Real Estate Investments

9 Months Ended

Sep. 30, 2018

Real Estate [Abstract]

REAL ESTATE INVESTMENTS

3. REAL ESTATE INVESTMENTS

As of September 30, 2018 and December 31, 2017, the gross carrying value of the operating properties was as follows (in thousands):

	September 30,		December 31,
	2018		2017
Land	$	437,640	$	492,197
Building and improvements		2,579,740		2,896,113
Tenant improvements		411,668		444,038
Operating properties		3,429,048		3,832,348
Assets held for sale - real estate investments		396,072		-
Total	$	3,825,120	$	3,832,348

Acquisitions

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, in accordance with ASC 840, capitalized $0.3 million of costs related to entering the lease. Based on the Company’s evaluation under ASC 840, 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, which has been accounted for as an asset acquisition under ASU 2017-01. As such, the Company capitalized $0.1 million of acquisition-related costs and allocated the unencumbered acquisition value, consisting of the fair value of $23.6 million and the acquisition-related costs, to tangible and intangible assets and liabilities. The unencumbered acquisition value was determined under the comparative sales approach, which utilized observable transactions within the Conshohocken submarket.

The Company utilized a number of sources in making estimates of fair value for purposes of allocating the acquisition value to tangible and intangible assets acquired. The acquisition value has been allocated as follows (in thousands):

	January 5, 2018
Building, land and improvements	$	20,734
Intangible assets acquired (a)		3,144
Below market lease liabilities assumed (b)		(182	)
Total unencumbered acquisition value	$	23,696
Mortgage debt assumed - at fair value (c)		(9,940	)
Total encumbered acquisition value	$	13,756
Total unencumbered acquisition value		23,696
Mortgage debt assumed - at fair value (c)		(9,940	)
Investment in unconsolidated real estate ventures		(3,502	)
Net working capital assumed		1,379
Gain on real estate venture transactions	$	11,633

(a)Weighted average amortization period of 4.1 years.

(b)Weighted average amortization period of 4.8 years.

(c)The outstanding principal balance on mortgage debt assumed at January 5, 2018 was $9.7 million.

Four Tower Bridge contributed approximately $0.7 million and $2.1 million of revenue and $0.1 million of net income and $0.1 million of net loss, included in the Company’s consolidated income statements, for the three- and nine-month periods ended September 30, 2018, respectively.

Dispositions

The Company sold the following office property during the nine-month period ended September 30, 2018 (dollars in thousands):

Disposition Date	Property/Portfolio Name	Location	Type	Number of Properties	Rentable Square Feet		Sales Price		Net Proceeds on Sale		Loss on Sale
June 21, 2018	20 East Clementon Road	Gibbsboro, NJ	Office	1		38,260	$	2,000	$	1,850	$	(35	)
Total Dispositions				1		38,260	$	2,000	$	1,850	$	(35	)

The Company sold the following land parcels during the nine-month period ended September 30, 2018 (dollars in thousands):

Disposition Date	Property/Portfolio Name	Location	Number of Parcels		Acres		Sales Price		Net Proceeds on Sale		Gain on Sale
March 16, 2018	Garza Ranch - Office	Austin, TX		1		6.6	$	14,571	$	14,509	$	1,424	(a)
January 10, 2018	Westpark Land	Durham, NC		1		13.1		485		412		22
Total Dispositions				2		19.7	$	15,056	$	14,921	$	1,446

(a) As of March 31, 2018, the Company had not transferred control to the buyer of this land parcel, or two other parcels at this site which were sold during 2017, because of a completion guarantee which required the Company, as developer, to complete certain infrastructure improvements on behalf of the buyers of the land parcels. The cash received at settlement was recorded as “Deferred income, gains and rent” on the Company’s consolidated balance sheets. During the three months ended June 30, 2018, the infrastructure improvements were substantially completed, at which time the Company transferred control of the land parcels. As a result, the Company then recognized the sale. See Note 2, “Basis of Presentation,” for further discussion of the infrastructure improvements and related revenue recognition.

The sales of property and land referenced above do not represent a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly, the operating results of these properties remain classified within continuing operations for all periods presented.

Held for Sale

The following is a summary of properties classified as held for sale but which did not meet the criteria to be classified within discontinued operations at September 30, 2018 (in thousands):

	Held for Sale Properties Included in Continuing Operations
	September 30, 2018
	Metropolitan Washington, D.C. - Office (a)			Pennsylvania Suburbs - Land (b)		Other - Land (b)		Total
ASSETS HELD FOR SALE
Real estate investments:
Operating properties	$	396,072		$	-	$	-	$	396,072
Accumulated depreciation		(112,600	)		-		-		(112,600	)
Operating real estate investments, net		283,472			-		-		283,472
Construction-in-progress		1,748			-		-		1,748
Land inventory		-			4,254		7,321		11,575
Total real estate investments		285,220			4,254		7,321		296,795
Other assets		399			-		-		399
Total assets held for sale, net	$	285,619		$	4,254	$	7,321	$	297,194
LIABILITIES HELD FOR SALE
Other liabilities	$	826		$	-	$	-	$	826
Total liabilities held for sale	$	826		$	-	$	-	$	826

(a) As of September 30, 2018, the Company determined that the sale of eight office properties, containing 1,293,197 rentable square feet, in the Metropolitan Washington, D.C. segment, was probable and classified these properties as held for sale in accordance with applicable accounting standards for long-lived assets. At such date, the $366.0 million carrying value of the properties exceeded the estimated $309.1 million fair value less the anticipated costs of sale. As a result, the Company recognized an impairment loss totaling approximately $56.9 million during the three-month period ended September 30, 2018. 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. As significant inputs to the model are unobservable, the Company determined that the value determined for this property falls within Level 3 fair value reporting.

(b) As of September 30, 2018, the Company determined that the sale of one land parcel in the Pennsylvania Suburbs segment and two parcels of land in the Other segment was probable and classified these properties as held for sale in accordance with applicable accounting standards for long-lived assets. At such date, the fair value less the anticipated costs of sale of the properties exceeded the carrying values. As a result, the Company expects to record gains on sale. The fair value measurement will be based on the pricing in the purchase and sale agreements.

The disposals of the properties referenced above do not represent a strategic shift that has a major effect on the operations and financial results of the Company. As a result, the operating results of the properties remain classified within continuing operations for all periods presented.