STOCK-BASED COMPENSATION

The Company maintains the 2009 Incentive Stock Plan (the “2009 Plan”), which allows the Company to issue awards of stock options, stock grants, or stock appreciation rights to employees and directors. As of December 31, 2017, 1,012,303 shares were authorized to be awarded pursuant to the 2009 Plan. The Company also maintains the 2005 Restricted Stock Unit ("RSU") Plan, as amended, which allows the Company to issue awards to employees that are paid in cash on the vesting date in an amount equal to the fair market value, as defined, of one share of the Company’s stock. The Company has granted stock options, restricted stock, and restricted stock units to employees as discussed below.

As a result of the Spin-Off, the number and strike price of stock options, shares of restricted stock, and the number of restricted stock units were adjusted to preserve the intrinsic value of the awards immediately prior to the Spin-Off using an adjustment ratio based on the market price of the Company's stock prior to the Spin-Off and the market price of the Company's stock subsequent to the Spin-Off pursuant to anti-dilution provisions of the 2009 Plan. Since these adjustments were considered to be a modification of the awards, the Company compared the fair value of the awards immediately prior to the Spin-Off to the fair value immediately after the Spin-Off to measure potential incremental stock-based compensation expense. The adjustments did not result in an increase in the fair value of the awards and, accordingly, the Company did not record incremental stock-based compensation expense.

Stock Options

At December 31, 2017, the Company had 928,608 stock options outstanding to key employees and outside directors pursuant to the 2009 Plan. The Company typically uses authorized, unissued shares to provide shares for option exercises. The stock options have a term of ten years from the date of grant and have a vesting period of four years, except director stock options, which vest immediately. In 2017, 2016, and 2015, there were no stock option grants to employees or directors.

In 2016, in conjunction with the Merger, the Company granted 672,375 options to former Parkway key executives. These options vested immediately, and have a term of ten years from the date of grant. The Company calculated the fair value of these grants using the Black-Scholes option-pricing model, which requires the Company to provide certain inputs as follows:


•	The risk-free interest rate utilized is the interest rate on U.S. Treasury Strips or Bonds having the same life as the estimated life of the Company’s option awards.


•	Expected life of the options granted is estimated based on historical data reflecting actual hold periods plus an estimated hold period for unexercised options outstanding.


•	Expected volatility is based on the historical volatility of the Company’s stock over a period equal to the estimated option life.


•	The assumed dividend yield is based on the Company’s expectation of an annual dividend rate for regular dividends over the estimated life of the option.

The weighted average fair value of options granted was $0.84 per option, and the Company computed the fair value of options granted using the Black-Scholes option pricing model with the following assumptions:



Risk-free interest rate	1.37	%
Assumed dividend yield	3.60	%
Assumed lives of option awards (in years)	6.4
Assumed volatility	23.23	%

The Company recorded $565,000 to additional paid-in capital for the fair value of the options granted as part of the Merger. During 2017, 2016, and 2015, $0, $0 and $15,000, respectively, was recognized as compensation expense related to stock options. The Company does not anticipate recognizing any future compensation expense related to stock options outstanding. During 2017, total cash proceeds from the exercise of options equaled $4.5 million. As of December 31, 2017, the intrinsic value of the options outstanding and exercisable was $2.7 million. The intrinsic value is calculated using the exercise prices of the options compared to the market value of the Company’s stock. At December 31, 2017 and 2016, the weighted-average contractual lives for the options outstanding and exercisable were 2.3 years and 3.2 years, respectively.

The following is a summary of stock option activity for the years ended December 31, 2017, 2016, and 2015:



	Number of Options (000s)		Weighted Average Exercise Price Per Option
Outstanding at December 31, 2014	2,211		$	22.69
Exercised	(23	)	8.02
Forfeited/Expired	(425	)	21.98
Outstanding at December 31, 2015	1,763		22.05
Granted as a result of the Merger and Spin-Off	1,222		11.78
Exercised	(2	)	8.35
Forfeited/Expired	(721	)	27.24
Outstanding at December 31, 2016	2,262		10.82
Exercised	(577	)	7.51
Forfeited/Expired	(756	)	18.47
Outstanding at December 31, 2017	929		$	6.59
Options Exercisable at December 31, 2017	929		$	6.59

Restricted Stock

In 2017, 2016, and 2015, the Company issued 308,289, 234,965, and 165,922 shares of restricted stock to employees, which vest ratably over three years from the issuance date. In 2017, 2016, and 2015, the Company also issued 120,878, 72,771, and 78,985 shares of stock to independent members of the board of directors which vested immediately on the issuance date. All shares of restricted stock receive dividends and have voting rights during the vesting period. The Company records restricted stock in common stock and additional paid-in capital at fair value on the grant date, with the offsetting deferred compensation also recorded in additional paid-in capital. The Company records compensation expense over the vesting period. Compensation expense related to restricted stock was $2.0 million, $1.6 million, and $1.5 million in 2017, 2016, and 2015, respectively.

As of December 31, 2017, the Company had recorded $2.6 million of unrecognized compensation cost included in additional paid-in capital related to restricted stock, which will be recognized over a weighted average period of 1.8 years. The total fair value of the restricted stock which vested during 2017 was $2.0 million. The following table summarizes restricted stock activity for the years ended December 31, 2017, 2016, and 2015:



	Number of Shares (000s)		Weighted-Average Grant Date Fair Value
Non-vested restricted stock at December 31, 2014	342		$	9.08
Granted	166		11.06
Vested	(210	)	8.41
Forfeited	(5	)	10.68
Non-vested restricted stock at December 31, 2015	293		10.65
Granted	235		8.62
Granted as a result of the Spin-Off	114		7.57
Vested	(141	)	8.54
Forfeited	(30	)	9.77
Non-vested restricted stock at December 31, 2016	471		7.57
Granted	308		8.63
Vested	(214	)	7.50
Forfeited	(8	)	6.53
Non-vested restricted stock at December 31, 2017	557		$	7.93

Restricted Stock Units

During 2017, 2016, and 2015, the Company awarded two types of performance-based RSUs to key employees: one based on the total stockholder return of the Company, as defined, relative to that of office peers included in the SNL US Office REIT Index (the "TSR RSUs") and the other based on the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (the “FFO RSUs”). The performance period for these awards is three years and the ultimate payout of these awards can range from 0% to 200% of the targeted number of units depending on the achievement of the performance metrics described above. Both of these RSUs are to be settled in cash with payment dependent upon the attainment of required service, market, and performance criteria. The Company expenses an estimate of the fair value of the TSR RSUs over the performance period using a quarterly Monte Carlo valuation. The Company expenses the FFO RSUs over the vesting period using the fair market value of the Company’s stock at the reporting date multiplied by the anticipated number of units to be paid based on the current estimate of what the ratio is expected to be upon vesting. Dividend equivalents on the TSR RSUs and FFO RSUs will also be paid based upon the percentage vested. The targeted number of performance-based RSUs outstanding at December 31, 2017 are 396,384, 391,684, and 295,472 related to the 2017, 2016, and 2015 grants, respectively.

In 2012, the Company also issued 281,532 performance-based RSUs to a key employee. The payout of these awards could have ranged from 0% to 150% of the targeted number of units depending on the total stockholder return of the Company, as defined, as compared to that of a peer group of companies through 2016. This award was expensed using a quarterly Monte Carlo valuation over the vesting period until the fourth quarter of 2016, when it was adjusted to the actual amount paid in 2017.

The following table summarizes the performance-based RSU activity as of December 31, 2017, 2016, and 2015 (in thousands):



Outstanding at December 31, 2014	796
Granted	244
Vested	(191	)
Forfeited	(6	)
Outstanding at December 31, 2015	843
Granted	312
Granted as a result of the Spin-Off	308
Vested	(160	)
Forfeited	(30	)
Outstanding at December 31, 2016	1,273
Granted	399
Vested	(576	)
Forfeited	(12	)
Outstanding at December 31, 2017	1,084

During 2017 and 2016, the Company granted 264,723 and 28,938 time-vested RSUs, respectively, to key employees. The vesting period for these awards is three years. The value of each unit is equal to the fair market value of one share of common stock. These RSUs are to be settled in cash with payment dependent upon the attainment of the required service criteria. Dividend equivalent units will be paid based on the number of RSUs granted, with such payments made concurrently with payment of common dividends.

The Company estimates future expense for all types of RSUs outstanding at December 31, 2017 to be $4.9 million (using stock prices and estimated target percentages as of December 31, 2017), which will be recognized over a weighted-average period of 1.2 years. During 2017, total cash paid for all types of RSUs and related dividend payments was $5.6 million.

During 2017, 2016, and 2015, $7.0 million, $6.4 million, and $67,000, respectively, was recognized as compensation expense related to RSUs for employees and directors.