Gramercy Property Trust - FORM 10-Q - August 7, 2014

Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - Gramercy Property Trusta2014063010-qex312.htm
EX-31.1 - EXHIBIT 31.1 - Gramercy Property Trusta2014063010-qex311.htm
EX-32.2 - EXHIBIT 32.2 - Gramercy Property Trusta2014063010-qex322.htm
EX-32.1 - EXHIBIT 32.1 - Gramercy Property Trusta2014063010-qex321.htm
EXCEL - IDEA: XBRL DOCUMENT - Gramercy Property TrustFinancial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 000-53200
 
 
 
 
CHAMBERS STREET PROPERTIES
(Exact name of registrant as specified in its charter)
 
 
 
 

Maryland
56-2466617
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
47 Hulfish Street, Suite 210, Princeton, New Jersey 08542
(Address of principal executive offices) (Zip Code)
(609) 683-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x   NO  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
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  x
The number of shares outstanding of the registrant's common shares of beneficial ownership, $0.01 par value, was 236,947,283 as of August 6, 2014.



CHAMBERS STREET PROPERTIES
INDEX

 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 



PART I.
FINANCIAL INFORMATION
ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CHAMBERS STREET PROPERTIES
Condensed Consolidated Balance Sheets
as of June 30, 2014 and December 31, 2013
(In Thousands, Except Share Data)
 
June 30,
 
December 31,
 
2014
 
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in Real Estate:
 
 
 
Land
$
646,513

 
$
639,382

Land Available for Expansion
25,752

 
24,631

Buildings and Improvements
1,630,531

 
1,606,209

 
2,302,796

 
2,270,222

Less: Accumulated Depreciation and Amortization
(230,804
)
 
(195,778
)
Net Investments in Real Estate
2,071,992

 
2,074,444

Investments in Unconsolidated Entities
486,452

 
514,802

Cash and Cash Equivalents
55,588

 
83,007

Restricted Cash
12,793

 
15,236

Tenant and Other Receivables, Net
12,253

 
10,394

Deferred Rent
38,068

 
35,499

Deferred Leasing Costs and Intangible Assets, Net
230,899

 
248,872

Deferred Financing Costs, Net
10,318

 
11,585

Prepaid Expenses and Other Assets
10,299

 
16,757

Total Assets
$
2,928,662

 
$
3,010,596

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
LIABILITIES
 
 
 
Secured Notes Payable, Net
$
652,166

 
$
681,200

Unsecured Term Loan Facilities
570,000

 
570,000

Unsecured Revolving Credit Facility
170,044

 
170,044

Accounts Payable, Accrued Expenses and Other Liabilities
56,734

 
50,053

Intangible Liabilities, Net
25,994

 
28,070

Prepaid Rent and Security Deposits
14,392

 
16,648

Distributions Payable
9,953

 
9,931

Total Liabilities
1,499,283

 
1,525,946

COMMITMENTS AND CONTINGENCIES (NOTE 13)


 


SHAREHOLDERS' EQUITY
 
 
 
Common Shares of Beneficial Interest, $0.01 par value, 990,000,000 shares authorized; 236,987,530 and 236,463,981 issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
2,361

 
2,359

Additional Paid-in-Capital
2,068,683

 
2,067,008

Accumulated Deficit
(640,523
)
 
(589,313
)
Accumulated Other Comprehensive (Loss) Income
(1,142
)
 
4,596

Total Shareholders' Equity
1,429,379

 
1,484,650

Total Liabilities and Shareholders' Equity
$
2,928,662

 
$
3,010,596

See accompanying notes to condensed consolidated financial statements.

1

CHAMBERS STREET PROPERTIES
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)
(In Thousands, Except Share and per Share Data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
REVENUES
 
 
 
 
 
 
 
Rental
$
52,033

 
$
50,620

 
$
103,909

 
$
94,171

Tenant Reimbursements
14,595

 
15,936

 
29,815

 
25,817

Other Property Income
—

 
—

 
1,069

 
—

Total Revenues
66,628

 
66,556

 
134,793

 
119,988

EXPENSES
 
 
 
 
 
 
 
Property Operating
8,392

 
7,846

 
17,945

 
14,002

Real Estate Taxes
10,465

 
11,269

 
20,266

 
18,704

General and Administrative
5,953

 
7,234

 
12,817

 
12,194

Investment Management Fee
—

 
(11
)
 
—

 
489

Acquisition-Related
—

 
162

 
290

 
2,003

Depreciation and Amortization
27,126

 
26,571

 
54,364

 
48,367

Transition and Listing
—

 
11,199

 
—

 
11,234

Total Expenses
51,936

 
64,270

 
105,682

 
106,993

OTHER EXPENSES AND INCOME
 
 
 
 
 
 
 
Interest and Other Income
151

 
280

 
318

 
487

Interest Expense
(13,907
)
 
(10,367
)
 
(27,968
)
 
(19,554
)
Interest Expense and Net Change in Fair Value of Non-Qualifying Derivative Financial Instruments
(14
)
 
1,679

 
12

 
419

(Loss) Gain on Conversion of Equity Interest to Controlling Interest 
—

 
(32
)
 
—

 
77,203

Total Other (Expenses) Income
(13,770
)
 
(8,440
)
 
(27,638
)
 
58,555

Income (Loss) Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities
922

 
(6,154
)
 
1,473

 
71,550

Provision For Income Taxes
(381
)
 
(151
)
 
(439
)
 
(220
)
Equity in Income of Unconsolidated Entities
4,612

 
2,575

 
7,438

 
6,939

INCOME (LOSS) FROM CONTINUING OPERATIONS
5,153

 
(3,730
)
 
8,472

 
78,269

DISCONTINUED OPERATIONS
 
 
 
 
 
 
 
Income from Discontinued Operations
—

 
90

 
—

 
181

TOTAL INCOME FROM DISCONTINUED OPERATIONS
—

 
90

 
 
 
181

NET INCOME (LOSS)
5,153

 
(3,640
)
 
8,472

 
78,450

Net Loss (Income) Attributable to Non-Controlling Operating Partnership Units
—

 
4

 
—

 
(79
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON 
   SHAREHOLDERS
$
5,153

 
$
(3,636
)
 
$
8,472

 
$
78,371

Basic and Diluted Net Income (Loss) per Share from Continuing Operations Attributable to Common Shareholders
$
0.02

 
$
(0.02
)
 
$
0.03

 
$
0.31

Basic and Diluted Net Income (Loss) per Share Attributable to Common Shareholders
$
0.02

 
$
(0.02
)
 
$
0.03

 
$
0.31

Weighted Average Common Shares Outstanding-Basic and Diluted
237,000,613

 
248,224,851

 
236,793,334

 
248,350,481

See accompanying notes to condensed consolidated financial statements.

2

CHAMBERS STREET PROPERTIES
Condensed Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)
(In Thousands)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
NET INCOME (LOSS)
$
5,153

 
$
(3,640
)
 
$
8,472

 
$
78,450

Foreign Currency Translation Gain (Loss)
1,330

 
1,665

 
2,153

 
(7,476
)
Swap Fair Value Adjustments
(5,130
)
 
5,207

 
(7,891
)
 
4,219

COMPREHENSIVE INCOME
1,353

 
3,232

 
2,734

 
75,193

Comprehensive Income Attributable to Non-Controlling Operating Partnership Units
—

 
(3
)
 
—

 
(76
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
1,353

 
$
3,229

 
$
2,734

 
$
75,117

See accompanying notes to condensed consolidated financial statements.

3
CHAMBERS STREET PROPERTIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2014 and 2013 (unaudited)
(In Thousands)


 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net Income
$
8,472

 
$
78,450

Adjustments to Reconcile Net Income to Net Cash Flows Provided by Operating Activities:
 
 
 
Equity in Income of Unconsolidated Entities
(7,438
)
 
(6,939
)
Distributions from Unconsolidated Entities
22,609

 
19,689

Gain on Interest Rate Swaps
(12
)
 
(1,466
)
Gain on Conversion of Equity Investment to Controlling Interest
—

 
(77,202
)
Depreciation and Amortization
54,364

 
48,774

Amortization of Non-Cash Interest Expense
(348
)
 
(218
)
Amortization of Above and Below Market Leases
2,883

 
3,071

Share-Based Compensation
1,924

 
4,556

Straight-Line Rent Adjustment
(2,545
)
 
(4,505
)
Changes in Assets and Liabilities:
 
 
 
Tenant and Other Receivables
(1,856
)
 
(3,155
)
Prepaid Expenses and Other Assets
1,041

 
(4,374
)
Accounts Payable, Accrued Expenses and Other Liabilities
(6,244
)
 
(1,322
)
Net Cash Flows Provided By Operating Activities
72,850

 
55,359

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Acquisition of Real Property
(27,450
)
 
(63,101
)
Distributions from Unconsolidated Entities
19,690

 
—

Acquisition Deposit
(875
)
 
—

Restricted Cash
2,443

 
(4,657
)
Lease Commissions
(1,810
)
 
(287
)
Improvements to Variable Interest Entity
—

 
(3,601
)
Improvements to Investments in Real Estate
(4,202
)
 
(4,961
)
Net Cash Flows Used in Investing Activities
(12,204
)
 
(76,607
)

4
CHAMBERS STREET PROPERTIES
Condensed Consolidated Statements of Cash Flows (continued)
For the Six Months Ended June 30, 2014 and 2013 (unaudited)
(In Thousands)


 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Redemption of Common Shares
—

 
(44,225
)
Repurchase and Cancellation of Common Shares
—

 
(125,000
)
Repurchase and Cancellation of Vested Shares
(247
)
 
—

Payment of Distributions
(59,660
)
 
(41,111
)
Distribution to Non-Controlling Interest Operating—Partnership Units
—

 
(74
)
Acquisition of Non-Controlling Interest—Variable Interest Entity
—

 
(826
)
Borrowings on Unsecured Revolving Credit Facility
10,000

 
220,044

Principal Payments on Unsecured Revolving Credit Facility
(10,000
)
 
(225,000
)
Proceeds from Unsecured Term Loan Facilities
—

 
250,000

Principal Payments on Secured Notes Payable
(28,013
)
 
(30,028
)
Payment of Financing Costs
(160
)
 
(1,905
)
Net Cash Flows (Used in) Provided by Financing Activities
(88,080
)
 
1,875

EFFECT OF FOREIGN CURRENCY TRANSLATION
15

 
(121
)
Net Decrease in Cash and Cash Equivalents
(27,419
)
 
(19,494
)
Cash and Cash Equivalents, Beginning of the Period
83,007

 
107,355

Cash and Cash Equivalents, End of the Period
$
55,588

 
$
87,861

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Cash Paid During the Period for Interest
$
28,464

 
$
19,169

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Distributions Declared and Payable
$
9,953

 
$
35,486

Accounts Payable and Accrued Expenses—Construction In Progress
$
430

 
$
1,526

JV Contribution/Distribution—Expansion
$
6,351

 
$
19

Proceeds from Dividend Reinvestment Program
$
—

 
$
33,579

Notes Payable Assumed on Acquisitions of Real Estate
$
—

 
$
216,011

Conversion of Duke JV Equity Investment to Controlling Interest
$
—

 
$
139,770

See accompanying notes to condensed consolidated financial statements.

5

CHAMBERS STREET PROPERTIES
Condensed Consolidated Statements of Equity
For the Six Months Ended June 30, 2014 and 2013 (unaudited)
(In Thousands, Except Share Data)

 
Common Shares
 
Additional
Paid-in-
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Balance at January 1, 2014
236,463,981

 
$
2,359

 
$
2,067,008

 
$
(589,313
)
 
$
4,596

 
$
1,484,650

Net Income Attributable to Common Shareholders
—

 
—

 
—

 
8,472

 
—

 
8,472

Other Comprehensive Loss
—

 
—

 
—

 
—

 
(5,738
)
 
(5,738
)
Share-Based Compensation
555,508

 
2

 
1,922

 
—

 
—

 
1,924

Repurchase and Cancellation of Vested Shares
(31,959
)
 
—

 
(247
)
 
—

 
—

 
(247
)
Distributions Declared ($0.252 per share)
—

 
—

 
—

 
(59,682
)
 
—

 
(59,682
)
Balance as of June 30, 2014
236,987,530

 
$
2,361

 
$
2,068,683

 
$
(640,523
)
 
$
(1,142
)
 
$
1,429,379


 
Common Shares
 
Additional
Paid-in-
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Balance at January 1, 2013
249,664,156

 
$
2,494

 
$
2,203,888

 
$
(540,462
)
 
$
(8,587
)
 
$
1,657,333

Net Income Attributable to Common Shareholders
—

 
—

 
—

 
78,371

 
—

 
78,371

Other Comprehensive Loss
—

 
—

 
—

 
—

 
(3,257
)
 
(3,257
)
Net Contributions From DRIP of Common Shares, $0.01 Par Value
3,534,649

 
36

 
33,544

 
—

 
—

 
33,580

Share-Based Compensation
788,925

 
5

 
4,551

 
—

 
—

 
4,556

Redemption of Common Shares
(4,663,279
)
 
(46
)
 
(44,179
)
 
—

 
—

 
(44,225
)
Adjustment to Record Non-Controlling Interest at Redemption Value
—

 
—

 
2

 
—

 
—

 
2

Repurchase and Cancellation of Common Shares
(12,376,237
)
 
(124
)
 
(124,876
)
 
—

 
—

 
(125,000
)
Distributions Declared ($0.30 per share)
—

 
—

 
—

 
(72,758
)
 
—

 
(72,758
)
Balance as of June 30, 2013
236,948,214

 
$
2,365

 
$
2,072,930

 
$
(534,849
)
 
$
(11,844
)
 
$
1,528,602

See accompanying notes to condensed consolidated financial statements.

6

CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)

1. Organization and Nature of Business
Chambers Street Properties (NYSE: CSG) is a self-administered real estate investment trust ("REIT") that focuses on acquiring, owning and managing net leased industrial and office properties leased to creditworthy tenants. We were formed under the laws of the state of Maryland on March 30, 2004, and have elected to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986 (the "Internal Revenue Code") beginning with the taxable period ended December 31, 2004.
We operate in an umbrella partnership REIT structure in which our operating partnership, CSP Operating Partnership, LP ("CSP OP"), indirectly owns substantially all of the properties acquired on our behalf. CSP OP was formed in Delaware on March 30, 2004, and we are the 100% owner and sole general partner. For each interest in our common shares of beneficial interest $0.01 par value (the "common shares"), that we issue, an equal interest in the limited partnership units of CSP OP is issued to us in exchange for the cash proceeds from the issuance of the interest in our common shares. As of June 30, 2014, we owned 100% of the limited partnership units of CSP OP directly or indirectly through a wholly-owned taxable REIT subsidiary.
On May 21, 2013, we listed our common shares on the New York Stock Exchange (the "NYSE") under the symbol "CSG" and concurrently commenced a modified "Dutch Auction" tender offer to purchase up to $125.0 million in value of the common shares (the "Tender Offer") from our shareholders. As a result of the Tender Offer, on June 26, 2013, we accepted for purchase 12,376,237 common shares at a purchase price of $10.10 per share, for an aggregate cost of approximately $125.0 million, excluding fees and expenses relating to the Tender Offer. As of June 30, 2014, we had 236,987,530 common shares issued and outstanding.
As of June 30, 2014, we owned, on a consolidated basis, 100 industrial (primarily warehouse/distribution), office and retail properties located in 19 U.S. states (Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia) and in the United Kingdom, encompassing approximately 23.1 million rentable square feet. Our consolidated properties were approximately 93.9% leased (based upon rentable square feet) as of June 30, 2014. As of June 30, 2014, 75 of our consolidated properties were net leased to single tenants, which encompassed approximately 18.7 million rentable square feet.
We had ownership interests in four unconsolidated entities that, as of June 30, 2014, owned interests in 32 properties. Excluding those properties owned through our investment in CB Richard Ellis Strategic Partners Asia II-A, L.P. ("CBRE Strategic Partners Asia"), we owned, on an unconsolidated basis, 29 industrial (primarily warehouse/distribution) and office properties located in eight U.S. states (Arizona, Florida, Illinois, Indiana, North Carolina, Ohio, Tennessee and Texas) and three countries in Europe (France, Germany and the United Kingdom), encompassing approximately 12.8 million rentable square feet. Our unconsolidated properties were approximately 99.5% leased (based upon rentable square feet) as of June 30, 2014. As of June 30, 2014, 20 of our unconsolidated properties were net leased to single tenants, which encompassed approximately 11.5 million rentable square feet.
Unless the context otherwise requires or indicates, references to the "Company," "we," "our" and "us" refer to the activities of and the assets and liabilities of the business and operations of Chambers Street Properties and its subsidiaries. References to unconsolidated properties include properties owned through unconsolidated joint ventures and do not include properties owned by CBRE Strategic Partners Asia. See Note 4 "Investments in Unconsolidated Entities."


7
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") and reflect the accounts of the Company, CSP OP and its consolidated subsidiaries. The Company consolidates its wholly-owned properties and joint ventures it controls through either 1) voting rights or similar rights or 2) by means other than voting rights if the Company is deemed to be the primary beneficiary of a variable interest entity. All significant intercompany accounts and transactions are eliminated in consolidation.
Certain information and footnotes required for annual financial statement presentation have been condensed or excluded pursuant to Securities and Exchange Commission (the "SEC") rules and regulations. Accordingly, our interim financial statements do not include all of the information and disclosures required under GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary in all material respects to present fairly our financial position, results of our operations and cash flows as of and for the three and six months ended June 30, 2014 have been made. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results of operations to be expected for the entire year. The condensed consolidated financial statements and notes thereto should be read in conjunction with our current Annual Report on Form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2013.
Use of Estimates
The preparation of financial statements, in conformity with GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment Information
Our chief operating decision-makers internally evaluate the operating performance and financial results of our portfolio based on Net Operating Income. We define "Net Operating Income" as: rental income, tenant reimbursements, and other property income less property and related expenses (operating and maintenance and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and corporate general and administrative expenses. During the first quarter of 2014, we reassessed our segment reporting and determined that the proper aggregation of our properties was by property type, Industrial Properties and Office Properties. Both of these operating segments meet the 10% quantitative reporting thresholds to be considered a reportable segment under GAAP and reflect the core operations of our business. Beginning with the reporting period ended March 31, 2014, we view our consolidated property operations as two reportable segments: Industrial Properties and Office Properties. In addition, we have one non-reportable segment, which is Retail Properties. We have reclassified the prior period segment financial results to conform to the current year presentation.
Revenue Recognition and Valuation of Receivables
All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, we have received irrevocable stand-by letters of credit totaling $14.8 million and $14.5 million as security for such leases at June 30, 2014 and December 31, 2013.
Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis, when we are the primary obligor with respect to incurring expenses and with respect to having the credit risk.
Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management's determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible rent receivable was $95,000 and $24,000 as of June 30, 2014 and December 31, 2013, respectively.

8
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Translation of Non-U.S. Currency Amounts
The financial statements and transactions of our United Kingdom real estate operation are recorded in their functional currency, namely the Great Britain Pound ("GBP") and are then translated into U.S. dollars ("USD").
Assets and liabilities of this operation are denominated in the functional currency and are then translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the reporting period. Translation adjustments are reported in "Accumulated Other Comprehensive Income (Loss)," a component of Shareholders' Equity.
The carrying value of our United Kingdom assets and liabilities fluctuate due to changes in the exchange rate between the USD and the GBP. The exchange rate of the USD to the GBP was $1.7109 and $1.6573 at June 30, 2014 and December 31, 2013, respectively. The profit and loss weighted average exchange rate of the USD to the GBP was approximately $1.6764 and $1.5312 for the three months ended June 30, 2014 and 2013, respectively; and approximately $1.6675 and $1.5524 for the six months ended June 30, 2014 and 2013, respectively.
The carrying value of our assets and liabilities held within our joint venture in Europe (the "European JV") fluctuate due to changes in the exchange rate between the USD and the EUR. The exchange rate of the USD to the EUR was $1.3693 and $1.3753 at June 30, 2014 and December 31, 2013. The profit and loss weighted average exchange rate of the USD to the EUR was approximately $1.3757 and $1.2993 for the three months ended June 30, 2014 and 2013, respectively; and approximately $1.3718 and $1.3131 for the six months ended June 30, 2014 and 2013, respectively.
Transition and Listing Expenses
We incurred certain costs in connection with our transition from being an externally managed company to a self-managed company ("Transition Costs"). These Transition Costs consist of legal, consulting and other third-party service provider costs incurred by us in order to execute on our Board of Trustees' decision to become a self-managed company. The Transition Costs were primarily incurred during 2012, with the exception of $0.7 million incurred during 2013 as a final settlement of the Transition Services Agreement.
We incurred certain costs in connection with our Listing and our Tender Offer in 2013. These listing expenses consisted of legal, investment banking, share-based compensation, consulting and other third-party service provider costs incurred by us in order to complete our Listing and Tender Offer. Listing costs totaling $12.0 million were incurred during the year ended December 31, 2013. Of the listing expenses incurred through December 31, 2013, $3.8 million was attributable to share-based compensation.
Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain). It is our current intention to adhere to these requirements and maintain our REIT qualification. As a REIT, we generally will not be subject to corporate level U.S. federal income tax on net income we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year, then we will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed taxable income, if any.
ASC 740-10 Income Taxes requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We did not have a liability for any unrecognized benefits as of June 30, 2014. The tax years from 2010 through 2013 remain open to examination by the taxing jurisdictions to which the Company is subject.
Included as a component of our tax provision, we have incurred income and other taxes (franchise, local and state government and international) related to our continuing operations in the amount of $381,000 and $151,000 during the three months ended June 30, 2014 and 2013, respectively; and 439,000 and 220,000 during the six months ended June 30, 2014 and 2013, respectively. The United Kingdom taxes real property operating results at a statutory rate of 20%. The United Kingdom taxable losses to date have generated a deferred tax asset of approximately $0.6 million consisting of these net operating loss carryforwards. We have provided for a full valuation allowance of $0.6 million

9
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


as of June 30, 2014 on deferred tax assets because it is not likely that future operating profits in the United Kingdom would be sufficient to absorb the net operating losses.
Reclassifications
To better present our condensed consolidated balance sheets and condensed consolidated statements of operations we have chosen to combine certain line items together instead of disclosing them as separate line items.
We have reclassified amounts related to property management general and administrative expense for the three and six months ended June 30, 2013 of $0.3 million and $0.5 million, respectively, from "General and Administrative" expense to "Property Operating" expense, which represents a newly created line item.
Property operating expenses include insurance, property management, repairs and maintenance, security, janitorial, landscaping and other administrative expenses incurred to operate our properties. General and administrative expenses represent costs unrelated to property operations or transaction costs. These expenses primarily include corporate office expenses, employee compensation and benefits as well as costs of being a public company including certain audit fees, regulatory fees, legal costs and other professional fees.
None of the reclassifications reflect corrections of any amounts.
New Accounting Standards
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires only disposals represented a strategic shift in operations (i.e., a disposal of a major geographic area, a major line of business, or a major equity method investment) to be presented as discontinued operations. The standard also requires expanded disclosures about discontinued operations and is intended to provide financial statement users with information about the ongoing trends in a company's results from continuing operations. ASU No. 2014-08 is effective in the first quarter of 2015 for public entities with calendar year ends. However, companies are permitted to early adopt the standard, beginning in the first quarter of 2014, but only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. We early adopted this standard in the first quarter of 2014 and the adoption did not have a material effect on our financial condition, results of operations, or disclosures.
In May 2014, the FASB and IASB issued their final standard on revenue from contracts with customers. The standard, issued by the FASB as ASU 2014-09, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including the guidance on real estate derecognition for most transactions. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in ASU 2014-09. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. We are assessing the impact of this guidance on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The ASU 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. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. ASU No. 2014-12 will be effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015, and early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

10
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


3. Investment in Real Estate Activity
Wholly-Owned Property Acquisitions
During the six months ended June 30, 2014, we acquired the property listed below. The acquisition was funded with proceeds from our unsecured revolving credit facility and proceeds from the sale of certain of our properties during the fourth quarter of 2013.
Property
 
Market
 
Date of
Acquisition
 
Purchase
Price ('000s)
 
Net
Rentable
Square
Feet
 
% Leased at 6/30/14
 
 
 
 
 
 
 
 
Property Type
445 Airtech Parkway(1)
 
Indianapolis
 
IN
 
1/2/2014
 
$
30,200

 
622,440

 
100%
 
Industrial
Total 2014 Wholly-Owned Property Acquisitions
 
$
30,200

 
622,440

 
 
 
 
________
(1)
The purchase price includes a $2.8 million deposit paid during the fourth quarter of 2013.
The following table summarizes the preliminary allocation of the fair value of amounts recognized for each major class of assets and liabilities (in thousands):
 
 
445 Airtech Parkway
Land
 
$
5,975

Land Available for Expansion
 
1,121

Building and Improvements
 
18,690

Acquired In-Place Leases(1)
 
2,529

Acquired Above-Market Leases(1)
 
1,885

Total Acquired Assets
 
$
30,200

__________
(1)
Represents in-place leases and above-market leases with a weighted average amortization period of 9.92 years.

The following table summarizes the results of operations for 445 Airtech Parkway, from January 2, 2014, the date of acquisition, through June 30, 2014 (in thousands):
Revenues
$
1,105

Net Income
$
267

Unaudited pro forma results, assuming the acquisition of 445 Airtech Parkway had occurred as of January 1, 2013, are presented below. Non-recurring acquisition costs totaling $0.3 million are excluded from the 2014 pro forma results and are included in the six months ended June 30, 2013 as an operating expense.

11
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as increased depreciation and amortization expenses as a result of tangible and intangible assets acquired in the acquisitions. These unaudited pro forma results do not purport to be indicative of what operating results would have been had the acquisitions actually occurred on January 1, 2013 and may not be indicative of future operating results (in thousands, except share data).
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues from Continuing Operations
$
66,628

 
$
67,104

 
$
134,793

 
$
121,093

Net Operating Income from Continuing Operations
47,771

 
47,905

 
96,582

 
88,222

Net Income (Loss) Attributable to Common Shareholders


5,153

 
(3,444
)
 
8,762

 
78,533

Basic and Diluted Net Income (Loss) per Share Attributable to Common Shareholders
$
0.02

 
$
(0.01
)
 
$
0.04

 
$
0.32

Weighted Average Common Shares Outstanding - Basic and Diluted
237,000,613

 
248,224,851

 
236,793,334

 
248,350,481


12
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


4. Investments in Unconsolidated Entities
As of June 30, 2014 and December 31, 2013, we owned the following number of properties through unconsolidated entities:
 
Ownership %
 
Number of Properties
 
 
June 30,
 
December 31,
 
 
2014
 
2013
Duke JV
80.0%
 
17

 
18

European JV
80.0%
 
9

 
9

UK JV
80.0%
 
3

 
3

CBRE Strategic Partners Asia
5.07%
 
3

 
3

 
 
 
32

 
33

Investments in unconsolidated entities at June 30, 2014 and December 31, 2013 consist of the following (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Duke JV
$
271,711

 
$
292,548

European JV
166,995

 
174,272

UK JV
37,171

 
36,794

Afton Ridge(1)
1,040

 
1,512

CBRE Strategic Partners Asia
9,535

 
9,676

 
$
486,452

 
$
514,802

__________
(1)
Amount represents cash and an escrow holdback at the joint venture. The Afton Ridge Shopping Center was sold during December 2013.

The following is a summary of the investments in unconsolidated entities for the six months ended June 30, 2014 and the year ended December 31, 2013 (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Investment Balance, January 1
$
514,802

 
$
515,829

Contributions
6,351

 
210,745

Company's Equity in Net Income (including adjustments for basis differences)
7,438

 
12,111

Other Comprehensive Income of Unconsolidated Entities
160

 
7,293

Conversion of Duke JV Equity Investment to Controlling Interest
—

 
(139,558
)
Distributions
(42,299
)
 
(91,618
)
Investment Balance, End of Period
$
486,452

 
$
514,802


13
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


The combined balance sheets of our investments in unconsolidated entities at June 30, 2014 are as follows (in thousands):
 
Duke JV
 
European JV
 
Other
 
Total
 
 
 
 
Assets
 
 
 
 
 
 
 
Investments in Real Estate
$
382,693

 
$
344,087

 
$
244,113

 
$
970,893

Other Assets
43,444

 
31,109

 
11,688

 
86,241

Total Assets
$
426,137

 
$
375,196

 
$
255,801

 
$
1,057,134

Liabilities and Equity
 
 
 
 
 
 
 
Secured Notes Payable, net
$
79,051

 
$
152,978

 
$
—

 
$
232,029

Other Liabilities
8,029

 
13,474

 
16,568

 
38,071

Total Liabilities
87,080

 
166,452

 
16,568

 
270,100

CSP Equity
271,711

 
166,995

 
47,746

 
486,452

Other Investors' Equity
67,346

 
41,749

 
191,487

 
300,582

Total Liabilities and Equity
$
426,137

 
$
375,196

 
$
255,801

 
$
1,057,134

The combined balance sheets of our investments in unconsolidated entities at December 31, 2013 are as follows (in thousands):
 
Duke JV
 
European JV
 
Other
 
Total
 
 
 
 
Assets
 
 
 
 
 
 
 
Investments in Real Estate(1)
$
403,818

 
$
343,642

 
$
243,370

 
$
990,830

Other Assets
52,086

 
35,872

 
15,713

 
103,671

Total Assets
$
455,904

 
$
379,514

 
$
259,083

 
$
1,094,501

Liabilities and Equity
 
 
 
 
 
 
 
Secured Notes Payable, net
$
79,761

 
$
153,651

 
$
—

 
$
233,412

Other Liabilities
11,055

 
8,023

 
17,146

 
36,224

Total Liabilities
90,816

 
161,674

 
17,146

 
269,636

CSP Equity
292,549

 
174,272

 
47,981

 
514,802

Other Investors' Equity
72,539

 
43,568

 
193,956

 
310,063

Total Liabilities and Equity
$
455,904

 
$
379,514

 
$
259,083

 
$
1,094,501

__________
(1)
Includes REIT Basis Adjustments for costs incurred by the Company outside of the Duke JV that are directly capitalizable to its investment in real estate assets acquired, including acquisition costs paid to our former investment advisor prior to January 1, 2009.

14
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


The combined statements of operations for our investments in unconsolidated entities for the three months ended June 30, 2014 and June 30, 2013 are as follows (in thousands):
 
Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
Duke JV
 
European JV
 
Other
 
Total
 
Duke JV
 
European JV
 
Other
 
Total
Total Revenue
$
14,693

 
$
7,783

 
$
1,253

 
$
23,729

 
$
16,552

 
$
4,537

 
$
21,416

 
$
42,505

Operating Expenses
4,293

 
863

 
722

 
5,878

 
5,343

 
745

 
970

 
7,058

Net Operating Income
10,400

 
6,920

 
531

 
17,851

 
11,209

 
3,792

 
20,446

 
35,447

Depreciation and Amortization
6,683

 
3,087

 
528

 
10,298

 
7,721

 
1,814

 
908

 
10,443

Interest Expense
1,035

 
1,165

 
—

 
2,200

 
3,520

 
552

 
376

 
4,448

Net Income (Loss)
2,682

 
2,668

 
3

 
5,353

 
(32
)
 
1,426

 
19,162

 
20,556

Company Share in Net Income (Loss)
2,146

 
2,134

 
362

 
4,642

 
(26
)
 
1,141

 
1,503

 
2,618

Adjustments for REIT basis
(30
)
 
—

 
—

 
(30
)
 
(38
)
 
—

 
(5
)
 
(43
)
CSP Equity in Net Income (Loss)
$
2,116

 
$
2,134

 
$
362

 
$
4,612

 
$
(64
)
 
$
1,141

 
$
1,498

 
$
2,575

The combined statements of operations for our investments in unconsolidated entities for the six months ended June 30, 2014 and June 30, 2013 are as follows (in thousands):
 
Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
Duke JV
 
European JV
 
Other
 
Total
 
Duke JV
 
European JV
 
Other
 
Total
Total Revenue
$
29,353

 
$
15,119

 
$
854

 
$
45,326

 
$
33,171

 
$
9,627

 
$
28,810

 
$
71,608

Operating Expenses
9,329

 
1,992

 
1,467

 
12,788

 
10,808

 
1,912

 
3,482

 
16,202

Net Operating Income
20,024

 
13,127

 
(613
)
 
32,538

 
22,363

 
7,715

 
25,328

 
55,406

Depreciation and Amortization
14,199

 
6,016

 
1,051

 
21,266

 
15,533

 
3,281

 
1,840

 
20,654

Interest Expense
2,075

 
2,298

 
—

 
4,373

 
7,036

 
1,108

 
752

 
8,896

Income from Continuing Operations
3,750

 
4,813

 
(1,664
)
 
6,899

 
(206
)
 
3,326

 
22,736

 
25,856

Income from Discontinued Operations
—

 
—

 
—

 
—

 
2,268

 
—

 
—

 
2,268

Net Income
3,750

 
4,813

 
(1,664
)
 
6,899

 
2,062

 
3,326

 
22,736

 
28,124

Company Share in Net Income
3,000

 
3,850

 
649

 
7,499

 
1,650

 
2,661

 
2,140

 
6,451

Adjustments for REIT basis
(61
)
 
—

 
—

 
(61
)
 
497

 
—

 
(9
)
 
488

CSP Equity in Net Income
$
2,939

 
$
3,850

 
$
649

 
$
7,438

 
$
2,147

 
$
2,661

 
$
2,131

 
$
6,939

Investments in Unconsolidated Entities Activity

On January 16, 2014, the Duke JV sold one multi-tenant office property located in Chicago, Illinois for approximately $13.1 million, of which our pro rata share was approximately $10.5 million.

15
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


5. Deferred Leasing Costs and Intangible Assets and Liabilities
The following table summarizes our deferred leasing costs and intangible assets, including acquired above-market leases and acquired in-place leases and intangible liabilities, including acquired below-market leases and acquired above-market ground lease obligations (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Deferred Leasing Costs and Intangible Assets, Net:
 
 
 
Deferred Leasing Costs
$
13,135

 
$
11,243

Accumulated Amortization
(3,736
)
 
(3,016
)
Deferred Leasing Costs, Net
9,399

 
8,227

Above-Market Leases
79,065

 
77,180

Accumulated Amortization
(38,526
)
 
(33,577
)
Above-Market Leases, Net
40,539

 
43,603

In-Place Leases
324,702

 
321,776

Accumulated Amortization
(143,741
)
 
(124,734
)
In-Place Leases, Net
180,961

 
197,042

Total Deferred Leasing Costs and Intangible Assets, Net
$
230,899

 
$
248,872

 
 
 
 
Intangible Liabilities, Net:
 
 
 
Below-Market Leases
$
49,786

 
$
49,751

Accumulated Amortization
(25,098
)
 
(23,022
)
Below-Market Leases, Net
24,688

 
26,729

Above-Market Ground Lease Obligation
1,500

 
1,501

Accumulated Amortization
(194
)
 
(160
)
Above-Market Ground Lease Obligation, Net
1,306

 
1,341

Total Intangible Liabilities, Net
$
25,994

 
$
28,070

The following table sets forth amortization related to intangible assets and liabilities for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Deferred Leasing Costs(1)
$
364

 
$
233

 
$
718

 
$
462

Above-Market Leases(2)
2,433

 
2,903

 
4,948

 
5,237

In-Place Leases(1)
9,284

 
9,862

 
18,753

 
17,502

Below-Market Leases(2)
(1,032
)
 
(1,204
)
 
(2,065
)
 
(2,165
)
Above-Market Ground Lease Obligation(3)
(17
)
 
(18
)
 
(35
)
 
(35
)
__________
(1)
The amortization of deferred leasing costs and in-place leases are recorded to depreciation and amortization expense in the condensed consolidated statements of operations for the periods presented.
(2)
The amortization of above-market leases and below-market leases are recorded as reductions and additions to rental income, respectively, in the condensed consolidated statements of operations for the periods presented.
(3)
The amortization of the above-market ground lease obligation is recorded as a decrease to property operating expense in the condensed consolidated statements of operations for the periods presented.

16
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


The following is a schedule of future amortization of deferred leasing costs, intangible assets and liabilities as of June 30, 2014 (in thousands):
 
Intangible Assets
 
Intangible Liabilities
 
Deferred Leasing Costs
 
Acquired
Above-Market
Leases
 
Acquired
In-Place
 Leases
 
Acquired
Below-Market
Leases
 
Above-Market
Ground Lease
Obligations
Remaining 2014
$
739

 
$
4,722

 
$
18,224

 
$
2,065

 
$
35

2015
1,377

 
9,272

 
34,676

 
3,962

 
71

2016
1,254

 
5,730

 
27,886

 
3,383

 
71

2017
1,119

 
4,589

 
23,450

 
2,891

 
71

2018
1,075

 
4,087

 
20,545

 
2,572

 
71

Thereafter
3,835

 
12,139

 
56,180

 
9,815

 
987

 
$
9,399

 
$
40,539

 
$
180,961

 
$
24,688

 
$
1,306

6. Debt
Secured Debt
Secured notes payable are summarized as follows (in thousands):
Property
 
Stated
Interest Rate
 
Effective Interest Rate(1)
 
Maturity Date
 
Outstanding Balance
 
 
 
 
June 30,
 
December 31,
 
 
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
Maskew Retail Park - Swapped to Fixed(2)
 
5.68%
 
5.68%
 
8/10/2014
 
$
23,909

 
$
23,161

12650 Ingenuity Drive(3)
 
5.62%
 
7.50%
 
10/1/2014
 
11,617

 
11,842

Bolingbrook Point III
 
5.26%
 
5.26%
 
1/1/2015
 
7,900

 
7,900

One Wayside Road
 
5.66%
 
5.25%
 
8/1/2015
 
13,148

 
13,352

One Wayside Road
 
5.92%
 
5.25%
 
8/1/2015
 
11,013

 
11,169

Lakeside Office Center
 
6.03%
 
6.03%
 
9/1/2015
 
8,681

 
8,743

Deerfield Commons I
 
5.23%
 
5.23%
 
12/1/2015
 
9,210

 
9,290

Celebration Office Center III(4)
 
4.25%
 
2.50%
 
12/1/2015
 
8,908

 
8,998

22535 Colonial Pkwy(4)
 
4.25%
 
2.50%
 
12/1/2015
 
7,971

 
8,051

Northpoint III(4)
 
4.25%
 
2.50%
 
12/1/2015
 
10,316

 
10,419

Goodyear Crossing II(4)
 
4.25%
 
2.50%
 
12/1/2015
 
19,692

 
19,891

3900 North Paramount Parkway(4)
 
4.25%
 
2.50%
 
12/1/2015
 
7,736

 
7,815

3900 South Paramount Parkway(4)
 
4.25%
 
2.50%
 
12/1/2015
 
7,736

 
7,815

1400 Perimeter Park Drive(4)
 
4.25%
 
2.50%
 
12/1/2015
 
2,344

 
2,368

Miramar I(4)
 
4.25%
 
2.50%
 
12/1/2015
 
9,191

 
9,283

Miramar II(4)
 
4.25%
 
2.50%
 
12/1/2015
 
12,378

 
12,503

70 Hudson Street
 
5.65%
 
5.15%
 
4/11/2016
 
115,109

 
116,100

Point West I - Swapped to Fixed
 
3.41%
 
3.41%
 
12/6/2016
 
10,879

 
11,041

100 Tice Blvd
 
5.97%
 
4.38%
 
9/15/2017
 
19,256

 
19,544

100 Tice Blvd
 
5.97%
 
4.38%
 
9/15/2017
 
19,256

 
19,543

4701 Gold Spike Drive(5)
 
4.45%
 
4.45%
 
3/1/2018
 
10,057

 
10,154


17
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Property
 
Stated
Interest Rate
 
Effective Interest Rate(1)
 
Maturity Date
 
Outstanding Balance
 
 
 
 
June 30,
 
December 31,
 
 
 
 
2014
 
2013
1985 International Way(5)
 
4.45%
 
4.45%
 
3/1/2018
 
6,988

 
7,055

3770 Deerpark Boulevard(5)
 
4.45%
 
4.45%
 
3/1/2018
 
7,224

 
7,294

Tolleson Commerce Park II(5)
 
4.45%
 
4.45%
 
3/1/2018
 
4,344

 
4,386

20000 S. Diamond Lake Road(5)
 
4.45%
 
4.45%
 
3/1/2018
 
6,327

 
6,388

Atrium I - Swapped to Fixed
 
3.78%
 
3.78%
 
5/31/2018
 
22,048

 
22,516

McAuley Place
 
3.98%
 
3.50%
 
9/1/2018
 
13,049

 
13,230

Easton III - Swapped to Fixed
 
3.95%
 
3.95%
 
1/31/2019
 
6,373

 
6,466

90 Hudson Street
 
5.66%
 
5.26%
 
5/1/2019
 
104,126

 
104,928

Fairforest Bldg. 6
 
5.42%
 
6.50%
 
6/1/2019
 
1,921

 
2,086

North Rhett I
 
5.65%
 
6.50%
 
8/1/2019
 
2,185

 
2,405

Kings Mountain II
 
5.47%
 
6.50%
 
1/1/2020
 
3,759

 
4,043

North Rhett II
 
5.20%
 
6.50%
 
10/1/2020
 
1,528

 
1,628

Mount Holly Bldg.
 
5.20%
 
6.50%
 
10/1/2020
 
1,528

 
1,628

Orangeburg Park Bldg.
 
5.20%
 
6.50%
 
10/1/2020
 
1,554

 
1,656

Kings Mountain I
 
5.27%
 
6.50%
 
10/1/2020
 
1,324

 
1,411

Ten Parkway North
 
4.75%
 
4.75%
 
1/1/2021
 
11,625

 
11,777

Union Cross Bldg. II
 
5.53%
 
6.50%
 
6/1/2021
 
6,118

 
6,471

Union Cross Bldg. I
 
5.50%
 
6.50%
 
7/1/2021
 
2,009

 
2,124

Norman Pointe I
 
5.24%
 
3.50%
 
10/1/2021
 
20,347

 
20,512

Norman Pointe II
 
5.24%
 
3.50%
 
10/1/2021
 
22,401

 
22,583

The Landings I
 
5.24%
 
3.50%
 
10/1/2021
 
15,313

 
15,437

The Landings II
 
5.24%
 
3.50%
 
10/1/2021
 
13,506

 
13,616

Fairforest Bldg. 5
 
6.33%
 
6.50%
 
2/1/2024
 
7,982

 
8,277

North Rhett IV
 
5.80%
 
6.50%
 
2/1/2025
 
8,142

 
8,414

Avion Midrise III & IV(6)
 
5.52%
 
7.00%
 
4/1/2014
 
—

 
19,979

Total Secured Notes Payable
 
 
 
 
 
 
 
638,028

 
665,292

Plus Premium
 
 
 
 
 
 
 
15,204

 
17,294

Less Discount
 
 
 
 
 
 
 
(1,066
)
 
(1,386
)
Total Secured Notes Payable, Net
 
 
 
 
 
 
 
$
652,166

 
$
681,200

__________
(1)
Represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of any discounts/premiums, excluding debt issuance costs.
(2)
The loan is subject to certain financial covenants (interest coverage and loan to value). The loan was paid off in full on July 23, 2014 prior to the maturity date.
(3)
This loan was paid off in full on July 1, 2014.
(4)
These nine loans are cross-collateralized.
(5)
These five loans are cross-collateralized.
(6)
This loan was paid off in full on January 2, 2014.

18
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Unsecured Term Loan Facilities
The terms of our unsecured term loan facilities and outstanding balances as of June 30, 2014 and December 31, 2013 are set forth in the table below (in thousands):
Term Loan Facility
 
Unswapped Interest Rate
 
Effective Interest Rate(1)
 
Maturity Date
 
Outstanding Balance
 
 
 
 
June 30,
 
December 31,
 
 
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
WF Term Loan #2(2)
 
LIBOR + 1.50%
 
2.49%
 
3/7/2018
 
$
200,000

 
$
200,000

WF Term Loan #3(2)
 
LIBOR + 1.50%
 
3.12%
 
1/15/2019
 
200,000

 
200,000

TD Term Loan(3)
 
LIBOR + 1.75%
 
3.28%
 
3/6/2020
 
50,000

 
50,000

Capital One Term Loan(2)
 
LIBOR + 1.75%
 
4.32%
 
1/31/2021
 
120,000

 
120,000

Total Unsecured Term Loan Facilities
 
 
 
 
 
 
 
$
570,000

 
$
570,000

__________
(1)
Represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the effect of the interest rate swaps, excluding debt issuance costs.
(2)
As of June 30, 2014 and December 31, 2013, the applicable LIBOR rate was 0.151% and 0.165%, respectively, for these loans.
(3)
As of June 30, 2014 and December 31, 2013, the applicable LIBOR rate was 0.151% and 0.16875%, respectively, for this loan.

Unsecured Revolving Credit Facility
The terms of our unsecured revolving credit facility are set forth in the table below (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Outstanding Borrowings
$
170,044


$
170,044

Remaining Borrowing Capacity
679,956


679,956

Total Borrowing Capacity
$
850,000


$
850,000

Interest Rate(1)
1.45
%

1.47
%
Facility Fee(2)
30 bps


30 bps

Maturity Date(3)
January 15, 2018


January 15, 2018

__________
(1)
Calculated based on one-month LIBOR plus 1.30% and 1.30% as of June 30, 2014 and December 31, 2013, respectively.
(2)
The facility fee is based on the unsecured revolving credit facility's total borrowing capacity.
(3)
We may exercise an option to extend the maturity date by one year.
Debt Covenants and Restrictions
Certain of our secured notes payable are subject to certain financial covenants (interest coverage and loan to value).
As of June 30, 2014, our unsecured term loan facilities and revolving credit facility were subject to certain financial covenants that require, among other things: the maintenance of (i) a leverage ratio of not more than 0.60; (ii) a fixed charge coverage ratio of at least 1.50; (iii) a secured leverage ratio of not more than (a) 0.45 prior to September 30, 2014 for the Capital One Term Loan, March 6, 2015 for WF Term Loan #2, WF Term Loan #3, and unsecured revolving credit facility, or September 26, 2015 for the TD Term Loan, or (b) 0.40 thereafter; (iv) an unencumbered leverage ratio of not more than 0.60; (v) an unencumbered interest-service coverage ratio of at least 1.75; (vi) minimum tangible net worth of $1.5 billion plus 85% of the net proceeds of certain future equity issuances; and (vii) unencumbered asset value of at least $400.0 million. In addition, our unsecured term loan facilities and revolving credit facility contain a number of customary non-financial covenants including those restricting liens, mergers, sales of assets, certain investments in unimproved land and mortgage receivables, intercompany transfers, transactions with affiliates and distributions. The Company and certain of its subsidiaries have provided guarantees

19
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


in connection with our unsecured term loan facilities and revolving credit facility. As of June 30, 2014, we were in compliance with all financial debt covenants.
The minimum principal payments due for our secured notes payable, unsecured term loan facilities and unsecured revolving credit facility are as follows as of June 30, 2014 (in thousands):
Remaining 2014
$
43,370

2015
148,476

2016
134,179

2017
46,355

2018
442,113

Thereafter
563,579

 
$
1,378,072

7. Risk Management and Use of Financial Instruments
Risk Management
In the course of our ongoing business operations, we encounter economic risk. There are three main components of economic risk: interest rate risk, credit risk and market risk. We are subject to interest rate risk on our interest-bearing liabilities. Credit risk is primarily the risk of inability or unwillingness of tenants to make contractually required payments and of counterparties on derivatives contracts to fulfill their obligations. Market risk is the risk of declines in the value of our properties due to changes in rental rates, interest rates, supply and demand of similar products and other market factors affecting the valuation of properties.
Derivative Financial Instruments
We utilize interest rate swaps to mitigate the effects of interest rate fluctuations on our variable-rate loans. Our strategy is to use a swap to convert the floating-rate borrowing (usually a secured note payable or an unsecured term loan facility) where LIBOR is consistently applied into a fixed-rate obligation with the only variable piece remaining is the spread between different reset dates when/if the swap and debt are not lined up. We generally enter into an interest rate swap agreement concurrently with the origination of the variable-rate loan for an equivalent principal amount for a period covering the term of the loan, which effectively converts our variable-rate debt to a fixed-rate loan. Our use of derivative instruments, including swaps, is limited by policy to hedging or mitigating commercial risk and we do not use derivative instruments for speculative, trading or investment purposes.

20
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


The following table sets forth the terms of our interest rate swaps at June 30, 2014 and December 31, 2013 (amounts in thousands):
 
Notional Amount
 
Fair Value
 
Rate
 
 
 
 
Type of Instrument
June 30,
 
December 31,
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
Index
 
Maturity Date
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
Interest Rate Swap
$
23,909

 
$
23,161

 
$
(79
)
 
$
(398
)
 
2.9
%
 
2.9
%
 
GBP LIBOR(1)
 
8/10/2014
Interest Rate Swap(2)
10,879

 
11,041

 
(193
)
 
(205
)
 
1.3
%
 
1.2
%
 
LIBOR
 
12/6/2016
Interest Rate Swap(3)
200,000

 
200,000

 
1,268

 
2,854

 
0.8
%
 
0.8
%
 
LIBOR
 
3/7/2018
Interest Rate Swap(2)
22,048

 
22,516

 
(451
)
 
(361
)
 
1.6
%
 
1.6
%
 
LIBOR
 
5/31/2018
Interest Rate Swap
200,000

 
200,000

 
(1,642
)
 
667

 
1.5
%
 
1.4
%
 
LIBOR
 
1/15/2019
Interest Rate Swap(2)
6,373

 
6,466

 
(143
)
 
(86
)
 
1.8
%
 
1.8
%
 
LIBOR
 
1/31/2019
Interest Rate Swap(3)
50,000

 
50,000

 
623

 
1,690

 
1.4
%
 
1.3
%
 
LIBOR
 
3/6/2020
Interest Rate Swap
120,000

 
120,000

 
(4,615
)
 
(1,515
)
 
2.4
%
 
2.4
%
 
LIBOR
 
1/31/2021
__________
(1)
Based on the three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps.
(2)
We assumed this swap in connection with the purchase of the Duke Portfolio on March 1, 2013. This swap is considered a hedging instrument under ASC 815-20 as of June 30, 2014. The swap was not considered a hedging instrument under ASC 815-20 during the period from March 1, 2013 to March 31, 2013.
(3)
We entered into these swaps in connection with the origination of the TD Term Loan and WF Term Loan #1 in March 2013. These swaps are considered hedging instruments under ASC 815-20 as of June 30, 2014. These swaps were not considered hedging instruments under ASC 815-20 during the period from March 11, 2013 and March 12, 2013, respectively, to May 29, 2013.
We record all derivative instruments on a gross basis in the condensed consolidated balance sheets. Accordingly, there are no offsetting amounts that net assets against liabilities. The asset and liability balances presented in the table below reflects the gross amounts of derivatives recorded in the consolidated balance sheets (in thousands):
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value
 
 
 
Fair Value
 
 
 
June 30,
 
December 31,
 
 
 
June 30,
 
December 31,
Type of Instrument
Balance Sheet Location
 
2014
 
2013
 
Balance Sheet Location
 
2014
 
2013
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest Rate Swaps
Prepaid Expenses and Other Assets
 
$
1,892

 
$
5,211

 
Accounts Payable, Accrued Expenses and Other Liabilities
 
$
7,124

 
$
2,565


21
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


The table below presents the effect of our derivative instruments on our consolidated statement of operations for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
(Loss) Gain Recognized in Other Comprehensive Income (OCI) (Effective Portion)
$
(7,497
)
 
$
4,630

 
$
(12,586
)
 
$
3,447

Loss Reclassified from AOCI into Interest Expense (Effective Portion)
(2,367
)
 
(581
)
 
(4,695
)
 
(776
)
Net Change in Fair Value of Derivative Financial Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(14
)
 
6

 
12

 
6

 
 
 
 
 
 
 
 
Derivatives Not Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
Realized and Unrealized Loss Recognized in Net Change in Fair Value of Non-Qualifying Interest Rate Swaps
$
—

 
$
2,383

 
$
—

 
$
1,466

Net Settlement Payments from Non-Qualifying Interest Rate Swaps
—

 
(704
)
 
$
—

 
$
(1,047
)
At June 30, 2014, the Company expects that the hedged forecasted transactions, for each of the outstanding qualifying cash flow hedging relationships, remains probable of occurring. During the next twelve months we anticipate reclassifying $8.6 million of amounts currently recorded in accumulated other comprehensive income to earnings.
Concentration of Credit Risk
Our credit risk relates primarily to cash, restricted cash, and interest rate swap agreements. Cash accounts at each U.S. institution are insured by the Federal Deposit Insurance Corporation up to $250,000 through December 31, 2014.
We have not experienced any losses to date on our invested cash and restricted cash. The interest rate swap agreements create credit risk. Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of their contracts. Our risk management policies define parameters of acceptable market risk and limit exposure to credit risk. Credit exposure resulting from derivative financial instruments is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from changes over time in interest rates, maturities, and other relevant factors. We do not anticipate nonperformance by any of our counterparties.
Our consolidated properties are located throughout the United States and in the United Kingdom. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory, and social factors affecting the communities in which the tenants operate. In addition, we do not have any tenant whose rents exceeds 10% of our total rental revenue.

22
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


8. Future Minimum Rents
The following is a schedule of future minimum rents to be received on non-cancelable operating leases from consolidated properties as of June 30, 2014 (in thousands):
Remaining 2014
$
102,611

2015
208,154

2016
190,108

2017
173,085

2018
161,301

Thereafter
551,586

 
$
1,386,845

9. Related Party Transactions
Prior to July 1, 2012, all of our business activities were managed by the former investment advisor pursuant to the fourth amended and restated advisory agreement ("Fourth Amended Advisory Agreement"), which terminated according to its terms on June 30, 2012. Effective July 1, 2012, we entered into the Transitional Services Agreement with the former investment advisor pursuant to which the former investment advisor would provide certain consulting related services to us at the direction of our officers and other personnel for a term which ended on April 30, 2013. As part of the Transitional Services Agreement, we paid $2.5 million on the effective date of the agreement to reimburse the former investment advisor for expenses incurred related to personnel costs. In addition, during 2013, we paid $0.7 million to the former investment advisor as a final settlement of the Transitional Services Agreement.
Pursuant to the Transitional Services Agreement, for services provided to us in connection with the investment management of our assets, the former investment advisor was paid an investment management consulting fee payable in cash consisting of (i) a monthly fee equal to one-twelfth of 0.5% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio, subject to certain adjustments. For services provided to us in connection with the acquisition of assets, the former investment advisor or its affiliates was paid acquisition fees up to 1.5% of (i) the contract purchase price of real estate investments acquired by us, or (ii) when we make an investment indirectly through another entity, such investment's pro rata share of the gross asset value of real estate investments held by that entity. The total of all acquisition consulting fees payable with respect to real estate investments did not exceed an amount equal to 6% of the contract purchase price (or 6% of funds advanced with respect to mortgages) provided, however, that a majority of the uninterested members of the Board of Trustees could approve amounts in excess of this limit.
As required by the Transitional Services Agreement, we and the former investment advisor have agreed on a list of unacquired real estate investments for which the former investment advisor has performed certain acquisition related consulting services prior to the termination of the Transitional Service Agreement (a "Qualifying Property"). If any Qualifying Property is acquired by us within the nine months following the termination of the Transitional Services Agreement then we shall pay an acquisition consulting fee equal to 0.75% of (i) the contract purchase price of the real estate investments (including debt), or (ii) when we make an investment indirectly through another entity, such investment's pro rata share of the gross asset value of real estate investments held by that entity to the former investment advisor.
During the six months ended June 30, 2014, we acquired one Qualifying Property and paid the former investment advisor $0.2 million in acquisition consulting fees. There are no further Qualifying Properties under the Transitional Services Agreement and we do not anticipate paying the former investment advisor any further acquisition consulting fees.

23
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Previously, pursuant to the Fourth Amended Advisory Agreement and the Transitional Services Agreement, the former investment advisor and its affiliates performed services relating to property management, leasing, construction supervision and management, and brokerage services. The various fees paid to the former investment advisor are summarized in the table below for the three and six months ended June 30, 2013 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2013
Investment Management Fees
$
(11
)
 
$
489

Transition Services Agreement Fees
686

 
686

Acquisition-Related Fees
—

 
1,472

Property Management Fees(1)
286

 
520

Leasing Commissions(1)
—

 
539

Construction Supervision and Management Fees
—

 
871

Total
$
961

 
$
4,577

__________
(1)
Such fees for each service ranged from 2.0% to 5.0% of gross revenues received from a property that we owned.
10. Equity Incentive Plan and Performance Bonus Plan
Equity Incentive Plan
At our annual shareholders' meeting held on May 31, 2013, our shareholders approved the 2013 equity incentive plan. A description of the material terms of the 2013 equity incentive plan, as well as a copy of the 2013 equity incentive plan, were included in our definitive proxy statement on Schedule 14A filed with the SEC on April 12, 2013. Our key employees, directors, trustees, officers, advisors, consultants or other personnel of ours and our subsidiaries or other persons expected to provide significant services to us or our subsidiaries would be eligible to be granted incentive share options, non-qualified share options, share appreciation rights, restricted shares, restricted share units, dividend equivalent rights and other equity-based awards as contemplated in the 2013 equity incentive plan. As of June 30, 2014, there were 4,041,992 common shares available for grant under the 2013 equity incentive plan.
On January 29, 2014, our Board's independent trustees, Messrs. Charles Black, Mark Brugger, James Francis, James Orphanides and Louis Salvatore, were awarded equity grants under the 2013 equity incentive plan on the following terms: (i) (x) Mr. Black's award was for 20,000 common shares, (y) Messrs. Orphanides and Salvatore each were awarded 5,000 common shares and (z) Messrs. Brugger and Francis each were awarded 1,550 common shares for a total of 33,100 and (ii) each award vested in its entirety, upon issuance.
On February 26, 2014, the Company and Operating Partnership entered into an amendment to Martin A. Reid's employment agreement, effective as of January 1, 2013, increasing Mr. Reid's annual target Long Term Incentive Award to 90,000 restricted common shares of the Company.
On March 15, 2014, a total of 401,875 restricted common shares were granted to our named executive officers (Messrs. Cuneo, Kianka and Reid) based on each executive's achievement of performance objectives during 2013, as determined at the discretion of our Compensation Committee. Additionally, 25 of our employees were granted 143,450 restricted common shares, in the aggregate, on March 15, 2014. One-third of the restricted shares granted to our named executive officers and employees will vest on each of the first three anniversaries of grant if the grantee is employed by the Company on such anniversary. Compensation expense is recognized on a straight-line basis over the service vesting period of three years. We recognized share-based compensation expense of $339,000 and $405,000 during the three and six months ended June 30, 2014 as a result of granting the awards to our named executive officers and our employees.

24
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Summary of Time-Based Restricted Common Shares
A summary of our Time-Based Restricted Common Shares from January 1, 2014 through June 30, 2014 is presented below:
 
Nonvested
 
 
 
Common
Shares
 
Weighted-Average
Grant Date
Fair Value
per Share
 
Vested
Outstanding at January 1, 2014
598,925

 
$
10.00

 
—

Granted
545,325

 
7.74

 
—

Vested 
(132,966
)
 
7.74

 
132,966

Forfeited
(22,917
)
 
8.40

 
—

Canceled(1)
—

 
—

 
(31,959
)
Outstanding as of June 30, 2014
988,367

 
$
9.09

 
101,007

__________
(1)
31,959 common shares were tendered in accordance with the terms of the 2013 equity incentive plan to satisfy minimum state tax withholding requirements related to the restricted common shares that have vested. We accept the return of shares at the current quoted closing share price of the Company's common shares on the NYSE to satisfy tax obligations.
 
2014
 
2013
 
(in thousands, except share data)
Compensation Expense Recorded During the Six Months ended June 30
$
1,924

 
$
4,556

Unamortized Compensation Costs
$
7,351

 
$
5,551

Shares Available for the Future Awards(1)
4,041,992

 
4,625,000

__________
(1)
Shares available for the future awards includes units under the 2013 equity incentive plan.
11. Shareholders' Equity
Common Shares
Under our current declaration of trust, we have the authority to issue a total of 1,000,000,000 shares of beneficial interest. Of the total shares authorized, 990,000,000 shares are designated as common shares, with a par value of $0.01 per share, and 10,000,000 shares are designated as preferred shares, with a par value of $0.01 per share.
At-The-Market Offering
On November 6, 2013, we and CSP OP entered into four separate Equity Distribution Agreements with certain sales agents, pursuant to which we may sell, from time to time, our common shares having an aggregate offering price of up to $250.0 million. Sales of our common shares may be made in ordinary brokers' transactions on the NYSE, in negotiated transactions or transactions that are deemed to be "at the market" ("ATM") offerings, including sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. We may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under our unsecured revolving credit facility, to make acquisitions of properties or portfolios of properties, or for general corporate purposes. As of June 30, 2014, there have been no sales of common shares under the ATM program.

25
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Accumulated Other Comprehensive Income (Loss)
The following presents the changes in the balances of each component of accumulated other comprehensive income (loss) for the six months ended June 30, 2014 and 2013 (in thousands):
 
Foreign Currency
Translation Gain
 
Swap Fair Value
Adjustment
 
Accumulated
Other Comprehensive
Income (Loss)
Balance at January 1, 2014
$
1,670

 
$
2,926

 
$
4,596

Other Comprehensive Income (Loss) Before Reclassifications
2,153

 
(12,586
)
 
(10,433
)
Amounts Reclassified from Accumulated Other Comprehensive Income
—

 
4,695

 
4,695

Balance at June 30, 2014
$
3,823

 
$
(4,965
)
 
$
(1,142
)
 
Foreign Currency
Translation Loss
 
Swap Fair Value
Adjustment
 
Accumulated
Other Comprehensive
Income (Loss)
Balance at January 1, 2013
$
(6,164
)
 
$
(2,423
)
 
$
(8,587
)
Other Comprehensive (Loss) Income Before Reclassifications
(7,476
)
 
3,443

 
(4,033
)
Amounts reclassified from Accumulated Other Comprehensive Income
—

 
776

 
776

Balance at June 30, 2013
$
(13,640
)
 
$
1,796

 
$
(11,844
)
12. Fair Value of Financial Instruments and Investments
We apply the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical financial instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
As of June 30, 2014 and December 31, 2013, we held certain items that were required to be measured at fair value on a recurring basis. These included cash equivalents, interest rate swap derivative contracts and our equity method investment in CBRE Strategic Partners Asia. Cash equivalents consist of short-term, highly liquid, income-producing investments, all of which have maturities of 90 days or less, including money market funds and U.S. Government obligations. Derivative instruments are related to our economic hedging activities with respect to interest rates.
The fair values of the interest rate swap derivative agreements are estimated with the assistance of a third-party valuation specialist using the market standard methodology of discounting the future expected cash payments and receipts on the pay and receive legs of the interest rate swap agreements that swap the estimated variable rate mortgage note payment stream for a fixed rate receive payment stream over the period of the loan. The variable interest rates used in the calculation of projected receipts on the interest rate swap agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements (where appropriate). 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 credit valuation adjustments 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, as of June 30, 2014 and December 31, 2013, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold.

26
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Our investment in CBRE Strategic Partners Asia is based on the Level 3 valuation inputs applied by the Investment Manager of this investment company utilizing a mix of different approaches for valuing the underlying real estate related investments within the investment company. The approaches include the income approach, direct market comparison approach and the replacement cost approach for newer properties. For investments owned more than one year, except for investments under construction or incurring significant renovation, it is CBRE Strategic Partners Asia’s policy to obtain a third-party appraisal. For investments in real estate under construction or incurring significant renovation, the valuation analysis is prepared by the Investment Manager. On a quarterly basis, the Company obtained financial results of CBRE Strategic Partners Asia and compares this information to benchmark data. In addition, the Company receives audited financial statements on an annual basis.
The following items are measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 (in thousands):
 
As of June 30, 2014
 
 
 
Fair Value Measurements Using:
 
Total
Fair Value
 
Quoted
Markets
Prices
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets (Liabilities)
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
10,572

 
$
10,572

 
$
—

 
$
—

Interest Rate Swaps Designated as Cash Flow Hedges - Assets
1,892

 
—

 
1,892

 
—

Interest Rate Swaps Designated as Cash Flow Hedges - Liabilities
(7,124
)
 
—

 
(7,124
)
 
—

Investment in CBRE Strategic Partners Asia
9,535

 
—

 
—

 
9,535

 
 
As of December 31, 2013
 
 
 
Fair Value Measurements Using:
 
Total
Fair Value
 
Quoted
Markets
Prices
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets (Liabilities)
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,069

 
$
1,069

 
$
—

 
$
—

Interest Rate Swaps Designated as Cash Flow Hedges - Assets
5,211

 
—

 
5,211

 
—

Interest Rate Swaps Designated as Cash Flow Hedges - Liabilities
(2,565
)
 
—

 
(2,565
)
 
—

Investment in CBRE Strategic Partners Asia
9,676

 
—

 
—

 
9,676

The following table presents our activity for our investment in CBRE Strategic Partners Asia and for the variable rate note payable measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2014 and 2013, respectively (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Investment in
CBRE Strategic
Partners Asia
Balance at January 1, 2014
 
$
9,676

Total Loss on Fair Value Adjustment
 
(141
)
Balance as of June 30, 2014
 
$
9,535



27
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Investment in
CBRE Strategic
Partners Asia
 
Secured notes payable - Albion Mills(1)
Balance at January 1, 2013
 
$
8,098

 
$
(9,288
)
Total Income (Loss) on Fair Value Adjustment
 
1,087

 
(57
)
Translation Adjustment in Other Comprehensive Income
 
—

 
592

Balance at June 30, 2013
 
$
9,185

 
$
(8,753
)
__________
(1)
We repaid the debt secured by Albion Mills Retail Park in October 2013.
Gains and losses (realized and unrealized) included in earnings related to the interest rate swaps, as well as for the elected fair value note payable for the three and six months ended June 30, 2014 and 2013, respectively, are reported as components of "Other Income and Expense" on the consolidated statements of operations.
Disclosure of Fair Value Financial Instruments
For disclosure purposes only, the following table summarizes our notes payable and their estimated fair value at June 30, 2014 and December 31, 2013 (in thousands):
 
 
Carrying Value
 
Fair Value
Financial Instrument
 
June 30, 2014
 
December 31, 2013
 
June 30, 2014
 
December 31, 2013
Secured Notes Payable(1)
 
$
652,166

 
$
681,200

 
$
715,182

 
$
721,728

Unsecured Term Loan Facilities(1)
 
$
570,000

 
$
570,000

 
$
577,050

 
$
570,272

Unsecured Revolving Credit Facility
 
$
170,044

 
$
170,044

 
$
170,044

 
$
170,044

__________
(1)
Items are measured using Level 2 inputs.
These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
13. Commitments and Contingencies
Ground Leases - We own a property that is subject to a long-term noncancellable ground lease obligation that contractually expires on November 30, 2032. We have three ten-year renewal options that will allow us to extend the expiration of the ground lease through November 30, 2062. The minimum commitment under the ground lease as of June 30, 2014 and thereafter is as follows (in thousands):
Remaining 2014
$
136

2015
273

2016
273

2017
273

2018
276

Thereafter
4,782

 
$
6,013


28
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


Litigation—From time to time, we and our properties may be subject to legal proceedings, which arise in the ordinary course of our business. Currently, neither our Company nor any of our properties are subject to, or threatened with, any legal proceedings for which the outcome is reasonably likely to have a material adverse effect on our financial statements.
Environmental Matters—We are not aware of any material environmental liability or any unasserted claim or assessment with respect to a material environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
14. Segment Disclosure
As a result of the reassessment of our reportable segments during the period ended March 31, 2014, we view our consolidated property operations as two reportable segments: Industrial Properties and Office Properties. In addition, we have one non-reportable segment, which is Retail Properties. We have also reclassified the prior period segment financial results to conform to the current year presentation. Management internally evaluates the operating performance and financial results of our segments based on net operating income. We also have certain general and administrative level activities including legal, accounting, tax preparation and shareholder servicing costs that are not considered separate operating segments.
We evaluate the performance of our segments based on net operating income, defined as: rental income, tenant reimbursements and other property income less property and related expenses (operating and maintenance and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and corporate general and administrative expenses.

29
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


The following table compares the net operating income for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Industrial Properties
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Rental
$
13,980

 
$
13,505

 
$
28,125

 
$
26,711

Tenant Reimbursements
4,249

 
5,565

 
7,970

 
8,797

Total Revenues
18,229

 
19,070

 
36,095

 
35,508

Property and Related Expenses:
 
 
 
 
 
 
 
Property Operating
1,215

 
921

 
2,706

 
1,879

Real Estate Taxes
3,601

 
4,943

 
6,730

 
7,562

Total Property and Related Expenses
4,816

 
5,864

 
9,436

 
9,441

Net Operating Income
$
13,413

 
$
13,206

 
$
26,659

 
$
26,067

Office Properties
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Rental
$
37,015

 
$
36,175

 
$
73,715

 
$
65,542

Tenant Reimbursements
10,300

 
10,339

 
21,776

 
16,955

Other Property Income
—

 
—

 
1,069

 
—

Total Revenues
47,315

 
46,514

 
96,560

 
82,497

Property and Related Expenses:
 
 
 
 
 
 
 
Property Operating
7,097

 
6,876

 
15,099

 
12,036

Real Estate Taxes
6,864

 
6,326

 
13,536

 
11,142

Total Property and Related Expenses
13,961

 
13,202

 
28,635

 
23,178

Net Operating Income
$
33,354

 
$
33,312

 
$
67,925

 
$
59,319

Retail Properties
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Rental
$
1,038

 
$
940

 
$
2,069

 
$
1,918

Tenant Reimbursements
46

 
32

 
69

 
65

Total Revenues
1,084

 
972

 
2,138

 
1,983

Property and Related Expenses:
 
 
 
 
 
 
 
Property Operating
80

 
49

 
140

 
87

Real Estate Taxes
—

 
—

 
—

 
—

Total Property and Related Expenses
80

 
49

 
140

 
87

Net Operating Income
$
1,004

 
$
923

 
$
1,998

 
$
1,896


30
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Reconciliation to Consolidated Net Income (Loss)
 
 
 
 
 
 
 
Total Segment Net Operating Income
$
47,771

 
$
47,441

 
$
96,582

 
$
87,282

Expenses:
 
 
 
 
 
 
 
General and Administrative
5,953

 
7,234

 
12,817

 
12,194

Investment Management Fee
—

 
(11
)
 
—

 
489

Acquisition-Related
—

 
162

 
290

 
2,003

Depreciation and Amortization
27,126

 
26,571

 
54,364

 
48,367

Transition and Listing Expenses
—

 
11,199

 
—

 
11,234

 
14,692

 
2,286

 
29,111

 
12,995

Other Expenses and Income
 
 
 
 
 
 
 
Interest and Other Income
151

 
280

 
318

 
487

Interest Expense
(13,907
)
 
(10,367
)
 
(27,968
)
 
(19,554
)
Interest Expense and Net Change in Fair Value of Non-Qualifying Derivative Financial Instruments
(14
)
 
1,679

 
12

 
419

(Loss) Gain on Conversion of Equity Investment to Controlling Interest
—

 
(32
)
 
—

 
77,203

Income (Loss) Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities

922

 
(6,154
)
 
1,473

 
71,550

Provision for Income Taxes
(381
)
 
(151
)
 
(439
)
 
(220
)
Equity in Income of Unconsolidated Entities
4,612

 
2,575

 
7,438

 
6,939

Income (Loss) from Continuing Operations
5,153

 
(3,730
)
 
8,472

 
78,269

Discontinued Operations
 
 
 
 
 
 
 
Income from Discontinued Operations
—

 
90

 
—

 
181

Total Income From Discontinued Operations
—

 
90

 
—

 
181

Net Income (Loss)
$
5,153

 
$
(3,640
)
 
$
8,472

 
$
78,450

 
June 30,
 
December 31
Condensed Assets
2014
 
2013
Industrial Properties
$
742,560

 
$
725,566

Office Properties
1,598,902

 
1,639,875

Retail Properties
51,288

 
50,209

Non-Segment Assets(1)
535,912

 
594,946

Total Assets
$
2,928,662

 
$
3,010,596

_________
(1)
Non-segment assets primarily include our investments in unconsolidated entities.

31
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


15. Earnings per Share Attributable to Common Shareholders
The following table reconciles the numerator and denominator in computing the Company's basic and diluted per-share computations for net income (loss) attributable to common shareholders for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands except share data):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Income (Loss) from Continuing Operations
$
5,153

 
$
(3,730
)
 
$
8,472

 
$
78,269

Loss (Income) from Continuing Operations Attributable to Noncontrolling Interests
—

 
4

 
—

 
(79
)
Allocation to Participating Securities (Nonvested Time-Based Shares)
(125
)
 
(105
)
 
(252
)
 
(210
)
Numerator for Basic and Diluted Income (Loss) from Continuing Operations
5,028

 
(3,831
)
 
8,220

 
77,980

Income from Discontinued Operations
—

 
90

 
—

 
181

Numerator for Basic and Diluted Net Income (Loss) Attributable to Common Shareholders
$
5,028

 
$
(3,741
)
 
$
8,220

 
$
78,161

Denominator:
 
 


 
 
 
 
Basic Weighted Average Vested Shares Outstanding
237,000,613

 
248,224,851

 
236,793,334

 
248,350,481

Effect of Dilutive Securities - Performance-Based Shares
—

 
—

 
—

 
—

Diluted Weighted Average Vested Shares Outstanding
237,000,613

 
248,224,851

 
236,793,334

 
248,350,481

Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Income (Loss) from Continuing Operations Attributable to Common Shareholders per Share
$
0.02

 
$
(0.02
)
 
$
0.03

 
$
0.31

Income from Discontinued Operations Attributable to Common Shareholders per Share
$
0.00

 
$
0.00

 
$
0.00

 
$
0.00

Net Income (Loss) Attributable to Common Shareholders per Share
$
0.02

 
$
(0.02
)
 
$
0.03

 
$
0.31

16. Subsequent Events
On July 1, 2014, we repaid a $11.6 million note payable prior to its maturity date of October 1, 2014.
On July 7, 2014, we amended the unsecured revolving credit facility and the unsecured term loan facilities ("unsecured loans") to reduce the Capitalization Rate, which is used to calculate the value of our assets for certain covenants under the unsecured loans, from 8.00% to 7.25%. There were no other changes to the terms of the unsecured loans in connection with this amendment.
On July 23, 2014, we sold Maskew Retail Park, our last retail property. Maskew Retail Park, a 144,400 square foot shopping center located in the United Kingdom, was sold for approximately $63.0 million. In connection with the sale, we paid off the secured note payable of approximately $23.8 million and terminated the related swap agreement.
On July 31, 2014, our Board of Trustees approved a monthly distribution of $0.042 per common share for each of the months of October, November and December of 2014. The October dividend will be paid on November 7, 2014 to all shareholders of record on October 30, 2014, the November dividend will be paid on December 8, 2014 to all shareholders of record on November 26, 2014, and the December dividend will be paid on January 7, 2015 to all shareholders of record on December 30, 2014.

32
CHAMBERS STREET PROPERTIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)


On July 31, 2014, we acquired 1 Rocket Road located in Hawthorne, California for a purchase price of approximately $46.7 million exclusive of customary closing costs. The acquisition was funded using proceeds from the sale of properties and assumption of an existing loan. 1 Rocket Road is a 510,000 square foot industrial building and is 100% leased to the Space Exploration Technologies Corp. (SpaceX). In connection with the acquisition, we assumed a $18.7 million fixed rate mortgage loan issued by Wells Fargo Commercial Mortgage Securities, Inc., that bears interest at a rate of 6.6% per annum and matures on August 1, 2020.


33

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Explanatory Note
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes thereto, and the other financial data included elsewhere in this Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This document contains various "forward-looking statements." You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "would," "could," "should," "seeks," "approximately," "intends," "plans," "projects," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Statements regarding the following subjects may be impacted by a number of risks and uncertainties:
•
our business strategy;
•
our ability to obtain future financing arrangements;
•
estimates relating to our future distributions;
•
our understanding of our competition;
•
market trends;
•
projected capital expenditures;
•
the impact of technology on our products, operations and business; and
•
the use of the proceeds of any offerings of securities.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common shares of beneficial interest $0.01 par value (the "common shares"), along with the following factors that could cause actual results to vary from our forward-looking statements:
•
general volatility of the securities markets in which we participate;
•
national, regional and local economic climates;
•
changes in supply and demand for industrial and office properties;
•
adverse changes in the real estate markets, including increasing vacancy, increasing competition and decreasing rental revenue;
•
availability and credit worthiness of prospective tenants;
•
our ability to maintain rental rates and maximize occupancy;
•
our ability to identify and secure acquisitions;
•
our failure to successfully manage growth or operate acquired properties;
•
our pace of acquisitions and/or dispositions of properties;
•
risks related to development projects (including construction delay, cost overruns or our inability to obtain necessary permits);
•
payment of distributions from sources other than cash flows and operating activities;
•
receiving and maintaining corporate debt ratings and changes in the general interest rate environment;
•
availability of capital (debt and equity);
•
our ability to refinance existing indebtedness or incur additional indebtedness;
•
failure to comply with our debt covenants;

34

•
unanticipated increases in financing and other costs, including a rise in interest rates;
•
the actual outcome of the resolution of any conflict;
•
material adverse actions or omissions by any of our joint venture partners;
•
our ability to operate as a self-managed company;
•
availability of and ability to retain our executive officers and other qualified personnel;
•
future terrorist attacks in the United States or abroad;
•
the ability of CSP Operating Partnership, LP ("CSP OP") to qualify as a partnership for U.S. federal income tax purposes;
•
our ability to qualify as a self-administered real estate investment trust ("REIT") for U.S. federal income tax purposes;
•
foreign currency fluctuations;
•
changes to accounting principles and policies and guidelines applicable to REITs;
•
legislative or regulatory changes adversely affecting REITs and the real estate business;
•
environmental, regulatory and/or safety requirements; and
•
other factors discussed under Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013 and those factors that may be contained in any filing we make with the Securities and Exchange Commission (the "SEC"), including Part II, Item 1A of Form 10-Qs.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013, and Item 1A,"Risk Factors" in this quarterly report on Form 10-Q.
Overview
We are a self-administered REIT focused on acquiring, owning and managing net leased industrial and office properties leased to creditworthy tenants. Our experienced management team manages our day-to-day operations, with certain services provided by third parties. All of our real estate investments are held directly by, or indirectly through wholly-owned subsidiaries of CSP OP of which we are the 100% owner and sole general partner. We have elected to be taxed as a REIT for U.S. federal income tax purposes.
We were formed in Maryland on March 30, 2004 and commenced operations in July 2004 following an initial private placement of our common shares. Jack A. Cuneo, our founder, President and Chief Executive Officer, developed the initial business plan to establish our Company. Since that time, we have raised equity capital of approximately $2.5 billion in gross proceeds through two public offerings of our common shares to finance our real estate investment activities.
On May 21, 2013, we listed our common shares on the New York Stock Exchange (the "NYSE") under the symbol "CSG" and concurrently commenced a modified "Dutch Auction" tender offer to purchase up to $125.0 million in value of the common shares (the "Tender Offer") from our shareholders, which was completed on June 26, 2013.
As of June 30, 2014, we owned, on a consolidated basis, 100 industrial (primarily warehouse/distribution), office and retail properties located in 19 U.S. states (Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia) and in the United Kingdom, encompassing approximately 23.1 million rentable square feet. Our consolidated properties were approximately 93.9% leased (based upon rentable square feet) as of June 30, 2014. As of June 30, 2014, 75 of our consolidated properties were net leased to single tenants, which encompassed approximately 18.7 million rentable square feet.
In addition, we owned, on an unconsolidated basis, 29 industrial (primarily warehouse/distribution) and office properties located in eight U.S. states (Arizona, Florida, Illinois, Indiana, North Carolina, Ohio, Tennessee and Texas) and in three European countries (France, Germany and the United Kingdom) encompassing approximately 12.8 million rentable square feet. Our unconsolidated properties were approximately 99.5% leased (based upon rentable square feet) as of June 30, 2014. As of June 30, 2014, 20 of our unconsolidated properties were net leased to single tenants, which encompassed approximately 11.5 million rentable square feet.

35

Unless the context otherwise requires or indicates, references to the "Company," "we," "our" and "us" refer to the activities of and the assets and liabilities of the business and operations of Chambers Street Properties and its subsidiaries. References to unconsolidated properties include properties owned through unconsolidated joint ventures and do not include properties owned by CB Richard Ellis Strategic Partners Asia II-A, L.P. ("CBRE Strategic Partners Asia").
Business Strategy
We focus on investing in industrial and office properties that are primarily net leased to investment grade or creditworthy tenants on long-term leases through acquisitions of existing properties or build-to-suit projects. We believe the credit quality of many of our tenants, the length of our leases, the relatively modest capital expense requirements of our industrial properties and our single-tenant focus help us to enhance shareholder value. We monitor the credit of our tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports regarding our tenants and their underlying businesses and (4) monitoring the timeliness of rent collections. We also believe that our senior management team's extensive experience will allow us to identify and consummate the acquisition and development of high-quality net leased properties. Our strategy is to grow our portfolio with properties targeted to provide steady income, sustaining tenant relationships and enhancing the value of our existing properties. We continue to execute our strategy and expand our portfolio through the following:
Acquisitions. We believe high-quality industrial and office properties, which are net leased to tenants with strong credit profiles, represent attractive investments. We target acquisitions in markets with above-average projected rental growth, strong tenant demand and significant barriers to new construction. During the six months ended June 30, 2014, we continued to expand our portfolio with the purchase of one wholly-owned property for $30.2 million that is fully leased to a creditworthy tenant.
Build-to-Suit Opportunities. We also intend to pursue build-to-suit opportunities that have attractive development yields and tenants with strong credit profiles, under long-term triple net leases.
Maximize Cash Flow Through Internal Growth. We seek investments with fixed rent escalations over long term leases that provide stable, increasing cash flow. We have typically structured our property acquisitions to achieve a positive spread between our cost of capital and the yields achieved on our investments. Our existing leases typically have embedded rental rate growth as the majority of them provide for periodic increases in rent.
Capital Recycling. We intend to pursue a disciplined capital allocation strategy by selectively disposing of properties that are no longer consistent with our investment strategy or whose returns appear to have been maximized. To the extent that we dispose of properties, we intend to redeploy the capital into investment opportunities that we believe are more attractive, or to reduce debt. During the six months ended June 30, 2014, consistent with our investment strategy to focus on single-tenant industrial and office properties, we sold one multi-tenant office property held in the Duke JV for approximately $13.1 million, of which our pro rata share was approximately $10.5 million. In addition, subsequent to June 30, 2014, we sold our last retail property located in the United Kingdom for approximately $63.0 million.
Actively Manage a Strong and Flexible Capital Structure. We expect to maintain a prudent capital structure with access to multiple sources of equity and debt financing. We continue to stagger our debt maturities and utilize a balance of secured and unsecured borrowings. We continue to have a mix of fixed and floating-rate debt and intend to maintain modest total leverage. As a means to reduce our exposure to foreign currency fluctuations, we endeavor to retain debt in the local currency of our international properties.
During the six months ended June 30, 2014, we completed the following activities in order to maintain a prudent capital structure:
•
On January 2, 2014, we paid off the notes payable secured by Avion III and IV in the amount of $20.0 million.
•
On January 7, 2014, we received a BBB- corporate rating from Standard and Poor's Rating Services ("S&P"). S&P also gave us a stable outlook, reflecting our high-quality real estate portfolio and selective acquisition strategy, which S&P believes will support solid revenue and earnings growth in the near future.
Factors that May Influence the Results of Operations
Economic conditions, leasing activity and real estate capital availability all improved throughout 2013 and this trend has continued into 2014.
Whereas industrial and office leasing activity in the immediately preceding years was substantially weighted toward large corporate tenants, starting in 2013 activity trended towards normalization in the market for smaller tenants.  Much of this activity has been driven by increasing activity in the single-family home market. Brokers, title companies, developers, contractors and material providers all require office and/or

36

warehouse space for their businesses. However, growth in demand for space was by no means exclusive to these industries, and activity remains relatively stable for the large, corporate user as well.
In concert with this leasing activity, market rent trends remain positive in most major markets. Driven by market rent growth and investor demand, construction and development activity has continued to increase, including both single-tenant build-to-suit and speculative projects. Beginning in 2013 we observed speculative construction activity expanding to a wider selection of markets, although development still remains below long-term averages.
Debt and equity capital availability for commercial real estate investment continued to improve during 2013 and into 2014, resulting in increasing competition to acquire properties. Even with this increased competition, we remain well positioned to acquire properties that fit our investment parameters, due to our strong liquidity position, modest near-term capital needs and excellent portfolio. We intend to continue to focus our strategy on enhancing the value of our existing properties, sustaining our tenant relationships, and growing our portfolio by continuing to selectively acquire high-quality and well-leased properties.

37

Leasing Activity

Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue. Our leasing activity for the three months ended June 30, 2014 is presented in the table below:
 
 
 
 
Prior Lease (1)
New Lease (1)
 
 
Square Feet
 
Annualized Base Rent(2)
 
Annualized Base Rent(2)
 
Tenant
Improve-
ments
& Leasing
Commis-
sions(4)
 
 
 
Cash
 
GAAP(3)
 
Cash
 
GAAP(3)
 
Industrial Properties
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Renewals
 
91,684

 
$
284,446

 
$
319,601

 
$
224,482

 
$
351,577

 
$
27,673

New Tenants - Previously Leased Space(5)
 
417,185

 
1,240,251

 
1,232,996

 
1,641,600

 
1,648,371

 
917,256

Total Consolidated
 
508,869

 
1,524,697

 
1,552,597

 
1,866,082

 
1,999,948

 
944,929

Consolidated & Unconsolidated
 
 
 
 
 
 
 
 
 
 
 
 
Renewals
 
91,684

 
284,446

 
319,601

 
224,482

 
351,577

 
27,673

New Tenants - Previously Leased Space(5)
 
417,185

 
1,240,251

 
1,232,996

 
1,641,600

 
1,648,371

 
917,256

Total Industrial Properties
 
508,869

 
1,524,697

 
1,552,597

 
1,866,082

 
1,999,948

 
944,929

Office Properties
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Renewals
 
113,825

 
1,678,930

 
1,738,551

 
1,628,945

 
2,000,501

 
1,088,512

New Tenants - Not Previously Leased Space(6)(7)
 
52,158

 
—

 
—

 
886,620

 
965,867

 
2,973,026

Total Consolidated
 
165,983

 
1,678,930

 
1,738,551

 
2,515,565

 
2,966,368

 
4,061,538

Unconsolidated
 
 
 
 
 
 
 
 
 
 
 
 
New Tenants - Not Previously Leased Space(6)
 
2,799

 
—

 
—

 
26,758

 
25,751

 
36,143

Consolidated & Unconsolidated
 
 
 
 
 
 
 
 
 
 
 
 
Renewals
 
113,825

 
1,678,930

 
1,738,551

 
1,628,945

 
2,000,501

 
1,088,512

New Tenants - Not Previously Leased Space(6)
 
54,957

 
—

 
—

 
913,378

 
991,618

 
3,009,169

Total Office Properties
 
168,782

 
1,678,930

 
1,738,551

 
2,542,323

 
2,992,119

 
4,097,681

Total Properties
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Renewals
 
205,509

 
1,963,376

 
2,058,152

 
1,853,427

 
2,352,078

 
1,116,185

New Tenants - Previously Leased Space(5)
 
417,185

 
1,240,251

 
1,232,996

 
1,641,600

 
1,648,371

 
917,256

New Tenants - Not Previously Leased Space(6)(7)
 
52,158

 
—

 
—

 
886,620

 
965,867

 
2,973,026

Total Consolidated
 
674,852

 
3,203,627

 
3,291,148

 
4,381,647

 
4,966,316

 
5,006,467

Unconsolidated
 
 
 
 
 
 
 
 
 
 
 
 
New Tenants - Not Previously Leased Space(6)
 
2,799

 
—

 
—

 
26,758

 
25,751

 
36,143

Consolidated & Unconsolidated
 
 
 
 
 
 
 
 
 
 
 
 
Renewals
 
205,509

 
1,963,376

 
2,058,152

 
1,853,427

 
2,352,078

 
1,116,185

New Tenants - Previously Leased Space(5)
 
417,185

 
1,240,251

 
1,232,996

 
1,641,600

 
1,648,371

 
917,256

New Tenants - Not Previously Leased Space(6)
 
54,957

 
—

 
—

 
913,378

 
991,618

 
3,009,169

Total Properties
 
677,651

 
$
3,203,627

 
$
3,291,148

 
$
4,408,405

 
$
4,992,067

 
$
5,042,610

__________
(1)
Prior lease amounts represent rents in place at the time of expiration or termination. New lease amounts represent rents in place at the time of lease commencement.
(2)
Cash Annualized Base Rent for each lease equals (i) 12 times the monthly cash base rent due as of June 30, 2014, or (ii) for any lease still in an initial free or reduced rent period as of June 30, 2014, 12 times the monthly cash base rent due upon expiration of the initial free or reduced rent period. U.S. Generally Accepted Accounting Principles ("GAAP") Annualized Base Rent includes the effect of straight-line rent. Cash and GAAP annualized base rent amounts for unconsolidated properties are included at pro rata share.
(3)
GAAP amounts for prior leases include above/below market rents if applicable.
(4)
Includes tenant improvement costs and lease commissions incurred to execute the lease and not necessarily paid in the current quarter.
(5)
Represents leases signed to new tenants for space that was previously leased since the later of (i) twelve months ago or (ii) the date we acquired the property.
(6)
Represents leases signed to new tenants for space that was not previously leased since the later of (i) twelve months ago or (ii) the date we acquired the property.

38

(7)
Includes 47,250 square feet leased on future expansion of 22535 Colonial Parkway property, expected to be delivered in 2015 with a new 10 year term upon completion of the expansion. Total property (new and existing) will be 137,000 square feet. 
The following table sets forth percentage leased and average annual net effective rent information regarding our total portfolio of consolidated properties and unconsolidated properties as of June 30, 2014 and 2013. Percentage leased information is presented at 100% and average annual net effective rent information is presented at our pro-rata share for our unconsolidated properties (in thousands, except percentage and per square foot data):
 
Total Square Feet
 
% of Total Square Feet
 
% Leased
 
Average Annual Net Effective Rent (1)
 
Average Annual Net Effective Rent/Square Feet
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Consolidated Properties:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office
7,559

 
7,334

 
32.7
%
 
32.7
%
 
96.7
%
 
96.9
%
 
$
148,538

 
$
145,463

 
$
19.65

 
$
19.83

Industrial
15,380

 
14,871

 
66.6
%
 
66.4
%
 
92.5
%
 
94.8
%
 
56,647

 
57,759

 
$
3.68

 
$
3.88

Retail
144

 
200

 
0.7
%
 
0.9
%
 
100.0
%
 
100.0
%
 
3,980

 
4,727

 
$
27.64

 
$
23.64

Total
23,083

 
22,405

 
100.0
%
 
100.0
%
 
93.9
%
 
95.5
%
 
$
209,165

 
$
207,949

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated Properties:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office
1,202

 
1,559

 
9.4
%
 
13.3
%
 
94.3
%
 
93.2
%
 
$
20,172

 
$
25,012

 
$
16.78

 
$
16.04

Industrial
11,627

 
9,893

 
90.6
%
 
84.2
%
 
100.0
%
 
100.0
%
 
55,336

 
43,274

 
$
4.76

 
$
4.37

Retail
—

 
296

 
—
%
 
2.5
%
 
—%

 
97.9
%
 
—

 
20,959

 
$
—

 
$
70.81

Total
12,829

 
11,748

 
100.0
%
 
100.0
%
 
99.5
%
 
99.0
%
 
$
75,508

 
$
89,245

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated and Unconsolidated Properties:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office
8,761

 
8,893

 
24.4
%
 
26.0
%
 
96.4
%
 
96.2
%
 
$
168,710

 
$
170,475

 
$
19.26

 
$
19.17

Industrial
27,007

 
24,764

 
75.2
%
 
72.5
%
 
95.7
%
 
96.9
%
 
111,983

 
101,033

 
$
4.15

 
$
4.08

Retail
144

 
496

 
0.4
%
 
1.5
%
 
100.0
%
 
98.8
%
 
3,980

 
25,686

 
$
27.64

 
$
51.79

Total
35,912

 
34,153

 
100.0
%
 
100.0
%
 
95.9
%
 
96.7
%
 
$
284,673

 
$
297,194

 
 
 
 
__________
(1)
Average Annual Net Effective Rent is calculated as the total average annual cash base rental payments, adjusted for free rent periods. There is no effect given to other landlord concessions and excludes payments received from tenants for reimbursement of real estate taxes and operating expenses.

39

Tenant Lease Expirations
Our ability to maintain occupancy rates, and net effective rents, primarily depends upon our continuing ability to re-lease expiring space. We have limited near term lease expirations with an average remaining lease term of 6.75 years as of June 30, 2014. In addition, approximately 95.9% of our base rent is scheduled to expire after 2015. The following table sets forth a schedule of expiring leases for our consolidated and unconsolidated properties as of June 30, 2014 (Expiring Net Rentable Square Feet and Expiring Base Rent in thousands):
 
Consolidated Properties
 
Unconsolidated
Properties(1)
 
Consolidated &
Unconsolidated
Properties(1)
 
Expiring
Net Rentable
Square Feet
 
Expiring
Base Rent
 
Expiring
Net Rentable
Square Feet
 
Expiring
Base Rent
 
Number Of
Expiring
Leases
 
Expiring
Net Rentable
Square Feet
 
Expiring
Base Rent
 
Percentage
of Expiring
Base Rent
Remaining 2014
813

 
$
3,361

 
8

 
$
113

 
23

 
821

 
$
3,474

 
1.2
%
2015
544

 
3,014

 
771

 
5,331

 
31

 
1,315

 
8,345

 
2.9
%
2016
1,741

 
31,701

 
235

 
2,112

 
26

 
1,976

 
33,813

 
11.6
%
2017
672

 
10,610

 
1,018

 
6,994

 
27

 
1,690

 
17,604

 
6.0
%
2018
1,568

 
18,693

 
1,997

 
10,433

 
36

 
3,565

 
29,126

 
10.0
%
2019
3,416

 
25,327

 
2,874

 
12,014

 
27

 
6,290

 
37,341

 
12.8
%
2020
1,868

 
18,558

 
22

 
236

 
15

 
1,890

 
18,794

 
6.4
%
2021
4,358

 
38,094

 
2,167

 
9,482

 
20

 
6,525

 
47,576

 
16.3
%
2022
693

 
8,755

 
1,360

 
6,992

 
7

 
2,053

 
15,747

 
5.4
%
2023
2,830

 
27,991

 
1,188

 
5,801

 
16

 
4,018

 
33,792

 
11.5
%
Thereafter
3,173

 
41,311

 
1,119

 
5,720

 
22

 
4,292

 
47,031

 
16.1
%
Total
21,676

 
$
227,415

 
12,759

 
$
65,228

 
250

 
34,435

 
$
292,643

 
100.0
%
Weighted Average Remaining Term (Years) (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Triple Net Single-Tenant Properties(3)
 
 
7.10

 
 
 
6.61

 
 
 
 
 
6.99

 
 
Multi-Tenant Properties
 
 
7.14

 
 
 
4.83

 
 
 
 
 
6.56

 
 
Other Single-Tenant Properties
 
 
4.86

 
 
 
5.50

 
 
 
 
 
4.92

 
 
Total Weighted Average Remaining Term (Years)(2)
 
 
6.91

 
 
 
6.19

 
 
 
 
 
6.75

 
 
__________
(1)
Expiring Net Rentable Square Feet for Unconsolidated Properties is at 100%. Expiring Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership.
(2)
Weighted Average Remaining Term is the average remaining term weighted by Expiring Base Rent.
(3)
Triple Net Single-Tenant Properties include certain properties that have minimal secondary tenant(s).

40

Property Portfolio Size
Our portfolio size at the end of each quarter since commencement of our initial public offering (October 24, 2006) through June 30, 2014 is as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):
 
 
Consolidated Properties
 
Unconsolidated Properties(1)
 
Consolidated &
Unconsolidated
Properties(1)
Cumulative
Property
Portfolio as of:
 
Properties
 
Net Rentable
Square Feet
 
Approximate
Total
Acquisition
Cost
 
Properties
 
Net Rentable
Square Feet
 
Approximate
Total
Acquisition
Cost
 
Properties
 
Net Rentable
Square Feet
 
Approximate
Total
Acquisition
Cost
12/31/2006
 
9

 
878

 
$
86,644

 
—

 
—

 
$
—

 
9

 
878

 
$
86,644

3/31/2007
 
9

 
878

 
86,644

 
—

 
—

 
—

 
9

 
878

 
86,644

6/30/2007
 
10

 
928

 
110,491

 
—

 
—

 
—

 
10

 
928

 
110,491

9/30/2007
 
42

 
5,439

 
348,456

 
—

 
—

 
—

 
42

 
5,439

 
348,456

12/31/2007
 
44

 
5,576

 
353,594

 
—

 
—

 
—

 
44

 
5,576

 
353,594

3/31/2008
 
47

 
6,257

 
426,856

 
—

 
—

 
—

 
47

 
6,257

 
426,856

6/30/2008
 
47

 
6,257

 
426,856

 
1

 
605

 
35,636

 
48

 
6,862

 
462,492

9/30/2008
 
49

 
6,483

 
486,777

 
6

 
3,307

 
193,773

 
55

 
9,790

 
680,550

12/31/2008
 
52

 
6,771

 
582,682

 
8

 
5,649

 
273,205

 
60

 
12,420

 
855,887

3/31/2009
 
52

 
6,771

 
582,717

 
8

 
5,649

 
273,130

 
60

 
12,420

 
855,847

6/30/2009
 
53

 
7,106

 
598,103

 
11

 
5,976

 
305,308

 
64

 
13,082

 
903,411

9/30/2009
 
57

 
7,805

 
719,822

 
11

 
5,976

 
305,202

 
68

 
13,781

 
1,025,024

12/31/2009
 
60

 
8,630

 
791,314

 
13

 
6,904

 
356,158

 
73

 
15,534

 
1,147,472

3/31/2010
 
58

 
8,407

 
748,835

 
18

 
7,392

 
418,818

 
76

 
15,799

 
1,167,653

6/30/2010
 
62

 
9,086

 
916,210

 
22

 
8,633

 
471,615

 
84

 
17,719

 
1,387,825

9/30/2010
 
63

 
9,295

 
983,810

 
22

 
8,633

 
471,615

 
85

 
17,928

 
1,455,425

12/31/2010
 
73

 
12,800

 
1,308,560

 
30

 
9,901

 
629,268

 
103

 
22,701

 
1,937,828

3/31/2011
 
73

 
12,800

 
1,308,560

 
43

 
11,950

 
903,508

 
116

 
24,750

 
2,212,068

6/30/2011
 
75

 
14,614

 
1,657,966

 
43

 
12,356

 
917,566

 
118

 
26,970

 
2,575,532

9/30/2011
 
74

 
13,906

 
1,689,048

 
43

 
12,355

 
918,771

 
117

 
26,261

 
2,607,819

12/31/2011
 
77

 
14,434

 
1,747,299

 
45

 
13,851

 
997,506

 
122

 
28,285

 
2,744,805

3/31/2012
 
78

 
15,784

 
1,824,403

 
46

 
13,997

 
1,007,753

 
124

 
29,781

 
2,832,156

6/30/2012
 
78

 
15,784

 
1,842,359

 
46

 
13,997

 
1,007,753

 
124

 
29,781

 
2,850,112

9/30/2012
 
78

 
16,831

 
1,920,218

 
46

 
13,997

 
1,008,246

 
124

 
30,828

 
2,928,464

12/31/2012
 
82

 
18,995

 
2,070,272

 
47

 
15,067

 
1,071,267

 
129

 
34,062

 
3,141,539

3/31/2013
 
99

 
22,314

 
2,572,995

 
30

 
11,748

 
713,722

 
129

 
34,062

 
3,286,717

6/30/2013
 
99

 
22,405

 
2,573,034

 
30

 
11,748

 
713,722

 
129

 
34,153

 
3,286,756

9/30/2013
 
101

 
22,791

 
2,630,692

 
30

 
11,748

 
713,722

 
131

 
34,539

 
3,344,414

12/31/2013
 
99

 
22,460

 
2,595,194

 
30

 
12,807

 
740,525

 
129

 
35,267

 
3,335,719

3/31/2014
 
100

 
23,083

 
2,625,394

 
29

 
12,702

 
728,205

 
129

 
35,785

 
3,353,599

6/30/2014
 
100

 
23,083

 
2,625,394

 
29

 
12,829

 
734,556

 
129

 
35,912

 
3,359,950

__________
(1)
Net Rentable Square Feet for unconsolidated properties is at 100%. Approximate Total Acquisition Cost is at our pro rata share of effective ownership and does not include our investment in CBRE Strategic Partners Asia.
Critical Accounting Policies
Refer to our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of our critical accounting policies. There have been no changes to these policies during the six months ended June 30, 2014.

41

Results of Operations
As of June 30, 2014, we owned and operated 100 consolidated office, industrial and retail properties and 29 unconsolidated office and industrial properties. As of June 30, 2013, we owned and operated 99 consolidated office, industrial and retail properties and 30 unconsolidated office and industrial properties. Our consolidated occupancy rate as of June 30, 2014 and 2013 was 93.9% and 95.5%, respectively. Our unconsolidated occupancy rate as of June 30, 2014 and 2013 was 99.5% and 99.0%, respectively.
The properties acquired or consolidated during 2013 and 2014 are presented in the table below:
Property
 
Market
 
Date of
Acquisition
 
Property
Type
 
Purchase
Price ('000s)
 
Rentable
Square
Feet
 
 
 
 
2014 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
445 Airtech Parkway
 
Indianapolis
 
IN
 
1/2/2014
 
Industrial
 
$
30,200

 
622,440

 
 
 
 
 
 
 
 
 
 
 
 
 
2013 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
Carpenter Corporate Center I and II
 
Dallas
 
TX
 
7/31/2013
 
Office
 
$
49,509

 
226,822

1200 Woods Chapel Road
 
Spartanburg
 
SC
 
8/8/2013
 
Industrial
 
10,750

 
156,800

Total 2013 Wholly-Owned Property Acquisitions
 
 
 
$
60,259

 
383,622

 
 
 
 
 
 
 
 
 
 
 
 
 
2013 Properties Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Duke Portfolio(1)
 
Various
 
 
 
3/1/2013
 
Office/Industrial
 
$
98,100

 
3,318,402

__________
(1)
We acquired Duke's 20% interest in 17 properties that were held by the Duke JV.
Net Operating Income
Management internally evaluates the operating performance and financial results of our property portfolio based on Net Operating Income. We define "Net Operating Income" as: rental income, tenant reimbursements and other property income less property and related expenses (operating and maintenance and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and corporate general and administrative expenses. Property operating expenses include insurance, property management, repairs and maintenance, security, janitorial, landscaping and other administrative expenses incurred to operate our properties. Corporate general and administrative expenses represent costs unrelated to property operations or transaction costs. These expenses primarily include corporate office expenses, employee compensation and benefits as well as costs of being a public company including certain audit fees, regulatory fees, legal costs and other professional fees.
Net Operating Income is considered by management to be an important and appropriate supplemental performance measure to net income (loss) because we believe it helps both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and non-cash depreciation and amortization. Net Operating Income is an unlevered operating performance metric of our properties and allows for a useful comparison of the operating performance of individual assets or groups of assets. This measure thereby provides an operating perspective not immediately apparent from GAAP income (loss) from operations or net income (loss). In addition, Net Operating Income is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. Other real estate companies may use different methodologies for calculating Net Operating Income, and accordingly, our presentation of Net Operating Income may not be comparable to other real estate companies. Because of the exclusion of the items shown in the reconciliation below, Net Operating Income should only be used as a supplemental measure of our financial performance and not as an alternative to GAAP income (loss) from operations or net income (loss).



42

Comparison of Three Months Ended June 30, 2014 to Three Months Ended June 30, 2013
The following table summarizes the historical results of operations of our portfolio for the three months ended June 30, 2014 and the three months ended June 30, 2013 (in thousands):
 
For the Three Months Ended June 30,
 
 
 
 
 
2014
 
2013
 
$
Change
 
%
Change
 
 
 
 
 
 
 
 
Net Operating Income, as defined
$
47,771

 
$
47,441

 
$
330

 
0.7
 %
Expense:
 
 
 
 


 


General and Administrative
5,953

 
7,234

 
(1,281
)
 
(17.7
)%
Investment Management Fee
—

 
(11
)
 
11

 
(100.0
)%
Acquisition-Related
—

 
162

 
(162
)
 
(100.0
)%
Depreciation and Amortization
27,126

 
26,571

 
555

 
2.1
 %
Transition and Listing
—

 
11,199

 
(11,199
)
 
(100.0
)%
Total Expenses
33,079

 
45,155

 
(12,076
)
 
(26.7
)%
Other Expenses and Income:
 
 
 
 
 
 
 
Interest and Other Income
151

 
280

 
(129
)
 
(46.1
)%
Interest Expense
(13,907
)
 
(10,367
)
 
(3,540
)
 
34.1
 %
Interest Expense and Net Change in Fair Value of Non-Qualifying Derivative Financial Instruments
(14
)
 
1,679

 
(1,693
)
 
(100.8
)%
Loss on Conversion of Equity Investment to Controlling Interest
—

 
(32
)
 
32

 
(100.0
)%
Total Other Expenses
(13,770
)
 
(8,440
)
 
(5,330
)
 
63.2
 %
Income (Loss) Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities
922

 
(6,154
)
 
7,076

 
(115.0
)%
Provision for Income Taxes
(381
)
 
(151
)
 
(230
)
 
152.3
 %
Equity in Income of Unconsolidated Entities
4,612

 
2,575

 
2,037

 
79.1
 %
Income (Loss) from Continuing Operations
5,153

 
(3,730
)
 
8,883

 
(238.2
)%
Income from Discontinued Operations
—

 
90

 
(90
)
 
(100.0
)%
Total Income from Discontinued Operations
—

 
90

 
(90
)
 
(100.0
)%
Net Income (Loss)
$
5,153

 
$
(3,640
)
 
$
8,793

 
(241.6
)%

43

The following tables summarize the Net Operating Income, as defined, for our total portfolio, excluding our unconsolidated properties, for the three months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30, 2014
 
Same Office Properties(1)
 
Acquisition Office(2)
 
Same Industrial Properties(1)
 
Acquisition Industrial(3)
 
Retail
 
Total
Rental Revenue
$
26,045

 
$
10,970

 
$
12,219

 
$
1,761

 
$
1,038

 
$
52,033

Tenant Reimbursement
6,578

 
3,722

 
3,866

 
383

 
46

 
14,595

Other Property Income
—

 
—

 
—

 
—

 
—

 
—

Total Revenues
32,623

 
14,692

 
16,085

 
2,144

 
1,084

 
66,628

Property Operating
4,400

 
2,697

 
1,083

 
132

 
80

 
8,392

Real Estate Taxes
4,521

 
2,343

 
3,363

 
238

 
—

 
10,465

Total Expenses
8,921

 
5,040

 
4,446

 
370

 
80

 
18,857

Net Operating Income
$
23,702

 
$
9,652

 
$
11,639

 
$
1,774

 
$
1,004

 
$
47,771

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
 
Same Office Properties(1)
 
Acquisition Office(2)
 
Same Industrial Properties(1)
 
Acquisition Industrial(3)
 
Retail
 
Total
Rental Revenue
$
25,892

 
$
10,283

 
$
12,403

 
$
1,102

 
$
940

 
$
50,620

Tenant Reimbursement
6,452

 
3,887

 
5,336

 
229

 
32

 
15,936

Other Property Income
—

 
—

 
—

 
—

 
—

 
—

Total Revenues
32,344

 
14,170

 
17,739

 
1,331

 
972

 
66,556

Property Operating
4,239

 
2,637

 
842

 
79

 
49


7,846

Real Estate Taxes
4,022

 
2,304

 
4,829

 
114

 
—

 
11,269

Total Expenses
8,261

 
4,941

 
5,671

 
193

 
49

 
19,115

Net Operating Income
$
24,083

 
$
9,229

 
$
12,068

 
$
1,138

 
$
923

 
$
47,441

__________
(1)
Properties owned as of January 1, 2013 and still owned as of June 30, 2014.
(2)
Includes results, from the dates of acquisition through the periods presented, for the office properties acquired or consolidated during 2013.
(3)
Includes results, from the dates of acquisition through the periods presented, for the industrial properties acquired or consolidated during 2013 and 2014.
 
Three Months Ended June 30, 2014 as compared to the Three Months Ended June 30, 2013
 
Same Office
Properties
 
Acquisition Office
 
Same Industrial
Properties
 
Acquisition
Industrial
 
Retail
 
Total
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
Rental Revenue
$
153

 
0.6
 %
 
$
687

 
6.7
 %
 
$
(184
)
 
(1.5
)%
 
$
659

 
59.8
%
 
$
98

 
10.4
%
 
$
1,413

 
2.8
 %
Tenant
Reimbursement
126

 
2.0

 
(165
)
 
(4.2
)
 
(1,470
)
 
(27.5
)
 
154

 
67.2

 
14

 
43.8

 
(1,341
)
 
(8.4
)
Other Property Income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Revenues
279

 
0.9

 
522

 
3.7

 
(1,654
)
 
(9.3
)
 
813

 
61.1

 
112

 
11.5

 
72

 
0.1

Property Operating
161

 
3.8

 
60

 
2.3

 
241

 
28.6

 
53

 
67.1

 
31

 
63.3

 
546

 
7.0

Real Estate Taxes
499

 
12.4

 
39

 
1.7

 
(1,466
)
 
(30.4
)
 
124

 
108.8

 
—

 
—

 
(804
)
 
(7.1
)
Total Expenses
660

 
8.0

 
99

 
2.0

 
(1,225
)
 
(21.6
)
 
177

 
91.7

 
31

 
63.3

 
(258
)
 
(1.3
)
Net Operating Income
$
(381
)
 
(1.6
)%
 
$
423

 
4.6
 %
 
$
(429
)
 
(3.6
)%
 
$
636

 
55.9
%
 
$
81

 
8.8
%
 
$
330

 
0.7
 %
Net Operating Income
Net Operating Income increased $0.3 million, or 0.7%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 as a result of:
•
A net increase in revenues of $0.1 million which is primarily due to:

44

◦
$1.4 million from our Acquisition Office and Acquisition Industrial Properties (collectively the "Acquisition Properties") for rental revenue;
◦
partially offset by $1.3 million from our Same Office Properties, Same Industrial Properties and Retail Properties (collectively the "Same Properties") which is primarily a result of a decrease of $1.5 million in tenant reimbursements from our Same Industrial Properties;
•
And a net decrease of $0.3 million in property operating expenses and real estate taxes due to:
◦
a decrease of $0.5 million from our Same Properties which is comprised of:
▪
a decrease of $1.5 million primarily due to a reduction in real estate taxes in our Same Industrial Properties offset by
▪
an increase of $0.7 million in property operating expenses and real estate taxes in our Same Office Properties; and
◦
an increase of $0.2 million from our Acquisition Properties.
Other Expenses and Income
General and Administrative
General and administrative expense decreased $1.3 million, or 17.7%, to $6.0 million for the three months ended June 30, 2014 compared to $7.2 million for the three months ended June 30, 2013. The decrease was primarily due to lower legal and other professional fees during the three months ended June 30, 2014 compared to the same period in 2013.
Acquisition-Related
Acquisition-related expenses decreased $0.2 million, or 100.0%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 as we did not acquire any properties during the three months ended June 30, 2014.
Depreciation and Amortization
Depreciation and amortization expense increased $0.6 million, or 2.1%, to $27.1 million for the three months ended June 30, 2014 as compared to $26.6 million for the three months ended June 30, 2013. The increase was primarily due to the properties acquired after July 1, 2013 and in 2014.
Interest Expense
Interest expense increased $3.5 million, or 34.1%, to $13.9 million for the three months ended June 30, 2014 compared to $10.4 million for the three months ended June 30, 2013 primarily as a result of an increase in the weighted average debt outstanding balance.
Interest Expense and Net Change in Fair Value of Non-Qualifying Derivative Financial Instruments
During the three months ended June 30, 2013, our non-qualifying derivative instruments incurred a gain of $2.4 million. In addition, we made net payments on the non-qualifying interest rate swaps of $0.7 million. All of the Company's derivative financial instruments now qualify for hedge accounting treatment.
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities increased $2.0 million, or 79.1%, to $4.6 million for the three months ended June 30, 2014 compared to $2.6 million for the three months ended June 30, 2013. The increase was primarily due to the four properties acquired through the joint venture in Europe (the "European JV") in the fourth quarter of 2013 and the payoff of a secured note payable by the Duke JV on July 2, 2013.


45

Comparison of Six Months Ended June 30, 2014 to Six Months Ended June 30, 2013
The following table summarizes the historical results of operations of our portfolio for the six months ended June 30, 2014 and the six months ended June 30, 2013 (in thousands):
 
Six Months Ended June 30,
 
 
 
 
 
2014
 
2013
 
$
Change
 
%
Change
 
 
 
 
 
 
 
 
Net Operating Income, as defined
$96,582
 
$87,282
 
$9,300
 
10.7
 %
Expense:
 
 
 
 
 
 
 
General and Administrative
12,817

 
12,194

 
623

 
5.1
 %
Investment Management Fee
—

 
489

 
(489
)
 
(100.0
)%
Acquisition-Related
290

 
2,003

 
(1,713
)
 
(85.5
)%
Depreciation and Amortization
54,364

 
48,367

 
5,997

 
12.4
 %
Transition and Listing
—

 
11,234

 
(11,234
)
 
(100.0
)%
Total Expenses
67,471

 
74,287

 
(6,816
)
 
(9.2
)%
Other Expenses and Income:
 
 
 
 
 
 
 
Interest and Other Income
318

 
487

 
(169
)
 
(34.7
)%
Interest Expense
(27,968
)
 
(19,554
)
 
(8,414
)
 
43.0
 %
Interest Expense and Net Change in Fair Value of Non-Qualifying Derivative Financial Instruments
12

 
419

 
(407
)
 
(97.1
)%
Gain on Conversion of Equity Investment to Controlling Interest
—

 
77,203

 
(77,203
)
 
(100.0
)%
Total Other (Expenses) Income
(27,638
)
 
58,555

 
(86,193
)
 
(147.2
)%
Income Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities
1,473

 
71,550

 
(70,077
)
 
(97.9
)%
Provision for Income Taxes
(439
)
 
(220
)
 
(219
)
 
99.5
 %
Equity in Income of Unconsolidated Entities
7,438

 
6,939

 
499

 
7.2
 %
Income from Continuing Operations
8,472

 
78,269

 
(69,797
)
 
(89.2
)%
Income from Discontinued Operations
—

 
181

 
(181
)
 
(100.0
)%
Total Income from Discontinued Operations
—

 
181

 
(181
)
 
(100.0
)%
Net Income
$
8,472

 
$
78,450

 
$
(69,978
)
 
(89.2
)%

46

The following tables summarize the Net Operating Income, as defined, for our total portfolio, excluding our unconsolidated properties, for the six months ended June 30, 2014 and 2013 (in thousands):
 
Six Months Ended June 30, 2014
 
Same Office Properties(1)
 
Acquisition Office(2)
 
Same Industrial Properties(1)
 
Acquisition Industrial(3)
 
Retail
 
Total
Rental Revenue
$
51,991

 
$
21,724

 
$
24,591

 
$
3,534

 
$
2,069

 
$
103,909

Tenant Reimbursement
13,646

 
8,130

 
7,218

 
752

 
69

 
29,815

Other Property Income
—

 
1,069

 
—

 
—

 
—

 
1,069

Total Revenues
65,637

 
30,923

 
31,809

 
4,286

 
2,138

 
134,793

Property Operating
9,241

 
5,858

 
2,409

 
297

 
140

 
17,945

Real Estate Taxes
8,788

 
4,748

 
6,289

 
441

 
—

 
20,266

Total Expenses
18,029

 
10,606

 
8,698

 
738

 
140

 
38,211

Net Operating Income
$
47,608

 
$
20,317

 
$
23,111

 
$
3,548

 
$
1,998

 
$
96,582

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
 
Same Office Properties(1)
 
Acquisition Office(2)
 
Same Industrial Properties(1)
 
Acquisition Industrial(3)
 
Retail
 
Total
Rental Revenue
$
51,837

 
$
13,705

 
$
25,242

 
$
1,469

 
$
1,918

 
$
94,171

Tenant Reimbursement
11,913

 
5,041

 
8,492

 
305

 
65

 
25,816

Other Property Income
—

 
—

 
—

 
—

 
—

 
—

Total Revenues
63,750

 
18,746

 
33,734

 
1,774

 
1,983

 
119,987

Property Operating
8,635

 
3,401

 
1,789

 
90

 
87

 
14,002

Real Estate Taxes
8,102

 
3,039

 
7,379

 
183

 
—

 
18,703

Total Expenses
16,737

 
6,440

 
9,168

 
273

 
87

 
32,705

Net Operating Income
$
47,013

 
$
12,306

 
$
24,566

 
$
1,501

 
$
1,896

 
$
87,282

__________
(1)
Properties owned as of January 1, 2013 and still owned as of June 30, 2014.
(2)
Includes results, from the dates of acquisition through the periods presented, for the office properties acquired or consolidated during 2013.
(3)
Includes results, from the dates of acquisition through the periods presented, for the industrial properties acquired or consolidated during 2013 and 2014.
 
Six Months Ended June 30, 2014 as compared to the Six Months Ended June 30, 2013
 
Same Office
Properties
 
Acquisition Office
 
Same Industrial
Properties
 
Acquisition
Industrial
 
Retail
 
Total
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
Rental Revenue
$
154

 
0.3
%
 
$
8,019

 
58.5
%
 
$
(651
)
 
(2.6
)%
 
$
2,065

 
140.6
%
 
$
151

 
7.9
%
 
$
9,738

 
10.3
%
Tenant Reimbursement
1,733

 
14.5

 
3,089

 
61.3

 
(1,274
)
 
(15.0
)
 
447

 
146.6

 
4

 
6.2

 
3,999

 
15.5

Other Property Income
—

 
—

 
1,069

 
100.0

 
—

 
—

 
—

 
—

 
—

 
—

 
1,069

 
100.0

Total Revenues
1,887

 
3.0

 
12,177

 
65.0

 
(1,925
)
 
(5.7
)
 
2,512

 
141.6

 
155

 
7.8

 
14,806

 
12.3

Property Operating
606

 
7.0

 
2,457

 
72.2

 
620

 
34.7

 
207

 
230.0

 
53

 
60.9

 
3,943

 
28.2

Real Estate Taxes
686

 
8.5

 
1,709

 
56.2

 
(1,090
)
 
(14.8
)
 
258

 
141.0

 
—

 
—

 
1,563

 
8.4

Total Expenses
1,292

 
7.7

 
4,166

 
64.7

 
(470
)
 
(5.1
)
 
465

 
170.3

 
53

 
60.9

 
5,506

 
16.8

Net Operating Income
$
595

 
1.3
%
 
$
8,011

 
65.1
%
 
$
(1,455
)
 
(5.9
)%
 
$
2,047

 
136.4
%
 
$
102

 
5.4
%
 
$
9,300

 
10.7
%

47

Net Operating Income
Net Operating Income increased $9.3 million, or 10.7%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 as a result of:
•
An increase in revenues of $14.8 million which is primarily due to:
◦
$14.7 million from our Acquisition Properties which is comprised of:
▪
an increase of $10.1 million from our Acquisition Properties for rental revenue;
▪
an increase of $3.5 million in tenant reimbursements from our Acquisition Properties; and
▪
an increase of $1.1 million from our Acquisition Office Properties due to lease termination fees included in other property income.
•
The increase in revenues are offset by an increase of $5.5 million in property operating expenses and real estate taxes due to:
◦
an increase of $4.6 million from our Acquisition Properties; and
◦
a net increase of $0.8 million from our Same Properties which is comprised of:
▪
an increase of $1.3 million in property operating expenses and real estate taxes in our Same Office Properties; and
▪
a decrease of $0.5 million primarily due to a reduction in real estate taxes in our Same Industrial Properties.
Other Expenses and Income
General and Administrative and Investment Management Fee
General and administrative expense increased $0.6 million, or 5.1%, to $12.8 million for the six months ended June 30, 2014 compared to $12.2 million for the six months ended June 30, 2013. The net increase was primarily related to payroll and administrative costs associated with the growth of the Company offset by a decrease in legal and other professional fees.
Our increase in general and administrative expenses is offset by a reduction of $0.5 million in investment management fees due to the termination of the Transitional Services Agreement.
Acquisition-Related
Acquisition-related expenses decreased $1.7 million, or 85.5%, to $0.3 million for the six months ended June 30, 2014 compared to $2.0 million for the six months ended June 30, 2013. The decrease was due to fewer properties acquired during the six months ended June 30, 2014 compared to the amount acquired during the same period in 2013.
Depreciation and Amortization
Depreciation and amortization expense increased $6.0 million or 12.4%, to $54.4 million for the six months ended June 30, 2014 as compared to $48.4 million for the six months ended June 30, 2013. The increase was primarily due to the properties acquired or consolidated during 2014 and 2013.
Interest Expense
Interest expense increased $8.4 million, or 43.0%, to $28.0 million for the six months ended June 30, 2014 compared to $19.6 million for the six months ended June 30, 2013 primarily as a result of an increase in the weighted average debt outstanding balance.
Interest Expense and Net Change in Fair Value of Non-Qualifying Derivative Financial Instruments
During the six months ended June 30, 2013, our non-qualifying derivative instruments incurred a gain of $1.5 million. In addition, we made net payments on the non-qualifying interest rate swaps of $1.1 million. All of the Company's derivative financial instruments now qualify for hedge accounting treatment.

48

Gain on Conversion of Equity Interest to Controlling Interest
During the six months ended June 30, 2013, gain on conversion of equity investment to controlling interest was $77.2 million attributable to the acquisition of Duke Realty's 20% interest in 17 properties held by the Duke JV. There was no gain on conversion of equity investment to controlling interest during the six months ended June 30, 2014.
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities increased $0.5 million, or 7.2%, to $7.4 million for the six months ended June 30, 2014 compared to $6.9 million for the six months ended June 30, 2013. The increase was primarily due to our properties acquired through the European JV in the fourth quarter of 2013 and the payoff of a secured note payable by the Duke JV on July 2, 2013, which was offset by lower performance from our investment in CBRE Strategic Partners Asia.
Liquidity and Capital Resources
Sources of Liquidity
Liquidity is a measurement of the ability to meet cash requirements, which principally include funding investments and ongoing commitments, to repay borrowings, to make distributions to our shareholders and other general business needs. Our sources of funds will primarily be property operating cash flows and borrowings, including under our unsecured revolving credit facility, term loans or other forms of secured or unsecured financing that we may enter into from time to time. Additionally, we expect other financing opportunities could provide additional sources of funds, including the issuance of common equity (through our at-the-market offering program or otherwise), preferred equity or debt securities. Our ability to raise funds is dependent on general economic conditions, general market conditions for REITs, and our operating performance. We believe that these cash resources will be sufficient to satisfy our cash requirements and we do not anticipate a need to raise funds from other than these sources within the next twelve months. We believe that we have sufficient cash flow from operations to continue as a going concern for the next twelve months and into the foreseeable future.
While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. As of June 30, 2014, we had $55.6 million in cash as well as approximately$680.0 million available under our unsecured revolving credit facility. Of the $55.6 million in cash, approximately $3.0 million is held in a financial institution in the United Kingdom.
Net Cash Flow from Operations
Cash flow from operations is our primary source of liquidity and is dependent upon the occupancy level of our portfolio, the net effective rental rates achieved on our leases, the collectability of rent and operating escalations and recoveries from our tenants and the level of operating and other costs. The properties in our portfolio are primarily located in markets throughout the United States. Positive or negative changes in economic or other conditions, adverse weather conditions and natural disasters in these markets may affect our overall performance.
Unsecured Term Loan Facilities
We intend to enter into unsecured term loan facilities from time to time for general corporate purposes, to fund potential acquisitions and to potentially repay long-term debt.

49

The following table summarizes the balance and terms of our unsecured term loan facilities as of June 30, 2014 and December 31, 2013 (in thousands):
 
 
 
 
 
 
 
 
Outstanding Balance
 
 
Unswapped Interest Rate
 
Effective Interest Rate(1)
 
Maturity Date
 
June 30,
 
December 31,
Term Loan Facility
 
 
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
WF Term Loan #2(2)
 
LIBOR + 1.50%
 
2.49%
 
3/7/2018
 
$
200,000

 
$
200,000

WF Term Loan #3(2)
 
LIBOR + 1.50%
 
3.12%
 
1/15/2019
 
200,000

 
200,000

TD Term Loan(3)
 
LIBOR + 1.75%
 
3.28%
 
3/6/2020
 
50,000

 
50,000

Capital One Term Loan(2)
 
LIBOR + 1.75%
 
4.32%
 
1/31/2021
 
120,000

 
120,000

Total Unsecured Term Loan Facilities
 
 
 
 
 
 
 
$
570,000

 
$
570,000

__________
(1)
Represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the effect of the interest rate swaps, excluding debt issuance costs.
(2)
As of June 30, 2014 and December 31, 2013, the applicable LIBOR rate was 0.151% and 0.165%, respectively, for these loans.
(3)
As of June 30, 2014 and December 31, 2013, the applicable LIBOR rate was 0.151% and 0.16875%, respectively, for this loan.

Unsecured Revolving Credit Facility
We intend to borrow under our unsecured revolving credit facility from time to time for general corporate purposes, to fund potential acquisitions and to potentially repay long-term debt. The following table summarizes the balance and terms of our unsecured revolving credit facility as of June 30, 2014 and December 31, 2013, respectively (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Outstanding Borrowings
$
170,044

 
$
170,044

Remaining Borrowing Capacity
679,956

 
679,956

Total Borrowing Capacity
$
850,000

 
$
850,000

Interest Rate(1)
1.45
%
 
1.47
%
Facility Fee(2)
30 bps

 
30 bps

Maturity Date(3)
January 15, 2018

 
January 15, 2018

_________
(1)
Calculated based on one-month LIBOR plus 1.30% and 1.30% as of June 30, 2014 and December 31, 2013, respectively.
(2)
The facility fee is based on the unsecured revolving credit facility's total borrowing capacity.
(3)
We may exercise an option to extend the maturity date by one year.

50

Secured Debt Financing
From time to time, we partially fund property acquisitions with secured mortgage financing. The following table details our Encumbered and Unencumbered Properties as of June 30, 2014 (Approximate Acquisition Cost and Debt Balance in thousands):
 
Consolidated Properties
 
Unconsolidated Properties(1)
 
Consolidated &
Unconsolidated Properties(1)
 
Properties
 
Approximate
Acquisition Cost
 
Debt
Balance
 
Properties
 
Approximate
Acquisition Cost
 
Debt
Balance
 
Properties
 
Approximate
Acquisition Cost
 
Debt
Balance
Encumbered Properties
43

 
$
1,275,155

 
$
638,028

 
14

 
$
372,506

 
$
185,623

 
57

 
$
1,647,661

 
$
823,651

Unencumbered Properties
57

 
1,350,239

 
—

 
15

 
362,050

 
—

 
72

 
1,712,289

 
—

Total Properties
100

 
$
2,625,394

 
$
638,028

 
29

 
$
734,556

 
$
185,623

 
129

 
$
3,359,950

 
$
823,651

__________
(1)
Number of Properties at 100%. Approximate Acquisition Cost and Debt Balance for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.
Depending on market conditions, our debt financing may be as much as approximately 65% of the value of the cost of our assets before non-cash reserves and depreciation. The amount of debt we place on an individual property, or the amount of debt incurred by an individual entity in which we invest, may be more or less than 65% of the value of such property or the value of the assets owned by such entity, depending on market conditions and other factors.
In fact, depending on market conditions and other factors, we may choose not to place debt on our portfolio or our assets and may choose not to borrow to finance our operations or to acquire properties. Any indebtedness we do incur will likely be subject to continuing covenants, and we will likely be required to make continuing representations and warranties in connection with such debt. Moreover, some or all of our debt may be secured by some or all of our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy.
Debt Covenants and Restrictions
As of June 30, 2014, we were in compliance with all financial debt covenants. See Note 6 "Debt" in the notes to our consolidated financial statements for additional information.
At-The-Market Offering
On November 6, 2013, we and CSP OP entered into four separate Equity Distribution Agreements with certain sales agents, pursuant to which we may sell, from time to time, our common shares having an aggregate offering price of up to $250.0 million. Sales of our common shares may be made in ordinary brokers' transactions on the NYSE, in negotiated transactions or transactions that are deemed to be "at the market" ("ATM") offerings, including sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. We may use these proceeds and proceeds from the sale of debt securities to repay debt, including borrowings under our unsecured revolving credit facility, to make acquisitions of properties or portfolios of properties, or for general corporate purposes. As of June 30, 2014, there have been no sales of common shares under the ATM program.
Shelf Registration
On November 6, 2013, we filed an automatically effective shelf registration statement on Form S-3 with the SEC that may permit us, from time to time, to facilitate public offerings of our securities. We evaluate the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, we may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. However, there can be no assurance that we will be able to complete any such offerings of securities. We may use these proceeds to repay debt, including borrowings under our unsecured revolving credit facility, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.

51

Sale of Real Estate Properties
We regularly work to identify, consider and pursue opportunities to dispose of non-strategic properties with the intent of using the proceeds generated from the dispositions to fund new strategic acquisitions, to repay long-term debt and for other general corporate purposes. The timing of any potential future dispositions will depend on market conditions and our capital needs. Our ability to dispose of such properties on favorable terms, or at all, is dependent upon a number of factors including the availability of credit to potential buyers to purchase properties at prices that we consider acceptable.
Transactions with Unconsolidated Joint Ventures
Transactions with unconsolidated joint ventures also provide a source of liquidity. Our unconsolidated joint ventures will from time to time obtain debt financing or sell properties and will then distribute to us, and our joint venture partners, all or a portion of the proceeds from such transactions.
Debt Composition
Our consolidated and pro rata share of unconsolidated debt is comprised of the following as of June 30, 2014 (amounts in thousands):
 
Consolidated Debt(1)
 
Unconsolidated Debt(2)
 
Consolidated &
Unconsolidated Debt(1)(2)
 
Scheduled
Amortization
 
Term
Maturities
 
Total
 
Scheduled
Amortization
 
Term
Maturities
 
Total
 
Scheduled
Amortization
 
Term
Maturities
 
Total
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Interest Rate Debt
$
81,323

 
$
1,126,705

 
$
1,208,028

 
$
10,021

 
$
175,602

 
$
185,623

 
$
91,344

 
$
1,302,307

 
$
1,393,651

Floating Interest Rate Debt
—

 
170,044

 
170,044

 
—

 
—

 
—

 
—

 
170,044

 
170,044

Total
$
81,323

 
$
1,296,749

 
$
1,378,072

 
$
10,021

 
$
175,602

 
$
185,623

 
$
91,344

 
$
1,472,351

 
$
1,563,695

Weighted Average Remaining Term (years):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Interest Rate Debt
 
 
 
 
4.58

 
 
 
 
 
5.56

 
 
 
 
 
4.71

Floating Interest Rate Debt
 
 
 
 
3.54

 
 
 
 
 
N/A

 
 
 
 
 
3.54

Total
 
 
 
 
4.57

 
 
 
 
 
5.56

 
 
 
 
 
4.69

Weighted Average Interest Rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Interest Rate Debt
 
 
 
 
4.24
%
 
 
 
 
 
3.48
%
 
 
 
 
 
4.14
%
Floating Interest Rate Debt
 
 
 
 
1.45
%
 
 
 
 
 
N/A

 
 
 
 
 
1.45
%
Total
 
 
 
 
3.90
%
 
 
 
 
 
3.48
%
 
 
 
 
 
3.85
%
__________
(1)
Consolidated debt amount includes a $170.0 million outstanding balance on our unsecured revolving credit facility as of June 30, 2014. The unsecured revolving credit facility may be extended for an additional year from January 2018 to January 2019. The annual facility fee of 0.30% is not reflected in the interest rate amounts included this table.
(2)
Unconsolidated debt amounts are at our pro rata share of effective ownership.

52

Contractual Obligations and Commitments
The following table provides information with respect to our contractual obligations as of June 30, 2014 (in thousands): 
Contractual Obligations
 
Less than
One Year
 
One to Three
Years
 
Three to Five
Years
 
More than
Five Years
 
Total
Principal Payments - Secured Notes Payable
 
$
59,463

 
$
272,678

 
$
217,240

 
$
88,648

 
$
638,029

Principal Payments - Unsecured Term Loan Facilities
 
—

 
—

 
400,000

 
170,000

 
570,000

Principal Payments - Unsecured Revolving Credit Facility
 
—

 
—

 
170,044

 
—

 
170,044

Principal Payments - Unconsolidated Debt at Pro Rata Share(1)
 
1,179

 
2,545

 
71,665

 
110,235

 
185,624

Interest Payments - Fixed-Rate Debt(2)
 
49,019

 
77,742

 
50,776

 
19,635

 
197,172

Interest Payments - Variable-Rate Debt(3)
 
2,494

 
4,989

 
1,379

 
—

 
8,862

Interest Payments - Unconsolidated Debt at Pro Rata Share(1)
 
6,437

 
12,690

 
9,577

 
8,672

 
37,376

Ground Lease Payments
 
273

 
546

 
566

 
4,628

 
6,013

Total
 
$
118,865

 
$
371,190

 
$
921,247

 
$
401,818

 
$
1,813,120

__________
(1)
Unconsolidated debt excludes amounts due to our investment in CBRE Strategic Partners Asia.
(2)
Amounts include the expected net payments due under our interest rate swap agreements where in each case we have swapped our variable interest rate payments due under the debt agreements for fixed rates of interest payments.
(3)
As of June 30, 2014, our variable rate debt consisted of amounts outstanding under our unsecured revolving credit facility. The variable interest rate payments are based on LIBOR plus a spread of 1.30%. As of June 30, 2014, LIBOR was 0.151%.
Debt Maturities
The following table details our consolidated and unconsolidated debt maturities as of June 30, 2014 (in thousands):
 
Consolidated Debt(1)
 
Unconsolidated Debt(2)
 
Consolidated &
Unconsolidated Debt(1)(2)
 
Scheduled
Amortization
 
Term
Maturities
 
Total
 
Scheduled
Amortization
 
Term
Maturities
 
Total
 
Scheduled
Amortization
 
Term
Maturities
 
Total
Remaining 2014
$
7,957

 
35,413

 
$
43,370

 
$
582

 
$
—

 
$
582

 
$
8,539

 
$
35,413

 
$
43,952

2015
16,028

 
132,448

 
148,476

 
1,210

 
—

 
1,210

 
17,238

 
132,448

 
149,686

2016
12,838

 
121,341

 
134,179

 
1,272

 
—

 
1,272

 
14,110

 
121,341

 
135,451

2017
12,028

 
34,327

 
46,355

 
1,338

 
68,848

 
70,186

 
13,366

 
103,175

 
116,541

2018
10,127

 
431,986

 
442,113

 
1,408

 
—

 
1,408

 
11,535

 
431,986

 
443,521

2019
7,447

 
300,786

 
308,233

 
1,481

 
—

 
1,481

 
8,928

 
300,786

 
309,714

2020
5,962

 
50,000

 
55,962

 
1,558

 
53,534

 
55,092

 
7,520

 
103,534

 
111,054

2021
3,742

 
190,448

 
194,190

 
1,172

 
53,220

 
54,392

 
4,914

 
243,668

 
248,582

2022
1,870

 
—

 
1,870

 
—

 
—

 
—

 
1,870

 
—

 
1,870

2023
1,987

 
—

 
1,987

 
—

 
—

 
—

 
1,987

 
—

 
1,987

Thereafter
1,337

 
—

 
1,337

 
—

 
—

 
—

 
1,337

 
—

 
1,337

Total
$
81,323

 
$
1,296,749

 
$
1,378,072

 
$
10,021

 
$
175,602

 
$
185,623

 
$
91,344

 
$
1,472,351

 
$
1,563,695

__________
(1)
Consolidated debt amount includes a $170.0 million outstanding balance on the unsecured revolving credit facility as of June 30, 2014. The unsecured revolving credit facility expires January 15, 2018. We may exercise an option to extend the maturity date by one year.
(2)
Unconsolidated debt amounts are at our pro rata share of effective ownership.

53

Distribution Policy
We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004. As a REIT, we generally will not be subject to U.S. federal income tax on income that we distribute currently to our shareholders. Under the Internal Revenue Code of 1986 (the "Internal Revenue Code"), REITs are subject to numerous organizational and operational requirements, including a requirement that they generally distribute at least 90% of their annual net taxable income (excluding net capital gains) to their shareholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify.
In order to qualify as a REIT under the Internal Revenue Code, we generally must make distributions to our shareholders each year in an amount at least equal to 90% of our REIT taxable income (as determined without regard to the dividends paid deduction and excluding net capital gain). Our distribution policy is subject to revision at the discretion of our Board of Trustees without notice to you or shareholder approval. All distributions will be made by us at the discretion of our Board of Trustees and will be based upon out Board of Trustee's evaluation of our assets, operating results, historical and projected cash flows (and source thereof), historical and projected equity offering proceeds from our offerings, historical and projected debt incurred, projected investments and capital requirements, the anticipated timing between receipt of our equity offering proceeds and investment of those proceeds, maintenance of REIT qualification, applicable provisions of Maryland law, general economic, market and industry conditions, and such other factors as our Board of Trustees deems relevant.
It is anticipated that distributions generally will be taxable as ordinary income to our shareholders, although a portion of such distributions may be designated by us as a return of capital or as capital gain. We will furnish annually to each of our shareholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains.
The following table presents total distributions declared and paid and distributions per share as well as the source of payment of such distributions, for the following periods (in thousands, except per share amounts):
2014 Quarter
First
 
Second
Total distributions declared and paid
$
29,820

 
$
29,862

Distributions per share
$
0.126

 
$
0.126

Amount of distributions per share funded by cash flows provided by operating entities
$
0.126

 
$
0.126

On April 29, 2014, our Board of Trustees approved a monthly distribution of $0.042 per common share for each of the months of July, August and September of 2014. The July dividend will be paid on August 7, 2014 to all shareholders of record on July 31, 2014, the August dividend will be paid on September 8, 2014 to all shareholders of record on August 29, 2014, and the September dividend will be paid on October 7, 2014 to all shareholders of record on September 30, 2014.
On July 31, 2014, our Board of Trustees approved a monthly distribution of $0.042 per common share for each of the months of October, November and December of 2014. The October dividend will be paid on November 7, 2014 to all shareholders of record on October 30, 2014, the November dividend will be paid on December 8, 2014 to all shareholders of record on November 26, 2014, and the December dividend will be paid on January 7, 2015 to all shareholders of record on December 30, 2014.
Historical Cash Flows
Our net cash provided by operating activities increased by $17.5 million to $72.9 million for the six months ended June 30, 2014, compared to $55.4 million for the six months ended June 30, 2013. The increase was primarily due to Net Operating Income generated by the properties acquired or consolidated since January 1, 2013.
Net cash used in investing activities decreased by $64.4 million to $12.2 million for the six months ended June 30, 2014, compared to $76.6 million for the six months ended June 30, 2013. The decrease was primarily attributable to a reduction of $35.7 million paid for acquisitions during the current period as compared to the prior year period. In addition, we received a $19.7 million distribution from the sale of an office property through the Duke JV and a VAT refund for a property in the European JV.
Net cash used in financing activities increased by $90.0 million to $88.1 million for the six months ended June 30, 2014, compared to net cash provided by financing activities of $1.9 million for the six months ended June 30, 2013. During the six months ended June 30, 2014 we increased our distribution payments by $18.5 million as compared to the prior year period. During the six months ended June 30, 2013 we

54

received $250.0 million from borrowings under our unsecured term loan facilities offset by $169.2 million paid to complete our Tender Offer in the prior year period.
Off-Balance Sheet Arrangements
As of June 30, 2014, we had four Investments in Unconsolidated Entities: (i) a 5.07% ownership interest in CBRE Strategic Partners Asia; (ii) an 80% ownership interest in the Duke JV; (iii) an 80% ownership interest in the UK JV; and (iv) an 80% ownership interest in the European JV. Our investments are discussed in Note 4 to the accompanying condensed consolidated financial statements "Investments in Unconsolidated Entities."
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. We expect to include provisions in the majority of our tenant leases designed to protect us from the impact of inflation. We expect these provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases, annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market.
Non-GAAP Supplemental Financial Measures: FFO, Core FFO and AFFO
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors consider presentations of operating results for REITs that use historical cost accounting to be insufficient. Consequently, the National Association of Real Estate Investment Trusts ("NAREIT") created Funds from Operations ("FFO") as a supplemental measure of REIT operating performance.
FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net income. FFO, as we define it, is presented as a supplemental financial measure. Management believes that FFO is a useful supplemental measure of REIT performance. FFO does not present, nor do we intend for it to present, a complete picture of our financial condition and/or operating performance. We believe that net income, as computed under GAAP, appropriately remains the primary measure of our performance and that FFO, when considered in conjunction with net income, improves the investing public's understanding of the operating results of REITs and makes comparisons of REIT operating results more meaningful.
We compute FFO in accordance with standards established by NAREIT. Modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business and provide greater transparency to the investing public as to how the management team considers their results of operations. As a result, our FFO may not be comparable to FFO as reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised NAREIT White Paper on FFO defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, impairment charges and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures.
Management believes that NAREIT's definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time, and that depreciation charges required by GAAP do not always reflect the underlying economic conditions. Likewise, the exclusion from NAREIT's definition of FFO of impairment charges and gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activity and assists in comparing those operating results between periods. Thus, FFO provides a performance measure that, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates and operating costs. Management also believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs, since FFO is generally recognized as the industry standard for reporting the operations of REITs.
However, changes in the accounting and reporting rules under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that have been put into effect since the establishment of NAREIT's definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. We calculate Core FFO as FFO exclusive of the net effects of acquisition costs, interest rate swap gains/losses, transition and listing costs, and unrealized gain/loss in investments in unconsolidated entities. Core FFO, is a useful measure to management's decision-making process. As discussed below, period to period fluctuations in the excluded items

55

can be driven by short-term factors that are not particularly relevant to our long-term investment decisions, long-term capital structures or long-term tax planning and tax structuring decisions.
We believe that Core FFO appropriately presents our results of operations on a comparative basis. The items that we exclude from net income are subject to significant fluctuations from period to period that cause both positive and negative effects on our results of operations, often in inconsistent and unpredictable directions. For example, our acquisition costs are primarily the result of the volume of our acquisitions completed during each period, and therefore we believe such acquisition costs are not reflective of our operating results during each period. Similarly, unrealized gains or losses that we have recognized during a given period are based primarily upon changes in the estimated fair market value of certain of our investments due to changes in market conditions and do not necessarily reflect the operating performance of these properties during the corresponding period. During the year ended December 31, 2012, the Company began the process of transitioning from being an externally managed company to a self-managed company and we believe the costs incurred to accomplish this transition involve many costs which are being excluded to arrive at Core FFO. Lastly, we incurred certain costs during the year ended December 31, 2013, in connection with the Listing and the Tender Offer and believe the costs incurred should also be excluded to arrive at Core FFO.
We believe that Core FFO is useful to investors as a supplemental measure of operating performance. We believe that adjusting FFO to exclude acquisition costs provides investors a view of the performance of our portfolio over time, including if we cease to acquire properties on a frequent and regular basis and allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions. We also believe that Core FFO may provide investors with a useful indication of our future performance, and of the sustainability of our current distribution policy. However, because Core FFO excludes acquisition costs, which are important components in an analysis of our historical performance, such supplemental measure should not be construed as a historical performance measure and may not be as useful a measure for estimating the value of our common shares.
We calculate AFFO as Core FFO exclusive of the net effects of (i) amortization associated with deferred financings costs; (ii) amortization of above- and below-market lease intangibles; (iii) amortization of premium on notes payable; (iv) amortization of deferred revenue related to tenant improvements, (v) deferred income taxes; (vi) share-based and other non-cash compensation expense; (vii) deferred straight-line rental revenue; and (viii) recurring capital expenditures.
FFO, Core FFO and AFFO measure cash generated from operating activities not in accordance with GAAP and should not be considered as alternatives to (i) net income (determined in accordance with GAAP), as indications of our financial performance, or (ii) to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make cash distributions. We believe that to further understand our performance, each of FFO, Core FFO and AFFO, should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our Consolidated Financial Statements.
Not all REITs calculate FFO, Core FFO and AFFO (or an equivalent measure), in the same manner and therefore comparisons with other REITs may not be meaningful.

56

The following table presents our FFO, Core FFO and AFFO for the three and six months ended June 30, 2014 and 2013 (in thousands, except share data): 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Reconciliation of Net Income (Loss) to FFO, Core FFO and AFFO
 
 
 
 
 
Net Income (Loss)
$
5,153

 
$
(3,640
)
 
$
8,472

 
$
78,450

Real Estate Depreciation and Amortization
27,010

 
26,770

 
54,141

 
48,774

Pro Rata Share of Real Estate Depreciation and Amortization from Unconsolidated Entities
8,238

 
8,396

 
17,009

 
18,546

Loss (Gain) on Conversion of Equity Interest to Controlling Interest
—

 
32

 
—

 
(77,203
)
Pro Rata Share of Realized Loss (Gain) on Investment in CBRE Strategic Partners Asia
—

 
(132
)
 
—

 
2,113

Funds from Operations
$
40,401

 
$
31,426

 
$
79,622

 
$
70,680

Acquisition-Related Expenses
—

 
162

 
290

 
2,003

Net Change in Fair Value of Non-Qualifying Derivative Financial Instruments
14

 
(2,383
)
 
(12
)
 
(1,466
)
Transition and Listing Expenses
—

 
11,199

 
—

 
11,234

Pro Rata Share of Unrealized Loss (Gain) on Investment in CBRE Strategic Partners Asia
50

 
(1,032
)
 
120

 
(3,565
)
Core Funds from Operations
$
40,465

 
$
39,372

 
$
80,020

 
$
78,886

Amortization of Non-Cash Interest Expense
(244
)
 
(436
)
 
(348
)
 
(367
)
Pro Rata Share of Amortization of Non-Cash Interest Expense from Unconsolidated Entities
119

 
149

 
238

 
339

Amortization of Above and Below Market Leases
1,401

 
1,699

 
2,883

 
3,072

Pro Rata Share of Amortization of Above/Below Market Leases from Unconsolidated Entities
(54
)
 
(111
)
 
(108
)
 
(24
)
Amortization of Deferred Revenue Related to Tenant Improvements
(199
)
 
(633
)
 
(475
)
 
(633
)
Share-Based Compensation
912

 
553

 
1,924

 
993

Straight-line Rent Adjustments, Net
(1,253
)
 
(2,621
)
 
(2,545
)
 
(4,531
)
Pro Rata Share of Straight-Line Rent Adjustments, Net from Unconsolidated Entities
225

 
(1,800
)
 
730

 
(3,382
)
Recurring Capital Expenditures
(3,066
)
 
(1,615
)
 
(4,917
)
 
(2,238
)
Pro Rata Share of Recurring Capital Expenditures from Unconsolidated Entities
(240
)
 
(693
)
 
(242
)
 
(1,531
)
Adjusted Funds from Operations
$
38,066

 
$
33,864

 
$
77,160

 
$
70,584

Amounts per share (Basic and Diluted):
 
 
 
 
 
 
 
Net Income (Loss) Attributable to Common Shareholders

$
0.02

 
$
(0.02
)
 
$
0.03

 
$
0.31

Funds from Operations
$
0.17

 
$
0.13

 
$
0.34

 
$
0.28

Core Funds from Operations
$
0.17

 
$
0.16

 
$
0.34

 
$
0.32

Adjusted Funds from Operations
$
0.16

 
$
0.14

 
$
0.33

 
$
0.28



57

Subsequent Events
On July 1, 2014, we repaid a $11.6 million note payable prior to its maturity date of October 1, 2014.
On July 7, 2014, we amended the unsecured revolving credit facility and the unsecured term loan facilities ("unsecured loans") to reduce the Capitalization Rate, which is used to calculate the value of our assets for certain covenants under the unsecured loans, from 8.00% to 7.25%. There were no other changes to the terms of the unsecured loans in connection with this amendment.
On July 23, 2014, we sold Maskew Retail Park, our last retail property. Maskew Retail Park, a 144,400 square foot shopping center located in the United Kingdom, was sold for approximately $63.0 million. In connection with the sale, we paid off the secured note payable of approximately $23.8 million and terminated the related swap agreement.
On July 31, 2014, our Board of Trustees approved a monthly distribution of $0.042 per common share for each of the months of October, November and December of 2014. The October dividend will be paid on November 7, 2014 to all shareholders of record on October 30, 2014, the November dividend will be paid on December 8, 2014 to all shareholders of record on November 26, 2014, and the December dividend will be paid on January 7, 2015 to all shareholders of record on December 30, 2014.
On July 31, 2014, we acquired 1 Rocket Road located in Hawthorne, California for a purchase price of approximately $46.7 million exclusive of customary closing costs. The acquisition was funded using proceeds from the sale of properties and assumption of an existing loan. 1 Rocket Road is a 510,000 square foot industrial building and is 100% leased to the Space Exploration Technologies Corp. (SpaceX). In connection with the acquisition, we assumed a $18.7 million fixed rate mortgage loan issued by Wells Fargo Commercial Mortgage Securities, Inc., that bears interest at a rate of 6.6% per annum and matures on August 1, 2020.  
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.
We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. 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 our objectives, we will borrow primarily at fixed rates or variable rates and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

58

To illustrate the effect of movements in the interest rate markets, we performed a market sensitivity analysis on its outstanding hedging instruments. We applied various basis point spreads to the underlying interest rate curves of the derivative portfolio in order to determine the instruments’ change in fair value. The following tables summarize the results of the analysis performed for the six months ended June 30, 2014 and 2013, respectively (amounts in thousands):
 
 
 
 
 
 
Effects of Change in Interest Rates as of
Type of Instrument
 
Notional 
Amount
 
Maturity Date
 
June 30, 2014
-100 Basis
Points
 
-50 Basis
Points
 
+50 Basis
Points
 
+100 Basis
Points
 
 
 
 
 
 
 
 
 
 
 
 
 
Qualifying Interest Rate Swap on Maskew Retail Park Debt(1)
 
$
23,909

 
8/10/2014
 
$
(7
)
 
$
(7
)
 
$
7

 
$
14

Qualifying Interest Rate Swap on Point West I Debt
 
10,879

 
12/6/2016
 
(156
)
 
(103
)
 
126

 
252

Qualifying Interest Rate Swap on WF Term Loan #2
 
200,000

 
3/7/2018
 
(6,348
)
 
(3,471
)
 
3,461

 
6,849

Qualifying Interest Rate Swap on Atrium I
 
22,048

 
5/31/2018
 
(717
)
 
(372
)
 
385

 
760

Qualifying Interest Rate Swap on WF Term Loan #3
 
200,000

 
1/15/2019
 
(8,730
)
 
(4,402
)
 
4,201

 
8,328

Qualifying Interest Rate Swap on Easton III debt
 
6,373

 
1/31/2019
 
(256
)
 
(129
)
 
132

 
258

Qualifying Interest Rate Swap on TD Term Loan
 
50,000

 
3/6/2020
 
(2,692
)
 
(1,329
)
 
1,290

 
2,540

Qualifying Interest Rate Swap on Capital One Term Loan
 
120,000

 
1/31/2021
 
(7,406
)
 
(3,670
)
 
3,691

 
7,126

__________
(1)
Based on three-month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps.
 
 
 
 
 
 
Effects of Change in Interest Rates as of
Type of Instrument
 
Notional 
Amount
 
Maturity Date
 
June 30, 2013
-100 Basis
Points
 
-50 Basis
Points
 
+50 Basis
Points
 
+100 Basis
Points
 
 
 
 
 
 
 
 
 
 
 
 
 
Qualifying Interest Rate Swap on Maskew Retail Park Debt(1)
 
$
21,252

 
8/10/2014
 
(139
)
 
(112
)
 
112

 
222

Qualifying Interest Rate Swap on Point West I Debt
 
$
11,204

 
12/6/2016
 
(268
)
 
(167
)
 
178

 
354

Qualifying Interest Rate Swap on Wells Fargo Term Loan
 
$
200,000

 
3/7/2018
 
(8,909
)
 
(4,400
)
 
4,288

 
8,464

Qualifying Interest Rate Swap on Atrium I Debt
 
$
22,984

 
5/31/2018
 
(937
)
 
(482
)
 
480

 
950

Qualifying Interest Rate Swap on Easton III Debt
 
$
6,559

 
1/31/2019
 
(314
)
 
(161
)
 
156

 
310

Qualifying Interest Rate Swap on TD Term Loan
 
$
50,000

 
3/6/2020
 
(3,059
)
 
(1,423
)
 
1,447

 
2,844

__________
(1)
Based on three-month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps.
The estimated fair value of our investment in CBRE Strategic Partners Asia is most sensitive to changes in capitalization rates for commercial properties in large urban areas in China, and among other factors, is also sensitive to currency exchange rate fluctuations and changes in the interest rates of China and the U.S., respectively. Decreases in capitalization rates and increases in interest rates generally increase the value of our investments. Changes in currency exchanges rates where the U.S. Dollar increases in value against the Chinese Yuan generally decrease the value of our investments.
Upon the maturity of our debt, there is a market risk as to the prevailing rates at the time of refinancing. Changes in market rates on our fixed-rate debt affect the fair market value of our debt but it has no impact on interest expense or cash flow. A 100 basis point increase or decrease in interest rates on our fixed rate debt would not increase or decrease our annual interest expense on our fixed rate debt.

59

A 100 basis point increase or decrease in interest rates would increase or decrease the fair market value of our notes payable by $19.2 million at June 30, 2014. In addition, a 100 basis point increase or decrease in interest rates would either increase or decrease annual variable interest expense by approximately $0.2 million on the Maskew Retail Park property.
In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.
ITEM 4.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have formally adopted a policy for disclosure controls and procedures that provides guidance on the evaluation of disclosure controls and procedures and is designed to ensure that all corporate disclosure is complete and accurate in all material respects and that all information required to be disclosed in the periodic reports submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods and in the manner specified in the Securities and Exchange Commission's rules and forms and that disclosure controls and procedures were effective to ensure that the information required to be disclosed by us is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our Company to disclose material information otherwise required to be set forth in our periodic reports.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, as required by the Securities Exchange Act Rule 13(a)-15(e), our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Controls Over Financial Reporting
No changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


60

PART II.
OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS
We are not party to any material legal proceedings as of June 30, 2014.
ITEM 1A.    RISK FACTORS
There have been no material changes to the "Risk Factors" set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.    MINE SAFETY DISCLOSURE
None. 
ITEM 5.    OTHER INFORMATION
None. 
ITEM 6.    EXHIBITS
10.1
Chambers Street Properties Incentive Bonus Plan (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-35933) filed July 31, 2014 and incorporated herein by reference).
 
 
10.2
Form of Restricted Share Award Agreement (Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-35933) filed July 31, 2014 and incorporated herein by reference).
 
 
10.3
Form of Restricted Share Unit Award Agreement (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File No. 001-35933) filed July 31, 2014 and incorporated herein by reference).
 
 
31.1
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
31.2
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
101
The following materials from Chambers Street Properties' Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Equity and (vi) the Notes to the Condensed Consolidated Financial Statements, filed herewith.


61

SIGNATURES
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. 
 
Chambers Street Properties
 
 
Date: August 7, 2014
/S/    JACK A. CUNEO
 
Jack A. Cuneo
 
President and Chief Executive Officer
 
 
Date: August 7, 2014
/S/    MARTIN A. REID
 
Martin A. Reid
 
Chief Financial Officer

62

Gramercy Property Trust Reports