourne Business Center, located in Louisville, Kentucky, which combined with the sales earlier in 2016 of Lawson Commons, located in St. Paul, Minnesota, and FOUR40, located in Chicago, Illinois, resulted in combined year to date gross proceeds of approximately $300.4 million. Subsequent to September 30, 2016, we sold 801 Thompson located in Rockville, Maryland. Exiting these properties has allowed us to further sharpen our geographic focus and de-lever the balance sheet, and we anticipate future dispositions of properties will provide capital to further de-lever the balance sheet and to be recycled into our target growth markets. We can provide no assurance that we will sell any of the remaining properties located outside our target markets on terms favorable to us, or at all, or on the timing we expect. We can also provide no assurance regarding the specific uses of any net proceeds.

Reduce our Leverage

Substantial progress was made in 2015 to create a more flexible capital structure, balance our debt maturities, lower our leverage, and reduce our weighted average borrowing costs. We have continued this progress in 2016 by transitioning our $860.0 million credit facility from secured to unsecured. We are also utilizing proceeds from the sale of properties to further reduce our leverage, as we did with proceeds from the sale of Lawson Commons, FOUR40 and the Hurstbourne Business Center. During the nine months ended September 30, 2016, we repaid (without penalty) approximately $226.0 million of debt ahead of scheduled maturity dates, and subsequent to September 30, 2016, we repaid (without penalty) approximately $70.0 million of additional debt scheduled to mature in January 2017.

Manage Capital Expenditures

We continue to actively manage capital expenditures with the objective of balancing leasing capital and building improvements with our ability to meet customer demands and achieve our leasing objectives. We believe our long-term strategy of acquiring and developing high-quality strategic properties within our target growth markets will allow us to better manage our capital expenditures by: (1) increasing total operating cash flow; (2) sustaining the overall quality of our portfolio; and (3) leveraging the existing property management team, thereby resulting in operating efficiencies within each market.

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Increase Portfolio Occupancy and Address Short- to Mid-term Lease Expirations

We are focused on increasing our portfolio’s occupancy. As of September 30, 2016, occupancy of our operating office properties was approximately 89.8%, an increase of 10 basis points from December 31, 2015. As anticipated, we had downward pressure on occupancy in the third quarter of 2016 due to known tenant move outs coupled with typical downtime to market and backfill the vacated space, but we anticipate positive movement in our occupancy in the fourth quarter of the year. The leasing environment remains strong in the majority of our markets; however, we continuously monitor the economy and our real estate markets closely and we can provide no assurance of any such positive occupancy movement.

While we are focused on increasing occupancy, we are also focused on addressing short-term lease expirations and certain mid-term lease expirations to lock in recent market rental rate growth while reducing lease rollover exposure throughout the portfolio. However, in certain markets such as Houston, seeking to reduce risk within our portfolio by renewing tenants early may result in tenants reducing their leased space which would apply downward pressure to occupancy.

The following table sets forth information regarding our leasing activity for the three and nine months ended September 30, 2016:

Three months ended September 30, 2016	Renewal			Expansion			New			Total
Square feet leased	82,000			58,000			123,000			263,000
Weighted average lease term (in years)	5.0			9.4			7.0			6.9
Increase in weighted average net rental rates per square foot per year (1)	$	2.17		$	1.74		$	4.19		$	2.99
% increase in weighted average net rental rates per square foot per year	15		%	14		%	25		%	20		%
Leasing cost per square foot per year (2)	$	2.16		$	3.57		$	6.00		$	4.40
Nine months ended September 30, 2016
Square feet leased	414,000			163,000			341,000			918,000
Weighted average lease term (in years)	3.5			7.6			6.9			5.5
Increase in weighted average net rental rates per square foot per year (1)	$	1.51		$	0.87		$	3.28		$	2.06
% increase in weighted average net rental rates per square foot per year	12		%	6		%	19		%	14		%
Leasing cost per square foot per year (2)	$	3.33		$	3.39		$	5.72		$	4.38

_________________

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

(2) Includes tenant improvements and leasing commissions.

Results of Operations

The results of operations of our consolidated operating and non-operating properties are included in the discussion below, and include properties sold in 2016 and 2015 that were not held for sale as of December 31, 2014, for our period of ownership. Properties disposed of prior to 2015, and properties sold in 2015 that were held for sale as of December 31, 2014, have been reclassified to discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for all periods presented and are excluded from the discussions below. Effective January 1, 2015, we adopted new accounting guidance that changes the criteria for reporting a discontinued operation. This adoption impacts the comparability of our financial statements as disposals of individual operating properties after January 1, 2015, generally no longer qualify as discontinued operations. The term “same store” in the discussion below includes our consolidated operating office properties not held for sale and owned and operated for the entirety of the two periods being compared.

Three months ended September 30, 2016, as compared to the three months ended September 30, 2015

Rental Revenue.  Rental revenue for the three months ended September 30, 2016, was approximately $56.0 million as compared to approximately $69.4 million for the three months ended September 30, 2015, a $13.4 million decrease. Our non-same store properties had a decrease of approximately $10.2 million in rental revenue due to a decrease of approximately $11.1 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by an increase of approximately $0.6 million from acquired properties and an increase of approximately $0.3 million from our recently developed office property. Our same store properties had a decrease of approximately $3.2 million, primarily as a result of a decrease in lease termination fee income of approximately $1.8 million, a decrease in contribution to revenue from the amortization of above- and below-market rents, net, of approximately $1.1 million, and a decrease in occupancy resulting in a decrease in revenue of approximately $0.7

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million. These decreases were partially offset by an increase in rental rates resulting in an increase in rental revenue of approximately $0.2 million.

Property Operating Expenses. Property operating expenses for the three months ended September 30, 2016, were approximately $16.3 million as compared to approximately $21.3 million for the three months ended September 30, 2015, a $5.0 milliondecrease. Our non-same store properties had a decrease of approximately $5.1 million due to a decrease of approximately $4.5 million from the sale (or held for sale classification) of properties in 2016 and 2015, a decrease of approximately $0.3 million from acquired properties and a decrease of approximately $0.3 million from our recently developed office property. Our same store properties had an increase of approximately $0.1 million, primarily due to higher repair and maintenance expense.

Interest Expense. Interest expense for the three months ended September 30, 2016, was approximately $9.0 million as compared to approximately $12.8 million for the three months ended September 30, 2015, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties, our interest rate swap agreements, and our credit facility. The $3.8 million decrease was primarily due to lower overall interest rates (a weighted average effective interest rate of approximately 4.17% as of September 30, 2016, as compared to approximately 4.47% as of July 1, 2015) which reduced our interest expense by approximately $2.1 million, lower overall borrowings which reduced our interest expense by approximately $0.3 million, approximately $1.5 million of expense reduction in 2016 related to interest rate hedge ineffectiveness and approximately $0.1 million of decreased amortization of deferred financing costs, partially offset by approximately $0.3 million of default interest in 2016 related to one of our mortgage loans.

Real Estate Taxes. Real estate taxes from our consolidated real estate properties for the three months ended September 30, 2016, were approximately $8.4 million as compared to approximately $9.7 million for the three months ended September 30, 2015, a $1.3 million decrease. Our non-same store properties had a decrease of approximately $2.1 million due to a decrease of $2.5 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by increases of approximately $0.4 million from our recently developed office property. Our same store properties had an increase of approximately $0.8 million primarily due to tax refunds received in 2015 that did not recur in 2016.

Asset Impairment Losses. We had approximately $4.2 million in asset impairment losses for the three months ended September 30, 2016, related to assets assessed for impairment primarily due to a change in management’s estimate of the intended hold periods. We had no asset impairment losses for the three months ended September 30, 2015.

General and Administrative.  General and administrative expenses for the three months ended September 30, 2016, were approximately $5.5 million as compared to approximately $10.1 million for the three months ended September 30, 2015, and were comprised of corporate general and administrative expenses including payroll costs, directors’ and officers’ insurance premiums, audit and tax fees, legal fees, corporate office rent, and other administrative expenses. The $4.6 million decrease is primarily due to costs incurred in 2015 that we did not incur in 2016, including approximately $2.6 million in costs related to our 2015 tender offer and listing of our common stock on the NYSE, approximately $0.6 million of 2015 acquisition expense, and to 2016 cost reductions of approximately $1.4 million of corporate rent, insurance and other administrative expenses.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2016, was approximately $25.1 million as compared to approximately $31.4 million for the three months ended September 30, 2015, a $6.3 million decrease. Our non-same store properties had a decrease of approximately $5.3 million due to a decrease of approximately $5.8 million primarily from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by an increase of approximately $0.1 million from acquired properties and an increase of approximately $0.4 million from our recently developed office property. Our same store properties had a decrease of approximately $1.0 million primarily due to lower lease intangible amortization.

Equity in Operations of Investments. Equity in operations of investments for the three months ended September 30, 2016, was income of approximately $0.6 million as compared to a loss of approximately $0.2 million for the three months ended September 30, 2015, and was comprised of our share of the earnings and losses of our unconsolidated investments. The $0.8 million increase was primarily due to increased 2016 earnings at our Wanamaker property and 2015 losses at Paces West, a property that was sold in November 2015.

Gain (Loss) on Sale of Assets. We had approximately $10.8 million in gain on sale of assets for the three months ended September 30, 2016, primarily related to our sale of the Hurstbourne Business Center. We had approximately $0.1 million in loss on sale of assets for the three months ended September 30, 2015, related to adjustment of gains on sales of assets that occurred in previous quarters.

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Nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015

Rental Revenue.  Rental revenue for the nine months ended September 30, 2016, was approximately $188.7 million as compared to approximately $215.3 million for the nine months ended September 30, 2015, a $26.6 million decrease. Our non-same store properties had a decrease of approximately $24.5 million in rental revenue due to a decrease of approximately $33.0 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by an increase of approximately $6.9 million from acquired properties and an increase of approximately $1.6 million from our recently developed office property. Our same store properties had a decrease of approximately $2.1 million, primarily as a result of a decrease in occupancy resulting in a decrease in rental revenue of approximately $2.4 million, a decrease in contribution to revenue from the amortization of above- and below-market rents, net, of approximately $1.9 million, and a decrease in lease termination fee income of approximately $1.4 million. These decreases were partially offset by an increase to rental revenue of approximately $1.8 million primarily due to larger write-offs of straight-line rent revenue in 2015 than in 2016, an increase in rental rates resulting in an increase in revenue of approximately $0.9 million, and an increase of approximately $0.7 million of lease incentive adjustments.

Property Operating Expenses. Property operating expenses for the nine months ended September 30, 2016, were approximately $56.6 million as compared to approximately $67.3 million for the nine months ended September 30, 2015, a $10.7 million decrease. Our non-same store properties had a decrease of approximately $11.5 million due to a decrease of approximately $12.7 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by an increase of approximately $1.2 million from acquired properties. Our same store properties had an increase of approximately $0.8 million, primarily due to higher repair and maintenance expense and higher bad debt expense, partially offset by lower utility expenses.

Interest Expense. Interest expense for the nine months ended September 30, 2016, was approximately $34.7 million as compared to approximately $44.7 million for the nine months ended September 30, 2015, and was comprised of interest expense, amortization of deferred financing fees, and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties, our interest rate swap agreements, and our credit facility. The $10.0 million decrease was primarily due to lower overall interest rates (a weighted average effective interest rate of approximately 4.17% as of September 30, 2016, as compared to approximately 5.34% as of January 1, 2015) which reduced our interest expense by approximately $8.7 million, lower overall borrowings which reduced our interest expense by approximately $3.2 million, and approximately $0.6 million of decreased amortization of deferred financing costs, partially offset by approximately $0.4 million of expense in 2016 related to interest rate hedge ineffectiveness, approximately $1.5 million of default interest in 2016 related to one of our mortgage loans, and a $0.5 million reduction in capitalized interest.

Real Estate Taxes. Real estate taxes from our consolidated real estate properties for the nine months ended September 30, 2016, were approximately $28.8 million as compared to approximately $31.5 million for the nine months ended September 30, 2015, a $2.7 million decrease. Our non-same store properties had a decrease of approximately $4.0 million due to a decrease of approximately $6.0 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by increases of approximately $0.9 million from acquired properties and approximately $1.1 million from our recently developed office property. Our same store properties had an increase of approximately $1.3 million, primarily due to tax refunds received in 2015 that did not recur in 2016.

Property Management Fees. Property management fees for the nine months ended September 30, 2016, were approximately $0.7 million as compared to approximately $4.8 million for the nine months ended September 30, 2015, a $4.1 million decrease, primarily due to the internalization of the management of our properties that were formerly managed by HPT Management Services, LLC.

Asset Impairment Losses. We had approximately $9.0 million in asset impairment losses for the nine months ended September 30, 2016, related to assets assessed for impairment primarily due to a change in management’s estimate of the intended hold periods. We had approximately $0.1 million in asset impairment losses for the nine months ended September 30, 2015, related to final estimated closing costs incurred in connection with the disposition of One and Two Chestnut Place.

General and Administrative.  General and administrative expenses for the nine months ended September 30, 2016, were approximately $17.9 million as compared to approximately $36.0 million for the nine months ended September 30, 2015, and were comprised of corporate general and administrative expenses including payroll costs, directors’ and officers’ insurance premiums, audit and tax fees, legal fees, corporate office rent, and other administrative expenses.  The $18.1 million decrease is primarily due to approximately $10.3 million (combined) of costs incurred in 2015, and not incurred in 2016, related to the buyout and termination fees paid in connection with our 2015 property management and administrative services internalization, approximately $5.6 million in costs related to our 2015 tender offer and listing of our common stock on the NYSE, and to 2016 cost reductions in insurance and other administrative expenses of approximately $2.9 million, approximately $1.5 million of 2015 acquisition expense, and approximately $0.7 million of reduced corporate rent expense, partially offset by increased 2016 payroll costs of approximately $2.9 million, which includes approximately $1.5 million of increased stock based compensation.

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Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2016, was approximately $88.0 million as compared to approximately $92.5 million for the nine months ended September 30, 2015, a $4.5 million decrease. Our non-same store properties had a decrease of approximately $7.1 million primarily due to a decrease of approximately $12.9 million from the sale (or held for sale classification) of properties in 2016 and 2015, partially offset by an increase of approximately $4.1 million from acquired properties and an increase of approximately $1.7 million from our recently developed office property. Our same store properties had an increase of approximately $2.6 million primarily due to increased amortization related to tenant improvements and leasing commissions.

Loss on Early Extinguishment of Debt. We had no loss on early extinguishment of debt for the nine months ended September 30, 2016. Loss on early extinguishment of debt for the nine months ended September 30, 2015, was approximately $21.5 million and was primarily comprised of defeasance costs related to early payoffs of debt.

Equity in Operations of Investments. Equity in operations of investments for the nine months ended September 30, 2016, was approximately $1.9 million as compared to approximately $0.2 million for the nine months ended September 30, 2015, and was comprised of our share of the earnings and losses of our unconsolidated investments. The $1.7 million increase was primarily due to increased 2016 earnings at our Wanamaker property, 2015 losses at Paces West, a property that was sold in November 2015, and acquisition fees paid in 2015 that we did not incur in 2016.

Gain on Sale of Assets. We had approximately $21.5 million in gain on sale of assets for the nine months ended September 30, 2016 related to our sales of Lawson Commons, FOUR40, and the Hurstbourne Business Center. We had approximately $44.5 million in gain on sale of assets for the nine months ended September 30, 2015, related to our sales of 1650 Arch and United Plaza and our partial sales of 1325 G Street and the Colorado Building.

Cash Flow Analysis

Nine months ended September 30, 2016, as compared to nine months ended September 30, 2015

Cash provided by operating activities was approximately $36.0 million for the nine months ended September 30, 2016. Cash used in operating activities for the nine months ended September 30, 2015, was approximately $19.2 million. The approximately $55.2 million increase is primarily attributable to (1) the timing of receipt of revenues and payment of expenses which resulted in approximately $7.7 million more net cash inflows from working capital assets and liabilities in 2016 compared to 2015; (2) approximately $41.5 million primarily due to more cash received from the results of our real estate property operations, including discontinued operations, net of interest expense, general and administrative expenses including costs associated with our 2015 listing on the NYSE, and termination fees and buyout fees paid in connection with our 2015 internalization of property management services and administrative services; and (3) a decrease in cash paid for lease commissions and other lease intangibles of approximately $6.0 million.

Cash provided by investing activities for the nine months ended September 30, 2016, was approximately $264.8 million and was primarily comprised of proceeds from the sale of properties of approximately $290.0 million and return of investments of approximately $16.9 million primarily due to proceeds received from a loan that was refinanced, partially offset by monies used to fund capital expenditures for existing real estate and real estate under development of approximately $40.6 million, and investments in unconsolidated entities of approximately $3.8 million related to development activities at an unconsolidated property. Cash provided by investing activities for the nine months ended September 30, 2015, was approximately $215.6 million and was primarily comprised of proceeds from the sale of properties of approximately $474.3 million and changes in restricted cash of approximately $18.7 million, partially offset by escrow deposits for anticipated real estate purchases, purchases of real estate, a ground lease, investments in unconsolidated entities of approximately $220.2 million, and monies used to fund capital expenditures for existing real estate and real estate under development of approximately $57.9 million.

Cash used in financing activities for the nine months ended September 30, 2016, was approximately $261.6 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $235.5 million and distributions of approximately $25.8 million. Cash used in financing activities for the nine months ended September 30, 2015, was approximately $220.1 million and was primarily comprised of payments on notes payable and financing costs, net of proceeds from notes payable of approximately $160.2 million, redemption of common stock primarily related to our tender offer of approximately $50.8 million, and distributions of approximately $9.0 million.

Funds from Operations (“FFO”)

Historical cost accounting for real estate assets in accordance with accounting principles generally accepted in the United States of America (���GAAP”) implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered

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the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient for evaluating operating performance.  FFO is a non-GAAP financial measure that is widely recognized as a measure of a REIT’s operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper on Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated entities which resulted from measurable decreases in the fair value of the depreciable real estate held by the unconsolidated entity), plus depreciation and amortization of real estate assets, and after related adjustments for unconsolidated entities and noncontrolling interests.  The determination of whether impairment charges have been incurred is based partly on anticipated operating performance and hold periods.  Estimated undiscounted cash flows from a property, derived from estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred.  While impairment charges for depreciable real estate are excluded from net income (loss) in the calculation of FFO as described above, impairments reflect a decline in the value of the applicable property which we may not recover.

We believe that the use of FFO, together with the required GAAP presentations, is helpful in understanding our operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairments of depreciable real estate assets, and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Factors that impact FFO include fixed costs, yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on debt financing, and operating expenses.

We also evaluate FFO, excluding certain items. The items excluded relate to certain non-operating activities or certain non-recurring activities that may create significant FFO volatility and affect the comparability of FFO across periods. We believe it is useful to evaluate FFO excluding these items because it provides useful information in analyzing comparability between reporting periods and in assessing the sustainability of our operating performance.

FFO and FFO, excluding certain items, should not be considered as alternatives to net income (loss), or as indicators of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions.  Additionally, the exclusion of impairments limits the usefulness of FFO and FFO, excluding certain items, as historical operating performance measures since an impairment charge indicates that operating performance has been permanently affected.  FFO and FFO, excluding certain items, are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and FFO, excluding certain items.  FFO and FFO, excluding certain items, are non-GAAP measurements and should be reviewed in connection with other GAAP measurements.  Our FFO and FFO, excluding certain items, as presented may not be comparable to amounts calculated by other REITs that do not define FFO in accordance with the current NAREIT definition, or interpret it differently, or that identify and exclude different items related to non-operating activities or certain non-recurring activities.         

The following section presents our calculations of FFO (as defined by NAREIT) attributable to common stockholders and FFO attributable to common stockholders, excluding certain items, for the three and nine months ended September 30, 2016 and 2015, and provides additional information related to our FFO attributable to common stockholders and FFO attributable to common stockholders, excluding certain items.

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The table below is presented in thousands, except per share amounts: 

	Three Months Ended						Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Net loss	$	(1,028	)	$	(15,832	)	$	(23,112	)	$	(22,907	)
Net loss attributable to noncontrolling interests	3			57			28			89
Dilution of Series A Convertible Preferred Stock	—			1,926			—			1,926
Net loss attributable to common stockholders	(1,025		)	(13,849		)	(23,084		)	(20,892		)
Adjustments (1):
Real estate depreciation and amortization from consolidated properties	25,062			31,217			87,351			92,320
Real estate depreciation and amortization from unconsolidated properties	2,058			1,904			6,108			4,558
Real estate depreciation and amortization - noncontrolling interests	—			(10		)	(6		)	(10		)
Impairment of depreciable real estate	4,151			—			8,977			132
Gain on sale of depreciable real estate	(10,837		)	(318		)	(21,586		)	(59,565		)
Taxes associated with sale of depreciable real estate	(152		)	(5		)	(88		)	1,259
Noncontrolling interests	(18		)	(56		)	(57		)	(66		)
FFO attributable to common stockholders	19,239			18,883			57,615			17,736
Acquisition expenses	—			642			—			1,837
Severance charges	—			—			493			—
Tender offer and listing costs	—			2,562			—			5,553
Interest rate hedge ineffectiveness expense (2)	(1,534		)	—			407			—
Loss on early extinguishment of debt	—			127			—			21,575
Default interest (3)	619			355			1,852			355
BHT Advisors termination fee and HPT Management buyout fee	—			101			—			10,301
Noncontrolling interests	—			(7		)	(2		)	(69		)
Dilution of Series A Convertible Preferred Stock	—			(1,926		)	—			(1,926		)
FFO attributable to common stockholders, excluding certain items	$	18,324		$	20,737		$	60,365		$	55,362
Weighted average common shares outstanding - basic	47,413			48,843			47,403			49,539
Weighted average common shares outstanding - diluted (4)	47,846			49,034			47,796			49,725
Net loss per common share - basic and diluted (4)	$	(0.02	)	$	(0.28	)	$	(0.49	)	$	(0.42	)
FFO per common share - diluted	$	0.40		$	0.39		$	1.21		$	0.36
FFO, excluding certain items, per common share - diluted	$	0.38		$	0.42		$	1.26		$	1.11

_____________

(1) Reflects the adjustments of continuing operations, as well as discontinued operations.

(2) Interest rate swaps are adjusted to fair value through other comprehensive income (loss). However, because our interest rate swaps do not have a LIBOR

floor while the hedged debt is subject to a LIBOR floor, the portion of the change in fair value of our interest rate swaps attributable to this mismatch is reclassified to interest rate hedge ineffectiveness expense.

(3) We have a non-recourse loan in default which subjects us to incur default interest at a rate that is 500 basis points higher than the stated interest rate. Although there can be no assurance, we anticipate that when this property is sold or when ownership of this property is conveyed to the lender, this default interest will be forgiven.

(4) There are no dilutive securities for purposes of calculating net loss per common share.

For a more detailed discussion of certain changes in the factors listed above, refer to “Results of Operations” beginning on page 27.

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

Same Store GAAP NOI is equal to rental revenue, less lease termination fee income, property operating expenses (excluding tenant improvement demolition costs), real estate taxes, and property management expenses for our same store properties and is considered a non-GAAP financial measure. Same Store Cash NOI is equal to Same Store GAAP NOI less non-cash revenue items including straight-line rent adjustments and the amortization of above- and below-market rent. The same store properties include our operating office properties not held for sale and owned and operated for the entirety of both periods being compared and include our comparable ownership percentage in each period for properties in which we own an unconsolidated interest.  We view Same Store GAAP NOI and Same Store Cash NOI as important measures of the operating performance of our properties because they allow us to compare operating results of properties owned and operated for the entirety of both periods being compared and therefore eliminate variations caused by acquisitions or dispositions during such periods.

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

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The table below presents our Same Store GAAP NOI and Same Store Cash NOI with a reconciliation to net loss for the three and nine months ended September 30, 2016 and 2015 (in thousands). The same store properties for these comparisons consist of 20 operating properties and 7.8 million square feet. Five operating properties (Two BriarLake Plaza, Domain 2, Domain 3, Domain 4, and Domain 7) have been excluded from our same store results below as we did not own these properties or they were not fully operational during the entirety of the three and nine months ended September 30, 2016 and 2015.

			Three Months Ended						Nine Months Ended
			September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Same Store Revenue:
	Rental revenue		$	46,670		$	49,872		$	142,282		$	144,370
		Less:
		Lease termination fees	(264		)	(2,018		)	(1,337		)	(2,688		)
			46,406			47,854			140,945			141,682
Same Store Expenses:
		Property operating expenses (less tenant improvement demolition costs)	13,259			13,354			39,763			39,165
		Real estate taxes	7,212			6,375			21,350			20,057
		Property management fees	129			125			386			3,077
	Property Expenses		20,600			19,854			61,499			62,299
Same Store GAAP NOI - consolidated properties			25,806			28,000			79,446			79,383
Same Store GAAP NOI - unconsolidated properties (at ownership %)			2,606			2,541			7,883			7,313
Same Store GAAP NOI			28,412			30,541			87,329			86,696
Increase (decrease) in Same Store GAAP NOI			(7.0		)%				0.7		%
		Less:
		Straight-line rent revenue adjustment	(112		)	(1,446		)	(4,048		)	(3,900		)
		Amortization of above- and below-market rents, net	(775		)	(1,869		)	(2,606		)	(4,537		)
Same Store Cash NOI - consolidated properties			24,919			24,685			72,792			70,946
Same Store Cash NOI - unconsolidated properties (at ownership %)			2,395			2,264			6,990			6,586
Same Store Cash NOI			$	27,314		$	26,949		$	79,782		$	77,532
Increase in Same Store Cash NOI			1.4		%				2.9		%
Reconciliation of net loss to Same Store GAAP NOI and Same Store Cash NOI
	Net loss		$	(1,028	)	$	(15,832	)	$	(23,112	)	$	(22,907	)
		Adjustments:
		Interest expense	9,005			12,765			34,692			44,747
		Asset impairment losses	4,151			—			8,977			132
		Tenant improvement demolition costs	306			106			445			312
		General and administrative	5,529			10,123			17,853			36,007
		Depreciation and amortization	25,133			31,446			87,974			92,549
		Interest and other income	(248		)	(267		)	(866		)	(553		)
		Loss on early extinguishment of debt	—			30			—			21,478
		Provision for income taxes	4			36			467			1,298
		Equity in operations of investments	(646		)	159			(1,884		)	(153		)
		Income from discontinued operations	—			(21		)	—			(1,390		)
		Gain on sale of discontinued operations	—			(403		)	—			(15,086		)
		Gain (loss) on sale of assets	(10,777		)	85			(21,526		)	(44,479		)
		Net operating income of non-same store properties	(5,359		)	(8,209		)	(22,237		)	(29,884		)
		Lease termination fees	(264		)	(2,018		)	(1,337		)	(2,688		)
		Same store GAAP NOI unconsolidated properties (at ownership %)	2,606			2,541			7,883			7,313
Same Store GAAP NOI			28,412			30,541			87,329			86,696
		Straight-line rent revenue adjustment	(112		)	(1,446		)	(4,048		)	(3,900		)
		Amortization of above- and below-market rents, net	(775		)	(1,869		)	(2,606		)	(4,537		)
		Cash NOI adjustments for unconsolidated properties (at ownership %)	(211		)	(277		)	(893		)	(727		)
Same Store Cash NOI			$	27,314		$	26,949		$	79,782		$	77,532

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For a more detailed discussion of certain of the changes in the factors listed above, refer to “Results of Operations” beginning on page 27.

Liquidity and Capital Resources

As of September 30, 2016, we had cash and cash equivalents of approximately $51.5 million and restricted cash of approximately $8.6 million.  We also have a credit facility with a borrowing capacity of $860.0 million (as described in more detail below). As of September 30, 2016, we had approximately $575.0 million of outstanding borrowings and had the ability, subject to our most restrictive financial covenants, to borrow an additional approximately $137.3 million under the credit facility as a whole.

Our expected actual and potential short- and long-term liquidity sources are, among others, cash and cash equivalents, restricted cash, revenue from our properties, proceeds from available borrowings under our credit facility and additional secured or unsecured debt financings and refinancings, and proceeds from the sales of properties in connection with our efforts to sharpen our geographic focus. We believe our listing on the NYSE in 2015 will facilitate supplementing these sources by selling equity or debt securities of the Company in the future if and when we believe appropriate to do so.

We may also seek to generate capital by contributing one or more of our existing assets to a joint venture with a third party. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved. Our ability to successfully identify, negotiate, and complete joint venture transactions on acceptable terms or at all is highly uncertain.

Generally, our principal liquidity needs are operating and administrative expenses, payment of principal and interest on our outstanding indebtedness, including repaying or refinancing our outstanding indebtedness as it matures, capital improvements to our properties, including commitments for future tenant improvements, property acquisitions, and distributions to our stockholders. As of September 30, 2016, approximately $177.1 million of debt, including our share of debt at our unconsolidated properties, matures before the end of 2017. Subsequent to September 30, 2016, approximately $70.0 million of this debt was repaid (without penalty).

At projected operating levels, we anticipate we have adequate capital resources and liquidity to meet our short-term and long-term liquidity requirements.

Notes Payable

Our notes payable, net were approximately $837.9 million as of September 30, 2016. Approximately $269.9 million of these notes payable, net were secured by real estate assets with a carrying value of approximately $262.2 million as of September 30, 2016. As of September 30, 2016, all of our outstanding debt was fixed rate debt (or effectively fixed rate debt, through the use of interest rate swaps), with the exception of approximately $50.0 million from certain borrowings under our credit facility. As of September 30, 2016, the stated annual interest rates on our outstanding debt, excluding mezzanine financing, ranged from approximately 2.02% to 6.09%. We had mezzanine financing on one property with a stated annual interest rate of 9.80%. As of September 30, 2016, the effective weighted average interest rate for our consolidated debt is approximately 4.17%. For our loan that is in default and detailed below, we incur a default interest rate that is 500 basis points higher than the stated interest rate, which resulted in an overall effective weighted average interest rate of approximately 4.46% as of September 30, 2016, for our consolidated debt and an increase in interest expense for the nine months ended September 30, 2016, of approximately $1.9 million. We anticipate, although we can provide no assurance, that when the property to which such loan relates is sold, or if ownership of this property is conveyed to the lender, the default interest will be forgiven.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of September 30, 2016, we were in default on a non-recourse property loan with an outstanding balance of approximately $48.3 million secured by our Fifth Third Center property located in Columbus, Ohio, which has a carrying value of approximately $34.0 million as of September 30, 2016. A receiver was appointed for this property in March 2016. The loan had an original maturity date of July 2016, and we are currently working with the lender to dispose of this property on their behalf. As of September 30, 2016, other than the default discussed above, we believe we were in compliance with the covenants under each of our loan agreements, including our credit facility and our debt (excluding the default debt) had maturity dates that range from January 2017 to June 2022. Subsequent to September 30, 2016, approximately $70.0 million of secured debt that was due in January 2017 was repaid.

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Credit Facility

We have a credit agreement through our operating partnership, Tier OP. In March 2016, the available borrowings under the credit facility were increased, and as a result of meeting certain financial covenants, the credit facility was converted from secured to unsecured and now provides for total borrowings of up to $860.0 million, subject to our compliance with certain financial covenants. The facility consists of a $300.0 million term loan, a $275.0 million term loan, and a $285.0 million revolving line of credit. The first term loan matures on December 18, 2019. The second term loan matures on June 30, 2022. The revolving line of credit matures on December 18, 2018, and can be extended one additional year subject to certain conditions and payment of an extension fee. The annual interest rate on the credit facility is equal to either, at our election, (1) the “base rate” (calculated as the greatest of (i) the agent’s “prime rate”; (ii) 0.5% above the Federal Funds Effective Rate; or (iii) the LIBOR Market Index Rate plus 1.0%) plus the applicable margin or (2) LIBOR for an interest period of one, three, or six months plus the applicable margin.  The applicable margin will be determined based on the ratio of total indebtedness to total asset value and ranges from 35 basis points to 250 basis points.  We have entered into interest rate swap agreements to hedge interest rates on $525.0 million of these borrowings to manage our exposure to future interest rate movements. All amounts owed are guaranteed by us and certain subsidiaries of Tier OP. As of September 30, 2016, we had approximately $575.0 million in borrowings outstanding under the term loans, and no borrowings outstanding under the revolving line of credit with the ability, subject to our most restrictive financial covenants, to borrow an additional approximately $137.3 million under the facility as a whole. As of September 30, 2016, the weighted average effective interest rate for borrowings under the credit facility as a whole, inclusive of our interest rate swaps, was approximately 3.34%.

Distributions

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

Our board of directors reinstated quarterly cash distributions beginning in the second quarter of 2015, at $0.18 per share per quarter, and has authorized cash distributions in the same amount for each quarter since that time. We have paid distributions of approximately $25.8 million to our common stockholders thus far in 2016. We anticipate that the board of directors will continue to consider authorizing a quarterly distribution payable from cash anticipated to be provided by operations. There is no assurance that distributions will continue or at any particular rate or timing. All or a portion of the distribution may constitute a return of capital.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate changes primarily as a result of our debt used to acquire properties. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we borrow primarily at fixed rates or variable rates with what we believe are the lowest margins available at the time and in some cases, the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We have entered into derivative financial instruments to mitigate our interest rate risk on certain financial instruments and as a result have effectively fixed the interest rate on certain of our variable rate debt. As of September 30, 2016, we had approximately $575.0 million of debt that bears interest at a variable rate with $525.0 million of this variable rate debt effectively fixed through the use of interest rate swaps.

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A 100 basis point increase in interest rates on our variable rate debt outstanding as of September 30, 2016, would result in a net increase in total annual interest incurred of approximately $0.5 million. A 100 basis point decrease in interest rates on our variable rate debt outstanding as of September 30, 2016, would result in a net decrease in total annual interest incurred of approximately $0.3 million. In the event LIBOR was less than zero we would incur additional interest expense of approximately $1.3 million per year per 25 basis point decrease. A 100 basis point increase in interest rates on our variable rate debt outstanding as of September 30, 2016, would result in a net increase in the fair value of our interest rate swaps of approximately $22.2 million. A 100 basis point decrease in interest rates on our variable rate debt outstanding as of September 30, 2016, would result in a net decrease in the fair value of our interest rate swaps of approximately $23.6 million.

We do not have any foreign operations and thus we are not directly exposed to foreign currency fluctuations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated as of September 30, 2016, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2016, were effective for the purpose of ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

We are not party to, and none of our properties are subject to, any material pending legal proceedings.

Item 1A. Risk Factors.

Except to the extent updated below or previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015.

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

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

	TIER REIT, INC.
Dated: November 9, 2016	By:	/s/ James E. Sharp
		James E. Sharp
		Chief Accounting Officer and Executive Vice President
		(Principal Accounting Officer)

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Index to Exhibits

Exhibit Number	Description
31.1	Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
31.2	Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
32.1*	Section 1350 Certifications (furnished herewith)
101	The following financial information from TIER REIT, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith)

 _______________________________________________________________

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

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