Capital and Financing Transactions

Notes Payable to Banks

At June 30, 2013, the Company had $68.0 million outstanding under its senior unsecured revolving credit facilities and had $245.0 million outstanding under its unsecured term loans. The Company was in compliance with all loan covenants under its revolving credit facilities and term loans.



Credit Facilities	Lender	Interest Rate		Maturity	Outstanding Balance
$10.0 Million Unsecured Working Capital Revolving Credit Facility (1)	PNC Bank	—		3/29/2016	$	—
$215.0 Million Unsecured Revolving Credit Facility (1)	Wells Fargo	1.8	%	3/29/2016	68,000
$125.0 Million Unsecured Term Loan (2)	Key Bank	2.2	%	9/27/2017	125,000
$120.0 Million Unsecured Term Loan (3)	Wells Fargo	3.1	%	6/11/2018	120,000
		2.4	%		$	313,000

(1)

The interest rate on the credit facilities is based on LIBOR plus an applicable margin of 160 basis point to 235 basis points, depending upon overall Company leverage as defined in the loan agreements for the Company's credit facilities, with the current rate set at 160 basis points. Additionally, the Company pays fees on the unused portion of the credit facilities ranging between 25 and 35 basis points based upon usage of the aggregate commitment, with the current rate set at 35 basis points.


(2)	The interest rate on the term loan is based on LIBOR plus an applicable margin of 150 to 230 basis points depending on overall Company leverage (with the current rate set at 150 basis points). On September 28, 2012, the Company executed two floating-to-fixed interest rate swaps totaling $125 million, locking LIBOR at 0.7% for five years which was effective October 1, 2012.


(3)	The interest rate on the term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on overall Company leverage (with the current rate set at 145 basis points). On June 12, 2013, the Company executed a floating-to-fixed interest rate swap totaling $120 million, locking LIBOR at 1.6% for five years.

On June 12, 2013, the Company entered into a term loan agreement for a $120 million unsecured term loan. The term loan has a maturity date of June 11, 2018, and has an accordion feature that allows for an increase in the size of the term loan to as much as $250 million. Interest on the term loan is based on LIBOR plus an applicable margin of 145 to 200 basis points depending on overall Company leverage (with the current rate set at 145 basis points). The term loan has substantially the same operating and financial covenants as required by the Company's $215 million unsecured revolving credit facility. Wells Fargo Bank, National Association, acted as Administrative Agent and lender. The Company also executed a floating-to-fixed interest rate swap totaling $120.0 million, locking LIBOR at 1.6% for five years and resulting in an effective initial interest rate of 3.1%. The term loan had an outstanding balance of $120.0 million at June 30, 2013.

Mortgage Notes Payable

Mortgage notes payable at June 30, 2013 totaled $724.1 million, with an average interest rate of 5.1% and were secured by office properties.

On February 21, 2013, the Company obtained an $80.0 million first mortgage secured by Phoenix Tower, a 629,000 square foot office property located in the Greenway Plaza submarket of Houston, Texas. The mortgage loan bears interest at a fixed rate of 3.9% and matures on March 1, 2023. Payments of interest only are due on the loan for two years, after which the principal amount of the loan begins amortizing over a 25-year period until maturity. The loan is pre-payable after March 1, 2015, but any such prepayment is subject to a yield maintenance premium. The agreement governing the mortgage loan contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

On March 7, 2013, simultaneous with the purchase of the Deerwood Portfolio, the Company obtained an $84.5 million first mortgage, which is secured by the office properties in the portfolio. The mortgage bears interest at a fixed rate of 3.9% and matures on April 1, 2023. Payments of interest only are due on the loan for three years, after which the principal amount of the loan begins amortizing over a 30-year period until maturity. The loan is pre-payable after May 1, 2015, but any such prepayment is subject to a yield maintenance premium. The agreement governing the mortgage contains customary rights of the lender to accelerate the loan upon, among other things, a payment default or if certain representations and warranties made by the borrower are untrue.

On March 25, 2013, simultaneous with the purchase of its co-investor's 70% interest in the Tampa Fund II assets, the Company assumed $40.7 million of existing first mortgages that are secured by the properties, which represents its co-investor's 70% share of the approximately $58.1 million of the existing first mortgage indebtedness.

On May 31, 2013, the Company modified the existing $22.5 million first mortgage secured by Corporate Center Four at International Plaza ("Corporate Center Four"), a 250,000 square foot office property located in the Westshore submarket of Tampa, Florida. The modified first mortgage has a principal balance of $36.0 million, a weighted average fixed interest rate of 4.6%, an initial 24-month interest only period and a maturity date of April 8, 2019. In conjunction with the modification, the Company executed a floating-to-fixed interest rate swap fixing the interest rate on the additional $13.5 million in loan proceeds at 3.3%.

On June 3, 2013, in connection with the purchase of the US Airways Building, an affiliate of the Company issued a $13.9 million mortgage loan to its wholly owned subsidiary and an affiliate of US Airways which is secured by the US Airways Building, a 225,000 square foot office building located in the Tempe submarket of Phoenix, Arizona. The mortgage carries a fixed interest rate of 3.0% and matures on December 31, 2016. In accordance with GAAP, the Company's share of this loan and its related principal and interest payments have been eliminated in the Company's consolidated financial statements.

On June 12, 2013, the Company repaid two first mortgages totaling $55.0 million which were secured by Cypress Center, a 286,000 square foot office complex in Tampa, Florida, and NASCAR Plaza, a 394,000 square foot office property in Charlotte, North Carolina. The two mortgages had a weighted average interest rate of 3.6% and were scheduled to mature in 2016. The Company repaid the mortgage loans using proceeds from its $120.0 million unsecured term loan.

On June 28, 2013, the Company modified the existing mortgage secured by Hayden Ferry II, a 299,000 square foot office property located in the Tempe submarket of Phoenix, Arizona. The loan modification eliminates quarterly principal payments of $625,000. As a result of the modification, loan payments are now interest-only through February 2015. The mortgage bears interest at LIBOR plus an applicable spread which ranges from 250 to 350 basis points. The Company entered into a floating-to-fixed interest rate swap which fixed LIBOR on the original loan at 1.5% through January 2018. Effective August 1, 2013, the Company entered into a second floating-to-fixed interest rate swap which fixes LIBOR at 1.7% through January 2018 on the additional notional amount associated with the loan modification. This loan is cross-defaulted with Hayden Ferry I, IV and V.

Interest Rate Swaps

The Company has entered into interest rate swap agreements. The Company designated the swaps as cash flow hedges of the variable interest rates on the Company's borrowings under the $125.0 million unsecured term loan, $120.0 million unsecured term loan and the debt secured by 245 Riverside, Corporate Center Four, Bank of America Center, Two Ravinia, Hayden Ferry I, and Hayden Ferry II. These swaps are considered to be fully effective and changes in the fair value of the swaps are recognized in accumulated other comprehensive loss.

The Company's interest rate hedge contracts at June 30, 2013, and 2012 are summarized as follows (in thousands):



								Fair Value Asset (Liability)
Type of	Balance Sheet	Notional		Maturity		Fixed		June 30
Hedge	Location	Amount		Date	Reference Rate	Rate		2013			2012
Swap	Accounts payable and other liabilities	$	12,088	11/18/2015	1-month LIBOR	4.1	%	$	—		$	(642	)
Swap	Receivables and other assets	$	50,000	9/27/2017	1-month LIBOR	2.2	%	972			—
Swap	Receivables and other assets	$	75,000	9/27/2017	1-month LIBOR	2.2	%	1,409			—
Swap	Accounts payable and other liabilities	$	33,875	11/18/2017	1-month LIBOR	4.7	%	(2,171		)	(3,359		)
Swap	Accounts payable and other liabilities	$	625	1/25/2018	1-month LIBOR	4.9	%	(29		)	—
Swap	Accounts payable and other liabilities	$	22,000	1/25/2018	1-month LIBOR	4.5	%	(1,178		)	(1,912		)
Swap	Accounts payable and other liabilities	$	46,875	1/25/2018	1-month LIBOR	4.7	%	(411		)	(1,344		)
Swap	Accounts payable and other liabilities	$	120,000	6/11/2018	1-month LIBOR	3.1	%	(1,216		)	—
Swap	Accounts payable and other liabilities	$	9,250	9/30/2018	1-month LIBOR	5.2	%	(793		)	(1,241		)
Swap	Accounts payable and other liabilities	$	22,500	10/8/2018	1-month LIBOR	5.4	%	(2,077		)	(3,204		)
Swap	Receivables and other assets	$	13,500	10/8/2018	1-month LIBOR	3.3	%	74			—
Swap	Accounts payable and other liabilities	$	22,100	11/18/2018	1-month LIBOR	5.0	%	(1,626		)	(2,654		)
								$	(7,046	)	$	(14,356	)

On March 25, 2013, in connection with the purchase of its co-investor's interest in the Tampa Fund II Assets, the Company assumed the remaining 70% of two interest rate swaps, which have a total notional amount of $34.6 million.

One May 31, 2013, the Company executed a floating-to-fixed interest rate swap for a notional amount of $13.5 million, associated with the first mortgage secured by Corporate Center Four in Tampa, Florida, that fixes LIBOR at 3.3% through October 8, 2018.

On June 12, 2013, the Company also executed a floating-to-fixed interest rate swap for a notional amount of $120.0 million, associated with its 120,000,000 $120.0 million term loan that fixes LIBOR at 1.6% for five years, which resulted in an initial all-in interest rate of 3.1%. The interest rate swap matures June 11, 2018.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2013, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. See Note J - Fair Values of Financial Instruments, for the fair value of the Company's derivative financial instruments as well as their classification on the Company's consolidated balance sheets as of June 30, 2013 and December 31, 2012.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next twelve months, the Company estimates that an additional $5.5 million will be reclassified as an increase to interest expense. During the three and six months ended June 30, 2013 the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts were a loss of $386,000.

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company's derivative financial instruments on the Company's consolidated statements of operations and comprehensive income (loss) for the three months and six months ended June 30, 2013 and June 30, 2012 (in thousands):



Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps and Caps)	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Amount of gain (loss) recognized in other comprehensive income on derivative	5,992		274		6,481		(3,220	)
Amount of gain (loss) reclassified from accumulated other comprehensive income into interest expense	(1,143	)	(882	)	(2,810	)	(1,832	)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)	(386	)	—		(386	)	—

Credit risk-related Contingent Features

The Company has entered into agreements with each of its derivative counterparties that provide that if the Company defaults or is capable of being declared in default on any of its indebtedness, the Company could also be declared in default on its derivative obligations.

As of June 30, 2013, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $10.1 million. As of June 30, 2013, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $10.1 million at June 30, 2013.