REAL ESTATE

Real Estate Held for Investment

As of March 31, 2018, the Company’s real estate portfolio held for investment was composed of 27 office properties and one mixed-use office/retail property encompassing in the aggregate approximately 10.9 million rentable square feet. In addition, the Company had entered into a consolidated joint venture to develop and subsequently operate a multifamily apartment project, which is currently under construction. As of March 31, 2018, the Company’s real estate portfolio was collectively 92% occupied. The following table summarizes the Company’s investments in real estate as of March 31, 2018 (in thousands):



Property	Date Acquired	City	State	Property Type	Total Real Estate, at Cost		Accumulated Depreciation and Amortization			Total Real Estate, Net
Domain Gateway	09/29/2011	Austin	TX	Office	$	47,482	$	(14,074	)	$	33,408
Town Center	03/27/2012	Plano	TX	Office	115,755		(25,893		)	89,862
McEwen Building	04/30/2012	Franklin	TN	Office	37,156		(7,509		)	29,647
Gateway Tech Center	05/09/2012	Salt Lake City	UT	Office	24,598		(5,962		)	18,636
Tower on Lake Carolyn	12/21/2012	Irving	TX	Office	51,508		(11,053		)	40,455
RBC Plaza	01/31/2013	Minneapolis	MN	Office	153,814		(33,155		)	120,659
One Washingtonian Center	06/19/2013	Gaithersburg	MD	Office	91,463		(16,274		)	75,189
Preston Commons	06/19/2013	Dallas	TX	Office	118,047		(20,714		)	97,333
Sterling Plaza	06/19/2013	Dallas	TX	Office	79,761		(12,426		)	67,335
201 Spear Street	12/03/2013	San Francisco	CA	Office	143,531		(13,265		)	130,266
500 West Madison	12/16/2013	Chicago	IL	Office	438,217		(65,896		)	372,321
222 Main	02/27/2014	Salt Lake City	UT	Office	161,387		(26,283		)	135,104
Anchor Centre	05/22/2014	Phoenix	AZ	Office	95,149		(14,402		)	80,747
171 17th Street	08/25/2014	Atlanta	GA	Office	133,415		(23,055		)	110,360
Reston Square	12/03/2014	Reston	VA	Office	46,816		(7,282		)	39,534
Ten Almaden	12/05/2014	San Jose	CA	Office	122,256		(13,976		)	108,280
Towers at Emeryville	12/23/2014	Emeryville	CA	Office	271,090		(29,530		)	241,560
101 South Hanley	12/24/2014	St. Louis	MO	Office	71,720		(9,466		)	62,254
3003 Washington Boulevard	12/30/2014	Arlington	VA	Office	151,134		(16,416		)	134,718
Village Center Station	05/20/2015	Greenwood Village	CO	Office	78,183		(10,599		)	67,584
Park Place Village	06/18/2015	Leawood	KS	Office/Retail	128,678		(14,819		)	113,859
201 17th Street	06/23/2015	Atlanta	GA	Office	102,620		(11,430		)	91,190
Promenade I & II at Eilan	07/14/2015	San Antonio	TX	Office	62,643		(7,497		)	55,146
CrossPoint at Valley Forge	08/18/2015	Wayne	PA	Office	90,352		(9,260		)	81,092
515 Congress	08/31/2015	Austin	TX	Office	118,766		(12,265		)	106,501
The Almaden	09/23/2015	San Jose	CA	Office	167,501		(13,696		)	153,805
3001 Washington Boulevard	11/06/2015	Arlington	VA	Office	57,135		(3,532		)	53,603
Carillon	01/15/2016	Charlotte	NC	Office	152,662		(13,361		)	139,301
Hardware Village ⁽¹⁾	08/26/2016	Salt Lake City	UT	Development/Apartment	79,958		—			79,958
					$	3,392,797	$	(463,090	)	$	2,929,707

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⁽¹⁾On August 26, 2016, the Company, through an indirect wholly-owned subsidiary, entered into a joint venture (the “Hardware Village Joint Venture”) to develop and subsequently operate a multifamily apartment complex, located on the developable land at Gateway Tech Center. The Company owns a 99.24% equity interest in the joint venture.

As of March 31, 2018, the following property represented more than 10% of the Company’s total assets:



Property	Location	Rentable Square Feet	Total Real Estate, Net (in thousands)		Percentage of Total Assets		Annualized Base Rent (in thousands) ⁽¹⁾		Average Annualized Base Rent per sq. ft.		Occupancy
500 West Madison	Chicago, IL	1,457,724	$	372,321	11.5	%	$	33,324	$	28.37	80.6	%

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⁽¹⁾Annualized base rent represents annualized contractual base rental income as of March 31, 2018, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

Operating Leases

The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2018, the leases had remaining terms, excluding options to extend, of up to 13.8 years with a weighted-average remaining term of 4.4 years. Some of the leases have provisions to extend the term of the leases, options for early termination for all or a part of the leased premises after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from the tenant in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective lease and the creditworthiness of the tenant, but generally is not a significant amount. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $11.6 million and $11.5 million as of March 31, 2018 and December 31, 2017, respectively.

During the three months ended March 31, 2018 and 2017, the Company recognized deferred rent from tenants of $3.6 million and $4.1 million, respectively. As of March 31, 2018 and December 31, 2017, the cumulative deferred rent balance was $78.2 million and $74.4 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $9.1 million and $9.3 million of unamortized lease incentives as of March 31, 2018 and December 31, 2017, respectively.

As of March 31, 2018, the future minimum rental income from the Company’s properties under its non-cancelable operating leases was as follows (in thousands):



April 1, 2018 through December 31, 2018	$	223,171
2019	280,816
2020	248,987
2021	219,360
2022	185,290
Thereafter	530,492
	$	1,688,116

As of March 31, 2018, the Company’s real estate properties were leased to approximately 900 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentration (greater than 10% of annualized base rent) was as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾(in thousands)		Percentage of Annualized Base Rent
Finance	151	$	60,743	19.9	%

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⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2018, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

As of March 31, 2018, no other tenant industries accounted for more than 10% of annualized base rent and no tenant accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

Geographic Concentration Risk

As of March 31, 2018, the Company’s net investments in real estate in California, Texas and Illinois represented 20%, 15% and 11% of the Company’s total assets, respectively. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California, Texas and Illinois real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to pay distributions to stockholders.

Property Damage

In December 2017, 222 Main located in Salt Lake City, Utah suffered physical damages due to a broken sprinkler pipe. The Company’s insurance policy provides coverage for property damage and business interruption subject to a deductible of up to $5,000 per incident. Based on management’s estimates, the Company recognized an estimated aggregate loss due to damages of $7.9 million during the year ended December 31, 2017, which was reduced by $7.9 million of estimated insurance recoveries related to such damages, which the Company determined were probable of collection. The aggregate net loss of $5,000 due to damages during the year ended December 31, 2017 was classified as operating, maintenance and management expenses in the Company’s consolidated statement of operations for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC and relates to the Company’s insurance deductible. During the three months ended March 31, 2018, the Company received $2.5 million in insurance recoveries relating to the property damage.

During the three months ended March 31, 2018, the Company recorded $0.5 million of business interruption insurance recovery, which is included in rental income on the accompanying consolidated statements of operations. During the three months ended March 31, 2018, the Company received $1.1 million of business interruption insurance recovery, consisting of $0.7 million of revenue related to the year ended December 31, 2017 and $0.4 million of revenue related to January and February 2018.

As of March 31, 2018, the Company recorded $5.5 million of insurance recoveries receivable, which is included in prepaid expenses and other assets on the accompanying consolidated balance sheet.

Real Estate Held for Sale

In accordance with ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”), results of operations from properties that are classified as held for sale in the ordinary course of business would generally be included in continuing operations on the Company’s consolidated statements of operations. As of March 31, 2018, the Company had classified one property as held for sale.

The results of operations for this property as of March 31, 2018 are included in continuing operations on the Company’s consolidated statements of operations. The following table summarizes certain revenues and expenses related to this property for the three months ended March 31, 2018 (in thousands):



	Three Months Ended March 31,
	2018		2017
Revenues
Rental income	$	1,128	$	1,114
Tenant reimbursements and other operating income	84		30
Total revenues	$	1,212	$	1,144
Expenses
Operating, maintenance, and management	$	309	$	293
Real estate taxes and insurance	142		108
Asset management fees to affiliate	65		65
Depreciation and amortization	—		525
Interest expense	193		143
Total expenses	$	709	$	1,134

The following summary presents the major components of assets and liabilities related to real estate held for sale as of March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018			December 31, 2017
Assets related to real estate held for sale
Total real estate, at cost	$	33,579		$	33,575
Accumulated depreciation and amortization	(5,558		)	(5,558		)
Real estate held for sale, net	28,021			28,017
Other assets	1,791			1,786
Total assets related to real estate held for sale	$	29,812		$	29,803
Liabilities related to real estate held for sale
Notes payable, net	21,672			21,648
Other liabilities	47			50
Total liabilities related to real estate held for sale	$	21,719		$	21,698