SIGNATURE OFFICE REIT INC - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________

FORM 10-Q

_________________________________________________



(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2015



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 000-54248

__________________________________

SIGNATURE OFFICE REIT, INC.

(Exact name of registrant as specified in its charter)

__________________________________



Maryland		26-0500668
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6200 The Corners Pkwy., Suite 100 Norcross, Georgia		30092-3365
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code		(770) 243-4449

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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.



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

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

Number of shares outstanding of the registrant's

only class of common stock, as of April 30, 2015: 20,473,024 shares

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FORM 10-Q

SIGNATURE OFFICE REIT, INC.

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			Page No.

PART I.	FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements	4

		Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	5

		Consolidated Statements of Operations for the Three Months Ended March 31, 2015 (unaudited) and 2014 (unaudited)	6

		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 (unaudited) and 2014 (unaudited)	7

		Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2015 (unaudited) and 2014 (unaudited)	8

		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 (unaudited) and 2014 (unaudited)	9

		Condensed Notes to Consolidated Financial Statements (unaudited)	10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

	Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	33

	Item 1A.	Risk Factors	33

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

	Item 3.	Defaults Upon Senior Securities	33

	Item 4.	Mine Safety Disclosures	33

	Item 5.	Other Information	34

	Item 6.	Exhibits	34

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this quarterly report on Form 10-Q of Signature Office REIT, Inc. and subsidiaries ("Signature Office REIT," "we," "our" or "us") other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as "may," "will," "expect," "intend," "anticipate," "estimate," "believe," "continue," or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the U. S. Securities and Exchange Commission ("SEC"). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this report, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual conditions, our ability to accurately anticipate results expressed in such forward-looking statements, including our ability to generate positive cash flow from operations, make distributions to stockholders, maintain the value of our real estate properties, and complete our proposed merger with a subsidiary of Griffin Capital Essential Asset REIT, Inc., may be significantly hindered. See Item 1A in Signature Office REIT's Annual Report on Form 10-K for the year ended December 31, 2014, for a discussion of some of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements. The risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2014 are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also harm our business.

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PART I.	FINANCIAL INFORMATION


ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The information furnished in the accompanying consolidated balance sheets and related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows reflect all normal and recurring adjustments that are, in management's opinion, necessary for a fair and consistent presentation of the aforementioned financial statements.

The accompanying consolidated financial statements should be read in conjunction with the condensed notes to Signature Office REIT's financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q and with Signature Office REIT's Annual Report on Form 10-K for the year ended December 31, 2014. Signature Office REIT's results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results expected for the full year.

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SIGNATURE OFFICE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	(Unaudited)
	March 31, 2015			December 31, 2014
Assets:
Real estate assets, at cost:
Land	$	55,733,041		$	55,733,041
Buildings and improvements, less accumulated depreciation of $52,911,576 and $51,212,159 as of March 31, 2015 and December 31, 2014, respectively	383,408,465			387,731,127
Intangible lease assets, less accumulated amortization of $26,941,822 and $25,726,318 as of March 31, 2015 and December 31, 2014, respectively	33,625,392			36,188,591
Construction in progress	13,770			13,770
Total real estate assets	472,780,668			479,666,529
Cash and cash equivalents	4,931,948			5,059,952
Tenant receivables, net of allowance for doubtful accounts of $319,376 and $158,654 as of March 31, 2015 and December 31, 2014, respectively	14,633,923			14,098,561
Prepaid expenses and other assets	1,154,536			1,254,619
Deferred financing costs, less accumulated amortization of $4,616,805 and $4,340,323 as of March 31, 2015 and December 31, 2014, respectively	1,048,031			1,324,513
Intangible lease origination costs, less accumulated amortization of $9,143,644 and $9,314,242 as of March 31, 2015 and December 31, 2014, respectively	15,460,850			16,402,544
Deferred lease costs, less accumulated amortization of $2,389,062 and $2,149,853 as of March 31, 2015 and December 31, 2014, respectively	11,033,107			6,784,817
Investments in development authority bonds	115,000,000			115,000,000
Total assets	$	636,043,063		$	639,591,535

Liabilities:
Line of credit	$	59,250,000		$	56,000,000
Notes payable	100,000,000			100,000,000
Accounts payable and accrued expenses	6,862,975			9,134,243
Accrued capital expenditures and deferred lease costs	2,858,972			86,625
Deferred income	5,190,675			5,150,410
Intangible lease liabilities, less accumulated amortization of $926,417 and $839,856 as of March 31, 2015 and December 31, 2014, respectively	871,957			958,518
Obligations under capital leases	115,000,000			115,000,000
Total liabilities	290,034,579			286,329,796

Commitments and Contingencies (Note 5)

Stockholders' Equity:
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 20,473,024 shares issued and outstanding	204,730			204,730
Additional paid-in capital	453,828,351			453,828,351
Cumulative distributions in excess of earnings	(107,907,065		)	(101,119,778		)
Accumulated other comprehensive income (loss)	(117,532		)	348,436
Total stockholders' equity	346,008,484			353,261,739
Total liabilities and stockholders' equity	$	636,043,063		$	639,591,535

See accompanying notes.

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SIGNATURE OFFICE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



	(Unaudited)
	Three Months Ended
	March 31,
	2015			2014
Revenues:
Rental income	$	12,354,063		$	13,350,268
Tenant reimbursements	5,465,979			5,161,539
Other property income	433,207			29,168
	18,253,249			18,540,975
Expenses:
Property operating costs	6,647,708			6,403,750
Asset and property management fees	253,184			274,947
Depreciation	4,595,705			4,448,170
Amortization	2,879,842			2,759,098
General and administrative	1,681,513			1,579,128
	16,057,952			15,465,093
Real estate operating income	2,195,297			3,075,882
Other income (expense):
Interest expense	(2,989,206		)	(3,091,152		)
Interest and other income	1,725,098			1,730,157
	(1,264,108		)	(1,360,995		)
Income before income tax expense	931,189			1,714,887
Income tax expense	(41,090		)	(35,068		)
Net income	$	890,099		$	1,679,819

Per-share net income – basic and diluted	$	0.04		$	0.08
Weighted-average common shares outstanding – basic and diluted	20,473,024			20,435,361

See accompanying notes.

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SIGNATURE OFFICE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	(Unaudited)
	Three Months Ended
	March 31,
	2015			2014
Net income	$	890,099		$	1,679,819
Other comprehensive loss:
Market value adjustment to interest rate swap	(465,968		)	(5,008		)
Comprehensive income	$	424,131		$	1,674,811

See accompanying notes.

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SIGNATURE OFFICE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014 (UNAUDITED)



	Common Stock			Additional Paid-In Capital		Cumulative Distributions in Excess of Earnings			Redeemable Common Stock		Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
	Shares	Amount		Additional Paid-In Capital		Cumulative Distributions in Excess of Earnings			Redeemable Common Stock		Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance, December 31, 2014	20,473,024	$	204,730	$	453,828,351	$	(101,119,778	)	$	—	$	348,436		$	353,261,739
Distributions to common stockholders ($0.38 per share)	—	—		—		(7,677,386		)	—		—			(7,677,386		)
Net income	—	—		—		890,099			—		—			890,099
Market value adjustment to interest rate swap	—	—		—		—			—		(465,968		)	(465,968		)
Balance, March 31, 2015	20,473,024	$	204,730	$	453,828,351	$	(107,907,065	)	$	—	$	(117,532	)	$	346,008,484



	Common Stock					Additional Paid-In Capital			Cumulative Distributions in Excess of Earnings			Redeemable Common Stock			Accumulated Other Comprehensive Income			Total Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital			Cumulative Distributions in Excess of Earnings			Redeemable Common Stock			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance, December 31, 2013	20,443,176		$	204,432		$	452,981,513		$	(76,492,911	)	$	(3,988,217	)	$	642,976		$	373,347,793
Issuance of common stock	157,299		1,573			3,734,285			—			—			—			3,735,858
Redemption of common stock	(113,283	)	(1,133		)	(2,566,624		)	—			—			—			(2,567,757		)
Decrease in redeemable common stock	—		—			—			—			1,158,095			—			1,158,095
Distributions to common stockholders ($0.38 per share)	—		—			—			(7,646,192		)	—			—			(7,646,192		)
Other offering costs	—		—			(97		)	—			—			—			(97		)
Net income	—		—			—			1,679,819			—			—			1,679,819
Market value adjustment to interest rate swap	—		—			—			—			—			(5,008		)	(5,008		)
Balance, March 31, 2014	20,487,192		$	204,872		$	454,149,077		$	(82,459,284	)	$	(2,830,122	)	$	637,968		$	369,702,511

See accompanying notes.

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SIGNATURE OFFICE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	(Unaudited)
	Three Months Ended
	March 31,
	2015			2014
Cash Flows from Operating Activities:
Net income	$	890,099		$	1,679,819
Adjustments to reconcile net income to net cash provided by operating activities:
Straight-line rental income	(412,773		)	(562,413		)
Noncash other property income	(160,000		)	—
Depreciation	4,595,705			4,448,170
Amortization	3,686,752			3,478,886
Noncash interest expense	276,482			301,482
Changes in assets and liabilities, net of acquisitions:
Increase in other tenant receivables	(122,589		)	(20,389		)
Increase in prepaid expenses and other assets	(250,591		)	(12,932		)
Decrease in accounts payable and accrued expenses	(2,388,800		)	(1,613,791		)
Increase (decrease) in deferred income	40,265			(70,426		)
Net cash provided by operating activities	6,154,550			7,628,406

Cash Flows from Investing Activities:
Additions to real estate assets and other capital expenditures	(52,873		)	(22,856		)
Deferred lease costs paid	(1,802,295		)	(50,159		)
Net cash used in investing activities	(1,855,168		)	(73,015		)

Cash Flows from Financing Activities:
Proceeds from lines of credit and notes payable	4,250,000			750,000
Repayments of lines of credit and notes payable	(1,000,000		)	(2,250,000		)
Issuance of common stock	—			3,735,858
Redemptions of common stock	—			(2,567,757		)
Distributions paid to stockholders	(7,677,386		)	(3,910,334		)
Distributions paid to stockholders and reinvested in shares of our common stock	—			(3,735,858		)
Other offering costs paid	—			(97		)
Net cash used in financing activities	(4,427,386		)	(7,978,188		)
Net change in cash and cash equivalents	(128,004		)	(422,797		)
Cash and cash equivalents, beginning of period	5,059,952			7,394,979
Cash and cash equivalents, end of period	$	4,931,948		$	6,972,182

See accompanying notes.

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SIGNATURE OFFICE REIT, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 (unaudited)


1.	Organization

Signature Office REIT, Inc. ("Signature Office REIT") is a Maryland corporation that has elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes and engages in the acquisition and ownership of commercial real estate properties. Signature Office REIT's stock is not listed on a national securities exchange. Signature Office REIT was formed in 2007 and commenced operations in 2010. Substantially all of Signature Office REIT's business is conducted through Signature Office Operating Partnership, L.P. ("Signature Office OP"), a Delaware limited partnership. Signature Office REIT is the sole general partner of Signature Office OP. Signature Office Income Holdings, LLC ("Signature Office Holdings"), a Delaware limited liability company, is the sole limited partner of Signature Office OP. Signature Office REIT owns 100% of the interests of Signature Office Holdings and possesses full legal control and authority over the operations of Signature Office OP and Signature Office Holdings. References to Signature Office REIT herein shall include Signature Office REIT and its subsidiaries, including Signature Office OP, and Signature Office Holdings, unless stated otherwise.

Signature Office REIT operates a diversified portfolio of commercial real estate consisting primarily of high-quality, income-generating office properties located in the United States leased to creditworthy companies. As of March 31, 2015, Signature Office REIT owned 13 office properties consisting of 15 buildings and approximately 2.6 million square feet. As of March 31, 2015, these office properties were 97.5% leased.

From June 2010 through June 2013, Signature Office REIT raised equity proceeds through its initial public offering (the "Initial Offering") of 230.0 million shares of common stock, of which 30.0 million shares were offered through the Signature Office REIT Distribution Reinvestment Plan ("DRP"). Under the Initial Offering, shares of common stock in the primary offering were offered at a price of $25.00 per share, with discounts available to certain categories of purchasers, and DRP shares were offered at a price of $23.75 per share. Signature Office REIT terminated the primary portion of the Initial Offering on June 12, 2013. Signature Office REIT continued to raise equity proceeds through the DRP through March 2014, after which the DRP was terminated. Signature Office REIT raised aggregate net offering proceeds of approximately $460.3 million, including net offering proceeds from the DRP of approximately $29.5 million, substantially all of which were invested in real properties and related assets.

On November 21, 2014, Signature Office REIT entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Griffin Capital Essential Asset REIT, Inc. (“Griffin”) and Griffin SAS, LLC, a wholly owned subsidiary of Griffin (“Merger Sub”). Upon the terms and conditions set forth in the Merger Agreement, Signature Office REIT will merge with and into Merger Sub, with Merger Sub surviving the merger as a wholly owned subsidiary of Griffin (the “Merger”). Subject to the terms and conditions of the Merger Agreement, at the date and time the Merger becomes effective (the “Merger Effective Time”) each share of common stock of Signature Office REIT issued and outstanding immediately prior to the Merger Effective Time will be converted into 2.04 (the “Merger Exchange Ratio”) shares of common stock of Griffin (“Griffin Common Stock”). The consummation of the Merger is subject to certain customary closing conditions, including, among others, the approval of the Merger by Signature Office REIT's stockholders. In addition, the Merger Agreement may be terminated under certain circumstances by Griffin or Signature Office REIT. Signature Office REIT expects the Merger to close in the second quarter of 2015.

Signature Office REIT's stock is not listed on a national securities exchange. Should the Merger with Griffin not be consummated, Signature Office REIT will still be subject to its current charter requirement to execute a liquidity transaction by July 31, 2020. Signature Office REIT's charter requires that in the event that Signature Office REIT's stock is not listed on a national securities exchange by July 31, 2020, Signature Office REIT must either seek stockholder approval to extend or amend this listing deadline or seek stockholder approval to begin liquidating investments and distributing the resulting proceeds to the stockholders. If Signature Office REIT seeks stockholder approval to extend or amend this listing date and does not obtain it, Signature Office REIT would then be required to seek stockholder approval to liquidate. In this circumstance, if Signature Office REIT seeks and does not obtain approval to liquidate, Signature Office REIT would not be required to list or liquidate and could continue to operate indefinitely as an unlisted company.

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2.	Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The consolidated financial statements of Signature Office REIT have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of management, the statements for these unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Results for these interim periods are not necessarily indicative of a full year's results.

Signature Office REIT owns a controlling financial interest in Signature Office OP and Signature Office Holdings and, accordingly, includes the accounts of these entities in its consolidated financial statements. The financial statements of Signature Office OP and Signature Office Holdings are prepared using accounting policies consistent with those used by Signature Office REIT. All intercompany balances and transactions have been eliminated in consolidation.

For further information, refer to the financial statements and footnotes included in Signature Office REIT's Annual Report on Form 10-K for the year ended December 31, 2014.

Recent Accounting Pronouncements

In January 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items ("ASU 2015-01"). ASU 2015-01 eliminates the requirement for an entity to separately classify, present and disclose extraordinary events and transactions. Under ASU 2015-01, reporting entities will no longer be required to assess whether an underlying event or transaction is extraordinary; however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 will be effective for Signature Office REIT for the period beginning January 1, 2016. Signature Office REIT expects that the adoption of ASU 2015-01 will not have a material impact on its consolidated financial statements or disclosures.

In February 2015, the FASB issued Accounting Standards Update 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 requires reevaluation of the consolidation of certain legal entities. Specifically, it (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) revises the consolidation analysis of reporting entities that are involved with VIEs, and (vi) provides a scope exception from consolidation guidance for certain investment funds. ASU 2015-02 will be effective for Signature Office REIT for the period beginning on January 1, 2016. Signature Office REIT is currently evaluating the impact that the adoption of ASU 2015-02 may have on its consolidated financial statements or disclosures.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by the amendments in ASU 2015-03. ASU 2015-03 will be effective for Signature Office REIT for the period beginning on January 1, 2016. Signature Office REIT is currently evaluating the impact that the adoption of ASU 2015-03 may have on its consolidated financial statements or disclosures.

Fair Value Measurements

Signature Office REIT estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures. Under this guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, the accounting standard for fair

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value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:

Level 1 - Assets or liabilities valued based on quoted prices in active markets for identical assets or liabilities.

Level 2 - Assets or liabilities valued based on observable market data for similar instruments.

Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Intangible Assets and Liabilities Arising from In-Place Leases where Signature Office REIT is the Lessor

As of March 31, 2015 and December 31, 2014, Signature Office REIT had the following gross intangible in-place lease assets and liabilities:



	As of March 31, 2015
	Intangible Lease Assets						Intangible Lease Origination Costs			Intangible Below-Market In-Place Lease Liabilities
	Above-Market In-Place Lease Assets			Absorption Period Costs			Intangible Lease Origination Costs			Intangible Below-Market In-Place Lease Liabilities
Gross	$	11,892,399		$	48,674,815		$	24,604,494		$	1,798,374
Accumulated Amortization	(6,518,067		)	(20,423,755		)	(9,143,644		)	(926,417		)
Net	$	5,374,332		$	28,251,060		$	15,460,850		$	871,957

	As of December 31, 2014
	Intangible Lease Assets						Intangible Lease Origination Costs			Intangible Below-Market In-Place Lease Liabilities
	Above-Market In-Place Lease Assets			Absorption Period Costs			Intangible Lease Origination Costs			Intangible Below-Market In-Place Lease Liabilities
Gross	$	12,241,045		$	49,673,864		$	25,716,786		$	1,798,374
Accumulated Amortization	(6,206,488		)	(19,519,830		)	(9,314,242		)	(839,856		)
Net	$	6,034,557		$	30,154,034		$	16,402,544		$	958,518

For the three months ended March 31, 2015 and 2014, Signature Office REIT recognized the following amortization of intangible lease assets and liabilities:



	Intangible Lease Assets				Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
	Above-Market In-Place Lease Assets		Absorption Period Costs		Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
For the three months ended March 31:
2015	$	660,225	$	1,902,974	$	941,694	$	86,561
2014	$	585,166	$	1,860,440	$	874,644	$	86,561

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The remaining net intangible lease assets and liabilities as of March 31, 2015 will be amortized as follows:



	Intangible Lease Assets				Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
	Above-Market In-Place Lease Assets		Absorption Period Costs		Intangible Lease Origination Costs		Intangible Below-Market In-Place Lease Liabilities
For the nine months ending December 31, 2015	$	1,529,165	$	5,166,834	$	2,395,327	$	257,197
For the year ending December 31:
2016	2,014,818		6,496,805		3,100,190		115,146
2017	1,013,296		5,123,929		2,656,050		115,146
2018	565,245		4,323,063		2,295,336		115,146
2019	251,808		2,695,163		1,588,231		99,059
2020	—		1,580,210		1,038,369		97,755
Thereafter	—		2,865,056		2,387,347		72,508
Total	$	5,374,332	$	28,251,060	$	15,460,850	$	871,957
Weighted-Average Amortization Period	3 years		5 years		6 years		5 years

Investments in Development Authority Bonds and Obligations Under Capital Leases

In connection with the acquisition of the 64 & 66 Perimeter Center Buildings, Signature Office REIT has assumed investments in development authority bonds and corresponding obligations under capital leases of land and buildings totaling $115.0 million. The local development authority issued bonds to a developer to finance the renovation of these buildings, which were then leased back to the developer under a capital lease. This structure enabled the developer to receive property tax abatements over the concurrent terms of the development authority bonds and capital leases. The remaining property tax abatement benefits transferred to Signature Office REIT upon assumption of the bonds and corresponding capital leases at acquisition. The development authority bonds and the obligations under the capital leases were both recorded at their net present values at the time of acquisition, which Signature Office REIT believes approximate fair value. The related amounts of interest income and expense are recognized as earned in equal amounts and, accordingly, do not impact net income.

Fair Value of Debt Instruments

Signature Office REIT applied the provisions of the accounting standard for fair value measurements and disclosures in estimations of fair value of its debt instruments based on Level 2 assumptions. The fair values of its debt instruments were based on discounted cash flow analysis using the current market borrowing rates for similar types of borrowing arrangements as of the measurement dates (see Note 3 for additional information). The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.

Interest Rate Swaps

Signature Office REIT has entered into an interest rate swap contract (see Note 4 for additional information), and may enter into future interest rate swap contracts, to hedge its exposure to changing interest rates on variable rate debt instruments. Signature Office REIT does not enter into derivative or interest rate transactions for speculative purposes; however, certain of its derivatives may not qualify for hedge accounting treatment. Signature Office REIT records the fair value of its interest rate swap either as prepaid expenses and other assets or as accounts payable and accrued expenses. Changes in the fair value of the effective portion of interest rate swaps that are designated as cash flow hedges are recorded as other comprehensive income (loss), while changes in the fair value of the ineffective portion of a hedge, if any, is recognized in earnings. Changes in the fair value of interest rate swaps that do not qualify for hedge accounting treatment, if any, are recorded as gain (loss) on interest rate swaps. Amounts received or paid under interest rate swap agreements are recorded as interest expense for contracts that qualify for hedge accounting treatment and as gain (loss) on interest rate swaps for contracts that do not qualify for hedge accounting treatment.

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Signature Office REIT applied the provisions of the accounting standard for fair value measurements and disclosures in recording its interest rate swap at fair value. The fair value of the interest rate swap, classified under Level 2, was determined using a third-party proprietary model that is based on prevailing market data for contracts with matching durations, current and anticipated LIBOR information, and reasonable estimates about relevant future market conditions.

Income Taxes

Signature Office REIT has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and has operated as such beginning with its taxable year ended December 31, 2010. To qualify as a REIT, Signature Office REIT must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its REIT taxable income, as defined by the Code, to its stockholders. As a REIT, Signature Office REIT generally will not be subject to federal income tax on taxable income it distributes to stockholders. If Signature Office REIT fails to qualify as a REIT in any taxable year, it will then be subject to federal and state income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service ("IRS") grants Signature Office REIT relief under certain statutory provisions.

Signature Office REIT may perform certain additional, noncustomary services for tenants of its buildings through taxable REIT subsidiaries; however, any earnings related to such services are subject to federal and state income taxes. In addition, for Signature Office REIT to continue to qualify as a REIT, Signature Office REIT must limit its investments in taxable REIT subsidiaries to 25% of the value of the total assets of Signature Office REIT. On December 13, 2011, Signature Office OP formed Wells Core REIT TRS, LLC ("TRS"), a wholly owned subsidiary organized as a Delaware corporation. Through December 31, 2013, Signature Office REIT elected to treat TRS as a taxable REIT subsidiary. On December 9, 2013, Signature Office REIT elected to treat TRS as a disregarded entity, effective January 1, 2014.

Deferred tax assets and liabilities represent temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on the enacted rates expected to be in effect when the temporary differences reverse. Deferred tax expense or benefits are recognized in the financial statements according to the changes in deferred tax assets or liabilities between years. Valuation allowances are established to reduce deferred tax assets when it becomes more likely than not that such assets, or portions thereof, will not be realized. No provision for federal income taxes has been made in the accompanying consolidated financial statements as Signature Office REIT has made distributions in excess of taxable income for the periods presented.

Signature Office REIT is subject to certain state and local taxes related to property operations in certain locations, which have been provided for in the accompanying consolidated financial statements. Signature Office REIT records interest and penalties related to uncertain tax positions as general and administrative expense in the accompanying consolidated statements of operations.

3. Line of Credit and Notes Payable

As of March 31, 2015 and December 31, 2014, Signature Office REIT had the following indebtedness outstanding:



	Outstanding Balance as of
Facility	March 31, 2015		December 31, 2014
Signature Revolving Facility	$	59,250,000	$	56,000,000
Signature Term Loan	100,000,000		100,000,000
Total indebtedness	$	159,250,000	$	156,000,000

Signature Unsecured Debt Facility

Signature Office REIT is a party to an unsecured credit facility (the "Signature Unsecured Debt Facility") with a syndicate of banks led by Regions Bank ("Regions"), U.S. Bank National Association ("U.S. Bank"), and JPMorgan Chase Bank, N.A. ("JPMorgan"). Under the Signature Unsecured Debt Facility, Signature Office REIT may borrow

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up to a total of $300 million (the "Facility Amount"), subject to availability. The Facility Amount is comprised of a revolving credit facility in an amount up to $200 million (the "Signature Revolving Facility") and a term loan facility in an amount up to $100 million (the "Signature Term Loan"). The Signature Revolving Facility and the Signature Term Loan will be due and payable in full on September 26, 2015 and September 26, 2017, respectively. Signature Office REIT has the option to extend the Signature Revolving Facility for two periods of 12 months each subject to satisfaction of certain conditions, including (i) no existence of default, (ii) no material adverse effect has occurred in the financial condition of Signature Office REIT, (iii) compliance with covenants set forth in the Signature Unsecured Debt Facility, and (iv) payment of an extension fee equal to 0.25% of the amount committed under the Signature Revolving Facility. Signature Office REIT does not expect the results of operations to provide sufficient cash flow to pay off the Signature Revolving Facility. To the extent necessary, Signature Office REIT intends to either refinance the Signature Unsecured Debt Facility prior to the maturity of the Signature Revolving Facility in September 2015 or to exercise the first of two 12-month extension options available.

The Signature Unsecured Debt Facility contains certain restrictive covenants. As of March 31, 2015, Signature Office REIT believes it was in compliance with all financial covenants of its outstanding debt obligations and expects to remain in compliance with these, and all other, restrictive covenants of the Signature Unsecured Debt Facility. Although Signature Office REIT expects to comply with these covenants for the duration of the term of the Signature Unsecured Debt Facility, depending on its future operating performance and distribution payments, Signature Office REIT cannot assure such compliance. In the event that it projects future non-compliance with the restricted payments covenant, Signature Office REIT has the ability to remain in compliance by reducing future distribution payments.

Fair Value of Outstanding Debt

As of March 31, 2015 and December 31, 2014, the fair value of Signature Office REIT's total indebtedness approximated its carrying value. Signature Office REIT estimated the fair values of its debt instruments based on discounted cash flow analysis using the current incremental borrowing rates for similar types of borrowing arrangements obtained from multiple market participants as of the respective reporting dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.

Weighted-Average Interest Rate and Interest Paid

As of March 31, 2015 and December 31, 2014, the weighted-average interest rate on Signature Office REIT's outstanding debt, after consideration of the interest rate swap, was approximately 2.20%. Signature Office REIT made the following interest payments on its borrowings:



	Three Months Ended
	March 31,
	2015		2014
Signature Revolving Facility	$	397,606	$	346,022
Signature Term Loan	445,667		458,372
Technology Way Loan	—		95,720
	$	843,273	$	900,114

No interest was capitalized during the three months ended March 31, 2015 and 2014.

4. Interest Rate Swap

Signature Office REIT entered into an interest rate swap agreement with JPMorgan on September 26, 2012, to hedge its exposure to changing interest rates on $75.0 million of the Signature Term Loan (the "Interest Rate Swap"). The Interest Rate Swap was effective as of September 26, 2013 and matures on September 26, 2017. Under the terms of the Interest Rate Swap, Signature Office REIT pays interest at a fixed rate of 0.891% per annum and receives LIBOR-based interest payments from JPMorgan on a notional amount of $75.0 million. Beginning September 26, 2013, the

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Interest Rate Swap effectively fixed the interest rate on $75.0 million of the Signature Term Loan at 0.891% plus a margin of 1.65% to 2.40%, based on Signature Office REIT's then current leverage ratio.

The following table provides additional information related to the Interest Rate Swap as of March 31, 2015 and December 31, 2014:



		Estimated Fair Value as of
Instrument Type	Balance Sheet Classification	March 31, 2015			December 31, 2014
Derivatives designated as hedging instruments:
Interest rate swap	(Accounts payable and accrued expenses) Prepaid expenses and other assets	$	(117,532	)	$	348,436

During the three months ended March 31, 2015 and 2014, Signature Office REIT recorded the following amounts related to the Interest Rate Swap:



	Three months ended March 31,
	2015			2014
Market value adjustment to interest rate swap designated as a hedging instrument and included in other comprehensive income	$	(465,968	)	$	(5,008	)
Previously recorded loss reclassified from accumulated other comprehensive income into interest expense	$	135,187		$	136,248

Signature Office REIT estimates that approximately $337,000 will be reclassified from accumulated other comprehensive income to interest expense over the next 12 months. During the periods presented, there was no hedge ineffectiveness on the Interest Rate Swap required to be recognized in earnings, and there were no derivative instruments that did not qualify for hedge accounting treatment.

5. Commitments and Contingencies

Obligations Under Capital Leases

The 64 & 66 Perimeter Center Buildings are subject to capital leases of land and buildings. Each of these obligations is completely offset by the principal balances and corresponding interest receivable from related investments in development authority bonds, which mature in 2027. The required payments under the terms of the leases are as follows as of March 31, 2015:



For the nine months ending December 31, 2015	$	5,175,000
For the year ending December 31:
2016	6,900,000
2017	6,900,000
2018	6,900,000
2019	6,900,000
2020	6,900,000
Thereafter	158,125,000
	197,800,000
Amounts representing interest	(82,800,000		)
Total	$	115,000,000

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Commitments Under Existing Lease Agreements

Certain lease agreements include provisions that, at the option of the tenant, may obligate Signature Office REIT to expend capital to expand an existing property or provide other expenditures for the benefit of the tenant, including the following:



Building	Tenant	Tenant Allowance Obligations as of March 31, 2015⁽¹⁾
Four Parkway North Building	Lundbeck	$2,235,020
Royal Ridge Building	NEC Corporation of America	$3,588,330
Duke Bridges II Building	Conifer Revenue Cycle Solutions	$3,777,000

⁽¹⁾ Represents tenant allowance obligations required by certain lease agreements that are not accrued as of March 31, 2015.

Litigation

From time to time, Signature Office REIT is party to legal proceedings that arise in the ordinary course of its business. Management makes assumptions and estimates concerning the likelihood and amount of any reasonably possible loss relating to these matters using the latest information available. Signature Office REIT records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, Signature Office REIT accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, Signature Office REIT accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, Signature Office REIT discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, Signature Office REIT discloses the nature and estimate of the possible loss of the litigation. Signature Office REIT does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote. Signature Office REIT is not currently involved in any legal proceedings for which the outcome is expected to have a material effect on the results of operations or financial condition of Signature Office REIT. Signature Office REIT is not aware of any legal proceedings contemplated by governmental authorities.

Merger-Related Contingencies

The consummation of the Merger is subject to certain customary closing conditions, including, among others, the approval of the Merger by Signature Office REIT's stockholders. The Merger Agreement may be terminated under certain circumstances by Griffin or Signature Office REIT. Upon termination, if such termination occurs under certain specified circumstances, Signature Office REIT may be required to pay Griffin a termination fee of $20 million. The Merger Agreement also provides that one party may be required to reimburse the other party's transaction expenses, not to exceed $3 million, if the Merger Agreement is terminated under certain circumstances.

In connection with entering into the Merger Agreement with Griffin, the Compensation Committee and Signature Office REIT's board of directors unanimously approved, declared and granted awards under the Retention and Transaction Award Plan to eligible employees in an aggregate amount of $2.2 million. Upon the closing of the Merger, Signature Office REIT is obligated to fund these cash retention bonus payments; however, the consummation of the Merger is subject to certain customary closing conditions, including, among others, the approval of the Merger by Signature Office REIT's stockholders. In addition, upon the closing of the Merger, Signature Office REIT will be obligated to fund severance payments to eligible employees in accordance with the terms of respective employment agreements and Signature Office REIT's severance plan. Should the Merger with Griffin not be completed, Signature Office REIT will not be obligated to fund these cash retention bonus and severance payments.

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6. Supplemental Disclosures of Noncash Activities

Outlined below are significant noncash investing and financing transactions for the three months ended March 31, 2015 and 2014, respectively:



	Three Months Ended
	March 31,
	2015			2014
Market value adjustment to interest rate swap that qualifies for hedge accounting treatment	$	(465,968	)	$	(5,008	)
Accrued capital expenditures and deferred lease costs	$	2,794,773		$	158,362
Noncash contribution of real estate assets	$	160,000		$	—
Discounts applied to issuance of common stock under DRP	$	—		$	196,624
Decrease in redeemable common stock	$	—		$	(1,158,095	)

7. Related-Party Transactions

From its inception through December 31, 2013, Signature Office REIT operated as an externally advised REIT pursuant to an advisory agreement, under which Wells Core Office Income REIT Advisory Services, LLC (the "Advisor"), a subsidiary of Wells Real Estate Funds, Inc. ("WREF"), performed certain key functions on behalf of Signature Office REIT, including, among others, the investment of capital proceeds and management of day-to-day operations. The Advisor contracted with Wells Capital, Inc. ("Wells Capital") and Wells Management Company, Inc. ("Wells Management"), also wholly owned subsidiaries of WREF, to engage their employees to carry out, among others, the key functions enumerated above on behalf of Signature Office REIT. On December 31, 2013, Signature Office REIT terminated the advisory agreement and became a self-managed company on January 1, 2014. As a result, management of day-to-day operations is now performed by employees of Signature Office REIT.

Transition Services Agreement

On January 1, 2014, Signature Office REIT entered into the Transition Services Agreement (the "TSA") with WREF for the period from January 1, 2014 through June 30, 2014, pursuant to which WREF and its affiliates provided certain consulting, support and transitional services to Signature Office REIT at the direction of Signature Office REIT in order to facilitate its successful transition to self-management.

In exchange for the services provided by WREF under the TSA, Signature Office REIT paid WREF a monthly consulting fee of $51,267 (the "Consulting Fee"). In addition to the Consulting Fee, Signature Office REIT paid directly or reimbursed WREF for any third-party expenses paid or incurred by WREF and its affiliates on behalf of Signature Office REIT in connection with the services provided pursuant to the TSA; provided, however, that (i) WREF obtained written approval from Signature Office REIT prior to incurring any third-party expenses for the account of, or reimbursable by, Signature Office REIT and (ii) Signature Office REIT was not required to reimburse WREF for any administrative service expenses, including WREF's overhead, personnel costs and costs of goods used in the performance of services under the TSA. In addition, the TSA also provided that WREF provide Signature Office REIT a portion of the office space then used and occupied by WREF (the "Office Space") for the period from January 1, 2014 to June 30, 2014 in exchange for monthly rent of $4,552.

On June 30, 2014, Signature Office REIT entered into the first amendment to the TSA (the "TSA Amendment"), which extended the expiration date of the TSA as it related to certain transfer agent and client services functions from June 30, 2014 to September 30, 2014. Pursuant to the TSA Amendment, WREF and its affiliates continued to provide support for the transfer agent and client services functions through September 30, 2014 to Signature Office REIT in exchange for a monthly consulting fee of $6,500 (the "Amended Consulting Fee"). All other transitional services described in the TSA expired on June 30, 2014, in accordance with its terms. The TSA Amendment expired on September 30, 2014 in accordance with its terms.

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Related-Party Costs

Pursuant to the terms of the agreements described above, Signature Office REIT incurred the following related-party costs for the three months ended March 31, 2015 and 2014:



	Three Months Ended
	March 31,
	2015		2014
Consulting fees	$	—	$	153,801
Rent expense	—		13,656
Total	$	—	$	167,457

8. Subsequent Event

Declaration of Distributions

On May 5, 2015, Signature Office REIT’s board of directors declared a distribution to stockholders for the period commencing on March 14, 2015 and ending on the day immediately preceding the Merger Effective Time in a prorated amount based on its current annual distribution rate of $1.50 per share (a 6.0% annualized yield on a $25.00 original share price). In the event that the Merger Effective Time is earlier than June 16, 2015, the distribution to stockholders will be in an amount based on the number of days from and including March 14, 2015 through the day immediately preceding the Merger Effective Time. In the event that the Merger Effective Time is on or after June 16, 2015, the distribution to stockholders will be in an amount of $0.375 per share payable to stockholders of record as of June 15, 2015, plus an amount, if any, based on the number of days from and including June 16, 2015 through the day immediately preceding the Merger Effective Time. The payment date for such distributions will be the later of a day in June 2015 chosen by the officers of Signature Office REIT or a date as soon as reasonably practicable following the Merger Effective Time, taking into account the time required by Signature Office REIT’s transfer agent to determine stockholders of record as of the record dates for such distributions.


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as our consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Overview

We operate a diversified portfolio of commercial real estate consisting of high-quality, income-producing office properties primarily leased to creditworthy entities located in major metropolitan areas throughout the United States. Portfolio data as of March 31, 2015 and 2014 is as follows:



	March 31,
	2015	2014
Total number of properties/buildings	13 / 15	13 /15
Total square feet	2,623,753	2,623,527
Percent of total square feet leased	97.5%	99.3%

We have elected to be taxed as a REIT for federal income tax purposes and have operated as such beginning with our taxable year ended December 31, 2010.

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From June 2010 through June 2013, we raised gross offering proceeds of approximately $527.7 million through the issuance of common stock under our Initial Offering, including proceeds from our DRP, and we have used those proceeds, net of fees, to invest in real estate and repay borrowings used to acquire real estate properties in advance of raising equity proceeds. We continued to raise equity proceeds through the DRP through March 2014, after which the DRP was terminated. As a result, starting with the second quarter of 2014, all distributions have been or are expected to be paid in cash and will not be reinvested in shares of our common stock. In addition, the share redemption program, as amended, was terminated effective April 30, 2014.

From inception through December 31, 2013, we had no paid employees and were externally advised and managed by the Advisor and Wells Management, wholly owned subsidiaries of WREF. On January 1, 2014, upon the termination of the Revised Advisory Agreement and the hiring of the employees necessary to perform the requisite corporate functions previously performed by the Advisor and its affiliates, we completed our transition to a self-managed company. For additional details regarding our transition to self-management, please refer to Note 7 of the accompanying consolidated financial statements.

Following our initial fundraising and acquisition phases, we have continued to concentrate our efforts on actively managing our assets, including enhancing the composition of our portfolio and its total return potential for our stockholders. In addition, we have more recently focused on the exploration of strategic options which could result in the execution of a transaction well in advance of July 31, 2020, the date by which we must have listed on a national securities exchange or sought stockholder approval to (i) extend or amend this listing deadline or (ii) begin liquidation. In connection with our exploration of strategic options, on November 21, 2014, we entered into the Merger Agreement with Griffin. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each share of our common stock issued and outstanding immediately prior to the Merger Effective Time will be converted into 2.04 shares of common stock of Griffin Common Stock. In evaluating the Merger Agreement, our board of directors consulted with our senior management and legal, business and financial advisors and considered several factors that it viewed as supporting its decision to enter into the Merger Agreement with Griffin.

Subject to limitations set forth in the Merger Agreement, our operating strategy entails actively managing our portfolio to generate sufficient cash flow from operations to meet our required obligations and to provide current income in the form of cash distributions to our investors; managing lease expirations with a goal of achieving diversified lease expiration dates; maintaining a moderate leverage profile; considering appropriate actions for future lease expirations resulting in receipt of increased rents over longer terms; and controlling administrative operating expenses as a percentage of revenues. With our goals of providing current income to our stockholders and preserving their capital, we view our most significant challenges as (i) a projected reduction in operating cash flows in 2015 due to vacancy created by the early lease terminations exercised in 2014 by Leidos at the Franklin Center Building and JP Morgan at the Royal Ridge V Building, which were effective December 31, 2014 and January 23, 2015, respectively, (ii) addressing the risks associated with our lease expiration dates, specifically in 2017 and 2019, and (iii) repaying or refinancing our outstanding borrowings as they become due. Each of these challenges was considered in our evaluation of the terms of the Merger Agreement.

Liquidity and Capital Resources

Overview

We have continued to actively manage our real estate portfolio in order to maximize cash flow from operations, to meet our required obligations and to provide current income in the form of cash distributions to our investors. We anticipate that our primary sources of future capital will be derived from operating cash flows from our real estate portfolio and draws from our credit facility. The Signature Unsecured Debt Facility is comprised of the $200 million Signature Revolving Facility and the $100 million Signature Term Loan, which mature on September 26, 2015 and September 26, 2017, respectively. As of March 31, 2015, we had outstanding balances on the Signature Revolving Facility and the Signature Term Loan of approximately $59.25 million and $100 million, respectively. We do not expect the results of operations to provide sufficient cash flow to pay off the Signature Revolving Facility. We have the option to extend the Signature Revolving Facility for two periods of 12 months each subject to satisfaction of certain conditions,

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including (i) no existence of default, (ii) no material adverse effect has occurred in our financial condition, (iii) compliance with covenants set forth in the Signature Unsecured Debt Facility, and (iv) payment of an extension fee equal to 0.25% of the amount committed under the Signature Revolving Facility. To the extent necessary, we intend to either refinance the Signature Unsecured Debt Facility prior to the maturity of the Signature Revolving Facility in September 2015 or to exercise the first of two 12-month extension options available to us.

Subject to limitations set forth in the Merger Agreement, we expect that our primary uses of capital will continue to include stockholder distributions and funding capital improvements to our existing properties, as well as potential future acquisitions of real estate properties. Stockholder distributions will be largely dependent upon, among other things, the amount of cash generated from our operating activities, our determination of near-term cash needs for capital expenditures at our properties and debt repayments, and our expectations of future operating cash flow generated from our properties.

In determining how and when to allocate cash resources in the future, we will initially consider the source of the cash. Substantially all cash raised from operations, after payments of periodic operating expenses and certain capital expenditures required for our properties, is anticipated to be used to pay distributions to stockholders. Therefore, to the extent that cash flows from operations are lower, distributions are anticipated to be lower as well. In addition, distributions may be lower to the extent that operating cash flow is reserved to fund future capital expenditures for our existing portfolio in order to achieve our investment objectives. Substantially all net proceeds generated from debt financing will be available to fund capital improvement to our existing properties, as well as potential future acquisitions of real estate properties, and to pay down outstanding borrowings.

Short-Term Liquidity and Capital Resources

During the three months ended March 31, 2015, net cash provided by operating activities was approximately $6.2 million, which consisted primarily of rental receipts and tenant reimbursements in excess of payments for property operating costs, property management fees, and general and administrative costs, such as salaries, legal, accounting and other professional fees. During the three months ended March 31, 2015, we paid total distributions to stockholders of approximately $7.7 million. We expect to use the majority of our future net cash flow from operating activities to fund distributions to stockholders (please refer to the Distributions section below for additional information). To the extent that future net cash flow from operating activities exceeds distributions to stockholders, we intend to make repayments on the Signature Revolving Facility.

During the three months ended March 31, 2015, net cash used for investing activities was approximately $1.9 million, which primarily related to payment of deferred lease costs associated with a new lease executed in January 2015 with NEC Corporation of America ("NEC") at the Royal Ridge V Building, effective December 1, 2015.

Net cash used in financing activities for the three months ended March 31, 2015 was approximately $4.4 million. During the three months ended March 31, 2015, we paid total distributions to stockholders of approximately $7.7 million, which were funded by a combination of net cash provided by operating activities and debt proceeds. During the three months ended March 31, 2015, we received gross debt proceeds of approximately $4.3 million from the Signature Revolving Facility, which were primarily used to fund distributions and deferred lease costs associated with the NEC lease. During the three months ended March 31, 2015, we made total debt repayments of approximately $1.0 million on the Signature Revolving Facility.

We expect to utilize the residual cash balance of approximately $4.9 million as of March 31, 2015 to satisfy current and future liabilities. We believe that we have adequate liquidity and capital resources to meet our current obligations as they come due. As of April 30, 2015, we had access to the borrowing capacity under the Signature Unsecured Debt Facility of $140.9 million.

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event that the Merger Effective Time is earlier than June 16, 2015, the distribution to stockholders will be in an amount based on the number of days from and including March 14, 2015 through the day immediately preceding the Merger Effective Time. In the event that the Merger Effective Time is on or after June 16, 2015, the distribution to stockholders will be in an amount of $0.375 per share payable to stockholders of record as of June 15, 2015, plus an amount, if any, based on the number of days from and including June 16, 2015 through the day immediately preceding the Merger Effective Time. The payment date for such distributions will be the later of a day in June 2015 chosen by our officers or a date as soon as reasonably practicable following the Merger Effective Time, taking into account the time required by our transfer agent to determine stockholders of record as of the record dates for such distributions. We intend to utilize operating cash flow to fund this stockholder distribution; however, if necessary, we may also utilize other sources of cash to fund a portion of this distribution.

As of March 31, 2015, the Signature Unsecured Debt Facility contained, among others, the following restrictive covenants:



		Actual Performance
	Covenant Level	March 31, 2015
Fixed-charge coverage ratio	Greater than 1.75x	9.45
Total debt relative to total asset value	Less than 55%	29%
Secured debt relative to consolidated tangible assets	Less than 40%	0%
Secured debt, excluding non-recourse debt, relative to consolidated tangible assets	Less than 15%	0%
Tangible net worth	Greater than approximately $317.7 million⁽¹⁾	$436.5 million
Net distributions paid relative to funds from operations ("Restricted Payments Covenant")	Less than 90%⁽²⁾	N/A⁽²⁾


⁽¹⁾	Our tangible net worth must be greater than $233.8 million, plus 72.25% of the gross cash proceeds, net of redemptions paid, of all of our equity issuances consummated after September 26, 2012.

⁽²⁾

Total distributions for each fiscal year, less amounts reinvested pursuant to the DRP, cannot exceed the greater of (i) 90% of funds from operations, as defined in the Signature Unsecured Debt Facility, as long as total distributions, less amounts reinvested pursuant to the DRP, for any two consecutive quarters do not exceed 100% of funds from operations, as defined, or (ii) the minimum amount required to continue to qualify as a REIT.

As of March 31, 2015, we believe we were in compliance and expect to remain in compliance with these, and all other, restrictive covenants of the Signature Unsecured Debt Facility. Although we expect to comply with these covenants for the duration of the term of the Signature Unsecured Debt Facility, depending on our future operating performance and distribution payments, we cannot assure such compliance. In the event that we project future non-compliance with the Restricted Payments Covenant, we have the ability to remain in compliance by reducing future distribution payments.

Long-Term Liquidity and Capital Resources

Subject to limitations set forth in the Merger Agreement, over the long term, we expect that our primary sources of capital will include proceeds from secured or unsecured financings from banks and other lenders and net cash flows from operations, including proceeds from strategic property sales. We anticipate funding distributions to our stockholders from net cash flows from operations; however, we may borrow funds to fund distributions as well.

We expect that our principal demands for capital will include operating expenses, including interest expense on any outstanding indebtedness; funding capital improvements and leasing costs with respect to our existing properties, as well as potential future acquisitions of real estate properties; repayment of debt; and distributions.

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We have a policy of keeping our debt at no more than 50% of the cost of our assets (before depreciation), referred to as the debt-to-real-estate-asset ratio; however, we may borrow in excess of this threshold under some circumstances. Our working capital line of credit provides flexibility with regard to managing our capital resources. Over the short term, we expect to temporarily draw on the Signature Revolving Facility to fund capital improvements and leasing costs with respect to our existing properties, as well as potential future acquisitions of real estate properties. Additionally, we may place long-term debt on our existing properties and any properties acquired in the future. We currently intend to maintain amounts outstanding under our long-term debt arrangement so that we will have more funds available for working capital and potential investment in capital improvements and leasing costs with respect to our existing properties, as well as potential future acquisitions of real estate properties, which may allow us to further diversify our portfolio. However, our level of leverage will depend upon various factors to be considered in the sole discretion of our board of directors, including, but not limited to, our ability to pay distributions, the amount of capital improvements and leasing costs required for our existing properties, the availability of real estate properties meeting our investment criteria, the availability of debt, and changes in the cost of debt financing. Over the long term, we intend to maintain debt levels less than the 50% debt-to-real-estate-asset ratio. This conservative leverage goal could reduce the amount of current income we can generate for our stockholders, but it also reduces their risk of loss. We believe that preserving investor capital while generating stable current income is in the best interest of our stockholders. As of March 31, 2015, our debt-to-real-estate-asset ratio was approximately 28%. Prior to its amendment in August 2014, our charter limited us from incurring debt in relation to our net assets in excess of 100%, unless borrowings in excess of this limit were approved by a majority of our board of directors and disclosed in our next quarterly report. During the periods presented, our debt-to-net asset ratio did not exceed 100%.

Contractual Obligations and Commitments

As of March 31, 2015, our contractual obligations were as follows:



	Payments Due By Period
Contractual Obligations	Total		2015		2016-2017		2018-2019		Thereafter
Debt obligations	$	159,250,000	$	59,250,000	$	100,000,000	$	—	$	—
Estimated interest on debt obligations⁽¹⁾	6,438,168		2,333,235		4,104,933		—		—
Capital lease obligations⁽²⁾	115,000,000		—		—		—		115,000,000
Tenant allowances	9,600,350		9,600,350		—		—		—
Total	$	290,288,518	$	71,183,585	$	104,104,933	$	—	$	115,000,000


⁽¹⁾	Interest obligations on variable-rate debt are measured at the rate at which they are effectively fixed with interest rate swaps (where applicable). Interest obligations on all other debt are measured at the contractual rate.

⁽²⁾

Amounts include principal obligations only. We will recognize an additional $82.8 million in interest expense on these obligations over the term of the leases. The principal obligation and related interest expense will be completely offset by our investments in development authority bonds and their corresponding interest income (see Note 2 and Note 5 to the accompanying consolidated financial statements).

Merger-Related Contingencies

The consummation of the Merger is subject to certain customary closing conditions, including, among others, the approval of the Merger by our stockholders. The Merger Agreement may be terminated under certain circumstances by Griffin or us. Upon termination, if such termination occurs under certain specified circumstances, we may be required to pay Griffin a termination fee of $20 million. The Merger Agreement also provides that one party may be required to reimburse the other party's transaction expenses, not to exceed $3 million, if the Merger Agreement is terminated under certain circumstances.

In connection with entering into the Merger Agreement with Griffin, our Compensation Committee unanimously approved, declared and granted awards under the Retention and Transaction Award Plan to eligible employees in an aggregate amount of $2.2 million. Upon the closing of the Merger, we are obligated to fund these cash retention bonus

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payments; however, the consummation of the Merger is subject to certain customary closing conditions, including, among others, the approval of the Merger by our stockholders. In addition, upon the closing of the Merger, we will be obligated to fund severance payments to eligible employees in accordance with the terms of respective employment agreements and our severance plan. Should the Merger with Griffin not be completed, we will not be obligated to fund these cash retention bonus and severance payments.

Distributions

Our board of directors declares quarterly distributions based on a single record date at the end of the quarterly period. In determining the rate of stockholder distributions, our board considers a number of factors, including the current and future levels of cash available to fund stockholder distributions, which is dependent upon the operations of our properties, our current and future projected financial condition, our capital expenditure requirements, our expectations of future sources of liquidity, and the annual distribution requirements necessary to maintain our status as a REIT under the Code. When evaluating the amount of current and future cash available to fund distributions to stockholders, we consider net cash provided by operating activities (as presented in accordance with GAAP in the accompanying consolidated statements of cash flows). We also consider certain costs that were incurred for the purpose of generating future earnings and appreciation in value over the long term, including acquisition-related costs. In accordance with Accounting Standards Codification Topic 805 Business Combinations ("ASC 805"), we expense all acquisition-related costs as incurred. Acquisition-related costs include customary third-party costs, such as legal fees and expenses; costs of appraisals; accounting fees and expenses; title insurance premiums; and other closing costs. Generally, our policy is to pay distributions based on current and projected cash flow from operations after giving consideration to certain amounts excluded from cash flow from operations under GAAP. Over the long term, we expect to fund stockholder distributions principally with cash flow from operations; however, we may also use borrowings to fund stockholder distributions.

Our board of directors declared a quarterly distribution for stockholders of record as of March 13, 2015 in the amount of $0.375 per share (a 6.0% annualized yield on a $25.00 original share price). This distribution was paid in March 2015.

For the three months ended March 31, 2015, we paid total distributions to stockholders of approximately $7.7 million. During the same period, net cash provided by operating activities was approximately $6.2 million. As a result, the distributions paid to common stockholders for the three months ended March 31, 2015, as described above, were funded with approximately $6.2 million from cash provided by operating activities and the remaining amount of approximately $1.5 million was funded from our borrowings. Borrowings have been used to fund distributions to the extent that quarterly cash flows from operating activities have been used to fund annual payments of operating expenses, specifically the payment of a significant portion of annual real estate taxes during the three months ended March 31, 2015.

On May 5, 2015, our board of directors declared a distribution to stockholders for the period commencing on March 14, 2015 and ending on the day immediately preceding the Merger Effective Time in a prorated amount based on its current annual distribution rate of $1.50 per share (a 6.0% annualized yield on a $25.00 original share price). In the event that the Merger Effective Time is earlier than June 16, 2015, the distribution to stockholders will be in an amount based on the number of days from and including March 14, 2015 through the day immediately preceding the Merger Effective Time. In the event that the Merger Effective Time is on or after June 16, 2015, the distribution to stockholders will be in an amount of $0.375 per share payable to stockholders of record as of June 15, 2015, plus an amount, if any, based on the number of days from and including June 16, 2015 through the day immediately preceding the Merger Effective Time. The payment date for such distributions will be the later of a day in June 2015 as chosen by our officers or a date as soon as reasonably practicable following the Merger Effective Time, taking into account the time required by our transfer agent to determine stockholders of record as of the record dates for such distributions.

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Results of Operations

Overview

Our real estate operating results declined for the three months ended March 31, 2015, as compared to the same period in 2014, primarily due to early lease terminations exercised by (i) Leidos, effective December 31, 2014, for approximately 15% of its space in the Franklin Center Building and (ii) JP Morgan, effective January 23, 2015, for the entire Royal Ridge V Building. In January 2015, we entered into a 10-year lease agreement with NEC to lease the entire space previously occupied by JP Morgan at the Royal Ridge V Building, effective December 1, 2015. Therefore, we expect to see an improvement in our real estate operating results when the lease with NEC commences in December 2015.

Comparison of the three months ended March 31, 2015 versus the three months ended March 31, 2014

The following table sets forth data from our consolidated statements of operations for the three months ended March 31, 2015 and 2014, respectively, as well as each balance as a percentage of total revenues for the same periods presented:



	Three months ended March 31, 2015			% of Revenues		Three months ended March 31, 2014			% of Revenues		$ Increase (Decrease)			% Increase (Decrease)
Revenues:
Rental income	$	12,354,063		68	%	$	13,350,268		72	%	$	(996,205	)	(7	)%
Tenant reimbursements	5,465,979			30	%	5,161,539			28	%	304,440			6	%
Other property income	433,207			2	%	29,168			0	%	404,039			N/M
Total revenues	18,253,249			100	%	18,540,975			100	%	(287,726		)	(2	)%
Expenses:
Property operating costs	6,647,708			37	%	6,403,750			35	%	243,958			4	%
Asset and property management fees	253,184			1	%	274,947			1	%	(21,763		)	(8	)%
Depreciation	4,595,705			25	%	4,448,170			23	%	147,535			3	%
Amortization	2,879,842			16	%	2,759,098			15	%	120,744			4	%
General and administrative	1,681,513			9	%	1,579,128			9	%	102,385			6	%
Total expenses	16,057,952			88	%	15,465,093			83	%	592,859			4	%
Real estate operating income	2,195,297			12	%	3,075,882			17	%	(880,585		)	(29	)%
Other income (expense):
Interest expense	(2,989,206		)	(16	)%	(3,091,152		)	(17	)%	(101,946		)	(3	)%
Interest and other income	1,725,098			9	%	1,730,157			9	%	(5,059		)	0	%
Income before income tax expense	931,189			5	%	1,714,887			9	%	(783,698		)	(46	)%
Income tax expense	(41,090		)	0	%	(35,068		)	0	%	6,022			17	%
Net income	$	890,099		5	%	$	1,679,819		9	%	$	(789,720	)	(47	)%
Per-share net income - basic and diluted	$	0.04				$	0.08				$	(0.04	)	(50	)%

*N/M - Not Meaningful

Revenues

Rental income decreased $1.0 million, or 7%, for the three months ended March 31, 2015 compared to the same period in 2014, due to (i) an early lease termination option exercised by Leidos, effective December 31, 2014, for approximately 29,000 square feet of its space in the Franklin Center Building and (ii) an early lease termination by JP Morgan for the entire Royal Ridge V Building, effective January 23, 2015. We continue to market the vacant space in the Franklin Center Building for lease. We expect that rental income will remain relatively stable as compared to the three months ended March 31, 2015 until the new lease with NEC at the Royal Ridge V Building commences in December 2015.

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Other property income increased $0.4 million for the three months ended March 31, 2015 compared to the same period in 2014, due to termination penalty fees recognized pursuant to the agreement reached with JP Morgan to terminate the final remaining floor of its lease at the Royal Ridge V Building, effective January 23, 2015. This lease termination resulted in a total termination penalty fee from JP Morgan of approximately $1.8 million, payable to us and recognized on a straight-line basis from the early termination notice date through January 2015. This lease termination income was offset by additional depreciation and amortization related to the acceleration of depreciation and amortization for the remaining tangible and intangible lease assets associated with the early lease terminations. We expect other property income to stabilize during the remainder of 2015 as a result of not recognizing lease termination income equal to that recognized in 2014 and the first quarter of 2015 related to the Leidos and JP Morgan early lease terminations.

Other Income (Expense)

Interest expense remained relatively stable, decreasing $102,000, or 3%, for the three months ended March 31, 2015 compared to the same period in 2014. Future levels of interest expense will vary, primarily based on the amounts of future borrowings and the costs of borrowings. Future borrowings will be used primarily to invest in additional capital expenditures, including improvements to our existing properties, as well as potential future acquisitions of real estate properties.

Net Income

Our net income decreased $0.8 million for the three months ended March 31, 2015 compared to the same period in 2014, primarily due to a decrease in our real estate operating income of $0.9 million as a result of the Leidos and JP Morgan early lease terminations discussed above. Our net income per share decreased $0.04 for the three months ended March 31, 2015 compared to the same period in 2014 due to the decrease in our net income discussed above.

Except as noted in the sections above, we anticipate that our net income and net income per share for the remainder of 2015 will remain relatively stable as compared to the three months ended March 31, 2015 until the new lease with NEC at the Royal Ridge Building commences in December 2015.

Funds From Operations and Adjusted Funds From Operations

Funds from Operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), is a non-GAAP financial measure considered by some equity REITs in evaluating operating performance. We compute FFO in accordance with NAREIT's definition as GAAP net income adjusted to exclude: gains (losses) on sales of real estate, impairments of real estate assets, real estate-related depreciation and amortization and adjustments for unconsolidated partnerships and joint ventures. We consider FFO a useful measure of our performance because it principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful supplemental measure of our performance. We believe that the use of FFO, combined with the required GAAP presentations, is beneficial in improving our investors' understanding of our operating results and allowing for comparisons among other companies who define FFO as we do.

We do not, however, believe that FFO is the only measure of the sustainability of our operating performance. Changes in GAAP accounting and reporting rules that were put into effect after the establishment of NAREIT's definition of FFO in 1999 result in the inclusion of a number of items in FFO that do not correlate with the sustainability of our operating performance (e.g., acquisition expenses and amortization of certain in-place lease intangible assets and liabilities, among others). Therefore, in addition to FFO, we present Adjusted Funds from Operations ("AFFO"), a non-GAAP measure. AFFO is calculated by adjusting FFO to exclude the income and expenses that we believe are not reflective of the sustainability of our ongoing operating performance, as further explained below:


•	Additional amortization of lease assets (liabilities). GAAP implicitly assumes that the value of intangible lease assets (liabilities) diminishes predictably over time and, thus, requires these charges to be recognized ratably

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over the respective lease terms. Such intangible lease assets (liabilities) arise from the allocation of acquisition price related to the value of opportunity costs associated with lost rentals, the value of tenant relationships, and the value of effective rental rates of in-place leases that are above or below market rates of comparable leases at the time of acquisition. Like real estate values, market lease rates in aggregate have historically risen or fallen with local market conditions. As a result, management believes that, by excluding these charges, AFFO provides useful supplemental information that is reflective of the performance of our real estate investments and that is useful in assessing the sustainability of our operations.

•

Straight-line rental income. In accordance with GAAP, rental payments are recognized as income on a straight-line basis over the terms of the respective leases. Thus, for any given period, straight-line rental income represents the difference between the contractual rental billings for that period and the average rental billings over the lease term for the same length of time. This application results in income recognition that can differ significantly from the current contract terms. By adjusting for this item, we believe AFFO provides useful supplemental information reflective of the realized economic impact of our leases, which is useful in assessing the sustainability of our operating performance.

•

Real estate acquisition-related costs. Acquisition expenses are incurred for investment purposes (i.e., to promote portfolio appreciation and generation of future earnings over the long term) and, therefore, do not correlate with the ongoing operations of our portfolio. We believe that excluding these items from AFFO provides supplemental information indicative of the sustainability of our operations. This exclusion also improves comparability of our reporting periods and of our company with other real estate operators.

•

Noncash interest expense. This item represents amortization of financing costs paid in connection with executing our debt instruments. GAAP requires these items to be recognized over the remaining term of the respective debt instrument, which may not correlate with the ongoing operations of our real estate portfolio. By excluding these items, we believe that AFFO provides supplemental information that allows for better comparability of reporting periods, which is useful in assessing the sustainability of our operations.

•

Master lease proceeds. In conjunction with certain acquisitions, we may enter into a master lease agreement with a seller, whereby the seller is obligated to pay us rent pertaining to certain spaces impacted by existing rental abatements. In accordance with GAAP, master lease proceeds are recorded as an adjustment to the basis of real estate assets at the time of acquisition, and, accordingly, are not included in revenues, net income, or FFO. This application results in income recognition that can differ significantly from current contract terms. By adjusting for this item, we believe AFFO is reflective of the realized economic impact of our leases (including master leases) that is useful in assessing the sustainability of our operating performance.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. FFO and AFFO should not be considered alternatives to GAAP net income. Rather, these measures should be reviewed in conjunction with GAAP measurements, including GAAP net income, as an indication of our performance. FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties, nor is either measure indicative of funds available to fund our cash needs, including our ability to make distributions.

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Reconciliations of our net income to FFO and AFFO for the three months ended March 31, 2015 and 2014 are provided below:



	Three Months Ended
	March 31,
	2015			2014
Reconciliation of Net Income to FFO and AFFO:
Net income	$	890,099		$	1,679,819
Adjustments:
Depreciation of real estate assets	4,593,467			4,447,075
Amortization of lease-related costs	2,879,842			2,759,098
Total Funds From Operations adjustments	7,473,309			7,206,173
Funds From Operations	8,363,408			8,885,992

Other income (expenses) included in net income that do not correlate with our operations:
Additional amortization of lease assets	806,910			719,788
Straight-line rental income	(412,773		)	(562,413		)
Noncash interest expense	276,482			301,482
Noncash other property income	(160,000		)	—
Master lease proceeds	—			345,252
Adjusted Funds From Operations	$	8,874,027		$	9,690,101

Weighted-average common shares outstanding – basic and diluted	20,473,024			20,435,361

FFO per common share - basic and diluted	$	0.41		$	0.43
AFFO per common share - basic and diluted	$	0.43		$	0.47

Election as a REIT

We have elected to be taxed as a REIT under the Code and have operated as such beginning with our taxable year ended December 31, 2010. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted taxable income, as defined in the Code, to our stockholders, computed without regard to the dividends-paid deduction and by excluding our net capital gain. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost, unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes.

We may perform additional, noncustomary services for tenants of buildings that we own through taxable REIT subsidiaries, including any real estate or non-real-estate-related services; however, any earnings related to such services are subject to federal and state income taxes. In addition, for us to continue to qualify as a REIT, we must limit our investments in taxable REIT subsidiaries to 25% of the value of our total assets. TRS is a wholly owned subsidiary of Signature Office REIT that is organized as a Delaware limited liability company. Through December 31, 2013, we elected to treat TRS as a taxable REIT subsidiary. On December 9, 2013, we elected to treat TRS as a disregarded entity, effective January 1, 2014.

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Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted rates expected to be in effect when the temporary differences reverse. Deferred tax expense or benefits are recognized in the financial statements according to the changes in deferred tax assets or liabilities between years. Valuation allowances are established to reduce deferred tax assets when it becomes more likely than not that such assets, or portions thereof, will not be realized. No provision for federal income taxes has been made in our accompanying consolidated financial statements as we made distributions in excess of taxable income for the periods presented.

We are subject to certain state and local taxes related to property operations in certain locations, which have been provided for in our accompanying consolidated financial statements. We record interest and penalties related to uncertain tax positions, if any, as general and administrative expense in the accompanying consolidated statements of operations.

Inflation

We are exposed to inflation risk, as income from long-term leases is intended to be the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps; 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. However, due to the long-term nature of the leases, the leases may not reset frequently enough to fully cover inflation.

Application of Critical Accounting Policies

Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

Investment in Real Estate Assets

We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of our assets by class are as follows:



Buildings	40 years
Building improvements	5-25 years
Site improvements	15 years
Tenant improvements	Shorter of lease term or economic life
Furniture, fixtures, and equipment	3-5 years
Intangible lease assets	Lease term

Evaluating the Recoverability of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate and related intangible assets of both operating properties and properties under construction in which we have an ownership interest, either directly or through investments in joint ventures, may not be recoverable.

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When indicators of potential impairment are present that suggest that the carrying amounts of real estate assets and related intangible assets may not be recoverable, we assess the recoverability of these assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying values, we adjust the carrying value of the real estate assets and related intangible assets to the estimated fair values, pursuant to the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are calculated based on the following information, in order of preference, depending upon availability: (i) recently quoted market price(s) for the subject property, or highly comparable properties, under sufficiently active and normal market conditions, or (ii) the present value of future cash flows, including estimated residual value. We have determined that there has been no impairment in the carrying value of our real estate assets to date.

Projections of expected future operating cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property's fair value and could result in the misstatement of the carrying value of our real estate assets and related intangible assets and net income (loss).

Allocation of Purchase Price of Acquired Assets

Upon the acquisition of real properties, we allocate the purchase price of properties to tangible assets, consisting of land and building, site improvements, and identified intangible assets and liabilities, including the value of in-place leases, based in each case on our estimate of their fair values.

The fair values of the tangible assets of an acquired property (which includes land and building) are determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land and building based on our determination of the relative fair value of these assets. We determine the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors we consider in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, we include real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market demand.

Intangible Assets and Liabilities Arising from In-Place Leases Where We Are the Lessor

As further described below, in-place leases where we are the lessor may have values related to direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease, tenant relationships, and effective contractual rental rates that are above or below market rates:

•

Direct costs associated with obtaining a new tenant, including commissions, tenant improvements, and other direct costs, are estimated based on management's consideration of current market costs to execute a similar lease. Such direct costs are included in intangible lease origination costs in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.

•

The value of opportunity costs associated with lost rentals avoided by acquiring an in-place lease is calculated based on the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Such opportunity costs are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.


•	The value of tenant relationships is calculated based on the expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. Values associated with tenant relationships are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.

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•

The value of effective rental rates of in-place leases that are above or below the market rates of comparable leases is calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received pursuant to the in-place leases and (ii) management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market lease values are recorded as intangible lease assets or liabilities and are amortized as an adjustment to rental income over the remaining terms of the respective leases.

See Note 2 to our accompanying consolidated financial statements included herein for a tabular presentation of our intangible in-place lease assets and liabilities and related amortization expense.

Evaluating the Recoverability of Intangible Assets and Liabilities

The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms. There may be instances in which intangible lease assets and liabilities become impaired, and we are required to expense the remaining asset or liability immediately or over a shorter period of time. Lease modifications, including, but not limited to, lease terminations and lease extensions, may impact the value and useful life of in-place leases. Such lease modifications will be evaluated for impairment if the original in-place lease terms have been modified. For lease modifications where the tenant exercises an early lease termination option, the related unamortized intangible lease assets and liabilities are amortized over the shortened lease term. For lease terminations that are effective immediately, we recognize an impairment loss. For other lease modifications where the discounted cash flows of the modified in-place lease stream are less than the discounted cash flows of the original in-place lease stream, we reduce the carrying value of the intangible lease assets to reflect the modified lease terms and recognize an impairment loss. For lease extensions of in-place leases that are executed more than one year prior to the original lease expiration date, the useful life of the intangible lease assets and liabilities will be extended over the new lease term with the exception of those components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term. Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term. In connection with the early lease termination of a tenant at the Duke Bridges I Building in March 2015, which was effective immediately, we recognized an impairment loss on the related unamortized intangible lease assets of approximately $0.5 million during the three months ended March 31, 2015.

Related-Party Transactions and Agreements

For the period from January 1, 2014 through June 30, 2014, we were party to the TSA with WREF, a former related party, pursuant to which WREF and its affiliates provide certain consulting, support and transitional services to us in order to facilitate our successful transition to self-management. From July 1, 2014 through September 30, 2014, we were party to the TSA Amendment, which extended services under the TSA as it related to certain transfer agent and client services functions. See Note 7 to our accompanying consolidated financial statements included herein for a discussion of the various related-party agreements and the related transactions, fees, and reimbursements. In addition, effective June 27, 2014, we entered into an agreement with Wells REF - 6200 The Corners Parkway Owner, LLC, a subsidiary of WREF, to lease 4,221 square feet, or approximately 3%, of the 6200 The Corners Parkway Building to serve as our corporate headquarters. This lease does not indicate any other business relationship between us and WREF except one of a landlord and tenant.

Commitments and Contingencies

We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 5 of our accompanying consolidated financial statements for further explanation. Examples of such commitments and contingencies include obligations under capital leases, commitments under existing lease agreements and Merger-related contingencies.

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Subsequent Event


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our future earnings, cash flows, and fair values of our financial instruments depend in part upon prevailing market interest rates. Market risk is the exposure to loss resulting from changes in interest rates, foreign currency, exchange rates, commodity prices, and equity prices. As a result, the primary market risk to which we believe we are exposed is interest rate risk. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control contribute to interest rate risk. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flow primarily through a low-to-moderate level of overall borrowings, as well as managing the variability in rate fluctuations on our outstanding debt. As such, we manage our ratio of fixed- to floating-rate debt with the objective of achieving a mix that we believe is appropriate in light of anticipated changes in interest rates. We closely monitor interest rates and will continue to consider the sources and terms of our borrowing facilities to determine whether we have appropriately guarded ourselves against the risk of increasing interest rates in future periods.

Additionally, we have entered into an interest rate swap, and may enter into other interest rate swaps, caps, or other arrangements, to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.

Our financial instruments consist of the Signature Revolving Facility and the Signature Term Loan. We have effectively fixed the interest rate on $75 million of the Signature Term Loan through an interest rate swap agreement. As of March 31, 2015, our consolidated debt consisted of the following:



	2015			2016			2017			2018			Thereafter
Maturing debt:
Effectively variable-rate debt	$	59,250,000		$	—		$	25,000,000		$	—		$	—
Effectively fixed-rate debt	$	—		$	—		$	75,000,000		$	—		$	—

Average interest rate:
Effectively variable-rate debt	1.93		%	—		%	1.83		%	—		%	—		%
Effectively fixed-rate debt	—		%	—		%	2.54		%	—		%	—		%

All of our debt was entered into for other-than-trading purposes. To the extent that we borrow additional funds in the future under the Signature Revolving Facility or potential future variable-rate lines of credit, we would have exposure to increases in interest rates, which would potentially increase our cost of debt. The amounts outstanding on our variable-rate debt facility in the future will largely depend upon future levels of cash provided by operating activities, the amount of capital improvements and leasing costs required for our existing properties, and future acquisition and disposition activity.

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We do not believe there is any exposure to increases in interest rates related to the capital lease obligations of $115.0 million at March 31, 2015, as the obligations are at fixed interest rates and are completely offset by fixed interest income on the related investment in development authority bonds.


ITEM 4.	CONTROLS AND PROCEDURES

Management's Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods in SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II.	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.


ITEM 1A.	RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


(a)	There were no unregistered sales of equity securities during the quarter ended March 31, 2015.


(b)	Not applicable.


(c)	Not applicable.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES


(a)	There have been no defaults with respect to any of our indebtedness.


(b)	Not applicable.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5.	OTHER INFORMATION


(a)	During the first quarter of 2015, there was no information that was required to be disclosed in a report on Form 8-K that was not disclosed in a report on Form 8-K.

Declaration of Distributions


(b)	There are no material changes to the procedures by which stockholders may recommend nominees to our board of directors since the filing of our proxy statement on Schedule 14A in respect of our 2014 annual stockholders' meeting.


ITEM 6.	EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.

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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.



		SIGNATURE OFFICE REIT, INC. (Registrant)

May 5, 2015		/s/ Glen F. Smith
		Glen F. Smith Senior Vice President, Chief Financial Officer and Principal Financial Officer

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EXHIBIT INDEX TO

FIRST QUARTER 2015 FORM 10-Q OF

SIGNATURE OFFICE REIT



Exhibit No.			Description
2.1			Agreement and Plan of Merger by and among Griffin Capital Essential Asset REIT, Inc., Griffin SAS, LLC and Signature Office REIT, Inc (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed November 24, 2014)

3.1			Second Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed with the Commission on August 7, 2014)

3.2			Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed with the Commission on August 7, 2014)

4.1			Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 4 to the Registration Statement on Form S-11 (No. 333-163411) filed with the Commission on June 4, 2010)

31.1*			Certification of the Principal Executive Officer of the Company, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*			Certification of the Principal Financial Officer of the Company, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*			Certification of the Principal Executive Officer and Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*			XBRL Instance Document.

101.SCH*			XBRL Taxonomy Extension Schema.

101.CAL*			XBRL Taxonomy Extension Calculation Linkbase.

101.DEF*			XBRL Taxonomy Extension Definition Linkbase.

101.LAB*			XBRL Taxonomy Extension Label Linkbase.

101.PRE*			XBRL Taxonomy Extension Presentation Linkbase.

__________


*	Filed herewith.

SIGNATURE OFFICE REIT INC - FORM 10-Q - May 5, 2015

Attached files

SIGNATURE OFFICE REIT INC Reports