Transactions With Tier Reit, Inc.

12 Months Ended

Dec. 31, 2019

On June 14, 2019, pursuant to the Agreement and Plan of Merger dated March 25, 2019 (the “Merger Agreement”), by and among the Company and TIER REIT, Inc. (“TIER”), TIER merged with and into a subsidiary of the Company (the “Merger”) with this subsidiary continuing as the surviving corporation of the Merger. The Merger has enhanced the Company's position in its existing markets of Austin and Charlotte, provided a strategic entry into Dallas, and rebalanced the Company's portfolio across its markets. In accordance with the terms and conditions of the Merger Agreement, each share of TIER common stock issued and outstanding immediately prior to the Merger, was converted into 2.98 newly issued, pre-reverse split shares of the Company’s common stock with fractional shares being settled in cash. In the Merger, former TIER common stockholders received approximately 166 million pre-reverse split shares of common stock of the Company. As discussed in note 1 to the consolidated financial statements, immediately following the Merger, the Company completed a 1-for-4 reverse stock split.

The Merger has been accounted for as a business combination with the Company as the accounting acquirer, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair value. The total value of the transaction is based on the closing stock price of the Company's common stock on June 13, 2019, the day immediately prior to the closing of the Merger. Based on the shares issued in the transaction, the total fair value of the assets acquired net of liabilities assumed in the Merger was $1.6 billion. During the year ended December 31, 2019, the Company incurred expenses related to the Merger of $52.9 million.

Management engaged a third party valuation specialist to assist with valuing the real estate assets acquired and liabilities assumed in the Merger. The third party used cash flow analyses, as well as a market approach, an income approach, and a cost approach to determine the fair value of real estate assets acquired. Based on additional information that may become available, subsequent adjustments may be made to the purchase price allocation within the measurement period, which typically does not exceed one year.

The purchase price was allocated as follows (in thousands):



Real estate assets	$	2,202,073
Real estate assets held for sale	20,835
Cash and cash equivalents	84,042
Restricted cash	1,947
Notes and other receivables	8,278
Investment in unconsolidated joint ventures	331
Intangible assets	141,184
Other assets	10,040
	2,468,730

Notes payable	747,549
Accounts payable and accrued expenses	53,321
Deferred income	8,388
Intangible liabilities	47,988
Other liabilities	7,793
Nonredeemable noncontrolling interests	5,329
	870,368

Total purchase price	$	1,598,362

During the year ended December 31, 2019, the Company recorded revenues and net income of $113.1 million and $291,000, respectively, from the operations of the assets acquired in the Merger. The following unaudited supplemental pro forma information is based upon the Company's historical consolidated statements of operations, adjusted as if the Merger had occurred on January 1, 2018. The supplemental pro forma information is not necessarily indicative of future results, or of actual results, that would have been achieved had the Merger been consummated at the beginning of the period.



	Year ended December 31,
	2019		2018
	(unaudited, in thousands)
Revenues	$	750,080	$	702,463
Net income	232,136		28,064
Net income available to common stockholders	229,503		27,742

2019 supplemental pro forma earnings were adjusted to exclude the $52.9 million of transaction costs incurred in the year ended December 31, 2019. Supplemental pro forma earnings for the year ended December 31, 2018 were adjusted to include this charge.

TRANSACTIONS WITH NORFOLK SOUTHERN RAILWAY COMPANY

On March 1, 2019, the Company entered into a series of agreements and executed related transactions with Norfolk Southern Railway Company (“NS”) as follows:


•	Sold land to NS for $52.5 million.


•	Executed a Development Agreement with NS whereby the Company will receive fees totaling $5 million in consideration for development services for NS’s corporate headquarters that is being constructed on the land sold to NS.


•	Executed a Consulting Agreement with NS whereby the Company will receive fees totaling $32 million in consideration for consulting services for NS’s corporate headquarters. The Development Agreement and Consulting Agreement are collectively referred to below as the “Fee Agreements.”


•	Purchased a building from NS (“1200 Peachtree”) for $82 million subject to a three-year market rate lease with NS that covers the entire building.

The Company sold the land to NS for $5.0 million above its carrying amount, which included $37.0 million of land purchased in 2018, $6.5 million of land purchased in 2019, and $4.0 million of site preparation work. The Company purchased 1200 Peachtree from NS for an amount it determined to be $10.3 million below the building’s fair value.

The Company determined that all contracts and transactions associated with NS should be combined for accounting purposes, and the amounts exchanged under the combined contracts should be allocated to the various components of the overall transaction at fair value or market value as discussed below. The Company determined that the purchase of 1200 Peachtree should be recorded at fair value of $92.3 million (see note 5 for allocation of the purchase price). The Company determined that the lease with NS at the 1200 Peachtree building was at market value under ASC 842. The land sale was accounted for under ASC 610-20, and no gain or loss was recorded on the derecognition of this non-financial asset as the fair value was determined to equal the carrying amount. Consideration related to various services provided to NS, and accounted for under ASC 606, was determined to be $52.3 million and represents the negotiated market value for the services agreed to by the Company and NS in the contracts. This amount included non-cash consideration of the $10.3 million discount on the purchase of 1200 Peachtree as well as cash consideration of $5 million from the land sale contract (difference between fair value and contract amount), $5 million from the Development Agreement, and $32 million from the Consulting Agreement. Since all of the agreements and contracts above were executed for the purpose of delivering and constructing a corporate headquarters for NS and all of the services and deliverables are highly interdependent, the Company determined that the services represent a single performance obligation under ASC 606.

The Company determined that control of the services to be provided is being transferred over time and, thus, the Company must recognize the $52.3 million contract price in revenue as it satisfies the performance obligation. The Company determined that the inputs method of measuring progress of satisfying the performance obligation was the most appropriate method of recognizing revenue for the services component. Therefore, the Company began recognizing revenue on March 1, 2019, based upon the time spent by the Company’s employees in providing these services as compared to the total estimated time required to satisfy the performance obligation. During the year ended December 31, 2019, the Company recognized $21.4 million in fee income in the statement of operations related to the services provided to NS. As of December 31, 2019, the Company had deferred income included in the consolidated balance sheet of $11.3 million related to NS.