REAL ESTATE INVESTMENTS

12 Months Ended

Dec. 31, 2019

Real Estate [Abstract]

REAL ESTATE INVESTMENTS

3. REAL ESTATE INVESTMENTS

As of December 31, 2019 and 2018, the gross carrying value of the operating properties was as follows (in thousands):

	December 31, 2019		December 31, 2018
Land	$	489,702	$	487,301
Building and improvements	3,049,395		3,048,889
Tenant improvements	467,362		415,529
Total	$	4,006,459	$	3,951,719

Construction-in-Progress

Internal direct construction costs totaling $7.4 million in 2019, $7.0 million in 2018, and $6.1 million in 2017 and interest totaling $3.2 million in 2019, $3.6 million in 2018, and $3.1 million in 2017 were capitalized related to the development of certain properties and land holdings.

During the years ended December 31, 2019, 2018 and 2017, the Company’s internal direct construction costs are comprised entirely of capitalized salaries. The following table shows the amount of compensation costs (including bonuses and benefits) capitalized for the years presented (in thousands):

	December 31,
	2019		2018		2017
Development	$	3,047	$	3,185	$	4,390
Redevelopment	775		968		319
Tenant Improvements	3,609		2,811		1,354
Total	$	7,431	$	6,964	$	6,063

2019 Acquisitions

During the year ended December 31, 2019, the Company did not acquire any properties from a third party.

2018 Acquisitions

On December 19, 2018, the Company acquired an office property containing 120,559 rentable square feet located at 4516 Seton Center Parkway in Austin, Texas, known as Quarry Lake II, for a gross purchase price of $39.5 million.

On December 11, 2018, the Company acquired from DRA Advisors (“DRA”), its 50% ownership interest in the G&I Austin Office LLC real estate venture (the "Austin Venture”) for an aggregate purchase price of $535.1 million. The Austin Venture owned twelve office properties (“the Austin Venture Portfolio”) containing an aggregate 1,570,123 square feet located in Austin, Texas. As a result of the acquisition, the Company acquired complete ownership of the Austin Venture Portfolio. The aggregate purchase price reflects the sum of: (i) the amount of such investment plus (ii) a $103.8 million non-cash accounting remeasurement gain related to the Company’s original investment in the Austin Venture Portfolio, reflected in the “Net gain on real estate venture transactions” in the consolidated statements of operations plus (iii) $28.3 million on account of the value of the Company’s promoted interest in the Austin Venture plus (iv) $14.6 million on account of the carrying amount of the Company’s original investment in the Austin Venture Portfolio. At settlement, the Company assumed $115.5 million of mortgage debt and received a credit at settlement of $130.7 million for a note receivable provided to the Austin Venture on November 1, 2018. This note receivable was used to repay one of Austin Venture’s mortgage loans prior to the December 11, 2018 acquisition date. The Company also obtained working capital of $24.9 million. Subsequent to receiving cash proceeds for its promoted interest in the Austin Venture and recognizing a remeasurement gain, the Company funded the acquisition with an aggregate cash payment of $117.3 million. Additionally, the assumed mortgage debt of $115.5 million was repaid at settlement. Both cash payments were funded through borrowings under the Company’s unsecured credit facility. The Company recognized a $28.3 million gain on its promoted interest in the Austin Venture, reflected in the caption “Gain on promoted interest in unconsolidated real estate venture” in the consolidated statements of operations. The gain on promoted interest was based off of the returns earned over

the duration of the Austin Venture and the returns were determined based on operating results and real estate valuation of the venture.

The Company previously accounted for its 50% non-controlling interest in the Austin Venture under the equity method of accounting. As a result of the Company’s acquisition of DRA’s 50% ownership interest in the Austin Venture, the Company obtained control of Austin Venture and the Company’s existing investment balance was remeasured based on the fair value of the underlying properties acquired and the existing distribution provisions under the relevant partnership agreement, including the Company’s entitlement to a distribution on account of its promoted interest.

On June 29, 2018, the Company acquired, through a 99-year ground lease, the leasehold interest in a one-acre land parcel, located at 3025 JFK Boulevard, in Philadelphia, Pennsylvania. The Company prepaid $15.0 million of ground lease rent and, in accordance with ASC 840, capitalized $0.3 million of costs related to entering the lease. Additionally, the ground lease required the Company to pay $5.6 million for a leasehold valuation credit, which can be applied to increase the density of the projects subject to the Schuylkill Yards Project master development agreement. Of this credit, $2.4 million will be applied to the development of 3001-3003 and 3025 JFK Boulevard if the Company constructs a minimum of 1.2 million square feet of floor area ratio (“FAR”) on these land parcels. The remaining credit of $3.2 million can be used for development in excess of 1.2 million FAR at 3001-3003 and 3025 JFK Boulevard or toward future ground lease takedowns at the Schuylkill Yards Development Site. This $3.2 million credit is reimbursed if the master development agreement is terminated by the landowner. Based on the Company’s evaluation under ASC 840, the ground lease is classified as an operating lease. The ground lease and credit are included in the “Prepaid leasehold interests in land held for development, net” and “Other assets” captions, respectively, in the consolidated balance sheets.

On March 22, 2018, the Company acquired, through a 99-year ground lease, the leasehold interest in a one-acre land parcel, located at 3001-3003 JFK Boulevard, in Philadelphia, Pennsylvania. The Company prepaid $24.6 million of ground lease rent and capitalized $0.3 million of costs related to entering the lease. The ground lease is classified as an operating lease and included in the “Prepaid leasehold interests in land held for development, net,” caption in the consolidated balance sheets.

On January 5, 2018, the Company acquired, from its then partner in each of the Four Tower Bridge real estate venture and the Seven Tower Bridge real estate venture, the partner’s 35% ownership interest in the Four Tower Bridge real estate venture in exchange for the Company's 20% ownership interest in the Seven Tower Bridge real estate venture. As a result of this non-monetary exchange, the Company acquired 100% of the Four Tower Bridge real estate venture, which owns an office property containing 86,021 square feet, in Conshohocken, Pennsylvania, encumbered with $9.7 million in debt. The Company previously accounted for its noncontrolling interest in Four Tower Bridge using the equity method. As a result of the exchange transaction, the Company obtained control of the Four Tower Bridge property.

The Company’s acquisition of the 35% ownership interest in Four Tower Bridge from its former partner resulted in the consolidation of the property. The unencumbered acquisition value of $23.6 million was determined under the comparative sales approach, which utilized observable transactions within the Conshohocken submarket.

The acquisition values have been allocated as follows (in thousands):

	Quarry Lake II			Austin Venture Portfolio			Four Tower Bridge
Acquisition Date	12/19/2018			12/11/2018			1/5/2018
Building, land and improvements	$	35,120		$	457,390		$	20,734
Intangible assets acquired	5,809			76,925			3,144
Below market lease liabilities assumed	(1,524		)	(13,769		)	(182		)
Deferred gain (a)	—			14,594			—
Total unencumbered acquisition value	$	39,405		$	535,140		$	23,696
Mortgage debt assumed - at fair value (b)	—			—			(9,940		)
Total encumbered acquisition value	$	39,405		$	535,140		$	13,756
Total unencumbered acquisition value	39,405			535,140			23,696
Mortgage debt assumed - at fair value (b)	—			—			(9,940		)
Mortgage debt repaid at settlement (c)	—			(115,461		)	—
Investment in unconsolidated real estate ventures	—			(14,594		)	(3,502		)
Gain on promoted interest in unconsolidated real estate venture	—			(28,283		)	—
Gain on real estate venture transactions	—			(103,847		)	(11,633		)
Purchase price reduction for note receivable (d)	—			(130,742		)	—
Net working capital assumed	(368		)	(24,865		)	1,379
Total cash payment at settlement	$	39,037		$	117,348		$	—
Weighted average amortization period of intangible assets	0			5.5 years			4.1 years
Weighted average amortization period of below market liabilities assumed	3.0 years			4.6 years			4.8 years

(a) Represents a deferred gain recognized at settlement, which resulted in a reduction of the acquisition value.

(b) The outstanding principal balance on mortgage debt for Four Tower Bridge, assumed on January 5, 2018, was $9.7 million.

(c) On December 11, 2018, the Company assumed $115.5 million of mortgage debt which was repaid in full at settlement.

(d) Represents a note receivable due from the DRA Austin Venture that represents a purchase price reduction.

Quarry Lake II contributed approximately $0.1 million of revenue and $0.1 million of net income, included in the Company’s consolidated statements of operations, for the twelve-month period ended December 31, 2018.

Austin Venture Portfolio contributed approximately $3.4 million of revenue and $1.3 million of net loss, included in the Company’s consolidated statements of operations, for the twelve-month period ended December 31, 2018.

Four Tower Bridge contributed approximately $2.8 million of revenue and $0.3 million of net income, included in the Company’s consolidated statements of operations, for the twelve-month period ended December 31, 2018.

The unaudited pro forma information below summarizes the Company’s combined results of operations for the years ended December 31, 2018 and December 31, 2017, respectively, as though the acquisition of the Austin Venture Portfolio was completed on January 1, 2017. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods (in thousands).

	December 31,
	2018		2017
Pro forma revenue	$	602,713	$	582,244
Pro forma net income	134,142		115,475
Pro forma net income available to common shareholders	134,142		115,475

2017 Acquisitions

On October 13, 2017, the Company acquired, through a 99-year prepaid ground lease, the leasehold interest in an office property containing 282,709 rentable square feet located at 3025 Market Street in Philadelphia, Pennsylvania, known as The Bulletin Building, for a gross purchase price of $35.0 million. The purchase price and acquisition-related costs have been allocated as follows (in thousands):

	October 13, 2017
Building and improvements	$	30,583
Construction-in-progress	672
Intangible assets acquired (a)	10,575
Below market lease liabilities assumed (b)	(4,055		)
	$	37,775

(a) Weighted average amortization period of 7.9 years.

(b) Weighted average amortization period of 7.0 years.

The Bulletin Building contributed approximately $1.2 million of revenue and approximately $0.4 million of net loss in the Company’s consolidated statements of operations, for the period from October 13, 2017 through December 31, 2017.

On July 28, 2017, the Company acquired an office building containing 58,587 rentable square feet located at 3000 Market Street, in Philadelphia, Pennsylvania, for $32.7 million. The purchase price and acquisition-related costs have been allocated as follows (in thousands):

	July 28, 2017
Building, land and improvements	$	32,004
Intangible assets acquired (a)	2,562
Below market lease liabilities assumed (b)	(1,818		)
	$	32,748

(a) Weighted average amortization period of 5.9 years.

(b) Weighted average amortization period of 6.0 years.

3000 Market Street contributed approximately $0.8 million of revenue and a $0.5 million of net loss in the Company’s consolidated statements of operations, for the period from July 28, 2017 through December 31, 2018.

Dispositions

The following table summarizes the properties sold during the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):

Property/Portfolio Name	Disposition Date	Location	Property Type	Rentable Square Feet/ Acres	Sales Price		Gain/(Loss) on Sale (a)
1900 Gallows Rd	September 11, 2019	Vienna, VA	Office	210,632	$	36,400	$	(367	)
9 Presidential Boulevard	March 15, 2019	Bala Cynwyd, PA	Land	2.7 Acres	5,325		751
Subaru National Training Center (b)	December 21, 2018	Camden, NJ	Mixed-use	83,000	45,300		2,570
Rockpoint Portfolio (c)	December 20, 2018	Herndon, VA	Office	1,293,197	312,000		397
20 East Clementon Road	June 21, 2018	Gibbsboro, NJ	Office	38,260	2,000		(35		)
Garza Ranch - Office (d)	March 16, 2018	Austin, TX	Land	6.6 acres	14,571		1,515
Westpark Land	January 10, 2018	Durham, NC	Land	13.1 acres	485		22
11, 14, 15, 17 and 18 Campus Boulevard (Newtown Square)	November 22, 2017	Newtown Square, PA	Office	252,802	42,000		19,642
630 Allendale Road	October 31, 2017	King of Prussia, PA	Office	150,000	17,500		3,605
50 E. Swedesford Square	September 13, 2017	Malvern, PA	Land	12.0 acres	7,200		882
Bishop's Gate	July 18, 2017	Mount Laurel, NJ	Land	49.5 acres	6,000		71
Two, Four A, Four B and Five Eves Drive (Evesham Corporate Center) (e)	June 27, 2017	Marlton, NJ	Office	134,794	9,700		(325		)
7000 Midlantic Drive	June 12, 2017	Mount Laurel, NJ	Retail	10,784	8,200		1,413
Garza Ranch - Multi-family (d)	April 28, 2017	Austin, TX	Land	8.4 acres	11,800		1,311
200, 210 & 220 Lake Drive East (Woodland Falls)	March 30, 2017	Cherry Hill, NJ	Office	215,465	19,000		(249		)
Philadelphia Marine Center (Marine Piers) (f)	March 15, 2017	Philadelphia, PA	Mixed-use	181,900	21,400		6,498
11700, 11710, 11720 & 11740 Beltsville Drive (Calverton) (g)	March 13, 2017	Beltsville, MD	Office	313,810	9,000		—
Gateway Land - Site C	February 15, 2017	Richmond, VA	Land	4.8 acres	1,100		—
1200 & 1220 Concord Avenue (Concord Airport Plaza)	February 2, 2017	Concord, CA	Office	350,256	33,100		551
Garza Ranch - Hotel (d)	January 30, 2017	Austin, TX	Land	1.7 acres	3,500		192

(a) Gain/(Loss) on Sale is net of closing and other transaction related costs.

(b) During the third quarter of 2018, the tenant, Subaru, exercised its purchase option for the Subaru National Training Center Development. The lease with Subaru was classified as a direct finance lease within "Other assets" on the consolidated balance sheets. In connection with the lease, the Company recognized $1.6 million in interest income during the twelve months ended December 31, 2018, in accordance with accounting guidance for direct finance leases under ASC 840.

(c) For information related to this transaction, see the “Herndon Innovation Center Metro Portfolio Venture, LLC” section in Note 4, “Investment in Unconsolidated Real Estate Ventures.”

(d) The Company had continuing involvement in these properties through a completion guaranty, which required the Company, as developer, to complete certain infrastructure improvements on behalf of the buyers of the land parcels. The Company recorded the cash received at settlement as “Deferred income, gains and rent” on the consolidated balance sheet. The Company subsequently recognized the land sales and the $3.0 million gain on sale during the twelve months ended December 31, 2018 upon substantial completion of the infrastructure improvements and transfer of control to the buyer.

(e) As of March 31, 2017, the Company evaluated the recoverability of the carrying value of its properties that triggered assessment under the undiscounted cash flow model. Based on the Company’s evaluation, it was determined that due to the reduction in the Company’s intended hold period of four properties located in the Other segment, the Company would not recover the carrying values of these properties. Accordingly, the Company recorded impairment charges on these properties of $1.0 million at March 31, 2017, which reduced the aggregate carrying values of the properties from $10.2 million to their estimated fair value of $9.2 million. The Company measured these impairments based on a discounted cash flow analysis, using a hold period of 10 years and residual capitalization rates and discount rates of 9.00% and 9.25%, respectively. The results were comparable to indicative pricing in the market. The assumptions used to determine fair value under the income approach are Level 3 inputs in accordance with the fair value hierarchy. The loss on sale in the table above represents additional closing costs.

(f) On the closing date, the buyer paid $12.0 million in cash and the Company received cash proceeds of $11.2 million, after closing costs and prorations. The $9.4 million balance of the purchase price was due on (a) January 31, 2020, in the event that the tenant at the Marine Piers does not exercise an option it holds to extend the term of the sublease or (b) January 15, 2024, in the event that the tenant does exercise the option to extend the term of the sublease. The Company determined that it was appropriate to recognize the sale of the sublease interest in the Marine Piers and to defer the remaining $9.4 million balance due under the purchase and sale agreement until collectability can be determined. During the first quarter of 2019, the tenant at the Marine Piers exercised its option to extend the term of its sublease. As a result, the $9.4 million balance of the purchase price is due on January 15, 2024, and the Company will recognize the additional gain on sale when the gain is realized or realizable.

(g) During the twelve months ended 2017, there was a price reduction of $1.7 million under the agreement of sale and additional impairment of $1.7 million was recognized.

During the year ended December 31, 2019, the Company also recorded a $1.0 million gain related to contingent consideration received related to a land sale that closed in a prior period in the Other segment. We also received additional proceeds from a sale that closed in a prior year related to a property in the Metropolitan Washington D.C. segment resulting in $0.7 million of additional gain on sale.

Held for Use Impairment

As of December 31, 2019, the Company evaluated the recoverability of the carrying value of its properties that triggered assessment. Based on the analysis, no impairments were identified during the twelve months ended December 31, 2019.

As of December 31, 2018, the Company evaluated the recoverability of the carrying values of certain properties that triggered an assessment under the undiscounted cash flow model. Based on its evaluation, the Company determined it would not recover the carrying value of one property in its Other segment, 1900 Gallows Road, located in Vienna, Virginia, due to a reduction in the intended hold period. Accordingly, the Company recorded an impairment of $14.8 million at December 31, 2018, reflected in the results for the twelve months ended December 31, 2018, which reduced the carrying value of the property from $52.8 million to its estimated fair value of $38.0 million. The Company measured this impairment based on a discounted cash flow analysis, using a hold period of ten years and a residual capitalization rate and discount rate of 7.5% and 9.5%, respectively. The result was comparable to indicative pricing in the market.

Held for Sale

As of December 31, 2019, the Company determined that the sale of two parcels of land within the Other segment totaling 35.2 acres was probable and classified these properties as held for sale. As such, $7.3 million was classified as “Assets held for sale, net” on the consolidated balance sheets.

As of December 31, 2018, the Company determined that the sale of three parcels of land (two within the Other segment and one with Pennsylvania Suburbs segment) totaling 37.9 acres was probable and classified these properties as held for sale. As such, $11.6 million was classified as “Assets held for sale, net” on the consolidated balance sheets.

As of December 31, 2019 and 2018, the fair value less the anticipated costs of sale of the properties exceeded the carrying values. The fair value of the properties is based on the pricing in the purchase and sale agreement.

Held for Sale Impairment

During the year ended December 31, 2018, the Company determined that the sale of eight office properties, known as the Rockpoint Portfolio, containing 1,293,197 rentable square feet, in the Metropolitan Washington, D.C. segment, was probable and classified these properties as held for sale and, as a result, recognized an impairment of $56.9 million. The Company measured this impairment based on a discounted cash flow analysis, using a hold period of ten years and residual capitalization rates and discount rates of 7.47% and 8.60%, respectively. The results were comparable to indicative pricing in the market. The Rockpoint Portfolio was sold during the fourth quarter of 2018. See the “Dispositions” section above for further information relating to this sale.