Dividend Capital Diversified Property Fund Inc. 8-K

Exhibit 99.2

 

 

 

 

 

Table of Contents

 

PERFORMANCE	3
NET ASSET VALUE	4
FINANCIAL HIGHLIGHTS	6
PORTFOLIO PROFILE	7
BALANCE SHEETS	8
STATEMENTS OF OPERATIONS	9
FUNDS FROM OPERATIONS	10
RESULTS OF OPERATIONS	12
FINANCE & CAPITAL	14
REAL PROPERTIES	17
LEASING ACTIVITY	18
INVESTMENT ACTIVITY	22
DEFINITIONS	24

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS 

 

Statements included in this portfolio performance and review package that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance or assumptions or forecasts related thereto) are forward looking statements. These statements are only predictions. We caution that forward looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in the forward looking statements. Forward looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

 

The forward looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to: the continuing impact of high unemployment and the slow economic recovery, which is having and may continue to have a negative effect on the following, among other things, the fundamentals of our business, including overall market demand and occupancy, tenant space utilization, and rental rates; the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis; general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate); our ability to effectively raise and deploy proceeds from our equity offerings; risks associated with the availability and terms of debt and equity financing and refinancing and the use of debt to fund acquisitions and developments, including the risk associated with interest rates impacting the cost and/or availability of financing and refinancing; the business opportunities that may be presented to and pursued by us; changes in laws or regulations (including changes to laws governing the taxation of real estate investment trusts); changes in accounting principles, policies and guidelines applicable to real estate investment trusts; environmental, regulatory and/or safety requirements; and the availability and cost of comprehensive insurance, including coverage for terrorist acts and earthquakes. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward looking statements after the date of this supplemental package, whether as a result of new information, future events, changed circumstances or any other reason. You should review the risk factors contained in Part I, Item 1A of our 2015 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 3, 2016, and in our subsequent quarterly reports.

 

Please see the section titled “Definitions” at the end of this portfolio performance and review package for definitions of terms used herein.

 

 

 

 

Performance

 

Dividend Capital Diversified Property Fund Inc. is a daily NAV-based REIT and has invested in a diverse portfolio of real property and real estate related investments. As used herein, “the Portfolio,” “we,” “our” and “us” refer to Dividend Capital Diversified Property Fund Inc. and its consolidated subsidiaries and partnerships except where the context otherwise requires.

 

Quarter Highlights

 

·

Total return of 1.91% for the quarter; 9.40% for the last 12 months

·

Acquired (i) retail property in Chester, NJ for $53.8 million, (ii) office property in Boca Raton, FL for $35.8 million, and (iii) retail property in Tulsa, OK for $31.8 million

·

Sold (i) office property in Sunnyvale, CA for $16.8 million and (ii) retail property in Rockland, MA for $1.6 million

·

Percentage leased of 90.1% as of December 31, 2015 (if weighted by the fair value of each segment, our portfolio was 91.7% leased as of December 31, 2015)

·

Paid weighted-average distribution of $0.0894/share

 

 

 

(1)

As determined in accordance with our Valuation Procedures, filed as Exhibit 99.1 to our 2015 Annual Report on Form 10-K. See a discussion of some of the differences between the definition of “fair value” of our real estate assets as used in our Valuation Procedures and in this document versus GAAP values in the section titled “Definitions” beginning on page 24. For a description of key assumptions used in calculating the value of our real properties as of December 31, 2015, please refer to “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of our 2015 Annual Report on Form 10-K.

(2)	Any market for which we do not show a corresponding percentage of our total fair value comprises 1% or less of the total fair value of our real property portfolio.

(3)

Represents the compounded return realized from reinvested distributions before class specific expenses. We pay our dealer manager (1) a dealer manager fee equal to 1/365th of 0.60% of our NAV per share for Class A shares and Class W shares for each day, (2) a dealer manager fee equal to 1/365th of 0.10% of our NAV per share for Class I shares for each day and (3) for Class A shares only, a distribution fee equal to 1/365th of 0.50% of our NAV per share for Class A shares for each day.

(4)

Excludes the impact of up-front commissions paid with respect to certain Class A shares. We pay selling commissions on Class A shares sold in the primary offering of up to 3.0% of the public offering price per share, which may be higher or lower due to rounding. Selling commissions may be reduced or eliminated to or for the account of certain categories of purchasers.

(5)	Total return represents the compound annual rate of return assuming reinvestment of all dividend distributions. Past performance is not a guarantee of future results.

(6)	Q4 2012 represents the first full quarter for which we have complete NAV return data. As such, we use 9/30/12 as “inception” for the purpose of calculating cumulative returns since inception.

 

 

 

Net Asset Value

 

The following table sets forth the components of NAV for the Portfolio as of the end of each of the five quarters ending December 31, 2015, as determined in accordance with our valuation procedures. For information about the valuation procedures and key assumptions used in these calculations, please refer to our Annual Report on Form 10-K or Quarterly Report on Form 10-Q for the applicable period. As used below, “Fund Interests” means our Class E shares, Class A shares, Class W shares, and Class I shares, along with the OP Units held by third parties, and “Aggregate Fund NAV” means the NAV of all of the Fund Interests (amounts in thousands except per share information).

		As of
		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014
Real properties:
Office		$	1,378,635			$	1,356,600			$	1,308,600			$	1,245,000			$	1,446,850
Industrial			90,250				88,050				86,850				85,800				248,300
Retail			950,925				872,300				835,320				833,770				786,705
Total real properties			2,419,810				2,316,950				2,230,770				2,164,570				2,481,855
Debt related investments			15,722				27,775				56,548				87,901				94,951
Total investments			2,435,532				2,344,725				2,287,318				2,252,471				2,576,806
Cash and other assets, net of other liabilities			(14,069	)			(26,734	)			(25,014	)			(22,269	)			(10,814	)
Debt obligations			(1,098,853	)			(997,517	)			(818,417	)			(827,304	)			(1,192,250	)
Outside investors’ interests			(4,771	)			(4,498	)			(4,494	)			(4,445	)			(8,652	)
Aggregate Fund NAV		$	1,317,839			$	1,315,976			$	1,439,393			$	1,398,453			$	1,365,090
Total Fund Interests outstanding			176,490				177,468				195,153				191,434				190,547
NAV per Fund Interest		$	7.47			$	7.42			$	7.38			$	7.31			$	7.16

 

 

 

 

Net Asset Value (continued)

  

The following table sets forth the quarterly changes to the components of NAV for the Portfolio, for each of the most recent four quarters, and for the twelve month period ended December 31, 2015 (amounts in thousands, except per share information):

 

		Three Months Ended																Year Ended
		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2015				December 31, 2014
NAV as of beginning of period		$	1,315,976			$	1,439,393			$	1,398,453			$	1,365,090			$	1,365,090			$	1,311,924
Fund level changes to NAV
Realized/unrealized gains on net assets			4,239				5,149				12,168				22,540				44,096				32,472
Income accrual			25,131				23,391				24,237				26,217				98,976				94,880
Dividend accrual			(15,997	)			(16,747	)			(17,584	)			(17,197	)			(67,525	)			(66,676	)
Advisory fee			(3,851	)			(3,847	)			(4,143	)			(3,931	)			(15,772	)			(15,413	)
Performance based fee			(187	)			(364	)			(342	)			(352	)			(1,245	)			(413	)
Class specific changes to NAV
Dealer Manager fee			(77	)			(71	)			(59	)			(49	)			(256	)			(120	)
Distribution fee			(15	)			(13	)			(12	)			(11	)			(51	)			(28	)
NAV as of end of period
before share sale/redemption activity		$	1,325,219			$	1,446,891			$	1,412,718			$	1,392,307			$	1,423,313			$	1,356,626
Share sale/redemption activity
Shares sold			17,244				12,201				64,745				18,665				112,855				98,490
Shares redeemed			(24,624	)			(143,116	)			(38,070	)			(12,519	)			(218,329	)			(90,026	)
NAV as of end of period		$	1,317,839			$	1,315,976			$	1,439,393			$	1,398,453			$	1,317,839			$	1,365,090
Shares outstanding beginning of period			177,468				195,153				191,434				190,547				190,547				189,280
Shares sold			2,323				1,650				8,883				2,603				15,459				14,059
Shares redeemed			(3,301	)			(19,335	)			(5,164	)			(1,716	)			(29,516	)			(12,792	)
Shares outstanding end of period			176,490				177,468				195,153				191,434				176,490				190,547
NAV per share as of beginning of period		$	7.42			$	7.38			$	7.31			$	7.16			$	7.16			$	6.93
Change in NAV per share			0.05				0.04				0.07				0.15				0.31				0.23
NAV per share as of end of period		$	7.47			$	7.42			$	7.38			$	7.31			$	7.47			$	7.16

 

 

 

 

Financial Highlights

 

Amounts in thousands, except per share information and percentages.

		As of or For the Three Months Ended																				As of or For the Twelve Months Ended
Selected Operating Data  (as adjusted) (1)		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Total revenues		$	56,298			$	53,661			$	52,659			$	62,582			$	59,093			$	225,200			$	232,565
Net operating income (“NOI”) (2)			40,121				38,784				39,252				47,453				46,043				165,610				181,228
Net income (loss)			776				(1,425	)			107				132,201				5,700				131,659				33,994
Portfolio Statistics
Operating properties			60				59				58				58				68				60				68
Square feet			10,133				9,763				9,493				9,327				11,871				10,133				11,871
Percentage leased at end of period			90.1	%			88.8	%			87.5	%			89.5	%			93.7	%			90.1	%			93.7	%
Earnings Per Share
Net income (loss) per share		$	0.00			$	(0.00	)		$	0.00			$	0.69			$	0.03			$	0.70			$	0.16
Funds from Operations (“FFO”) per share (3)		$	0.12			$	0.11			$	0.10			$	0.13			$	0.12			$	0.47			$	0.48
Company-defined FFO per share (3)		$	0.13			$	0.12			$	0.10			$	0.14			$	0.12			$	0.49			$	0.48
Weighted average number of common shares outstanding - basic			166,352				174,290				183,157				179,317				179,926				175,938				178,273
Weighted average number of common shares outstanding - diluted			179,203				187,279				196,267				191,766				192,137				188,789				190,991
Net Asset Value (“NAV”) (4)
NAV per share at the end of period		$	7.47			$	7.42			$	7.38			$	7.31			$	7.16			$	7.47			$	7.16
Weighted average distributions per share		$	0.0894			$	0.0895			$	0.0896			$	0.0897			$	0.0872			$	0.3582			$	0.3492
Weighted average closing dividend yield - annualized			4.79	%			4.83	%			4.86	%			4.91	%			4.87	%			4.80	%			4.87	%
Weighted average total return for the period			1.90	%			1.75	%			2.19	%			3.23	%			2.31	%			9.37	%			8.56	%
Aggregate fund NAV at end of period		$	1,317,839			$	1,315,976			$	1,439,393			$	1,398,453			$	1,365,090			$	1,317,839			$	1,365,090
Consolidated Debt
Leverage (5)			45	%			43	%			36	%			37	%			47	%			45	%			47	%
Weighted average stated interest rate of total borrowings			4.1	%			4.3	%			4.8	%			4.9	%			4.8	%			4.1	%			4.8	%
Secured borrowings		$	587,086			$	543,947			$	574,043			$	652,127			$	853,267			$	587,086			$	853,267
Secured borrowings as % of total borrowings			53	%			54	%			70	%			78	%			71	%			53	%			71	%
Unsecured borrowings		$	517,000			$	459,000			$	250,000			$	181,000			$	345,000			$	517,000			$	345,000
Unsecured borrowings as % of total borrowings			47	%			46	%			30	%			22	%			29	%			47	%			29	%
Fixed rate borrowings (6)		$	954,631			$	919,633			$	815,973			$	824,967			$	1,145,017			$	954,631			$	1,145,017
Fixed rate borrowings as % of total borrowings			86	%			92	%			99	%			99	%			96	%			86	%			96	%
Floating rate borrowings		$	149,455			$	83,314			$	8,070			$	8,160			$	53,250			$	149,455			$	53,250
Floating rate borrowings as % of total borrowings			14	%			8	%			1	%			1	%			4	%			14	%			4	%
Total borrowings		$	1,104,086			$	1,002,947			$	824,043			$	833,127			$	1,198,267			$	1,104,086			$	1,198,267

 

(1)

Operating data in this table and throughout this document are presented inclusive of amounts relating to real properties that have been disposed of or classified as held for sale at the end of the period, and in certain cases, reclassified as discontinued operations in our GAAP financial statements. Certain asset and liability amounts in this table and throughout this document are presented inclusive of amounts relating to real properties that have been classified as held for sale in our GAAP financial statements.

(2)

For a reconciliation of NOI to GAAP net income, see the section titled “Results of Operations” beginning on page 12.

(3)

For a reconciliation of FFO and Company-Defined FFO to GAAP net income, see the section titled “Funds from Operations” beginning on page 10.

(4)

As determined in accordance with our Valuation Procedures, filed as Exhibit 99.1 to our 2015 Annual Report on Form 10-K.

(5)

Leverage presented represents our total borrowings, calculated on a GAAP basis, divided by the fair value of our real property and debt investments.

(6)

Fixed rate borrowings presented includes floating rate borrowings that are effectively fixed by a derivative instrument such as a swap through maturity or substantially through maturity.

 

 

Portfolio Profile

 

As of December 31, 2015, our real property investments were geographically diversified across 21 markets throughout the United States. Our debt related investments are located in three additional markets resulting in a combined portfolio allocation across 24 markets. The following table presents information about the operating results and fair value of our real property and debt investment portfolios as of or for the three months ended December 31, 2015 (dollar and square footage amount in thousands).

			Real Properties (1)
As of or for the three months ended December 31, 2015		Total				Office				Industrial				Retail				Debt Related Investments, Net				Grand Total
Number of investments			60				20				6				34				3				63
Square footage			10,133				4,461				1,909				3,763				N/A				10,133
Percentage leased at period end			90.1	%			91.0	%			80.4	%			93.9	%			N/A				90.1	%
Net operating income (“NOI”) (2)		$	38,793			$	23,385			$	1,099			$	14,309			$	1,328			$	40,121
Segment as % of total NOI			96.7	%			58.3	%			2.7	%			35.7	%			3.3	%			100.0	%
NOI - cash basis (3)		$	38,897			$	24,285			$	1,033			$	13,579			$	1,328			$	40,225
Fair Value (4)		$	2,419,810			$	1,378,635			$	90,250			$	950,925			$	15,722			$	2,435,532
Segment as % of total Fair Value			99.3	%			56.6	%			3.7	%			39.0	%			0.7	%			100.0	%

 

(1)

“As of” information includes all real properties that we owned as of December 31, 2015. Operations information provided here and throughout this document is presented inclusive of amounts related to properties that have been disposed of as of December 31, 2015, including amounts that are classified within discontinued operations in our 2015 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

(2)

For a reconciliation of NOI to GAAP net income, see the section titled “Results of Operations” beginning on page 12.

(3)

For a reconciliation of NOI – Cash Basis to NOI and to GAAP net income, see the section titled “Results of Operations” beginning on page 12.

(4)

As determined in accordance with our Valuation Procedures, filed as Exhibit 99.1 to our 2015 Annual Report on Form 10-K. See a discussion of some of the differences between the definition of “fair value” of our real estate assets as used in our Valuation Procedures and in this document versus GAAP values in the section titled “Definitions” beginning on page 23. For a description of key assumptions used in calculating the value of our real properties as of December 31, 2015, please refer to “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of our 2015 Annual Report on Form 10-K.

 

 

Balance Sheets

 

The following table presents our consolidated balance sheets, as adjusted, as of the end of each of the five quarters ended December 31, 2015. Certain asset and liability amounts in this table are presented inclusive of amounts relating to real properties that have been classified as held for sale in our GAAP financial statements (dollar amounts in thousands):

		As of
		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014
ASSETS
Investments in real property		$	2,380,174			$	2,270,746			$	2,199,150			$	2,139,022			$	2,472,926
Accumulated depreciation and amortization			(505,957	)			(489,395	)			(473,526	)			(455,064	)			(523,246	)
Total net investments in real property			1,874,217				1,781,351				1,725,624				1,683,958				1,949,680
Debt related investments, net			15,722				27,775				56,548				87,901				94,951
Total net investments			1,889,939				1,809,126				1,782,172				1,771,859				2,044,631
Cash and cash equivalents			15,769				15,186				28,919				10,226				14,461
Restricted cash			18,394				20,258				19,026				18,564				27,454
Other assets, net			43,106				46,250				47,223				49,877				61,587
Total Assets		$	1,967,208			$	1,890,820			$	1,877,340			$	1,850,526			$	2,148,133
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes and other secured borrowings		$	587,086			$	543,947			$	574,043			$	652,127			$	853,267
Unsecured borrowings			517,000				459,000				250,000				181,000				345,000
Intangible lease liabilities, net			63,874				58,649				54,994				54,937				86,243
Other liabilities			73,297				84,129				99,460				70,744				99,643
Total Liabilities			1,241,257				1,145,725				978,497				958,808				1,384,153
Equity:
Stockholders’ equity:
Common stock			1,641				1,650				1,821				1,783				1,784
Additional paid-in capital			1,470,859				1,479,403				1,607,115				1,584,780				1,586,444
Distributions in excess of earnings			(832,681	)			(818,531	)			(802,620	)			(786,286	)			(893,791	)
Accumulated other comprehensive loss			(11,014	)			(14,985	)			(9,405	)			(11,808	)			(10,120	)
Total stockholders’ equity			628,805				647,537				796,911				788,469				684,317
Noncontrolling interests			97,146				97,558				101,932				103,249				79,663
Total Equity			725,951				745,095				898,843				891,718				763,980
Total Liabilities and Equity		$	1,967,208			$	1,890,820			$	1,877,340			$	1,850,526			$	2,148,133

 

 

Statements Of Operations

 

The following table presents our condensed consolidated statements of operations, as adjusted, for each of the five quarters ended December 31, 2015 and the years ended December 31, 2015 and 2014. Operating data in this table are presented inclusive of amounts relating to real properties that have been reclassified as discontinued operations in our GAAP financial statements (amounts in thousands, except per share data):

		Three Months Ended																				Year Ended
		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
REVENUE:
Rental revenue		$	54,970			$	52,854			$	51,075			$	59,379			$	57,268			$	218,278			$	225,169
Debt related income			1,328				807				1,584				3,203				1,825				6,922				7,396
Total Revenue			56,298				53,661				52,659				62,582				59,093				225,200				232,565
EXPENSES:
Rental expense			16,177				14,877				13,407				15,129				13,050				59,590				51,337
Real estate depreciation and amortization expense			21,710				20,851				19,738				20,815				22,514				83,114				88,994
General and administrative expenses			2,564				2,477				2,944				2,735				2,922				10,720				11,108
Advisory fees, related party			4,062				4,225				4,497				4,299				4,242				17,083				15,919
Acquisition-related expenses			1,385				476				358				425				243				2,644				1,205
Impairment of real estate property			—				6,500				224				1,400				—				8,124				9,500
Total Operating Expenses			45,898				49,406				41,168				44,803				42,971				181,275				178,063
Other Income (Expenses):
Interest and other income			693				704				163				632				480				2,192				1,162
Interest expense			(11,301	)			(10,951	)			(11,275	)			(13,981	)			(15,354	)			(47,508	)			(62,199	)
Loss on extinguishment of debt and financing commitments			—				—				(272	)			(896	)			—				(1,168	)			(63	)
Gain on sale of real property			984				4,567				—				128,667				4,452				134,218				40,592
Net Income (Loss)			776				(1,425	)			107				132,201				5,700				131,659				33,994
Net (income) loss attributable to noncontrolling interests			(46	)			1,297				(37	)			(8,618	)			(397	)			(7,404	)			(4,802	)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	730			$	(128	)		$	70			$	123,583			$	5,303			$	124,255			$	29,192
NET INCOME (LOSS) PER BASIC AND DILUTED COMMON SHARE		$	0.00			$	(0.00	)		$	0.00			$	0.69			$	0.03			$	0.70			$	0.16
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic			166,352				174,290				183,157				179,317				179,926				175,938				178,273
Diluted			179,203				187,279				196,267				191,766				192,137				188,789				190,991
Weighted average distributions declared per common share		$	0.0894			$	0.0895			$	0.0896			$	0.0897			$	0.0872			$	0.3582			$	0.3492

 

 

 

Funds From Operations

 

The following tables present NAREIT-Defined Funds From Operations (“FFO”) and Company-defined FFO for each of the five quarters ended December 31, 2015 and the years ended December 31, 2015 and 2014. Operating data in these tables are presented inclusive of amounts relating to real properties that have been reclassified as discontinued operations in our GAAP financial statements (amounts in thousands except for per share amounts and percentages):

		Three Months Ended																				Year Ended
		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Reconciliation of net earnings to FFO:
Net (loss) income attributable to common stockholders		$	730			$	(128	)		$	70			$	123,583			$	5,303			$	124,255			$	29,192
Add (deduct) NAREIT-defined adjustments:
Depreciation and amortization expense			21,710				20,851				19,738				20,815				22,514				83,114				88,994
Gain on disposition of real property			(984	)			(4,567	)			—				(128,667	)			(4,452	)			(134,218	)			(40,592	)
Impairment of real property			—				6,500				224				1,400				—				8,124				9,500
Noncontrolling interests’ share of adjustments			(1,588	)			(2,891	)			(1,435	)			6,810				(1,251	)			895				(1,848	)
FFO attributable to common shares-basic			19,868				19,765				18,597				23,941				22,114				82,170				85,246
FFO attributable to dilutive OP units			1,535				1,473				1,331				1,662				1,501				6,001				6,077
FFO attributable to common shares-diluted		$	21,403			$	21,238			$	19,928			$	25,603			$	23,615			$	88,171			$	91,323
FFO per share-basic and diluted		$	0.12			$	0.11			$	0.10			$	0.13			$	0.12			$	0.47			$	0.48
FFO payout ratio			75	%			79	%			88	%			67	%			71	%			77	%			73	%
Reconciliation of FFO to Company-Defined FFO:
FFO attributable to common shares-basic		$	19,868			$	19,765			$	18,597			$	23,941			$	22,114			$	82,170			$	85,246
Add (deduct) our adjustments:
Acquisition-related expenses			1,385				476				358				425				243				2,644				1,205
Loss on extinguishment of debt and financing commitments			—				—				272				896				—				1,168				63
Unrealized (gain) loss on derivatives			(3	)			117				(128	)			11				—				(3	)			—
Noncontrolling interests’ share of our adjustments			(99	)			(41	)			(34	)			(86	)			(16	)			(260	)			(84	)
Company-Defined FFO attributable to common shares-basic			21,151				20,317				19,065				25,187				22,341				85,719				86,430
Company-Defined FFO attributable to dilutive OP units			1,634				1,514				1,365				1,748				1,516				6,261				6,161
Company-Defined FFO attributable to common shares-diluted		$	22,785			$	21,831			$	20,430			$	26,935			$	23,857			$	91,980			$	92,591
Company-Defined FFO per share-basic and diluted		$	0.13			$	0.12			$	0.10			$	0.14			$	0.12			$	0.49			$	0.48
Weighted average number of shares outstanding
Basic			166,352				174,290				183,157				179,317				179,926				175,938				178,273
Diluted			179,203				187,279				196,267				191,766				192,137				188,789				190,991

 

 

Funds From Operations (continued)

 

The following table presents certain other supplemental information for each of the five quarters ended December 31, 2015 and the years ended December 31, 2015 and 2014 (amounts in thousands):

		Three Months Ended																				Year Ended
		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Other Supplemental Information
Capital Expenditures Summary
Recurring capital expenditures (1)		$	3,152			$	2,476			$	3,871			$	2,795			$	4,084			$	12,294			$	11,971
Non-recurring capital expenditures (2)			1,167				311				255				261				818				1,994				2,713
Total Capital Expenditures			4,319				2,787				4,126				3,056				4,902				14,288				14,684
Other non-cash adjustments
Straight-line rent decrease (increase) to rental revenue			291				286				43				356				(98	)			976				(3,037	)
Amortization of above- and below- market rent (increase) decrease to rental revenue			(197	)			(130	)			(133	)			(353	)			(537	)			(813	)			(616	)
Amortization of loan costs and hedges - increase to interest expense			983				996				1,021				1,101				1,240				4,101				4,845
Amortization of mark-to-market adjustments on borrowings - (decrease) increase to interest expense			(608	)			(463	)			(268	)			(265	)			(262	)			(1,604	)			(721	)
Total other non-cash adjustments		$	469			$	689			$	663			$	839			$	343			$	2,660			$	471

 

(1)

Recurring capital expenditures include lease incentives. Unlike other capital expenditures, we record lease incentives as other assets in our balance sheet and we classify payments for lease incentives as cash used in operating activities in our statement of cash flows.

(2)

Amounts presented as non-recurring capital expenditures for the three months ended September 30, 2015 and the year ended December 31, 2015 exclude a payment of $12.0 million to terminate a purchase option previously held by a third party related to an office property in Northern New Jersey. We accounted for the payment as an investment in real property.

 

 

Results Of Operations

 

The following tables present revenue and net operating income (“NOI”) of our four operating segments, as adjusted, for each of the five quarters ending December 31, 2015 and the years ended December 31, 2015 and 2014. Our same store portfolio includes all operating properties owned for the entirety of all periods presented, and includes 49 properties acquired prior to January 1, 2014, and owned through December 31, 2015, comprising approximately 8.2 million square feet (amounts in thousands):

		Three Months Ended																				Year Ended
Revenue:		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Same store real property:
Office		$	26,899			$	27,439			$	27,571			$	28,308			$	27,557			$	110,217			$	111,217
Industrial			1,525				1,424				1,438				1,628				1,614				6,015				6,629
Retail			14,569				14,286				14,232				17,018				14,193				60,104				57,206
Total same store real property revenue			42,993				43,149				43,241				46,954				43,364				176,336				175,052
2014/2015 Acquisitions/Dispositions			11,977				9,705				7,834				12,425				13,904				41,942				50,117
Debt related investments			1,328				807				1,584				3,203				1,825				6,922				7,396
Total		$	56,298			$	53,661			$	52,659			$	62,582			$	59,093			$	225,200			$	232,565
NOI:
Same store real property:
Office		$	19,217			$	19,597			$	20,220			$	20,783			$	20,220			$	79,817			$	81,033
Industrial			1,099				951				1,019				1,111				1,242				4,180				4,869
Retail			11,136				11,055				11,180				12,246				11,160				45,617				44,994
Total same store real property NOI			31,452				31,603				32,419				34,140				32,622				129,614				130,896
2014/2015 Acquisitions/Dispositions			7,341				6,374				5,249				10,110				11,596				29,074				42,936
Debt related investments			1,328				807				1,584				3,203				1,825				6,922				7,396
Total		$	40,121			$	38,784			$	39,252			$	47,453			$	46,043			$	165,610			$	181,228
NOI - cash basis:
Same store real property:
Office		$	20,898			$	21,140			$	21,531			$	22,072			$	21,198			$	85,641			$	83,530
Industrial			1,033				931				981				1,041				1,172				3,986				4,381
Retail			10,798				10,717				10,843				11,840				10,693				44,198				42,973
Total same store real property NOI - cash basis			32,729				32,788				33,355				34,953				33,063				133,825				130,884
2014/2015 Acquisitions/Dispositions			6,168				5,351				4,230				9,248				10,459				24,997				39,012
Debt related investments			1,328				807				1,584				3,203				1,825				6,922				7,396
Total		$	40,225			$	38,946			$	39,169			$	47,404			$	45,347			$	165,744			$	177,292

 

 

Results Of Operations (continued)

 

The following tables present a reconciliation of NOI – Cash Basis and NOI of our four operating segments, as adjusted, to GAAP net income attributable to common stockholders for each of the five quarters ending December 31, 2015 and the years ended December 31, 2015 and 2014 (amounts in thousands): 

		Three Months Ended																				Year Ended
		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014				December 31, 2015				December 31,  2014
NOI - cash basis		$	40,225			$	38,946			$	39,169			$	47,404			$	45,347			$	165,744			$	177,292
Straight line rent			(291	)			(286	)			(43	)			(356	)			98				(976	)			3,037
Net amortization of above- and below-market lease assets and liabilities, and other non-cash adjustments to rental revenue			187				124				126				405				598				842				899
NOI		$	40,121			$	38,784			$	39,252			$	47,453			$	46,043			$	165,610			$	181,228
Real estate depreciation and amortization expense			(21,710	)			(20,851	)			(19,738	)			(20,815	)			(22,514	)			(83,114	)			(88,994	)
General and administrative expenses			(2,564	)			(2,477	)			(2,944	)			(2,735	)			(2,922	)			(10,720	)			(11,108	)
Advisory fees, related party			(4,062	)			(4,225	)			(4,497	)			(4,299	)			(4,242	)			(17,083	)			(15,919	)
Acquisition-related expenses			(1,385	)			(476	)			(358	)			(425	)			(243	)			(2,644	)			(1,205	)
Impairment of real estate property			—				(6,500	)			(224	)			(1,400	)			—				(8,124	)			(9,500	)
Interest and other income			693				704				163				632				480				2,192				1,162
Interest expense			(11,301	)			(10,951	)			(11,275	)			(13,981	)			(15,354	)			(47,508	)			(62,199	)
Loss on extinguishment of debt and financing commitments			—				—				(272	)			(896	)			—				(1,168	)			(63	)
Gain on sale of real property			984				4,567				—				128,667				4,452				134,218				40,592
Net (income) loss attributable to noncontrolling interests			(46	)			1,297				(37	)			(8,618	)			(397	)			(7,404	)			(4,802	)
Net income (loss) attributable to common stockholders		$	730			$	(128	)		$	70			$	123,583			$	5,303			$	124,255			$	29,192

 

The following tables present details regarding our capital expenditures for each of the five quarters ending December 31, 2015 and the years ended December 31, 2015 and 2014 (amounts in thousands): 

		Three Months Ended																				Year Ended
Recurring Capital Expenditures:		December 31, 2015				September 30, 2015				June 30, 2015				March 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Land and building improvements		$	1,425			$	1,035			$	1,850			$	848			$	1,626			$	5,158			$	3,539
Tenant improvements			1,178				607				1,503				1,500				1,250				4,788				4,471
Leasing costs (1)			549				834				518				447				1,208				2,348				3,961
Total recurring capital expenditures		$	3,152			$	2,476			$	3,871			$	2,795			$	4,084			$	12,294			$	11,971
Non-recurring Capital Expenditures:
Land and building improvements (2)		$	665			$	50			$	29			$	15			$	93			$	759			$	228
Tenant improvements			320				219				42				205				618				786				1,889
Leasing costs			182				42				184				41				107				449				596
Total non-recurring capital expenditures		$	1,167			$	311			$	255			$	261			$	818			$	1,994			$	2,713

 

(1)

Recurring leasing costs include lease incentives. Unlike other capital expenditures, we record lease incentives as other assets in our balance sheet and we classify payments for lease incentives as cash used in operating activities in our statement of cash flows.

(2)

Amounts presented as non-recurring capital expenditures for land and building improvements for the three months ended September 30, 2015 and the year ended December 31, 2015 exclude a payment of $12.0 million to terminate a purchase option previously held by a third party related to an office property in Northern New Jersey. We accounted for the payment as an investment in real property.

 

 

Finance & Capital

 

The following table describes certain information about our capital structure. Amounts reported as financing capital and our joint venture partners’ interests are presented on a GAAP basis. Amounts reported as equity capital other than our joint venture partners’ interests are presented based on the NAV as of December 31, 2015 (shares and dollar amounts other than price per share / unit in thousands). 

FINANCING:		As of December 31, 2015
Mortgage notes		$	587,086
Unsecured line of credit			167,000
Unsecured term loans			350,000
Total Financing		$	1,104,086

 

EQUITY:		Shares / Units				Percentage of Aggregate Shares and Units Outstanding				NAV Per Share / Unit				Value
Class E Common Stock			137,275				77.8	%		$	7.47			$	1,025,115
Class A Common Stock			1,703				1.0	%			7.47				12,715
Class W Common Stock			1,811				1.0	%			7.47				13,522
Class I Common Stock (1)			22,893				13.0	%			7.47				170,876
Class E OP Units (2)			12,808				7.2	%			7.47				95,611
Total/Weighted Average			176,490				100.0	%		$	7.47			$	1,317,839
Joint venture partners’ noncontrolling interests															2,412
Total Equity															1,320,251
TOTAL CAPITALIZATION														$	2,424,337

 

(1)

Amounts reported do not include approximately 441,000 restricted stock units granted to the Advisor that remain unvested as of December 31, 2015.

(2)

Subsequent to December 31, 2015, we entered into an amended and restated operating partnership agreement which created two series of Class E OP Units, including Series 1 Class E OP Units and Series 2 Class E OP Units, each series with different redemption and registration rights. As of December 31, 2015, only Series 1 Class E OP Units were outstanding. For information about the amended and restated operating partnership agreement, please refer to our Current Report on Form 8-K, filed March 3, 2016.

 

 

Finance & Capital (continued)

 

The following table presents a summary of our borrowings as of December 31, 2015 (dollar amounts in thousands):

 

		Weighted Average Stated Interest Rate				Outstanding Balance				Gross Investment Amount Securing Borrowings (1)
Fixed rate mortgages			5.6%			$	579,196			$	1,016,560
Floating rate mortgages			3.4%				7,890				16,618
Total secured borrowings			5.5%				587,086				1,033,178
Line of credit (2)			1.9%				167,000				N/A
Term loans (2)			2.6%				350,000				N/A
Total unsecured borrowings			2.4%				517,000				N/A
Total borrowings			4.1%			$	1,104,086				N/A

 

(1)

“Gross Investment Amount” as used here and throughout this document represents the allocated gross basis of real property, calculated in accordance with GAAP, inclusive of the effect of gross intangible lease liabilities totaling approximately $95.3 million and before accumulated depreciation and amortization of approximately $506.0 million as of December 31, 2015.

(2)

Approximately $375.4 million of our unsecured floating rate borrowings are effectively fixed by the use of fixed-for-floating rate swap instruments as of December 31, 2015. The stated interest rate disclosed above includes the impact of these swaps.

 

The following table presents a summary of our covenants and our actual results for each of the five quarters ended December 31, 2015, calculated in accordance with the terms of our credit facilities. 

				Actual as of:
Portfolio-Level Covenants:		Covenant		December 31,  2015				September 30, 2015				June 30,   2015				March 31,   2015				December 31,  2014
Leverage		< 60%			45.1	%			42.2	%			35.1	%			36.2	%			43.9	%
Fixed Charge Coverage		> 1.50			2.6				2.5				2.4				2.3				2.1
Secured Indebtedness		< 55%			24.0	%			22.9	%			24.4	%			28.3	%			31.2	%
Unencumbered Pool Covenants:
Unsecured Interest Coverage		>2.0			7.7				9.3				9.4				8.4				9.4
Leverage		< 60%			38.4	%			35.5	%			21.6	%			17.8	%			38.8	%

 

 

Finance & Capital (continued)

 

The following table presents a detailed analysis of our borrowings outstanding as of December 31, 2015 (dollar amounts in thousands).   

		As of December 31, 2015
Borrowings		Principal Balance				Secured / Unsecured			Maturity Date			Extension Options		% of Total Borrowings				Fixed or Floating Interest Rate		Current Interest Rate
40 Boulevard		$	7,890			Secured			1/24/2016			None			0.7	%		Floating			3.43	%
Washington Commons (1)			21,300			Secured			2/1/2016			None			1.9	%		Fixed			5.94	%
1300 Connecticut (1)			33,582			Secured			4/10/2016			None			3.0	%		Fixed			7.25	%
1300 Connecticut B Note (1)			11,459			Secured			4/10/2016			None			1.0	%		Fixed			5.53	%
655 Montgomery			56,134			Secured			6/11/2016			None			5.1	%		Fixed			6.01	%
Jay Street			23,500			Secured			7/11/2016			None			2.1	%		Fixed			6.05	%
Bala Pointe			24,000			Secured			9/1/2016			None			2.2	%		Fixed			5.89	%
Harborside			107,248			Secured			12/10/2016			2 - 1 Year			9.7	%		Fixed			5.50	%
Total 2016			285,113												25.7	%					5.86	%
Shiloh Road			22,700			Secured			1/8/2017			None			2.1	%		Fixed			5.57	%
Bandera Road			21,500			Secured			2/8/2017			None			1.9	%		Fixed			5.46	%
Eastern Retail Portfolio			110,000			Secured			6/11/2017			None			9.9	%		Fixed			5.51	%
Wareham			24,400			Secured			8/8/2017			None			2.2	%		Fixed			6.13	%
Kingston			10,574			Secured			11/1/2017			None			1.0	%		Fixed			6.33	%
Sandwich			15,825			Secured			11/1/2017			None			1.4	%		Fixed			6.33	%
Total 2017			204,999												18.5	%					5.69	%
Bank of America Term Loan (2)			150,000			Unsecured			1/31/2018			2 - 1 Year			13.6	%		Floating			1.91	%
Line of Credit (2)			167,000			Unsecured			1/31/2019			1 - 1 Year			15.1	%		Floating			3.09	%
Shenandoah			10,834			Secured			9/1/2021			None			1.0	%		Fixed			4.84	%
Wells Fargo Term Loan (2)			200,000			Unsecured			2/27/2022			None			18.1	%		Floating			1.88	%
Norwell			4,986			Secured			10/1/2022			None			0.5	%		Fixed			6.76	%
Greater DC Retail Center			70,000			Secured			12/1/2025			None			6.3	%		Fixed			3.80	%
Harwich			5,337			Secured			9/1/2028			None			0.5	%		Fixed			5.24	%
New Bedford			7,580			Secured			12/1/2029			None			0.7	%		Fixed			5.91	%
Total 2018 - 2029			615,737												55.8	%					2.61	%
Total borrowings			1,105,849												100.0	%					4.02	%
Add: mark-to-market adjustment on assumed debt			1,304
Less: GAAP principal amortization on restructured debt			(3,067	)
Total Borrowings (GAAP basis)		$	1,104,086

 

(1)

Subsequent to December 31, 2015, we repaid all amounts due on our 40 Boulevard, 1300 Connecticut, and Washington Commons mortgage notes using proceeds from our line of credit.

(2)

Approximately $375.4 million of our term loan and line of credit borrowings are effectively fixed by the use of fixed-for-floating rate swap instruments as of December 31, 2015. The stated interest rates disclosed above include the impact of these swaps.

 

 

Real Properties

 

The following table describes our operating property portfolio as of December 31, 2015 (dollar and square feet amounts in thousands):  

Market		Number of Properties				Gross Investment Amount				% of Gross Investment Amount				Net Rentable Square Feet				% of Total Net Rentable Square Feet				% Leased (1)				Secured Indebtedness (2)
Office Properties:
Washington, DC			3			$	282,939				11.9	%			878				8.7	%			78.4	%		$	45,041
Northern New Jersey			1				224,545				9.4	%			594				5.9	%			100.0	%			107,248
Austin, TX			3				153,419				6.4	%			585				5.8	%			99.3	%			—
East Bay, CA			1				145,339				6.1	%			405				4.0	%			100.0	%			—
San Francisco, CA			1				120,238				5.1	%			264				2.6	%			91.6	%			56,134
South Florida			2				82,130				3.5	%			363				3.6	%			92.2	%			—
Denver, CO			1				82,106				3.5	%			257				2.5	%			89.6	%			—
Princeton, NJ			1				51,233				2.2	%			167				1.6	%			100.0	%			—
Chicago, IL			2				43,745				1.8	%			307				3.0	%			76.1	%			29,190
Philadelphia, PA			1				43,482				1.8	%			173				1.7	%			81.7	%			24,000
Silicon Valley, CA			1				41,912				1.8	%			143				1.4	%			91.8	%			23,500
Dallas, TX			1				35,875				1.5	%			155				1.5	%			91.1	%			—
Minneapolis/St Paul, MN			1				29,515				1.2	%			107				1.1	%			100.0	%			—
Fayetteville, AR			1				11,695				0.5	%			63				0.6	%			100.0	%			—
Total/Weighted Average Office: 14 markets with average annual rent of $29.37 per sq. ft.			20				1,348,173				56.7	%			4,461				44.0	%			91.0	%			285,113
Industrial Properties:
Dallas, TX			1				35,746				1.6	%			446				4.4	%			35.1	%			22,700
Central Kentucky			1				28,296				1.2	%			727				7.2	%			100.0	%			—
Louisville, KY			4				27,273				1.1	%			736				7.3	%			88.5	%			—
Total/Weighted Average Industrial: three markets with average annual rent of $3.48 per sq. ft.			6				91,315				3.9	%			1,909				18.9	%			80.4	%			22,700
Retail Properties:
Greater Boston			26				545,382				22.9	%			2,280				22.5	%			94.0	%			84,702
Philadelphia, PA			1				105,126				4.4	%			426				4.2	%			99.1	%			67,800
Washington, DC			1				62,533				2.6	%			233				2.3	%			99.3	%			70,000
Northern New Jersey			1				58,484				2.5	%			223				2.2	%			94.6	%			—
Raleigh, NC			1				45,553				1.9	%			142				1.4	%			99.2	%			26,200
South Florida			1				37,898				1.6	%			124				1.2	%			100.0	%			10,834
Tulsa, OK			1				34,147				1.4	%			101				1.0	%			100.0	%			—
San Antonio, TX			1				32,069				1.3	%			161				1.6	%			89.6	%			21,500
Jacksonville, FL			1				19,494				0.8	%			73				0.7	%			20.3	%			—
Total/Weighted Average Retail: nine markets with average annual rent of $16.80 per sq. ft.			34				940,686				39.4	%			3,763				37.1	%			93.9	%			281,036
Grand Total/Weighted Average			60			$	2,380,174				100.0	%			10,133				100.0	%			90.1	%		$	588,849

 

(1)

Based on executed leases as of December 31, 2015. If weighted by the fair value of each segment, our portfolio was 91.7% leased as of December 31, 2015.

(2)

Secured indebtedness represents the principal balance outstanding and does not include our mark-to-market adjustment on debt or GAAP principal amortization on our troubled debt restructuring.

 

 

Leasing Activity

 

The following graphs highlight our total portfolio and same store portfolio percentage leased at the end of each of the five quarters ended December 31, 2015, by segment and in total:

 

 

 

 

 

 

 

Leasing Activity (continued)

 

As of December 31, 2015, the weighted average remaining term of our leases was approximately 4.5 years, based on annualized base rent, and 7.0 years, based on leased square footage. The following table presents our lease expirations, by segment and in total, as of December 31, 2015 (dollars and square feet in thousands): 

		Total										Office							Industrial							Retail
Year		Number of Leases Expiring		Annualized Base Rent			% of Total Annualized Base Rent			Square Feet		Number of Leases Expiring		Annualized Base Rent			Square Feet		Number of Leases Expiring		Annualized Base Rent			Square Feet		Number of Leases Expiring		Annualized Base Rent			Square Feet
2016 (1) (2)		104		$	21,925		12.0	%		917		68		$	19,974		750		1		$	182		52		35		$	1,769		115
2017		95			43,730		23.7	%		1,398		49			39,029		1,015		2			189		53		44			4,512		330
2018		126			13,443		7.3	%		680		72			9,079		390		2			142		40		52			4,222		250
2019		107			24,945		13.5	%		1,237		50			13,772		464		2			1,226		212		55			9,947		561
2020		111			24,229		13.1	%		1,259		43			10,206		452		1			299		105		67			13,724		702
2021		49			15,704		8.5	%		1,577		20			6,955		240		3			3,120		1,021		26			5,629		316
2022		32			9,105		4.9	%		516		15			4,053		152		—			—		—		17			5,052		364
2023		29			15,364		8.3	%		626		13			11,190		376		—			—		—		16			4,174		250
2024		24			4,977		2.7	%		333		6			1,755		94		—			—		—		18			3,222		239
2025		15			3,726		2.0	%		199		6			2,221		80		1			178		51		8			1,327		68
Thereafter		22			7,304		4.0	%		378		4			986		40		—			—		—		18			6,318		338
Total		714		$	184,452		100.0	%		9,120		346		$	119,220		4,053		12		$	5,336		1,534		356		$	59,896		3,533

  

(1)

Includes 8 office leases and 9 retail leases with combined annualized base rent of approximately $423,000 that are on a month-to-month basis.

(2)

Includes our lease with Northrop Grumman, which leased 100% of an office property comprising approximately 575,000 square feet, located in the Washington, DC market (“Colshire”). Northrop Grumman exercised a purchase option during January 2016 to acquire Colshire on February 18, 2016 (the “Northrop Grumman Purchase Option”). As a result, Northrop Grumman is no longer our tenant. Excluding the Northrop Grumman lease, we would have 103 leases expiring during 2016, with total annualized base rent of approximately $6.0 million or approximately 3.3% of total portfolio annualized base rent, comprising approximately 342,000 square feet or approximately 3.8% of total portfolio square feet. For a more detailed discussion of the purchase option and the related property disposition, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2015 Annual Report on Form 10-K.

 

 

 

Leasing Activity (continued)

 

The following table presents our top 10 tenants by annualized base rent and their related industry sector, as of December 31, 2015 (dollars and square feet in thousands): 

	Tenant		Locations		Industry Sector		Annualized Base Rent (1)			% of Total Annualized Base Rent			Square Feet		% of Occupied Square Feet
1	Charles Schwab & Co., Inc.		2		Securities, Commodities, Fin. Inv./Rel. Activities		$	23,408		12.8	%		602		6.6	%
2	Sybase		1		Publishing Information (except Internet)			18,692		10.3	%		405		4.5	%
3	Northrop Grumman (2)		1		Professional, Scientific and Technical Services			15,901		8.7	%		575		6.3	%
4	Stop & Shop		16		Food and Beverage Stores			14,983		8.2	%		911		10.1	%
5	Novo Nordisk		1		Chemical Manufacturing			4,535		2.5	%		167		1.8	%
6	Seton Health Care		1		Hospitals			4,339		2.4	%		156		1.7	%
7	Shaw’s Supermarket		4		Food and Beverage Stores			3,944		2.2	%		240		2.7	%
8	I.A.M. National Pension Fund		1		Funds, Trusts and Other Financial Vehicles			3,023		1.7	%		63		0.7	%
9	TJX Companies		7		Clothing and Clothing Accessories Stores			2,969		1.6	%		299		3.3	%
10	Home Depot		1		Building Material and Garden Equipment and Supplies Dealers			2,470		1.4	%		102		1.1	%
	Total		35				$	94,264		51.8	%		3,520		38.8	%

 

(1)

Annualized base rent represents the annualized monthly base rent of executed leases as of December 31, 2015.

(2)

As a result of the execution of the Northrop Grumman Purchase Option, Northrop Grumman is no longer our tenant. For a more detailed discussion of the Northrop Grumman Purchase Option and the related property disposition, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2015 Annual Report on Form 10-K. Subsequent to the disposition of Colshire, Alliant Techsystems Inc., a tenant in the computer and electronic product manufacturing industry, became our 10th largest tenant with an annualized base rent of approximately $2.4 million as of December 31, 2015, comprising approximately 107,000 square feet in one of our office properties.

 

 

 

Leasing Activity (continued)

 

The following series of tables details leasing activity during the four quarters ended December 31, 2015:

Quarter		Number of Leases Signed		Gross Leasable Area (“GLA”) Signed		Average   Rent Per Sq. Ft.			Average Growth / Straight Line Rent			Weighted Average Lease term (mos)		Tenant Improvements & Incentives  Per Sq. Ft.			Average Free Rent (mos)
Office Comparable (1)
Q4 2015		19		48,504		$	27.98		27.5	%		56		$	21.41		1.6
Q3 2015		14		79,831			35.11		33.4	%		47			27.93		0.9
Q2 2015		16		57,885			31.33		39.7	%		57			10.50		1.3
Q1 2015		12		36,394			28.59		28.9	%		48			11.16		1.6
Total - twelve months		61		222,614		$	31.36		33.0	%		52		$	19.24		1.3
Industrial Comparable (1)
Q4 2015		1		104,896		$	2.93		98.9	%		62		$	1.44		2.0
Q3 2015		0		—			0.00		0.0	%		0			0.00		—
Q2 2015		0		—			0.00		0.0	%		0			0.00		—
Q1 2015		1		1,200			3.75		7.0	%		36			0.34		—
Total - twelve months		2		106,096		$	2.94		96.4	%		62		$	1.43		2.0
Retail Comparable (1)
Q4 2015		11		21,343		$	25.91		15.2	%		37		$	1.45		—
Q3 2015		19		139,735			12.87		15.2	%		75			2.00		—
Q2 2015		20		139,310			16.04		14.7	%		58			0.62		—
Q1 2015		12		140,021			18.49		9.6	%		53			3.46		0.1
Total - twelve months		62		440,409		$	15.77		13.1	%		61		$	2.00		0.0
Total Comparable Leasing (1)
Q4 2015		31		174,743		$	11.59		30.8	%		57		$	6.98		1.6
Q3 2015		33		219,566			18.76		24.9	%		65			11.43		0.3
Q2 2015		36		197,195			20.48		24.3	%		58			3.52		0.4
Q1 2015		25		177,615			20.33		14.7	%		52			5.01		0.4
Total - twelve months		125		769,119		$	17.91		23.1	%		58		$	6.91		0.7
Total Leasing
Q4 2015		42		239,990		$	12.51					46		$	6.65		1.2
Q3 2015		45		272,108			18.14					63			11.70		0.3
Q2 2015		46		296,599			19.16					46			3.69		0.4
Q1 2015		42		297,686			17.64					57			9.36		0.6
Total - twelve months		175		1,106,383		$	17.18					53		$	7.83		0.6

 

(1)

Comparable leases comprise leases for which prior leases were in place for the same suite within 12 months of executing a new lease. Comparable leases must have terms of at least six months and the square footage of the suite occupied by the new tenant cannot deviate by more than 50% from the size of the old lease’s suite.

 

 

Investment Activity 

 

The following tables describe changes in our portfolio from December 31, 2013 through December 31, 2015 (dollars and square feet in thousands): 

						Square Feet
Properties and Square Feet Activity			Number of Properties				Total				Office				Industrial				Retail
Properties owned as of
December 31, 2013			82				15,250				5,132				7,046				3,072
2014 Acquisitions			3				585				262				—				323
2014 Dispositions			(17	)			(3,973	)			(300	)			(3,563	)			(110	)
Building remeasurement and other (1)			—				9				—				9				—
December 31, 2014			68				11,871				5,094				3,492				3,285
2015 Acquisitions			8				1,383				792				—				591
2015 Dispositions			(17	)			(3,124	)			(1,427	)			(1,583	)			(114	)
Building remeasurement and other (1)			1				3				2				—				1
December 31, 2015			60				10,133				4,461				1,909				3,763

 

(1)

Building remeasurements reflect changes in gross leasable area due to renovations or expansions of existing properties. In the first quarter of 2015 we retained one building of a two-building campus while disposing of the other building, resulting in an additional property that we did not previously consider a distinct property.

Property Acquisitions			Segment			Location			Acquisition Date			Number of Properties		Contract Purchase Price				Square Feet
(dollars and square feet in thousands)
2014:
Durgin Square			Retail			Portsmouth, NH			5/28/2014			1		$	24,700			138
1st Avenue Plaza			Office			Denver, CO			8/22/2014			1			75,000			262
Salt Pond			Retail			Narragansett, RI			11/4/2014			1			39,160			185
Total 2014												3		$	138,860			585
2015:
Rialto			Office			Austin, TX			1/15/2015			1		$	37,300			155
South Cape			Retail			Mashpee, MA			3/18/2015			1			35,450			143
City View			Office			Austin, TX			4/24/2015			1			68,750			274
Venture Corporate Center			Office			Hollywood, FL			8/6/2015			1			45,750			253
Shenandoah			Retail			Davie, FL			8/6/2015			1			32,670			124
Chester Springs			Retail			Chester, NJ			10/8/2015			1			53,781			223
Yale Village			Retail			Tulsa, OK			12/9/2015			1			31,800			101
Bank of America Tower			Office			Boca Raton, FL			12/11/2015			1			35,750			110
Total 2015												8		$	341,251			1,383

 

 

 

Investment Activity (continued)

Property Dispositions			Segment			Location			Disposition Date			Number of Properties		Contract Sales Price				Square Feet
(dollars and square feet in thousands)
During 2014
Industrial Portfolio			Industrial			Various (1)			1/22/2014			12		$	175,000			3,387
Cranston			Retail			Cranston, RI			2/18/2014			1			6,750			110
Shackleford			Office			Little Rock, AR			2/25/2014			1			19,550			102
Land Parcel			N/A			Denver, CO			4/14/2014			—			780			—
Shadelands			Office			East Bay, CA			6/13/2014			1			5,700			60
Lundy (2)			Industrial			Silicon Valley, CA			10/15/2014			1			13,579			177
South Havana			Office			Denver, CO			11/7/2014			1			9,100			138
Total 2014												17		$	230,459			3,974
During 2015
Park Place			Office			Dallas, TX			1/16/2015			1		$	46,600			177
Office and Industrial Portfolio			Office and Industrial			Various (3)			3/11/2015			12			398,635			2,669
Mt. Nebo			Retail			Pittsburgh, PA			5/5/2015			1			12,500			103
2100 Corporate Center Drive			Office			Los Angeles, CA			7/20/2015			1			12,549			111
Land parcel			N/A			Denver, CO			8/12/2015			—			7,577			—
DeGuigne			Office			Sunnyvale, CA			12/14/2015			1			16,750			53
Rockland 201 Market			Retail			Rockland, MA			12/18/2015			1			1,625			11
Total 2015												17		$	496,236			3,124

 

(1)

The Industrial Portfolio comprised 12 industrial properties located in the Atlanta, GA, Cincinnati, OH, Central Pennsylvania, Columbus, OH, Dallas, TX, Indianapolis, IN, and Minneapolis, MN markets.

(2)

Sales price for the Lundy property represents the principal balance outstanding of the mortgage note on the property as of the date of the foreclosure sale. Due to the contractual balance of the mortgage note, we did not receive any proceeds from the sale of Lundy.

(3)

The Office and Industrial Portfolio comprised (i) six office properties comprising 1.1 million net rentable square feet located in Los Angeles, CA (three properties), Northern New Jersey, Miami, FL, and Dallas, TX, and (ii) six industrial properties comprising 1.6 million net rentable square feet located in Los Angeles, CA, Dallas, TX, Cleveland, OH, Chicago, IL, Houston, TX, and Denver, CO.

 

 

 

Definitions 

 

This section contains an explanation of certain non-GAAP financial measures we provide in other sections of this document, as well as the reasons why management believes these measures provide useful information to investors about the Company’s financial condition or results of operations. Additional detail can be found in the Portfolio’s most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as other documents filed with or furnished to the Securities and Exchange Commission from time to time.

 

2015 Annual Report on Form 10-K

 

We refer to our Annual Report on Form 10-K for the period ended December 31, 2015, filed with the Securities and Exchange Commission on March 3, 2016, as our “2015 Annual Report on Form 10-K.”

 

Annualized Base Rent

 

Annualized base rent represents the annualized monthly base rent of leases executed as of December 31, 2015.

 

Comparable leases

 

Comparable leases comprise leases for which prior leases were in place for the same suite within 12 months of executing a new lease. Comparable leases must have terms of at least six months and the square footage of the suite occupied by the new tenant cannot deviate by more than 50% from the size of the old lease’s suite.

 

Funds From Operations (“FFO”)

 

We believe that FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expense. However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Thus, NAREIT created FFO as a supplemental measure of operating performance for real estate investment trusts that consists of net income (loss), calculated in accordance with GAAP, plus real estate-related depreciation and amortization and impairment of depreciable real estate, less gains (or losses) from dispositions of real estate held for investment purposes.

 

Company-Defined FFO

 

As part of its guidance concerning FFO, NAREIT has stated that the “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” As a result, modifications to FFO are common among REITs as companies seek to provide financial measures that meaningfully reflect the specific characteristics of their businesses. In addition to the NAREIT definition of FFO and other GAAP measures, we provide a Company-Defined FFO measure that we believe is helpful in assisting management and investors assess the sustainability of our operating performance. As described further below, our Company-Defined FFO presents a performance metric that adjusts for items that we do not believe to be related to our ongoing operations. In addition, these adjustments are made in connection with calculating certain of the Company’s financial covenants including its interest coverage ratio and fixed charge coverage ratio and therefore we believe this metric will help our investors better understand how certain of our lenders view and measure the financial performance of the Company and ultimately its compliance with these financial covenants. However, no single measure can provide users of financial information with sufficient information and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity and results of operations.

 

Our Company-Defined FFO is derived by adjusting FFO for the following items: acquisition-related expenses and gains and losses associated with extinguishment of debt and financing commitments. Historically, Management has also adjusted FFO for certain other adjustments that did not occur in any of the periods presented, and are further described in Item 7 of Part II of our 2014 Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Measure Our Performance.” Management’s evaluation of our future operating performance excludes these items based on the following economic considerations:

 

Acquisition-related expenses — For GAAP purposes, expenses associated with the efforts to acquire real properties, including efforts related to acquisition opportunities that are not ultimately completed, are recorded to earnings. We believe by excluding acquisition-related expenses, Company-Defined FFO provides useful supplemental information for management and investors when evaluating the sustainability of our operating performance, because these types of expenses are directly correlated to our investment activity rather than our ongoing operating activity.

 

 

 

Definitions (continued) 

 

Gains and losses on derivatives and on the extinguishment of debt and financing commitments —— Unrealized gains and losses on derivatives represent the gains or losses on the fair value of derivative instruments that are not accounted for as hedges of the underlying financing transactions. Such gains and losses may be due to the nonoccurrence of forecasted financings or ineffectiveness due to changes in the expected terms of financing transactions. As these gains or losses relate to underlying long-term assets and liabilities, where we are not speculating or trading assets, our management believes that any such gains or losses are not reflective of our ongoing operations. Losses on extinguishment of debt and financing commitments represent losses incurred as a result of the early retirement of debt obligations and breakage costs and fees incurred related to certain of our derivatives and other financing commitments. Such losses may be due to dispositions of assets, the repayment of debt prior to its contractual maturity or the nonoccurrence of forecasted financings. Our management believes that any such losses are not related to our ongoing operations. Accordingly, we believe by excluding anticipated gains or losses on derivatives and losses on extinguishment of debt and financing commitments, Company-Defined FFO provides useful supplemental information for management and investors when evaluating the sustainability of our operating performance.

 

We also believe that Company-Defined FFO allows investors and analysts to compare the performance of our portfolio with other REITs that are not currently affected by the adjusted items. In addition, as many other REITs adjust FFO to exclude the items described above, we believe that our calculation and reporting of Company-Defined FFO may assist investors and analysts in comparing our performance with that of other REITs. However, because Company-Defined FFO excludes items that are an important component in an analysis of our historical performance, such supplemental measure should not be construed as a complete historical performance measure and may exclude items that have a material effect on the value of our common stock.

 

Limitations of FFO and Company-Defined FFO

 

FFO (both NAREIT-defined and Company-Defined) is presented herein as a supplemental financial measure and has inherent limitations. We do not use FFO or Company-Defined FFO as, nor should they be considered to be, an alternative to net income (loss) computed under GAAP as an indicator of our operating performance, or as an alternative to cash from operating activities computed under GAAP, or as an indicator of liquidity or our ability to fund our short or long-term cash requirements, including distributions to stockholders. Management uses FFO and Company-Defined FFO as indications of our future operating performance and as a guide to making decisions about future investments. Our FFO and Company-Defined FFO calculations do not present, nor do we intend them to present, a complete picture of our financial condition and operating performance. In addition, other REITs may define FFO and an adjusted FFO metric differently and choose to treat acquisition-related expenses and potentially other accounting line items in a manner different from us due to specific differences in investment strategy or for other reasons; therefore, comparisons with other REITs may not be meaningful. Our Company-Defined FFO calculation is limited by its exclusion of certain items previously discussed, but we continuously evaluate our investment portfolio and the usefulness of our Company-Defined FFO measure in relation thereto. We believe that net income (loss) computed under GAAP remains the primary measure of performance and that FFO or Company-Defined FFO are only meaningful when they are used in conjunction with net income (loss) computed under GAAP. Further, we believe that our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and operating performance.

 

Specifically with respect to fees and expenses associated with the acquisition of real property, which are excluded from Company-Defined FFO, such fees and expenses are characterized as operational expenses under GAAP and included in the determination of net income (loss) and income (loss) from operations, both of which are performance measures under GAAP. The purchase of operating properties is a key strategic objective of our business plan focused on generating operating income and cash flow in order to fund our obligations and to make distributions to investors. However, as the corresponding acquisition-related costs are paid in cash, these acquisition-related costs negatively impact our GAAP operating performance and our GAAP cash flows from operating activities during the period in which properties are acquired. In addition, if we acquire a property after all offering proceeds from our public offerings have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, such costs will then be paid from other sources of cash such as additional debt proceeds, operational earnings or cash flow, net proceeds from the sale of properties, or other ancillary cash flows. Among other reasons as previously discussed, the treatment of acquisition-related costs is a reason why Company-Defined FFO is not a complete indicator of our overall financial performance, especially during periods in which properties are being acquired. Note that, pursuant to our valuation policies, acquisition expenses result in an immediate decrease to our NAV.

 

FFO and Company-Defined FFO may not be useful performance measures as a result of the various adjustments made to net income for the charges described above to derive such performance measures. Specifically, we intend to operate as a perpetual-life vehicle and, as such, it is likely for our operating results to be negatively affected by certain of these charges in the future, specifically acquisition-related expenses, as it is currently contemplated as part of our business plan to acquire additional investment properties which would result in additional acquisition-related expenses. Any change in our operational structure would cause the non-GAAP measure to be re-evaluated as to the relevance of any adjustments included in the non-GAAP measure. As a result, we caution investors against using FFO or Company-Defined FFO to determine a price to earnings ratio or yield relative to our NAV.

 

Further, FFO or Company-Defined FFO is not comparable to the performance measure established by the Investment Program Association (the “IPA”), referred to as “modified funds from operations,” or “MFFO,” as MFFO makes further adjustments including certain mark-to-market items and adjustments for the effects of straight-line rent. As such, FFO and Company-Defined FFO may not be comparable to the MFFO of non-listed REITs that disclose MFFO in accordance with the IPA standard. More specifically, Company-Defined FFO has limited comparability to the MFFO and other adjusted FFO metrics of those REITs that do not intend to operate as perpetual-life vehicles as such REITs have a defined acquisition stage. Because we do not have a defined acquisition stage, we may continue to acquire real estate and real estate-related investments for an indefinite period of time. Therefore, Company-Defined FFO may not reflect our future operating performance in the same manner that the MFFO or other adjusted FFO metrics of a REIT with a defined acquisition stage may reflect its operating performance after the REIT had completed its acquisition stage.

 

 

 

Definitions (continued) 

 

Neither the Securities and Exchange Commission nor any other regulatory body, nor NAREIT, has adopted a set of standardized adjustments that includes the adjustments that we use to calculate Company-Defined FFO. In the future, the Securities and Exchange Commission or another regulatory body, or NAREIT, may decide to standardize the allowable adjustments across the non-listed REIT industry at which point we may adjust our calculation and characterization of Company-Defined FFO.

 

Gross Investment Amount

 

The allocated gross basis of real property and debt related investments, after certain adjustments. Gross Investment Amount for real property (i) includes the effect of intangible lease liabilities, (ii) excludes accumulated depreciation and amortization, and (iii) includes the impact of impairments. Amounts reported for debt related investments represent our net accounting basis of the debt investments, which includes (i) unpaid principal balances, (ii) unamortized discounts, premiums, and deferred charges, and (iii) allowances for loan loss.

 

Net Operating Income (“NOI”) and NOI – Cash Basis

 

We also use NOI as a supplemental financial performance measure because NOI reflects the specific operating performance of our real properties and debt related investments and excludes certain items that are not considered to be controllable in connection with the management of each property, such as other-than-temporary impairment, gains and losses related to provisions for losses on debt related investments, gains or losses on derivatives, acquisition-related expenses, losses on extinguishment of debt and financing commitments, interest income, depreciation and amortization, general and administrative expenses, advisory fees, interest expense and noncontrolling interests. However, NOI should not be viewed as an alternative measure of our financial performance as a whole, since it does exclude such items that could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI. Therefore, we believe net income, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance. “NOI – Cash Basis” is NOI after eliminating the effects of straight-lining of rent and the impact of above- and below-market lease amortization and other non-cash amortization adjustments to rental revenue.

 

Non-Recurring Capital Expenditures

 

We classify capital expenditures that significantly increase a property’s ability to generate additional revenues relative to our initial underwriting as non-recurring capital expenditures. Examples of such capital expenditures may include property expansions, renovations or other significant strategic upgrades. Conversely, we classify capital expenditures incurred to maintain a property’s ability to generate expected revenues as “recurring.” In addition, we also classify the following capital expenditures as non-recurring:

 

·

First Generation Leasing Costs: We classify capital expenditures incurred to lease spaces for which we have either (i) never had a tenant or (ii) we expected a vacancy of the leasable space within two years of acquisition as non-recurring capital expenditures.

 

·

Value-Add Acquisitions: We define a Value-Add Acquisition as a property that we acquire with one or more of the following characteristics: (i) existing vacancy equal to or in excess of 20%, (ii) short-term lease roll-over, typically during the first two years of ownership, that results in vacancy in excess of 20% when combined with the existing vacancy at the time of acquisition or (iii) significant capital improvement requirements in excess of 20% of the purchase price within the first two years of ownership. We classify any capital expenditures in Value-Add Acquisitions as non-recurring until the property reaches the earlier of (i) stabilization, which we define as 90% leased or (ii) five years after the date we acquire the property.

 

·

Other Acquisitions: For property acquisitions that do not meet the criteria to qualify as Value-Add Acquisitions, we classify all anticipated capital expenditures within the first year of ownership as non-recurring.

 

Same Store Properties

 

In our analysis of NOI, particularly to make comparisons of NOI between periods meaningful, it is important to provide information for properties that were in-service and owned by us throughout each period presented. We refer to properties acquired or placed in-service prior to the beginning of the earliest period presented and owned by us through the end of the latest period presented as “Same Store Properties.” “Same Store Properties” therefore exclude properties placed in-service, acquired, repositioned, or in development or redevelopment after the beginning of the earliest period presented or disposed of prior to the end of the latest period presented. Accordingly, it takes at least one year and one quarter after a property is acquired or treated as “in-service” for that property to be included in “Same Store Properties.” For the purposes of this supplement, our “Same Store Properties” include properties classified as held for sale in our annual financial statements at the end of the most recently completed period.

 

Valuation Procedures

 

We refer to our Valuation Procedures filed as Exhibit 99.1 to our 2015 Annual Report on Form 10-K as our “Valuation Procedures.”