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EX-31.2 - CERTIFICATION - HINES REAL ESTATE INVESTMENT TRUST INChinesreit-0331201610qex312.htm
EX-31.1 - CERTIFICATION - HINES REAL ESTATE INVESTMENT TRUST INChinesreit-0331201610qex311.htm
EX-32.1 - CERTIFICATION - HINES REAL ESTATE INVESTMENT TRUST INChinesreit-0331201610qex321.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
or
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: 000-50805
________________
Hines Real Estate Investment Trust, Inc.
(Exact name of registrant as specified in its charter)

Maryland
20-0138854
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2800 Post Oak Boulevard
 
Suite 5000
 
Houston, Texas
77056-6118
(Address of principal executive offices)
(Zip code)

(888) 220-6121
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   o
 
Accelerated Filer   o
Non-accelerated filer   x (Do not check if 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
As of May 6, 2016, 221.6 million shares of the registrant’s common stock were outstanding.
 



TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited):
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6. 
 
 
 
EX-31.1
Certification
 
EX-31.2
Certification
 
EX-32.1
Certification of CEO & CFO pursuant to Section 906 
 
 
 
 
EX-101
Instance Document
 
EX-101
Schema Document
 
EX-101
Calculation Linkbase Document
 
EX-101
Labels Linkbase Document
 
EX-101
Presentation Linkbase Document
 
EX-101
Definition Linkbase Document
 




PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.

HINES REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 
March 31,
2016
 
December 31,
2015
 
(In thousands, except per share amounts)
ASSETS:
Investment property, net
$
1,690,231

 
$
1,698,456

Investments in unconsolidated entities
97,249

 
100,455

Cash and cash equivalents
49,610

 
69,743

Restricted cash
1,281

 
1,288

Distributions receivable
1,209

 
1,757

Tenant and other receivables, net
43,982

 
41,025

Intangible lease assets, net
115,196

 
124,265

Deferred leasing costs, net
154,334

 
143,656

Deferred financing costs, net
416

 
519

Other assets
4,411

 
2,567

TOTAL ASSETS
$
2,157,919

 
$
2,183,731

 
 
 
 
LIABILITIES:
 
 
 
Accounts payable and accrued expenses
$
56,125

 
$
58,828

Due to affiliates
4,572

 
4,501

Intangible lease liabilities, net
28,619

 
29,699

Other liabilities
16,295

 
16,603

Interest rate swap contracts
13,491

 
17,448

Participation interest liability
130,386

 
126,637

Distributions payable
15,026

 
15,219

Notes payable, net
836,583

 
852,245

Total liabilities
1,101,097

 
1,121,180

 
 
 
 
Commitments and contingencies (Note 12)

 

 
 
 
 
EQUITY:
 
 
 
Preferred shares, $.001 par value; 500,000 preferred shares authorized, none issued or outstanding as of March 31, 2016 and December 31, 2015

 

Common shares, $.001 par value; 1,500,000 common shares authorized, 222,106 and 222,510 common shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
223

 
223

Additional paid-in capital
2,099,093

 
2,101,105

Accumulated distributions in excess of earnings
(1,041,421
)
 
(1,037,548
)
Accumulated other comprehensive income (loss)
(1,073
)
 
(1,229
)
Total stockholders’ equity
1,056,822

 
1,062,551

Noncontrolling interests

 

Total equity
1,056,822

 
1,062,551

TOTAL LIABILITIES AND EQUITY
$
2,157,919

 
$
2,183,731


See notes to the condensed consolidated financial statements.

1


HINES REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2016 and 2015
(UNAUDITED)
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
(In thousands, except per share amounts)
Revenues:
 
 
 
 
Rental revenue
 
$
48,106

 
$
51,826

Other revenue
 
4,989

 
4,164

Total revenues
 
53,095

 
55,990

Expenses:
 
 
 
 
Property operating expenses
 
13,764

 
14,832

Real property taxes
 
8,446

 
7,652

Property management fees
 
1,385

 
1,487

Depreciation and amortization
 
19,593

 
22,483

Acquisition related expenses
 

 
56

Asset management and acquisition fees
 
8,419

 
8,681

General and administrative
 
1,950

 
1,350

Total expenses
 
53,557

 
56,541

Operating income (loss)
 
(462
)
 
(551
)
Other income (expenses):
 
 
 
 
Gain (loss) on derivative instruments, net
 
3,957

 
3,193

Equity in earnings (losses) of unconsolidated entities, net
 
16,347

 
33,199

Gain (loss) on sale of real estate investments
 
2

 
21,079

Interest expense
 
(8,639
)
 
(9,481
)
Interest income
 
26

 
10

Income (loss) from continuing operations before benefit (provision) for income taxes
 
11,231

 
47,449

Benefit (provision) for income taxes
 
(39
)
 
(86
)
Income (loss) from continuing operations
 
11,192

 
47,363

Income (loss) from discontinued operations, net of taxes
 
(38
)
 
(2
)
Net income (loss)
 
11,154

 
47,361

Less: Net (income) attributable to noncontrolling interests
 
(75
)
 
(74
)
Net income (loss) attributable to common stockholders
 
$
11,079

 
$
47,287

Basic and diluted income (loss) per common share
 
$
0.05

 
$
0.21

Distributions declared per common share
 
$
0.07

 
$
0.07

Weighted average number of common shares outstanding
 
222,106

 
224,260

 
 
 
 
 
Net comprehensive income (loss):
 
 
 
 
Net income (loss)
 
$
11,154

 
$
47,361

Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustment
 
156

 
(211
)
Net comprehensive income (loss)
 
11,310

 
47,150

Net comprehensive (income) loss attributable to noncontrolling interests
 
(75
)
 
(74
)
Net comprehensive income (loss) attributable to common stockholders
 
$
11,235

 
$
47,076

 

See notes to the condensed consolidated financial statements.

2


HINES REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Three Months Ended March 31, 2016 and 2015
(UNAUDITED)
(In thousands)
 
Hines Real Estate Investment Trust, Inc.
 
 
 
 
 
Common Shares
 
Amount
 
Additional Paid-in Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling
Interests
BALANCE,
January 1, 2016
222,510

 
$
223

 
$
2,101,105

 
$
(1,037,548
)
 
$
(1,229
)
 
$
1,062,551

 
$

Issuance of
common shares
816

 
1

 
5,463

 

 

 
5,464

 

Redemption of
common shares
(1,220
)
 
(1
)
 
(7,449
)
 

 

 
(7,450
)
 

Distributions declared

 

 

 
(14,952
)
 

 
(14,952
)
 
(75
)
Other offering costs, net

 

 
(26
)
 

 

 
(26
)
 

Net income (loss)

 

 

 
11,079

 

 
11,079

 
75

Foreign currency
translation adjustment

 

 

 

 
156

 
156

 

BALANCE,
March 31, 2016
222,106

 
$
223

 
$
2,099,093

 
$
(1,041,421
)
 
$
(1,073
)
 
$
1,056,822

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Shares
 
Amount
 
Additional Paid-in Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling
Interests
BALANCE,
January 1, 2015
225,207

 
$
225

 
$
2,110,537

 
$
(1,020,134
)
 
$
(790
)
 
$
1,089,838

 
$

Issuance of
common shares
857

 
1

 
5,609

 

 

 
5,610

 

Redemption of
common shares
(1,804
)
 
(2
)
 
(7,521
)
 

 

 
(7,523
)
 

Distributions declared

 

 

 
(14,931
)
 

 
(14,931
)
 
(74
)
Other offering costs, net

 

 
(1
)
 

 

 
(1
)
 

Net income (loss)

 

 

 
47,287

 

 
47,287

 
74

Foreign currency
translation adjustment

 

 

 

 
(211
)
 
(211
)
 

BALANCE,
March 31, 2015
224,260

 
$
224

 
$
2,108,624

 
$
(987,778
)
 
$
(1,001
)
 
$
1,120,069

 
$


See notes to the condensed consolidated financial statements.

3


HINES REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2016 and 2015
(UNAUDITED)

 
Three Months Ended March 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
(In thousands)
Net income (loss)
$
11,154

 
$
47,361

Adjustments to reconcile net income (loss) to cash from operating activities:
 

 
 

Depreciation and amortization
25,173

 
26,217

(Gain) loss on sale of real estate investments
(2
)
 
(21,079
)
Equity in (earnings) losses of unconsolidated entities, net
(16,347
)
 
(33,199
)
Distributions received from unconsolidated entities
16,347

 
7,199

Other losses, net
38

 
38

(Gain) loss on derivative instruments, net
(3,957
)
 
(3,193
)
Net change in operating accounts
(22,521
)
 
(12,375
)
Net cash provided by operating activities
9,885

 
10,969

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Distributions received from unconsolidated entities in excess of equity in earnings
3,753

 

Investments in acquired properties and lease intangibles

 
(188,364
)
Capital expenditures at operating properties
(1,557
)
 
(3,043
)
Proceeds from sale of real estate investments and unconsolidated joint ventures
1

 
37,233

Change in restricted cash
7

 
705

Net cash provided by (used in) investing activities
2,204

 
(153,469
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Change in security deposits
466

 
151

Redemption of common shares
(7,161
)
 
(10,178
)
Payments of offering costs
(32
)
 
(7
)
Distributions paid to stockholders and noncontrolling interests
(9,792
)
 
(9,830
)
Proceeds from notes payable
104,000

 
203,000

Payments on notes payable
(119,816
)
 
(45,408
)
Additions to deferred financing costs
(125
)
 
(129
)
Net cash provided by (used in) financing activities
(32,460
)
 
137,599

Effect of exchange rate changes on cash
238

 
(183
)
Net change in cash and cash equivalents
(20,133
)
 
(5,084
)
Cash and cash equivalents, beginning of period
69,743

 
56,821

Cash and cash equivalents, end of period
$
49,610

 
$
51,737

 
See notes to the condensed consolidated financial statements.

4


HINES REAL ESTATE INVESTMENT TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2016 and 2015
(UNAUDITED)

1.  Organization

The accompanying interim unaudited condensed consolidated financial information has been prepared according to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted according to such rules and regulations. For further information, refer to the financial statements and footnotes for the year ended December 31, 2015 included in Hines Real Estate Investment Trust, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly and in conformity with GAAP the financial position of Hines Real Estate Investment Trust, Inc. as of March 31, 2016 and the results of operations for the three months ended March 31, 2016 and 2015 and cash flows for the three months ended March 31, 2016 and 2015 have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Hines Real Estate Investment Trust, Inc., (“Hines REIT” and, together with its consolidated subsidiaries, the “Company”), was formed on August 5, 2003 under the General Corporation Law of the state of Maryland for the purpose of engaging in the business of investing in and owning interests in real estate. Beginning with its taxable year ended December 31, 2004, the Company operated and intends to continue to operate in a manner to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. The Company is structured as an umbrella partnership REIT under which substantially all of the Company’s current and future business is and will be conducted through its majority-owned subsidiary, Hines REIT Properties, L.P. (the “Operating Partnership”). Hines REIT is the sole general partner of the Operating Partnership. The business of the Company is managed by Hines Advisors Limited Partnership (the “Advisor”), an affiliate of Hines Interests Limited Partnership (“Hines”), pursuant to the advisory agreement between the Company and the Advisor (the “Advisory Agreement”).

Hines REIT has raised approximately $2.7 billion through public offerings of its common stock, including shares of its common stock offered pursuant to its dividend reinvestment plan, since Hines REIT commenced its initial public offering in June 2004.  The Company commenced a $150.0 million offering of shares of its common stock under its dividend reinvestment plan on July 1, 2010, which closed on June 30, 2012, immediately prior to the commencement of the Company’s current $300.0 million offering of shares of its common stock under its dividend reinvestment plan on July 1, 2012. The Company refers to both offerings of shares under its dividend reinvestment plan collectively as the “DRP Offering.” From inception of the DRP Offering through March 31, 2016, Hines REIT received gross offering proceeds of $209.4 million from the sale of 27.4 million shares through the DRP Offering. Based on market conditions and other considerations, the Company does not currently expect to commence any future offerings other than those related to shares issued under its dividend reinvestment plan.

Hines REIT contributes all net proceeds from its public offerings to the Operating Partnership in exchange for partnership units in the Operating Partnership. As of March 31, 2016 and December 31, 2015, Hines REIT owned a 91.6% and 91.8% general partner interest, respectively, in the Operating Partnership. Hines 2005 VS I LP, an affiliate of Hines, owned a 0.5% limited partnership interest in the Operating Partnership as of both March 31, 2016 and December 31, 2015. In addition, another affiliate of Hines, HALP Associates Limited Partnership (“HALP”), owned a 7.9% and 7.7% profits interest (the “Participation Interest”) in the Operating Partnership as of March 31, 2016 and December 31, 2015, respectively.

Since the conclusion of its third public offering, the Company has concentrated its efforts on actively managing its assets and exploring a variety of strategic opportunities focused on enhancing the composition of its portfolio and its total return potential for its stockholders.  The Company has made strategic acquisitions and dispositions, and is considering its strategic alternatives to execute a liquidity event (i.e., a sale of its assets, the Company’s sale or merger, a listing of its shares on a national securities exchange, or another similar transaction). However, there is no set timetable for the execution of such an event.

Investment Property

As of March 31, 2016, the Company owned direct and indirect investments in 27 properties. These properties consisted of 19 U.S. office properties and a portfolio of 8 grocery-anchored shopping centers located in four states primarily in the southeastern United States (the “Grocery-Anchored Portfolio”).


5


The Company makes investments directly through entities that are wholly-owned by the Operating Partnership, or indirectly through other entities, such as through its investment in Hines US Core Office Fund LP (the “Core Fund”) in which it owned a 28.8% non-managing general partner interest as of both March 31, 2016 and December 31, 2015. The Company accounts for its investment in the Core Fund using the equity method of accounting.

Unconsolidated VIEs

The Company has a non-managing general partner interest of 28.8% in the Core Fund. The Core Fund was determined to be a variable interest entity (“VIE”) in which the Company was determined not to be the primary beneficiary since the managing general partner has the ability to direct the activities that significantly impact the economic performance of the VIE. The Company’s maximum loss exposure is expected to change in future periods as a result of additional contributions made. Other than the initial capital contributions provided by the Company, the Company has not provided any additional subordinated financial support. See Note 5 — Investments in Unconsolidated Entities for information regarding the activity of the Company’s unconsolidated entities as of March 31, 2016 and 2015.

The table below summarizes the Company’s maximum loss exposure related to its investment in the unconsolidated VIE as of March 31, 2016 and December 31, 2015, which is equal to the carrying value of its investment in the unconsolidated VIE included in the balance sheet line item “Investment in unconsolidated entities” as of March 31, 2016 and December 31, 2015 (in thousands).

Period (1)
 
Investment in Unconsolidated VIEs
 
Maximum Risk of Loss
March 31, 2016
 
$
97,249

 
$
97,249

December 31, 2015
 
$
100,455

 
$
100,455


(1)
Represents the Company’s contributions, net of distributions, made to its VIEs, as well as the Company’s share of equity in earnings (losses) on the investment as of the date indicated.

2.  Summary of Significant Accounting Policies

Described below are certain of the Company’s significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q. Please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a complete listing of all of its significant accounting policies.

Basis of Presentation

The condensed consolidated financial statements of the Company included in this Quarterly Report on Form 10-Q include the accounts of Hines REIT, the Operating Partnership and the Operating Partnership’s wholly-owned subsidiaries as well as the related amounts of noncontrolling interests. All intercompany balances and transactions have been eliminated in consolidation. As a result of the adoption of Accounting Standards Update (“ASU”) 2015-02, the Company has determined that the Operating Partnership is considered a VIE. However, the Company meets the disclosure exemption criteria under ASU 2015-02, as the Company is the primary beneficiary of the VIE and the Company’s partnership interest is considered a majority voting interest.

The Company has retroactively changed, for all prior periods presented, its classification of distributions in the consolidated balance sheets and statements of equity by reflecting such distributions as charges against “accumulated distributions in excess of earnings.”  This presentation change had no impact on the total equity balances in any of the periods presented.

The Company’s investments in partially-owned real estate joint ventures and partnerships are reviewed for impairment periodically. The Company will record an impairment charge if it determines that a decline in the value of an investment below its carrying value is other than temporary.  The Company’s analysis will be dependent on a number of factors, including the performance of each investment, current market conditions, and its intent and ability to hold the investment to full recovery.  Based on the Company’s analysis of the facts and circumstances at each reporting period, no impairment was recorded related to its investment in the Core Fund for the three months ended March 31, 2016 and 2015. However, if market conditions deteriorate in the future and result in lower valuations or reduced cash flows of the Company’s remaining investment in the Core Fund, impairment charges may be recorded in future periods.

6



International Operations

In addition to its properties in the United States, the Company has owned investments in Canada and Brazil, although the Company no longer owns any operating investments outside the United States as of March 31, 2016. Accumulated other comprehensive income (loss) as of March 31, 2016 is related to the remaining non-operating net assets of the disposed directly-owned properties in Brazil and Canada.

Impairment of Investment Property

Real estate assets are reviewed for impairment in each reporting period if events or changes in circumstances indicate that the carrying amount of the individual property may not be recoverable. In such an event, a comparison will be made of the current and projected cash flows of each property on an undiscounted basis to the carrying amount of such property. If undiscounted cash flows are less than the carrying amount, such carrying amount would be adjusted, if necessary, to estimated fair values to reflect impairment in the value of the asset.  See Note 13 — Fair Value Disclosures for additional information regarding the Company’s policy for determining fair values of its investment property. No impairment charges were recorded for the three months ended March 31, 2016 and 2015 on the Company’s directly-owned and indirectly-owned properties.

Tenant and Other Receivables

Receivable balances outstanding consist primarily of base rents, tenant reimbursements and receivables attributable to straight-line rent.  An allowance for the uncollectible portion of tenant and other receivables is determined based upon an analysis of the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Tenant and other receivables are shown at cost in the condensed consolidated balance sheets, net of allowance for doubtful accounts of $4.1 million and $4.1 million at March 31, 2016 and December 31, 2015, respectively.

Deferred Leasing Costs

Tenant inducement amortization was $5.1 million and $3.7 million for the three months ended March 31, 2016 and 2015, respectively, and was recorded as an offset to rental revenue. In addition, the Company recorded $1.5 million and $1.2 million as amortization expense related to other direct leasing costs for the three months ended March 31, 2016 and 2015, respectively.

Deferred Financing Costs

Deferred financing costs consist of direct costs incurred in obtaining debt financing. These costs are presented as a direct reduction to the related debt liability for permanent mortgages and presented as an asset for revolving credit arrangements. In total, deferred financing costs were $1.5 million and $1.7 million as of March 31, 2016 and December 31, 2015, respectively. These costs are amortized into interest expense on a straight-line basis, which approximates the effective interest method, over the terms of the obligations. For the three months ended March 31, 2016 and 2015, $0.4 million and $0.5 million, respectively, of deferred financing costs were amortized into interest expense in the accompanying consolidated statements of operations.

Other Assets

Other assets included the following (in thousands):

March 31, 2016
 
December 31, 2015
Prepaid insurance
$
207

 
$
663

Prepaid taxes
2,778

 
547

Other
1,426

 
1,357

Total
$
4,411

 
$
2,567



7


Revenue Recognition

Rental payments are generally paid by the tenants prior to the beginning of each month. As of March 31, 2016 and December 31, 2015, the Company recorded liabilities of $7.6 million and $8.5 million, respectively, related to prepaid rental payments which were included in other liabilities in the accompanying condensed consolidated balance sheets. The Company recognizes rental revenue on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable was $39.8 million and $36.9 million as of March 31, 2016 and December 31, 2015, respectively.

Redemption of Common Stock

The Company’s share redemption program generally limits the funds available for redemption to the amount of proceeds received from the Company’s dividend reinvestment plan in the prior quarter. The board of directors determined to waive this limitation of the share redemption program and fully honor all eligible requests received for the three months ended March 31, 2016 totaling $7.4 million, which amount was in excess of the $5.4 million received from the issuance of shares pursuant to the dividend reinvestment plan in the prior quarter. The board of directors determined to waive the limitation on the share redemption program and fully honor all eligible requests received for the year ended December 31, 2015 totaling $31.4 million, which was in excess of the $21.9 million received from the dividend reinvestment plan in the prior quarters.

The Company has recorded liabilities of $7.4 million and $7.1 million in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively, related to shares that were tendered for redemption and approved by the board of directors but were not redeemed until the subsequent month. Such amounts have been included in redemption of common shares in the accompanying consolidated statements of equity based on a redemption price of $5.45 per share for ordinary share redemption requests and $6.50 per share for redemption requests in connection with the death or disability of a stockholder made during the first three quarters of 2015 and $6.65 per share for redemption requests in connection with the death or disability of a stockholder made during the fourth quarter of 2015. The estimated per share net asset value of the Company’s common stock as of June 30, 2015 is $6.65 and was determined by the Company’s board of directors in September 2015.

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (“FASB”) issued amendments to the Accounting Standards Codification (“ASC” or the “Codification”) to provide guidance on consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. These amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and early adoption is permitted. The Company has evaluated the impact of the adoption of these amendments on its consolidated financial statements and has determined that the Company’s operating partnership is considered a VIE. However, the Company meets the disclosure exemption criteria, as the Company is the primary beneficiary of the VIE and the Company’s partnership interest is considered a majority voting interest. The Company has also determined that the Core Fund will be considered to be a VIE as a result of this new guidance. However, the Company will not consolidate the Core Fund since the Company is not the primary beneficiary.

In September 2015, the FASB issued new guidance that eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Pursuant to the new guidance, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and early adoption is permitted. The adoption of this new guidance did not have a material impact on the Company’s financial statements.


8


3.  Real Estate Investments

Investment property consisted of the following (in thousands):

 
March 31, 2016
 
December 31, 2015
Buildings and improvements
$
1,429,400

 
$
1,427,955

Less: accumulated depreciation
(176,870
)
 
(167,200
)
Buildings and improvements, net
1,252,530

 
1,260,755

Land
437,701

 
437,701

Investment property, net
$
1,690,231

 
$
1,698,456


Lease Intangibles

As of March 31, 2016, the cost basis and accumulated amortization related to lease intangibles were as follows (in thousands):

 
Lease Intangibles
 
In-Place Leases
 
Out-of-Market 
Lease Assets
 
Out-of-Market
Lease Liabilities
Cost
$
234,718

 
$
35,144

 
$
50,495

Less: accumulated amortization
(129,796
)
 
(24,870
)
 
(21,876
)
Net
$
104,922

 
$
10,274

 
$
28,619


As of December 31, 2015, the cost basis and accumulated amortization related to lease intangibles were as follows (in thousands):

 
Lease Intangibles
 
In-Place Leases
 
Out-of-Market 
Lease Assets
 
Out-of-Market Lease Liabilities
Cost
$
238,176

 
$
35,158

 
$
50,798

Less: accumulated amortization
(124,891
)
 
(24,178
)
 
(21,099
)
Net
$
113,285

 
$
10,980

 
$
29,699


Amortization expense of in-place leases was $8.4 million and $11.4 million for the three months ended March 31, 2016 and 2015, respectively, and amortization of out-of-market leases, net, increased rental revenue by $0.4 million and $0.6 million, respectively.

Expected future amortization of in-place leases and out-of-market leases, net, including out-of-market ground leases for the period from April 1, 2016 through December 31, 2016 and for each of the years ending December 31, 2017 through 2020 is as follows (in thousands):

 
In-Place Leases
 
Out-of-Market Leases, Net
April 1, 2016 through December 31, 2016
$
21,155

 
$
(697
)
2017
22,889

 
(307
)
2018
17,815

 
(892
)
2019
10,558

 
(1,504
)
2020
7,898

 
(1,087
)


9


Leases

In connection with its directly-owned properties, the Company has entered into non-cancelable lease agreements with tenants for space. As of March 31, 2016, the approximate fixed future minimum rentals for the period from April 1, 2016 through December 31, 2016, for each of the years ending December 31, 2017 through 2020 and thereafter are as follows (in thousands):

 
Fixed Future Minimum Rentals
April 1, 2016 through December 31, 2016
$
119,794

2017
152,031

2018
135,708

2019
119,537

2020
105,664

Thereafter
506,161

Total
$
1,138,895


During the three months ended March 31, 2016 and 2015, the Company did not earn more than 10% of its revenue from any individual tenant.

4. Recent Acquisitions of Real Estate

The Company did not make any property acquisitions during the three months ended March 31, 2016. For the year ended December 31, 2015, the Company acquired the assets and assumed certain liabilities of two real estate operating properties located in the United States, for an aggregate net purchase price of $292.4 million.

The amounts recognized for major assets acquired as of the acquisition date were determined by allocating the purchase price of each property acquired in 2015 as follows (in thousands):

Property Name
 
Acquisition Date
 
Building and Improvements
 
Land
 
In-place Lease Intangibles
 
Out-of-Market Lease Intangibles, Net
 
Total Purchase Price
2015
 
 
 
 
 
 
 
 
 
 
 
 
Civica Office Commons
 
02/11/2015
 
$
141,037

 
$
41,240

 
$
26,190

 
$
(2,960
)
 
$
205,507

2851 Junction Avenue
 
05/14/2015
 
$
50,024

 
$
24,500

 
$
16,020

 
$
(3,680
)
 
$
86,864



The weighted average amortization periods for the intangible assets and liabilities acquired in connection with the 2015 acquisitions, as of the date of the acquisition, were as follows (in years):
 
 
In-Place Leases
 
Above-Market Lease Assets
 
Below-Market Lease Liabilities
2015 Acquisitions:
 
 
 
 
 
 
Civica Office Commons
 
3.9
 
4.0
 
3.9
2851 Junction Avenue
 
14.4
 
 
14.4


10


The table below includes the amounts of revenue and net income (loss) of the acquisitions completed during the three months ended March 31, 2015, which are included in the Company’s condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2015 (in thousands):




For the Three Months Ended
2015 Acquisition



March 31, 2015
Civica Office Commons

Revenue

$
2,131



Net income (loss)

$
(85
)

The following unaudited consolidated information is presented to give effect to the 2015 acquisition through March 31, 2015 as if the acquisition occurred on January 1, 2014. This information excludes activity that is non-recurring and not representative of the Company’s future activity, primarily acquisition fees and expenses of $0.5 million for the three months ended March 31, 2015. The information below is not necessarily indicative of what the actual results of operations would have been had the Company completed these transactions on January 1, 2014, nor does it purport to represent the Company’s future operations (amounts in thousands, except per share amounts):
 
For the Three Months Ended
 
March 31,
 
Pro Forma 2015
 
Pro Forma 2014
Revenue
$
58,536

 
$
64,733

Net income (loss) from continuing operations
$
47,277

 
$
41,959

Basic and diluted income (loss) from continuing operations per common share
$
0.21

 
$
0.18


5.   Investments in Unconsolidated Entities
 
As of March 31, 2016 and December 31, 2015, the Company owned indirect investments in 4 and 6 properties, respectively, through its interest in the Core Fund. The Company has determined that the Core Fund is considered to be a VIE. See Note 1 — Organization — Unconsolidated VIEs for additional information.

The table below presents the activity of the Company’s unconsolidated entities as of and for the periods presented (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Beginning balance
$
100,455

 
$
187,668

Distributions declared
(19,553
)
 
(56,788
)
Equity in earnings (losses)
16,347

 
33,199

Ending balance
$
97,249

 
$
164,079


11


Condensed financial information for the Core Fund is summarized as follows (in thousands):
Condensed Consolidated Balance Sheets for the Core Fund
 
 
 
 
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Cash
$
111,329

 
$
45,471

Investment property, net
736,886

 
905,229

Other assets
186,683

 
214,238

Total Assets
$
1,034,898

 
$
1,164,938

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Debt, net
$
520,307

 
$
636,239

Other liabilities
71,123

 
73,401

Redeemable noncontrolling interests
122,255

 
124,413

Equity
321,213

 
330,885

Total Liabilities and Equity
$
1,034,898

 
$
1,164,938


The Core Fund sold two properties during the three months ended March 31, 2016 and one property during the three months ended March 31, 2015, which is reflected in the table below (in thousands).

Condensed Consolidated Statements of Operations for the Core Fund
 
 
 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
Total revenues
 
$
23,352

 
$
46,501

Total expenses
 
28,819

 
50,091

Gain (loss) on sale of real estate investments
 
73,585

 
139,872

Net income (loss)
 
68,118

 
136,282

Less (income) loss allocated to noncontrolling interests
 
(9,891
)
 
(20,150
)
Net income (loss) attributable to parent
 
$
58,227

 
$
116,132


The following discusses items of significance for the periods presented for the Company’s equity method investments:

In January 2016, the Core Fund sold The Carillon Building for a contract sales price of $147.0 million. The Carillon Building was acquired in July 2007 for a contract purchase price of $140.0 million. As a result of the sale of The Carillon Building, the Core Fund recorded a gain on sale of $58.8 million. As a result of the sale, the Company recognized a gain on sale of $14.4 million, which is included in equity in earnings (losses) of unconsolidated entities, net, in the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2016.

In March 2016, the Core Fund sold 525 B Street for a contract sales price of $122.0 million. 525 B Street was acquired in August 2005 for a contract purchase price of $116.3 million. As a result of the sale of 525 B Street, the Core Fund recorded a gain on sale of $14.8 million. As a result of the sale, the Company recognized a gain on sale of $3.6 million, which is included in equity in earnings (losses) of unconsolidated entities, net, in the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2016.

In January 2015, a subsidiary of the Core Fund sold its remaining 51% interest in the entity that owns One North Wacker for $240.0 million. The Core Fund previously sold a 49% noncontrolling interest in One North Wacker in December 2011. One North Wacker was acquired in March 2008 for a contract purchase price of $540.0 million. As a result of the sale of the 51% interest in One North Wacker, the Core Fund recorded a gain on sale of $139.9 million. As a result of the sale, the Company

12


recognized a gain of $34.2 million, which is included in equity in earnings (losses) of unconsolidated entities, net, in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2015.

6.  Debt Financing

As of March 31, 2016 and December 31, 2015, the Company had $837.6 million and $853.4 million of debt outstanding, respectively, with a weighted average years to maturity of 1.1 years and 1.1 years, respectively, and a weighted average interest rate of 3.9% and 3.9%, respectively. The following table includes all of the Company’s outstanding notes payable balances as of March 31, 2016 and December 31, 2015 (in thousands, except interest rates):

Description
 
Maturity Date
 
Interest Rate Description
 
Interest Rate as of March 31, 2016
 
Principal Outstanding at March 31, 2016
 
Principal Outstanding at December 31, 2015
SECURED MORTGAGE DEBT
 
 
 
 
 
 
 
 
 
 
1515 S. Street (1)
 
9/1/2016
 
Fixed
 
4.25
%
 
$
36,340

 
$
36,618

345 Inverness Drive
 
12/11/2016
 
Fixed
 
5.85
%
 
14,160

 
14,224

JPMorgan Chase Tower (2)
 
2/1/2017
 
Variable
 
2.94
%
 
49,137

 
149,542

Thompson Bridge Commons
 
3/1/2018
 
Fixed
 
6.02
%
 
4,890

 
4,959

DEUTSCHE BANK POOLED MORTGAGE FACILITY (3)
 
 
 
 
 
 

 
 
 
 
321 North Clark, 1900 and 2000 Alameda
 
8/1/2016
 
Fixed via swap
 
5.86
%
 
169,697

 
169,697

3400 Data Drive, 2100 Powell
 
1/23/2017
 
Fixed via swap
 
5.25
%
 
98,000

 
98,000

Daytona and Laguna Buildings
 
5/2/2017
 
Fixed via swap
 
5.36
%
 
119,000

 
119,000

OTHER NOTES PAYABLE
 
 
 
 
 
 

 
 

 
 

JPMorgan Chase Revolving Credit Facility - Revolving Loan (4)
 
4/1/2017
 
Variable
 
2.04
%
 
146,400

 
61,400

JPMorgan Chase Revolving Credit Facility - Term Loan
 
4/1/2018
 
Variable
 
1.94
%
 
200,000

 
200,000

TOTAL PRINCIPAL OUTSTANDING
 
 
 
 
 
 

 
837,624

 
853,440

Unamortized Premium/ (Discount) (5)
 
 
 
 
 
 
 
25

 
(6
)
Unamortized Deferred Financing Fees
 
 
 
 
 
 
 
(1,066
)
 
(1,189
)
NOTES PAYABLE 
 
 
 
 
 
 
 
$
836,583

 
$
852,245

 

(1)
In April 2016, the Company sold 1515 S. Street and paid off the 1515 S. Street secured mortgage loan with proceeds from the sale.

(2)
In January 2016, the Company made a payment of $100.0 million to pay down the JPMorgan Chase Tower secured mortgage debt. Also, in January 2016, the maturity date of the remaining loan balance was extended for an additional year to February 1, 2017.

(3)
In December 2015, HSH Nordbank sold its interest in the HSH Credit Facility and its related swap agreements to Deutsche Bank AG, New York Branch (“Deutsche Bank”). No other terms or conditions of the credit facility were changed.

(4)
During the three months ended March 31, 2016, the Company borrowed $104.0 million and made payments of $19.0 million under the JPMorgan Chase Revolving Credit Facility (the “Revolving Loan Commitment”). The Company used proceeds from the sale of 1515 S. Street in April 2016 to pay down $25.0 million of the Revolving Loan Commitment.


13


(5)
The Company assumed notes payable in connection with various acquisitions, which were recorded at their estimated fair value as of the date of acquisition. The difference between the fair value at acquisition and the principal outstanding is amortized over the term of the related note.

Bridge Credit Agreement

In February 2015, the Operating Partnership entered into a Bridge Credit Agreement (the “Bridge Credit Agreement”) with JPMorgan Chase Bank, N.A. (“Chase”) to establish a $30.0 million secured term loan facility (the “Bridge Facility”) to provide temporary financing related to the Company’s acquisition of Civica Office Commons in February 2015. The Company repaid all amounts outstanding under this facility in July 2015. No additional credit was available under this facility after that date.

The following table summarizes required principal payments on the Company’s outstanding notes payable for the period from April 1, 2016 through December 31, 2016, for each of the years ending December 31, 2017 through December 31, 2020 and for the period thereafter (in thousands):
 
Principal Payments due by Period
 
April 1, 2016 through December 31, 2016
(1) 
2017
 
2018
 
2019
 
2020
 
Thereafter
Notes payable
$
221,320

 
$
411,927

 
$
204,377

 
$

 
$

 
$


(1)
In April 2016, the Company sold 1515 S. Street and paid off the 1515 S. Street secured mortgage loan with proceeds from the sale.

The Company is not aware of any instances of noncompliance with financial covenants as of March 31, 2016.

7.  Derivative Instruments

The Company has several interest rate swap transactions with Deutsche Bank, who purchased the interest in the swaps from HSH Nordbank in December 2015. These swap transactions were entered into as economic hedges against the variability of future interest rates on the Company’s variable interest rate borrowings under the Deutsche Bank Credit Facility. The Company has not designated any of its derivative instruments as hedging instruments for accounting purposes. The interest rate swaps have been recorded at their estimated fair value in the accompanying condensed consolidated balance sheets and changes in the fair value were recorded in gain (loss) on derivative instruments, net in the Company’s condensed consolidated statements of operations. See Note 13 — Fair Value Disclosures for additional information.

The tables below provide additional information regarding each of the Company’s outstanding interest rate swaps (all amounts are in thousands except for interest rates):
Effective Date
 
Expiration Date
 
Notional Amount
 
Interest Rate Received
 
Interest Rate Paid
August 1, 2006
 
August 1, 2016
 
$
169,697

 
LIBOR
 
5.4575
%
January 12, 2007
 
January 12, 2017
 
$
98,000

 
LIBOR
 
4.8505
%
May 1, 2007
 
May 1, 2017
 
$
119,000

 
LIBOR
 
4.9550
%

The Company has not entered into any master netting arrangements with its third-party counterparties and does not offset on its consolidated condensed balance sheets the fair value amounts recorded for derivative instruments. The table below presents the fair value of the Company’s derivative instruments included in “Liabilities — Interest Rate Swap Contracts” on the Company’s condensed consolidated balance sheets, as of March 31, 2016 and December 31, 2015 (in thousands):

 
Liability Derivatives Fair Value
 Derivatives not designated as hedging instruments for accounting purposes:
March 31, 2016
 
December 31, 2015
Interest rate swap contracts
$
13,491

 
$
17,448

Total derivatives
$
13,491

 
$
17,448

 

14


The table below presents the effects of the changes in fair value of the Company’s derivative instruments in the Company’s condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2016 and 2015 (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Gain (loss) on interest rate swap, net
$
3,957

 
$
3,193

Total
$
3,957

 
$
3,193


8.  Distributions

With the authorization of its board of directors, the Company declared distributions for the period from January 2015 through May 2016. These distributions were or will be calculated based on stockholders of record each day during this period in an amount equal to $0.00073973 per share, per day and will be paid on the first day of the month following the fiscal quarter to which they relate in cash, or reinvested in stock for those participating in the Company's dividend reinvestment plan.

The table below outlines the Company’s total distributions declared to stockholders and noncontrolling interests for each of the quarters during 2016 and 2015, including the breakout between the distributions paid in cash and those reinvested pursuant to the Company’s dividend reinvestment plan (all amounts are in thousands).
 
 
Stockholders
 
Noncontrolling Interests
Distributions for the Three Months Ended
 
Cash Distributions
 
Distributions Reinvested
 
Total Declared
 
Total Declared
2016 (1)
 
 
 
 
 
 
 
 
March 31, 2016
 
$
9,626

 
$
5,326

 
$
14,952

 
$
75

Total
 
$
9,626

 
$
5,326

 
$
14,952

 
$
75

 
 
 
 
 
 
 
 
 
2015 (1)
 
 
 
 
 
 
 
 
December 31, 2015
 
$
9,717

 
$
5,426

 
$
15,143

 
$
75

September 30, 2015
 
9,731

 
5,445

 
15,176

 
76

June 30, 2015
 
9,645

 
5,416

 
15,061

 
74

March 31, 2015
 
9,507

 
5,424

 
14,931

 
74

Total
 
$
38,600

 
$
21,711

 
$
60,311

 
$
299


(1)
Except as noted below, excluded from this table are distributions declared with respect to the Participation Interest (as discussed further in Note 9 — Related Party Transactions). The distributions declared with respect to the Participation Interest for the quarters ended March 31, 2016, December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015 were $1.3 million, $1.3 million, $1.2 million, $1.2 million and $1.1 million, respectively.


15


9.  Related Party Transactions

The table below outlines fees incurred and expense reimbursements payable to Hines, the Advisor and Hines Securities, Inc. for the three months ended March 31, 2016 and 2015 and outstanding as of March 31, 2016 and December 31, 2015 (all amounts are in thousands).

 
 
Incurred
 
Unpaid as of
 
 
Three Months Ended March 31,
 
March 31,
 
December 31,
Type and Recipient
 
2016
 
2015
 
2016
 
2015
Participation Interest in the Operating Partnership – HALP Associates Limited Partnership (1)
 
$
5,007

 
$
4,840

 
$
130,386

 
$
126,637

 
 
 
 
 
 
 
 
 
Due to Affiliates
 
 

 
 

 
 

 
 

Acquisition Fee – the Advisor (2)
 

 
410

 

 

Asset Management Fee – the Advisor
 
3,412

 
3,431

 
1,135

 
1,131

Debt Financing Fee – the Advisor (3)
 

 

 

 

Other – the Advisor
 
863

 
788

 
459

 
633

Property Management Fee – Hines
 
1,224

 
1,311

 
159

 
99

Leasing Fee – Hines
 
877

 
2,157

 
2,533

 
2,240

Tenant Construction Management Fees – Hines
 
28

 

 
10

 

Expense Reimbursements – Hines (with respect to management and operation of the Company’s properties)
 
2,898

 
3,064

 
276

 
398

Due to Affiliates
 
 

 
 

 
$
4,572

 
$
4,501


(1)
The Company recorded a liability related to the Participation Interest based on its estimated settlement value in the accompanying condensed consolidated balance sheets. This liability is remeasured at fair value based on the related estimated NAV per share in place as of the date of each balance sheet plus any unpaid distributions.

(2)
In connection with the acquisition of Civica Office Commons in February 2015, the Company was obligated to pay approximately $2.1 million of acquisition fees to the Advisor, half of which was payable in cash and half of which was payable as an increase to the Participation Interest. The Advisor and HALP, the holder of the Participation Interest, respectively, agreed to waive $0.6 million of the cash acquisition fee and all of the $1.0 million acquisition fee payable as an increase to the Participation Interest.

(3)
In connection with the financing pursuant to the Bridge Credit Agreement in February 2015, the Advisor agreed to waive the entire $0.3 million debt financing fee that otherwise would be payable to the Advisor.


16


10. Changes in Assets and Liabilities

The effect of the changes in asset and liability accounts on cash flows from operating activities for the three months ended March 31, 2016 and 2015 is as follows (in thousands):

 
Three Months Ended March 31,
 
2016
 
2015
Change in other assets
$
(1,844
)
 
$
(801
)
Change in tenant and other receivables, net
(2,952
)
 
(1,646
)
Change in deferred leasing costs, net
(17,806
)
 
(30,471
)
Change in accounts payable and accrued expenses
(2,881
)
 
13,992

Change in participation interest liability
3,749

 
3,738

Change in other liabilities
(842
)
 
(578
)
Change in due to affiliates
55

 
3,391

Changes in assets and liabilities
$
(22,521
)
 
$
(12,375
)

11. Supplemental Cash Flow Disclosures

Supplemental cash flow disclosures for the three months ended March 31, 2016 and 2015 are as follows (in thousands):

 
Three Months Ended March 31,
 
2016
 
2015
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid for interest
$
8,251

 
$
6,805

Cash paid for income taxes
$


$

Supplemental Schedule of Non-Cash Activities
 

 
 

Distributions declared and unpaid
$
15,026

 
$
15,004

Distributions receivable
$
1,209

 
$
56,788

Distributions reinvested
$
5,426

 
$
5,573

Shares tendered for redemption
$
7,439

 
$
7,520

Noncash net assets (liabilities) acquired upon acquisition of property
$

 
$
(1,812
)

12.  Commitments and Contingencies

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on the Company’s condensed consolidated financial statements.

13.  Fair Value Disclosures

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative Instruments

The Company records liabilities related to the fair values of its interest rate swap contracts. The valuation of these instruments is determined based on assumptions that management believes market participants would use in pricing, using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  The fair values of the Company’s interest rate contracts have been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are

17


based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Although the Company has determined the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty, Deutsche Bank. In adjusting the fair values of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds and guarantees. However, as of March 31, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuations of its derivatives. As a result, the Company has determined its derivative valuations are classified in Level 2 of the fair value hierarchy.
 
The following fair value hierarchy table sets forth the Company’s interest rate swaps which are measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of March 31, 2016 and December 31, 2015 (in thousands).  The Company’s derivative financial instruments are recorded in interest rate swap contracts in the accompanying condensed consolidated balance sheets.  The Company has not designated any of its derivative instruments as hedging instruments for accounting purposes.
 
 
 
 
Basis of Fair Value Measurements
Description
 
Fair Value
 
Quoted Prices In Active Markets for Identical Items (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
March 31, 2016
 
$
13,491

 
$

 
$
13,491

 
$

December 31, 2015
 
$
17,448

 
$

 
$
17,448

 
$


Financial Instruments Fair Value Disclosures

Other Financial Instruments

As of March 31, 2016, management estimated that the fair value of notes payable, which had a carrying value (excluding any unamortized discount or premium and unamortized deferred financing fees) of $837.6 million, was $847.5 million. As of December 31, 2015, management estimated that the fair value of notes payable, which had a carrying value (excluding any unamortized discount or premium and unamortized deferred financing fees) of $853.4 million, was $866.3 million. The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, assumes the debt is outstanding through maturity and considers the debt’s collateral (if applicable).  Management has utilized market information as available or present value techniques to estimate the amounts required to be disclosed. The Company has determined the majority of the inputs used to value its notes payable fall within Level 2 of the fair value hierarchy, however the credit quality adjustments associated with its fair value of notes payable utilize Level 3 inputs. However, as of March 31, 2016, the Company has assessed the significance of the impact of the credit quality adjustments on the overall valuations of its fair market value of notes payable and has determined that they are not significant.  As a result, the Company has determined these financial instruments utilize Level 2 inputs. Since such amounts are estimates that are based on limited available market information for similar transactions, there can be no assurance that the disclosed values could be realized.

Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, distributions receivable, tenant and other receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable.  The carrying value of these items reasonably approximates their fair value based on their highly-liquid nature and/or short-term maturities.  Due to the short-term nature of these instruments, Level 1 and Level 2 inputs are utilized to estimate the fair value of these financial instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 Certain long-lived assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments (i.e., impairments) in certain circumstances. The fair value methodologies used to measure long-lived assets are described in Note 2 — Summary of Significant Accounting Policies — Impairment of Investment Property. The inputs associated with the valuation of long-lived assets are generally included in Level 2 or Level 3 of the fair value hierarchy. There were no events during the three months ended March 31, 2016 and 2015 which indicated that fair value adjustments of the Company’s long-lived assets were necessary.


18


14.  Reportable Segments

The Company’s investments in real estate are geographically diversified and management evaluates the operating performance of each at an individual property level. The Company has determined it has three reportable segments: (1) office properties, (2) an industrial property and (3) retail properties. As of March 31, 2016, the office properties segment consisted of 15 office properties that the Company owned directly as well as 4 office properties that were owned indirectly through the Company’s investment in the Core Fund. The retail segment consisted of the 8 grocery-anchored shopping centers in the Grocery-Anchored Portfolio. The industrial property segment consisted of one industrial property located in Dallas, Texas, which was sold in April 2015.

The Company’s indirect investments are accounted for using the equity method of accounting. As such, the activities of these investments are reflected in investments in unconsolidated entities in the condensed consolidated balance sheets and equity in earnings (losses) of unconsolidated entities, net in the condensed consolidated statements of operations.

The tables below provide additional information related to each of the Company’s segments (in thousands) and a reconciliation to the Company’s net income or loss, as applicable. “Corporate-Level Accounts” includes amounts incurred by the corporate-level entities which are not allocated to any of the reportable segments.

 
Three Months Ended March 31,
 
2016
 
2015
Total revenue
 
 
 
Office properties
$
48,581

 
$
50,541

Industrial property

 
917

     Retail properties
4,514

 
4,532

Total revenue
$
53,095

 
$
55,990

 
 
 
 
Net property revenues in excess of expenses(1)
 
 
 
Office properties
$
26,445

 
$
28,193

Industrial property
(32
)
 
562

     Retail properties
3,087

 
3,264

Total segment net property revenues in excess of expenses
$
29,500

 
$
32,019

 
 
 
 
Equity in earnings (losses) of unconsolidated entities
 
 
 
Equity in earnings (losses) of office properties
$
16,347

 
$
33,199

Total equity in earnings (losses) of unconsolidated entities
$
16,347

 
$
33,199


(1)
Revenues less property operating expenses, real property taxes and property management fees.

Total assets
March 31, 2016
 
December 31, 2015
Office properties
$
1,845,010

 
$
1,853,435

Retail properties
186,024

 
185,850

Investment in unconsolidated entities
 
 
 
Office properties
97,249

 
100,455

Corporate-level accounts (1)
29,636

 
43,991

Total assets
$
2,157,919

 
$
2,183,731

 
(1)
This amount primarily consists of cash and cash equivalents at the corporate level, including proceeds from the sale of the Company’s directly and indirectly-owned investments and distributions receivable from the Company’s investments in unconsolidated entities.


19


 
Three Months Ended March 31,
 
2016
 
2015
Reconciliation to net income (loss)
 
 
 
Total segment net property revenues in excess of expenses
$
29,500

 
$
32,019

Depreciation and amortization
(19,593
)
 
(22,483
)
Acquisition related expenses

 
(56
)
Asset management and acquisition fees
(8,419
)
 
(8,681
)
General and administrative
(1,950
)
 
(1,350
)
Gain (loss) on derivative instruments, net
3,957

 
3,193

Equity in earnings (losses) of unconsolidated entities, net
16,347

 
33,199

Gain (loss) on sale of real estate investments
2

 
21,079

Interest expense
(8,639
)
 
(9,481
)
Interest income
26

 
10

Benefit (provision) for income taxes
(39
)
 
(86
)
Income (loss) from discontinued operations, net of taxes
(38
)
 
(2
)
Net income (loss)
$
11,154

 
$
47,361


15. Subsequent Events

1515 S. Street

In April 2016, the Company sold 1515 S. Street for a contract sales price of $68.5 million. 1515 S. Street is an office building located in Sacramento, California. The Company originally acquired 1515 S. Street in November 2005 for a contract purchase price of $66.6 million.

JPMorgan Chase Tower

In May 2016, the Company entered into a contract to sell JPMorgan Chase Tower, an office building located in Dallas, Texas. The contract sales price for JPMorgan Chase Tower is expected to be approximately $280.0 million, exclusive of transaction costs and closing prorations. The Company originally acquired JPMorgan Chase Tower in November 2007 for a contract purchase price of $289.6 million. Although the Company expects the closing of this sale to occur in June 2016, there can be no assurances as to if or when this sale will be completed.


*****


20


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited 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, 2015 (“2015 Annual Report”).

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements include statements concerning future financial performance and distributions, future debt and financing levels, payments to Hines Advisors Limited Partnership (the “Advisor”), and its affiliates and other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto as well as all other statements that are not historical 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 forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “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 in this Quarterly Report on Form 10-Q are based on 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, the availability of future financing and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying forward-looking statements could prove to be inaccurate. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, pay distributions to our stockholders and maintain the value of the real estate properties in which we hold an interest, may be significantly hindered.

The following are some of the risks and uncertainties, which could cause actual results to differ materially from those presented in certain forward-looking statements:

Whether we will have the opportunity to invest sales proceeds to acquire properties or other investments or whether such proceeds will be needed to redeem shares or for other purposes, and if proceeds are available for investment, our ability to make such investments in a timely manner and at appropriate amounts that provide acceptable returns;

The potential need to fund tenant improvements, lease-up costs or other capital expenditures, as well as increases in property operating expenses and costs of compliance with environmental matters or discovery of previously undetected environmentally hazardous or other undetected adverse conditions at our properties;

Risks associated with debt;

Competition for tenants and real estate investment opportunities, including competition with affiliates of Hines Interests Limited Partnership (“Hines”);

Risks associated with adverse changes in general economic or local market conditions, including terrorist attacks and other acts of violence, which may affect the markets in which we and our tenants operate;

Catastrophic events, such as hurricanes, earthquakes, tornadoes and terrorist attacks; and our ability to secure adequate insurance at reasonable and appropriate rates;

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments;

Changes in governmental, tax, real estate and zoning laws and regulations and the related costs of compliance and increases in our administrative operating expenses, including expenses associated with operating as a public company;


21


Risks relating to our investment in Hines US Core Office Fund LP (the “Core Fund”), such as its reliance on Hines for its operations and investments, and our potential liability for Core Fund obligations;

The lack of liquidity associated with our assets;

Our reliance on our Advisor, Hines and affiliates of Hines for our day-to-day operations and our Advisor’s ability to attract and retain high-quality personnel who can provide service at a level acceptable to us;

Risks associated with conflicts of interests that result from our relationship with our Advisor and Hines, as well as conflicts of interests certain of our officers and directors face relating to the positions they hold with other entities; and

Our ability to continue to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

These risks are more fully discussed in, and all forward-looking statements should be read in light of, all of the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.

You are cautioned not to place undue reliance on any forward-looking statements included in this Form 10-Q. All forward-looking statements are made as of the date of this Form 10-Q and the risk that actual results will differ materially from the expectations expressed in this Form 10-Q may increase with the passage of time. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Form 10-Q will be achieved. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. Each forward-looking statement speaks only as of the date of the particular statement, and we do not undertake to update any forward-looking statement.

Executive Summary

Hines Real Estate Investment Trust, Inc. (“Hines REIT” and, together with its consolidated subsidiaries, “we”, “us” or the “Company”) and its subsidiary, Hines REIT Properties, L.P. (the “Operating Partnership”) were formed in August 2003 for the purpose of investing in and owning interests in real estate. We have invested in real estate to satisfy our primary investment objectives, including preserving invested capital, paying regular cash distributions and achieving modest capital appreciation of our assets over the long term. We have made investments directly through entities wholly owned by the Operating Partnership or indirectly through other entities such as through our investment in the Core Fund. As of March 31, 2016, we had direct and indirect interests in 27 properties. These properties consist of 19 office properties located throughout the United States and a portfolio of eight grocery-anchored shopping centers located in four states primarily in the Southeastern United States (the “Grocery-Anchored Portfolio”). In total, we acquired interests in 66 properties since our inception and have sold our interests in 40 of those properties as of May 11, 2016.



22


The following table provides summary information regarding the properties in which we owned interests as of March 31, 2016. All assets which are 100% owned by us are referred to as “directly-owned properties.” All other properties are owned indirectly through investments in the Core Fund.
Property
City
 
Date Acquired
 
Leasable Square Feet
 
Percent Leased
 
Effective Ownership(1)
Directly-owned Properties
 
 
 
 
 
 
 
 
Office Properties
 
 
 
 
 
 
 
 
321 North Clark
Chicago, Illinois
 
04/2006
 
889,744

 
94
%
 
100
%
JPMorgan Chase Tower
Dallas, Texas
 
11/2007
 
1,255,473

 
76
%
 
100
%
345 Inverness Drive
Denver, Colorado
 
12/2008
 
175,287

 
95
%
 
100
%
Arapahoe Business Park
Denver, Colorado
 
12/2008
 
309,450

 
97
%
 
100
%
2100 Powell
Emeryville, California
 
12/2006
 
345,982

 
91
%
 
100
%
3 Huntington Quadrangle
Melville, New York
 
07/2007
 
407,912

 
95
%
 
100
%
3400 Data Drive
Rancho Cordova, California
 
11/2006
 
149,703

 
100
%
 
100
%
Daytona Buildings
Redmond, Washington
 
12/2006
 
251,313

 
100
%
 
100
%
Laguna Buildings
Redmond, Washington
 
01/2007
 
460,661

 
100
%
 
100
%
1515 S. Street (2)
Sacramento, California
 
11/2005
 
399,636

 
99
%
 
100
%
1900 and 2000 Alameda
San Mateo, California
 
06/2005
 
267,006

 
97
%
 
100
%
5th and Bell
Seattle, Washington
 
06/2007
 
197,135

 
100
%
 
100
%
Howard Hughes Center
Los Angeles, California
 
01/2014
 
1,334,586

 
82
%
 
100
%
Civica Office Commons
Bellevue, Washington
 
02/2015
 
309,039

 
91
%
 
100
%
2851 Junction Avenue
San Jose, California
 
05/2015
 
155,613

 
100
%
 
100
%
Total for Office Properties
 
 
 
6,908,540

 
90
%
 
 

 
 
 
 
 
 
 
 
 
Grocery-Anchored Portfolio
 
 
 
 

 
 

 
 

Cherokee Plaza
Atlanta, Georgia
 
11/2008
 
102,864

 
100
%
 
100
%
Thompson Bridge Commons
Gainesville, Georgia
 
03/2009
 
92,587

 
97
%
 
100
%
Champions Village
Houston, Texas
 
11/2008
 
392,870

 
82
%
 
100
%
Sandy Plains Exchange
Marietta, Georgia
 
02/2009
 
72,784

 
93
%
 
100
%
University Palms Shopping Center
Oviedo, Florida
 
11/2008
 
99,172

 
98
%
 
100
%
Shoppes at Parkland
Parkland, Florida
 
03/2009
 
145,720

 
95
%
 
100
%
Oak Park Village
San Antonio, Texas
 
11/2008
 
64,287

 
100
%
 
100
%
Heritage Station
Wake Forest, North Carolina
 
01/2009
 
68,641

 
97
%
 
100
%
Total for Grocery-Anchored Portfolio
 
 
 
1,038,925

 
91
%
 
 

Total for Directly-owned Properties
 
 
 
 
7,947,465

 
90
%
 
 
Indirectly-owned Properties
 
 
 
 

 
 

 
 

Core Fund Properties
 
 
 
 

 
 

 
 

One Atlantic Center
Atlanta, Georgia
 
07/2006
 
1,100,312

 
82
%
 
24
%
Renaissance Square
Phoenix, Arizona
 
12/2007
 
965,508

 
76
%
 
24
%
Wells Fargo Center
Sacramento, California
 
05/2007
 
507,903

 
89
%
 
20
%
Warner Center
Woodland Hills, California
 
10/2006
 
808,274

 
93
%
 
20
%
Total for Core Fund Properties
 
 
 
 
3,381,997

 
84
%
 
 

Total for All Properties
 
 
 
 
11,329,462

 
88
%
(3) 
 


(1)
This percentage shows the effective ownership of the Operating Partnership in the properties listed. On March 31, 2016, Hines REIT owned a 91.6% interest in the Operating Partnership as its sole general partner. Affiliates of Hines owned the remaining 8.4% interest in the Operating Partnership. In addition, we owned an approximate 28.8% non-

23


managing general partner interest in the Core Fund as of March 31, 2016. The Core Fund does not own 100% of these properties; its ownership interest in its properties ranges from 67.8% to 84.9%.

(2)
In April 2016, we sold 1515 S. Street for a contract sales price of $68.5 million. We originally acquired 1515 S. Street in November 2005 for a contract purchase price of $66.6 million.

(3)
This amount represents the percentage leased assuming we own a 100% interest in each of these properties.  The percentage leased based on our effective ownership interest in each property is 90%.

In order to provide capital for the investments described above, with the exception of the Howard Hughes Center, Civica Office Commons and 2851 Junction Avenue, we raised approximately $2.7 billion through public offerings of our common stock since we commenced our initial public offering in June 2004. In consideration of market conditions and other factors, our board of directors determined to cease sales of our shares to new investors pursuant to our third public offering as of January 1, 2010. However, we have continued to sell shares under our dividend reinvestment plan. Based on market conditions and other considerations, we do not currently expect to commence any future offerings other than those related to shares issued under our dividend reinvestment plan.

Since the conclusion of our third public offering, we have concentrated our efforts on actively managing our assets and exploring a variety of strategic opportunities focused on enhancing the composition of our portfolio and its total return potential for our stockholders.  In doing this, we have elected to make strategic dispositions, which have provided us with additional liquidity. We have used the proceeds from such dispositions to make additional strategic acquisitions focused on high-quality office assets located on the West Coast in order to best position our portfolio for a liquidity event, such as our purchase of 2851 Junction Avenue, which we acquired in May 2015, Civica Office Commons, which we acquired in February 2015 and the Howard Hughes Center, which we acquired in January 2014. We may also choose to use such proceeds for future capital expenditure and leasing capital needs, reduce our leverage in the portfolio, make additional special distributions or other purposes. In addition to the actions we have taken such as our strategic acquisitions and dispositions, we are considering our strategic alternatives to execute a liquidity event (i.e., a sale of our assets, our sale or merger, a listing of our shares on a national securities exchange, or another similar transaction). However, there is no set timetable for the execution of such an event.

Our portfolio was 90% and 88% leased (based on our effective ownership) as of March 31, 2016 and December 31, 2015, respectively. As a result of the strategic acquisitions and dispositions described above, as of March 31, 2016, our portfolio was geographically located 66% in the West, 11% in the Midwest, 2% in the East and 21% in the South. Our management closely monitors the portfolio’s lease expirations, which for the period from April 1, 2016 through December 31, 2016, and for each of the years ending December 31, 2017 through December 31, 2020, are expected to approximate 5%, 7%, 15%, 6% and 8%, respectively, of leasable square feet. We believe this level of expirations is manageable, and we will remain focused on filling tenant vacancies with high-quality tenants in each of the markets in which we operate. Although we continue to lease our properties to a diverse tenant base over a variety of industries, as of March 31, 2016, our portfolio was approximately 14% leased to over 74 companies in the legal industry, approximately 14% leased to over 45 companies in the financial and insurance industries, approximately 12% leased to over 132 companies in the grocery-anchored retail industry and approximately 10% leased to over 34 companies in the information and technology industries.

Further, with the authorization of our board of directors, we declared distributions for January 2015 through May 2016. These distributions were or will be calculated based on stockholders of record each day during this period in an amount equal to $0.00073973 per share, per day and will be paid on the first day of the month following the fiscal quarter to which they relate in cash, or reinvested in stock for those participating in our dividend reinvestment plan.

Critical Accounting Policies

Each of our critical accounting policies involves the use of estimates that require management to make assumptions that are subjective in nature. Management relies on its experience, collects historical and current market data, and analyzes these assumptions in order to arrive at what it believes to be reasonable estimates. In addition, application of these accounting policies involves the exercise of judgment regarding assumptions as to future uncertainties. Actual results could materially differ from these estimates. A disclosure of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2015 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no significant changes to our policies during 2016.


24


Financial Condition, Liquidity and Capital Resources

General
 
Our principal cash requirements have been for the acquisition of real estate investments, property-level operating expenses, capital improvements and leasing costs, strategic investments in real property, debt service, corporate-level general and administrative expenses, distributions and redemptions. We have four primary sources of capital for meeting our cash requirements:

proceeds from our dividend reinvestment plan;
debt financings, including secured or unsecured facilities;
proceeds from the sale of our properties, including those owned by the Core Fund; and
cash flow generated by our real estate investments and operations.

We are focused on maintaining a strong cash position and managing our capital needs. Our liquidity needs were primarily met through cash flow generated by our properties and distributions from unconsolidated entities. Additionally, due to our ability to execute on several strategic asset sales, we had available liquidity to acquire additional investment properties in order to reposition our portfolio for a liquidity event. If we continue to sell significant assets and do not reinvest the proceeds in additional investments, it will reduce the cash flow generated by our properties and may adversely impact our ability to pay regular distributions to our stockholders at the current distribution rate. We did not acquire or sell any properties during the three months ended March 31, 2016. Below is a list of the properties we sold during the three months ended March 31, 2015 and a list of the properties acquired and sold by the Core Fund during the three months ended March 31, 2016 and 2015:

Hines REIT Acquisitions and Asset Sales

Civica Office Commons - In February 2015, we acquired Civica Office Commons, a portfolio of two Class A office buildings located in Bellevue, Washington, for a contract purchase price of $205.5 million.

Citymark - In February 2015, we sold Citymark, an office building located in Dallas, Texas, for a contract sales price of $38.9 million. We acquired Citymark in August 2005 for a contract purchase price of $27.8 million. We received net proceeds of $37.2 million from this sale.

Core Fund Asset Sales

The Carillon Building - In January 2016, the Core Fund sold The Carillon Building, an office building located in Charlotte, North Carolina, for a contract sales price of $147.0 million. The Carillon Building was acquired in July 2007 for a contract purchase price of $140.0 million. The Core Fund received net proceeds of $88.1 million from this sale. We recognized a gain on sale of $14.4 million. At the date of disposition, we owned a 24% effective interest in The Carillon Building.

525 B Street - In March 2016, the Core Fund sold 525 B Street, an office building located in San Diego, California, for a contract sales price of $122.0 million. 525 B Street was acquired in August 2005 for a contract purchase price of $116.3 million. The Core Fund received net proceeds of $58.4 million from this sale. We recognized a gain on sale of $3.6 million. At the date of disposition, we owned a 24% effective interest in 525 B Street.

One North Wacker - In January 2015, a subsidiary of the Core Fund sold its remaining 51% interest in the entity that owns One North Wacker, an office building located in Chicago, Illinois. The Core Fund previously sold a 49% noncontrolling interest in One North Wacker in December 2011. At the date of disposition, we owned a 12% effective interest in One North Wacker. The Core Fund received net proceeds of $238.6 million from this sale. We recognized a gain on sale of $34.2 million.

Cash Flows from Operating Activities

Net cash provided by operating activities was $9.9 million for the three months ended March 31, 2016 compared to net cash provided by operating activities of $11.0 million for the three months ended March 31, 2015. This decrease is primarily due to an increase in the cash paid for deferred lease costs in 2016 and a non-recurring lease termination payment received at JPMorgan Chase Tower in 2015 offset by an increase in the distributions received from the Core Fund during the three months ended March 31, 2016.


25


Cash Flows from Investing Activities

Net cash provided by investing activities was $2.2 million for the three months ended March 31, 2016 compared to net cash used in investing activities of $153.5 million for the three months ended March 31, 2015. The factors that contributed to the change between the two periods are summarized below.

2016

We received distributions from the Core Fund totaling $20.1 million, of which $3.8 million was included in cash flows from investing activities, as they exceeded our equity in earnings of the joint venture.

We had cash outflows related to capital expenditures at operating properties of $1.6 million.

2015

We had cash outflows related to our acquisition of Civica Office Commons in February 2015 of $188.4 million.

We received proceeds of $37.2 million from sale of Citymark in February 2015.

We had cash outflows related to capital expenditures at operating properties of $3.0 million.

Cash Flows from Financing Activities

Net cash used in financing activities for the three months ended March 31, 2016 decreased by $170.1 million as compared to the same period in the prior year. This decrease is primarily due to net proceeds from debt being $173.4 million lower in 2016.

Distributions

In order to meet the requirements for being treated as a REIT under the Internal Revenue Code of 1986, as amended, and to pay regular cash distributions to our stockholders, which is one of our investment objectives, we have declared and expect to continue to declare distributions to stockholders (as authorized by our board of directors) as of daily record dates and aggregate and pay such distributions quarterly. We intend to continue this distribution policy for so long as our board of directors decides this policy is in our best interests.

With the authorization of our board of directors, we declared distributions for the period from January 2015 through May 2016. These distributions were or will be calculated based on stockholders of record each day during this period in an amount equal to $0.00073973 per share, per day and will be paid on the first day of the month following the fiscal quarter to which they relate in cash, or reinvested in stock for those participating in our dividend reinvestment plan.


26


The table below outlines our total distributions declared to stockholders and noncontrolling interests for each of the quarters during 2016 and 2015, including the breakout between the distributions paid in cash and those reinvested pursuant to our dividend reinvestment plan (all amounts are in thousands).
 
 
Stockholders
 
Noncontrolling Interests
Distributions for the Three Months Ended
 
Cash Distributions
 
Distributions Reinvested
 
Total Declared
 
Total Declared
2016 (1)
 
 
 
 
 
 
 
 
March 31, 2016
 
$
9,626

 
$
5,326

 
$
14,952

 
$
75

Total
 
$
9,626

 
$
5,326

 
$
14,952

 
$
75

 
 
 
 
 
 
 
 
 
2015 (1)
 
 
 
 
 
 
 
 
December 31, 2015
 
$
9,717

 
$
5,426

 
$
15,143

 
$
75

September 30, 2015
 
9,731

 
5,445

 
15,176

 
76

June 30, 2015
 
9,645

 
5,416

 
15,061

 
74

March 31, 2015
 
9,507

 
5,424

 
14,931

 
74

Total
 
$
38,600

 
$
21,711

 
$
60,311

 
$
299


(1)
Except as noted below, excluded from this table are distributions declared with respect to the Participation Interest (as discussed further in Note 9 — Related Party Transactions). The distributions declared with respect to the Participation Interest for the quarters ended March 31, 2016, December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015 were $1.3 million, $1.3 million, $1.2 million, $1.2 million and $1.1 million, respectively.

For the three months ended March 31, 2016, we funded our cash distributions with cash flows from operating activities (66%) and from excess undistributed cash flows from prior periods (34%). For the three months ended March 31, 2015, we funded our cash distributions with cash flows from operating activities (73%) and proceeds from the sales of our real estate investments (27%).

Redemptions

During the three months ended March 31, 2016 and 2015, we funded redemptions of $7.2 million and $10.2 million, respectively, pursuant to the terms of our share redemption program. On March 25, 2013, our board of directors amended and restated our share redemption program to reinstate the program, effective for share redemption requests received on or after April 1, 2013, subject to the conditions and limitations described in the amended and restated share redemption program. Generally, funds available for redemption are limited to the amount of proceeds received from our dividend reinvestment plan in the prior quarter.  However, our board of directors has the discretion to redeem shares in excess of this amount if it determines there are sufficient available funds and it is appropriate to do so as long as the total amount redeemed does not exceed the amount required to redeem 10% of our shares outstanding as of the same date in the prior calendar year. Our board of directors determined to waive this limitation on the share redemption plan and fully honor all eligible requests received for the three months ended March 31, 2016, which were in excess of the $5.4 million received from our dividend reinvestment plan in the prior quarter. We have fully honored all eligible requests received for all periods since our share redemption program reopened.

Debt Financings

We use debt financing from time to time for investments in real property, property improvements, tenant improvements, leasing commissions and other working capital needs. Most of our debt is in the form of secured mortgage loans, which we entered into at the time each real estate asset was acquired. Our portfolio was 37% leveraged as of March 31, 2016, with 54% of our debt in the form of fixed-rate mortgage loans (some of which are effectively fixed through the use of interest rate swaps). By comparison, our portfolio was 37% leveraged as of December 31, 2015, with 53% of our debt in the form of fixed-rate mortgage loans. This leverage percentage is calculated using the estimated aggregate value of our real estate investments (including our pro-rata share of real estate assets through our investments in other entities such as the Core Fund), cash and cash equivalents and restricted cash on hand as of that date.  Additionally, as of March 31, 2016 and December 31, 2015, our debt financing had a weighted average interest rate of 3.9% and 3.9%, respectively (including the effect of interest rate swaps).


27


The following list summarizes our debt financings for the three months ended March 31, 2016 and 2015:

2016
We made payments of $100.0 million to pay down the JPMorgan Chase Tower secured mortgage debt in January 2016.
We received proceeds of $104.0 million under a revolving credit facility (the “Revolving Loan Commitment”) pursuant to a credit agreement with JPMorgan Chase Bank, N.A. (“Chase”) and we made payments of $19.0 million related to this agreement.
We made payments of $0.1 million for financing costs related to our loans.

2015
We received proceeds of $30.0 million related to our Bridge Credit Agreement (the “Bridge Credit Agreement”) with Chase to fund our acquisition of Civica Office Commons.
We received proceeds of $173.0 million under the Revolving Loan Commitment and we made payments of $44.0 million in February 2015 related to this agreement.
We made payments of $0.1 million for financing costs related to our loans.

Results of Operations
 
RESULTS OF OUR DIRECTLY-OWNED PROPERTIES

We directly owned 21 same-store properties as of January 1, 2015 that were 90% leased as of March 31, 2016 as compared to 89% leased as of March 31, 2015. The table below includes revenues and expenses of our directly-owned properties for the three months ended March 31, 2016 and 2015. Disposed properties include the results of operations of properties that were sold, but whose results were not classified as discontinued operations (all amounts in thousands, except for percentages):
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,

Change
 
2016

2015

$

%
Property revenues in excess of expenses (1)
 
 
 
 


 


  Same-store properties
$
25,259

 
$
27,056

 
$
(1,797
)
 
(6.6
)%
  Recent acquisitions
4,325

 
1,556

 
2,769

 
178.0
 %
  Disposed properties
(84
)
 
3,407

 
(3,491
)
 
(102.5
)%
Total property revenues in excess of expenses
$
29,500

 
$
32,019

 
$
(2,519
)
 
(7.9
)%
 
 
 
 
 


 


Other
 
 
 
 
 
 
 
Depreciation and amortization
$
19,593

 
$
22,483

 
$
(2,890
)
 
(12.9
)%
Gain (loss) on sale of real estate investments
$
2

 
$
21,079

 
$
(21,077
)
 
(100.0
)%
Interest expense
$
8,639

 
$
9,481

 
$
(842
)
 
(8.9
)%

(1)
 Property revenues in excess of expenses include total revenues less property operating expenses, real property taxes, and property management fees.

The decrease in property revenues in excess of expenses for the same-store properties for the three months ended March 31, 2016 is primarily due to:

a non-recurring lease termination payment received at JPMorgan Chase Tower in 2015;
an increase in rental revenue at 2100 Powell for new leases executed in 2016, which partially offset the items that caused property revenues in excess of expenses to decrease; and
lower rental rates under leases at 3 Huntington Quadrangle in 2016.


28


Depreciation and amortization decreased during the three months ended March 31, 2016, as compared to the same period in 2015, primarily due to the sale of several properties during 2015.

Gain on sale of real estate investments decreased during the three months ended March 31, 2016, as compared to the same period in 2015 as a result of the sale of a property in 2015.

Interest expense decreased during the three months ended March 31, 2016, as compared to the same period in 2015 as a result of a decrease in total debt outstanding.

Additionally, we are continually evaluating each of our investments to determine the ideal time to sell assets in order to achieve attractive total returns and provide additional liquidity to the Company.  As a result of future potential disposals, possible reinvestments and other factors, our results of operations for the period ended March 31, 2016 could differ from our results of operations in future periods.

RESULTS FOR OUR INDIRECTLY-OWNED PROPERTIES

Our Interest in the Core Fund

As of March 31, 2016, we owned a 28.8% non-managing general partner interest in the Core Fund, which held interests in 4 properties that were 84% leased. As of March 31, 2015, we owned a 28.8% non-managing general partner interest in the Core Fund, which held interests in 9 properties that were 83% leased.

Our equity in earnings related to our investment in the Core Fund for the three months ended March 31, 2016 was $16.3 million, compared to equity in earnings of $33.2 million for the three months ended March 31, 2015. The change in our equity in earnings (losses) for the three months ended March 31, 2016 primarily resulted from the following:

In January 2016, the Core Fund sold The Carillon Building for a contract sales price of $147.0 million. The Carillon Building was acquired in July 2007 for a contract purchase price of $140.0 million. As a result of the sale, we recognized a gain on sale of $14.4 million, which is included in equity in earnings (losses) of unconsolidated entities, net, in the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2016.

In March 2016, the Core Fund sold 525 B Street for a contract sales price of $122.0 million. 525 B Street was acquired in August 2005 for a contract purchase price of $116.3 million. As a result of the sale, we recognized a gain on sale of $3.6 million, which is included in equity in earnings (losses) of unconsolidated entities, net, in the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2016.

In January 2015, a subsidiary of the Core Fund sold its remaining 51% interest in the entity that owns One North Wacker for $240.0 million. The Core Fund previously sold a 49% noncontrolling interest in One North Wacker in December 2011. One North Wacker was acquired in March 2008 for a contract purchase price of $540.0 million. As a result of the sale of the 51% interest in One North Wacker, we recognized a gain on sale of $34.2 million, which is included in equity in earnings (losses) of unconsolidated entities, net, in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2015.


29


CORPORATE LEVEL ACTIVITIES

Other Corporate-level Activities

The tables below provide detail relating to our asset management fees and general and administrative expenses (all amounts in thousands, except percentages):
 
Three Months Ended March 31,
 
Change
 
2016
 
2015
 
$
 
%
Acquisition fee
$

 
$
410

 
$
(410
)
 
(100.0
)%
Asset management fee
8,419

 
8,271

 
148

 
1.8
 %
Asset management and acquisition fees
$
8,419

 
$
8,681

 
$
(262
)
 
(3.0
)%
 
 
 
 
 
 
 
 
Acquisition related expenses
$

 
$
56

 
$
(56
)
 
(100.0
)%
General and administrative expenses
$
1,950

 
$
1,350

 
$
600

 
44.4
 %

We pay acquisition fees to our Advisor for services related to the due diligence, selection and acquisition of direct or indirect real estate investments. The acquisition fee is equal to 0.50% of (i) the purchase price of real estate investments acquired directly by us, including any debt attributable to such investments or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. Acquisition fees decreased for the three months ended March 31, 2016, as compared to the same period in 2015, due to no acquisition fees having been incurred for the three months ended March 31, 2016, while acquisition fees were incurred on our acquisition of Civica Office Commons in February 2015. In connection with the acquisition of Civica Office Commons, we were obligated to pay approximately $2.1 million of acquisition fees to our Advisor, half of which was payable in cash and half of which was payable related to the Participation Interest. Our Advisor and HALP, the holder of the Participation Interest, respectively, agreed to waive $0.6 million of the cash acquisition fee and all of the $1.0 million acquisition fee payable as an increase to the Participation Interest. We also pay monthly asset management fees to our Advisor based on an annual fee equal to 1.5% of the amount of net equity capital invested in real estate investments.

General and administrative expenses include legal and accounting fees, insurance costs, costs and expenses associated with our board of directors and other administrative expenses. General and administrative expenses increased for the three months ended March 31, 2016 due to an increase in legal fees associated with our consideration of strategic alternatives for the execution of a liquidity event.

30


Funds from Operations and Modified Funds from Operations

Funds from Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors and analysts as one measure of operating performance of a real estate company. FFO excludes items such as real estate depreciation and amortization. Depreciation and amortization, as applied in accordance with GAAP, implicitly assumes that the value of real estate assets diminishes predictably over time and also assumes that such assets are adequately maintained and renovated as required in order to maintain their value. Since real estate values have historically risen or fallen with market conditions such as occupancy rates, rental rates, inflation, interest rates, the business cycle, unemployment and consumer spending, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies using historical cost accounting alone is insufficient. In addition, FFO excludes gains and losses from the sale of real estate and impairment charges related to depreciable real estate assets and in-substance real estate equity investments, which we believe provides management and investors with a helpful additional measure of the historical performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs. A property will be evaluated for impairment if events or circumstances indicate that the carrying amount may not be recoverable (i.e. the carrying amount exceeds the total estimated undiscounted future cash flows from the property). Undiscounted future cash flows are based on anticipated operating performance, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows. While impairment charges are excluded from the calculation of FFO as described above, stockholders are cautioned that due to the limited term of our operations, it could be difficult to recover any impairment charges.

In addition to FFO, management uses modified funds from operations (“MFFO”), as defined by the Investment Program Association (the “IPA”), as a non-GAAP supplemental financial performance measure to evaluate our operating performance. The IPA has recommended the use of MFFO as a supplemental measure for publicly registered, non-listed REITs to enhance the assessment of the operating performance of a non-listed REIT. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be useful as a measure of the long-term operating performance of our investments or as a comparative measure to other publicly registered, non-listed REITs if we do not continue to operate with a limited life and targeted exit strategy, as currently intended and described herein. MFFO includes funds generated by the operations of our real estate investments and funds used in our corporate-level operations. MFFO is based on FFO, but includes certain additional adjustments which we believe are appropriate. Such items include reversing the effects of straight-line rent revenue recognition, fair value adjustments to derivative instruments that do not qualify for hedge accounting treatment, gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting, and gains or losses related to early extinguishment of hedges or debt. Some of these adjustments are necessary to address changes in the accounting and reporting rules under GAAP for real estate subsequent to the establishment of NAREIT’s definition of FFO. These changes also have prompted a significant increase in the magnitude of non-cash and non-operating items included in FFO, as defined. Such items include amortization of out-of-market lease intangible assets and liabilities and certain tenant incentives.

The purchase of properties, and the corresponding expenses associated with that process, including acquisition fees and expenses, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to our stockholders. MFFO excludes acquisition expenses. Under GAAP, acquisition expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to our stockholders. All paid and accrued acquisition expenses with respect to the acquisition of a property negatively impact our operating performance during the period in which the property is acquired and will have negative effects on returns to our stockholders, the potential for future distributions, and future cash flows, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, the related acquisition expenses and other costs related to such property. In addition, if we acquire a property, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless our Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to the Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. Since MFFO excludes acquisition expenses, MFFO would only be comparable to the operations of non-listed REITs that have completed their acquisition activity and have other similar operating characteristics.

MFFO is useful in assisting management and investors in assessing the sustainability (that is, the capacity to continue to be maintained) of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO.


31


Management uses MFFO to evaluate the financial performance of our investment portfolio, including the impact of potential future investments. In addition, our board of directors uses MFFO to evaluate and establish our distribution policy and the sustainability thereof.

FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. In addition, FFO and MFFO should not be considered as alternatives to net income (loss) or income (loss) from continuing operations as an indication of our performance or as alternatives to cash flows from operating activities as an indication of our liquidity, but rather should be reviewed in conjunction with these and other GAAP measurements. Further, FFO and MFFO are not intended to be used as liquidity measures indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. Please see the limitations listed below associated with the use of MFFO:

We use interest rate swap contracts as economic hedges against the variability of interest rates on variable rate loans. Although we expect to hold these instruments to maturity, if we were to settle these instruments currently, it would have an impact on our operating performance. Additionally, these derivative instruments are measured at fair value on a quarterly basis in accordance with GAAP. MFFO excludes gains (losses) related to changes in these estimated values of our derivative instruments because such adjustments may not be reflective of ongoing operations and may reflect unrealized impacts on our operating performance.

MFFO excludes acquisition expenses. Although these amounts reduce net income, we are currently funding such costs with sales proceeds and acquisition-related indebtedness and do not consider these fees and expenses in the evaluation of our operating performance and determining MFFO.

MFFO excludes impairment charges related to long-lived assets that have been written down to current market valuations. Although these losses are included in the calculation of net income (loss), we have excluded them from MFFO because we believe doing so more appropriately presents the operating performance of our real estate investments on a comparative basis.

Our business is subject to volatility in the real estate markets and general economic conditions, and adverse changes in those conditions could have a material adverse impact on our business, results of operations and MFFO. Accordingly, the predictive nature of MFFO is uncertain and past performance may not be indicative of future results.

Neither the Securities and Exchange Commission (the “SEC”), NAREIT nor any regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or a regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.


32


The table below summarizes FFO and MFFO attributable to common stockholders for the three months ended March 31, 2016 and 2015 and a reconciliation of such non-GAAP financial performance measures to our net income (loss) for the periods then ended (in thousands).
 
Three Months Ended March 31,
 
2016
 
2015
Net income (loss)
$
11,154

 
$
47,361

     Depreciation and amortization(1)
19,593

 
22,483

     (Gain) loss on sale or dissolution of investment property and unconsolidated joint venture(2)
(2
)
 
(21,079
)
     Adjustments to equity in earnings (losses) from unconsolidated entities, net(3)
(15,011
)
 
(29,666
)
     Adjustments for noncontrolling interests(4)
(146
)
 
(391
)
Funds from Operations attributable to common stockholders
15,588

 
18,708

     (Gain) loss on derivative instruments(5)
(3,957
)
 
(3,193
)
     Other components of revenues and expenses(6)
1,869

 
2,249

     Acquisition fees and expenses (7)

 
466

     Adjustments to equity in earnings (losses) from unconsolidated entities, net(3)
(171
)
 
(513
)
     Adjustments for noncontrolling interests(4)
190

 
74

Modified Funds from Operations attributable to common stockholders
$
13,519

 
$
17,791

 
 
 
 
Basic and diluted income (loss) per common share
$
0.05

 
$
0.21

Funds From Operations attributable to common stockholders per common share
$
0.07

 
$
0.08

Modified Funds From Operations attributable to common stockholders per common share
$
0.06

 
$
0.08

Weighted average shares outstanding
222,106

 
224,260

 
(1)
Represents the depreciation and amortization of various real estate assets. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that such depreciation and amortization may be of limited relevance in evaluating current operating performance and, as such, these items are excluded from our determination of FFO.

(2)
Represents the gain on disposition of certain real estate investments. Although this gain is included in the calculation of net income (loss), we have excluded it from FFO because we believe doing so more appropriately presents the operating performance of our real estate investments on a comparative basis. This adjustment includes amounts from the “Gain (loss) on sale or dissolution of unconsolidated joint venture” and “Gain (loss) on sale of real estate investments” included in the condensed consolidated statements of operations and comprehensive income (loss).

(3)
Includes adjustments to equity in earnings (losses) of unconsolidated entities, net, similar to those described in Notes 1, 2, 5 and 6 for our unconsolidated entities, which are necessary to convert our share of income (loss) from unconsolidated entities to FFO and MFFO.

(4)
Includes income attributable to noncontrolling interests and all adjustments to eliminate the noncontrolling interests’ share of the adjustments to convert our net income (loss) to FFO and MFFO.

(5)
Represents components of net income (loss) related to the estimated changes in the values of our interest rate swap derivatives.  We have excluded these changes in value from our evaluation of our operating performance and MFFO because we expect to hold the underlying instruments to their maturity and accordingly the interim gains or losses will remain unrealized.





33


(6)
Includes the following components of revenues and expenses that we do not consider in evaluating our operating performance and determining MFFO (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Straight-line rent adjustment (a)
$
(2,889
)
 
$
(1,010
)
Amortization of lease incentives (b)
5,088

 
3,729

Amortization of out-of-market leases (b)
(386
)
 
(610
)
Other
56

 
140

 
$
1,869

 
$
2,249


(a)
Represents the adjustments to rental revenue as required by GAAP to recognize minimum lease payments on a straight-line basis over the respective lease terms.  We have excluded these adjustments from our evaluation of the operating performance of the Company and in determining MFFO because we believe that the rent that is billable during the current period is a more relevant measure of the Company’s operating performance for such period.

(b)
Represents the amortization of lease incentives and out-of-market leases.  As stated in Note 1 above, historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that such amortization may be of limited relevance in evaluating current operating performance and, as such, these items are excluded from our determination of MFFO.

(7)
Represents acquisition expenses and acquisition fees paid to our Advisor that are expensed in our condensed consolidated statements of operations. We fund such costs with sales proceeds and acquisition-related indebtedness, and therefore do not consider these expenses in evaluating our operating performance and determining MFFO. 

Related-Party Transactions and Agreements

We have entered into agreements with the Advisor and Hines or its affiliates, whereby we pay certain fees and reimbursements to these entities, including property management fees, leasing fees, construction management fees, debt financing fees, re-development construction management fees, reimbursement of organizational and offering expenses, and reimbursement of certain operating costs, as described elsewhere in this Quarterly Report on Form 10-Q and previously in our Annual Report on Form 10-K for the year ended December 31, 2015.

Off-Balance Sheet Arrangements

As of March 31, 2016 and December 31, 2015, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Subsequent Events

1515 S. Street

In April 2016, we sold 1515 S. Street for a contract sales price of $68.5 million. 1515 S. Street is an office building located in Sacramento, California. We originally acquired 1515 S. Street in November 2005 for a contract purchase price of $66.6 million.

JPMorgan Chase Tower

In May 2016, we entered into a contract to sell JPMorgan Chase Tower, an office building located in Dallas, Texas. The contract sales price for JPMorgan Chase Tower is expected to be approximately $280.0 million, exclusive of transaction costs and closing prorations. We originally acquired JPMorgan Chase Tower in November 2007 for a contract purchase price of $289.6 million. Although we expect the closing of this sale to occur in June 2016, there can be no assurances as to if or when this sale will be completed.


34


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates and equity prices. Interest rate risk is the primary risk in pursuing our business plan.

As of March 31, 2016, we had $395.5 million in variable rate debt that was not hedged with an interest rate swap. If interest rates were to increase by 1%, we would incur an additional $4.0 million in interest expense.

Item 4. Controls and Procedures.

In accordance with Rules 13a-15 and 15d-15 promulgated under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

35


PART II – OTHER INFORMATION
  
Item 1. Legal Proceedings.

From time to time in the ordinary course of business, the Company or its subsidiaries may become subject to legal proceedings, claims or disputes. As of May 11, 2016, neither the Company nor any of its subsidiaries was a party to any material pending legal proceedings.

Item 1A. Risk Factors.

We are subject to a number of risks and uncertainties, which are discussed in Part I, Item 1A, “Risk Factors” in our 2015 Annual Report. There have been no material changes to the risk factors set forth under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended March 31, 2016, we did not sell or issue any equity securities that were not registered under the Securities Act of 1933, as amended.

All eligible requests for redemption received by the Company for the three months ended December 31, 2015 were redeemed on January 1, 2016. The shares were redeemed using proceeds from our dividend reinvestment plan from the prior quarter and proceeds from the sale of assets. The following table lists shares we redeemed under our share redemption program during the period covered by this report.

Period
 
Total
Number of
Shares
Redeemed
 
Average
Price
Paid per
Share
 
Total
Number of Shares
Redeemed as Part of Publicly
Announced Plans or Programs
 
Maximum Number of Shares that May Yet be Redeemed
Under the Plans or Programs (2)
January 1, 2016 through March 31, 2016
(1) 
1,219,500

 
$
5.87

 
1,219,500

 
816,008

Total
 
1,219,500

 
 

 
1,219,500

 
 
 
(1)
All shares were redeemed on January 1, 2016.

(2)
This amount represents the number of shares available for redemption on April 1, 2016. Please see Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition, Liquidity and Capital Resources — Cash Flows from Financing Activities for additional information on the re-opening and amendment and restatement of our share redemption program effective in April 2013. The funds available for redemption are generally limited to the amount of proceeds received from our dividend reinvestment plan. However, our board of directors may approve requests for redemptions in excess of this amount, as long as the total amount redeemed does not exceed the amount required to redeem 10% of our shares outstanding as of the same date in the prior calendar year. In the event of a redemption request in connection with the death or disability of a stockholder, we may waive the annual limitation on the number of shares that will be redeemed.


36


Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

The exhibits required by this item are set forth on the Exhibit Index attached hereto.

37


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.

 
 
HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 
 
 
 
May 11, 2016
 
By:
/s/ SHERRI W. SCHUGART
 
 
 
 
Sherri W. Schugart
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
May 11, 2016
 
By:
/s/ RYAN T. SIMS
 
 
 
 
Ryan T. Sims
 
 
 
 
Chief Financial Officer and Secretary
 

38


EXHIBIT INDEX
 
Exhibit No.
 
Description
3.1
 
Second Amended and Restated Articles of Incorporation of Hines Real Estate Investment Trust, Inc. (filed as Exhibit 3.1 to the registrant’s Current Report on Form 8-K on July 13, 2007 and incorporated by reference herein).
3.2
 
Second Amended and Restated Bylaws of Hines Real Estate Investment Trust, Inc. (filed as Exhibit 3.1 to the registrant’s Current Report on Form 8-K on August 3, 2006 and incorporated by reference herein).
3.3
 
Amendment No. 1 to Second Amended and Restated Bylaws of Hines Real Estate Investment Trust, Inc. (filed as Exhibit 3.1 to the registrant’s Current Report on Form 8-K on September 21, 2015 and incorporated by reference herein).
4.1
 
Hines Real Estate Investment Trust, Inc. Dividend Reinvestment Plan (included as Appendix A to the prospectus contained in the registrant’s Registration Statement on Form S-3 (file No. 333-182401) filed on June 28, 2012 and incorporated by reference herein).
31.1
*
Certification.
31.2
*
Certification.
32.1
*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC herewith and shall not be deemed to be “filed.”
101
*
The following materials from Hines Real Estate Investment Trust, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed on May 11, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.
*
Filed herewith


39