UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 27, 2017
GOVERNMENT PROPERTIES INCOME TRUST
(Exact Name of Registrant as Specified in Its Charter)
Maryland
(State or Other Jurisdiction of Incorporation)
001-34364 |
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26-4273474 |
(Commission File Number) |
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(IRS Employer Identification No.) |
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Two Newton Place,
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02458-1634 |
(Address of Principal Executive Offices) |
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(Zip Code) |
617-219-1440
(Registrants Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
In this Current Report on Form 8-K, the terms the Company, we, us and our refer to Government Properties Income Trust.
Item 1.01. Entry into a Material Definitive Agreement.
Agreement and Plan of Merger
On June 27, 2017, we and two of our wholly owned subsidiaries, GOV NEW OPPTY REIT, a Maryland real estate investment trust, or REIT, and GOV NEW OPPTY LP, a Delaware limited partnership, entered into a definitive Agreement and Plan of Merger, or the Merger Agreement, to acquire First Potomac Realty Trust, a Maryland REIT, or FPO, and its operating partnership and majority owned subsidiary, First Potomac Realty Investment Limited Partnership, a Delaware limited partnership, or FPO LP. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of certain customary conditions, GOV NEW OPPTY LP will merge with and into FPO LP, with FPO LP surviving (such merger, the Partnership Merger), and, immediately following the Partnership Merger, FPO will merge with and into GOV NEW OPPTY REIT, with GOV NEW OPPTY REIT surviving as our direct, wholly owned subsidiary (such merger, the REIT Merger, and, together with the Partnership Merger, the Mergers). Following the REIT Merger, FPO LP will be our indirect, majority owned subsidiary. The Mergers and the other transactions contemplated by the Merger Agreement are collectively referred to herein as the Transaction.
Pursuant to the terms and subject to the conditions and limitations set forth in the Merger Agreement: (i) at the effective time of the REIT Merger, or the REIT Merger Effective Time, each of the common shares of beneficial interest of FPO, par value $0.001 per share, or FPO Common Shares, issued and outstanding immediately prior to the REIT Merger Effective Time (other than any FPO Common Shares held by a FPO subsidiary) will be converted into the right to receive an amount in cash equal to $11.15, without interest, or the REIT Per Share Merger Consideration; and (ii) at the effective time of the Partnership Merger, or the Partnership Merger Effective Time, each unit of limited partnership interests in FPO LP issued and outstanding immediately prior to the Partnership Merger Effective Time (other than any FPO LP limited partnership units held by FPO) will be converted into the right to receive an amount in cash equal to the REIT Per Share Merger Consideration, without interest, or the Partnership Per Unit Merger Consideration, except that each holder of FPO LP limited partnership interests may elect, in lieu of the Partnership Per Unit Merger Consideration, to have such holders units of limited partnership interests in FPO LP converted into an equal number of units of preferred limited partnership interests in FPO LP. In addition, at the REIT Merger Effective Time, each outstanding option to purchase FPO Common Shares, each outstanding restricted FPO Common Share granted under FPOs equity compensation plans and each award outstanding under FPOs legacy historical, long-term incentive program shall become fully vested and exercisable, and shall be cancelled in exchange for the right to receive a single, lump sum cash payment, in accordance with the Merger Agreement.
The Transaction is subject to approval by the holders of at least a majority of the outstanding FPO Common Shares, and each partys obligation to consummate the Transaction is subject to certain other customary conditions provided for in the Merger Agreement, including the accuracy of the other partys representations and warranties, subject to customary qualifications, the other partys material compliance with its covenants and agreements, and, with respect to us, the lack of an existence of a material adverse effect with respect to FPO and our receipt of a tax opinion relating to the REIT status of FPO. The Transaction is expected to close prior to December 31, 2017.
Pursuant to the Merger Agreement, FPO has agreed that it will not pay regular, quarterly distributions to the holders of FPO Common Shares prior to the closing of the Transaction, except to the extent that dividends
and other distributions are necessary for each of FPO and its REIT subsidiary to maintain its status as a REIT. Pursuant to the Merger Agreement, FPO has agreed, upon written request by us, to cooperate and work in good faith (i) to effect the Transaction by means of a tender offer for all of the outstanding FPO Common Shares for the REIT Per Share Merger Consideration, and/or (ii) in certain circumstances, to restructure the REIT Merger as a reverse merger subject to certain requirements, including that such restructurings do not delay the closing of the Transaction. We have not made a decision on whether to commence, and have not commenced, a tender offer for FPO Common Shares pursuant to the Merger Agreement or otherwise.
We expect to finance this transaction on a long term basis with the sale of our common shares of beneficial interest, par value $.01 per share, or our common shares, including the Equity Offering (as defined and described below), with additional debt, including senior unsecured notes, mortgage financing and/or bank debt, and/or with the proceeds of the sales of certain properties. Pending the completion of our long term financing plan, we may use borrowings under our existing revolving credit facility and under the Bridge Loan Facility (as defined and described below) to finance the Transaction. The closing of the Transaction is not subject to a financing condition and the parties to the Merger Agreement have the right to specific performance to enforce the terms thereof, including the obligation of us to consummate the Transaction in accordance with the terms and conditions of the Merger Agreement.
The Merger Agreement contains certain customary representations, warranties and covenants, including, among others, covenants with respect to the conduct of FPOs business prior to closing, subject to certain consent rights by us, and covenants prohibiting FPO from soliciting, providing information or entering into discussions concerning proposals relating to an alternative acquisition transaction (for 20% or more of the equity or assets of FPO), subject to certain limited exceptions.
The Merger Agreement contains certain termination rights for both us and FPO. Under specified circumstances, FPO is entitled to terminate the Merger Agreement to accept a superior proposal (for 67% or more of the equity or assets of FPO, which proposal the FPO board of trustees determines in its good faith judgment, if consummated, would be more favorable to the shareholders of FPO from a financial point of view, and if accepted, is reasonably likely to be completed on the terms proposed on a timely basis). Upon such a termination by FPO, or under certain other specified circumstances, FPO will be required to pay us a termination fee of $25 million. If the Merger Agreement is terminated by us for a material breach of the Merger Agreement by FPO or terminated by either party as a result of the failure to obtain the approval of the Transaction by the holders of at least a majority of the outstanding FPO Common Shares, FPO will be required to reimburse us up to $5 million for expenses incurred by us in connection with the Merger Agreement (although if the termination fee later becomes payable, amounts reimbursed to us by FPO will be credited against the termination fee payable).
The foregoing description of the Merger Agreement is not complete and is subject to and qualified in its entirety by reference to the copy of the Merger Agreement attached as Exhibit 2.1 hereto, which is incorporated herein by reference. Certain of the representations and warranties contained in the Merger Agreement were made as of a specified date, may be subject to a contractual standard of materiality different from what might be viewed as material to FPOs or our shareholders or may have been used for the purpose of allocating risk between the parties to the Merger Agreement. Accordingly, the representations and warranties contained in the Merger Agreement are not necessarily characterizations of the actual state of facts with respect to us or our subsidiaries or FPO or its subsidiaries, including FPO LP, at the time they were made or otherwise, and investors should not rely on them as statements of fact.
Commitment Letter
Concurrently with the execution of the Merger Agreement, we entered into a commitment letter, or the Commitment Letter, with Citigroup Global Markets Inc., or Citigroup, pursuant to which, on the terms and subject to the conditions set forth therein, Citigroup (or certain of its affiliates) and Bank of America, N.A., Morgan Stanley Bank, N.A. and UBS AG, Stamford Branch have committed to provide us a 364-day senior unsecured bridge loan facility in an aggregate principal amount of up to $750.0 million, or the
Bridge Loan Facility. We will be required to pay interest at a rate of LIBOR plus a premium of 1.40% per annum, subject to adjustment based upon changes to our credit ratings, on borrowings under the Bridge Loan Facility. Pending the completion of our long term financing plan, we may use borrowings under the Bridge Loan Facility to finance the Transaction. The commitment to provide the Bridge Loan Facility is subject to consummation of the Transaction and certain other customary conditions as set forth in the Commitment Letter. The funding of the Bridge Loan Facility is not a condition to our obligations under the Merger Agreement. We will pay certain customary fees and expenses to Citigroup and the other parties to the Commitment Letter in connection with obtaining the Bridge Loan Facility. The foregoing description of the Commitment Letter is not complete and is subject to and qualified in its entirety by reference to the copy of the Commitment Letter attached as Exhibit 10.1 hereto, which is incorporated herein by reference.
Citigroup and the other parties to the Commitment Letter, as well as their affiliates, have engaged in, and may in the future engage in, investment banking, commercial banking, advisory and other dealings in the ordinary course of business with us. They have received, and may in the future receive, customary fees and commissions for these engagements. In addition, Citigroup is acting as our exclusive financial advisor for the Transaction, and Citigroup and affiliates of other parties to the Commitment Letter are acting as underwriters for the Equity Offering and will receive customary fees and commissions in connection therewith.
Item 7.01. Regulation FD Disclosure.
On June 28, 2017, we issued a press release announcing the Transaction, and we also released an investor presentation containing additional detail on the Transaction. Copies of that press release and presentation are furnished as Exhibits 99.1 and 99.3, respectively, to this Current Report on Form 8-K.
Also on June 28, 2017, we issued a press release announcing the launch of an underwritten public offering, or the Equity Offering, for 25,000,000 of our common shares. It is contemplated that the underwriters will also be granted a 30-day option to purchase up to an additional 3,750,000 of our common shares from us, at the public offering price, less the underwriting discount. A copy of that press release is furnished as Exhibit 99.2 to this Current Report on Form 8-K.
The Equity Offering will be made pursuant to our effective shelf registration statement filed with the Securities and Exchange Commission, or SEC. The Equity Offering will be made only by means of a prospectus and a related preliminary prospectus supplement. This Current Report on Form 8-K shall not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of any securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.
Item 8.01. Other Events.
Material United States Federal Income Tax Consequences of the Transaction
The following summary supplements and updates the more detailed description of the material United States federal income tax considerations contained in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2016, or our Annual Report, captioned Material United States Federal Income Tax Considerations, which summary is incorporated herein by reference. Subject to the qualifications and assumptions contained in its opinion, Sullivan & Worcester LLP, Boston, Massachusetts, has rendered a legal opinion that the discussion in our Annual Report captioned Material United States Federal Income Tax Considerations, as supplemented by this section, is accurate in all material respects and fairly summarizes the U.S. federal income tax considerations discussed therein and in this section, and the opinions of counsel referred to therein and in this section represent Sullivan & Worcester LLPs opinions on those subjects.
General U.S. Federal Income Tax Consequences of the Transaction
As discussed above, we intend to complete the Transaction, which will include a cash payment by us to the holders of the FPO Common Shares. As a result of the Transaction, we will be treated for federal income tax purposes as acquiring the assets of FPO for the cash we pay plus the assumption of FPOs liabilities, after which FPO will be treated as liquidating and distributing the cash to its shareholders. FPO will recognize gain or loss on the disposition of its assets based on the sum of the cash paid by us and the value of the liabilities assumed by us, but this gain or loss plus FPOs operating income is expected to be offset fully by the dividends paid deduction available to liquidating REITs in their final taxable year. Our holding period in the assets we acquire from FPO will begin on the day following the completion of the Transaction and our initial tax basis in the assets of FPO will be equal to the sum of the cash we pay to the holders of FPO Common Shares in conjunction with the Transaction, the value of FPOs liabilities that we assume, and the acquisition costs that we capitalize for income tax purposes.
The assets that we acquire in the Transaction are generally expected to (a) qualify as real estate assets that satisfy the REIT asset tests that are described in the section of our Annual Report captioned Material United States Federal Income Tax Considerations REIT Qualification RequirementsAsset Tests, and (b) generate gross income that satisfies the REIT gross income tests that are described in the section of our Annual Report captioned Material United States Federal Income Tax ConsiderationsREIT Qualification RequirementsIncome Tests. As a result, we believe that our acquisition of FPOs assets will not materially impact our qualification for taxation as a REIT.
If the Transaction is not completed, then under specified circumstances we may be entitled to receive a termination fee from FPO over time. The timing for the payment of the termination fee has been structured so that we can manage successfully the REIT gross income tests that we must satisfy. In addition, if we become entitled to termination fee payments then we may seek a U.S. Internal Revenue Service, or IRS, private letter ruling or opinion of counsel that enables us to receive the termination fee on an accelerated basis while still complying with the REIT gross income tests. In sum, we believe that our receipt of termination fee payments would not materially impact our qualification for taxation as a REIT.
Tax Liabilities and Attributes Inherited from FPO
As a condition of the closing of the Transaction, FPOs counsel will provide us with an opinion that FPO has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the U.S. Internal Revenue Code of 1986, as amended, or the IRC . If, contrary to that opinion and our expectation, FPO has failed or fails to qualify for taxation as a REIT for U.S. federal income tax purposes, then we may inherit significant tax liabilities in the Transaction because, as the successor by merger to FPO, we would generally inherit any corporate income tax liabilities of FPO, including penalties and interest.
It is unclear whether the IRC provisions that are generally available to remediate REIT compliance failures will be available to us as a successor in respect of any determination that FPO failed to qualify for taxation as a REIT. If and to the extent the remedial provisions are available to us to address FPOs REIT qualification and taxation for the applicable period prior to or including the Transaction, we may incur significant cash outlays in connection with the remediation, possibly including (a) required distribution payments to shareholders and associated interest payments to the IRS and (b) tax and interest payments to the IRS and state and local tax authorities.
FPOs failure before the Transaction to qualify for taxation as a REIT and our efforts to remedy any such failure could have an adverse effect on our results of operations and financial condition.
Risk Factors
Our business faces many risks, a number of which are described under the caption Risk Factors in our Annual Report, the Equity Offering may subject us to certain risk associated with the offering of our common shares and the Transaction may subject us to certain risks that are described below. The risks so described may not be the only risks we face. Additional risks of which we are not yet aware, or that we currently believe are immaterial, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our Annual Report or described below occurs, our business, financial condition or results of operations could be adversely impacted and the trading price of our securities could decline. Investors and prospective investors should consider the risks described in our Annual Report and below and the information contained under the heading Warning Concerning Forward Looking Statements below, in our Annual Report and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 before deciding whether to invest in our securities.
Risks Related to the Transaction
The Transaction is subject to a number of customary conditions that if not satisfied or waived could delay or prevent the Transactions consummation.
The completion of the Transaction is subject to a number of customary conditions, including, among others, the approval of the Transaction by the holders of at least a majority of the FPO Common Shares and the absence of a material adverse effect with respect to FPO. These conditions make the timing of the completion of the Transaction, and completion of the Transaction itself, uncertain. Also, either we or FPO may terminate the Merger Agreement if the Transaction is not completed by December 31, 2017, except that this right to terminate the Merger Agreement will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was the cause of, or resulted in, the failure of the Transaction to be completed on or before such date.
If the Transaction is not completed in the timeframe that we currently expect, or at all, we may be adversely affected by a number of risks, including the following:
· we will be required to pay our costs relating to the Transaction, such as legal, accounting and financial advisory fees, whether or not the Transaction is completed;
· the time and attention committed by our management to matters relating to the Transaction could otherwise have been devoted to pursuing other opportunities;
· our shareholders could suffer substantial dilution if we issue common shares in anticipation of funding a portion of the Transactions purchase price and the Transactions consummation is delayed or ultimately not completed, with the result that we will not have the opportunity to capture the expected benefits from the Transaction within the anticipated timeframe, or at all, and be required to find an alternative use for the net proceeds of any such equity issuance which could take a substantial amount of time; and
· the market price of our common shares could decline to the extent that the then current market price is positively affected by a market assumption that the Transaction will be completed.
The actual cap rate achieved in connection with the Transaction may be lower than our current preliminary estimate.
We believe our estimated cap rate for the Transaction is approximately 7.0%, based on our preliminary estimate of 2018 net operating income attributable to the FPO properties. For these purposes, we define cap rate as the GAAP earnings from the acquired properties (for both consolidated properties and a pro rata share of unconsolidated joint venture properties) before depreciation, amortization, interest and an allocable
share of corporate office general and administrative expense, divided by the aggregate transaction value (including a pro rata share of non-recourse unconsolidated joint venture indebtedness and adjusted for other tangible properties and liabilities, but excluding transaction costs). Our calculation of our preliminary estimated acquisition cap rate for the Transaction relies upon our preliminary estimate of the 2018 net operating income attributable to the FPO properties, which is inherently uncertain and based upon our current assumptions regarding the 2018 operations of the FPO properties and information available in FPOs public filings and additional information made available to us by FPO during the process leading to signing of the Merger Agreement. We have not completed our own detailed accounting analysis of FPOs property level earnings, which could result in revisions that lower our preliminary estimate of 2018 net operating income attributable to the FPO properties. The 2018 net operating income attributable to the FPO properties could be materially lower than our current preliminary estimate due to numerous factors, including, without limitation, unexpected increases in property level operating expenses or decreases in property level revenue, decreases in occupancy, failure to achieve expected cost savings, tenant defaults, financing arrangements and potential dispositions of certain assets. Additionally, property level earnings from FPOs properties may decrease before or after the Transaction closes. Moreover, alternative methods of calculating cap rates, such as methods that utilize cash based accounts, would result in a different cap rate. Accordingly, the acquisition cap rate ultimately realized by us on the Transaction may be lower than the cap rate that we currently estimate.
While we expect that the Transaction will be accretive to our normalized funds from operations per share after 2018 and approximately leverage neutral on a debt to gross assets basis after completion of our long term financing plan, there can be no assurance that this will be the case; additionally, it is expected that the Transaction will be dilutive to our normalized funds from operations per share for the years ending December 31, 2017 and 2018, though the amount of any such dilution cannot be determined at this time.
While we currently believe that the Transaction will be accretive to our normalized funds from operations per share after 2018 and approximately leverage neutral on a debt to gross assets basis after completion of our long term financing plan, there can be no assurance that this will be the case; additionally, while we currently believe that the Transaction will be dilutive to our normalized funds from operations per share for the years ending December 31, 2017 and 2018, the actual amount of any such dilution cannot be determined at this time and will be based on numerous factors. Normalized funds from operations is a non-GAAP financial measure that has been historically reported by us in our periodic filings with the SEC and is calculated by adjusting funds from operations (which is also a non-GAAP financial measure), as defined by the National Association of Real Estate Investment Trusts, as described in such filings. The accretion to normalized funds from operations per share that we currently expect to realize after 2018 and our expectation that the Transaction will be approximately leverage neutral on a debt to gross assets basis after completion of our long term financing plan depend upon many factors, such as the types and costs of long term financing that we ultimately use to fund the Transaction, the rents that we will receive from our existing properties and from the properties now owned by FPO, occupancy, and other factors. Similarly, any dilution to normalized funds from operations per share for the years ending December 31, 2017 and 2018 depends upon many factors, such as the timing of any equity issuances and the closing of the Transaction, and other factors. Most of these factors will be materially impacted by market conditions beyond our control. Accordingly we can provide no assurance that the Transaction will be accretive to our normalized funds from operations per share after 2018, and, in fact, we may experience dilution to our normalized funds from operations per share as a result of the Transaction.
Our current expectation that the Transaction will be approximately leverage neutral on a debt to gross assets basis after completion of our long term financing plan and dilutive for the years ending December 31, 2017 and 2018 is based upon our current beliefs regarding the types and costs of our long term financing for the Transaction. The types and costs of the long term financing which we use for the Transaction will depend in large part on market conditions which are beyond our control. To the extent our estimates regarding our future normalized funds from operations or the underlying assumptions are inaccurate, the Transaction may not be accretive to our normalized funds from operations per share after 2018 or approximately leverage neutral and the dilutive effect to our normalized funds from operations per share for the years ending December 31, 2017 and 2018 may be greater than currently expected.
No assurance can be given that we will be successful in achieving the currently expected general and administrative expense cost savings in managing the FPO properties as compared to FPO on a stand alone basis.
We currently expect to realize approximately $11.0 million of annual general and administrative expense saving compared to FPO on a stand alone basis. Our management agreement with The RMR Group LLC, or RMR LLC, sets the fees that we pay in lieu of certain general and administrative expenses pursuant to a complex formula based upon the lower of our market capitalization or the historical cost of certain of our assets. Also, we may pay incentive fees to RMR LLC in certain circumstances based upon total returns realized by our shareholders compared to an index of total returns of certain other REITs. Some of these calculations will depend upon future market prices of our securities and other REITs securities which are beyond our control. Accordingly, the amount of annual general and administrative expense savings which we may realize, if any,
cannot be precisely calculated; and, in fact we may realize more or less savings or no savings and our annual general and administrative expenses incurred as a result of the Transaction may be higher than FPO incurred or would incur on a stand alone basis.
The unaudited pro forma condensed consolidated financial statements relating to the Transaction and the other transactions referred to therein are presented for illustrative purposes only and are not necessarily indicative of what our financial position or results of operations would have been if the Transaction and such other transactions had actually been completed on the dates indicated and are not intended to project such information for any future date or for any future period.
The unaudited pro forma condensed consolidated financial statements relating to the Transaction and the other transactions referred to therein are based on numerous assumptions, and the adjustments described therein are based on available information that our management considers reasonable. In addition, other than as specified therein, such unaudited pro forma condensed consolidated financial statements do not reflect adjustments for other developments with our business or FPOs business after March 31, 2017. As a result, the unaudited pro forma condensed consolidated financial statements do not purport to represent what our financial condition actually would have been had the relevant transactions occurred on March 31, 2017 or represent what the results of our operations actually would have been had the relevant transactions occurred on January 1, 2016 or project our financial position or results of operations as of any future date or for any future period. The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of our expected financial position or results of operations for any future period. Differences could result from numerous factors, including future changes in our portfolio of investments, capital structure, property level operating expenses and revenues, including rents expected to be received on our existing leases or leases we may enter into during and after 2017, changes in interest rates and other reasons. Actual future results are likely to be different from amounts presented in the unaudited pro forma condensed consolidated financial statements and such differences could be significant.
The transition of business and property management functions for the FPO properties to RMR LLC may create unexpected costs, and any delay in the transition may reduce the benefits expected to be received by us in the Transaction.
The Transaction involves the combination of two publicly traded companies that currently operate independently. We and RMR LLC will be required to devote significant management time and attention to integrating our properties and operations with those of FPO. Unexpected difficulties or delays may arise during this integration process, including, for example, difficulties or delays in transitioning the management or financial and tax reporting functions with respect to all, or some portion of, the FPO properties. While we have assumed transition and integration expense will be incurred, unexpected transition and integration difficulties may create additional expenses and reduce or delay the benefits expected to be received by us from the Transaction.
Additionally, the Transaction and the integration of the FPO properties into our existing business may result in material unanticipated problems, expenses and liabilities as a result of a number of factors. For example, the FPO properties may be subject to tax reassessment, which may result in higher than expected tax payments. Similarly, we may have underestimated the costs we expect to incur in connection with leasing, operating and improving the FPO properties. Many of these risks will be outside of our control and any one of them could result in increases in costs, decreases in the amount of expected revenue and diversion of our managements time and attention.
We may be subject to unknown or contingent liabilities related to the FPO properties for which we may have no recourse against FPO.
The FPO properties may be subject to unknown or contingent liabilities for which we may have no recourse against FPO. In addition, the total amount of costs and expenses that we may incur with respect to liabilities associated with the FPO properties may exceed our expectations.
Our future results of operations may be adversely affected if we are unable to effectively manage our expanded portfolio and operations following the Transaction.
Following the Transaction, we will have an expanded portfolio and operations, and we may continue to expand our operations through additional acquisitions and other strategic transactions. Our future success will depend, in part, upon our ability to manage our expansion opportunities, integrate new operations into our existing business in an efficient and timely manner, successfully monitor our operations and costs, and maintain necessary internal controls. We cannot be sure that we will be able to maintain or improve current rents and occupancy at the properties we acquire, that renovation, expansion or acquisition opportunities will be successful, or that we will realize any expected revenue enhancements or other benefits from such transactions.
If our committed debt financing is not available we may be required to obtain alternative financing for the Transaction on terms which are materially less favorable to us.
Pending the long term financing of the Transaction, we intend to finance a portion of the purchase price and Transaction fees and expenses with borrowings under our existing $750.0 million revolving credit facility and under the Bridge Loan Facility. The obligations of lenders under our revolving credit facility and the Bridge Loan Facility to fund borrowings are subject to certain conditions, which may or may not be satisfied as of the completion of the Transaction. The availability of these funds to us is not a condition precedent to our obligation to complete the Transaction. In the event any of these funds are not available or are available in less than the full amount anticipated, we will be required to seek alternative financing, which may not be available on as favorable terms, in a timely manner or at all.
If we are unable to implement our long term financing plan for the Transaction on currently expected terms, our anticipated costs of financing the Transaction could materially increase.
We expect to finance the Transaction on a long term basis with the net proceeds from the sale of common shares, additional debt, including senior unsecured notes, mortgage financings and/or bank debt, and/or the sale of certain properties. If we are unable to finance the Transaction as currently expected and to repay the amounts outstanding under the Bridge Loan Facility prior to its expiration, our available cash flow to fund working capital, capital expenditures, acquisitions and other business activities may be reduced. In such event, the alternative financing may be more expensive and the expected benefits of the Transaction could be reduced or eliminated.
In connection with the Transaction, we will incur significant additional indebtedness, which will increase the related risks we now face.
In connection with the Transaction, we will incur significant additional indebtedness and expect to acquire certain properties of FPO subject to mortgage indebtedness. As a result, we will be subject to increased risks associated with debt financing, including an increased risk that our cash flow could be insufficient to meet required payments on our debt.
As of March 31, 2017, we had indebtedness of approximately $1.4 billion. Taking into account our existing indebtedness, the incurrence of additional indebtedness in connection with the Transaction and the assumption of certain existing FPO debt in connection with the Transaction, our pro forma consolidated indebtedness as of March 31, 2017 would have been approximately $2.2 billion. Our increased indebtedness could adversely affect us for numerous reasons, including by:
· increasing our vulnerability to general adverse economic and business conditions;
· limiting our ability to obtain additional financing to fund future acquisitions, working capital, capital expenditures and other general business requirements;
· requiring the use of a substantial portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general operating requirements; and
· limiting our flexibility in planning for, or reacting to, changes in our business.
If we default under a loan, including defaults resulting from violations of covenants contained in our revolving credit facility, Bridge Loan Facility and our term loans, we may also default under other debt instruments that have cross-default provisions, and the maturity of outstanding indebtedness may be accelerated and future borrowings under our revolving credit facility will be prohibited.
Our variable rate indebtedness (including amounts outstanding under our revolving credit facility and the Bridge Loan Facility) subjects us to interest rate risk. When interest rates increase, so will our interest costs, which could adversely affect our cash flow, our ability to pay principal and interest on our debt and our cost of refinancing our debt when it becomes due. Additionally, if we choose to hedge our interest rate risk, we cannot be sure that the hedge will be effective or that any hedging counterparty will meet its obligations to us.
The Bridge Loan Facility has a 364-day term and the principal balance of such loan will not be reduced during the term of the loan, except in the case of voluntary or mandatory prepayments. At maturity we will be required to make a lump sum payment of the principal (less any amount of prepayments). Our ability to make this lump sum payment is uncertain and may depend upon our ability to obtain additional financing.
The pendency of the Transaction could adversely affect our and FPOs business and operations.
In connection with the pending Transaction, some tenants or vendors may delay or defer decisions related to their business dealings with us or FPO, which could negatively impact our and FPOs revenues, earnings, cash flows or expenses, regardless of whether the Transaction is completed.
We may incur adverse tax consequences if FPO has failed or fails to qualify for taxation as a REIT for U.S. federal income tax purposes.
As a condition of the closing of the Transaction, FPOs counsel will provide us with an opinion that FPO has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the IRC. If, contrary to that opinion and our expectation, FPO has failed or fails to qualify for taxation as a REIT for U.S. federal income tax purposes, then we may inherit significant tax liabilities in the Transaction because, as the successor by merger to FPO, we would generally inherit any corporate income tax liabilities of FPO, including penalties and interest.
It is unclear whether the IRC provisions that are generally available to remediate REIT compliance failures will be available to us as a successor in respect of any determination that FPO failed to qualify for taxation as a REIT. If and to the extent the remedial provisions are available to us to address FPOs REIT qualification and taxation for the applicable period prior to or including the Transaction, we may incur significant cash outlays in connection with the remediation, possibly including (a) required distribution payments to shareholders and associated interest payments to the IRS, and (b) tax and interest payments to the IRS and state and local tax authorities.
FPOs failure before the Transaction to qualify for taxation as a REIT and our efforts to remedy any such failure could have an adverse effect on our results of operations and financial condition.
The market price of our common shares may decline in the future as a result of the Transaction or for other reasons.
In addition to the information set forth in our Annual Report under the caption Risk FactorsRisks Related to our SecuritiesChanges in market conditions could adversely affect the market price of our common shares, the market price of our common shares may decline in the future as a result of the Transaction, our financing thereof or a number of other reasons, such as our failure to achieve the benefits of the Transaction expected by us, investors or analysts in the timeframe expected or to the extent anticipated. Our shareholders could suffer substantial dilution if we issue common shares in anticipation of funding a portion of the Transactions purchase price and the Transactions consummation is delayed or ultimately not completed, with the result that we will not have the opportunity to capture the expected benefits from the Transaction within the anticipated timeframe, or at all, and be required to find an alternative use for the net proceeds of any such equity issuance which could take a substantial amount of time. Additionally, the market price of our common shares may be affected by perceived additional risks or uncertainties to us following the Transaction to which we are not currently exposed.
We cannot assure you that we will continue paying distributions at or above our current annualized distribution rate.
Our current annualized distribution rate is $1.72 per common share. We may not be able to continue paying distributions at or above our current annualized distribution rate for various reasons, including: the occurrence of any of the risks described herein or in our Annual Report; restrictions contained in our revolving credit facility, the Bridge Loan Facility and the terms of certain other debt instruments; or any future determination by our Board of Trustees to retain cash to maintain or improve our credit ratings.
We have no obligation to pay distributions to our shareholders, and future distributions, if any, will be made at the discretion of our Board of Trustees. The declaration of any future distribution will depend on various factors that our Board of Trustees at the time deems relevant, including our results of operations, our financial condition, debt and equity capital available to us, our expectation of our future capital requirements and operating performance, our funds from operations, our normalized funds from operations, our receipt of distributions from Select Income REIT, restrictive covenants in our financial or other contractual arrangements (including those in our revolving credit facility, the Bridge Loan Facility and our term loan agreement), tax law requirements to maintain our qualification for taxation as a REIT, restrictions under Maryland law and our expected needs and availability of cash to pay our obligations. For these reasons, among others, we may not maintain our annualized distribution rate, and we may reduce or eliminate future distributions.
Upon completion of the Transaction our concentration of properties located in the metropolitan Washington, D.C. market area will increase.
As of March 31, 2017, approximately 27.4% of our annualized rental income was received from properties located in the metropolitan Washington, D.C. market area. Similarly, the FPO properties are concentrated in the metropolitan Washington, D.C. market area and, pro forma for the Transaction approximately 54.3% of our annualized rental income would have been received from properties located in the metropolitan Washington, D.C. market area. Accordingly, upon completion of the Transaction our exposure to changes in economic, regulatory and other conditions in that area will increase. A downturn in economic conditions in this area could result in reduced demand from tenants for our properties or lower the rents that our tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated. Additionally, in recent years there has been a decrease in demand for new leased space by the U.S. government in the metropolitan Washington, D.C. market area, and that could increase competition for government tenants and adversely affect our ability to retain government tenants when our leases expire.
The metropolitan Washington, D.C. market area office market may be subject to higher volatility than the office market in other areas due to uncertainty in government spending and regulations. In particular, the office market in the metropolitan Washington, D.C. market area was negatively impacted by uncertainty regarding the potential for significant reductions in spending by the U.S. government and may be impacted by the uncertainty regarding policy changes under the Trump administration. In addition to actual economic conditions, investor perception of risks associated with real estate in the metropolitan Washington, D.C. market area, as a result of its perceived dependence on the U.S. government, the impact of sequestration or anticipated policy changes, may make investors less likely to invest in our common shares and adversely affect their market price.
Upon completion of the Transaction, government and other investment grade rated tenants will represent a smaller portion of our annualized rental income and, therefore, we may experience higher rates of tenant defaults than before the Transaction.
During the three months ended March 31, 2017, government tenants and other investment grade rated tenants represented approximately 88.1% and 43.9% of our and FPOs annualized rental income, respectively. Pro forma for the Transaction, approximately 71.7% of our total annualized rental income would have come from government and other investment grade rated tenants. Any investments in properties with tenants that are not governments or investment grade rated may have a greater risk of default and bankruptcy than investments in properties leased to governments and investment grade rated tenants. As a result, we may experience higher rates of tenant defaults than before the Transaction.
As a result of the Transaction, we will acquire two properties that are subject to joint venture agreements with unrelated third parties and our flexibility with respect to these jointly owned properties may be limited.
As a result of the Transaction, we will acquire properties which are subject to joint venture agreements with unrelated third parties. Our participation in these joint ventures will subject us to risks, including the following:
· we may share approval rights over major decisions affecting the ownership or operation of the joint ventures and any property owned by the joint ventures;
· we may be required to contribute additional capital if our joint venture partners fail to fund their share of any required capital contributions;
· our joint venture partners may have economic or other business interests or goals that are inconsistent with our business interests or goals and that could affect our ability to lease or release the property, operate the property or maintain our qualification for taxation as a REIT;
· our joint venture partners may be subject to different laws or regulations than us, or may be structured differently than us for tax purposes, which could create conflicts of interest and/or affect our ability to maintain our qualification for taxation as a REIT;
· our ability to sell our joint venture interests on advantageous terms when we so desire may be limited or restricted under the terms of the applicable joint venture agreements; and
· disagreements with our joint venture partners could result in litigation or arbitration that could be expensive and distracting to management and could delay important decisions.
Any of the foregoing risks could have a material adverse effect on our business, financial condition and results of operations.
IMPORTANT NOTICE REGARDING POSSIBLE TENDER OFFER
This Current Report on Form 8-K is for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell FPO Common Shares. We have not commenced a tender offer for FPO Common Shares pursuant to terms of the Merger Agreement described herein or otherwise. If we commence a tender offer for FPO Common Shares, we will file with the SEC a tender offer statement on Schedule TO, and FPO will file with the SEC a solicitation/recommendation statement on Schedule 14D-9 with respect to such tender offer. ANY SUCH TENDER OFFER MATERIALS (INCLUDING AN OFFER TO PURCHASE, A RELATED LETTER OF TRANSMITTAL AND CERTAIN OTHER OFFER DOCUMENTS) AND THE SOLICITATION/RECOMMENDATION STATEMENT OF FPO ON SCHEDULE 14D-9 WILL CONTAIN IMPORTANT INFORMATION. HOLDERS OF FPO COMMON SHARES SHOULD READ THESE
DOCUMENTS CAREFULLY IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION THAT HOLDERS OF FPO COMMON SHARES SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING TENDERING THEIR SECURITIES. Copies of these documents, if and when filed with the SEC, will be available free of charge at the SECs website at www.sec.gov. In addition to these documents, FPO files annual, quarterly and current reports and other information with the SEC. You may read and copy any reports or other information filed by FPO at the SEC public reference room at 100 F Street, N.E., Washington, D.C. 20549. FPOs filings with the SEC are also available for free at the SECs website at www.sec.gov.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS CURRENT REPORT ON FORM 8-K CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS BELIEVE, EXPECT, ANTICIPATE, INTEND, PLAN, ESTIMATE, WILL, MAY AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FOR EXAMPLE:
· THIS CURRENT REPORT ON FORM 8-K STATES THAT WE ENTERED INTO A DEFINITIVE MERGER AGREEMENT TO ACQUIRE FPO AND THAT THE TRANSACTION IS EXPECTED TO CLOSE BEFORE DECEMBER 31, 2017. THE CLOSING OF THE TRANSACTION IS SUBJECT TO CUSTOMARY CONDITIONS AND CONTINGENCIES, INCLUDING APPROVAL BY THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING FPO COMMON SHARES. WE CANNOT BE SURE THAT SUCH CONDITIONS AND CONTINGENCIES WILL BE SATISFIED. ACCORDINGLY, THE TRANSACTION MAY NOT CLOSE BEFORE DECEMBER 31, 2017 OR AT ALL, OR THE TERMS OF THE TRANSACTION MAY CHANGE.
· THE APPROVAL OF THE TRANSACTION BY THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING FPO COMMON SHARES MAY BE SOLICITED BY A PROXY STATEMENT WHICH MUST BE FILED WITH THE SEC. THE PROCESS OF PREPARING THE PROXY STATEMENT IS TIME CONSUMING. ACCORDINGLY, WE CANNOT BE SURE THAT THE TRANSACTION WILL BE CONSUMMATED WITHIN A SPECIFIED TIME PERIOD OR AT ALL.
· OUR DECISION AS TO WHETHER TO MAKE A TENDER OFFER FOR ALL OF THE OUTSTANDING FPO COMMON SHARES WILL DEPEND ON CERTAIN FACTORS WE DETERMINE TO BE RELEVANT TO THAT DECISION, INCLUDING THE AVAILABILITY OF PERMANENT FINANCING, THE AGREEMENT OF CERTAIN FPO DEBT HOLDERS TO ACCEPT EXPEDITED DEBT ASSUMPTION OR REPAYMENT AND OTHER FACTORS. FURTHER, FACTORS BEYOND OUR CONTROL COULD DELAY THE CLOSING OF ANY TENDER OFFER. THERE CAN BE NO ASSURANCE THAT WE WILL DECIDE TO MAKE A TENDER OFFER FOR FPO SHARES OR THAT IF WE DO, SUCH TENDER OFFER WILL DECREASE THE TIME REQUIRED FOR US TO COMPLETE ITS ACQUISITION OF FPO.
· THE COMMITMENT LETTER IS SUBJECT TO VARIOUS CONDITIONS, INCLUDING MUTUALLY SATISFACTORY DOCUMENTATION AND CONSUMMATION OF THE TRANSACTION. WE CANNOT BE SURE THAT THESE CONDITIONS WILL BE SATISFIED, THAT THE TERMS OF THE BRIDGE LOAN FACILITY WILL NOT CHANGE OR THAT THE BRIDGE LOAN FACILITY WILL BE AVAILABLE TO US ON A TIMELY BASIS OR AT ALL.
· WE ARE NOT COMMITTED TO BORROW THE ENTIRE BRIDGE LOAN FACILITY OR ANY PORTION THEREOF, AND WE MAY UTILIZE OTHER DEBT OR EQUITY FINANCING FOR ALL OR A PORTION OF THE TRANSACTION COSTS WHICH MAY BE ON TERMS AND CONDITIONS THAT ARE LESS FAVORABLE TO US THAN THE COMMITMENT LETTERS TERMS AND CONDITIONS.
· CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND OTHER CUSTOMARY CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY.
· ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY AND THE BRIDGE LOAN FACILITY WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH SUCH FACILITIES.
· THE PREMIUMS USED TO DETERMINE THE INTEREST RATE PAYABLE ON OUR REVOLVING CREDIT FACILITY, THE BRIDGE LOAN FACILITY AND OUR TERM LOANS AND THE FACILITY FEE PAYABLE ON OUR REVOLVING CREDIT FACILITY ARE BASED ON OUR CREDIT RATINGS. FUTURE CHANGES IN OUR CREDIT RATINGS MAY CAUSE THE INTEREST AND FEES WE PAY TO INCREASE.
· THE PRO FORMA FINANCIAL INFORMATION FILED AS AN EXHIBIT TO THIS CURRENT REPORT ON FORM 8-K INCLUDES CERTAIN ASSUMPTIONS REGARDING THE POTENTIAL EQUITY OFFERING, INCLUDING WITH RESPECT TO THE NET PROCEEDS TO US FROM THE EQUITY OFFERING. WE CANNOT BE SURE THAT THESE ASSUMPTIONS WILL REFLECT THE ACTUAL NET PROCEEDS TO US FROM THE EQUITY OFFERING, IF ANY. IN ADDITION TO THE EQUITY OFFERING, WE MAY EXPLORE OTHER LONGER TERM DEBT OR EQUITY FINANCING ALTERNATIVES. OUR ACTUAL MIX OF DEBT AND EQUITY FINANCING WILL DEPEND ON THE AVAILABILITY AND COST OF SUCH FINANCING AND THE FINAL MIX OF FINANCING MAY BE DIFFERENT FROM CURRENT EXPECTATIONS.
· THE SETTLEMENT OF THE EQUITY OFFERING, IF ANY, WILL BE SUBJECT TO VARIOUS CONDITIONS AND CONTINGENCIES AS ARE CUSTOMARY IN UNDERWRITING AGREEMENTS IN THE UNITED STATES. IF THESE CONDITIONS ARE NOT SATISFIED OR THE SPECIFIED CONTINGENCIES DO NOT OCCUR, THE EQUITY OFFERING MAY BE DELAYED OR MAY NOT BE COMPLETED.
· AN IMPLICATION OF THE STATEMENT THAT IT IS CONTEMPLATED THAT THE UNDERWRITERS WILL BE GRANTED AN OPTION TO PURCHASE UP TO AN ADDITIONAL 3,750,000 OF OUR COMMON SHARES FROM US MAY BE THAT THIS OPTION MAY BE EXERCISED IN WHOLE OR IN PART. IN FACT, WE DO NOT KNOW WHETHER THE UNDERWRITERS WOULD EXERCISE THIS OPTION, OR ANY PART OF IT.
THE INFORMATION CONTAINED IN OUR FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION RISK FACTORS ABOVE AND IN OUR ANNUAL REPORT, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE STATED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SECS WEBSITE AT WWW.SEC.GOV.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited consolidated financial statements of FPO and its subsidiaries comprising the consolidated balance sheets as of December 31, 2016 and 2015 and the consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of equity and consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014 and the notes related thereto, and the related financial statement schedule, are filed as Exhibit 99.4 to this Current Report on Form 8-K. The unaudited condensed consolidated financial statements of FPO and its subsidiaries comprising the consolidated balance sheet as of March 31, 2017 and the consolidated statements of operations, consolidated statements of comprehensive income (loss) and consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 and the notes related thereto are filed as Exhibit 99.5 to this Current Report on Form 8-K.
(b) Pro Forma Financial Information
Our unaudited pro forma condensed consolidated balance sheet as of March 31, 2017 and our unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2016 and the three months ended March 31, 2017 and the notes related thereto are filed as Exhibit 99.6 to this Current Report on Form 8-K. The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of our expected financial position or results of operations for any future period. Differences could result from numerous factors, including future changes in our portfolio of investments, capital structure, property level operating expenses and revenues, including rents expected to be received on our existing leases or leases we may enter into during and after 2017, changes in interest rates and other reasons. Actual future results are likely to be different from amounts presented in the unaudited pro forma condensed consolidated financial statements and such differences could be significant.
(d) Exhibits
2 .1 |
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Agreement and Plan of Merger, dated as of June 27, 2017, among Government Properties Income Trust, GOV NEW OPPTY REIT, GOV NEW OPPTY LP, First Potomac Realty Trust and First Potomac Realty Investment Limited Partnership.* (Filed herewith.) |
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8.1 |
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Opinion of Sullivan & Worcester LLP as to tax matters. (Filed herewith.) |
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10 .1 |
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Commitment Letter, dated as of June 27, 2017, by and among Government Properties Income Trust, Citigroup Global Markets Inc., Bank of America, N.A., Morgan Stanley Bank, N.A and UBS AG, Stamford Branch . (Filed herewith.) |
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23.1 |
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Consent of KPMG LLP, independent registered public accounting firm for First Potomac Realty Trust. (Filed herewith.) |
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23.2 |
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Consent of Sullivan & Worcester LLP (included in Exhibit 8.1). (Filed herewith.) |
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99.1 |
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Press Release dated June 28, 2017 announcing the Transaction. (Furnished herewith.) |
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99.2 |
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Press Release dated June 28, 2017 announcing the Equity Offering. (Furnished herewith.) |
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99.3 |
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Investor Presentation dated June 28, 2017. (Furnished herewith.) |
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99.4 |
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Audited consolidated financial statements of First Potomac Realty Trust for the years ended December 31, 2016, 2015 and 2014 and the notes related thereto. (Filed herewith.) |
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99.5 |
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Unaudited condensed consolidated financial statements of First Potomac Realty Trust for the quarter ended March 31, 2017 and the notes related thereto. (Filed herewith.) |
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99.6 |
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Unaudited pro forma condensed consolidated financial statements of Government Properties Income Trust for the year ended December 31, 2016 and the three months ended March 31, 2017 and the notes related thereto. (Filed herewith.) |
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* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish copies of any such schedules and exhibits to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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GOVERNMENT PROPERTIES INCOME TRUST |
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By: |
/s/ Mark L. Kleifges |
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Name: |
Mark L. Kleifges |
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Title: |
Chief Financial Officer and Treasurer |
Dated: June 28, 2017
Exhibit 2.1
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AGREEMENT AND PLAN OF MERGER
AMONG
GOVERNMENT PROPERTIES INCOME TRUST,
GOV NEW OPPTY REIT,
GOV NEW OPPTY LP,
FIRST POTOMAC REALTY TRUST,
AND
FIRST POTOMAC REALTY INVESTMENT LIMITED PARTNERSHIP
DATED AS OF JUNE 27, 2017
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TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS |
2 |
Section 1.1 Definitions |
2 |
Section 1.2 Interpretation and Rules of Construction |
13 |
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ARTICLE 2 THE MERGERS |
14 |
Section 2.1 The Mergers |
14 |
Section 2.2 Closing |
15 |
Section 2.3 Effective Times |
15 |
Section 2.4 Governing Documents |
16 |
Section 2.5 Trustees and Officers of the REIT Surviving Entity |
16 |
Section 2.6 Tax Consequences |
16 |
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ARTICLE 3 EFFECTS OF THE MERGERS |
17 |
Section 3.1 Effects on Company Common Shares |
17 |
Section 3.2 Effect on Partnership Interest and Other Securities |
17 |
Section 3.3 Effect on Company Equity Awards and Company Look-Back LTI Awards |
20 |
Section 3.4 Company ESPP |
22 |
Section 3.5 Adjustment to the Merger Consideration |
22 |
Section 3.6 Payment Fund; Paying Agent |
22 |
Section 3.7 Withholding Rights |
26 |
Section 3.8 Lost Certificates |
26 |
Section 3.9 Dissenters Rights |
26 |
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ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND COMPANY LP |
26 |
Section 4.1 Organization and Qualification; Subsidiaries |
27 |
Section 4.2 Organizational Documents |
28 |
Section 4.3 Capital Structure |
28 |
Section 4.4 Authority |
30 |
Section 4.5 No Conflict; Required Filings and Consents |
31 |
Section 4.6 Permits; Compliance with Law |
32 |
Section 4.7 SEC Documents; Financial Statements |
33 |
Section 4.8 Absence of Certain Changes or Events |
36 |
Section 4.9 No Undisclosed Liabilities |
36 |
Section 4.10 No Default |
36 |
Section 4.11 Litigation |
36 |
Section 4.12 Taxes |
37 |
Section 4.13 Benefit Plans |
40 |
Section 4.14 Labor Matters |
42 |
Section 4.15 Information Supplied |
43 |
Section 4.16 Intellectual Property |
43 |
Section 4.17 Environmental Matters |
44 |
Section 4.18 Properties |
45 |
Section 4.19 Material Contracts |
48 |
Section 4.20 Insurance |
51 |
Section 4.21 Opinion of Financial Advisor |
51 |
Section 4.22 Approval Required |
51 |
Section 4.23 Brokers |
51 |
Section 4.24 Investment Company Act |
52 |
Section 4.25 Takeover Statutes |
52 |
Section 4.26 Existing Indebtedness |
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Section 4.27 Related Party Transactions |
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Section 4.28 No Other Representations and Warranties |
53 |
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ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PARENT, REIT MERGER SUB AND PARTNERSHIP MERGER SUB |
53 |
Section 5.1 Organization and Qualification |
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Section 5.2 Authority |
54 |
Section 5.3 No Conflict; Required Filings and Consents |
55 |
Section 5.4 Litigation |
56 |
Section 5.5 Information Supplied |
56 |
Section 5.6 Brokers |
56 |
Section 5.7 Available Funds |
56 |
Section 5.8 Solvency |
57 |
Section 5.9 No Agreements with Company Related Parties |
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Section 5.10 No Vote of Parent Equityholders |
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Section 5.11 Ownership of Company Common Shares |
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Section 5.12 No Other Representations or Warranties |
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ARTICLE 6 COVENANTS RELATING TO CONDUCT OF BUSINESS PENDING THE MERGERS |
58 |
Section 6.1 Conduct of Business by the Company and Company LP |
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Section 6.2 Other Actions |
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Section 6.3 No Control of Business |
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ARTICLE 7 ADDITIONAL COVENANTS |
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Section 7.1 Preparation of the Proxy Statement; Shareholders Meeting |
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Section 7.2 Access to Information; Confidentiality |
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Section 7.3 No Solicitation; Company Acquisition Proposals |
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Section 7.4 Public Announcements |
72 |
Section 7.5 Indemnification; Trustees, Directors and Officers Insurance |
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Section 7.6 Appropriate Action; Consents; Filings |
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Section 7.7 Notification of Certain Matters; Transaction Litigation |
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Section 7.8 Section 16 Matters |
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Section 7.9 Delisting and Deregistering of Company Securities |
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Section 7.10 Dividends |
78 |
Section 7.11 Voting of Shares |
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Section 7.12 Takeover Statutes |
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Section 7.13 Tax Representation Letter |
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Section 7.14 Merger Subs; Subsidiaries |
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Section 7.15 Employee Benefit Matters |
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Section 7.16 Transfer Taxes |
81 |
Section 7.17 Financing Cooperation |
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Section 7.18 Existing Loans; Other Cooperation |
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Section 7.19 Asset Sales |
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Section 7.20 Operation of REIT Subsidiary After Closing |
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Section 7.21 Personal Holding Company Status |
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Section 7.22 Accounting Functions |
86 |
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ARTICLE 8 CONDITIONS |
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Section 8.1 Conditions to Each Partys Obligation to Effect the Mergers |
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Section 8.2 Conditions to Obligations of Parent, REIT Merger Sub and Partnership Merger Sub |
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Section 8.3 Conditions to Obligations of the Company and Company LP |
88 |
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ARTICLE 9 TERMINATION AND FEES |
88 |
Section 9.1 Termination |
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Section 9.2 Notice of Termination; Effect of Termination |
90 |
Section 9.3 Fees and Expenses |
90 |
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ARTICLE 10 GENERAL PROVISIONS |
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Section 10.1 Nonsurvival of Representations and Warranties and Certain Covenants |
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Section 10.2 Notices |
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Section 10.3 Severability |
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Section 10.4 Counterparts |
95 |
Section 10.5 Entire Agreement; No Third Party Beneficiaries |
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Section 10.6 Tender Offer |
96 |
Section 10.7 Amendment |
96 |
Section 10.8 Extension; Waiver |
96 |
Section 10.9 Governing Law |
96 |
Section 10.10 Consent to Jurisdiction |
97 |
Section 10.11 Assignment |
97 |
Section 10.12 Specific Performance |
98 |
Section 10.13 Waiver of Jury Trial |
99 |
Section 10.14 Authorship |
99 |
Section 10.15 Non-liability of Trustees of Parent |
99 |
EXHIBITS AND DISCLOSURE LETTERS
Exhibits
Exhibit A Form of Amendment to Surviving Partnership Agreement
Exhibit B Form of Company REIT Qualification Opinion
Disclosure Letters
Company Disclosure Letter
Parent Disclosure Letter
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER , dated as of June 27, 2017 (this Agreement ), is by and among GOVERNMENT PROPERTIES INCOME TRUST, a Maryland real estate investment trust ( Parent ), GOV NEW OPPTY REIT, a Maryland real estate investment trust and a wholly owned subsidiary of Parent ( REIT Merger Sub ), GOV NEW OPPTY LP, a Delaware limited partnership and a majority owned subsidiary of REIT Merger Sub and a wholly owned subsidiary of Parent ( Partnership Merger Sub ), FIRST POTOMAC REALTY TRUST, a Maryland real estate investment trust (the Company ) and FIRST POTOMAC REALTY INVESTMENT LIMITED PARTNERSHIP, a Delaware limited partnership and a majority owned subsidiary of the Company ( Company LP ). Each of Parent, REIT Merger Sub, Partnership Merger Sub, the Company and Company LP is sometimes referred to herein as a Party and collectively as the Parties . Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in Article 1 .
WHEREAS, the Parties hereto wish to effect a business combination through a merger of the Company with and into REIT Merger Sub (such merger transaction, the REIT Merger ), with REIT Merger Sub being the surviving entity (the REIT Surviving Entity ) in the REIT Merger, upon the terms and conditions set forth in this Agreement and in accordance with the Maryland REIT Law (the MD REIT Law ) and pursuant to which each outstanding common share of beneficial interest, $0.001 par value per share, of the Company (the Company Common Shares ) issued and outstanding immediately prior to the REIT Merger Effective Time will be converted into the right to receive the REIT Per Share Merger Consideration, upon the terms and subject to the conditions set forth in this Agreement and in accordance with the MD REIT Law;
WHEREAS, prior to the REIT Merger, Partnership Merger Sub shall merge with and into Company LP (such merger transaction, the Partnership Merger and, together with the REIT Merger, the Mergers ), with Company LP continuing as the surviving entity and, following the REIT Merger, a subsidiary of the REIT Surviving Entity (the Partnership Surviving Entity ), and each Company Partnership Unit held by limited partners other than the Company (the Outside Limited Partners ) will be converted into the right to receive the Partnership Per Unit Merger Consideration, upon the terms and subject to the conditions set forth in this Agreement and in accordance with the Delaware Revised Uniform Limited Partnership Act (the DRULPA ), provided that Outside Limited Partners may elect to receive, in lieu of the Partnership Per Unit Merger Consideration and on the terms and conditions specified herein, New Partnership Preferred Units in the Partnership Surviving Entity as described in Section 3.2(d) (each such electing Outside Limited Partner, a Roll-Over Limited Partner , and each other Outside Limited Partner, a Cash-Out Limited Partner );
WHEREAS, the Board of Trustees of the Company (the Company Board ) has (a) determined that this Agreement, the Mergers and the other transactions contemplated by this Agreement are advisable and in the best interests of the Company and the holders of the Company Common Shares, (b) approved and adopted this Agreement, the Mergers and the other transactions contemplated by this Agreement, (c) directed that the REIT Merger and the other transactions contemplated by this Agreement be submitted to a vote for approval by the holders of the Company Common Shares, and (d) resolved to recommend that the holders of the
Company Common Shares vote in favor of approval of the REIT Merger and the other transactions contemplated by this Agreement;
WHEREAS, the Board of Trustees of Parent (the Parent Board ) has (a) determined that this Agreement, the Mergers and the other transactions contemplated by this Agreement are advisable and in the best interests of Parent, and (b) approved and adopted this Agreement, the Mergers and the other transactions contemplated by this Agreement;
WHEREAS, (a) the Company, in its capacity as the sole general partner of Company LP and as a limited partner of Company LP, (b) Parent, in its capacity as the sole shareholder of REIT Merger Sub, and (c) REIT Merger Sub, in its capacity as the sole general partner of Partnership Merger Sub, have each taken all actions required, as applicable, (i) for the execution of this Agreement by Company LP, REIT Merger Sub and Partnership Merger Sub, and (ii) on behalf of Company LP and REIT Merger Sub and Partnership Merger Sub, to adopt and approve this Agreement and to approve the Mergers and the other transactions contemplated by this Agreement and the consummation thereof by such Parties;
WHEREAS, for U.S. federal income Tax purposes (and, where applicable, state and local income Tax purposes), it is intended that (a) the REIT Merger will be treated as a taxable sale by the Company of all of the Companys assets to Parent in exchange for the REIT Merger Consideration and the Share Award Payments and the assumption of all of the Companys other liabilities (including the Companys interests in Company LP, as determined under the applicable U.S. federal income Tax regulations), immediately followed by a distribution of such consideration (other than assumed liabilities) by the Company to the holders of equity interests in the Company in liquidation of the Company pursuant to Section 331 and Section 562 of the Code, and that this Agreement shall constitute a plan of liquidation of the Company for U.S. federal income Tax purposes, and (b) the Partnership Merger shall be treated as (i) the sale of the Company Partnership Units by the Cash-Out Limited Partners to the REIT Surviving Entity, and (ii) the contribution of Company Partnership Units by the Roll-Over Limited Partners in Company LP in exchange for New Partnership Preferred Units of the Partnership Surviving Entity in a tax-deferred transaction under Section 721 of the Code to the extent applicable to the exchange by each Roll-Over Limited Partner; and
WHEREAS, the Parties desire to make certain representations, warranties, covenants and agreements in connection with the execution of this Agreement and to prescribe various conditions to the Mergers.
NOW THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions .
(a) For purposes of this Agreement:
Acceptable Confidentiality Agreement shall mean a customary confidentiality agreement containing terms no less favorable to the Company in any material respect than the terms set forth in the Nondisclosure Agreement; provided , however , that such confidentiality agreement shall not prohibit compliance by the Company with any of the provisions of Section 7.3 and shall not include any standstill provisions.
Action means any claim, action, suit, litigation, proceeding, arbitration, mediation, inquiry, investigation or other legal proceeding (whether sounding in contract, tort or otherwise, whether civil or criminal) brought, conducted, tried or heard by or before, or otherwise involving, any Governmental Authority.
Affiliate of a specified Person means a Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person.
Book-Entry Share means a book- entry share registered in the transfer books of the Company.
Book-Entry Unit means a book-entry unit of limited partnership interest registered in the transfer books of Company LP.
Business Day means any day other than a Saturday, Sunday or any day on which banks located in New York, New York or Washington, D.C. are authorized or required to be closed.
Code means the Internal Revenue Code of 1986, as amended.
Company Bylaws means the Third Amended and Restated Bylaws of the Company, as amended and in effect on the date hereof.
Company Declaration means the Declaration of Trust of the Company filed with the Maryland SDAT, as amended and supplemented and in effect on the date hereof.
Company Employment Agreement means each written agreement of the Company, Company LP or any Company Subsidiary with any individual who is rendering or has rendered services thereto as an employee or officer of the Company, Company LP or any Company Subsidiary, pursuant to which the Company, Company LP or any Company Subsidiary has any actual or contingent liability or obligation to provide compensation and/or benefits in consideration for past, present or future services.
Company Equity Award means any Company Option or award of Company Restricted Shares, as applicable.
Company Equity Incentive Plan means either the Company 2003 Equity Compensation Plan, dated as of September 17, 2003, as amended, or the Company 2009 Equity Compensation Plan, dated as of May 21, 2009, as amended, as applicable.
Company ESPP means the Company 2009 Employee Share Purchase Plan, as amended.
Company Intervening Event means a material event, development or change in circumstances with respect to Company, Company LP and the Company Subsidiaries, taken as a whole, that occurred or arose after the date of this Agreement, which (i) was unknown to, nor reasonably foreseeable by, the Company Board as of or prior to the date of this Agreement and (ii) becomes known to or by the Company Board prior to the receipt of the Company Shareholder Approval; provided , however , that none of the following will constitute, or be considered in determining whether there has been, a Company Intervening Event: (A) the receipt, existence of or terms of any inquiry, discussion, offer or request that constitutes, or could reasonably be expected to lead to, a Company Acquisition Proposal or any matter relating thereto or consequence thereof and (B) changes in the market price or trading volume of the Company Common Shares or the fact that the Company meets or exceeds internal or external projections or forecasts or any estimates of earnings, revenues, or other financial or other metrics for any period (it being understood that the underlying cause of such change or fact shall not be excluded by this clause (B) from the meaning of Company Intervening Event or the determination of whether there has been a Company Intervening Event).
Company Leases means each lease or sublease and each guarantee thereof in effect as of the date hereof and to which the Company, Company LP or any Company Subsidiary are parties as lessors or sublessors with respect to any Company Property (together with all amendments, modifications, supplements, renewals, exercise of options and extensions related thereto).
Company Look-Back LTI Award means an award outstanding under the Company Look-Back LTI Program for the measurement period commencing January 1, 2015 and ending December 31, 2017 that is settled in the form of Company Restricted Shares.
Company Look-Back LTI Program means the legacy historical-looking, long-term incentive program adopted by the Company on April 2, 2013, as amended or supplemented as of the date hereof, under which the Company no longer makes awards.
Company Material Adverse Effect means any event, circumstance, change, effect, development, condition or occurrence that (i) individually or in the aggregate with all other events, circumstances, changes, effects, developments, conditions or occurrences is material and adverse to the business, assets (including any Company Property), liabilities, condition (financial or otherwise) or results of operations of the Company, Company LP and the Company Subsidiaries, taken as a whole, or (ii) prevents or materially impairs the ability of the Company or Company LP to consummate the Mergers or any of the other transactions contemplated by this Agreement, or prevents or materially impairs the ability of the Company or Company LP to perform their obligations hereunder, in each case in this clause (ii) before the Outside Date; provided , that for purposes of clause (i) , Company Material Adverse Effect shall not include any event, circumstance, change, effect, development, condition or occurrence to the extent arising out of or resulting from (A) any failure of the Company or Company LP to meet any projections or forecasts or any estimates of earnings, revenues or other metrics for any period ( provided , that any event, circumstance, change, effect, development, condition or occurrence giving rise to such failure may constitute or otherwise be taken into account in
determining whether there has been a Company Material Adverse Effect), (B) any events, circumstances, changes or effects that affect the real estate industry generally, (C) any changes in the United States or global economy or capital, financial or securities markets generally, including changes in interest or exchange rates, (D) any changes in the legal, regulatory or political conditions in the United States or in any other country or region of the world, (E) the commencement, escalation or worsening of a war or armed hostilities or the occurrence of acts of terrorism or sabotage, (F) the public announcement of the Mergers or the other transactions contemplated by this Agreement, including the impact thereof on relationships, contractual or otherwise, with tenants, suppliers, lenders, investors (including shareholders and unitholders), venture partners or employees ( provided that the exception in this clause (F) does not apply for purposes of any representations in Article 4 that address the public announcement or pendency of this Agreement), (G) the taking of any action expressly required by this Agreement, the taking of any action at the written request or with the prior written consent of Parent or the failure to take any action at the request of Parent or expressly prohibited by this Agreement, (H) earthquakes, hurricanes, floods or other natural disasters, (I) changes in Law or GAAP (or the interpretation or enforcement thereof), or (J) any (x) Action including any derivative claims, or (y) public action, campaign or announcement seeking representation on the Company Board or to control or influence the Company Board, the Companys management, governance or policies, in each case of (x) and (y) arising out of or relating to this Agreement, the Mergers or the other transactions contemplated by this Agreement and made or initiated by any holder of Company Common Shares, any holder of Company Partnership Units or any holder of shares, capital stock, units or other equity interests in any Company Subsidiary, which in the case of each of clauses (B) , (C) , (D) , (E) and (I) do not disproportionately affect the Company, Company LP and the Company Subsidiaries, taken as a whole, relative to other Persons in the office real estate industry in the United States, and in the case of clause (H) , does not disproportionately affect the Company, Company LP and the Company Subsidiaries, taken as a whole, relative to other Persons in the office real estate industry in the geographic regions in which the Company, Company LP and the Company Subsidiaries operate, own or lease properties.
Company Option means any outstanding option to purchase Company Common Shares granted pursuant to a Company Equity Incentive Plan.
Company Partnership Certificate means the Certificate of Limited Partnership of Company LP, as amended and in effect on the date hereof.
Company Partnership Agreement means that certain Amended and Restated Agreement of Limited Partnership of Company LP, dated as of September 15, 2003, as amended and in effect on the date hereof.
Company Partnership Unit means a Partnership Unit, as defined in the Company Partnership Agreement.
Company Permitted Liens means any of the following: (i) Lien for Taxes or governmental assessments, charges or claims of payment not yet due, or the validity of which is being contested in good faith and for which adequate accruals or reserves have been established; (ii) Lien that is a cashiers, landlords, carriers, warehousemens, mechanics, materialmens, repairmens or other similar Lien arising in the ordinary course of business not yet due, or the
validity of which is being contested in good faith and for which adequate accruals or reserves have been established; (iii) Lien that is a zoning regulation, entitlement or other land use or environmental regulation by any Governmental Authority; (iv) Lien that is disclosed in Section 4.18(m) of the Company Disclosure Letter; (v) Lien that is disclosed on the Companys most recent consolidated balance sheet (including the notes thereto) included in the Company SEC Documents filed prior to the date of this Agreement (or securing liabilities reflected on such balance sheet); (vi) Lien arising under any Company Material Contracts or Company Leases; (vii) Lien that is disclosed on the Company Title Insurance Policies or surveys made available to Parent prior to the date hereof; or (viii) Lien, limitation, title defect, covenant, restriction or reservation of interests in title that does not interfere materially with the current use or operation of the property affected thereby (assuming its continued use and operation in the manner in which it is currently used and operated) or materially adversely affect the value or marketability of such property.
Company Properties means each real property owned, or leased (including ground leased) as lessee or sublessee, by the Company, Company LP or any Company Subsidiary as of the date of this Agreement (including all buildings, structures and other improvements and fixtures located on or under such real property and all easements, rights and other appurtenances to such real property).
Company Restricted Share means a restricted Company Common Share granted pursuant to an award under a Company Equity Incentive Plan, which includes, without limitation, any Company Common Shares issued under the Companys forward-looking, long-term incentive program, including shares issued upon performance in excess of the target level in accordance with the terms of any such award, and shares issued under the Company Look-Back LTI Program.
Company Share Certificate means any certificate evidencing the Company Common Shares (which, for the avoidance of doubt, shall not include certificates with respect to Company Restricted Shares).
Company Shareholder Meeting means the meeting of the holders of the Company Common Shares for the purpose of seeking the Company Shareholder Approval, including any postponement or adjournment thereof.
Company Subsidiary means any corporation, partnership, limited liability company, joint venture, business trust, real estate investment trust or other organization, whether incorporated or unincorporated, or other legal entity of which (i) the Company directly or indirectly owns or controls at least a majority of the capital stock or other equity interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions, (ii) the Company and/or any Person that is a Company Subsidiary by reason of the application of clause (i) or clause (iii) of this definition is a general partner, manager, managing member, operating member, trustee, director or the equivalent, or (iii) the Company, directly or indirectly, holds a majority of the beneficial, equity, capital, profits or other economic interest. For the avoidance of doubt, each Unconsolidated Subsidiary is a Company Subsidiary.
Delaware SOS means the Secretary of State of the State of Delaware.
Environmental Law means any Law relating to the pollution or protection of the environment (including air, surface water, groundwater, land surface or subsurface land), or human health or safety (solely as such matters relate to Hazardous Substances), including Laws relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Substances.
Environmental Permit means any permit, approval, registration, license or other authorization required under any applicable Environmental Law.
ERISA means the Employee Retirement Income Security Act of 1974, as amended.
ERISA Affiliate means, with respect to an entity (the Referenced Entity ), any other entity, which, together with the Referenced Entity, would be treated as a single employer under Code Section 414 or ERISA Section 4001.
Exchange Act means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
Financing means any issuance of equity or convertible securities or bonds or incurrences of indebtedness for borrowed money by Parent or any Parent Subsidiary for the purpose of financing the Mergers and the other transactions contemplated by this Agreement.
Financing Sources means the Persons that at any time commit to provide, or otherwise arrange, any Financing, including the parties to any definitive documentation relating to any Financing, together with their Affiliates, Representatives, successors and assigns, in each case other than Parent and any of its Affiliates.
GAAP means the United States generally accepted accounting principles.
Governmental Authority means the United States (federal, state or local) government or any foreign government, or any other governmental or quasi-governmental regulatory, judicial or administrative authority, instrumentality, board, bureau, agency, commission, self-regulatory organization, arbitration panel or similar entity.
Hazardous Substances means any substance, material, or waste that is defined, characterized, or regulated as hazardous, toxic, dangerous or words of similar import under any Environmental Law; petroleum and petroleum products, including crude oil and any fractions thereof; polychlorinated biphenyls; asbestos; toxic mold; and radon.
Indebtedness means, with respect to any Person and without duplication, (i) the unpaid principal of and premium (if any) of all indebtedness, notes payable, accrued interest payable or other obligations for borrowed money, whether secured or unsecured, (ii) all obligations under conditional sale or other title retention agreements, or incurred as financing, in either case with respect to property acquired by such Person, (iii) all obligations issued, undertaken or assumed as the deferred purchase price for any property or assets (including any
potential future earn-out, purchase price adjustment or release of holdback or similar payment), (iv) all obligations under capital leases, (v) all obligations in respect of bankers acceptances or letters of credit, (vi) all obligations under interest rate cap, swap, collar or similar transaction or currency hedging transactions (valued at the termination value thereof), (vii) all obligations evidenced by any note, bond, debenture or other similar instrument, whether secured or unsecured, (viii) any direct or indirect guarantee of any of the foregoing, whether or not evidenced by a note, mortgage, bond, indenture or similar instrument and (ix) any agreement to provide any of the foregoing; provided , that for purposes of clarity, Indebtedness shall not include trade payables.
Intellectual Property means all United States, foreign and multinational intellectual property and proprietary rights, including all (i) patents, patent applications, invention disclosures, and all related continuations, continuations-in-part, divisionals, reissues, re-examinations, substitutions and extensions thereof, (ii) trademarks, service marks, trade dress, logos, trade names, corporate names, Internet domain names, design rights and other source identifiers, together with the goodwill symbolized by any of the foregoing, (iii) published and unpublished works of authorship, copyrightable works and copyrights, (iv) confidential and proprietary information, including trade secrets, know-how, ideas, formulae, models, algorithms and methodologies, (v) software, (vi) all rights in the foregoing and in other similar intangible assets, and (vii) all applications and registrations for the foregoing.
IRS means the United States Internal Revenue Service or any successor agency.
Knowledge of Parent or similar phrases mean the actual knowledge of the Persons set forth in Section 1.1 of the Parent Disclosure Letter.
Knowledge of the Company or similar phrases mean the actual knowledge of the Persons set forth in Section 1.1 of the Company Disclosure Letter.
Law means any and all domestic (federal, state or local) or foreign laws (including common law), rules, regulations and Orders promulgated by any Governmental Authority.
Lien means with respect to any asset (including any security), any mortgage, deed of trust, condition, covenant, lien, pledge, charge, security interest, option or other third party right (including right of first refusal or first offer), restriction, right of way, easement, title defect or encumbrance of any kind in respect of such asset, including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.
Maryland SDAT means the State Department of Assessments and Taxation of Maryland.
New Partnership Preferred Unit means a Series A Preferred Unit of the Partnership Surviving Entity as defined in the form of Surviving Partnership Amendment attached hereto as Exhibit A , which shall be adopted and made part of the Surviving Partnership Agreement prior to the Closing Date.
Nondisclosure Agreement means the Nondisclosure Agreement, dated as of May 2, 2017 between Parent and the Company.
Order means a judgment, order, injunction, award, decree, writ or other legally enforceable requirement of any Governmental Authority.
Parent Expenses means all reasonable, actual and documented out-of-pocket costs and expenses, up to an aggregate maximum amount of $5,000,000, incurred prior to the termination of this Agreement by or on behalf of Parent, REIT Merger Sub and Partnership Merger Sub (or their respective Representatives or Affiliates) in connection with the entering into of this Agreement and the carrying out of any and all acts contemplated hereunder.
Parent Material Adverse Effect means any event, circumstance, change, effect, development, condition or occurrence that prevents or materially impairs or delays the consummation of the Mergers or any of the other transactions contemplated by this Agreement or prevents or materially impairs or delays the ability of Parent, REIT Merger Sub or Partnership Merger Sub to perform their respective obligations hereunder.
Parent Subsidiary means any corporation, partnership, limited liability company, joint venture, business trust, real estate investment trust or other organization, whether incorporated or unincorporated, or other legal entity of which (i) Parent directly or indirectly owns or controls at least a majority of the capital stock or other equity interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions, (ii) Parent and/or any Person that is a Parent Subsidiary by reason of the application of clause (i) or clause (iii) of this definition is a general partner, manager, managing member, trustee, director or the equivalent, or (iii) Parent, directly or indirectly, holds a majority of the beneficial, equity, capital, profits or other economic interest.
Partnership Merger Consideration means the aggregate consideration that the Cash-Out Limited Partners are entitled to receive in connection with the Partnership Merger as determined pursuant to Section 3.2 .
Partnership Unit Certificate means any certificate evidencing units of limited partnership interest of Company LP.
Person means an individual, corporation, partnership, limited partnership, limited liability company, person (including a person as defined in Section 13(d)(3) of the Exchange Act), trust, association or other entity or organization (including any Governmental Authority or a political subdivision, agency or instrumentality of a Governmental Authority).
Proxy Statement means a proxy statement in preliminary and definitive form relating to the Company Shareholder Meeting, together with any amendments or supplements thereto.
Redacted Fee Letter means a fee letter from a Financing Source redacted to only mask the fees payable to the Financing Source in respect of the Debt Financing, the rates, timing and economic amounts included in the market flex provisions and other economic terms; provided, that such redaction shall not mask terms that could affect the conditionality, amount
(other than the fees and rates payable in connection therewith), timing, availability or termination of the Debt Financing.
REIT Merger Consideration means the aggregate consideration that all holders of the Company Common Shares are entitled to receive as determined pursuant to Section 3.1 (for the avoidance of doubt, excluding the Share Award Payments).
Representative means, with respect to any Person, one or more of such Persons trustees, directors, officers, employees, advisors (including attorneys, accountants, consultants, investment bankers and financial advisors), agents and other representatives.
Required Information means (i) the Company SEC Documents, (ii) all other financial statements regarding the Company, Company LP and the Company Subsidiaries that are (A) reasonably requested by Parent (including on behalf of any Financing Sources), (B) within the Companys control, and (C) customarily prepared by or for the Company, Company LP or the Company Subsidiaries in the ordinary course, (iii) all other financial statements, financial data, projections, audit reports and other information regarding the Company, Company LP and the Company Subsidiaries as may be required by Rule 3-05 of Regulation S-X promulgated under the Exchange Act to be filed on a Form 8-K by Parent, regardless of the time of filing, or which would be customarily included or incorporated in any Offering Materials used in connection with the type of such Financing, or as otherwise reasonably requested by Parent or any Financing Sources in connection with any Financing or as otherwise necessary in order for Parent to receive customary comfort letters (including negative assurances and pro forma financial statement comfort) on the financial statements, information and data relating to the Company, Company LP and the Company Subsidiaries included or incorporated into any Offering Materials for any Financing from the Companys, Company LPs and Company Subsidiaries independent accountants in connection with any offering(s) of securities included in any Financing, in form and substance customary for securities offerings of such type and which such accountants are prepared to issue upon completion of customary procedures, and (iv) all financial statements necessary to update the Company SEC Documents or such other financial statements (and which updating financial statements shall be prepared on a basis consistent with the financial statements they are updating, including compliance with GAAP and the applicable accounting requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC thereunder, as applicable) so that at no time will the Company SEC Documents or such other financial statements be stale under the rules of Regulation S-X promulgated under the Exchange Act as they would be applied to the Offering Materials as if the Offering Materials were a registration statement filed by Parent.
SEC means the U.S. Securities and Exchange Commission (including the staff thereof).
Securities Act means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Share Award Payments means the total of (i) the aggregate REIT Option Merger Consideration, (ii) the aggregate REIT Restricted Share Merger Consideration, and (iii) the aggregate Restricted Share Accrued Dividends.
Tax or Taxes means any federal, state, local or foreign income, gross receipts, capital gains, withholding, property, recording, stamp, transfer, sales, use, abandoned property, escheat, franchise, employment, payroll, excise, environmental or any other taxes, duties, assessments or similar governmental charges, together with penalties, interest or additions imposed with respect to such amounts, in each case imposed by and payable to any Governmental Authority.
Tax Return means any return, declaration, report, claim for refund, or information return or statement relating to Taxes filed or required to be filed with a Governmental Authority, including any schedule or attachment thereto, and including any amendment thereof.
Tenant Improvement(s) means the construction or improvement of long-term real property (not including furniture, fixtures, equipment or inventory) for use in a tenants trade or business at the Company Properties.
Unconsolidated Subsidiary means either Prosperity Metro Plaza of Virginia, LLC or FP CPT 1750 Holdings, LLC.
(b) The following terms have the respective meanings set forth in the sections set forth below opposite such term:
Defined Terms |
|
Location of Definition |
|
|
|
Alternate Financing |
|
Section 7.17(a) |
Agreement |
|
Preamble |
Cash-Out Limited Partner |
|
Recitals |
Change Notice |
|
Section 7.3(f) |
Claim |
|
Section 7.5(a) |
Claim Expenses |
|
Section 7.5(a) |
Closing |
|
Section 2.2 |
Closing Date |
|
Section 2.2 |
Company |
|
Preamble |
Company Acquisition Proposal |
|
Section 7.3(h)(i) |
Company Adverse Recommendation Change |
|
Section 7.3(d) |
Company Alternative Acquisition Agreement |
|
Section 7.3(a) |
Company Benefit Plans |
|
Section 4.13(a) |
Company Board |
|
Recitals |
Company Board Recommendation |
|
Section 4.4(b) |
Company Common Shares |
|
Recitals |
Company Disclosure Letter |
|
Article 4 |
Company Insurance Policies |
|
Section 4.20 |
Company Letter of Transmittal |
|
Section 3.6(e) |
Company LP |
|
Preamble |
Company Material Contract |
|
Section 4.19(b) |
Company Parties |
|
Section 9.3(b) |
Company Pending Acquisitions |
|
Section 6.1(b)(vi) |
Company Permits |
|
Section 4.6(a) |
Company Preferred Shares |
|
Section 4.3(a) |
Company SEC Documents |
|
Section 4.7(a) |
Company Shareholder Approval |
|
Section 4.22 |
Company Subsidiary Partnership |
|
Section 4.12(g) |
Company Superior Proposal |
|
Section 7.3(h)(ii) |
Company Tax Protection Agreements |
|
Section 4.12(g) |
Company Terminating Breach |
|
Section 9.1(c)(i) |
Company Termination Fee |
|
Section 9.3(b) |
Company Third Party |
|
Section 4.18(h) |
Company Title Insurance Policy(ies) |
|
Section 4.18(j) |
Debt Commitment Letter |
|
Section 5.7(b) |
Debt Financing |
|
Section 5.7(b) |
DRULPA |
|
Recitals |
Election Date |
|
Section 3.2(d)(i) |
ESPP Participants |
|
Section 3.4 |
Existing Loans |
|
Section 4.26(a) |
Existing Loan Documents |
|
Section 4.26(a) |
FCPA |
|
Section 4.6(c) |
Financing Agreement |
|
Section 7.17(a) |
Form of Election |
|
Section 3.2(d)(i) |
Ground Leases |
|
Section 4.18(e) |
Indemnified Parties |
|
Section 7.5(a) |
Interim Period |
|
Section 6.1(a) |
Maryland Courts |
|
Section 10.10 |
MD REIT Law |
|
Recitals |
Mergers |
|
Recitals |
New Plans |
|
Section 7.15(d) |
NYSE |
|
Section 4.3(e) |
Offering Materials |
|
Section 7.17(b) |
Organizational Documents |
|
Section 4.2 |
Other Filings |
|
Section 4.15 |
Outside Date |
|
Section 9.1(b)(i) |
Outside Limited Partners |
|
Recitals |
Parent |
|
Preamble |
Parent Board |
|
Recitals |
Parent Disclosure Letter |
|
Article 5 |
Parent Terminating Breach |
|
Section 9.1(d)(i) |
Partnership Letter of Transmittal |
|
Section 3.6(g) |
Partnership Merger |
|
Recitals |
Partnership Merger Certificate of Merger |
|
Section 2.3(a) |
Partnership Merger Effective Time |
|
Section 2.3(a) |
Partnership Merger Sub |
|
Preamble |
Partnership Merger Sub Minority Limited Partner |
|
Section 3.2(a)(ii) |
Partnership Per Unit Merger Consideration |
|
Section 3.2(b)(iii) |
Partnership Surviving Entity |
|
Recitals |
Party(ies) |
|
Preamble |
Patriot Act |
|
Section 4.6(c) |
Paying Agent |
|
Section 3.6(a) |
Payment Fund |
|
Section 3.6(c) |
Payoff Letter(s) |
|
Section 7.18(a) |
Qualified REIT Subsidiary |
|
Section 4.12(b) |
Qualifying Income |
|
Section 9.3(d) |
Referenced Entity |
|
Section 1.1(a) |
REIT |
|
Section 4.12(b) |
REIT Merger |
|
Recitals |
REIT Merger Articles of Merger |
|
Section 2.3(b) |
REIT Merger Effective Time |
|
Section 2.3(b) |
REIT Merger Sub |
|
Preamble |
REIT Option Merger Consideration |
|
Section 3.3(a) |
REIT Per Share Merger Consideration |
|
Section 3.1(a)(ii) |
REIT Restricted Share Merger Consideration |
|
Section 3.3(b) |
REIT Subsidiary |
|
Section 4.12(b) |
REIT Surviving Entity |
|
Recitals |
Restricted Share Accrued Dividends |
|
Section 3.3(d) |
Reverse Merger Structure |
|
Section 7.18(c) |
Roll-Over Limited Partner |
|
Recitals |
RMR LLC |
|
Section 7.15(a) |
Severance Guidelines |
|
Section 7.15(a) |
SOX Act |
|
Section 4.7(a) |
Surviving Partnership Agreement |
|
Section 2.4(a) |
Surviving Partnership Amendment |
|
Section 2.4(a) |
Takeover Statutes |
|
Section 4.25 |
Taxable REIT Subsidiary |
|
Section 4.12(b) |
Termination Payment |
|
Section 9.3(d) |
Transfer Taxes |
|
Section 7.16 |
Unit Election |
|
Section 3.2(d) |
willful and intentional breach |
|
Section 9.2 |
Section 1.2 Interpretation and Rules of Construction . In this Agreement, except to the extent otherwise provided or that the context otherwise requires:
(a) when a reference is made in this Agreement to an Article, Section or Exhibit, such reference is to an Article or Section of, or an Exhibit to, this Agreement unless otherwise indicated;
(b) the table of contents and headings for this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement;
(c) whenever the words include, includes or including are used in this Agreement, they are deemed to be followed by the words without limitation unless the context expressly provides otherwise;
(d) the words made available in this Agreement shall mean that the item referred to has been (i) provided to Parent prior to the date of this Agreement by being posted in
the electronic data room established by the Company, to which Parent and its Representatives have been provided full access, or (ii) is a Company SEC Document filed prior to the date of this Agreement;
(e) the words hereof, herein and hereunder and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement, except to the extent otherwise specified;
(f) references to any statute, rule or regulation are to the statute, rule or regulation as amended, modified, supplemented or replaced from time to time (and, in the case of statutes, include any rules and regulations promulgated under the statute) and to any section of any statute, rule or regulation include any successor to the section;
(g) all terms defined in this Agreement have the defined meanings when used in any certificate or other document made or delivered pursuant hereto, unless otherwise defined therein;
(h) the definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms;
(i) references to a Person are also to its successors and permitted assigns;
(j) the use of or is not intended to be exclusive unless expressly indicated otherwise; and
(k) all uses of currency or the symbol $ in this Agreement refer to U.S. dollars, unless otherwise indicated.
ARTICLE 2
THE MERGERS
Section 2.1 The Mergers .
(a) Upon the terms and subject to the conditions of this Agreement, and in accordance with the DRULPA, at the Partnership Merger Effective Time, Partnership Merger Sub shall merge with and into Company LP, whereupon the separate existence of Partnership Merger Sub shall cease, and Company LP shall continue under the name GOV NEW OPPTY LP as the Partnership Surviving Entity. The Partnership Merger shall have the effects provided in this Agreement and as specified in the DRULPA. Without limiting the generality of the foregoing, and subject thereto, from and after the Partnership Merger Effective Time, the Partnership Surviving Entity shall possess all properties, rights, privileges, powers and franchises of Company LP and Partnership Merger Sub, and all of the claims, obligations, liabilities, debts and duties of Company LP and Partnership Merger Sub shall become the claims, obligations, liabilities, debts and duties of the Partnership Surviving Entity.
(b) Upon the terms and subject to the conditions of this Agreement, and in accordance with the MD REIT Law, at the REIT Merger Effective Time, the Company shall be merged with and into REIT Merger Sub, whereupon the separate existence of the Company shall
cease, and REIT Merger Sub shall continue under the name GOV NEW OPPTY REIT as the REIT Surviving Entity. The REIT Merger shall have the effects provided in this Agreement and as specified in the MD REIT Law. Without limiting the generality of the foregoing, and subject thereto, from and after the REIT Merger Effective Time, the REIT Surviving Entity shall possess all properties, rights, privileges, powers and franchises of the Company and REIT Merger Sub, and all of the claims, obligations, liabilities, debts and duties of the Company and REIT Merger Sub shall become the claims, obligations, liabilities, debts and duties of the REIT Surviving Entity.
Section 2.2 Closing . The closing of the Mergers (the Closing ) shall take place at the offices of Hogan Lovells US LLP, 555 13th Street NW, Washington, DC 20004 on a date that is the third (3rd) Business Day after all the conditions set forth in Article 8 (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or valid waiver of such conditions at the Closing) shall have been satisfied or validly waived by the Party entitled to the benefit of such condition (subject to applicable Law), or on such other date and such other time as may be mutually agreed upon by the Parties, unless such date is extended by mutual agreement of the Parties (the actual date of Closing being referred to herein, the Closing Date ).
Section 2.3 Effective Times .
(a) Prior to the Closing, Parent, Company LP and Partnership Merger Sub shall prepare and, on the Closing Date, Parent, Company LP and Partnership Merger Sub shall (i) cause the certificate of merger with respect to the Partnership Merger (the Partnership Merger Certificate of Merger ) to be duly executed and filed with the Delaware SOS as provided under the DRULPA, and (ii) make any other filings, recordings or publications required to be made by Company LP or Partnership Merger Sub under the DRULPA in connection with the Partnership Merger. The Partnership Merger shall become effective upon such time as the Partnership Merger Certificate of Merger has been filed with the Delaware SOS, or such later time that the Parties shall have agreed upon and designated in such filings in accordance with the DRULPA as the effective time of the Partnership Merger (the Partnership Merger Effective Time ).
(b) Prior to the Closing, Parent, REIT Merger Sub and the Company shall prepare and, on the Closing Date, for effectiveness immediately following the Partnership Merger Effective Time, Parent, REIT Merger Sub and the Company shall (i) cause articles of merger with respect to the REIT Merger (the REIT Merger Articles of Merger ) to be duly executed and filed with the Maryland SDAT as provided under the MD REIT Law, and (ii) make any other filings, recordings or publications required to be made by the Company, Parent or REIT Merger Sub under the MD REIT Law in connection with the REIT Merger. The REIT Merger shall become effective upon the later of such time as the REIT Merger Articles of Merger have been accepted for record by the Maryland SDAT, or such later time which the Parties shall have agreed upon and designated in the REIT Merger Articles of Merger in accordance with the MD REIT Law as the effective time of the REIT Merger (the REIT Merger Effective Time ), it being understood and agreed that the Parties shall cause the REIT Merger Effective Time to occur immediately following the Partnership Merger Effective Time.
Section 2.4 Governing Documents .
(a) Subject to Section 7.5 , the limited partnership agreement of Partnership Merger Sub (the Surviving Partnership Agreement ), as in effect immediately prior to the Partnership Merger Effective Time, except for such changes as may be necessary to reflect any change of name of the Partnership Surviving Entity, shall be the principal governing document of the Partnership Surviving Entity immediately following the Partnership Merger Effective Time, until thereafter amended in accordance with the provisions thereof and in accordance with applicable Law. Prior to the Closing Date, to the extent any Outside Limited Partner has made and not revoked a timely Unit Election, Parent and Partnership Merger Sub shall adopt or cause to be adopted Amendment No. 1 to the Surviving Partnership Agreement in the form attached hereto as Exhibit A (the Surviving Partnership Amendment ), as an amendment to the Surviving Partnership Agreement, to create and establish the New Partnership Preferred Units and enable their issuance to the Roll-Over Limited Partners at the Closing.
(b) Subject to Section 7.5 , at the REIT Merger Effective Time, the declaration of trust and bylaws of REIT Merger Sub, as in effect immediately prior to the REIT Merger Effective Time, except for such changes as may be necessary to reflect any change of name of the REIT Surviving Entity, shall be the declaration of trust and bylaws of the REIT Surviving Entity, until thereafter amended in accordance with applicable Law and the applicable provisions of such declaration of trust and bylaws.
Section 2.5 Trustees and Officers of the REIT Surviving Entity . The trustees and officers of REIT Merger Sub immediately prior to the REIT Merger Effective Time shall be the trustees and officers of the REIT Surviving Entity immediately after the REIT Merger Effective Time, each to serve until such time as his or her resignation or removal or such time as his or her successor shall be duly elected and qualified, in each case in accordance with the declaration of trust and bylaws of the REIT Surviving Entity.
Section 2.6 Tax Consequences . The Parties intend that for U.S. federal income Tax purposes (and, where applicable, state and local income Tax purposes) (a) the REIT Merger will be treated as a taxable sale by the Company of all of the Companys assets (including all of the Companys interests in Company LP, as determined under the applicable U.S. federal income Tax regulations) to Parent in exchange for the REIT Merger Consideration and the Share Award Payments provided for herein to be provided to the holders of equity interests in the Company and the assumption of all of the Companys liabilities (including the Companys share of Company LPs liabilities, as determined under the applicable U.S. federal income Tax regulations), immediately followed by a distribution of such consideration (other than assumed liabilities) by the Company to the holders of equity interests in the Company in liquidation of the Company pursuant to Section 331 and Section 562 of the Code, and that this Agreement shall constitute a plan of liquidation of the Company for U.S. federal income Tax purposes, and (b) the Partnership Merger shall be treated as (i) the sale of the Company Partnership Units by the Cash-Out Limited Partners to the REIT Surviving Entity, and (ii) the contribution of Company Partnership Units by the Roll-Over Limited Partners in Company LP in exchange for New Partnership Preferred Units of the Partnership Surviving Entity in a tax-deferred transaction under Section 721 of the Code to the extent applicable to the exchange by each Roll-Over Limited Partner.
ARTICLE 3
EFFECTS OF THE MERGERS
Section 3.1 Effects on Company Common Shares .
(a) At the REIT Merger Effective Time, by virtue of the REIT Merger and without any further action on the part of the Company, Parent, REIT Merger Sub or the holders of any securities of the Company, Parent or REIT Merger Sub:
(i) each Company Common Share then held by any wholly owned Company Subsidiary shall automatically be cancelled and retired and shall cease to exist, and no REIT Merger Consideration shall be paid, nor shall any other payment or right inure or be made, with respect thereto in connection with or as a consequence of the REIT Merger;
(ii) except as provided in Section 3.1(a)(i) , each Company Common Share then outstanding shall no longer be outstanding and shall be automatically cancelled and retired and converted into the right to receive, subject to Section 3.3(e) and Section 3.6 , an amount in cash equal to $11.15, without interest (the REIT Per Share Merger Consideration ); and
(iii) each common share of beneficial interest of REIT Merger Sub issued and outstanding immediately prior to the REIT Merger Effective Time shall remain as an issued and outstanding common share of beneficial interest of the REIT Surviving Entity and each such share shall continue to be owned by Parent.
(b) From and after the REIT Merger Effective Time, the share transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of the Company Common Shares. From and after the REIT Merger Effective Time, Persons who held the Company Common Shares immediately prior to the REIT Merger Effective Time shall cease to have rights with respect to such Company Common Shares, except as otherwise provided for in this Agreement.
Section 3.2 Effect on Partnership Interest and Other Securities .
(a) At the Partnership Merger Effective Time, by virtue of the Partnership Merger and without any further action on the part of Company LP, Parent, REIT Merger Sub, Partnership Merger Sub or the holders of the Company Partnership Units or units of partnership interest in Partnership Merger Sub:
(i) each unit of general partnership interest held by REIT Merger Sub in Partnership Merger Sub immediately prior to the Partnership Merger Effective Time shall automatically be converted into one (1) unit of general partnership interest of the Partnership Surviving Entity and shall continue to be held by REIT Merger Sub, and REIT Merger Sub shall be admitted as general partner of the Partnership Surviving Entity; and
(ii) each unit of limited partnership interest held by each of REIT Merger Sub and GOV NEW OPPTY LP REIT, a Maryland real estate investment trust ( Partnership Merger Sub Minority Limited Partner ), in Partnership Merger Sub immediately prior to the Partnership Merger Effective Time shall automatically be converted into one (1) unit of limited partnership interest of the Partnership Surviving Entity and shall continue to be held by REIT Merger Sub and Partnership Merger Sub Minority Limited Partner, and REIT Merger
Sub and Partnership Merger Sub Minority Limited Partner shall be admitted as limited partners of the Partnership Surviving Entity.
(b) At the Partnership Merger Effective Time, by virtue of the Partnership Merger and without any further action on the part of Parent, REIT Merger Sub, Partnership Merger Sub, Company LP or the holders of the Company Partnership Units or units of partnership interest in Partnership Merger Sub:
(i) each unit of general partnership interest held by the Company in Company LP shall automatically be converted into one (1) unit of general partnership interest of the Partnership Surviving Entity and, upon the REIT Merger Effective Time, shall be held by the REIT Surviving Entity;
(ii) each Company Partnership Unit held by the Company in Company LP shall automatically be converted into (1) one unit of limited partnership interest of the Partnership Surviving Entity and, upon the REIT Merger Effective Time, shall be held by the REIT Surviving Entity; and
(iii) subject to Sections 3.2(d) and 3.6 , each Company Partnership Unit held by an Outside Limited Partner issued and outstanding immediately prior to the Partnership Merger Effective Time, subject to the terms and conditions set forth herein, shall be converted into, and shall be cancelled in exchange for, the right to receive an amount in cash equal to the REIT Per Share Merger Consideration, without interest (the Partnership Per Unit Merger Consideration ); provided , however , that, if and only if (A) the Outside Limited Partner has effectively made and not revoked a valid Unit Election pursuant to Section 3.2(d) to receive New Partnership Preferred Units in respect thereof, and (B) the issuance of such New Partnership Preferred Units would be exempt from registration under the Securities Act and applicable state securities Laws, then, in lieu of the Partnership Per Unit Merger Consideration, each of such Outside Limited Partners Company Partnership Units shall be converted automatically into one fully paid New Partnership Preferred Unit, without interest.
(c) From and after the Partnership Merger Effective Time, the unit transfer books of Company LP shall be closed and thereafter there shall be no further registration of transfers of the Company Partnership Units. From and after the Partnership Merger Effective Time, Persons who held the Company Partnership Units immediately prior to the Partnership Merger Effective Time shall cease to have rights with respect to such units, except as otherwise provided for in this Agreement.
(d) Subject to Section 3.2(d)(iv) and in accordance with Section 3.2(b) , each Outside Limited Partner shall be entitled, with respect to all, but not less than all, of such holders Company Partnership Units, to make an unconditional election, on or prior to the Election Date, to receive in the Partnership Merger in lieu of the Partnership Per Unit Merger Consideration to which such holder is otherwise entitled, New Partnership Preferred Units (a Unit Election ), as follows:
(i) Partnership Merger Sub shall prepare and deliver to Company LP, as promptly as practicable following the date of this Agreement, and Company LP shall mail to
any Outside Limited Partner that is an Outside Limited Partner, a form of election, which form shall be subject to the reasonable approval of the Company, as sole general partner of Company LP (the Form of Election ). The Form of Election may be used by each Outside Limited Partner to designate its election to exchange all, but not less than all, of the Company Partnership Units held by such Outside Limited Partner into New Partnership Preferred Units. Any Outside Limited Partners election to receive New Partnership Preferred Units shall be deemed to have been properly made only if Parent shall have received at its principal executive office, not later than 5:00 p.m. Eastern Time on that date that is five (5) Business Days before the scheduled date of the Company Shareholder Meeting (the Election Date ), a Form of Election specifying that such Outside Limited Partner elects to receive the New Partnership Preferred Units and otherwise properly completed and signed. The Form of Election shall state therein the date that constitutes the Election Date.
(ii) A Form of Election may be revoked by any Outside Limited Partner only by written notice received by Parent at its principal executive office prior to 5:00 p.m. Eastern Time on the Election Date. In addition, all Forms of Election shall automatically be revoked if the Partnership Merger has been abandoned.
(iii) The reasonable determination of Parent shall be binding as to whether or not elections to receive New Partnership Preferred Units have been properly made or revoked. If Parent determines that any election to receive New Partnership Preferred Units was not properly made, the Company Partnership Units with respect to which such election was not properly made shall be converted into the right to receive the Partnership Per Unit Merger Consideration in accordance with Section 3.2(b) . Parent may, with the agreement of the Company, as sole general partner of Company LP, make such rules as are consistent with this Section 3.2(d) for the implementation of elections provided for herein as shall be necessary or desirable to fully effect such elections.
(iv) Each Outside Limited Partner, as a condition to making a Unit Election with respect to such Outside Limited Partners Company Partnership Units, shall (i) represent to Parent that it (A) is an Accredited Investor (as such term is defined under Rule 501 promulgated under the Securities Act) and is acquiring the New Partnership Preferred Units for investment purposes and not with a view to distribution, and (B) is not a benefit plan investor within the meaning of Section 3(42) of ERISA or other plan, account or arrangement (or entity whose assets constitute the assets of a plan, account or arrangement) that is subject to any Laws or regulations that are similar to the fiduciary responsibility or prohibited transaction provisions of Title I of ERISA or Section 4975 of the Code, and (ii) agree to be bound by the terms of the Surviving Partnership Agreement as it will be in effect immediately following the Partnership Merger Effective Time (which agreement shall have been amended by the Surviving Partnership Amendment incorporating the terms of the New Partnership Preferred Units).
(v) The Company and Company LP shall reasonably cooperate with Parent in preparing any disclosure statement or other disclosure information to accompany the Form of Election, including, to the extent necessary, information applicable to an offering of securities exempt from registration under the Securities Act pursuant to Rule 506 thereunder.
(vi) Promptly after the Partnership Merger Effective Time, the Surviving Partnership shall deliver to each Outside Limited Partner entitled to receive New Partnership Preferred Units pursuant to the terms of Section 3.2(b) and this Section 3.2(d) a notice confirming such Outside Limited Partners record ownership of the New Partnership Preferred Units issuable pursuant hereto in respect of such Outside Limited Partners Company Partnership Units.
(vii) Each Person that receives New Partnership Preferred Units pursuant to the terms of Section 3.2(b) and this Section 3.2(d) shall automatically be admitted as a limited partner of the Surviving Partnership at the Partnership Merger Effective Time.
Section 3.3 Effect on Company Equity Awards and Company Look-Back LTI Awards . All of the provisions of this Section 3.3 other than the first sentence of Section 3.3(b) shall be effectuated without any action on the part of the holder of any Company Equity Award or Company Look-Back LTI Award (and for the avoidance of doubt, the actions below shall result in the appropriate issuances of additional Company Partnership Units to the Company in the manner contemplated by Section 4.02 of the Company Partnership Agreement):
(a) Immediately prior to the REIT Merger Effective Time, each Company Option outstanding immediately prior to the REIT Merger Effective Time (whether or not then vested or exercisable) shall become fully vested and exercisable (regardless of the exercise price thereof). At the REIT Merger Effective Time, each Company Option not theretofore exercised shall be cancelled in exchange for the right to receive a single lump sum cash payment, equal to the product of (i) the number of Company Common Shares subject to such Company Option immediately prior to the REIT Merger Effective Time, whether or not vested or exercisable, and (ii) the excess, if any, of the REIT Per Share Merger Consideration over the exercise price per share of such Company Option ( REIT Option Merger Consideration ). If the exercise price per share of any such Company Option is equal to or greater than the REIT Per Share Merger Consideration, such Company Option shall be cancelled without any cash payment being made in respect thereof. As of the REIT Merger Effective Time, each holder of the Company Options shall cease to have any rights with respect thereto, except the right to receive the REIT Option Merger Consideration related to the applicable Company Option. No portion of the REIT Option Merger Consideration shall be paid with respect to a Company Option later than the fifth (5th) anniversary of the Closing Date, with any amount not paid by the fifth (5th) anniversary of the Closing Date being forfeited to the extent required under Section 409A of the Code.
(b) Prior to the REIT Merger Effective Time, the holders of any certificates evidencing Company Restricted Shares shall have delivered, or shall have caused to be delivered, to the Company such certificates (or affidavit of loss in lieu thereof and, if required by Parent, the posting by such holder of a bond in such reasonable amount as Parent may reasonably direct, as indemnity against any claim that may be made against it with respect to such certificate evidencing Company Restricted Shares), each duly endorsed in blank or accompanied by stock powers or other instruments of transfer, in form and substance reasonably satisfactory to Parent, duly executed in blank. Immediately prior to the REIT Merger Effective Time, all Company Restricted Shares that are outstanding immediately prior to the REIT Merger Effective Time (whether or not then vested or subject to any performance condition that has not been satisfied or performance period that has not lapsed) shall automatically become fully vested (which, for
Company Restricted Shares subject to performance conditions, shall mean fully vested in accordance with, and shall include any additional Company Restricted Shares issued upon performance in excess of target level in accordance with, the terms of the applicable award agreement or Company Equity Incentive Plan governing such awards) and all restrictions with respect thereto shall lapse . At the REIT Merger Effective Time, each Company Restricted Share that will vest, or become issued and vest, in accordance with the terms of the applicable award agreement , Company Equity Incentive Plan or the terms hereof (which includes for the avoidance of doubt and without limitation (i) any Company Restricted Shares issued upon performance in excess of target level in accordance with the terms of the applicable award agreement or Company Equity Incentive Plan governing such awards, and (ii) Company Restricted Shares issued upon conversion of a Company Look-Back LTI Award in accordance with Section 3.3(c) ) shall be considered (to the extent that such Company Restricted Share is not otherwise considered to be outstanding) an outstanding Company Common Share for all purposes of this Agreement, including the right to receive the REIT Per Share Merger Consideration (the aggregate REIT Per Share Merger Consideration payable in respect of the Company Restricted Shares, the REIT Restricted Share Merger Consideration ). As of the REIT Merger Effective Time, each holder of Company Restricted Shares shall cease to have any rights with respect thereto, except the right to receive the REIT Per Share Merger Consideration for each Company Restricted Share, subject to Section 3.3(e) , and the certificates evidencing Company Restricted Shares so surrendered shall be forthwith cancelled and have no further force or effect.
(c) Immediately prior to the REIT Merger Effective Time, each Company Look-Back LTI Award that is outstanding immediately prior to the REIT Merger Effective Time shall automatically become earned (with the portion thereof that is subject to the achievement of performance-based metrics becoming earned at the greater of the target award or actual performance, measured as of immediately prior to the REIT Merger Effective Time) and shall be converted into a number of fully vested Company Restricted Shares, equal to the dollar amount of such earned Company Look-Back LTI Award divided by the REIT Per Share Merger Consideration. At the REIT Merger Effective Time, each such fully vested Company Restricted Share shall be considered an outstanding Company Restricted Share for all purposes of this Agreement, including the right to receive the REIT Per Share Merger Consideration. As of the REIT Merger Effective Time, each holder of a Company Look-Back LTI Award shall cease to have any rights with respect thereto, except the right to receive the REIT Per Share Merger Consideration, subject to Section 3.3(e) , for each such fully vested Company Restricted Share into which such Company Look-Back LTI Award was converted.
(d) As of the REIT Merger Effective Time, each holder of Company Restricted Shares that become fully vested, or issued and vested, in accordance with this Section 3.3 shall be entitled to receive a cash lump sum payment equal to the sum of any cash dividends and other distributions paid from the applicable date of grant of such Company Restricted Shares (which, for the avoidance of doubt, for any shares issued immediately prior to the REIT Merger Effective Time, shall mean the date of the applicable award) to immediately prior to the REIT Merger Effective Time with respect to the total number of Company Restricted Shares that become fully vested or issued and vested as of immediately prior to the REIT Merger Effective Time (but including only those dividends and other distributions which have not previously been distributed to the holder), which dividends or other distributions shall, to the
extent not vested, automatically become fully vested in accordance with the terms of the applicable award agreement governing such Company Restricted Shares ( Restricted Share Accrued Dividends ).
(e) At or immediately after the REIT Merger Effective Time, Parent shall cause to be deposited with the Partnership Surviving Entity the Share Award Payments for the benefit of the former holders of the Company Equity Awards and the Company Look-Back LTI Awards. Promptly after the REIT Merger Effective Time (but in any event within three (3) Business Days after the REIT Merger Effective Time), the Partnership Surviving Entity shall pay to each of the former holders of the Company Equity Awards or the Company Look-Back LTI Awards, as applicable, the applicable amount of the Share Award Payments payable to such holder pursuant to this Section 3.3 .
Section 3.4 Company ESPP . The Company shall, prior to the REIT Merger Effective Time, take all actions necessary to terminate the Company ESPP and all outstanding rights thereunder as of immediately prior to the REIT Merger Effective Time; provided , that from and after the date of this Agreement, the Company shall take all actions necessary: (a) to ensure that participants in the Company ESPP ( ESPP Participants ) may not increase their payroll deductions under the Company ESPP from those in effect on the date of this Agreement; (b) to ensure that no new ESPP Participants may commence participation in the Company ESPP following the date of this Agreement; (c) not to commence a new offering period, such that the offering period in effect as of the date of this Agreement will be the final offering period under the Company ESPP; and (d) to provide notice to participants describing the treatment of the Company ESPP pursuant to this Section 3.4 . Immediately prior to the REIT Merger Effective Time, any then outstanding offering period rights under the Company ESPP shall terminate and the Company shall distribute to each participant in the Company ESPP all of his or her accumulated payroll deductions with respect to the offering period then in effect (if any).
Section 3.5 Adjustment to the Merger Consideration . If at any time during the period between the date of this Agreement and the Partnership Merger Effective Time, any change in the issued and outstanding shares of beneficial interest of the Company or Company Partnership Units, or securities convertible or exchangeable into or exercisable for shares of beneficial interest of the Company or Company Partnership Units, occurs as a result of any merger, business combination, reclassification, recapitalization, share split (including a reverse share split) or subdivision or combination, exchange or readjustment of shares, or any share dividend or other share distribution with a record date during such period, the REIT Per Share Merger Consideration, the Share Award Payments and the Partnership Per Share Merger Consideration will be equitably adjusted, without duplication, to reflect such change, except that nothing in this Section 3.5 will be construed to permit the Company or Company LP to take any action with respect to shares of beneficial interest of the Company or Company Partnership Units, as applicable, that is prohibited by the terms of this Agreement.
Section 3.6 Payment Fund; Paying Agent .
(a) Prior to the mailing of the Proxy Statement, Parent will designate a bank or trust company reasonably acceptable to the Company to act as a paying agent in the Mergers (the Paying Agent ), and the Paying Agent will administer the payments of REIT Merger
Consideration and Partnership Merger Consideration described in Section 3.1 and Section 3.2 , respectively, with the REIT Surviving Entity administering the payments of Share Award Payments pursuant to Section 3.3 .
(b) Prior to the REIT Merger Effective Time, Parent will enter into an exchange and paying agent and nominee agreement with the Paying Agent, in a form reasonably acceptable to the Company, setting forth the procedures to be used in accomplishing the deliveries and other actions contemplated by this Section 3.6 .
(c) At or before the REIT Merger Effective Time, Parent shall deposit, or cause to be deposited, with the Paying Agent cash in immediately available funds in an amount sufficient to pay the REIT Merger Consideration and the Partnership Merger Consideration (such total cash amount deposited with the Paying Agent, the Payment Fund ), in each case, for the sole benefit of the holders of the Company Common Shares and the Cash-Out Limited Partners. Parent, the REIT Surviving Entity and the Partnership Surviving Entity shall cause the Paying Agent to make, and the Paying Agent shall make, delivery of the REIT Merger Consideration and the Partnership Merger Consideration out of the Payment Fund in accordance with this Agreement. For the avoidance of doubt, the Share Award Payments are not part of the Payment Fund and shall be deposited by Parent with the Partnership Surviving Entity and paid by the Partnership Surviving Entity in accordance with Section 3.3(e) . The Payment Fund shall not be used for any other purpose.
(d) The Payment Fund shall be invested by the Paying Agent as directed by Parent, on behalf of the REIT Surviving Entity and the Partnership Surviving Entity, provided that any investment of such cash shall be limited to direct short-term obligations of, or short-term obligations fully guaranteed as to principal and interest by, the United States of America in investment-grade commercial paper obligations, and that no such investment or loss thereon will affect the amounts payable to holders of the Company Common Shares and the Cash-Out Limited Partners pursuant to this Article 3 . Interest and other income on the Payment Fund shall be the sole and exclusive property of the REIT Surviving Entity and the Partnership Surviving Entity and shall be paid to the REIT Surviving Entity and the Partnership Surviving Entity. No investment of the Payment Fund shall relieve Parent, the REIT Surviving Entity, the Partnership Surviving Entity or the Paying Agent from making the payments required by this Article 3 , and following any losses from any such investment, Parent, the REIT Surviving Entity and the Partnership Surviving Entity shall promptly provide additional funds to the Paying Agent to the extent necessary to satisfy the REIT Surviving Entitys and the Partnership Surviving Entitys obligations hereunder for the benefit of the holders of the Company Common Shares and the Cash-Out Limited Partners, which additional funds will be deemed to be part of the Payment Fund.
(e) Promptly after the REIT Merger Effective Time (but in any event within three (3) Business Days after the REIT Merger Effective Time), Parent and the REIT Surviving Entity shall cause the Paying Agent to mail to each holder of record of a Company Share Certificate or Book-Entry Share immediately prior to the REIT Merger Effective Time (other than holders of Company Restricted Shares) a letter of transmittal (a Company Letter of Transmittal ) in customary form as prepared by Parent and the REIT Surviving Entity and reasonably acceptable to the Company (which shall specify, among other things, that delivery
shall be effected, and risk of loss and title to the Company Share Certificates and Book-Entry Shares shall pass, only upon proper delivery of the Company Share Certificates (or affidavits of loss in lieu thereof in accordance with Section 3.8 ) or transfer of any Book-Entry Shares to the Paying Agent) and instructions for use in effecting the surrender of such Company Share Certificates or the transfer of such Book-Entry Shares in exchange for the REIT Per Share Merger Consideration.
(f) Upon surrender of a Company Share Certificate (or affidavit of loss in lieu thereof in accordance with Section 3.8 ) or transfer of any Book-Entry Share for exchange and cancellation to the Paying Agent, together with a Company Letter of Transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Paying Agent, the holder of such Company Share Certificate or Book-Entry Share shall be entitled to receive in exchange therefor the REIT Per Share Merger Consideration, by mail or by wire transfer, for each Company Common Share formerly represented by such Company Share Certificate or Book-Entry Share pursuant to the provisions of this Article 3 . After the Paying Agents receipt of such Company Share Certificate (or affidavit of loss in lieu thereof in accordance with Section 3.8 ) or Book-Entry Share, the Company Share Certificate or Book-Entry Share so surrendered shall be forthwith cancelled, and promptly after such surrender or transfer, Parent and the REIT Surviving Entity shall cause the Paying Agent to pay to such former holder the REIT Per Share Merger Consideration, and such surrendered Company Share Certificate or Book-Entry Share shall have no further force or effect. Until surrendered or transferred as contemplated by this Section 3.6 , each Company Share Certificate or Book-Entry Share shall be deemed, at any time after the REIT Merger Effective Time, to represent only the right to receive, upon such surrender, the REIT Per Share Merger Consideration as contemplated by this Article 3 . No interest will be paid or accrued for the benefit of holders of the Company Share Certificates or Book-Entry Shares on any of the REIT Merger Consideration payable upon the surrender of such Company Share Certificates or transfer of such Book-Entry Shares.
(g) Promptly after the Partnership Merger Effective Time (but in any event within three (3) Business Days after the Partnership Merger Effective Time), Parent and the Partnership Surviving Entity shall cause the Paying Agent to mail to each Cash-Out Limited Partner immediately prior to the Partnership Merger Effective Time a letter of transmittal (a Partnership Letter of Transmittal ) in customary form as prepared by Parent and the Partnership Surviving Entity and reasonably acceptable to Company LP (which shall specify, among other things, that delivery shall be effected, and risk of loss and title to the Partnership Unit Certificates and Book-Entry Units shall pass, only upon proper delivery of the Partnership Unit Certificates (or affidavits of loss in lieu thereof in accordance with Section 3.8 ) or transfer of any Book-Entry Units to the Paying Agent) and instructions for use in effecting the surrender of such Partnership Unit Certificates or the transfer of such Book-Entry Units in exchange for the Partnership Per Unit Merger Consideration.
(h) Upon surrender of a Partnership Unit Certificate (or affidavit of loss in lieu thereof in accordance with Section 3.8 ) or transfer of any Book-Entry Unit for exchange and cancellation to the Paying Agent, together with a Partnership Letter of Transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Paying Agent, the holder of such Partnership
Unit Certificate or Book-Entry Unit shall be entitled to receive in exchange therefor the Partnership Per Unit Merger Consideration, by mail or by wire transfer, for each Company Partnership Unit formerly represented by such Partnership Unit Certificate or Book-Entry Unit pursuant to the provisions of this Article 3 . After the Paying Agents receipt of such Partnership Unit Certificate (or affidavit of loss in lieu thereof in accordance with Section 3.8 ) or Book-Entry Unit, the Partnership Unit Certificate or Book-Entry Unit so surrendered shall be forthwith cancelled, and promptly after such surrender or transfer, Parent and the Partnership Surviving Entity shall cause the Paying Agent to pay to such former holder the Partnership Per Share Unit Consideration, and such surrendered Partnership Unit Certificate or Book-Entry Unit shall have no further force or effect. Until surrendered or transferred as contemplated by this Section 3.6 , each Partnership Unit Certificate or Book-Entry Unit shall be deemed, at any time after the Partnership Merger Effective Time, to represent only the right to receive, upon such surrender, the Partnership Per Unit Merger Consideration as contemplated by this Article 3 . No interest will be paid or accrued for the benefit of holders of the Partnership Unit Certificates or Book-Entry Units on any of the Partnership Merger Consideration payable upon the surrender of such Partnership Unit Certificates or transfer of such Book-Entry Units.
(i) In the event of a transfer of ownership of the Company Common Shares or the Company Partnership Units that is not registered in the transfer records of the Company or Company LP, as applicable, it shall be a condition of payment that any Company Share Certificate or Partnership Unit Certificate surrendered or transferred in accordance with the procedures set forth in this Section 3.6 shall be properly endorsed or shall be otherwise in proper form for transfer, or any Book-Entry Share or Book-Entry Unit shall be properly transferred, and that the Person requesting such payment shall have paid any Transfer Taxes and other Taxes required by reason of the payment of the REIT Per Share Merger Consideration or the Partnership Per Unit Merger Consideration, as applicable, to a Person other than the registered holder of the Company Share Certificate or Book-Entry Share surrendered or the Partnership Unit Certificate or Book-Entry Unit surrendered, or shall have established to the reasonable satisfaction of the Parent Surviving Entity that such Tax either has been paid or is not applicable.
(j) Any portion of the Payment Fund that remains undistributed to the former holders of the Company Common Shares or the Company Partnership Units for twelve (12) months after the Closing Date shall be delivered to the REIT Surviving Entity or the Partnership Surviving Entity, as applicable, upon demand, and any former holders of the Company Common Shares or former holders of the Company Partnership Units who have not theretofore complied with this Article 3 shall thereafter look only to the REIT Surviving Entity (and only as general creditors thereof) for payment of the REIT Merger Consideration or the Partnership Surviving Entity (and only as general creditors thereof) for payment of the Partnership Merger Consideration, as applicable.
(k) None of Parent, the Company, the REIT Surviving Entity, the Partnership Surviving Entity, the Paying Agent, or any employee, officer, trustee, director, agent or Affiliate thereof, shall be liable to any Person in respect of the REIT Merger Consideration or the Partnership Merger Consideration, as applicable, if the Payment Fund has been delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. Any amounts remaining unclaimed by holders of any Company Share Certificates or Partnership Unit Certificates immediately prior to the time at which such amounts would otherwise escheat to, or
become property of, any Governmental Authority shall, to the extent permitted by applicable Law, become the property of the REIT Surviving Entity free and clear of any claims or interest of such holders or their successors, assigns or personal representatives previously entitled thereto.
Section 3.7 Withholding Rights . The REIT Surviving Entity, the Partnership Surviving Entity, Parent or the Paying Agent, as applicable, shall be entitled to deduct and withhold from the REIT Merger Consideration, the Share Award Payments, the Partnership Merger Consideration and any other amounts otherwise payable pursuant to this Agreement to any holder of Company Common Shares, Company Partnership Units, Company Equity Awards or Company Look-Back LTI Awards, such amounts as it is required to deduct and withhold with respect to such payments under the Code or any other provision of state, local or foreign Tax Law. Any such amounts so deducted and withheld shall be paid over to the applicable Governmental Authority in accordance with applicable Law and shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made. No earlier than two (2) Business Days prior to the Closing Date and unless the Company on such date no longer believes the same, the Company shall deliver to Parent a notice confirming that the Company believes, without diligence or inquiry, that on the date of such notice that the Company is a domestically controlled qualified investment entity within the meaning of Section 897(h)(4)(B) of the Code and a domestically-controlled REIT within the meaning of Treasury Regulation Section 1.897-1(c)(2)(i).
Section 3.8 Lost Certificates . If any Company Share Certificate or Partnership Unit Certificate shall have been lost, stolen or destroyed, then upon the making of an affidavit of such fact by the Person claiming such Company Share Certificate or Partnership Unit Certificate to be lost, stolen or destroyed, and, if required by Parent or Paying Agent, the posting by such Person of a bond in such reasonable amount as Parent or Paying Agent may reasonably direct, as indemnity against any claim that may be made against it with respect to such Company Share Certificate or Partnership Unit Certificate, the Paying Agent will issue in exchange for such lost, stolen or destroyed Company Share Certificate or Partnership Unit Certificate the portion of the REIT Merger Consideration or Partnership Merger Consideration, as applicable, to which the holder thereof is entitled pursuant to this Article 3 .
Section 3.9 Dissenters Rights . No dissenters or appraisal rights, or rights of objecting shareholders, shall be available with respect to the Mergers or the other transactions contemplated by this Agreement, including any remedy under Section 8-501.1(j) of the MD REIT Law.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND COMPANY LP
Except (a) as set forth in the disclosure letter prepared by the Company and Company LP, with numbering corresponding to the numbering of this Article 4 , delivered by the Company and Company LP to Parent prior to the execution and delivery of this Agreement (the Company Disclosure Letter ) (it being acknowledged and agreed that disclosure of any item in any section or subsection of the Company Disclosure Letter shall be deemed disclosed with respect to any other section or subsection of this Agreement to the extent the applicability of such disclosure is
reasonably apparent from the face of such disclosure (it being understood that to be so reasonably apparent it is not required that the other Sections be cross-referenced)); provided , that nothing in the Company Disclosure Letter is intended to broaden the scope of any representation or warranty of the Company or Company LP made herein and no reference to or disclosure of any item or other matter in the Company Disclosure Letter shall be construed as an admission or indication that (i) such item or other matter is material, (ii) such item or other matter is required to be referred to in the Company Disclosure Letter or (iii) any breach or violation of applicable Laws or any contract, agreement, arrangement or understanding to which the Company, Company LP or any of the Company Subsidiaries is a party exists or has actually occurred, or (b) as disclosed in the Company SEC Documents publicly available, filed with, or furnished to, as applicable, the SEC on or after January 1, 2014 and prior to the date of this Agreement (excluding any risk factor disclosures contained in such documents under the heading Risk Factors and any disclosure of risks or other matters included in any forward-looking statements disclaimer or other statements that are cautionary, predictive or forward-looking in nature, which in no event shall be deemed to be an exception to or disclosure for purposes of, any representation or warranty set forth in this Article 4 ), each of the Company and Company LP hereby, jointly and severally, represents and warrants to Parent, REIT Merger Sub and Partnership Merger Sub that:
Section 4.1 Organization and Qualification; Subsidiaries .
(a) The Company is a real estate investment trust duly organized, validly existing and in good standing under the Laws of the State of Maryland, and Company LP is a limited partnership duly organized, validly existing and in good standing under the Laws of the State of Delaware. Each of the Company and Company LP has the requisite real estate investment trust and partnership power and authority, respectively, to own, lease and, to the extent applicable, operate any Company Properties or other assets owned by it and to conduct its business as it is now being conducted. Each of the Company and Company LP is duly qualified or licensed to do business, and is in good standing, in each jurisdiction where the character of the Company Properties or other assets owned, operated or leased by it or the nature of its business makes such qualification, licensing or good standing necessary, except for such failures to be so qualified, licensed or in good standing that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. There are no current dissolution, revocation or forfeiture proceedings regarding the Company or Company LP.
(b) Section 4.1(b) of the Company Disclosure Letter sets forth a true and complete list of the Company Subsidiaries, together with (i) the jurisdiction of incorporation or organization, as the case may be, of each Company Subsidiary, (ii) the type of and percentage of interest held, directly or indirectly, by the Company, Company LP or Company Subsidiary in each Company Subsidiary, (iii) the names of and the type of and percentage of interest held by any Person other than the Company, Company LP or a Company Subsidiary in each Company Subsidiary, and (iv) the classification for U.S. federal income Tax purposes of each Company Subsidiary. Except as set forth on Section 4.1(b) of the Company Disclosure Letter or as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, each Company Subsidiary is duly organized, validly existing and in good standing (to the extent applicable) under the Laws of the jurisdiction of its incorporation or organization, as the case may be, and has the requisite corporate or other legal entity power and
authority to own, lease and, to the extent applicable, operate any Company Properties or other assets owned by it and to conduct its business as it is now being conducted. Each Company Subsidiary is duly qualified or licensed to do business, and is in good standing, in each jurisdiction where the character of the Company Properties or other assets owned, operated or leased by it or the nature of its business makes such qualification, licensing or good standing necessary, except for such failures to be so qualified, licensed or in good standing that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. There are no current dissolution, revocation or forfeiture proceedings regarding any of the Company Subsidiaries except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
(c) Except as set forth in Section 4.1(c) of the Company Disclosure Letter, neither the Company, Company LP nor any Company Subsidiary directly or indirectly owns any interest or investment (whether equity or debt) in any Person (other than in the Company Subsidiaries and investments in short-term investment securities).
Section 4.2 Organizational Documents . The Company has made available to Parent true and complete copies of (i) the Company Declaration and the Company Bylaws, (ii) the Company Partnership Certificate and the Company Partnership Agreement, and (iii) the charter, bylaws, certificate of formation or limited partnership, operating or partnership agreement or equivalent organizational documents of each Company Subsidiary, other than inactive entities or those pending dissolution, in each case as in effect on the date of this Agreement (the documents referenced in subclauses (i)-(iii) , the Organizational Documents ). To the Knowledge of the Company, except as set forth in Section 4.2 of the Company Disclosure Letter, the Company, Company LP and each Company Subsidiary is in compliance with the terms of its respective Organizational Documents in all material respects.
Section 4.3 Capital Structure .
(a) The authorized capital stock of the Company consists of 150,000,000 Company Common Shares and 50,000,000 preferred shares of beneficial interest, $0.001 par value per share ( Company Preferred Shares ). At the close of business on June 27, 2017, (i) 58,740,684 Company Common Shares were issued and outstanding, (ii) no Company Preferred Shares were issued and outstanding, and (iii) 4,139,512 Company Common Shares were reserved for issuance pursuant to the Company Equity Incentive Plans (which includes shares issuable upon exercise of outstanding options).
(b) The Company is the sole general partner of Company LP and the Company owns all of the general partner interests in Company LP. Section 4.3(b) of the Company Disclosure Letter sets forth, as of the date hereof, a list of all of the names of, and the number and class of limited partnership interests held by, each partner in Company LP. As of the date hereof, the Conversion Factor as set forth in the Company Partnership Agreement remains at 1.0.
(c) (i) All issued and outstanding shares of the beneficial interest of the Company are duly authorized, validly issued, fully paid and nonassessable and no class or series of shares of beneficial interest of the Company is entitled to preemptive rights; (ii) al l Company Common Shares reserved for issuance as noted above, shall be, when issued in accordance with
the terms and conditions of the applicable Company Equity Incentive Plan and instruments, if any, pursuant to which they are issuable, duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights; and (iii) there are no outstanding bonds, debentures, notes or other Indebtedness of the Company, Company LP or any Company Subsidiary having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matter on which holders of the Company Common Shares or holders of the Company Partnership Units may vote.
(d) All of the outstanding shares of capital stock of each of the Company Subsidiaries that is a corporation are duly authorized, validly issued, fully paid and nonassessable. All equity interests in each of the Company Subsidiaries that is a partnership or limited liability company are duly authorized and validly issued. Except as set forth in Section 4.3(d) of the Company Disclosure Letter, the Company owns, directly or indirectly, all of the issued and outstanding capital stock or other equity interests of each of the Company Subsidiaries, free and clear of all Liens other than statutory or other Liens for Taxes or assessments which are not yet due or delinquent or the validity of which is being contested in good faith by appropriate proceedings and for which adequate accruals and reserves are being maintained on the Companys financial statements (if such reserves are required pursuant to GAAP).
(e) The Company Common Shares are, and will continue, through and including the Closing Date, to be, listed on the New York Stock Exchange (the NYSE ).
(f) Other than as set forth on Section 4.3(f) of the Company Disclosure Letter or pursuant to a Company Equity Incentive Plan (including in connection with the satisfaction of withholding Tax obligations pursuant to certain awards outstanding under a Company Equity Incentive Plan in the event that the grantees fail to satisfy withholding Tax obligations) and the Organizational Documents of the Company and Company LP, there are no outstanding subscriptions, securities, options, restricted stock units, dividend equivalent rights, warrants, calls, rights, profits interests, share appreciation rights, phantom shares, convertible securities, rights of first refusal, preemptive rights or other similar rights, agreements, arrangements, undertakings or commitments of any kind to which the Company, Company LP or any of the Company Subsidiaries is a party or by which any of them is bound obligating the Company, Company LP or any of the Company Subsidiaries to (i) issue, deliver, transfer, sell or create, or cause to be issued, delivered, transferred, sold or created, additional shares of beneficial interest or capital stock or other equity interests, or phantom shares or other contractual rights, the value of which is determined in whole or in part by the value of any equity security of the Company, Company LP or any Company Subsidiary. or securities convertible into or exchangeable for such shares of beneficial interest or capital stock or other equity interests, (ii) issue, grant, extend or enter into any such subscriptions, securities, options, restricted stock units, dividend equivalent rights, warrants, calls, rights, profits interests, share appreciation rights, phantom shares, convertible securities, rights of first refusal, preemptive rights or other similar rights, agreements, arrangements, undertakings or commitments, or (iii) redeem, repurchase or otherwise acquire any such shares of beneficial interest or capital stock or other equity interests.
(g) Other than pursuant to the Organizational Documents, none of the Company, Company LP or any Company Subsidiary is a party to or bound by, any agreements or
understandings concerning the voting (including voting trusts and proxies) of any shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or any Company Subsidiary.
(h) Neither the Company nor Company LP has a poison pill or similar equityholder rights plan.
(i) Except as set forth on Section 4.1(i) of the Company Disclosure Letter, none of the Company, Company LP or any Company Subsidiary is under any obligation, contingent or otherwise, by reason of any contract to register the offer and sale or resale of any of their securities under the Securities Act. Except as set forth on Section 4.1(i) of the Company Disclosure Letter or in the Company Partnership Agreement, there are no outstanding contractual obligations of the Company, Company LP or any Company Subsidiary to repurchase, redeem or otherwise acquire any Company Common Shares or equity interests of any Company Subsidiary.
(j) All Company Equity Awards were (i) in the case of the Company Options, granted with an exercise price per share no lower than the fair market value, determined in accordance with Section 409A of the Code, of one Company Common Share on the date of grant, and (ii) validly issued and properly approved by the Company Board (or a duly authorized committee or subcommittee thereof) in compliance with applicable Law and recorded on the Companys financial statements in accordance with GAAP. Without limiting the generality of the preceding sentence, the Company has not engaged in any back dating or similar activities with respect to the Company Equity Awards, and has not been the subject of any investigation by the SEC, whether current, pending or closed (in the case of any such pending investigation, to the Knowledge of the Company), with respect to any such activities.
Section 4.4 Authority .
(a) Each of the Company and Company LP has the requisite real estate investment trust and partnership power and authority to execute and deliver this Agreement, to perform its obligations hereunder and, subject to receipt of the Company Shareholder Approval, to consummate the Mergers and the other transactions contemplated by this Agreement to which the Company or Company LP is a party. The execution and delivery of this Agreement by the Company and Company LP and the consummation by the Company and Company LP of the Mergers and the other transactions contemplated by this Agreement have been duly and validly authorized by all necessary real estate investment trust and partnership action, and no other real estate investment trust or partnership proceedings on the part of the Company or Company LP are necessary to authorize this Agreement or the Mergers or to consummate the Mergers or the other transactions contemplated by this Agreement, subject to (i) with respect to the REIT Merger, the receipt of the Company Shareholder Approval, (ii) with respect to the REIT Merger, the filing of the REIT Merger Articles of Merger with, and the acceptance for record of the REIT Merger Articles of Merger by, the Maryland SDAT, and (iii) with respect to the Partnership Merger, the filing of the Partnership Merger Certificate of Merger with, and the acceptance for record of the Partnership Merger Certificate of Merger by, the Delaware SOS. This Agreement has been duly executed and delivered by the Company and Company LP, and assuming due authorization, execution and delivery by Parent, REIT Merger Sub and Partnership Merger Sub, constitutes a legally valid and binding obligation of the Company and Company LP enforceable
against the Company and Company LP in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors rights generally and by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at Law).
(b) The Company Board at a duly held meeting has, by unanimous vote, (i) determined that the terms and conditions of this Agreement, the Mergers and the other transactions contemplated by this Agreement are advisable and in the best interests of the Company and the holders of the Company Common Shares, (ii) approved and adopted this Agreement, the Mergers and the other transactions contemplated by this Agreement, (iii) directed that the REIT Merger and the other transactions contemplated by this Agreement be submitted to a vote of the holders of the Company Common Shares, and (iv) resolved to recommend that the holders of the Company Common Shares vote in favor of approval of the REIT Merger and the other transactions contemplated by this Agreement (such recommendation, the Company Board Recommendation ), which resolutions remain in full force and effect and have not been subsequently rescinded, modified or withdrawn in any way, except as may be permitted after the date hereof by Section 7.3 .
Section 4.5 No Conflict; Required Filings and Consents .
(a) The execution and delivery of this Agreement by each of the Company and Company LP does not, and the performance of this Agreement and its obligations hereunder will not, (i) conflict with or violate any provision of (A) assuming receipt of the Company Shareholder Approval, the Company Declaration or the Company Bylaws, (B) the Company Partnership Certificate or Company Partnership Agreement, or (C) except as set forth in Section 4.5(a) of the Company Disclosure Letter, any Organizational Document of any Company Subsidiary, (ii) assuming that all consents, approvals, authorizations and permits described in Section 4.5(b) have been obtained, all filings and notifications described in Section 4.5(b) have been made and any waiting periods thereunder have terminated or expired, conflict with or violate any Law applicable to the Company, Company LP or any Company Subsidiary or by which any property or asset of the Company, Company LP or any Company Subsidiary is bound, or (iii) require any notice, consent or approval (except as contemplated by Section 4.5(b ) or as set forth in Section 4.5(a) of the Company Disclosure Letter) under, result in any breach of any obligation or any loss of any benefit or material increase in any cost or obligation of the Company, Company LP or any Company Subsidiary under, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to any other Person any right of termination, acceleration, notification or cancellation (with or without notice or the lapse of time or both) of, or give rise to any right of purchase, first offer or forced sale under or result in the creation of a Lien on any property or asset of the Company, Company LP or any Company Subsidiary pursuant to, any note, bond, debt instrument, indenture, contract, agreement, ground lease, license, permit or other legally binding obligation to which the Company, Company LP or any Company Subsidiary is a party, except, as to clauses (ii) and (iii) above, for any such conflicts, violations, breaches, defaults or other occurrences which individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
(b) The execution and delivery of this Agreement by each of the Company and Company LP does not, and the performance of this Agreement by each of the Company and Company LP will not, require any consent, approval, waiting period expiration or termination, authorization or permit of, or filing with or notification to, any Governmental Authority, except (i) the filing with the SEC of (A) the Proxy Statement and (B) such reports under, and other compliance with, the Exchange Act and the Securities Act as may be required in connection with this Agreement, the Mergers and the other transactions contemplated hereby, (ii) any filings required by any state securities or blue sky Laws, (iii) any filings required under the rules and regulations of the NYSE, (iv) the filing of the REIT Merger Articles of Merger with, and the acceptance for record of the REIT Merger Articles of Merger by, the Maryland SDAT pursuant to the MD REIT Law, (v) the filing of the Partnership Merger Certificate of Merger with, and the acceptance for record of the Partnership Merger Certificate of Merger by, the Delaware SOS pursuant to the DRULPA, (vi) such filings as may be required in connection with state and local Transfer Taxes, (vii) such filings as may be required by applicable antitrust, merger control, competition, national security or trade regulation Laws, and (viii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
Section 4.6 Permits; Compliance with Law .
(a) Except as set forth in Section 4.6(a) of the Company Disclosure Letter, the Company, Company LP and each Company Subsidiary holds all authorizations, permits, licenses, certificates, grants, consents, variances, exemptions, orders, approvals, franchises, certifications and clearances of all Governmental Authorities, including building permits and certificates of occupancy and property management and brokerage licenses, necessary for the Company, Company LP and each Company Subsidiary to own, lease and, to the extent applicable, operate its properties or to conduct their respective businesses substantially as they are being conducted as of the date hereof, other than the Environmental Permits (such permits, excluding Environmental Permits, the Company Permits ), and all such Company Permits are valid and in full force and effect, except where the failure to hold or be in possession of, or the failure to be valid or in full force and effect of, any of such Company Permits, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. The Company and each of its Subsidiaries are in compliance with the terms of the Company Permits, except where the failure to so comply does not have and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. All applications required to have been filed for the renewal of Company Permits have been duly filed on a timely basis with the appropriate Governmental Authority, except where the failure to do so would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, and all other filings required to have been made with respect to such Company Permits have been duly made on a timely basis with the appropriate Governmental Authority, except where the failure to do so would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. Neither the Company, Company LP nor any Company Subsidiary or any of the respective Representatives has received any written notice indicating, nor, to the Knowledge of the Company, is the Company, Company LP or any Company Subsidiary currently not in compliance in any material respect with the terms of any material Company Permit. Neither the Company, Company LP nor any Company
Subsidiary has taken any action that would reasonably be expected to result in the revocation of any Company Permit and, to the Knowledge of the Company, no suspension or cancellation of any Company Permit is pending, except in each case as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
(b) Neither the Company, Company LP nor any Company Subsidiary is or has been in conflict with, or in default or violation of (i) any Law applicable to the Company, Company LP or any Company Subsidiary or by which any property or asset of the Company, Company LP or any Company Subsidiary is bound (except with respect to Laws addressed in Section 4.12 , Section 4.16 , Section 4.17 , or Section 4.18 which are solely addressed in such Sections), or (ii) any Company Permits, except, in the case of clauses (i) and (ii) , for any such conflicts, defaults or violations that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. Notwithstanding the foregoing, none of the Company, Company LP or any of the Company Subsidiaries make any representation or warranty (pursuant to this Section 4.6 or elsewhere in the Agreement) regarding the effect of the applicable antitrust, merger control, competition, national security or trade regulation Laws on their respective ability to execute, deliver, or perform their respective obligations under the Agreement or to consummate the Mergers and the other transactions contemplated by this Agreement as a result of the enactment, promulgation, application, or threatened or actual judicial or administrative investigation or litigation under, or enforcement of, any antitrust, merger control, competition, national security or trade regulation Law with respect to the consummation of the Mergers and the other transactions contemplated by this Agreement.
(c) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, neither the Company, Company LP nor any of the Company Subsidiaries, nor, to the Knowledge of the Company, any director, trustee, officer or employee of the Company, Company LP or any of the Company Subsidiaries, has (i) knowingly used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, (ii) unlawfully offered or provided, directly or indirectly, anything of value to (or received anything of value from) any foreign or domestic government employee or official or any other Person, or (iii) taken any action, directly or indirectly, that would constitute a violation in any material respect by such Persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the FCPA ), the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ( Patriot Act ), Public Law 107-56, as amended, or any directives or requirements of the Office of Foreign Assets Control of the United States Department of Treasury.
(d) Notwithstanding this Section 4.6 or any other provision of this Agreement, Section 4.17 contains the exclusive representations and warranties of the Company and Company LP with respect to environmental matters, including Environmental Permits.
Section 4.7 SEC Documents; Financial Statements .
(a) The Company has timely filed with or furnished (as applicable) to the SEC all forms, documents, statements, schedules, reports, registration statements, prospectuses and other documents required to be filed or furnished (as applicable) by the Company, Company LP
or any Company Subsidiary since and including January 1, 2014 under the Exchange Act or the Securities Act (together with all certifications required pursuant to the Sarbanes-Oxley Act of 2002 (the SOX Act ) (such documents, as have been amended since the time of their filing, collectively, the Company SEC Documents ). No Company Subsidiary is separately subject to the periodic reporting requirements of the Exchange Act. As of their respective filing dates, the Company SEC Documents did not (or with respect to the Company SEC Documents filed after the date of this Agreement, will not) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (except to the extent such statements have been modified or superseded by later Company SEC Documents filed or furnished prior to the date of this Agreement) and complied in all material respects with the applicable requirements of the Exchange Act or the Securities Act, as the case may be, the applicable rules and regulations of the SEC thereunder. Since January 1, 2014, except as set forth in Section 4.7(a) of the Company Disclosure Letter, there are no (i) outstanding or unresolved comments from the SEC with respect to any Company SEC Document, and to the Knowledge of the Company, no Company SEC Document is the subject of ongoing SEC review, or (ii) internal investigations, SEC inquiries or investigations or other governmental inquiries or investigations pending or, to the Knowledge of the Company, threatened.
(b) The Company has made available to Parent true and complete copies of all written correspondence between the SEC, on one hand, and the Company, on the other hand, since January 1, 2014. At all applicable times, the Company has complied in all material respects with the applicable provisions of the SOX Act and the rules and regulations thereunder, as amended from time to time, and the applicable listing and corporate governance rules of the NYSE.
(c) The consolidated financial statements of the Company, Company LP and the Company Subsidiaries included, or incorporated by reference, in the Company SEC Documents filed prior to the date of this Agreement, including the related notes and schedules, complied as to form in all material respects with the applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto, or, in the case of the unaudited statements, as permitted by Rule 10-01 of Regulation S-X promulgated under the Exchange Act) and fairly presented, in all material respects, in accordance with applicable requirements of GAAP and the applicable rules and regulations of the SEC (subject, in the case of the unaudited statements, to normal, recurring adjustments, none of which are material), the consolidated financial position of the Company, Company LP and the Company Subsidiaries, taken as a whole, as of their respective dates and the consolidated statements of income and the consolidated cash flows of the Company, Company LP and the Company Subsidiaries for the periods presented therein, in each case, except to the extent such financial statements have been modified or superseded by later Company SEC Documents filed and publicly available prior to the date of this Agreement.
(d) Except as set forth in Section 4.7(d) of the Company Disclosure Letter, none of the Company, Company LP or any Company Subsidiary is a party to, or has any commitment to become a party to, any joint venture, off-balance sheet partnership or any similar contract or arrangement, including any contract relating to any transaction or relationship
between or among the Company, Company LP or any Company Subsidiary, on the one hand, and any unconsolidated Affiliate (including any Unconsolidated Subsidiary) of the Company, Company LP or any Company Subsidiary, including any structured finance, special purpose or limited purpose entity or Person, on the other hand, or any off-balance sheet arrangements (as defined in Item 303(a) of Regulation S-K under the Securities Act) where the result, purpose or effect is to avoid disclosure of any material transaction involving, or material liabilities of, the Company, Company LP or any Company Subsidiary in the Companys, Company LPs or such Company Subsidiarys audited financial statements or other Company SEC Documents.
(e) None of the Company, Company LP or any Company Subsidiary has outstanding (nor has arranged or modified since the enactment of the SOX Act) any extensions of credit (within the meaning of Section 402 of the SOX Act) to trustees, directors or executive officers (as defined in Rule 3b-7 under the Exchange Act) of the Company, Company LP or any Company Subsidiary. The Company is otherwise in compliance with all applicable provisions of the SOX Act, except for any non-compliance that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
(f) The Company has established and maintains a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that is designed to provide reasonable assurance (i) regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, (ii) that receipts and expenditures of the Company, Company LP and the Company Subsidiaries are being made only in accordance with authorizations of Company management and the Company Board, and (iii) regarding prevention or timely detection of the unauthorized acquisition, use or disposition of the Companys, Company LPs and each of the Company Subsidiaries assets that could have a material effect on the Companys consolidated financial statements. The Company has disclosed, based on its most recent evaluation of such internal control over financial reporting prior to the date of this Agreement, to the Companys auditors and the audit committee of the Company Board and in Section 4.7(f) of the Company Disclosure Letter (x) any significant deficiency and material weakness in the design or operation of the Companys internal control over financial reporting that is reasonably likely to adversely affect the Companys ability to record, process, summarize or report financial information, and (y) any fraud, whether or not material, that involves Company management or other employees of the Company, Company LP or any Company Subsidiary who have a significant role in the Companys internal control over financial reporting. For purposes of this Agreement, the terms significant deficiency and material weakness shall have the meaning assigned to them in the auditing standards of the Public Company Accounting Oversight Board, as in effect on the date of this Agreement.
(g) The Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that all information (both financial and non-financial) required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such information is accumulated and communicated to the Companys management as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the chief executive officer and chief financial officer of the Company required under the Exchange Act with respect
to such reports. The Companys management has completed an assessment of the effectiveness of the Companys disclosure controls and procedures and, to the extent required by applicable Law, presented in any applicable Company SEC Document that is a report on Form 10-K or Form 10-Q, or any amendment thereto, its conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by such report or amendment based on such evaluation.
Section 4.8 Absence of Certain Changes or Events . From the date of the Companys most recent balance sheet included in the Company SEC Documents through the date of this Agreement and except as set forth in Section 4.8 of the Company Disclosure Letter, (a) each of the Company and Company LP and each Company Subsidiary has conducted its business in all material respects in the ordinary course of business consistent with past practice, and (b) there has not been any Company Material Adverse Effect or any event, circumstance, change, effect, development, condition or occurrence that, individually or in the aggregate with all other events, circumstances, changes, effects, developments, conditions or occurrences, would reasonably be expected to result in a Company Material Adverse Effect.
Section 4.9 No Undisclosed Liabilities . Except as set forth in Section 4.9 of the Company Disclosure Letter, there are no liabilities of the Company, Company LP or any of the Company Subsidiaries of any nature (whether accrued, absolute, contingent or otherwise) required under GAAP to be set forth on a consolidated balance sheet of the Company or in the notes thereto, other than: (a) liabilities reflected or reserved against as required by GAAP on the Companys most recent consolidated balance sheet (including the notes thereto) included in the Company SEC Documents filed prior to the date of this Agreement, (b) liabilities incurred in connection with the transactions contemplated by this Agreement, or (c) liabilities incurred in the ordinary course of business consistent with past practice since December 31, 2016, except for any such liabilities that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
Section 4.10 No Default . None of the Company, Company LP or any of the Company Subsidiaries is in default or violation of any term, condition or provision of (i) the Company Declaration or the Company Bylaws, (ii) the Company Partnership Certificate or the Company Partnership Agreement, or (iii) to the Knowledge of the Company, except as set forth in Section 4.2 of the Company Disclosure Letter, the Organizational Documents of any of the Company Subsidiaries in any material respect.
Section 4.11 Litigation . Except as individually or in the aggregate would not reasonably be expected to have a Company Material Adverse Effect or as set forth in Section 4.11 of the Company Disclosure Letter, as of the date of this Agreement (a) there is no Action pending or, to the Knowledge of the Company, threatened against the Company, Company LP or any Company Subsidiary or any director, trustee or officer thereof or any Company Properties or other assets owned thereby, and (b) none of the Company, Company LP or any Company Subsidiary, nor any of Company Property, is subject to any outstanding Order of any Governmental Authority.
Section 4.12 Taxes .
(a) Each of the Company, Company LP and each Company Subsidiary has timely filed with the appropriate Governmental Authority all material Tax Returns required to be filed, taking into account any extensions of time within which to file such Tax Returns, and all such Tax Returns were true and complete, except as, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. Each of the Company, Company LP and each Company Subsidiary has duly paid (or there has been paid on their behalf), or made adequate provisions in accordance with GAAP for, all material Taxes required to be paid by them, whether or not shown on any Tax Return. With respect to all taxable periods ending on or after December 31, 2013, the Company has made available to Parent complete and correct copies of all U.S. federal and state income Tax Returns and all other material Tax Returns of the Company, Company LP or the Company Subsidiaries.
(b) Each of the Company and VEF 500 First REIT LP (the REIT Subsidiary ) (i) for all taxable periods commencing with the taxable year ended, with respect to the Company, December 31, 2009, and with respect to the REIT Subsidiary, December 31, 2010, and through its taxable year ended December 31, 2016, has been subject to taxation as a real estate investment trust within the meaning of Sections 856 through 860 of the Code (a REIT ) and has satisfied all requirements to qualify, and has qualified, as a REIT for such years; (ii) has operated since January 1, 2017 and will operate to the day of the REIT Merger in a manner consistent with the requirements for qualification and taxation as a REIT; (iii) intends to continue to operate in such a manner as to qualify as a REIT for its taxable year that will end on the day of the REIT Merger; and (iv) has not taken or omitted to take any action that could reasonably be expected to result in a challenge by the IRS or any other Governmental Authority to its status as a REIT, and to the Knowledge of the Company, no such challenge is pending or threatened; provided , however , the qualification of each of the Company and the REIT Subsidiary as a REIT for its taxable year that will end on, in the case of the Company, the day of the REIT Merger, and in the case of the REIT Subsidiary, through December 31, 2017 (or applicable earlier date), assumes that the Parent will continue to operate the REIT Subsidiary after the Closing Date in a manner to qualify as a REIT for its taxable year that will end on December 31, 2017 (or such earlier date on which the REIT Subsidiary is terminated for U.S. federal income tax purposes by liquidation or by merger with another entity after the Closing Date). No Company Subsidiary (including any subsidiary of the REIT Subsidiary) is a corporation for U.S. federal income Tax purposes, other than (i) a corporation that qualifies as a REIT, (ii) a corporation that qualifies as a qualified REIT subsidiary within the meaning of Section 856(i)(2) of the Code (each a Qualified REIT Subsidiary ) or (iii) a corporation that qualifies as a taxable REIT subsidiary within the meaning of Section 856(l) of the Code (each, a Taxable REIT Subsidiary ).
(c) (i) There are no audits, investigations by any Governmental Authority or other proceedings ongoing or, to the Knowledge of the Company, threatened with regard to any material Taxes or Tax Returns of the Company, Company LP or any Company Subsidiary; (ii) no material deficiency for Taxes of the Company, Company LP or any Company Subsidiary has been claimed, proposed or assessed in writing or, to the Knowledge of the Company, threatened, by any Governmental Authority, which deficiency has not yet been settled except for such deficiencies which are being contested in good faith or with respect to which the failure to pay, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect; (iii) neither the Company, Company LP nor any Company Subsidiary has waived any statute of limitations with respect to the assessment of material Taxes or agreed to
any extension of time with respect to any material Tax assessment or deficiency for any open tax year; (iv) no Governmental Authority in any jurisdiction in which any of the Company, Company LP or any Company Subsidiary does not file Tax Returns has claimed in writing that the Company, Company LP or such Company Subsidiary is or may be subject to taxation by such jurisdiction; and (v) neither the Company, Company LP nor any of the Company Subsidiaries has entered into any closing agreement as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign income Tax Law).
(d) Each Company Subsidiary other than the REIT Subsidiary that is a partnership, joint venture or limited liability company and that has not elected to be a Taxable REIT Subsidiary has been since its formation treated for U.S. federal income Tax purposes as a partnership, disregarded entity, or Qualified REIT Subsidiary, as the case may be, and not as a corporation or an association taxable as a corporation whose separate existence is respected for U.S. federal income Tax purposes.
(e) Neither the Company, Company LP nor any Company Subsidiary holds any asset the disposition of which would be subject to (or to rules similar to) Sections 337(d) or 1374 of the Code (including through application of Treasury Regulation Section 1.337(d)-7) as applied to either the Company or the REIT Subsidiary, nor has any of them disposed of any such asset during its current taxable year.
(f) Each of the Company, Company LP and each Company Subsidiary has complied, in all material respects, with all applicable Laws relating to the payment and withholding of Taxes (including withholding of Taxes pursuant to Sections 1441, 1442, 1445, 1446, 1471 and 3402 of the Code or similar provisions under any state and foreign Laws) and has duly and timely withheld and, in each case, has paid over to the appropriate taxing authorities all material amounts required to be so withheld and paid over on or prior to the due date thereof under all applicable Laws.
(g) Except as set forth in Section 4.12(g) of the Company Disclosure Letter, there are no Company Tax Protection Agreements in force on the date of this Agreement, and, as of the date of this Agreement, no Person has raised in writing, or to the Knowledge of the Company threatened to raise, a material claim against the Company, Company LP or any Company Subsidiary for any breach of any Company Tax Protection Agreements. As used herein, Company Tax Protection Agreements means any written agreement to which one or more of the Company, Company LP or any Company Subsidiary is a party pursuant to which: (i) any liability to holders of interests in a Company Subsidiary Partnership relating to Taxes may arise, whether or not as a result of the consummation of the transactions contemplated by this Agreement; (ii) in connection with the deferral of income Taxes of a holder of interests in a Company Subsidiary Partnership, the Company or any Company Subsidiary has agreed to (A) maintain a minimum level of debt, continue a particular debt, or provide rights to guarantee or otherwise assume economic risk of loss with respect to debt, (B) retain or not dispose of assets or engage in transactions of comparable tax effect, (C) make or refrain from making Tax elections, (D) only dispose of assets in a particular manner, (E) operate (or refrain from operating) in a particular manner on account of the Tax impact thereof, (F) use (or refrain from using) a specified method of taking into account book-tax disparities under Section 704(c) of the Code with respect to one or more properties, and/or (G) use (or refrain from using) a particular method
for allocating one or more liabilities of such party or any of its direct or indirect subsidiaries under Section 752 of the Code; (iii) any Person has guaranteed, indemnified or assumed debt of a Company Subsidiary Partnership; and/or (iv) the general partner or manager of a Company Subsidiary Partnership would be required to consider separately the interests of any limited partner, member or other beneficial owner of such Company Subsidiary Partnership in connection with any transaction or other action. As used herein, Company Subsidiary Partnership means each of Company LP and any Company Subsidiary that is a partnership for U.S. federal income Tax purposes.
(h) There are no Tax Liens upon any property or assets of the Company, Company LP or any Company Subsidiary, except (i) Liens for Taxes not yet due and payable or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP or (ii) the Company Permitted Liens.
(i) There are no Tax allocation, indemnity or sharing agreements or similar arrangements with respect to which one or more of the Company, Company LP or any Company Subsidiary is a party or otherwise has any liability.
(j) Neither the Company, Company LP nor any Company Subsidiary has requested, received or is subject to any written ruling of a Governmental Authority or has entered into any written agreement with a Governmental Authority with respect to any Taxes.
(k) Neither the Company, Company LP nor any Company Subsidiary (i) has been a member of an affiliated group filing a consolidated U.S. federal income Tax Return or (ii) has any liability for the Taxes of any Person (other than the Company, Company LP or any Company Subsidiary) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign Law), as a transferee or successor, by contract, or otherwise.
(l) Neither the Company, Company LP nor any Company Subsidiary has participated in any reportable transaction within the meaning of Treasury Regulation Section 1.6011-4(b), other than a loss transaction within the meaning of Treasury Regulation Section 1.6011-4(b)(5).
(m) None of the Company, Company LP or any Company Subsidiary has constituted either a distributing corporation or a controlled corporation (within the meaning of Section 355(a)(1)(A) of the Code), a successor to a distributing corporation or a controlled corporation (within the meaning of Treasury Regulation Section 1.337(d)-7T(f)(2)) or a member of a separate affiliated group of a distributing corporation or a controlled corporation (all within the meaning of Section 355 of the Code), in a distribution of shares qualifying for tax-free treatment under Sections 355 or 356 of the Code (i) in the two (2) years prior to the date of this Agreement or (ii) in a distribution which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with transactions contemplated by this Agreement.
(n) Except as set forth in Section 4.12(n) of the Company Disclosure Letter, no written power of attorney that has been granted by the Company, Company LP or any
Company Subsidiary (other than to the Company, Company LP or a Company Subsidiary) currently is in force with respect to any matter relating to Taxes.
(o) Since their respective dates of formation, neither the Company nor the REIT Subsidiary has incurred any liability for Taxes under Sections 856(c)(7), 857(b), 857(f), 860(c) or 4981 of the Code which has not been previously paid. Neither the Company nor the REIT Subsidiary has engaged at any time in any prohibited transactions within the meaning of Section 857(b)(6) of the Code or any transaction that would give rise to redetermined rents, redetermined deductions or excess interest as each is described in Section 857(b)(7) of the Code. No event has occurred, and no condition or circumstance exists, which presents a material risk that any material amount of Tax described in the previous sentence will be imposed upon the Company, Company LP or any Company Subsidiary.
(p) With respect to the Companys taxable year ending with the REIT Merger, taking into account, without limitation, all distributions to be made by the Company prior to the day of the REIT Merger, the U.S. federal income Tax effects of the REIT Merger described in Section 2.6 , and the non-deductibility of certain change in control payments, (i) the Company will have distributed amounts to its respective shareholders equal to or in excess of the amount required to be distributed pursuant to Section 857(a) of the Code, and (ii) the Company will not be subject to Tax under Sections 857(b) or 4981 of the Code.
(q) Section 4.12(q) of the Company Disclosure Letter lists each waiver or exemption (including any amendments thereto) by the Company of any transfer restrictions or ownership limitations contained in the Companys Organizational Documents. The Company has made available to Parent complete and correct copies of each such waiver or exemption and all representations, analyses, opinions and Company Board resolutions generated or received by the Company in connection with each such waiver or exemption. To the Knowledge of the Company, except to the extent disclosed in Section 4.12(q) of the Company Disclosure Letter, no Person has owned, does own or will own 10% or more of the Company, within the meaning of Sections 856(d)(2)(B) and 856(d)(5) of the Code, as a result of such waivers or exemptions.
Section 4.13 Benefit Plans .
(a) Section 4.13(a) of the Company Disclosure Letter lists, as of the date hereof, all material employee benefit plans (as defined in Section 3(3) of ERISA (whether or not subject to ERISA)) and all material bonus, stock option, share purchase, restricted share, other equity or equity-based plans, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, employment, retention, transaction bonus, termination, change in control, severance, health, life, or disability insurance, dependent care or other material benefit plans, programs, policies, arrangements, contracts or agreements (including the Company Employment Agreements), in each case, to which the Company, Company LP or any Company Subsidiary is a party, with respect to which the Company, Company LP or any Company Subsidiary has or could have any current or future obligation or liability (contingent or otherwise), or under which any of the current or former employees, officers, trustees, directors or independent contractors of the Company, Company LP or any Company Subsidiary (or any of their dependents) has any present or future right to compensation or benefits (all such plans, programs, arrangements, contracts or agreements, collectively, the Company Benefit Plans ).
The Company has made available to Parent, to the extent applicable, and, to the Knowledge of the Company, true and complete copies of the following with respect to each material Company Benefit Plan: (i) the Company Benefit Plans to the extent in written form (or to the extent not in written form, a written description of all of the material terms of such Company Benefit Plan), (ii) the annual reports (Form 5500s) filed for the most recent plan year, if any, relating to a Company Benefit Plan, (iii) the most recently received IRS determination letter or opinion letter, if any, relating to a Company Benefit Plan, (iv) the most recently prepared actuarial report or financial statement, if any, relating to a Company Benefit Plan, (v) any related trust agreement or other funding instrument, (vi) the most recent prospectus, if any, for each Company Equity Incentive Plan and the Company ESPP, and (vii) all material correspondence with the Department of Labor, the IRS or any other Governmental Authority with respect to any Company Benefit Plan for the last three (3) plan years.
(b) Each Company Benefit Plan has been established and operated in all material respects in accordance with its terms and the requirements of all applicable Laws, including ERISA and the Code.
(c) Each Company Benefit Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS, or is entitled to rely on a favorable opinion letter issued by the IRS, and, except as would not reasonably be expected to have a Company Material Adverse Effect, no fact or event has occurred since the date of such determination letter or opinion letter from the IRS that would reasonably be expected to adversely affect the qualified status of any such Company Benefit Plan. None of the assets of any such Company Benefit Plan are invested in securities of the Company, Company LP or any Company Subsidiary, or in employer real property.
(d) None of the Company, Company LP or any Company Subsidiary or any of their ERISA Affiliates have within the last six (6) years (i) sponsored, maintained or had any obligation with respect to an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the provisions of Section 302 or Title IV of ERISA or Section 412 of the Code or a multiemployer plan within the meaning of Section 3(37) of ERISA or (ii) incurred or reasonably expects to incur any material liability pursuant to Title IV of ERISA, whether contingent or otherwise. Neither the Company, Company LP, any Company Subsidiary nor any of their ERISA affiliates has any obligation with respect to any Company Benefit Plan that provides for any post-employment or post-retirement health or medical or life insurance benefits for former or current employees of the Company, Company LP, any Company Subsidiary or any of their ERISA Affiliates except as required by Section 4980B of the Code or similar state Law. No ERISA Affiliate of the Company, Company LP, any Company Subsidiary (other than the Company, Company LP or any Company Subsidiary) in existence on or prior to the Closing shall, after the Closing, maintain any group health plan as defined in Section 5000(b)(1) of the Code.
(e) Except as provided in any Company Benefit Plan or Company Employment Agreement, as set forth in Section 4.13(e) of the Company Disclosure Letter or as otherwise specifically contemplated by this Agreement with respect to the Company Equity Awards and Company Look-Back LTI Awards, neither the execution and delivery of this Agreement nor the consummation of the Mergers and the other transactions contemplated hereby will (either alone or in conjunction with any other event (whether contingent or otherwise)) (i)
increase the amount or value of, any payment, right or other benefit otherwise due to any current or former employee, officer, trustee, director or other service provider of the Company, Company LP or any Company Subsidiary, (ii) entitle any current or former employee, officer, trustee, director or other service provider of the Company, Company LP or any Company Subsidiary to severance pay or any other similar termination payment or (iii) result in any amount failing to be deductible by reason of Section 280G of the Code. No Person is entitled to any gross-up, make-whole or other additional payment in respect of any Taxes imposed under Section 409A or Section 4999 of the Code or any interest or penalty related thereto.
(f) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect: (i) no non-exempt prohibited transactions (as described in Section 406 of ERISA or Section 4975 of the Code) have occurred with respect to any Company Benefit Plan; and (ii) each Company Benefit Plan that is a nonqualified deferred compensation plan (as defined under Section 409A(d)(1) of the Code) has been operated and administered in good faith compliance with Section 409A of the Code and related Treasury guidance thereunder.
(g) Section 4.13(g) of the Company Disclosure Letter lists: (i) each outstanding award of Company Restricted Shares, and with respect to each award of Company Restricted Shares, the name of the holder thereof, the additional Company Restricted Shares issuable upon performance in excess of target levels in accordance with the terms of the applicable award agreement or Company Equity Incentive Plan governing such award and such target level and the aggregate cash dividends and other distributions payable with respect to the award pursuant to Section 3.3(d) if the REIT Merger Effective Time were on the date of this Agreement; (ii) each outstanding Company Option, and with respect to each Company Option, the name of the holder thereof (except to the extent that such Company Option is underwater relative to the REIT Per Share Merger Consideration), the grant date, exercise price, expiration date, current vesting status and vesting conditions and whether or not the Option was intended to be an incentive stock option; (iii) each outstanding Company Look-Back LTI Award, and with respect to each Company Look-Back LTI Award, the name of the grantee thereof, and for the outstanding performance period, the target amount of the performance portion of the award and the stretch amount of the performance portion of the award; and (iv) each Person that is entitled to receive any annual cash incentive under the Companys applicable annual incentive bonus program and the amount payable thereunder as described in Section 7.15(e) . The Company shall, no later than five (5) Business Days prior to the REIT Merger Effective Time, update the information set forth in Section 4.13(g) of the Company Disclosure Letter.
Section 4.14 Labor Matters .
(a) None of the Company, Company LP or any Company Subsidiary is a party to any collective bargaining agreement, trade union or other labor union contract applicable to Persons employed by the Company, Company LP or any Company Subsidiary. To the Knowledge of the Company, (i) no union organizing efforts have been conducted within the last three (3) years or are now being conducted, and (ii) there is no pending, nor to the Knowledge of the Company, threatened, strike, slowdown, work stoppage, lockout or other material labor dispute by or with respect to any employees of the Company, Company LP or any Company Subsidiary.
(b) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, each of the Company, Company LP and each Company Subsidiary is in compliance with all applicable Laws relating to labor and employment, including all applicable Laws relating to wages, hours, collective bargaining, unemployment compensation, employment discrimination, civil rights, immigration control, employee classification, safety and health, workers compensation, pay equity, information privacy and security, and the collection and payment of withholding and/or social security taxes. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, none of the Company, Company LP or any Company Subsidiary is delinquent in paying, or has otherwise failed to pay, any wages due to any employee or group of employees. None of the Company, Company LP or any Company Subsidiary has incurred any liability or obligation under the Worker Adjustment and Retraining Notification Act or any similar state or local Law within the last twelve (12) months that remains unsatisfied.
Section 4.15 Information Supplied . None of the information relating to the Company, Company LP or the Company Subsidiaries contained in the Proxy Statement or supplied by the Company for inclusion or incorporation by reference in the Proxy Statement or any other document to be filed with the SEC or any other Governmental Authority in connection with the transactions contemplated by this Agreement ( Other Filings ) will (a) in the case of the Proxy Statement, at the time of the mailing thereof or at the time the Company Shareholder Meeting is to be held or at the time of any amendment or supplement thereof, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, or (b) with respect to the Other Filings, at the time of the filing thereof with the SEC, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. All documents that the Company is responsible for filing with the SEC in connection with this Agreement, the Mergers or the other transactions contemplated hereby will comply as to form and substance in all material respects with the applicable requirements of the Securities Act and the Exchange Act; provided , that no representation or warranty is made hereunder with respect to statements made or incorporated by reference in the Proxy Statement by, or with respect to, Parent.
Section 4.16 Intellectual Property . Except as set forth in Section 4.16 of the Company Disclosure Letter, as of the date of this Agreement, none of the Company, Company LP or any Company Subsidiary: (i) owns any material registered trademarks, service marks, Internet domain names, patents or copyrights, (ii) has any pending applications, registrations or recordings for any trademarks, service marks, Internet domain names, patents or copyrights that are material to the operation of the Company, Company LP or any Company Subsidiary, as applicable, or (iii) is a party to any licenses, contracts or agreements with respect to use by the Company, Company LP or any Company Subsidiary of any material trademarks, service marks, Internet domain names, patents or copyrights (other than any license of commercially available software in the ordinary course of business). To the Knowledge of the Company, no Intellectual Property used by the Company, Company LP or any of the Company Subsidiaries infringes or is alleged to infringe any Intellectual Property rights of any third party. No claims are pending, or to the Knowledge of the Company, threatened, contesting the validity, enforceability, ownership
or use of any material Intellectual Property owned by the Company or alleging that the Company, Company LP or any of the Company Subsidiaries infringes or otherwise violates any Intellectual Property Rights of any third Person in any material respect. To the Knowledge of the Company, no Person is misappropriating, infringing or otherwise violating any Intellectual Property of the Company, Company LP or any Company Subsidiary. Except as, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect, the Company, Company LP and the Company Subsidiaries own the entire right, title and interest in and to, or are licensed to use, or otherwise possess valid rights to use, all Intellectual Property necessary to conduct the business of the Company, Company LP and the Company Subsidiaries as it is currently conducted. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, to the Knowledge of the Company, none of the Company, Company LP or any Company Subsidiary has experienced any interruption to, or any breach of the security of, its information technology systems, or any personal or other sensitive information in its possession or under its control.
Section 4.17 Environmental Matters . Except (i) as set forth in any Phase I or Phase II or other environmental report or any Company Title Insurance Policy provided or otherwise made available to Parent prior to the date hereof, (ii) as set forth in Section 4.17 of the Company Disclosure Letter or (iii) with respect to clauses (a)-(f) below, as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect:
(a) The Company, Company LP and each Company Subsidiary are and since January 1, 2013 have been in compliance with all Environmental Laws.
(b) The Company, Company LP and each Company Subsidiary have all Environmental Permits necessary to own their properties and conduct their current operations and are in compliance with such Environmental Permits. All such Environmental Permits are valid and in full force and effect. All applications required to have been filed for the renewal of such Environmental Permits have been duly filed on a timely basis with the appropriate Governmental Authority. To the Knowledge of the Company, no suspension or cancellation of any such Environmental Permit is pending.
(c) Neither the Company, Company LP nor any Company Subsidiary has received any written notice, demand, letter or claim alleging that the Company, Company LP or any such Company Subsidiary is in violation of, or liable under, any Environmental Law or that any Order has been issued against the Company, Company LP or any Company Subsidiary, in each case, which remains unresolved. There is no Action pending, or, to the Knowledge of the Company, threatened against the Company, Company LP or any Company Subsidiary under any Environmental Law.
(d) Neither the Company, Company LP nor any Company Subsidiary has entered into or agreed to any Order or is subject to any judgment, decree or judicial, administrative or compliance order relating to compliance with Environmental Laws, Environmental Permits or the investigation, sampling, monitoring, treatment, remediation, removal or cleanup of Hazardous Substances.
(e) Neither the Company, Company LP nor any Company Subsidiary, nor, to the Knowledge of the Company, any third Person, has caused any release of a Hazardous Substance that is in violation of any Environmental Law or would reasonably be expected to require investigation or remediation by the Company, Company LP or any Company Subsidiary under any Environmental Law.
(f) Neither the Company, Company LP nor any Company Subsidiary has assumed by contract any liability under any Environmental Law or is an indemnitor in connection with any asserted claim by any third party indemnitee for any liability under any Environmental Law or relating to any Hazardous Substances.
(g) To the Knowledge of the Company, the Company has made available to Parent all material environmental audits, reports and other material environmental documents relating to the Company, Company LP, and the Company Subsidiaries or their Affiliates or predecessors past or current properties, facilities or operations that are in its possession, custody or control.
(h) Notwithstanding any other provision of this Agreement, this Section 4.17 contains the exclusive representations and warranties of the Company, Company LP and any Company Subsidiary with respect to environmental matters, Environmental Laws or Hazardous Substances.
Section 4.18 Properties .
(a) Section 4.18(a)(i) of the Company Disclosure Letter sets forth a list of the address of each Company Property, whether such Company Property is owned, leased or subleased, and of which the Company, Company LP or Company Subsidiary is the owner, lessee or sublessee. Section 4.18(a)(ii) of the Company Disclosure Letter sets forth a list of each real property which, as of the date of this Agreement, is under contract by the Company, Company LP or a Company Subsidiary for purchase, lease or sublease by the Company, Company LP or such Company Subsidiary. Section 4.18(a)(iii) of the Company Disclosure Letter sets forth a list of the mortgage notes receivables and commercial mortgage backed and similar securities owned by the Company, Company LP or any Company Subsidiary.
(b) Either the Company, Company LP or a Company Subsidiary owns good and marketable fee simple title or leasehold title (as applicable) to each of the Company Properties, in each case, free and clear of Liens, except for Company Permitted Liens.
(c) To the Knowledge of the Company, (i) no certificate, permit or license from any Governmental Authority having jurisdiction over any of the Company Properties or any agreement, easement or other right of an unlimited duration that is necessary to permit the lawful use and operation of the buildings and improvements on any of the Company Properties or that is necessary to permit the lawful use and operation of all utilities, parking areas, retention ponds, driveways, roads and other means of egress and ingress to and from any of the Company Properties has failed to be obtained or is not in full force and effect as of the date of this Agreement (and there is no pending written threat of modification or cancellation of any of same), except for such failures to be in full force and effect which, individually or in the
aggregate, would not reasonably be expected to have a Company Material Adverse Effect , and (ii) there exists no uncured violation of any Laws affecting any of the Company Properties that would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
(d) No condemnation, eminent domain or similar proceeding is pending with respect to any owned Company Property, and neither the Company, Company LP nor any Company Subsidiary has received any written notice to the effect that (i) any condemnation or rezoning proceedings are threatened with respect to any of the Company Properties or (ii) any zoning regulation or ordinance (including with respect to parking), Board of Fire Underwriters rules, building, fire, health or other Law has been violated (and remains in violation) for any Company Property, except with respect to each of clauses (i) and (ii) as would not, individually or in the aggregate, reasonably be expected to result in a Company Material Adverse Effect.
(e) The information set forth in the rent rolls for each of the Company Properties, as of June 27, 2017, which rent rolls have previously been made available by or on behalf of the Company, Company LP or any Company Subsidiary to Parent (including an indication of whether any Company Property is subject to net leases), are true and correct in all material respects. Section 4.18(e) of the Company Disclosure Letter sets forth all ground leases and other leases for the Company Properties to which the Company, Company LP or any Company Subsidiary is the lessee or sublessee ( Ground Leases ).
(f) To the Knowledge of the Company, true and complete (in all material respects) copies of (i) all Ground Leases and (ii) all Company Leases (other than Company Leases for space at the Company Properties for telecommunications equipment pursuant to which the annual rental does not exceed $50,000 (the Antenna Leases ) and all month-to-month Company Leases), in each case in effect as of the date hereof, have been made available to Parent; and in the case of the Company Property known as the NOVA Build-to-Suit Property, the lease summary made available to Parent accurately summarizes all material terms of the Company Lease at such Company Property (other than the fee owner thereof) and does not fail to disclose any material term and there is no other Company Lease at such Company Property. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect in the case of clauses (i) , (iii) and (iv) below or as set forth in Section 4.18(f) of the Company Disclosure Letter, (i) neither the Company, Company LP nor any Company Subsidiary has given written notice of breach or violation of, or default under, any Company Lease, nor, to the Knowledge of the Company, is any counterparty in breach or violation of, or default under, any Ground Lease or Company Lease (other than any Antenna Lease), in each case, which violation or breach remains outstanding and uncured, (ii) other than monetary defaults which, in the aggregate, are not material to the Company, no tenant under a Company Lease is in monetary default under such Company Lease (other than any Antenna Lease), which default remains outstanding and uncured, (iii) each Ground Lease and Company Lease (other than any Antenna Lease) is valid, binding and enforceable in accordance with its terms and is in full force and effect with respect to the Company, Company LP or a Company Subsidiary and, to the Knowledge of the Company, with respect to the other parties thereto, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors rights generally and by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at Law), and (iv) neither the Company, Company LP nor any Company Subsidiary is responsible for any outstanding Tenant
Improvements, Tenant Improvement allowances or leasing commissions required in connection with any Ground Lease or Company Lease (other than any Antenna Lease).
(g) Except as set forth in Section 4.18(g) of the Company Disclosure Letter or as set forth in the Company Title Insurance Policies, there are no pending Tax abatements or exemptions specifically affecting any Company Properties, and the Company, Company LP and the Company Subsidiaries have not received any written notice of any proposed increase in the assessed valuation of any Company Property, except in each case for any such Taxes or assessment that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
(h) Except for the Company Permitted Liens, as set forth in the Company Leases and the Company Title Insurance Policies made available to Parent, as set forth in the Organizational Documents of the Unconsolidated Subsidiaries or as would not reasonably be expected to have a Company Material Adverse Effect, (i) there are no unexpired option to purchase agreements, rights of first refusal or first offer or any other rights to purchase or otherwise acquire any Company Property or any portion thereof, and (ii) there are no other outstanding rights or agreements to enter into any contract for sale, ground lease or letter of intent to sell or ground lease any Company Property or any portion thereof that is owned by any Company, Company LP or any Company Subsidiary, which, in each case, is in favor of any party other than the Company, Company LP or any Company Subsidiary (a Company Third Party ).
(i) Except as set forth in Section 4.18(i) of the Company Disclosure Letter and except pursuant to a Company Lease or any Ground Lease, neither the Company nor Company LP or any Company Subsidiary is a party to any agreement pursuant to which the Company, Company LP or any Company Subsidiary manages or manages the development of any real property for any Company Third Party.
(j) For each Company Property, policies of (i) title insurance have been issued insuring, as of the effective date of each such insurance policy, fee simple title interest held by the Company, Company LP or the applicable Company Subsidiary with respect to the Company Properties that are not subject to the Ground Leases, and (ii) leasehold insurance have been issued insuring, as of the effective date of each such insurance policy, the leasehold interest that the Company, Company LP, or the applicable Company Subsidiary holds with respect to each Company Property that is subject to a Ground Lease (each, a Company Title Insurance Policy and, collectively, the Company Title Insurance Policies ). A copy of each Company Title Insurance Policy in the Companys possession has been made available to Parent. No written claim has been made against any Company Title Insurance Policy, which, individually or in the aggregate, would be material to any Company Property.
(k) To the Knowledge of the Company, Section 4.18(k) of the Company Disclosure Letter lists each Company Property that is (i) under development as of the date hereof (other than normal repair and maintenance), and describes the status of such development as of the date hereof or (ii) subject to a binding agreement for development or commencement of construction by the Company, Company LP or a Company Subsidiary, in each case other than
those pertaining to customary capital repairs, replacements and other similar correction of deferred maintenance items in the ordinary course of business.
(l) Section 4.18(l) of the Company Disclosure Letter lists the parties (other than the Company, Company LP, or a Company Subsidiary) currently providing leasing brokerage services or third party property management services to the Company, Company LP or a Company Subsidiary and identifies the Company Properties to which such leasing brokerage services or third party management services apply. To the Knowledge of the Company, (i) true and complete (in all material respects) copies of all agreements governing third party management services have been made available to Parent, (ii) all agreements and arrangements for leasing brokerage services are terminable by the Company, Company LP or a Company Subsidiary upon not more than ninety (90) days notice without penalty, and (iii) none of the Company, Company LP or any Company Subsidiary or any counterparty is in breach or violation of, or default under, any leasing brokerage or third party management services agreement or arrangement, which breach or violation would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
(m) The Company and the Company Subsidiaries have good and valid title to, or a valid and enforceable leasehold interest in, or other right to use, all personal property owned, used or held for use by them as of the date of this Agreement (other than property owned by tenants and used or held in connection with the applicable tenancy), except as, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. None of the Companys or any of the Companys Subsidiaries ownership of or leasehold interest in any such personal property is subject to any Liens, except for the Company Permitted Liens and Liens that would not reasonably be expected to have a Company Material Adverse Effect.
(n) Except as set forth in Section 4.18(n) of the Company Disclosure Letter, to the Knowledge of the Company (i) there are no structural defects, or violation of Law, relating to any Company Property that would have, or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, and (ii) no physical damage has occurred at any Company Property that would have, or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect for which there is not insurance in effect covering the cost of the restoration and the loss of revenue, subject to reasonable deductibles and retention limits.
Section 4.19 Material Contracts .
(a) Except (i) for contracts filed as exhibits to the Company SEC Documents filed prior to the date hereof and (ii) for contracts that (x) will be fully performed and satisfied as of or prior to Closing, or (y) are by and among only the Company and any wholly owned Company Subsidiary or among wholly owned Company Subsidiaries, Section 4.19(a) of the Company Disclosure Letter sets forth a list of each contract, oral or written, to which the Company, Company LP or any Company Subsidiary is a party or by which any of them or any of their properties or assets are bound (other than Company Leases and Ground Leases) which, as of the date hereof:
(i) is required to be filed with the SEC pursuant to Item 601(b)(2), (4), (9) or (10) of Regulation S-K under the Securities Act;
(ii) is required to be described pursuant to Item 404 of Regulation S-K under the Securities Act;
(iii) obligates the Company, Company LP or any Company Subsidiary to make any expenditures (other than principal and/or interest payments or the deposit of other reserves with respect to debt obligations), except for (A) any contract which provides for routine property-level maintenance or service and is terminable upon not more than sixty (60) days notice without a penalty or premium, and (B) any contracts which obligate the Company, Company LP or such Company Subsidiary to make aggregate annual expenditures of not more than $300,000, provided that the unexpired term of such contract is not more than five (5) years;
(iv) contains any non-compete or exclusivity provisions with respect to any line of business or geographic area with respect to the Company, Company LP or any Company Subsidiary, or, upon consummation of the Mergers and the other transactions contemplated by this Agreement, Parent or Parent Subsidiaries, or which restricts the conduct of any business conducted by the Company, Company LP or any Company Subsidiary or any geographic area in which the Company, Company LP or any Company Subsidiary may conduct business;
(v) obligates the Company, Company LP or any Company Subsidiary to indemnify any past or present trustees, directors, officers, employees and agents of the Company, Company LP or any Company Subsidiary pursuant to which the Company, Company LP or such Company Subsidiary is the indemnitor, other than the Company Declaration, the Company Bylaws, the Company Partnership Certificate, the Company Partnership Agreement or the Organizational Documents of any Company Subsidiary;
(vi) is a settlement, conciliation, or similar contract that imposes any material monetary or non-monetary obligations upon the Company, Company LP or any Company Subsidiary after the date of this Agreement;
(vii) (A) requires the Company, Company LP or any Company Subsidiary to dispose of or acquire assets or properties (other than in connection with the expiration of a Company Lease or Ground Lease pursuant to the terms thereof), (B) gives any Person the right to buy any Company Property or obligates the Company, Company LP or any Company Subsidiary to acquire, sell or enter into any lease for any real property, or (C) involves any pending or contemplated merger, consolidation or similar business combination transaction;
(viii) relates to a joint venture, partnership, strategic alliance or similar arrangement or relates to or involves a sharing of revenues, profits, losses, costs or liabilities by the Company, Company LP or any Company Subsidiary with any Person;
(ix) contains restrictions on the ability of the Company, Company LP or any Company Subsidiary to pay dividends or other distributions (other than pursuant to the Organizational Documents and the Existing Loan Documents);
(x) contains a standstill or similar provision pursuant to which the Company, Company LP or any Company Subsidiary has agreed not to acquire assets of the other party or any of its Affiliates;
(xi) is with a Governmental Authority, except for any contract that is disclosed on the Company Title Insurance Policies; or
(xii) constitutes a loan to any Person (other than a wholly owned Company Subsidiary) by the Company, Company LP or any Company Subsidiary (other than advances or rent relief made under the Company Leases or grants of relief as to the timing for the payment of rent in the ordinary course of business in connection with or pursuant to the Company Leases or pursuant to any disbursement agreement, development agreement or development addendum entered into in connection with a Company Lease with respect to the development, construction or equipping of the Company Properties or the funding of improvements to the Company Properties).
(b) Each contract in any of the categories set forth in Section 4.19(a)(i) through (xii) to which the Company, Company LP or any Company Subsidiary is a party or by which it is bound as of the date hereof is referred to herein as a Company Material Contract . For the avoidance of doubt, the term Company Material Contract does not include any Company Leases or Ground Leases.
(c) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, each Company Material Contract is legal, valid, binding and enforceable on the Company, Company LP and each Company Subsidiary that is a party thereto and, to the Knowledge of the Company, each other party thereto, and is in full force and effect, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors rights generally and by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at Law). Except as, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect, the Company, Company LP and each Company Subsidiary has performed all obligations required to be performed by it prior to the date hereof under each Company Material Contract and, to the Knowledge of the Company, each other party thereto has performed all obligations required to be performed by it under such Company Material Contract prior to the date hereof. None of the Company, Company LP or any Company Subsidiary, nor, to the Knowledge of the Company, any other party thereto, is in material breach or violation of, or default under, any Company Material Contract, and no event has occurred that, with notice or lapse of time or both, would constitute a violation, breach or default under any Company Material Contract, except where in each case such breach, violation or default is not reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect. None of the Company, Company LP or any Company Subsidiary has received written notice of any violation or default under any Company Material Contract, except for violations or defaults that, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. None of the Company, Company LP or any Company Subsidiary has received written notice of termination under any Company Material Contract, and, to the Knowledge of the Company, no party to any Company Material Contract has threatened to cancel any Company Material Contract, except as would not, individually or in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect. To the Knowledge of the Company, the Company has made available to Parent copies of all Company Material Contracts (including any amendments or other modifications thereto), which copies are true and complete in all material respects.
Section 4.20 Insurance . The Company has made available to Parent copies of the binders of all material insurance policies and all material fidelity bonds or other material insurance contracts providing coverage for the Companys, Company LPs and the Company Subsidiaries businesses and for all Company Properties (the Company Insurance Policies which shall not be deemed to include any title insurance policies). The Company Insurance Policies include all material insurance policies and all material fidelity bonds or other material insurance service contracts required by any Ground Lease. Except as, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect, all premiums due and payable under all Company Insurance Policies have been paid, and the Company, Company LP and the Company Subsidiaries have otherwise complied in all material respects with the terms and conditions of all Company Insurance Policies. To the Knowledge of the Company, such Company Insurance Policies are valid and enforceable in accordance with their terms and are in full force and effect. No written notice of cancellation or termination has been received by the Company, Company LP or any Company Subsidiary with respect to any Company Insurance Policy which has not been replaced on substantially similar terms prior to the date of such cancellation. The Company Insurance Policies include such insurance in such amounts and with respect to risks and losses, which the Company believes are adequate for the operation of its, Company LPs and the Company Subsidiaries businesses.
Section 4.21 Opinion of Financial Advisor . The Company Board has received the written opinion of Wells Fargo Securities, LLC (or an oral opinion to be confirmed in writing), to the effect that, as of the date of such opinion and based upon and subject to the assumptions, qualifications and limitations set forth in such opinion, the REIT Per Share Merger Consideration to be received by the holders of the Company Common Shares (excluding Parent, REIT Merger Sub, Partnership Merger Sub and their respective Affiliates) is fair, from a financial point of view, to such holders.
Section 4.22 Approval Required . With respect to the Company, the affirmative vote of the holders of a majority of the Company Common Shares then outstanding and entitled to vote (the Company Shareholder Approval ) is the only vote of holders of securities of the Company required to approve the REIT Merger and the other transactions contemplated by this Agreement. With respect to Company LP, the affirmative vote of the Company, in its capacities as the sole general partner and a limited partner of Company LP, is the only vote required to approve the Partnership Merger and the other transactions contemplated by this Agreement.
Section 4.23 Brokers . Except for the fees and expenses payable to Wells Fargo Securities, LLC, no broker, investment banker or other Person is entitled to any brokers, finders or other similar fee or commission in connection with the Mergers and the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company, Company LP or any Company Subsidiary. The Company has made available to Parent true and complete copies of all agreements between the Company and Wells Fargo Securities, LLC relating to the Mergers and the other transactions contemplated by this Agreement, which agreements disclose all fees payable thereunder.
Section 4.24 Investment Company Act . Neither the Company or Company LP, nor any Company Subsidiary, is, or at the REIT Merger Effective Time will be, or be required to be, registered as an investment company under the Investment Company Act of 1940, as amended.
Section 4.25 Takeover Statutes . The Company Parties have taken all action required to be taken by them in order to exempt this Agreement, the Mergers and the other transactions contemplated by this Agreement from (and this Agreement, the Mergers and the other transactions contemplated by this Agreement are exempt from) the requirements of any fair price, moratorium, control share acquisition, business combination or other takeover Laws (collectively, the Takeover Statutes ). No dissenters, appraisal or similar rights are available to the holders of the Company Common Shares or Company Partnership Units with respect to the Mergers or the other transactions contemplated by this Agreement.
Section 4.26 Existing Indebtedness .
(a) There are no material agreements, documents or other instruments evidencing or securing Indebtedness of the types described in clauses (i) , (v) , (vi) or (vii) of the definition of Indebtedness (or of the types described in clauses (viii) or (ix) of the definition of Indebtedness with respect to such clauses), including outstanding commitments under any lines of credit, to which the Company, Company LP or any of the Company Subsidiaries is a borrower or obligor or by which Company, Company LP or any of the Company Subsidiaries or any of their respective properties or assets are bound as security for Indebtedness, including all loans encumbering the Company Properties or any other Indebtedness (excluding Indebtedness represented by equipment leases) with an aggregate principal amount of $1,000,000 or more (the Existing Loans ), other than those agreements, documents or other instruments evidencing and/or securing the Existing Loans set forth in Section 4.26 of the Company Disclosure Letter (the Existing Loan Documents ). To the Knowledge of the Company, the Company has made available to Parent true, correct and complete copies of all Existing Loan Documents together with all material amendments and other modifications thereto.
(b) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, the Existing Loan Documents are in full force and effect with respect to the Company, Company LP or the applicable Company Subsidiaries, as applicable, and, to the Knowledge of the Company, with respect to the other parties thereto, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors rights generally and by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at Law). None of the Company, Company LP or any Company Subsidiary is in default in any material respect, nor has it received written notice that it is in default in any material respect, under the Existing Loan Documents that remains uncured or which will not be cured prior to the Closing Date, and, to the Knowledge of the Company, no other party is in breach or violation of, or default under, any Existing Loan Document in any material respect.
Section 4.27 Related Party Transactions . Except for this Agreement or as set forth in the Company SEC Documents filed through and including the date of this Agreement or as permitted by this Agreement, from January 1, 2014 through the date of this Agreement, there have been no transactions, agreements, arrangements or understandings between the Company,
Company LP or any Company Subsidiary, on the one hand, and any Affiliates (other than the Company Subsidiaries) of the Company, on the other hand, that would be required to be disclosed under Item 404 of Regulation S-K under the Securities Act.
Section 4.28 No Other Representations and Warranties . Except for the representations or warranties expressly set forth in this Article 4 , neither the Company, Company LP nor any other Person has made to Parent, REIT Merger Sub or Partnership Merger Sub any representation or warranty, expressed or implied, with respect to the Company, Company LP or the Company Subsidiaries, their businesses, operations, assets, liabilities, condition (financial or otherwise), results of operations, future operating or financial results, estimates, projections, forecasts, plans or prospects (including the reasonableness of the assumptions underlying such estimates, projections, forecasts, plans or prospects) or the accuracy or completeness of any information regarding the Company, Company LP or the Company Subsidiaries. In particular, without limiting the foregoing disclaimer, neither the Company, Company LP nor any other Person makes or has made any representation or warranty to Parent or any of its Affiliates or Representatives with respect to, except for the representations and warranties made by the Company and Company LP in this Article 4 , any oral or written information presented to Parent or any of its Affiliates or Representatives in the course of their due diligence of the Company and Company LP, the negotiation of this Agreement or in the course of the transactions contemplated hereby.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT, REIT MERGER SUB AND PARTNERSHIP MERGER SUB
Except as set forth in the disclosure letter prepared by Parent, REIT Merger Sub and Partnership Merger Sub with numbering corresponding to the numbering of this Article 5 delivered by Parent, REIT Merger Sub and Partnership Merger Sub to the Company and Company LP prior to the execution and delivery of this Agreement (the Parent Disclosure Letter ) (it being acknowledged and agreed that disclosure of any item in any section or subsection of the Parent Disclosure Letter shall be deemed disclosed with respect to any other section or subsection of this Agreement to the extent the applicability of such disclosure is reasonably apparent from the face of such disclosure (it being understood that to be so reasonably apparent it is not required that the other Sections be cross-referenced)); provided , that nothing in the Parent Disclosure Letter is intended to broaden the scope of any representation or warranty of Parent, REIT Merger Sub and Partnership Merger Sub, and no reference to or disclosure of any item or other matter in the Parent Disclosure Letter shall be construed as an admission or indication that (i) such item or other matter is material, (ii) such item or other matter is required to be referred to in the Parent Disclosure Letter or (iii) any breach or violation of applicable Laws or any contract, agreement, arrangement or understanding to which Parent, REIT Merger Sub or Partnership Merger Sub is a party exists or has actually occurred, each of Parent, REIT Merger Sub and Partnership Merger Sub hereby, jointly and severally, represents and warrants to the Company and Company LP that:
Section 5.1 Organization and Qualification . Each of Parent and REIT Merger Sub is a real estate investment trust duly organized, validly existing and in good standing under the Laws of the State of Maryland. Partnership Merger Sub is a limited partnership duly organized, validly
existing and in good standing under the Laws of the State of Delaware. Each of Parent, REIT Merger Sub and Partnership Merger Sub has the requisite real estate investment trust or partnership, as applicable, power and authority to own and lease its properties and assets and to conduct its business as it is now being conducted. Each of Parent, REIT Merger Sub and Partnership Merger Sub is duly qualified or licensed to do business, and is in good standing, in each jurisdiction where the character of the properties owned or leased by it or the nature of its business makes such qualification, licensing or good standing necessary, except for such failures to be so qualified, licensed or in good standing that would not, individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect. REIT Merger Sub is a wholly owned Parent Subsidiary, and Partnership Merger Sub is a majority owned subsidiary of REIT Merger Sub and a wholly owned Parent Subsidiary. REIT Merger Sub and Partnership Merger Sub were each formed solely for the purpose of engaging in the Mergers and the other transactions contemplated by this Agreement, and none of REIT Merger Sub or Partnership Merger Sub has conducted any activities other than in connection with its organization, the negotiation and execution of this Agreement and the consummation of the Mergers and the other transactions contemplated hereby.
Section 5.2 Authority .
(a) Each of Parent, REIT Merger Sub and Partnership Merger Sub has the requisite real estate investment trust or partnership, as the case may be, power and authority, as applicable, to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated by this Agreement, including the Mergers. The execution and delivery of this Agreement by each of Parent, REIT Merger Sub and Partnership Merger Sub and the consummation by each of Parent, REIT Merger Sub and Partnership Merger Sub of the Mergers and the other transactions contemplated by this Agreement have been duly and validly authorized by all necessary real estate investment trust or partnership, as applicable, action, and no other real estate investment trust or partnership, as applicable, proceedings on the part of each of Parent, REIT Merger Sub and Partnership Merger Sub are necessary to authorize this Agreement or the Mergers or to consummate the Mergers or the other transactions contemplated by this Agreement, subject, with respect to the Mergers, to the filing of the REIT Merger Articles of Merger with, and the acceptance for record of the REIT Merger Articles of Merger by, the Maryland SDAT, and the filing of the Partnership Merger Certificate of Merger with, and the acceptance for record of the Partnership Merger Certificate of Merger by, the Delaware SOS. This Agreement has been duly executed and delivered by each of Parent, REIT Merger Sub and Partnership Merger Sub and assuming due authorization, execution and delivery by the Company and Company LP, constitutes a legally valid and binding obligation of each of Parent, REIT Merger Sub and Partnership Merger Sub, enforceable against each of them in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting creditors rights generally and by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at Law).
(b) The Parent Board at a duly held meeting has, by unanimous vote, (i) determined that the terms and conditions of this Agreement, the Mergers and the other transactions contemplated by this Agreement are advisable and in the best interests of Parent, and (ii) approved and adopted this Agreement, the Mergers and the other transactions
contemplated thereby, which resolutions remain in full force and effect and have not been subsequently rescinded, modified or withdrawn in any way. In addition, Parent, in its capacity as the sole shareholder of REIT Merger Sub, and REIT Merger Sub, in its capacity as the sole general partner of Partnership Merger Sub, have each taken all actions required for the execution of this Agreement by REIT Merger Sub and Partnership Merger Sub, as applicable, and to adopt and approve this Agreement and to approve the consummation by REIT Merger Sub and Partnership Merger Sub, as applicable, of the Mergers and the other transactions contemplated by this Agreement.
Section 5.3 No Conflict; Required Filings and Consents .
(a) The execution and delivery of this Agreement by each of Parent, REIT Merger Sub and Partnership Merger Sub does not, and the performance of this Agreement and its obligations hereunder will not, (i) conflict with or violate any provision of any organizational or governing document of Parent, REIT Merger Sub or Partnership Merger Sub, (ii) assuming that all consents, approvals, authorizations and permits described in Section 5.3(b) have been obtained, all filings and notifications described in Section 5.3(b) have been made and any waiting periods thereunder have terminated or expired, conflict with or violate any Law applicable to each of Parent, REIT Merger Sub and Partnership Merger Sub or by which any property or asset of each of Parent, REIT Merger Sub and Partnership Merger Sub is bound, or (iii) require any consent or approval (except as contemplated by Section 5.3(b) ) under, result in any breach of any obligation or any loss of any benefit or material increase in any cost or obligation of Parent, REIT Merger Sub or Partnership Merger Sub under, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to any other Person any right of termination, acceleration or cancellation (with or without notice or the lapse of time or both) of, or give rise to any right of purchase, first offer or forced sale under or result in the creation of a Lien on any property or asset of Parent, REIT Merger Sub or Partnership Merger Sub pursuant to, any note, bond, debt instrument, indenture, contract, agreement, ground lease, license, permit or other legally binding obligation to which Parent, REIT Merger Sub or Partnership Merger Sub is a party except, as to clauses (ii) and (iii) above, for any such conflicts, violations, breaches, defaults or other occurrences which, individually or in the aggregate, would not reasonably be expected to have a Parent Material Adverse Effect.
(b) The execution and delivery of this Agreement by each of Parent, REIT Merger Sub and Partnership Merger Sub does not, and the performance of this Agreement by each of Parent, REIT Merger Sub and Partnership Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, except (i) the filing with the SEC of such reports under, and other compliance with, the Exchange Act and the Securities Act as may be required in connection with this Agreement, the Mergers and the other transactions contemplated by this Agreement, (ii) for any filings required by any state securities or blue sky Laws, (iii) any filings required under the rules and regulations of The NASDAQ Stock Market LLC, (iv) the filing of the REIT Merger Articles of Merger with, and the acceptance of the REIT Merger Articles of Merger for record by, the Maryland SDAT, (v) the filing of the Partnership Merger Certificate of Merger with, and the acceptance of the Partnership Merger Certificate of Merger by, the Delaware SOS, (vi) such filings as may be required in connection with state and local Transfer Taxes, and (vii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or
notifications, individually or in the aggregate, would not reasonably be expected to have a Parent Material Adverse Effect.
Section 5.4 Litigation . Except as individually or in the aggregate, would not be expected to have a Parent Material Adverse Effect, as of the date of this Agreement, (a) there is no Action pending or, to the Knowledge of Parent, threatened in writing against Parent or REIT Merger Sub, Partnership Merger Sub or any other Parent Subsidiary, and (b) none of Parent or REIT Merger Sub, Partnership Merger Sub or any other Parent Subsidiary, is subject to any outstanding Order of any Governmental Authority.
Section 5.5 Information Supplied . None of the information relating to Parent, REIT Merger Sub or Partnership Merger Sub supplied in writing by Parent for inclusion or incorporation by reference in the Proxy Statement or any Other Filings (will (a) in the case of the Proxy Statement, at the time of the mailing thereof or at the time the Company Shareholder Meeting is to be held or at the time of any amendment or supplement thereof, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, or (b) with respect to any Other Filings, at the time of the filing thereof with the SEC, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.
Section 5.6 Brokers . No broker, investment banker or other Person is entitled to any brokers, finders or other similar fee or commission in connection with the Mergers or the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of any of Parent, REIT Merger Sub or Partnership Merger Sub for which the Company, Company LP or any Company Subsidiary would be responsible prior to the REIT Merger Effective Time.
Section 5.7 Available Funds .
(a) Parent (i) has, and will have on the Closing Date, sufficient cash on hand to pay the REIT Merger Consideration, the Share Award Payments, the Partnership Merger Consideration and all fees and related expenses required to be paid by Parent and the REIT Surviving Entity, and there is not, and there will not be on the Closing Date, any restriction on the use of such cash for such purpose and (ii) has, and will have on the Closing Date, the resources and capabilities (financial or otherwise) to perform and satisfy the obligations of Parent, REIT Merger Sub and Partnership Merger Sub set forth in this Agreement, including in connection with the Mergers and the other transactions contemplated by this Agreement, in the case of each of clauses (i) and (ii) , on the terms and conditions contained in this Agreement. Each of Parent, REIT Merger Sub and Partnership Merger Sub acknowledges that the obligations of each of Parent, REIT Merger Sub and Partnership Merger Sub hereunder are not subject to any conditions regarding the ability of Parent, REIT Merger Sub or Partnership Merger Sub to obtain financing for the consummation of the transactions contemplated by this Agreement or otherwise.
(b) Parent has previously provided the Company with a true, correct and complete copy of an executed commitment letter dated June 27, 2017 (including joinders,
exhibits, schedules and annexes thereto) and the Redacted Fee Letter (the Debt Commitment Letter ) from the Financing Source named therein pursuant to which, and subject to (and only to) the terms and conditions expressly set forth therein, such Financing Source has committed to provide Parent with financing in an aggregate amount of $750,000,000 (the Debt Financing ). The Debt Commitment Letter is legal, valid and binding obligations of Parent and, to the Knowledge of Parent, each of the other parties thereto. The Debt Commitment Letter has not been amended or modified prior to the date of this Agreement, and as of the date hereof (x) no such amendment or modification is contemplated and (y) the commitments and obligations contained in the Debt Commitment Letter have not been withdrawn, modified or rescinded in any respect. There are no conditions precedent or other contingencies related to the funding of the full amount of the Debt Financing (including any flex provisions), other than as set forth in or contemplated by the Debt Commitment Letter. As of the date hereof, Parent reasonably believes (both before and after giving effect to any flex provisions contained in the Redacted Fee Letter) that it will be able to satisfy the conditions to the Debt Financing contemplated by the Debt Commitment Letter and that the Debt Financing will be made available to Parent on the Closing Date. In no event shall the receipt or availability of any funds or Financing by Parent or any of its Affiliates or any other financing transactions be a condition to any of the obligations of Parent, REIT Merger Sub and Partnership Merger Sub hereunder.
Section 5.8 Solvency . Assuming (i) the satisfaction of the conditions to the obligations of Parent, REIT Merger Sub and Partnership Merger Sub to consummate the Mergers and the other transactions contemplated by this Agreement and (ii) that any estimates, projections or forecasts prepared by or on behalf of the Company Parties that have been provided to Parent have been prepared in good faith based upon assumptions that were and continue to be reasonable, immediately after the consummation of the Mergers and giving effect to the other transactions contemplated by this Agreement, the REIT Surviving Entity, the Partnership Surviving Entity, and each of their respective subsidiaries will be able to pay their respective indebtedness as it becomes due in the usual course of business and will own total assets whose value exceeds the sum of its total liabilities.
Section 5.9 No Agreements with Company Related Parties . As of the date of this Agreement, none of Parent, REIT Merger Sub or Partnership Merger Sub nor any of their respective Affiliates has entered into any agreement (written or oral) with any Affiliate of the Company or Company LP or any of the employees, officers, directors or trustees of the Company or Company LP or their Affiliates that is currently in effect or that would become effective in the future (upon consummation of the Mergers or otherwise) that has not been disclosed.
Section 5.10 No Vote of Parent Equityholders . Except for the adoption of the Agreement by Parent as the sole shareholder of REIT Merger Sub and by REIT Merger Sub as the sole general partner of Partnership Merger Sub, no vote of any equityholders of Parent, REIT Merger Sub or Partnership Merger Sub is required by any applicable Law, the organizational documents of Parent, REIT Merger Sub or Partnership Merger Sub or the applicable rules of the Nasdaq in order for Parent, REIT Merger Sub or Partnership Merger Sub to consummate the Mergers and other transactions contemplated by this Agreement.
Section 5.11 Ownership of Company Common Shares . None of Parent, REIT Merger Sub or Partnership Merger Sub or any Parent Subsidiary owns (directly or indirectly, beneficially or of record) or is a party to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, any Company Common Shares or other securities of the Company or Company LP (other than as contemplated by this Agreement).
Section 5.12 No Other Representations or Warranties . Except for the representations and warranties expressly set forth in this Article 5 , none of Parent, REIT Merger Sub or Partnership Merger Sub or any other Person has made to the Company or Company LP any representation or warranty, expressed or implied, with respect to Parent, REIT Merger Sub, Partnership Merger Sub or any other Parent Subsidiary, their businesses, operations, assets, liabilities, condition (financial or otherwise), results of operations, future operating or financial results, estimates, projections, forecasts, plans or prospects (including the reasonableness of the assumptions underlying such estimates, projections, forecasts, plans or prospects) or the accuracy or completeness of any information regarding Parent, REIT Merger Sub, Partnership Merger Sub or any other Parent Subsidiary.
ARTICLE 6
COVENANTS RELATING TO CONDUCT OF BUSINESS PENDING THE MERGERS
Section 6.1 Conduct of Business by the Company and Company LP .
(a) Each of the Company and Company LP covenants and agrees that, between the date of this Agreement and the earlier to occur of the REIT Merger Effective Time and the date, if any, on which this Agreement is terminated pursuant to Section 9.1 (the Interim Period ), except (i) to the extent required by Law, (ii) as may be consented to in advance in writing by Parent (which consent shall not be unreasonably withheld, delayed or conditioned), (iii) as may be expressly contemplated, required or permitted pursuant to this Agreement, or (iv) as set forth in Section 6.1 of the Company Disclosure Letter, the Company shall, and shall cause each of the Company Subsidiaries to, (A) conduct its business in the ordinary course and in a manner consistent with past practice in all material respects, subject to compliance with Parents consent rights set forth in Section 6.1(b) , and (B) use its commercially reasonable efforts to (I) maintain its material assets and properties in their current condition (normal wear and tear and damage caused by casualty or by any reason outside of the Company, Company LP or any Company Subsidiarys control excepted), (II) preserve intact in all material respects its current business organization, goodwill, ongoing businesses and significant relationships with third parties, (III) keep available the services of its then-current officers and key employees, (IV) maintain all Company Insurance Policies or substitutes therefor which are comparable with such Company Insurance Policies in all material respects, and (V) maintain the status of the Company and the REIT Subsidiary as a REIT.
(b) Without limiting the foregoing, the Company covenants and agrees that, during the Interim Period, except (i) to the extent required by Law, (ii) as may be consented to in writing by Parent (which consent shall not in any case be unreasonably withheld, delayed or conditioned) (it being understood that if, within five (5) Business Days after the Company provides notice to Parent in accordance with Section 10.2 requesting Parents consent pursuant to this Section 6.1(b) , Parent has not either affirmatively provided or withheld consent or
reasonably requested additional information from the Company with respect to such request (and following delivery of such information to Parent, Parents response to such request shall not be unreasonably delayed), the Company may provide a second notice requesting such consent, which notice shall specifically state that it is a second notice under this Section 6.1(b) , and if no response is received from Parent within two (2) Business Days after the Company delivers such second notice in accordance with Section 10.2 , Parents consent shall be deemed given ( provided , however , with respect to a consent request regarding a response to a buy/sell notice under any joint venture agreement, a non-response from Parent following such two (2) Business Day period shall be deemed a consent to sell)), (iii) as may be expressly contemplated, required or permitted by this Agreement, or (iv) as set forth in Section 6.1 of the Company Disclosure Letter, the Company shall not, and shall not cause or permit any Company Subsidiary to, do any of the following:
(i) amend the Company Declaration, the Company Bylaws, the Company Partnership Certificate, the Company Partnership Agreement or the Organizational Documents of any of the Company Subsidiaries or waive or exempt any Person from the Share Ownership Limit, as such term is defined in the Company Declaration;
(ii) split, combine, reclassify or subdivide any shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or any Company Subsidiary;
(iii) declare, set aside for payment or pay any dividend or other distribution on or make any other distributions (whether in cash, stock, property or otherwise) with respect to shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or any Company Subsidiary, except for (A) the declaration and payment of dividends or other distributions by any directly or indirectly wholly owned Company Subsidiary to its parent entity, (B) distributions by any Company Subsidiary or any other entity in which the Company owns an interest that is not wholly owned, directly or indirectly, by the Company, to the extent required by the Organizational Documents of such Company Subsidiary or other entity in which the Company owns an interest, (C) the payment of accrued dividends upon the vesting of Company Restricted Shares, (D) the payment of dividends in accordance with Section 7.10 , and (E) the payment of dividends and other distributions to the extent such dividends and other distributions on the Company Common Shares, Company Partnership Units and equity interests in the REIT Subsidiary are necessary for each of the Company and the REIT Subsidiary to maintain its status as a REIT, including under Sections 858 or 860 of the Code, and to avoid or reduce the imposition of any entity level income or excise Tax under the Code; provided , however , the authorization, declaration and payment of any such dividends or other distributions other than pursuant to clauses (A) , (B) , (C) and (D) shall reduce the REIT Per Share Merger Consideration and the Partnership Per Unit Merger Consideration by the amount of such per Company Common Share or per Company Partnership Unit dividend or distribution, as applicable.
(iv) redeem, repurchase or otherwise acquire, directly or indirectly, any shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or a Company Subsidiary, other than (A) the redemption or exchange of the Company Partnership Units pursuant to and in accordance with the provisions of the Company Partnership
Agreement, (B) the acquisition by the Company of the Company Common Shares in connection with the surrender of the Company Common Shares by holders of the Company Options in order to pay the exercise price of such Company Option and Taxes withheld in connection with the exercise of Company Options, (C) the withholding of the Company Common Shares to satisfy withholding Tax obligations with respect to awards granted pursuant to the Company Equity Incentive Plans, and (D) the acquisition by the Company in the ordinary course of business consistent with past practice in connection with the forfeiture of awards pursuant to the terms of a Company Equity Incentive Plan upon termination of employment or service of an award holder ;
(v) except for transactions among the Company and one or more wholly owned Company Subsidiaries or among one or more wholly owned Company Subsidiaries, or as otherwise contemplated in Section 6.1(b)(iv)(A) or (xiii) , issue, deliver, sell, pledge, dispose, encumber or grant any shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or any Company Subsidiary, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or any Company Subsidiary; provided , however , that the Company may issue Company Common Shares (A) upon the vesting or exercise of any Company Equity Award outstanding as of the date of this Agreement or as may be granted after the date of this Agreement under Section 6.1(b)(xiii) , (B) pursuant to a Company Look-Back LTI Award or Company Equity Award outstanding as of the date of this Agreement, to the extent required pursuant to this Agreement or the terms of the applicable award agreement, (C) upon the redemption or exchange of Company Partnership Units pursuant to and in accordance with the provisions of the Company Partnership Agreement, and (D) pursuant to the Company ESPP;
(vi) acquire or agree to acquire (including by merger, consolidation or acquisition of stock or assets) any material personal property, real property, corporation, partnership, limited liability company, other business organization or any division or material amount of assets thereof, except any pending acquisitions set forth in Section 6.1(b)(vi) of the Company Disclosure Letter (the Company Pending Acquisitions );
(vii) sell, mortgage, pledge, assign, transfer, dispose of or encumber, or effect a deed in lieu of foreclosure with respect to, any property or assets, except (A) dispositions of immaterial personal property in the ordinary course of business consistent with past practice, (B) pledges or encumbrances of direct or indirect equity interests in entities from time to time under the Companys existing revolving credit facility (including with respect to the addition or substitution of Company Subsidiaries as guarantors under the Companys existing revolving credit facilities) that (I) acquire properties that are the subject of the Company Pending Acquisitions, or (II) are not currently included in the Companys borrowing base under the Companys existing revolving credit facility, (C) any pending sales or other dispositions set forth in Section 6.1(b)(vii) of the Company Disclosure Letter, and (D) pursuant to existing contractual obligations of the Company, Company LP or any Company Subsidiary set forth in Section 6.1(b)(vii) of the Company Disclosure Letter;
(viii) incur, create, assume, refinance, replace or prepay any Indebtedness for borrowed money or issue or amend the terms of any debt securities of the
Company, Company LP or any of the Company Subsidiaries, or assume, guarantee or endorse, or otherwise become responsible (whether directly, contingently or otherwise) for the Indebtedness of any other Person (other than a wholly owned Company Subsidiary), except (A) Indebtedness incurred under the Companys existing revolving credit facilities (including the line of credit in connection with the development of the Company Property known as the NOVA Build-to-Suit Property) in the ordinary course of business consistent with past practice (including to the extent necessary to pay dividends or other distributions permitted by Section 6.1(b)(iii) and including the addition or substitution of the Company Subsidiaries as guarantors under the Companys existing revolving credit facilities and provided that there shall be no increase in the aggregate principal commitments of such facilities), or (B) repayment of existing Indebtedness set forth in Section 6.1(b)(viii) of the Company Disclosure Letter by means of a draw on the Companys existing credit facilities;
(ix) make any loans, advances, investments or capital contributions to, or investments in, any other Person, make any change in its existing borrowing or lending arrangements for or on behalf of such Persons or enter into any keepwell or similar agreements to maintain the financial condition of any other Person, other than (A) by the Company, Company LP or a Company Subsidiary to the Company, Company LP or a Company Subsidiary, (B) loans, advances, investments or capital contributions required to be made under the Company Leases (it being understood that grants of relief as to the timing for the payment of rent in the ordinary course of business are not loans, advances, investments or capital contributions for these purposes), (C) in connection with any required Tenant Improvements at any of the Company Properties set forth in Section 6.1(b)(xx)(B) of the Company Disclosure Letter, and (D) investments permitted pursuant to Section 6.1(b)(vi) ;
(x) enter into, renew, modify, amend or terminate, or waive, release, compromise or assign any rights or claims under, any Company Material Contract (or any contract that, if existing as of the date hereof, would be a Company Material Contract), other than (A) any termination or renewal in accordance with the terms of any existing Company Material Contract that occurs automatically without any action (other than notice of renewal) by the Company, Company LP or any Company Subsidiary, (B) the entry into any modification or amendment of, or waiver or consent under, any mortgage or related agreement to which the Company, Company LP or any Company Subsidiary is a party as required or necessitated by this Agreement, the Mergers or the other transactions contemplated by this Agreement; provided , that any such modification, amendment, waiver or consent does not materially increase the principal amount or interest payable thereunder or otherwise materially adversely affect the Company, Company LP any Company Subsidiary or Parent, (C) in connection with any Tenant Improvements required under the Company Leases at any of the Company Properties set forth in Section 6.1(b)(xx)(B) of the Company Disclosure Letter, (D) as permitted pursuant to Section 6.1(b)(viii) or (xiii) , or (E) as may be reasonably necessary to comply with the terms of this Agreement;
(xi) enter into, renew, modify, amend or terminate, or waive, release, compromise or assign any rights or claims under, any Ground Lease or Company Lease (or any lease for Real Property that, if existing as of the date hereof, would be a Ground Lease or Company Lease) except, (A) month-to-month leases, (B) Antenna Leases, (C) leases on market terms for premises of no more than 20,000 square feet (other than at the Company Property located at 500 First Street NW, Washington, DC),
(D) any entry into, renewal, modification, amendment or termination in accordance with the terms of any such lease that occurs automatically without any action (other than notice of renewal) by the Company, Company LP or any Company Subsidiary and (E) as set forth in Section 6.1(b)(xi) of the Company Disclosure Letter;
(xii) except as set forth in Section 6.1(b)(xii) of the Company Disclosure Letter, waive, release, assign, settle or compromise any claim or Action made or pending against the Company, Company LP or any of the Company Subsidiaries;
(xiii) except (x) as required by Law, the terms of any Company Equity Incentive Plan, the Company Look-Back LTI Program, other Company Benefit Plan or award agreement with respect to any Company Equity Award, in each case in effect as of the date of this Agreement, (y) as set forth in Section 6.1(b)(xiii) of the Company Disclosure Letter or (z) as expressly otherwise contemplated by this Agreement, (A) enter into, adopt or materially amend any Company Equity Incentive Plan, the Company Look-Back LTI Program, other Company Benefit Plan or award agreement with respect to any Company Equity Award or Company Look-Back LTI Award, (B) increase in any respect the compensation or benefits of any officer, trustee or employee, other than base wage rate increases with respect to employees who are not officers made after January 1, 2018 that, in the aggregate for all such employees, do not exceed $275,000 on an annualized basis, (C) grant, confer, award or modify the terms of any options, convertible securities, restricted shares, phantom shares, equity-based compensation or other rights to acquire, or denominated in, any shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or any Company Subsidiary, (D) enter into any new or amend any existing employment, retention, indemnification, termination or similar agreement, (E) grant to any officer, trustee or employee the right to receive any new severance, change of control or termination pay or termination benefits or any increase in the right to receive any severance, change of control or termination pay or termination benefits, (F) hire any officer of the Company or promote or appoint any Person to a position of officer of the Company, (G) hire any employee other than employees reasonably required for the operation and management of the business of the Company and the Company Properties as contemplated by this Agreement (including Section 6.1(a) ) and whose annual base salary does not exceed $175,000, or (H) terminate any employees if such termination would implicate the Worker Adjustment and Retraining Notification Act or any similar state or local Law, other than in connection with the covenants set forth in Section 7.15 ;
(xiv) fail to maintain all financial books and records in all material respects in accordance with GAAP or make any material change to its methods of accounting in effect at January 1, 2017, except as required by a change in GAAP or in applicable Law, or make any change with respect to accounting policies, principles or practices unless required by GAAP or the SEC;
(xv) (A) enter into any contract, agreement, arrangement or commitment that limits or otherwise restricts the Company, Company LP or any Company Subsidiary from engaging or competing in any line of business in which it is currently engaged
or currently contemplates to be engaged or in any geographic area, or (B) enter into any new line of business;
(xvi) fail to duly and timely file all material reports and other material documents required to be filed with any Governmental Authority, subject to extensions permitted by Law;
(xvii) enter into or modify in a manner materially adverse to the Company or Company LP any Company Tax Protection Agreement, make, change or rescind any material election relating to Taxes, change a material method of Tax accounting, file or amend any material Tax Return, settle or compromise any material federal, state, local or foreign Tax liability, audit, claim or assessment, enter into any material closing agreement related to Taxes, or knowingly surrender any material right to claim any Tax refund, except, in each case, (A) to the extent required by Law, or (B) to the extent necessary (x) to preserve the Companys or the REIT Subsidiarys qualification as a REIT under the Code, or (y) to qualify or preserve the status of any Company Subsidiary (including any subsidiary of the REIT Subsidiary) as a disregarded entity or partnership for U.S. federal income Tax purposes or as a Qualified REIT Subsidiary or a Taxable REIT Subsidiary under the applicable provisions of Section 856 of the Code, as the case may be;
(xviii) subject to Section 6.1(b)(iii) , take any action, or fail to take any action, which action or failure would reasonably be expected to (A) cause the Company or the REIT Subsidiary to fail to qualify for taxation as a REIT, (B) cause any Company Subsidiary (including any subsidiary of the REIT Subsidiary) to cease to be treated as a Taxable REIT Subsidiary with respect to the Company or the REIT Subsidiary or, in the case of any Company Subsidiary other than the REIT Subsidiary (including any subsidiary of the REIT Subsidiary), cause it to cease to be treated for U.S. federal income Tax purposes as a disregarded entity, partnership or Qualified REIT Subsidiary, as the case may be, or (C) cause the Company or the REIT Subsidiary to become liable for U.S. federal income or excise Tax under Section 856, 857, 860 or 4981 of the Code (or similar provisions of state or local Tax Law), provided , however , if any action described in clauses (A) , (B) or (C) is required by Law or is necessary to preserve the status and taxation of either the Company or the REIT Subsidiary as a REIT under the Code, then the Company shall promptly notify Parent and make reasonable effort to permit Parent to review and comment on such action;
(xix) adopt a plan of merger, complete or partial liquidation or resolutions providing for or authorizing such merger, liquidation or a dissolution, consolidation, recapitalization or bankruptcy reorganization, except with respect to a Company Subsidiary in connection with any transaction permitted by Section 6.1(b)(vi) or (vii) or as permitted by Section 7.3 , in a manner that would not reasonably be expected to be materially adverse to the Company or Company LP or to prevent, delay or impair the ability of the Company or Company LP to consummate the Mergers;
(xx) except (A) pursuant to the operating expenditure budget set forth in Section 6.1(b)(xx)(A) of the Company Disclosure Letter, (B) in connection with any Tenant Improvements required under the Company Leases for any of the Company Properties set forth in Section 6.1(b)(xx)(B) of the Company Disclosure Letter, (C) capital expenditures set forth in
Section 6.1(b)(xx)(C) of the Company Disclosure Letter, and (D) capital expenditures for routine maintenance items or as are necessary in the event of an emergency situation to repair and / or prevent damage to any Company Property (after notice to Parent of such necessary emergency expense), authorize, make or commit to make any capital expenditures;
(xxi) form any new Company Subsidiaries, other than wholly owned Company Subsidiaries, or any new joint ventures, or exercise any major decision, buy / sell, deadlock or other similar rights under any existing joint venture, including with respect to the Unconsolidated Subsidiaries;
(xxii) amend or modify the compensation terms or any other obligations of the Company contained in the engagement letter with Wells Fargo Securities, LLC in a manner adverse to the Company, Company LP or any Company Subsidiary, Parent, the REIT Surviving Entity or Partnership Surviving Entity or engage other financial advisers in connection with the transactions contemplated by this Agreement;
(xxiii) fail to use reasonable best efforts to maintain in full force and effect the Company Insurance Policies or to replace such Company Insurance Policies with reasonably comparable insurance policies, to the extent available on commercially reasonable terms, covering the Company, Company LP, Company Properties, Company Subsidiaries and their respective properties, assets and businesses;
(xxiv) initiate or consent to any material zoning reclassification of any owned or material leased Company Properties or any material change to any approved site plan, special use permit, planned unit development approval or other land use entitlement affecting any owned or material leased Company Properties, except as may be required under applicable Law;
(xxv) enter into any contract, agreement, commitment or arrangement with respect to the voting or registration or any capital stock or equity interest of the Company, Company LP or any Company Subsidiary;
(xxvi) enter into any contract, agreement, commitment or arrangement between the Company, Company LP or any Company Subsidiary, on the one hand, and any Affiliates (other than the Company Subsidiaries) of the Company, on the other hand; and
(xxvii) authorize, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing.
(c) Notwithstanding anything to the contrary set forth in this Agreement, but subject to Section 6.1(b)(iii) , (xvii) and (xviii) , nothing in this Agreement shall prohibit (i) the Company, Company LP or the REIT Subsidiary from taking any action after giving prior written notice to Parent (to the extent practicable), at any time or from time to time, that in the reasonable judgment of the Company Board, upon advice of counsel to the Company, is reasonably necessary for either of the Company or the REIT Subsidiary to avoid or to continue to avoid incurring entity level income or excise Taxes under Sections 856, 857, 860 and 4981 of the Code (and similar provisions of state or local Tax Law) or to maintain its qualification for taxation as a REIT under the Code for any period or portion thereof ending on or prior to the
REIT Merger Effective Time, including making dividend or other distribution payments to shareholders of the Company or holders of interests in the REIT Subsidiary, in each case in accordance with this Agreement or otherwise as permitted pursuant to Section 6.1(b)(iii) , or to qualify or preserve the status for U.S. federal income Tax purposes of any Company Subsidiary (including any subsidiary of the REIT Subsidiary) as a disregarded entity, partnership, Qualified REIT Subsidiary, or Taxable REIT Subsidiary, as the case may be, or (ii) the Company from taking any action after giving prior written notice to Parent (to the extent practicable), at any time or from time to time, as the Company determines to be necessary to (A) be in compliance at all times with all of its obligations under any Company Tax Protection Agreement, and (B) avoid liability for any indemnification or other payment under any Company Tax Protection Agreement.
Section 6.2 Other Actions . Each Party agrees that, during the Interim Period, except as contemplated by this Agreement, such Party shall not, directly or indirectly, without the prior written consent of the other Parties, take or cause to be taken any action that would reasonably be expected to materially prevent or delay consummation of the transactions contemplated by this Agreement, or enter into any agreement to or otherwise make a commitment, to take any such action.
Section 6.3 No Control of Business . Nothing contained in this Agreement shall give Parent, REIT Merger Sub or Partnership Merger Sub, directly or indirectly, the right to control or direct the Company, Company LP or any of the Companys or Company LPs operations prior to the Partnership Merger Effective Time and the REIT Merger Effective Time. Prior to the Partnership Merger Effective Time and the REIT Merger Effective Time, each of the Company and Company LP shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its and the Company Subsidiaries operations. Notwithstanding anything to the contrary set forth in this Agreement, no consent of Parent and no consent of the Company shall be required with respect to any matter set forth in Section 6.1 or Section 6.2 or elsewhere in the Agreement to the extent that the requirement of such consent would violate any applicable Law.
ARTICLE 7
ADDITIONAL COVENANTS
Section 7.1 Preparation of the Proxy Statement; Shareholders Meeting .
(a) As promptly as reasonably practicable following the date of this Agreement, the Company shall prepare and cause to be filed with the SEC the Proxy Statement in preliminary form. The Company shall use commercially reasonable efforts to mail or deliver the definitive Proxy Statement to its shareholders entitled to vote at the Company Shareholder Meeting as promptly as reasonably practicable following clearance from SEC. Parent shall furnish all information concerning itself, its Affiliates and the holders of its capital stock to the Company and provide such other assistance as may be reasonably requested by the Company in connection with the preparation, filing and distribution of the Proxy Statement. The Company shall promptly notify Parent upon the receipt of any comments from the SEC or any request from the SEC for amendments or supplements to the Proxy Statement, and shall, as promptly as practicable after receipt thereof, provide Parent with copies of all correspondence between it and
its Representatives, on one hand, and the SEC, on the other hand, and all written comments with respect to the Proxy Statement received from the SEC and advise Parent of any oral comments with respect to the Proxy Statement received from the SEC. The Company shall use commercially reasonable efforts to respond as promptly as practicable to any comments from the SEC with respect to the Proxy Statement. Notwithstanding the foregoing, prior to filing or mailing the Proxy Statement (or any amendment or supplement thereto) or filing any other document to be filed by the Company with the SEC in connection with the Mergers or the other transactions contemplated by this Agreement or responding to any comments of the SEC with respect thereto, the Company shall cooperate and provide Parent a reasonable opportunity to review and comment on such document or response (including the proposed final version of such document or response), which comments the Company shall consider in good faith.
(b) If, at any time prior to the receipt of the Company Shareholder Approval, any information relating to the Company or Parent, or any of their respective Affiliates, should be discovered by the Company or Parent which, in the reasonable judgment of the Company or Parent, should be set forth in an amendment of, or a supplement to, the Proxy Statement, so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the Party that discovers such information shall promptly notify the other Parties hereto, and the Company and Parent shall cooperate in the prompt filing with the SEC of any necessary amendment of, or supplement to, the Proxy Statement and, to the extent required by Law, in disseminating the information contained in such amendment or supplement to shareholders of the Company. Nothing in this Section 7.1(b) shall limit the obligations of any Party under Section 7.1(a) . For purposes of Section 4.15 , Section 5.5 and this Section 7.1 , any information concerning or related to the Company, its Affiliates or the Company Shareholder Meeting will be deemed to have been provided by the Company, and any information concerning or related to Parent or its Affiliates will be deemed to have been provided by Parent.
(c) As promptly as reasonably practicable following the date that the Proxy Statement is cleared by the SEC, the Company shall, in accordance with applicable Law, the rules of the NYSE and the Company Declaration and the Company Bylaws, establish a record date for, duly call, give notice of, convene and hold the Company Shareholder Meeting; provided , that such record date shall not be more than ninety (90) days prior to the established date of the Company Shareholder Meeting. The Company shall, through the Company Board, recommend to its shareholders that they provide the Company Shareholder Approval, include such recommendation in the Proxy Statement and solicit and use its commercially reasonable efforts to obtain the Company Shareholder Approval, except to the extent that the Company Board shall have made a Company Adverse Recommendation Change as permitted by Section 7.3 . Notwithstanding the foregoing provisions of this Section 7.1(c) , if, on a date for which the Company Shareholder Meeting is scheduled, the Company has not received proxies representing a sufficient number of Company Common Shares to obtain the Company Shareholder Approval, whether or not a quorum is present, the Company shall have the right to make one or more successive postponements or adjournments of the Company Shareholder Meeting (solely for the purpose of and for the times reasonably necessary to solicit additional proxies and votes in favor of the Mergers and the other transactions contemplated hereby); provided , that the Company
Shareholder Meeting is not postponed or adjourned to a date that is less than three (3) Business Days prior to the Outside Date.
Section 7.2 Access to Information; Confidentiality .
(a) During the Interim Period, to the extent permitted by applicable Law, the Company and Company LP shall, and shall cause each of the Company Subsidiaries to, afford Parent and its Representatives reasonable access (including for the purpose of transition) during normal business hours and upon reasonable advance notice to all of their respective properties, offices, books, contracts, commitments, personnel and records, and their respective counsel and other Representatives, and, during such period, the Company and Company LP shall, and shall cause each of the Company Subsidiaries to, furnish reasonably promptly to Parent and its Representatives (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities Laws, and (ii) all other information (financial or otherwise) concerning its business, properties and personnel as Parent may reasonably request, subject to any privacy protections with respect to information concerning personnel as may be required by applicable Law. No representation or warranty as to the accuracy of information provided pursuant to this Section 7.2(a) is made, and Parent may not rely on the accuracy of such information except to the extent expressly set forth in the representations and warranties included in Article 4 , and no investigation under this Section 7.2(a) or otherwise shall affect any of the representations and warranties of the Company or Company LP contained in this Agreement or any condition to the obligations of the Parties under this Agreement. Notwithstanding the foregoing, neither the Company nor Company LP shall be required by this Section 7.2(a) to provide Parent or its Representatives with access to or to disclose information (A) that is subject to the terms of a confidentiality agreement in favor of a third party entered into prior to the date of this Agreement, (B) the disclosure of which would violate any Law or legal duty applicable to the Company, Company LP or any of their Representatives ( provided that the Company shall use its commercially reasonable efforts to make appropriate substitute arrangements to permit reasonable disclosure not in violation of Law or legal duty), or (C) that is subject to any attorney-client, attorney work product or other legal privilege or would cause a risk of loss of privilege to the Company, Company LP or the Company Subsidiaries ( provided that the Company will use commercially reasonable efforts to allow for access or disclosure to the extent that does not result in a loss of attorney-client privilege or other legal privilege). Parent will use its commercially reasonable efforts to minimize any disruption to the businesses of the Company, Company LP and the Company Subsidiaries that may result from the requests for access, data and information hereunder. Prior to the Partnership Merger Effective Time, Parent shall not, and shall cause its respective Representatives and Affiliates not to, contact or otherwise communicate with parties with which the Company, Company LP or any Company Subsidiary has a business relationship (including tenants/subtenants) regarding the business of the Company and the Company Subsidiaries or this Agreement, the Mergers and the other transactions contemplated hereby without the prior written consent of the Company which consent shall not be unreasonably withheld, delayed or conditioned ( provided , that, for the avoidance of doubt, nothing in this Section 7.2(a) shall be deemed to restrict Parent and its Representatives and Affiliates from contacting such parties in the ordinary course of Parents business).
(b) Unless and until the Closing occurs, Parent will hold, and will cause its Representatives and Affiliates to hold, any nonpublic information, including any information exchanged pursuant to this Section 7.2 , in confidence to the extent required by and in accordance with, and will otherwise comply with, the terms of the Nondisclosure Agreement, which shall remain in full force and effect pursuant to the terms thereof notwithstanding the execution and delivery of this Agreement or the termination thereof.
(c) Notwithstanding the foregoing in this Section 7.2 , Parent and its Affiliates and Representatives may disclose to Financing Sources and their Representatives, and Parent and its Affiliates and Representatives and Financing Sources and their Representatives may use, any such information regarding the Company, Company LP and the Company Subsidiaries and their business, this Agreement, the Mergers, the other transactions contemplated by this Agreement and documents related thereto, and the Company shall, and shall cause each of Company LP and the Company Subsidiaries to, afford any Financing Sources and their Representatives access to the Companys, Company LPs and Company Subsidiaries properties, offices, books, contracts, commitments, personnel and records and officers, accountants, managers employees, counsel and other Representatives as described in Section 7.2(a) , in each case, in connection with any Financing, including as part of the due diligence investigation by Financing Sources and their Representatives, for preparation of Offering Materials, and during syndication or marketing of any Financing; provided , however , in each case, that (x) such disclosure and use shall be subject to and shall not violate of the terms of the Nondisclosure Agreement (as may be amended to accommodate such disclosure and use, or as such disclosure and use maybe expressly consented to by the Company in accordance with the terms of the Nondisclosure Agreement) and Parent shall be liable for any breach of the Nondisclosure Agreement by Parent or any of its Representatives to the same extent as if the breach had been committed directly by Parent (unless such Financing Sources shall have entered into a separate nondisclosure agreement with the Company or any of its Affiliates), and (y) such Financing Sources shall first have entered into customary confidentiality undertakings with respect to such information regarding the Company, Company LP and the Company Subsidiaries and their business, this Agreement, the Mergers, the other transactions contemplated by this Agreement and documents related thereto (which may include through a notice and deemed undertaking in a form customarily used in Offering Materials).
Section 7.3 No Solicitation; Company Acquisition Proposals .
(a) Except as otherwise provided in this Section 7.3 , during the Interim Period, the Company and Company LP shall not, and shall cause the Company Subsidiaries not to, and shall not authorize or permit any Representatives of the Company, Company LP or any of the Company Subsidiaries to, (i) solicit, initiate or knowingly encourage or knowingly facilitate any inquiry, proposal or offer with respect to any Company Acquisition Proposal, or any inquiry, proposal or offer that is reasonably likely to lead to any Company Acquisition Proposal, (ii) enter into, continue or otherwise participate or engage in any discussions or negotiations regarding, or furnish to any Person other than Parent or its Representatives any non-public information or data with respect to, any Company Acquisition Proposal, (iii) enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement, share exchange agreement, consolidation agreement, option agreement or other similar definitive agreement (other than an Acceptable Confidentiality Agreement) in each case
related to a Company Acquisition Proposal (each, a Company Alternative Acquisition Agreement ), or (iv) agree to or propose publicly to do any of the foregoing. Each of the Company and Company LP shall, and shall cause each of the Company Subsidiaries to, and shall use their reasonable best efforts to cause their respective Representatives to, (A) immediately cease and cause to be terminated all existing negotiations with any Person and its Representatives (other than Parent or any of its Representatives) conducted heretofore with respect to any Company Acquisition Proposal, and (B) request the prompt return or destruction, to the extent required by any confidentiality agreement, of all confidential information previously furnished to any such Person and its Representatives. Notwithstanding anything in this Agreement to the contrary, the Company and Company LP may terminate, waive, amend, release or modify any provision of any standstill agreement (including any standstill provisions contained in any confidentiality or other agreement) to which it or any of its Affiliates or Representatives is a party, if the Company Board determines in good faith (after consultation with the Companys legal advisors) that a failure to take such action with respect to such standstill agreement would be inconsistent with its duties under applicable Law, and it is understood and agreed that each of the Company and Company LP by execution of this Agreement shall be deemed to have waived immediately prior to the date of this Agreement any provision in any such agreement to the extent necessary (and only to such extent) to enable such counterparty to convey confidentially a Company Acquisition Proposal to the Company Board.
(b) Notwithstanding anything to the contrary in Section 7.3(a) , if, at any time following the date of this Agreement and prior to obtaining the Company Shareholder Approval, (i) the Company or Company LP receives a written Company Acquisition Proposal that the Company Board believes in good faith to be bona fide, (ii) such Company Acquisition Proposal was not the result of a violation of this Section 7.3 , and (iii) the Company Board determines in good faith (after consultation with the Companys legal and financial advisors) that such Company Acquisition Proposal constitutes or is reasonably likely to lead to a Company Superior Proposal, and (after consultation with the Companys legal advisors) that a failure to take action with respect to such Company Acquisition Proposal would be inconsistent with its duties under applicable Law, then the Company and Company LP may (and may authorize the Company Subsidiaries and its and their Representatives to) (x) furnish, make available or provide access to non-public information with respect to the Company, Company LP and the Company Subsidiaries to the Person making such Company Acquisition Proposal (and its Representatives) pursuant to an Acceptable Confidentiality Agreement; provided , that any non-public information provided to any Person given such access shall have previously been provided to Parent or shall be provided (to the extent permitted by applicable Law) to Parent prior to or substantially concurrently with the time it is provided to such Person, and (y) participate in discussions or negotiations with the Person making such Company Acquisition Proposal (and such Persons Representatives) regarding such Company Acquisition Proposal. Notwithstanding anything to the contrary in this Agreement, the Company, Company LP and its Representatives may contact any Person submitting a Company Acquisition Proposal (that was not the result of a violation of this Section 7.3 ) to clarify and understand the terms of a Company Acquisition Proposal and to determine whether such Company Acquisition Proposal constitutes or is reasonably likely to lead to a Company Superior Proposal.
(c) From and after the date of this Agreement, in the event the Company, Company LP or any Company Subsidiary or any of their respective Representatives receives
from a Person or group of related Persons (i) a Company Acquisition Proposal, (ii) any request for non-public information relating to the Company, Company LP or the Company Subsidiaries from a Person who informs the Company, Company LP or any Company Subsidiary that it is considering making or has made a Company Acquisition Proposal or (iii) any inquiry or request for discussions or negotiations regarding any Company Acquisition Proposal, the Company shall promptly notify Parent of (but in no event more than two (2) Business Days following) such receipt, which shall identify the Person making the Company Acquisition Proposal, request or inquiry, and shall include a copy of such Company Acquisition Proposal, inquiry or request or, if not made in writing, a written description of the material terms thereof. The Company shall not provide any information to or engage in discussions or negotiations with the Person making the Company Acquisition Proposal until such notice has been given and shall keep Parent apprised in all material respects on a timely basis as to the status (including, within two (2) Business Days after the occurrence of any material amendment or modification) of, any such Company Acquisition Proposal, inquiry or request, including by furnishing copies of any documentation that supplements or amends any such Company Acquisition Proposal, inquiry or request in any material respect. Copies of documents provided to Parent pursuant to this paragraph may be redacted as necessary to protect the confidential information of the proposing Person.
(d) Except as provided in Sections 7.3(e) and 7.3(f) , the Company Board (i)(A) shall not fail to make and shall not withdraw (or modify or qualify in any manner adverse to Parent or publicly propose to withdraw, modify or qualify in any manner adverse to Parent) the approval, recommendation or declaration of advisability by the Company Board of this Agreement, the Mergers or the other transactions contemplated hereby, and (B) shall not adopt, approve or publicly recommend the adoption of any Company Acquisition Proposal (each such action set forth in this Section 7.3(d)(i) being referred to herein as a Company Adverse Recommendation Change ), and (ii) shall not cause or permit the Company, Company LP or any of the Company Subsidiaries to enter into any Company Alternative Acquisition Agreement relating to any Company Acquisition Proposal (other than an Acceptable Confidentiality Agreement).
(e) Notwithstanding anything in this Agreement to the contrary, at any time prior to obtaining the Company Shareholder Approval,
(i) the Company Board may make a Company Adverse Recommendation Change or authorize, cause or permit the Company, Company LP or any of the Company Subsidiaries to, and the Company, Company LP or any of the Company Subsidiaries may, terminate this Agreement pursuant to Section 9.1(d)(ii) and promptly thereafter enter into a Company Alternative Acquisition Agreement with respect to a Company Superior Proposal, if (i) the Company or Company LP receives a written Company Acquisition Proposal that the Company Board believes in good faith to be bona fide, (ii) such Company Acquisition Proposal was not the result of a violation of Section 7.3(a) , (iii) the Company Board determines in good faith (after consultation with the Companys legal and financial advisors) that such Company Acquisition Proposal constitutes or is reasonably likely to lead to a Company Superior Proposal, and (D) the Company Board determines in good faith (after consultation with the Companys legal advisors), that the failure to terminate this Agreement or make a Company Adverse Recommendation Change would be inconsistent with its duties under applicable Law; and
(ii) in circumstances not involving a Company Acquisition Proposal, the Company Board may make a Company Adverse Recommendation Change if, and only if, after the date of this Agreement, the Company Board determines in good faith (after consultation with the Companys legal advisors) that (A) a Company Intervening Event has occurred or arisen, and (B) the failure to do so would be inconsistent with its duties under applicable Law.
(f) The Company Board shall not be entitled to terminate this Agreement or effect a Company Adverse Recommendation Change as permitted under Section 7.3(e) unless, prior to taking such action, (i) the Company has notified Parent in writing that it intends to so terminate this Agreement and enter into a Company Alternative Acquisition Agreement, attaching the most current version of such agreement (including any amendments, supplements or notifications), or effect a Company Adverse Recommendation Change specifying in reasonable detail the reasons therefor (such notice, a Change Notice ); and (ii) during the four (4) Business Day period following Parents receipt of a Change Notice, the Company shall have offered to negotiate with (and, if accepted, negotiated in good faith with), and shall have caused its respective financial and legal advisors to offer to negotiate with (and if accepted, negotiated in good faith with), Parent in making adjustments to the terms and conditions of this Agreement such that, (x) in circumstances involving or relating to a Company Acquisition Proposal, the related Company Superior Proposal ceases to be a Company Superior Proposal, or (y) in circumstances not involving or relating to a Company Acquisition Proposal, such terms are as Parent proposes; and provided , further , that any amendment, supplement or modification to the financial or any other material terms of any Company Acquisition Proposal shall be deemed a new Company Acquisition Proposal and the Company may not terminate this Agreement pursuant to Section 9.1(d)(ii) or make a Company Adverse Recommendation Change pursuant to this Section 7.3 unless the Company has complied with the requirements of this Section 7.3(f) with respect to each such new Company Acquisition Proposal, including sending a Change Notice with respect to such Company Acquisition Proposal, provided that the Company shall be obligated to negotiate for a period of only three (3) Business Days from such new Change Notice, and (iii) following the end of the four (4) Business Day period or three (3) Business Day period (as applicable) contemplated by the immediately preceding subclause (ii), the Company Board determines, in good faith that (x) following consultation with the Companys legal and financial advisors in circumstances involving or relating to a Company Acquisition Proposal, the Company Superior Proposal giving rise to the Change Notice continues to constitute a Company Superior Proposal (taking into account modifications or amendments to this Agreement proposed by Parent in response to such Change Notice) and (y) in any case, following consultation with the Companys legal advisors, the failure to make such Company Adverse Recommendation Change would be inconsistent with its duties under applicable Law.
(g) Nothing contained in this Section 7.3 or elsewhere in this Agreement shall prohibit the Company or the Company Board through its Representatives, directly or indirectly, from (i) issuing a stop, look and listen communication pursuant to Rule 14d-9(f) under the Exchange Act pending disclosure of its position thereunder or taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a), or making a statement contemplated by Rule 14d-9 under the Exchange Act or Item 1012(a) of Regulation M-A under the Exchange Act, or (ii) making any disclosure to the shareholders of the Company if, in the good faith judgment of the Company Board (after consultation with its legal advisors), failure to so disclose would be inconsistent with its duties under applicable Law; provided , that in no event shall this Section 7.3(g) affect the obligations of the Company specified in Section 7.3(b) ; and provided , further ,
that a stop, look and listen communication or similar communication of the type contemplated by Rule 14d-9(f) under the Exchange Act shall not be deemed to be a Company Adverse Recommendation Change.
(h) For purposes of this Agreement:
(i) Company Acquisition Proposal means any proposal, offer, or inquiry from any Person or group (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) relating to any direct or indirect acquisition or purchase, in one transaction or a series of transactions, including any merger, reorganization, recapitalization, restructuring, share exchange, consolidation, tender offer, exchange offer, stock acquisition, asset acquisition, business combination, liquidation, dissolution, joint venture, sale, lease, exchange, license, transfer or disposition or similar transaction, (A) of any assets or businesses of the Company, Company LP and the Company Subsidiaries that generate 20% or more of the net revenues or net income or that represent 20% or more of the consolidated total assets (based on fair market value) of the Company, Company LP and the Company Subsidiaries, taken as a whole, immediately prior to such transaction, or (B) of 20% or more of any class of (including any Company Property) any shares of beneficial interest or capital stock or other equity interests of the Company, Company LP or any Company Subsidiary, or any resulting parent company of the Company, including any tender offer or exchange offer in which any Person or group (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) seeks to acquire beneficial ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) or the right to acquire beneficial ownership of any of the outstanding shares of any class of voting securities of the Company or Company LP, in each case other than the transactions contemplated by this Agreement.
(ii) Company Superior Proposal means any Company Acquisition Proposal made after the date hereof (with all percentages included in the definition of Company Acquisition Proposal increased to 67%), taking into account all legal, financial, regulatory and other aspects of the proposal and the Person making the proposal, that the Company Board determines in its good faith judgment that (A) if consummated, would be more favorable to the shareholders of the Company from a financial point of view than the transactions contemplated by this Agreement (including any adjustment to the terms and conditions thereof proposed in writing by Parent in response to any such Company Acquisition Proposal), and (B) if accepted, is reasonably likely to be completed on the terms proposed on a timely basis.
(iii) References in this Section 7.3 to the Company Board shall mean the board of trustees of the Company or a duly authorized committee thereof.
(iv) The Company shall not submit to the vote of its shareholders any Company Acquisition Proposal other than the REIT Merger prior to the termination of this Agreement in accordance with its terms.
Section 7.4 Public Announcements . Except with respect to any Company Adverse Recommendation Change or any action taken pursuant to, and in accordance with Section 7.3 or in connection with any Financing, so long as this Agreement is in effect, the Parties hereto shall, to the extent reasonable under the circumstances, consult with each other before issuing any
press release or otherwise making any public statements or filings with respect to this Agreement or any of the transactions contemplated by this Agreement and provide such Party with an opportunity to review and comment upon such press release or other public announcement or filing, which comments the other Party shall consider in good faith; provided, that a Party may, without consulting with or pursuing the other Parties review, issue such press release or make such public statement or filing with respect to this Agreement or any of the other transactions contemplated by this Agreement as may be required by Law, Order or the applicable rules of any stock exchange.
Section 7.5 Indemnification; Trustees, Directors and Officers Insurance .
(a) From the REIT Merger Effective Time and ending on the sixth (6th) anniversary of the REIT Merger Effective Time, without limiting any additional rights that any director, officer, trustee, or agent may have under any indemnification agreement or under the Organizational Documents of the Company, Company LP or any Company Subsidiary in effect as of the date hereof, each of the REIT Surviving Entity and the Partnership Surviving Entity, shall jointly and severally: (i) indemnify and hold harmless each Person who is at the date hereof, was previously, or during the period from the date hereof through the Closing Date, serving as a director, officer, trustee or agent of the Company, Company LP, any of the Company Subsidiaries and acting in such capacity (collectively, the Indemnified Parties ) to the fullest extent authorized or permitted by applicable Law, as now or hereafter in effect, in connection with any Claim and any losses, claims, damages, liabilities, costs, Claim Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of any thereof) relating to or resulting from such Claim; and (ii) promptly pay on behalf of, or, after any request for advancement, advance, to each of the Indemnified Parties, to the fullest extent authorized or permitted by applicable Law, as now or hereafter in effect, any Claim Expenses incurred in defending, serving as a witness with respect to or otherwise participating with respect to any Claim in advance of the final disposition of such Claim, including payment on behalf of or advancement to the Indemnified Party of any Claim Expenses incurred by such Indemnified Party in connection with enforcing any rights with respect to such indemnification and/or advancement, in each case without the requirement of any bond or other security, but subject to the Partnership Surviving Entitys and the REIT Surviving Entitys receipt of a written undertaking by or on behalf of such Indemnified Party to repay such Claim Expenses if it is ultimately determined under applicable Laws that such Indemnified Party is not entitled to be indemnified; provided , that the Partnership Surviving Entity and the REIT Surviving Entity shall not be liable for any amounts paid in settlement effected without its prior written consent (which consent shall not be unreasonably conditioned, withheld or delayed) and shall not be obligated to pay the fees and expenses of more than one counsel (selected by a plurality of the applicable Indemnified Parties) for all Indemnified Parties in any jurisdiction with respect to any single Claim (except to the extent the Indemnified Party is advised by counsel that such Indemnified Party has conflicting interests with one or more other Indemnified Parties in the outcome of such action (in which event such Indemnified Party shall be entitled to engage separate counsel, the fees and expenses for which the Surviving Entity shall be liable). The indemnification and advancement obligations of the Partnership Surviving Entity and the REIT Surviving Entity pursuant to this Section 7.5(a) shall extend to acts or omissions occurring at or before the
Partnership Merger Effective Time and the REIT Merger Effective Time, as applicable, and any Claim relating thereto (including with respect to any acts or omissions occurring in connection with the approval of this Agreement, the Mergers and the consummation of the other transactions contemplated by this Agreement, including the consideration and approval thereof and the process undertaken in connection therewith and any Claim relating thereto), and all rights to indemnification and advancement conferred hereunder shall continue as to a Person who has ceased to be a director, officer, trustee, or agent of the Company or Company LP or any of the Company Subsidiaries after the date hereof and shall inure to the benefit of such Persons heirs, executors and personal and legal representatives. As used in this Section 7.5(a) , (A) the term Claim means any threatened, asserted, pending or completed Action, whether instituted by any Party hereto, any Governmental Authority or any other Person, whether civil, criminal, administrative, investigative or other, including any arbitration or other alternative dispute resolution mechanism, arising out of or pertaining to, or that any Indemnified Party in good faith believes might lead to the institution of any Action arising out of or pertaining to (x) matters that relate to such Indemnified Partys duties or service as a director, officer, trustee or agent of the Company, Company LP, any of the Company Subsidiaries or, to the extent such Person is or was serving at the request or for the benefit of the Company, Company LP or any of the Company Subsidiaries, any other entity or any Company Benefit Plan maintained by any of the foregoing at or prior to the Closing, and (y) this Agreement, the Mergers or any of the other transactions contemplated by this Agreement; and (B) the term Claim Expenses means reasonable attorneys fees and all other reasonable costs, expenses and obligations (including experts fees, travel expenses, court costs, retainers, transcript fees, duplicating, printing and binding costs, as well as telecommunications, postage and courier charges) paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in, any Claim for which indemnification is authorized pursuant to this Section 7.5(a) , including any Action relating to a claim for indemnification or advancement brought by an Indemnified Party. The Partnership Surviving Entity and the REIT Surviving Entity, as applicable, shall not settle, compromise or consent to the entry of any judgment in any actual or threatened Claim in respect of which indemnification has been sought by an Indemnified Party hereunder unless such settlement, compromise or judgment includes an unconditional release of such Indemnified Party from all liability arising out of such Claim, or such Indemnified Party otherwise consents thereto in writing (which consent shall not be unreasonably withheld, delayed or conditioned).
(b) Without limiting the foregoing, each of Parent, the Partnership Surviving Entity and the REIT Surviving Entity agrees that all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the Closing now existing in favor of the Indemnified Parties as provided in the Organizational Documents and indemnification agreements of the Company, Company LP and the Company Subsidiaries shall survive the Mergers and shall continue in full force and effect in accordance with their terms. For a period of six (6) years following the Closing, the organizational documents of the Partnership Surviving Entity, the REIT Surviving Entity and any applicable Company Subsidiary shall contain provisions no less favorable with respect to indemnification and limitations on liability of trustees, directors, officers or agents than as set forth in the Organizational Documents of each of the Company, Company LP and the Company Subsidiaries.
(c) For a period of six (6) years after the Closing, as applicable, Parent, the Partnership Surviving Entity or the REIT Surviving Entity shall maintain in effect the Companys current trustees and officers liability insurance covering each Person currently covered by the Companys trustees, directors and officers liability insurance policy for acts or omissions occurring prior to and through the Closing; provided , that in lieu of such obligation, (i) Parent, the REIT Surviving Entity or the Partnership Surviving Entity, as applicable, may substitute therefor policies of an insurance company with the same or better rating as the Companys and Company LPs current insurance carrier the material terms of which, including coverage and amount, are no less favorable in any material respect to such trustees, directors and officers than the Companys, Company LPs or the applicable Company Subsidiarys existing policies as of the date hereof, or (ii) in consultation with Parent, the Company may obtain extended reporting period coverage under the Companys, Company LPs or the applicable Company Subsidiarys existing insurance programs (to be effective as of the Closing) or purchase a tail policy for a period of six (6) years after the Closing, as applicable, for a cost not in excess of three (3) times the current annual premiums for such insurance; and provided, further, that in no event shall the REIT Surviving Entity or the Partnership Surviving Entity be required to pay annual premiums for insurance under this Section 7.5(c) in excess of 300% of the most recent annual premiums paid by the Company, Company LP or the applicable Company Subsidiary, as applicable, prior to the date of this Agreement for such purpose, it being understood that if the annual premiums of such insurance coverage exceed such amount, the REIT Surviving Entity or the Partnership Surviving Entity, as applicable, shall nevertheless be obligated to provide such coverage as may be obtained for such 300% amount.
(d) If the REIT Surviving Entity, the Partnership Surviving Entity or any of their respective successors or assigns (i) consolidates with or merges with or into any other Person and shall not be the continuing or surviving corporation, partnership or other entity of such consolidation or merger, or (ii) liquidates, dissolves or winds-up, or transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, proper provision shall be made so that the successors and assigns of the REIT Surviving Entity or the Partnership Surviving Entity, as the case may be, shall assume the obligations set forth in this Section 7.5 .
(e) Parent, the REIT Surviving Entity and the Partnership Surviving Entity shall pay all reasonable expenses, including reasonable attorneys fees, that may be incurred by any Indemnified Party in enforcing the indemnity and other obligations provided in this Section 7.5 ; provided , that such Indemnified Party provides an undertaking to repay such expenses if it is determined by a final and non-appealable judgment of a court of competent jurisdiction that such Person is not legally entitled to indemnification under Law.
(f) The provisions of this Section 7.5 are intended to be for the express benefit of, and shall be enforceable by, each Indemnified Party (who are intended third party beneficiaries of this Section 7.5 ), his or her heirs and his or her personal representatives, shall be binding on all successors and assigns of Parent, the Company, Company LP, the REIT Surviving Entity and the Partnership Surviving Entity and shall not be amended in a manner that is adverse to the Indemnified Party (including his or her successors, assigns and heirs) without the prior written consent of the Indemnified Party (including such successors, assigns and heirs) affected thereby. The exculpation and indemnification provided for by this Section 7.5 shall not be
deemed to be exclusive of any other rights to which an Indemnified Party is entitled, whether pursuant to applicable Law, contract or otherwise.
Section 7.6 Appropriate Action; Consents; Filings .
(a) Upon the terms and subject to the conditions set forth in this Agreement, each of the Company, Company LP and Parent shall, and shall cause the Company Subsidiaries, REIT Merger Sub, Partnership Merger Sub and the Parent Subsidiaries, respectively, and their respective Affiliates to, use their respective reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other Party in doing, all things necessary, proper or advisable under applicable Law or pursuant to any contract or agreement to consummate and make effective, as promptly as practicable, the Mergers and the other transactions contemplated by this Agreement, including (i) the taking of all actions necessary to cause the conditions to Closing set forth in Article 8 to be satisfied, (ii) the obtaining of all necessary or advisable actions or non-actions, waivers, waiting period expirations or terminations, consents and approvals from Governmental Authorities or other Persons necessary in connection with the consummation of the Mergers and the other transactions contemplated by this Agreement and the making of all necessary or advisable registrations and filings (including filings with Governmental Authorities, if any) and the taking of all reasonable steps as may be necessary or advisable to obtain an approval or waiver from, or to avoid an Action by, any Governmental Authority or other Persons necessary in connection with the consummation of the Mergers and the other transactions contemplated by this Agreement, including complying expeditiously with any and all information and document requests by any Governmental Authority in connection with any investigation of the Mergers or the other transactions contemplated hereby, (iii) subject to Section 7.7(c) , the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the Mergers or the other transactions contemplated by this Agreement, including seeking to have any stay or restraining order entered by any court or other Governmental Authority vacated or reversed, and the avoidance of each and every impediment under any antitrust, merger control, competition or trade regulation Law that may be asserted by any Governmental Authority with respect to the Mergers so as to enable the Closing to occur as soon as reasonably possible, and (iv) the execution and delivery of any additional instruments necessary or advisable to consummate the Mergers and the other transactions contemplated by this Agreement and to fully carry out the purposes of this Agreement.
(b) In connection with and without limiting the foregoing Section 7.6(a) , each of Parent, the Company and Company LP shall use its commercially reasonable efforts (or shall cause REIT Merger Sub, Partnership Merger Sub, the Parent Subsidiaries or the Company Subsidiaries, respectively), to give any notices to third parties, and each of Parent and the Company shall use, and cause each of their respective Affiliates to use, its commercially reasonable efforts to obtain any third party consents not covered by Section 7.6(a) that are necessary, proper or advisable to consummate the Mergers and the other transactions contemplated by this Agreement. Each of the Parties hereto shall and shall cause their respective Affiliates to, furnish to the other such necessary information and reasonable assistance as the other may request in connection with the preparation of any required governmental filings or submissions and will cooperate in responding to any inquiry from a Governmental Authority, including promptly informing the other Parties of such inquiry, consulting in advance before
making any presentations or submissions to a Governmental Authority, and supplying each other with copies of all material correspondence, filings or communications between any Party and any Governmental Authority with respect to this Agreement. To the extent reasonably practicable and legally permitted, the Parties or their Representatives shall have the right to review in advance, and each of the Parties will consult the others on, all the information relating to such parties and each of their Affiliates that appears in any filing made with, or written materials submitted to, any Governmental Authority in connection with the Mergers and the other transactions contemplated by this Agreement, except that confidential, competitively sensitive business information may be redacted from such exchanges. The Parties may, as they deem advisable and necessary, designate any sensitive materials provided to the other under this Section 7.6 as outside counsel only. Such materials and the information contained therein shall be given only to outside counsel of the recipient and will not be disclosed by such outside counsel to employees, officers, directors or trustees of the recipient without the advance written consent of the Party providing such materials. To the extent reasonably practicable, neither the Company, Company LP, Parent, REIT Merger Sub nor Partnership Merger Sub shall, nor shall they permit their respective Representatives to, participate independently in any meeting or engage in any substantive conversation with any Governmental Authority in respect of any filing, investigation or other inquiry without giving the other Party prior notice of such meeting or conversation and, to the extent permitted by applicable Law, without giving the other party the opportunity to attend or participate (whether by telephone or in Person) in any such meeting with such Governmental Authority.
(c) In connection with obtaining any approval or consent from any Person (other than any Governmental Authority) with respect to the Mergers, none of the Parties or any of their Subsidiaries, or any of their respective Representatives, shall be obligated to pay or commit to pay to such Person whose approval or consent is being solicited any cash or other consideration, make any accommodation or commitment or incur any liability or other obligation to such Person prior to the Partnership Merger Effective Time and the REIT Merger Effective Time. The Parties shall cooperate with respect to accommodations that may be requested to obtain such consents.
Section 7.7 Notification of Certain Matters; Transaction Litigation .
(a) The Company, Company LP and their respective Representatives shall give prompt notice to Parent, and Parent and its Representatives shall give prompt notice to the Company and Company LP, of any notice or other communication received by such Party from any Governmental Authority in connection with this Agreement, the Mergers or the other transactions contemplated by this Agreement, or from any Person alleging that the consent of such Person is or may be required in connection with the Mergers or the other transactions contemplated by this Agreement.
(b) The Company, Company LP and their respective Representatives shall give prompt notice to Parent, and Parent and its Representatives shall give prompt notice to the Company and Company LP, if (i) any representation or warranty made by it contained in this Agreement becomes untrue or inaccurate such that it would be reasonable to expect that the applicable closing conditions would be incapable of being satisfied by the Outside Date, or (ii) it fails to comply with or satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided , that no such notification shall affect the representations, warranties, covenants or agreements of the Parties or the conditions to the obligations of the Parties under this Agreement. Without limiting the foregoing, the Company, Company LP and their respective Representatives shall give prompt notice to Parent, and Parent and its Representatives shall give prompt notice to the Company and Company LP, if, to the Knowledge of the Company or the Knowledge of Parent, as applicable, the occurrence of any state of facts, change, development, event or condition would cause, or would reasonably be expected to cause, any of the conditions to Closing set forth herein not to be satisfied or satisfaction to be materially delayed. Notwithstanding anything to the contrary in this Agreement, the failure by the Company, Company LP, Parent or their respective Representatives to provide such prompt notice under this Section 7.7(b) shall not constitute a breach of covenant for purposes of Section 8.2(b) , Section 8.3(b) or Section 9.3(b)(i) .
(c) The Company, Company LP and their respective Representatives shall give prompt notice to Parent, and Parent and its Representatives shall give prompt notice to the Company and Company LP, of any Action commenced relating to or involving such Party or any Company Subsidiary, Parent Subsidiary or any Affiliate thereof, respectively, that relates to this Agreement, the Mergers or the other transactions contemplated by this Agreement. The Company, Company LP and their respective Representatives shall give Parent the opportunity to reasonably participate in the defense and settlement of any shareholder litigation against the Company or Company LP and/or its trustees relating to this Agreement, the Mergers and the other transactions contemplated hereby, and no such settlement shall be agreed to without Parents prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed). Parent and its Representatives shall give the Company and Company LP the opportunity to reasonably participate in the defense and settlement of any litigation against Parent and/or its directors relating to this Agreement, the Mergers and the other transactions contemplated hereby.
Section 7.8 Section 16 Matters . Prior to the Closing, the Company shall take all such steps to cause any dispositions of Company Common Shares (including derivative securities with respect to Company Common Shares) resulting from the transactions contemplated by this Agreement by each Person who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to the Company to be exempt under Rule 16b-3 promulgated under the Exchange Act.
Section 7.9 Delisting and Deregistering of Company Securities . Parent and the REIT Surviving Entity shall use their reasonable best efforts to cause the Company Common Shares to be de-listed from the NYSE and de-registered under the Exchange Act promptly following the REIT Merger Effective Time.
Section 7.10 Dividends . In the event that a distribution with respect to the Company Common Shares or the Company Partnership Units permitted under the terms of this Agreement has a record date prior to the REIT Merger Effective Time or Partnership Merger Effective Time, as applicable, and has not been paid prior to the Closing Date, such distribution shall be paid to the holders of such Company Common Shares or Company Partnership Units on the Closing Date immediately prior to the REIT Merger Effective Time or the Partnership Merger Effective Time, as applicable.
Section 7.11 Voting of Shares . Parent shall vote all Company Common Shares beneficially owned by it or any of the Parent Subsidiaries as of the record date for the Company Shareholder Meeting, if any, in favor of approval of the REIT Merger and the other transactions contemplated by this Agreement.
Section 7.12 Takeover Statutes . The Parties shall use their respective reasonable best efforts (a) to take all action necessary so that no Takeover Statute is or becomes applicable to the Mergers or any of the other transactions contemplated by this Agreement, and (b) if any such Takeover Statute is or becomes applicable to any of the foregoing, to take all action necessary so that the Mergers and the other transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to eliminate or minimize the effect of such Takeover Statute on the Mergers and the other transactions contemplated by this Agreement.
Section 7.13 Tax Representation Letter . The Company shall deliver to Arnold & Porter Kaye Scholer LLP (or other counsel to the Company) a tax representation letter, dated as of the Closing Date and signed by an officer of the Company, in form and substance reasonably acceptable to such counsel, containing representations of the Company for purposes of rendering the opinion described in Section 8.2(e) .
Section 7.14 Merger Subs; Subsidiaries . Parent shall cause each of Partnership Merger Sub, REIT Merger Sub and any other applicable Parent Subsidiary to comply with and perform all of its obligations under or relating to this Agreement on the terms and conditions set forth in this Agreement. The Company and Company LP shall cause each of the Company Subsidiaries to comply with and perform all of its obligations under or relating to this Agreement.
Section 7.15 Employee Benefit Matters .
(a) The Company, Company LP and each Company Subsidiary (as applicable) shall terminate the employment of each employee of the Company, Company LP or any Company Subsidiary, excluding any such employee with a Company Employment Agreement with respect to the Company Employment Agreements set forth on Section 7.15(b) of the Company Disclosure Letter (which shall be governed by Section 7.15(b) ), effective immediately prior to the Closing. With respect to any such employee of the Company, Company LP or any Company Subsidiary as to whom The RMR Group LLC, a Maryland limited liability company ( RMR LLC ), prior to the Closing, does not offer comparable employment with comparable compensation for a position with comparable responsibilities at or within fifty (50) miles of such employees primary location of work as of immediately prior to the Closing, Parent will cause the Partnership Surviving Entity to pay each such employee the severance benefits that such employee is eligible to receive, calculated pursuant to the formula set forth in the Company Severance Guidelines, effective June 13, 2016 (the Severance Guidelines ) in accordance with such Severance Guidelines (regardless of any discretionary right on the part of the Company to pay or not pay such amounts under the Severance Guidelines).
(b) Effective as of the Closing, the employment of each employee of the Company, Company LP or any Company Subsidiary who is a party to a Company Employment Agreement set forth in Section 7.15(b) of the Company Disclosure Letter shall be terminated
pursuant to the terms thereof. From and after the Closing Date, Parent shall, and shall cause the REIT Surviving Entity, the Partnership Surviving Entity or their respective Affiliates to, honor the terms of such Company Employment Agreements, including the payment of amounts or other benefits to which such employees are entitled in connection with such termination (which payment, for the avoidance of doubt, will be calculated with such termination being deemed to have occurred within the Change in Control Protection Period under each of the Company Employment Agreement), subject in each case to such employees compliance with the provisions of the Company Employment Agreements applicable to such employee.
(c) Prior to the Closing, Parent may request RMR LLC to offer at will employment to some or all of the property level employees of the Company, Company LP or any Company Subsidiary. The Company and Company LP shall, and shall cause the Company Subsidiaries to, provide RMR LLC with reasonable access to any and all of their employees to permit RMR LLC, at its discretion, to discuss offers of employment with any such employees and the terms of any associated employment related documents, and to cooperate with RMR LLC in the transitioning of any such employees to be employees of RMR LLC as of the Closing Date.
(d) Parent shall cause RMR LLC to credit each employee of the Company, Company LP or any Company Subsidiary hired by RMR LLC with his or her years of service with the Company, Company LP and any of the Company Subsidiaries and their respective Affiliates (and any additional service with any predecessor employer) before the Closing for purposes of eligibility, severance, waiting periods, vesting and determination of level of benefits under the compensation and benefit plans, programs, agreements and arrangements of RMR LLC and any of its subsidiaries or Affiliates providing benefits to any employees hired by RMR LLC after the Closing (collectively, the New Plans ), including for purposes of accrual of vacation and other paid time off and severance benefits under New Plans (but excluding any New Plan that is a defined benefit pension plan or that is established after the Closing or that does not recognize service prior to its adoption), to the same extent as such employee was entitled, before the Closing, to credit for such service under any similar Company Benefit Plan, except where such credit would result in a duplication of benefits. In addition, to the extent permitted under the New Plans, Parent shall cause RMR LLC to use commercially reasonable efforts, but without cost to RMR LLC and without a potential for a resulting increase in the cost of or rates under the New Plans, to cause any eligible expenses incurred by any employee of the Company, Company LP or any Company Subsidiary hired by RMR LLC and his or her covered dependents under a Company Benefit Plan during the portion of the plan year prior to the REIT Merger Effective Time to be taken into account under such New Plan for purposes of satisfying all deductible, co-insurance, co-payment and maximum out-of-pocket requirements applicable to such employee and his or her covered dependents for the applicable plan year of the New Plan as if such amounts had been paid in accordance with such New Plan.
(e) At or immediately after the REIT Merger Effective Time, Parent shall pay, or shall cause the REIT Surviving Entity, the Partnership Surviving Entity or their respective
Affiliates to pay, to each individual who, prior to the Closing Date, was an employee of the Company, Company LP or any Company Subsidiary, as applicable, (i) if the Closing Date occurs before December 31, 2017, a pro-rata portion of any annual cash incentive in respect of the Companys 2017 fiscal year in an amount equal to the product of (x) the amount that such employee would have been entitled to receive under the Companys applicable annual incentive bonus program, based on the target level of achievement under such program and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Closing Date, and the denominator of which is 365; or (ii) if the Closing Date occurs on or after December 31, 2017, an amount equal to any unpaid annual cash incentive in respect of the Companys 2017 fiscal year that such employee earned (i.e., is entitled to receive) under the Companys applicable annual incentive bonus program (based on actual achievement for such fiscal year as determined by the Company Board).
(f) The Company or Company LP, as applicable, shall, no later than ten (10) days prior to the Closing Date, adopt resolutions of the Company or Company LP, as applicable, Board (the form and substance of which resolutions shall be subject to the prior review and approval of Parent, which approval will not be unreasonably withheld, delayed or conditioned) to authorize the termination of the First Potomac Realty Investment, LP 401(k) Plan effective at least one (1) day prior to the Closing Date.
(g) Parent shall take all action necessary to cause RMR LLC to provide to (i) each employee of Company, Company LP or any Company Subsidiary who has elected continuation coverage under COBRA prior to or as of immediately prior to the Closing, and (ii) each employee of the Company, Company LP or any Company Subsidiary who does not accept an offer of employment with RMR LLC, and all eligible dependents of each Person set forth in clause (i) and (ii), an ability to elect (or continue) COBRA continuation coverage for the maximum period available (or remaining with respect to a prior election) under COBRA.
(h) Nothing contained herein shall be construed as requiring Parent, the REIT Surviving Entity, the Partnership Surviving Entity or their Affiliates to continue any specific employee benefit plans or to continue the employment of any specific Person. Nothing contained herein shall be construed as an amendment to any Company Benefit Plan or any other compensation or benefit plan or arrangement for any purpose.
Section 7.16 Transfer Taxes . Parent and the Company shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, share transfer or stamp taxes, any transfer, recording, registration and other fees and any similar Taxes that become payable in connection with the transactions contemplated by this Agreement (together with any related interest, penalties or additions to Tax, Transfer Taxes ), and shall cooperate in attempting to minimize the amount of Transfer Taxes. From and after the Closing, each of the REIT Surviving Entity and the Partnership Surviving Entity shall pay or cause to be paid, without deduction or withholding from any consideration or amounts payable to holders of the Company Common Shares or holders of the Company Partnership Units, all Transfer Taxes.
Section 7.17 Financing Cooperation .
(a) Parent, REIT Merger Sub and Partnership Merger Sub shall use reasonable best efforts to take, or cause to be taken, all actions and do, or cause to be done, as promptly as possible, all things necessary, proper or advisable to consummate and obtain at or prior to the Closing the Debt Financing on the terms and conditions set forth in the Debt Commitment Letter or, if Parent determines that such Debt Financing will not be so obtained, Financing from alternative sources in an amount sufficient, together with funds otherwise available to Parent, to fund the REIT Merger Consideration, Partnership Merger Consideration and Share Awards required at the Closing on terms not materially less favorable to Parent than set forth in the Debt Commitment Letter (the Alternate Financing ), including using reasonable best efforts to (i) negotiate and enter into definitive agreements with respect to the Debt Financing on the terms and subject only to the conditions contained in the Debt Commitment Letter (including, to the extent required, the full exercise of any flex provisions contained in the Redacted Fee Letter) or the Alternate Financing (the Financing Agreements ), (ii) satisfy on a timely basis all conditions applicable to Parent, REIT Merger Sub or Partnership Merger set forth in the Debt Commitment Letter (or any replacement commitment letter for an Alternate Financing) and the Financing Agreements and comply with their obligation thereunder, and (iii) prepare the necessary offering circulars, private placement memoranda, or other offering documents or marketing materials with respect to the Debt Financing or any Alternate Financing. Parent shall promptly deliver to the Company true and complete copies of any commitment letter (including Redacted Fee Letters) and similar documents relating to any Alternate Financing.
(b) Without limiting Section 7.6 , subject to and in accordance with applicable Law, the Company agrees to, and to cause Company LP and the Company Subsidiaries to, and to use commercially reasonable efforts to cause their respective Representatives to, provide all cooperation reasonably requested by Parent and any Financing Sources in connection with any Financing, including: (i) furnishing to Parent and such Financing Sources as promptly as practicable the Required Information and periodically updating the Required Information so that it is complete and correct in all material respects and does not include an untrue statement of a material fact or omit to state a fact necessary to make the statements, in the light of the circumstances under which they were made, not misleading; (ii) using commercially reasonable efforts to provide information within its control that is reasonably requested by Parent or any Financing Sources for the preparation of private or public customary confidential information memoranda, private placement memoranda, registration statements, prospectuses and supplements thereto and offering documents otherwise customary for such Financing (collectively, the Offering Materials ) and roadshows and other customary marketing materials to be used in connection with such Financing reasonably deemed necessary by such Financing Sources to complete a successful syndication or offering of such Financing or otherwise in connection with such Financing, including customary authorization letters that confirm that the public version of any bank confidential information memorandum does not include any material non-public information with respect to the Company, Company LP and the Company Subsidiaries, and participating (including the participation of Company Representatives) in reasonable due diligence sessions and informational meetings with Parent, any Financing Sources (including potential Financing Sources) and their respective Representatives related to any Financing; (iii) causing the Companys, Company LPs and Company Subsidiaries (as applicable) independent auditors to reasonably cooperate with respect to any Financing consistent with customary practice, including by providing customary comfort letters
(including customary negative assurances and pro forma financial statement comfort) and customary assistance with the due diligence activities of Parent and any Financing Sources, and customary consents to the inclusion of audit reports in any relevant marketing materials, registration statements and related government filings, and causing the Companys, Company LPs and Company Subsidiaries legal counsel to provide customary assistance with the due diligence activities of Parent and any Financing Sources; (iv) taking all reasonable actions and providing all information related to the Company that is reasonably available to it to assist Parent in the consummation of any Financing, including the preparation of definitive agreements for such Financing, as may be reasonably requested by Parent; (v) delivering to Parent and any Financing Sources as promptly as reasonably practicable all documentation and other information requested by Parent and any Financing Sources and required by bank regulatory authorities under applicable know-your-customer and anti-money laundering rules and regulations, including the Patriot Act; (vi) reasonably cooperating with Parent and the Financing Sources to facilitate the consummation of any Financing to the extent within the control of the Company, Company LP and the Company Subsidiaries, including reasonably cooperating with Parent, REIT Merger Sub and Partnership Merger Sub to satisfy any conditions precedent to any Financing; and (vii) using commercially reasonable efforts to obtain a rating for any debt securities offered in connection with any Financing. Subject to the prior review by, and consent of, the Company (such consent not to be unreasonably withheld or delayed), the Companys, Company LPs and the Company Subsidiaries logos may be used in connection with any Financing, provided that such logos are used solely in a manner that is not intended to or reasonably likely to harm or disparage the Company, Company LP or the Company Subsidiaries or the reputation or goodwill of the Company, Company LP or the Company Subsidiaries. Notwithstanding anything to the contrary in this Section 7.17(b) or any other provisions of this Agreement, (A) prior to the Closing, none of the Company, Company LP or any of the Company Subsidiaries shall have any responsibility for, or incur any liability to, any Person under or in connection with the transactions contemplated by any Financing, definitive Financing Agreement or any certificate, document or instrument relating to any Financing, (B) none of the Company, Company LP or any of the Company Subsidiaries shall be required to take any action (i) under or in connection with the transactions contemplated by any agreement, certificate, document or instrument relating to any Financing that is not contingent upon the Closing Date (including the entry into any agreement that is effective before the Closing Date), (ii) that would reasonably be expected to cause any trustee, director, officer or employee of the Company, Company LP or any of the Company Subsidiaries to incur any personal liability relating to any Financing, (iii) that will conflict with or violate its Organizational Documents or any applicable Laws, or (iv) that would cause any condition to the Closing to fail to be satisfied or otherwise cause any material breach of this Agreement, (C) the pre-Closing board of trustees (or similar governing body) of the Company, Company LP and any of the Company Subsidiaries shall not be required to adopt resolutions approving the agreements, documents and instruments pursuant to which any Financing is obtained, (D) none of the Company, Company LP or any of the Company Subsidiaries shall be required to execute any definitive Financing documents, including any credit or other agreements, pledge or security documents, or other certificates, legal opinions or documents in connection with any Financing Agreements that are effective prior to the Closing, and (E) none of the Company, Company LP or any of the Company Subsidiaries shall be required to take any trust, limited partnership or limited liability company actions that are effective prior to the Closing to permit the consummation of any Financing.
None of the Company, Company LP or any of the Company Subsidiaries, or any of their respective Representatives, shall have any liability to Parent or any of its Affiliates in respect of any financial statements, other financial information or data or other information provided pursuant to this Section 7.17(b) . Notwithstanding anything to the contrary, the condition set forth in Section 8.2(b) , as it applies to the Companys obligations under this Section 7.17(b) shall be deemed satisfied unless any Financing has not been obtained primarily as a result of the Companys, Company LPs or the Company Subsidiaries willful and material breach of its obligations under this Section 7.17(b) .
(c) Parent shall, promptly upon demand by the Company, reimburse the Company for all reasonable out-of-pocket costs and expenses incurred by the Company, Company LP, the Company Subsidiaries and their respective Representatives in connection with the cooperation required by or requested pursuant to this Section 7.17 . Parent, REIT Merger Sub and Partnership Merger Sub shall, on a joint and several basis, indemnify and hold harmless the Company, Company LP, the Company Subsidiaries and their respective Representatives from and against any and all liabilities, losses, damages, claims, costs, expenses, interest, awards, judgments and penalties suffered or incurred by them in connection with the arrangement of any Financing and any information utilized in connection therewith (other than historical information related to the Company, Company LP and the Company Subsidiaries) except to the extent finally determined by a court of competent jurisdiction to have arisen from the Companys, Company LPs or any Company Subsidiarys fraud, gross negligence or willful misconduct.
(d) All non-public or otherwise confidential information regarding the Company obtained by Parent or its Representatives pursuant to this Section 7.17 shall be kept confidential in accordance with the Nondisclosure Agreement, and Parent shall be liable for any breach of this provision or the Nondisclosure Agreement by Parent or any of its Representatives to the same extent as if the breach had been committed directly by Parent.
(e) For purposes of clarity, the parties acknowledge and agree that in no event shall the consummation of all or any portion of any Financing constitute a condition to the Closing hereunder (pursuant to Article 8 or otherwise).
Section 7.18 Existing Loans; Other Cooperation . Without limiting Section 7.6 or Section 7.17 ,
(a) the Parties shall use reasonable best efforts to (i) cause any Existing Loans for which prepayment is permitted that Parent requests be repaid at Closing be so repaid, and any commitments thereunder be terminated, and any Liens or guarantees in connection therewith released (provided, any Existing Loan secured by a Company Property that is not wholly-owned by a Company Subsidiary may be prepaid only with the consent of the Companys joint venture partner, if required), and (ii) obtain any consents required in connection with any prepayment of any Existing Loan secured by a Company Property that is not wholly-owned if requested by Parent and any consents required in connection with the Closing under any other Existing Loans. The Company or Company LP shall, as promptly as practicable following execution of this Agreement, request, and use their respective commercially reasonable efforts to obtain at least five (5) Business Days prior to the Closing Date, customary payoff letters in form and substance reasonably acceptable to Parent and the Financing Sources (the Payoff Letters ) for the Existing Loans that Parent has requested be repaid in connection with the Closing from the applicable financial institutions;
(b) the Company and Company LP shall, and shall cause each Company Subsidiary to, each use its and their reasonable best efforts to cooperate with Parent, and as directed by Parent, in (i) seeking and negotiating waivers, consents or amendments to existing contracts, agreements and other arrangements pursuant to which the Company, Company LP or a Company Subsidiary has incurred any Indebtedness or which govern or relate to the Unconsolidated Subsidiaries; and (ii) negotiating with or otherwise dealing with the Outside Limited Partners and the holders of the minority interests in the Unconsolidated Subsidiaries; and
(c) in connection with obtaining any waivers, consents or amendments under this Section 7.18 , if requested by Parent in writing, the Parties will cooperate and work in good faith to restructure the acquisition of the Company as a reverse merger and to make such reasonable amendments to this Agreement as the Parties mutually agree are necessary to reflect such structure (the Reverse Merger Structure ); provided, however, that (i) the Reverse Merger Structure shall not delay the Closing, (ii) the Reverse Merger Structure (or the inability to complete the Reverse Merger Structure) shall not relieve Parent, REIT Merger Sub or Partnership Merger Sub of their obligations to pay the REIT Merger Consideration, Partnership Merger Consideration and Share Awards at the Closing as required under this Agreement, (iii) neither the Company nor any Company Subsidiary shall be required to engage in the Reverse Merger Structure if it could adversely affect the classification of the Company as, or its qualification for taxation as, a REIT, and (iv) neither the Company nor any Company Subsidiary shall be required to engage in the Reverse Merger Structure if it would reasonably be expected to result in adverse consequences to the shareholders or other equity interest holders of the Company or the Company LP as a whole, that are incrementally greater or more adverse, as the case may be, than the consequences to such parties in connection with the consummation of this Agreement in the absence of engaging in the Reverse Merger Structure pursuant to this Section 7.18(c) unless such holders (as a whole) are indemnified by the Parent for such incremental consequences; and
(d) for the avoidance of doubt, the Parties hereby acknowledge and agree that in no event shall the termination of any Existing Loans or the assumption of any Existing Loan constitute a condition to the Closing under this Agreement (pursuant to Article 8 or otherwise).
Section 7.19 Asset Sales . At any time prior to the Closing, Parent may request that the Company and Company LP prepare to market any assets (including any Company Property) for sale, and the Company and Company LP shall, and shall cause the applicable Company Subsidiaries to, cooperate in good faith with Parent in preparing to market such assets for sale and developing a strategy and process for marketing such assets, including with respect to identifying any notifications, authorizations, approvals or consents required in connection therewith; provided , that (i) nothing in this Agreement shall require the Company, Company LP or a Company Subsidiary to enter into an agreement with respect to, execute or consummate any asset sale prior to the Closing, and (ii) none of Company, Company LP or any Company Subsidiary shall be required to take any action in contravention of any Laws or any of their respective Organizational Documents or any other contract or agreement to which the Company, Company LP, the Company Subsidiaries or any of their respective assets are bound. Upon any termination of this Agreement, Parent shall upon request by Company reimburse the Company or Company LP all reasonable out-of-pocket costs incurred by the Company, Company LP or the applicable Company Subsidiaries in connection with any actions taken by Company or Company LP at the request of Parent in accordance with this Section 7.19 (including reasonable fees and expenses of their Representatives). For the avoidance of doubt, the Parties acknowledge and agree that in no event shall the Company be required to sell any of its assets, and no asset sale shall constitute a condition to the Closing hereunder (pursuant to Article 8 or otherwise).
Section 7.20 Operation of REIT Subsidiary After Closing . After the Closing Date and through the taxable year of the REIT Subsidiary that will end on December 31, 2017 (or such earlier date on which the REIT Subsidiary is terminated for U.S. federal income tax purposes by liquidation or by merger with another entity after the Closing Date), the Parent will operate the REIT Subsidiary in a manner to qualify as a REIT.
Section 7.21 Personal Holding Company Status. The Parties acknowledge that the acquisition structure described in this Agreement is based on the assumption that the Company is not, and will not be for its taxable year ending with the REIT Merger, a personal holding company within the meaning of Section 542(a) of the Code. If either Parent or the Company reasonably believes that, based on the Companys income and activities from January 1, 2017 through the REIT Merger Effective Time (including the U.S. federal income Tax effects described in Section 2.6 ), the Company may be or become a personal holding company, then if Parent so requests, the Parties will negotiate in good faith to resolve the issue, including, as may
be requested by Parent, restructuring the acquisition of the Company as the Reverse Merger Structure subject to the conditions in Section 7.18(c) . For the avoidance of doubt, the Parties acknowledge and agree that the determination whether the Company is or could become a personal holding company shall not constitute a condition to the Closing hereunder (pursuant to Article 8 or otherwise).
Section 7.22 Accounting Functions . During the Interim Period, the Company and Company LP shall use commercially reasonable efforts, and shall direct each of its employees to use commercially reasonable efforts, to reasonably cooperate with the accounting group of RMR LLC in connection with the transition of accounting functions with respect to the Company, Company LP and the Company Subsidiaries to RMR LLC.
ARTICLE 8
CONDITIONS
Section 8.1 Conditions to Each Partys Obligation to Effect the Mergers . The respective obligations of the Parties to this Agreement to effect the Mergers and to consummate the other transactions contemplated by this Agreement on the Closing Date are subject to the satisfaction or, to the extent permitted by Law, waiver by each of the Parties at or prior to the Closing of the following conditions:
(a) Company Shareholder Approval . The Company Shareholder Approval shall have been obtained in accordance with applicable Law and the Company Declaration.
(b) No Injunctions or Restraints . No temporary restraining order, preliminary or permanent injunction or other judgment, order or decree issued by any Governmental Authority of competent jurisdiction prohibiting consummation of the Mergers or any other transactions contemplated hereby shall be in effect, and no Law shall have been enacted, entered, promulgated or enforced by any Governmental Authority after the date of this Agreement that, in any case, makes illegal the consummation of the Mergers.
Section 8.2 Conditions to Obligations of Parent, REIT Merger Sub and Partnership Merger Sub . The obligations of Parent, REIT Merger Sub and Partnership Merger Sub to effect the Mergers and to consummate the other transactions contemplated by this Agreement are subject to the satisfaction or (to the extent permitted by Law) waiver by Parent, at or prior to the Closing, of the following additional conditions:
(a) Representations and Warranties . (i) The representations and warranties set forth in Sections 4.1(a) and (b) (Organization and Qualification; Subsidiaries), Section 4.3 (Capital Structure) (other than Sections 4.3(a) and (b) (Capital Structure)), Section 4.4 (Authority), Section 4.8 (Absence of Certain Changes or Events), Section 4.21 (Opinion of Financial Advisor), Section 4.22 (Approval Required), Section 4.23 (Brokers), Section 4.24 (Investment Company Act) and Section 4.25 (Takeover Statutes), shall be true and correct in all respects (in the case of any representation or warranty qualified by materiality or Company Material Adverse Effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or Company Material Adverse Effect) as of the date of this Agreement and as of the Closing, as though made as of the Closing, (ii) the representations and warranties set forth in Sections 4.3(a) and (b) and Section 4.13(g) shall be true and correct in all
but de minimus respects as of the date of this Agreement and as of the Closing, as though made as of the Closing, and (iii) each of the other representations and warranties of the Company and Company LP contained in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing, as though made as of the Closing, except (A) in each case, representations and warranties that are made as of a specific date shall be true and correct only on and as of such date, and (B) in the case of clause (iii) where the failure of such representations or warranties to be true and correct (without giving effect to any materiality or Company Material Adverse Effect qualifications set forth therein) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
(b) Performance of Covenants and Obligations of the Company and Company LP . Each of the Company and Company LP shall have performed in all material respects all obligations, and complied in all material respects with all agreements and covenants, required to be performed by it under this Agreement on or prior to the Closing.
(c) Material Adverse Effect . On the Closing Date, there shall not exist any event, change, or occurrence arising after the date of this Agreement that, individually or in the aggregate, constitutes a Company Material Adverse Effect.
(d) Delivery of Certificates . The Company shall have delivered to Parent a certificate, dated the Closing Date and signed by its chief executive officer and chief financial officer on behalf of the Company and Company LP, certifying to the effect that the conditions set forth in Sections 8.2(a) , 8.2(b) and Section 8.2(c) have been satisfied.
(e) Opinion Relating to REIT Qualification . The Company shall have received the written opinion of Arnold & Porter Kaye Scholer LLP, on which Parent shall be entitled to rely, dated as of the Closing Date, in substantially the form attached hereto as Exhibit B , to the effect that (i) for all taxable periods of the Company commencing with its taxable year ended December 31, 2009, (A) the Company has been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Code and (B) the Companys actual method of operation has enabled it to continue to meet the requirements for qualification and taxation as a REIT under the Code for all such taxable periods through its most recently completed taxable year and from the end of its most recently completed taxable year through the Closing Date, and (ii) for all taxable periods of the REIT Subsidiary, commencing with its taxable year ended December 31, 2010, (A) the REIT Subsidiary has been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Code and (B) the REIT Subsidiarys actual method of operation has enabled it to continue to meet the requirements for qualification and taxation as a REIT under the Code for all such taxable periods through its most recently completed taxable year and from the end of its most recently completed taxable year through the Closing Date (which opinion shall be based upon the representation letter described in Section 7.13 and shall be subject to customary assumptions, exceptions, limitations and qualifications, including an assumption that Parent will continue to operate the REIT Subsidiary after the Closing Date in a manner to qualify as a REIT for its taxable year that will end on December 31, 2017 (or such earlier date on which the REIT Subsidiary is terminated for U.S. federal income tax purposes by liquidation or by merger with another entity after the Closing Date)).
Section 8.3 Conditions to Obligations of the Company and Company LP . The obligations of the Company and Company LP to effect the Mergers and to consummate the other transactions contemplated by this Agreement are subject to the satisfaction or (to the extent permitted by Law) waiver by the Company and Company LP at or prior to the Closing, of the following additional conditions:
(a) Representations and Warranties . (i) The representations and warranties set forth in Sections 5.1 (Organization and Qualification), Section 5.2 (Authority), Section 5.6 (Brokers), Section 5.7 (Available Funds), Section 5.10 (No Vote of Parent Equityholders) and Section 5.11 (Ownership of Company Common Shares) shall be true and correct in all respects (in the case of any representation or warranty qualified by materiality or Parent Material Adverse Effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or Parent Material Adverse Effect) as of the date of this Agreement and as of the Closing, as though made as of the Closing, and (ii) each of the other representations and warranties of Parent contained in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing, as though made as of the Closing, except (A) in each case, representations and warranties that are made as of a specific date shall be true and correct only on and as of such date, and (B) in the case of clause (ii) where the failure of such representations or warranties to be true and correct (without giving effect to any materiality or Parent Material Adverse Effect qualifications set forth therein) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Parent Material Adverse Effect.
(b) Performance of Covenants or Obligations of Parent . Parent shall have performed in all material respects all obligations, and complied in all material respects with all agreements and covenants, required to be performed by it under this Agreement on or prior to the Closing.
(c) Delivery of Certificates . Parent shall have delivered to the Company a certificate, dated the Closing Date and signed by its chief executive officer and chief financial officer (or equivalent officers) on behalf of Parent, REIT Merger Sub and Partnership Merger Sub, certifying to the effect that the conditions set forth in Section 8.3(a) and Section 8.3(b) have been satisfied.
ARTICLE 9
TERMINATION AND FEES
Section 9.1 Termination . This Agreement may be terminated and the Mergers may be abandoned at any time prior to the Closing, notwithstanding the receipt of the Company Shareholder Approval (except as otherwise specified in this Section 9.1 ):
(a) by mutual written consent of each of Parent and the Company;
(b) by either Parent or the Company:
(i) if the Mergers shall not have been consummated on or before December 31, 2017 (the Outside Date ); provided , that the right to terminate this Agreement pursuant to this Section 9.1(b)(i) shall not be available to any Party if the failure of such Party to
comply with any provision of this Agreement shall have been the cause of, or resulted in, the failure of the Mergers to be consummated by the Outside Date;
(ii) if any Governmental Authority of competent jurisdiction shall have issued an Order or taken any other action permanently restraining or otherwise prohibiting the Mergers, and such Order or other action shall have become final and non-appealable; provided , that the right to terminate this Agreement under this Section 9.1(b)(ii) shall not be available to any Party if the failure of such Party to comply with any provision of this Agreement shall have been the cause of, or resulted in the issuance of such final, non-appealable Order or taking of such other action by such Governmental Authority; or
(iii) if the Company Shareholder Approval shall not have been obtained at the Company Shareholder Meeting duly convened therefor or at any adjournment or postponement thereof at which a vote on the approval of the REIT Merger and the other transactions contemplated by this Agreement was taken.
(c) by Parent:
(i) if the Company or Company LP shall have breached, violated or failed to perform any of its representations, warranties, covenants or agreements set forth in this Agreement which breach, violation or failure to perform, either individually or in the aggregate, if continuing at the Closing (A) would result in the failure of any of the conditions set forth in Sections 8.2(a) or (b) (a Company Terminating Breach ), and (B) cannot be cured, or, if curable, is not cured by the Company or Company LP, or waived by Parent by the earlier of (x) the Outside Date and (y) forty five (45) days after the receipt by the Company of written notice of such breach, violation or failure from Parent; provided , that Parent shall not have the right to terminate this Agreement pursuant to this Section 9.1(c)(i) if a Parent Terminating Breach shall have occurred and be continuing at the time Parent delivers notice of its election to terminate this Agreement pursuant to this Section 9.1(c)(i) ; or
(ii) if, prior to obtaining the Company Shareholder Approval, the Company Board or any committee thereof (A) shall have effected a Company Adverse Recommendation Change ( provided , that Parents right to terminate this Agreement pursuant to this Section 9.1(c)(ii)(A) in respect of a Company Adverse Recommendation Change will expire twenty (20) Business Days after the last date upon which the Company Board or a committee thereof has made such Company Adverse Recommendation Change), (B) fails to publicly reaffirm the Company Board Recommendation within ten (10) Business Days of being requested to do so by Parent following the public announcement by any Person of a Company Acquisition Proposal or an intention (whether or not conditional) to make a Company Acquisition Proposal, (C) fails to include the Company Board Recommendation in the Proxy Statement, (D) approves, adopts, publicly recommends, or enters into or allows the Company, Company LP or any of the Company Subsidiaries to enter into, a Company Alternative Acquisition Agreement relating to any Company Acquisition Proposal (other than an Acceptable Confidentiality Agreement) or (E) the Company or the Company Board publicly announces its intention to do any of the foregoing.
(d) by the Company:
(i) if Parent, REIT Merger Sub or Partnership Merger Sub shall have breached, violated or failed to perform any of its representations, warranties, covenants or agreements set forth in this Agreement, which breach, violation or failure to perform, either individually or in the aggregate, if continuing at the Closing (A) would result in the failure of any of the conditions set forth in Sections 8.3(a) or (b) (a Parent Terminating Breach ), and (B) cannot be cured, or, if curable, is not cured by Parent, or waived by Company by the earlier of (x) the Outside Date and (y) forty five (45) days after the receipt by Parent of written notice of such breach, violation or failure from the Company; provided , that the Company shall not have the right to terminate this Agreement pursuant to this Section 9.1(d)(i) if a Company Terminating Breach shall have occurred and be continuing at the time the Company delivers notice of its election to terminate this Agreement pursuant to this Section 9.1(d)(i) ; or
(ii) prior to obtaining the Company Shareholder Approval, if the Company Board determines to enter into a Company Alternative Acquisition Agreement with respect to a Company Superior Proposal in accordance with Section 7.3(e) , and the Company pays the Company Termination Fee due under Section 9.3 in accordance with Section 9.3 .
Section 9.2 Notice of Termination; Effect of Termination . In the event of termination of this Agreement as provided in Section 9.1 , written notice thereof shall be given to the other Party, specifying the provisions hereof pursuant to which such termination is made and describing the basis therefor in reasonable detail, and this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of Parent or the Company, except that the Nondisclosure Agreement and the provisions of Section 7.2(b) (Confidentiality), Section 7.4 (Public Announcements), this Section 9.2 (Notice of Termination; Effect of Termination), Section 9.3 (Fees and Expenses) and Article 10 (General Provisions) and the definitions of all defined terms appearing in such sections, shall survive such termination of this Agreement; provided , that subject to Section 10.11 , no such termination shall relieve any Party from any liability or damages resulting from any fraud in connection with this Agreement or any willful and intentional breach of any of its representations, warranties, covenants or agreements set forth in this Agreement prior to such termination of this Agreement, in which case the non-breaching Party shall be entitled to all rights and remedies available at law or in equity including, in the case of a willful and intentional breach by Parent, REIT Merger Sub or Partnership Merger Sub, liability to the Company for damages, determined taking into account all relevant factors, including damages to the Companys shareholders to the extent awarded by the applicable court. For purposes of this Agreement, willful and intentional breach means a material breach that is a consequence of an act knowingly undertaken by the breaching Party with the intent of causing a breach of this Agreement (it being understood that the failure of the Company or Company LP, on the one hand, or Parent, REIT Merger Sub or Partnership Merger Sub, on the other hand, to consummate the Mergers when required under the terms of this Agreement (and in the case of Parent, REIT Merger Sub or Partnership Merger Sub, regardless of whether any of such entities has obtained or received the proceeds of any Financing) will constitute a willful and intentional breach.
Section 9.3 Fees and Expenses .
(a) Except as otherwise provided in this Section 9.3 , all fees and expenses incurred in connection with this Agreement, the Mergers and the other transactions contemplated
hereby shall be paid by the Party incurring such fees or expenses, whether or not the Mergers are consummated.
(b) In the event that:
(i) (A)(x) this Agreement is terminated by Parent pursuant to Section 9.1(c)(i) , and after the date hereof and prior to the breach giving rise to such right of termination, a Company Acquisition Proposal (with, for all purposes of this Section 9.3(b)(i) , all percentages included in the definition of Company Acquisition Proposal increased to 67%) has been publicly announced, disclosed or otherwise communicated to the Company Board, or (y) this Agreement is terminated by the Company or Parent pursuant to Section 9.1(b)(iii) , and prior to the Company Shareholder Meeting, a Company Acquisition Proposal has been publicly announced, disclosed or otherwise communicated to the Companys shareholders, and (B) within twelve (12) months after the date of such termination, a transaction in respect of a Company Acquisition Proposal is consummated or the Company enters into a Company Alternative Acquisition Agreement in respect of a Company Acquisition Proposal (other than an Acceptable Confidentiality Agreement) that is later consummated;
(ii) this Agreement is terminated by Parent pursuant to Section 9.1(c)(ii) ; or
(iii) this Agreement is terminated by the Company pursuant to Section 9.1(d)(ii) ;
then, in any such event, the Company shall pay to Parent a termination fee of $25,000,000 (the Company Termination Fee ), it being understood that in no event shall the Company be required to pay the Company Termination Fee on more than one occasion. Payment of the Company Termination Fee shall be made by wire transfer of same day funds to the account or accounts designated by Parent (x) at the earlier of execution of a definitive agreement with respect to, submission to the shareholders of the Company of, or the consummation of any transaction contemplated by a Company Acquisition Proposal, in the case of a Company Termination Fee payable pursuant to Section 9.3(b)(i) , (y) as promptly as reasonably practicable after termination (and, in any event, within two (2) Business Days thereof), in the case of a Company Termination Fee payable pursuant to Section 9.3(b)(ii) , and (z) at the time of termination, in the case of a Company Termination Fee payable pursuant to Section 9.3(b)(iii) . Notwithstanding anything in this Agreement to the contrary, except in the case of fraud or intentional and willful misconduct as expressly provided below, in the event that the Company Termination Fee becomes payable, then payment to Parent of the Company Termination Fee, together with any amounts due under Section 9.3(f) , shall be Parents sole and exclusive remedy as liquidated damages for any and all losses or damages of any nature against the Company, Company LP, the Company Subsidiaries and each of their respective former, current and future trustees, directors, officers, employees, agents, general and limited partners, managers, members, shareholders, Affiliates and assignees and each former, current or future trustee, director, officer, employee, agent, general or limited partner, manager, member, shareholder, Affiliate or assignee of any of the foregoing (collectively, the Company Parties ) in respect of this Agreement, any agreement executed in connection herewith, the Mergers and the other transactions contemplated hereby, including for any loss or damage suffered as a result of the termination of this
Agreement, the failure of the Mergers to be consummated or for a breach or failure to perform hereunder (whether intentionally, unintentionally, or otherwise) or otherwise, and upon payment of such Company Termination Fee no Company Party shall have any further liability or obligation relating to or arising out of this Agreement, the Mergers or the other transactions contemplated hereby; provided , that neither the Company nor Company LP shall be relieved from any liability or damages resulting from any fraud in connection with this Agreement or any willful and intentional breach (as defined in Section 9.2 above) of any of its covenants or agreements set forth in this Agreement prior to such termination of this Agreement.
(c) If this Agreement shall be terminated by either Parent or the Company pursuant to Section 9.1(b)(iii) or by Parent pursuant to Section 9.1(c)(i) under circumstances in which the Company Termination Fee is not payable pursuant to Section 9.3(b)(i) , then the Company shall pay, within three (3) Business Days of the Outside Date, to Parent the Parent Expenses in immediately available funds to an account directed by Parent; provided , that the payment by the Company of the Parent Expenses pursuant to this Section 9.3(c) shall not relieve the Company of any subsequent obligation to pay the Company Termination Fee pursuant to Section 9.3(b) (but in the event such Company Termination Fee is or becomes payable, it shall be reduced on a dollar for dollar basis for the Parent Expenses actually paid to Parent pursuant to this Section 9.3(c) ) and neither the Company nor Company LP shall be relieved from any liability or damages resulting from any fraud in connection with this Agreement or any willful and intentional breach of any of its covenants or agreements set forth in this Agreement prior to such termination of this Agreement.
(d) If the Company is required to pay Parent the Company Termination Fee (a Termination Payment ), such Termination Payment shall be paid into escrow on the date such payment is required to be paid by such party ( Payor ) pursuant to this Agreement by wire transfer of immediately available funds to an escrow account designated in accordance with this Section 9.3(d) . In the event that a Payor is required to pay a Termination Fee, the amount payable to the other party (such party, Payee ) in any tax year of Payee shall not exceed the lesser of (i) the Termination Payment, and (ii) the sum of (A) the maximum amount that can be paid to Payee without causing such party to fail to meet the requirements of Section 856(c)(2) and (3) of the Code for the relevant tax year, determined as if the payment of such amount did not constitute income described in Sections 856(c)(2) or 856(c)(3) of the Code ( Qualifying Income ), and Payee has income from unknown sources during such year in an amount equal to 1% of its gross income which is not Qualifying Income (in addition to any known or anticipated income which is not Qualifying Income), in each case as determined by Payees independent accountants, plus (B) in the event Payee receives either (x) a letter from Payees counsel indicating that Payee has received a ruling from the IRS as described in Section 9.3(e) or (y) an opinion from its outside counsel as described in Section 9.3(e) , an amount equal to the excess of the Termination Payment less the amount payable under clause (A) above.
(e) To secure the Companys obligation to pay any amounts payable pursuant to Section 9.3(c) , the Company shall deposit into escrow an amount in cash equal to the Termination Payment owed by it with an escrow agent selected by the Company on such terms (subject to this Section 9.3 ) as shall be mutually agreed upon by the Company, Parent and the escrow agent. The payment or deposit into escrow of the Termination Payment pursuant to this
Section 9.3(e) shall be made at the time the Company is obligated to pay Parent such amount pursuant to this Section 9.3 by wire transfer of immediately available funds. The escrow agreement shall provide that the Termination Payment held in escrow or any portion thereof shall not be released to Parent unless the escrow agent receives any one or combination of the following: (i) a letter from Parents independent accountants indicating the maximum amount that can be paid by the escrow agent to Parent without causing Parent to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute Qualifying Income and Parent has income from unknown sources during such year in an amount equal to 1% of its gross income which is not Qualifying Income (in addition to any known or anticipated income which is not Qualifying Income), in which case the escrow agent shall release such amount to the receiving party, or (ii) a letter from Parents counsel indicating that (A) Parent received a ruling from the IRS holding that the receipt by such Parent of the Termination Payment would either constitute Qualifying Income or would be excluded from gross income within the meaning of Sections 856(c)(2) and (3) of the Code or (B) Parents outside counsel has rendered a legal opinion to the effect that the receipt by Parent of the Termination Payment should either constitute Qualifying Income should be excluded from gross income within the meaning of Sections 856(c)(2) and (3) of the Code, in which case the escrow agent shall release the remainder of the Termination Payment to Parent. The Company agrees to amend this Section 9.3 at the reasonable request of Parent in order to (i) maximize the portion of the Termination Payment that may be distributed to Parent hereunder without causing Parent to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code, (ii) improve Parents chances of securing a favorable ruling described in this Section 9.3 or (iii) assist Parent in obtaining a favorable legal opinion from its outside counsel as described in this Section 9.3 . Any amount of the Termination Payment that remains unpaid as of the end of a taxable year shall be paid as soon as possible during the following taxable year, subject to the foregoing limitations of this Section 9.3 , provided , however , that the obligation of the Company to pay the unpaid portion of the Termination Payment shall terminate on the December 31 following the date which is five (5) years from the date of this Agreement. Any payment due to Parent described in this Section 9.3 shall be subject to the same limitations on payment as set forth in this Section 9.3 .
(f) Each of the Company and Parent acknowledges that the agreements contained in this Section 9.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, the other Party would not enter into this Agreement. If the Company fails promptly to pay any amounts due pursuant to Section 9.3(b) , and, in order to obtain such payment, Parent commences a suit that results in a judgment against the Company for the amounts set forth in Section 9.3(b) , the Company shall pay to Parent its reasonable costs and expenses (including reasonable attorneys fees and expenses) in connection with such suit, together with interest on the amounts set forth in Section 9.3(b) from the date of termination of this Agreement at the prime rate set forth in the Wall Street Journal in effect on the date such payment was required to be made plus 1%.
ARTICLE 10
GENERAL PROVISIONS
Section 10.1 Nonsurvival of Representations and Warranties and Certain Covenants . None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement, including any rights arising out of any breach of such
representations and warranties, shall survive the Closing. The covenants to be performed prior to or at the Closing shall terminate at the Closing. This Section 10.1 shall not limit any covenant or agreement of the Parties that by its terms contemplates performance after the Closing.
Section 10.2 Notices . All notices, requests, claims, consents, demands and other communications under this Agreement shall be in writing and shall be deemed given on the date of actual delivery, if delivered personally, or on the date of receipt, if sent by overnight courier (providing proof of delivery) to the Parties or if sent by facsimile or e-mail of a .pdf attachment (providing confirmation of transmission) at the following street addresses, email addresses or facsimile numbers, as applicable (or at such other United States street address, email address or facsimile number for a Party as shall be specified by like notice):
(a) if to the Company to:
First Potomac Realty Trust
7600 Wisconsin Avenue, 11th Floor
Bethesda, Maryland 20814
Attn:
Samantha Sacks Gallagher
Email:
sgallagher@first-potomac.com
with a copy (which shall not constitute notice) to:
Hogan Lovells US LLP
555 13
th
Street NW
Washington, DC 20004
Attn:
David W. Bonser
Matt N. Thomson
Email: david.bonser@hoganlovells.com
matt.thomson@hoganlovells.com
Fax: (202) 637-5910
(b) if to Parent or REIT Merger Subsidiary to:
Government Properties Income Trust
Two Newton Place
255 Washington Street, Suite 300
Newton, Massachusetts 02458-1634
Attn:
David M. Blackman
Jennifer B. Clark
Email: dblackman@govreit.com
jclark@rmrgroup.com
Fax: (617) 796-8267
with a copy (which shall not constitute notice) to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Attn: Nicole Rives
Email: nrives@sandw.com
Fax: (617) 338-2880
Section 10.3 Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced under any present or future Law or public policy in any jurisdiction, as to that jurisdiction, (a) such term or other provision shall be fully separable, (b) this Agreement shall be construed and enforced as if such invalid, illegal or unenforceable provision had never comprised a part hereof, (c) all other conditions and provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable term or other provision or by its severance herefrom so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any party, and (d) such terms or other provision shall not affect the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced in any jurisdiction, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that transactions contemplated by this Agreement be consummated as originally contemplated to the fullest extent possible.
Section 10.4 Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered (by electronic delivery or otherwise) to the other Parties. Signatures to this Agreement transmitted by facsimile transmission, by electronic mail in .pdf format, or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing the original signature.
Section 10.5 Entire Agreement; No Third Party Beneficiaries . This Agreement (including any Exhibit, the Company Disclosure Letter and the Parent Disclosure Letter) and the Nondisclosure Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the Parties with respect to the subject matter of this Agreement. This Agreement is not intended to and shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns, except for the provisions of Article 3 (which, from and after the Partnership Merger Effective Time and REIT Merger Effective Time, as applicable, shall be for the benefit of holders of the Company Partnership Units immediately prior to the Partnership Merger Effective Time or the holders of the Company Common Shares immediately prior to the REIT Merger Effective Time, as applicable), and Section 7.5 (which, from and after the Partnership Merger Effective Time and the REIT Merger Effective Time shall be for the benefit of the Indemnified Parties); provided, however, that any Financing Sources and any of their respective Representatives shall be intended third party beneficiaries with respect to Sections 10.9(b) , 10.12(b) and 10.13 (and no amendment or modification to such provisions in respect of any Financing Sources may be made
without the prior consent of such Financing Sources). The representations and warranties in this Agreement are the product of negotiations among the Parties and are for the sole benefit of the Parties other than as described in this Section 10.5 . Any inaccuracies in such representations and warranties are subject to waiver by the Parties in accordance with Section 10.8 without notice or liability to any other Person. The representations and warranties in this Agreement may represent an allocation among the Parties of risks associated with particular matters regardless of the Knowledge of any of the Parties. Accordingly, Persons other than the Parties may not rely upon the representations and warranties in this Agreement as characterizations of actual facts or circumstances as of the date of this Agreement or as of any other date.
Section 10.6 Tender Offer . The Company and Company LP agree, upon written request by Parent, to cooperate and work in good faith with Parent to effectuate the transactions contemplated by this Agreement by means of a tender offer for all of the outstanding Company Common Shares for the REIT Per Share Merger Consideration and to make such reasonable and customary amendments to this Agreement as the Parties mutually agree are necessary to reflect such structure; provided that (i) such tender offer structure shall not delay the Closing and (ii) the inability to make or complete such a tender offer shall not relieve the obligations of Parent, REIT Merger Sub or Partnership Merger Sub to consummate the Mergers as required under this Agreement. The Parties agree that the obligation of the Company and Company LP to cooperate and work in good faith with Parent pursuant to this Section 10.6 shall not require the Company Board to approve any action that it believes is inconsistent with its duties under applicable Law.
Section 10.7 Amendment . Subject to any consent rights of Financing Sources pursuant to Section 10.5 and compliance with applicable Law, this Agreement may be amended by mutual agreement of the Parties hereto by action taken or authorized by the Company Board and the Parent Board, respectively, at any time before or after receipt of the Company Shareholder Approval and prior to the Closing; provided , that after the Company Shareholder Approval has been obtained, there shall not be any amendment of this Agreement that changes the amount or the form of the consideration to be delivered under this Agreement to the holders of the Company Common Shares or the Company Partnership Units, or which by applicable Law requires the further approval of the shareholders of the Company without such further approval of such shareholders. This Agreement may not be amended except by an instrument in writing signed by each of the Parties.
Section 10.8 Extension; Waiver . At any time prior to the Partnership Merger Effective Time and the REIT Merger Effective Time, a Party may (a) extend the time for the performance of any of the obligations or other acts of the other Parties hereto, (b) waive any inaccuracies in the representations and warranties of the other Party contained in this Agreement or in any document delivered pursuant to this Agreement, or (c) subject to the requirements of applicable Law, waive compliance with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a Party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such Party. The failure of any Party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights.
Section 10.9 Governing Law .
(a) This Agreement, and all Actions (whether at Law, in contract or in tort) that may be based upon, arise out of or related to this Agreement or the negotiation, execution or performance of this Agreement, shall be governed by, and construed in accordance with, the
Laws of the State of Maryland without giving effect to any choice or conflict of Law principles (whether of the State of Maryland or any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the State of Maryland.
(b) Notwithstanding anything herein to the contrary, the Parties hereto and any Company Affiliates acknowledge and irrevocably agree (i) that any Action involving a Financing Source that is in any way related to this Agreement, the Mergers or any of the other transactions contemplated by this Agreement or the performance of services hereunder or related hereto, including, without limitation, any dispute arising out of or relating in any way to the Financing, shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to the conflicts of law rules of the State of New York that would result in the application of the laws of any other State, (ii) that service of process, summons, notice or document by registered mail addressed to them at their respective addresses provided in Section 10.2 shall be effective service of process against them for any such Action, and (iii) that a final judgment in any such Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Notwithstanding anything herein to the contrary, each of the Parties hereby agrees that it will not, nor permit any of its respective Affiliates to, bring or support any action, cause of action, claim, cross-claim or third party claim of any kind or description, whether in law or in equity, whether in contract or in tort or otherwise, against any Financing Sources in any way relating to this Agreement, the Mergers or any the other transactions contemplated hereby, including, without limitation, any dispute arising out of or relating in any way to any Financing or the performance thereof, in any forum other than the Supreme Court of the State of New York, County of New York, located in the Borough of Manhattan, or, if under applicable law exclusive jurisdiction is vested in the federal courts, the United States District Court for the Southern District of New York (and the appellate courts thereof), and that the provisions of Section 10.13 relating to the waiver of jury trial shall apply to any such action, cause of action, claim, cross-claim or third party claim.
Section 10.10 Consent to Jurisdiction . Each Party irrevocably agrees and consents (a) to submit itself to the exclusive jurisdiction of any federal court located in the State of Maryland or any Maryland State court (the Maryland Courts ) for the purpose of any Action (whether based on contract, tort or otherwise), directly or indirectly, arising out of or relating to this Agreement or the transactions contemplated by this Agreement or the actions of the Parties in the negotiation, administration, performance and enforcement of this Agreement, and further that any proceeding in Maryland State court shall be assigned to the Business and Technology Case Management Program, (b) that it will not attempt to deny or defeat such jurisdiction by motion or other request for leave from any such court, (c) that it will not bring any Action relating to this Agreement or the transactions contemplated by this Agreement or the actions of the parties hereto in the negotiation, administration, performance and enforcement of this Agreement in any court other than the Maryland Courts, and (d) that a final judgment in any Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law.
Section 10.11 Assignment . Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned or delegated, in whole or in part, by operation of Law or otherwise by any of the Parties without the prior written consent of the other Parties and any attempt to make any such assignment without such consent shall be null and void.
Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the Parties and their respective successors and assigns.
Section 10.12 Specific Performance .
(a) The Parties agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached (including the obligation of Parent, REIT Merger Sub or the Partnership Merger Sub to consummate, as applicable, the REIT Merger and the Partnership Merger in accordance with the terms and conditions of this Agreement), and that monetary damages, even if available, would not be an adequate remedy therefor. It is accordingly agreed that, prior to the termination of this Agreement pursuant to Article 9 , each Party shall be entitled to an injunction or injunctions, specific performance or other equitable relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, without proof of damages or otherwise (including the Parties obligations to consummate the Mergers and the obligation of the Parent, REIT Merger Sub or Partnership Merger Sub to pay, and the right of the holders of Company Common Stock and the holders of Company Partnership Units to receive, the REIT Merger Consideration, aggregate Share Award Payments and Partnership Merger Consideration, as applicable, pursuant to the Mergers, subject in each case to the terms and conditions of this Agreement), in addition to any other remedy to which such Party is entitled at Law or in equity. Each of the Parties hereby waives (i) any defense in an Action for specific performance that a remedy at Law would be adequate and (ii) any requirement under any Law to post a security as prerequisite to obtaining equitable relief. Each Party agrees that the right of specific performance and other equitable relief is an integral part of the transactions contemplated by this Agreement and without that right neither the Company nor Company LP, on the one hand, nor Parent, REIT Merger Sub or Partnership Merger Sub, on the other hand, would have entered into this Agreement. For the avoidance of doubt, the Parties may pursue both a grant of specific performance or other equitable remedies to the extent permitted by this Section 10.11 and the payment of damages, but shall not be entitled or permitted to receive an award of damages if specific performance or other equitable remedies are awarded and consummation of the Mergers occurs and shall not be entitled or permitted to receive an award of specific performance or other equitable remedies if damages are awarded.
(b) Notwithstanding anything to the contrary contained herein, the Company (on behalf of itself and any of its Affiliates, trustees, directors, officers, employees, agents and representatives) hereby waives any rights or claims against any Financing Source in connection with this Agreement, any Financing or definitive Financing agreements or in respect of any other document or theory of law or equity (whether in tort, contract or otherwise) or in respect of any oral or written representations made or alleged to be made in connection herewith or therewith, and the Company (on behalf of itself and any of its Affiliates, trustees, directors, officers, employees, agents and representatives) agrees not to commence any action or proceeding against any Financing Source in connection with this Agreement, any Financing or definitive Financing agreements or in respect of any related document or theory of law or equity and agrees to cause any such action or proceeding asserted by the Company (on behalf of itself and any of its Affiliates, trustees, directors, officers, employees, agents and representatives) in connection with this Agreement, any Financing or definitive Financing agreements or in respect of any other document or theory of law or equity against any Financing Source to be dismissed or otherwise
terminated, provided that any Financing Sources and any of their respective Representatives shall be intended third parties beneficiaries with respect to Sections 10.9(b) , 10.12(b) and 10.13 . In furtherance and not in limitation of the foregoing waiver, it is acknowledged and agreed that no Financing Source shall have any liability for any claims or damages to the Company in connection with this Agreement, any Financing or definitive Financing agreements or the transactions contemplated hereby or thereby.
Section 10.13 Waiver of Jury Trial . EACH PARTY IRREVOCABLY HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR OTHER PROCEEDING (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF THIS AGREEMENT, THE MERGERS OR THE OTHER TRANSACTIONS CONTEMPLATED HEREBY (INCLUDING, WITHOUT LIMITATION, ANY TRANSACTION OR PROPOSED TRANSACTION WITH ANY FINANCING SOURCE). EACH PARTY (A) CERTIFIES THAT NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SUIT OR PROCEEDING, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT, BY, AMONG OTHER THINGS, THE MUTUAL WAIVER AND CERTIFICATIONS IN THIS SECTION 10.13 .
Section 10.14 Authorship . The Parties agree that the terms and language of this Agreement are the result of negotiations between the Parties and their respective advisors and, as a result, there shall be no presumption that any ambiguities in this Agreement shall be resolved against any Party. Any controversy over construction of this Agreement shall be decided without regard to events of authorship or negotiation.
Section 10.15 Non-liability of Trustees of Parent . The Amended and Restated Declaration of Trust of Parent, as filed with the Maryland SDAT, provides that no trustee, officer, shareholder, employee or agent of Parent shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Parent. All Persons dealing with Parent in any way shall look only to the assets of Parent for the payment of any sum or the performance of any obligation.
[Signature Page Follows]
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed and delivered by their respective duly authorized officers, all as of the date first written above.
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GOVERNMENT PROPERTIES INCOME |
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TRUST |
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David M. Blackman |
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President and Chief Operating Officer |
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GOV NEW OPPTY REIT |
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/s/ David M. Blackman |
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David M. Blackman |
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President and Chief Operating Officer |
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GOV NEW OPPTY LP |
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GOV NEW OPPTY REIT, |
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Its General Partner |
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/s/ David M. Blackman |
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David M. Blackman |
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President and Chief Operating Officer |
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FIRST POTOMAC REALTY TRUST |
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/s/ Robert M. Milkovich |
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Robert M. Milkovich |
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Chief Executive Officer |
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FIRST POTOMAC REALTY |
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INVESTMENT LIMITED PARTNERSHIP |
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By: First Potomac Realty Trust, |
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Its General Partner |
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/s/ Robert M. Milkovich |
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Robert M. Milkovich |
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Chief Executive Officer |
[Signature Page to Agreement and Plan of Merger]
Exhibit 8.1
June 28 , 2017
Government Properties Income Trust
Two Newton Place
255 Washington Street, Suite 300
Newton, Massachusetts 02458
Ladies and Gentlemen:
The following opinion is furnished to Government Properties Income Trust, a Maryland real estate investment trust (the Company), to be filed with the Securities and Exchange Commission (the SEC) as Exhibit 8.1 to the Companys Current Report on Form 8-K to be filed on the date hereof (the Form 8-K) under the Securities Exchange Act of 1934, as amended.
We have acted as counsel for the Company in connection with the preparation of the Form 8-K. We have reviewed originals or copies of such corporate records, such certificates and statements of officers of the Company and of public officials, and such other documents as we have considered relevant and necessary in order to furnish the opinion hereinafter set forth. In doing so, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies, and the authenticity of the originals of such documents. Specifically, and without limiting the generality of the foregoing, we have reviewed: (i) the Companys amended and restated declaration of trust, as amended, and its amended and restated bylaws; (ii) the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 2016 (the Form 10-K); (iii) the section of Item 8.01 of the Form 8-K captioned Material United States Federal Income Tax Consequences of the Transaction; and (iv) the Companys Quarterly Report on Form 10-Q for its quarterly period ended March 31, 2017 (the Form 10-Q). For purposes of the opinion set forth below, we have assumed that any documents (other than documents which have been executed, delivered, adopted or filed, as applicable, by the Company prior to the date hereof) that have been provided to us in draft form will be executed, delivered, adopted and filed, as applicable, without material modification.
The opinion set forth below is based upon the Internal Revenue Code of 1986, as amended, the Treasury regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, Tax Laws), and upon the Employee Retirement Income Security Act of 1974, as amended, the Department of Labor regulations issued thereunder, published administrative interpretations
Government Properties Income Trust
June 28, 2017
Page 2
thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, ERISA Laws). No assurance can be given that Tax Laws or ERISA Laws will not change. In the discussions with respect to Tax Laws matters and ERISA Laws matters in the sections of Item 1 of the Form 10-K captioned Material United States Federal Income Tax Considerations and ERISA Plans, Keogh Plans and Individual Retirement Accounts, as supplemented by the discussion in the section of Item 8.01 of the Form 8-K captioned Material United States Federal Income Tax Consequences of the Transaction, certain assumptions have been made therein and certain conditions and qualifications have been expressed therein, all of which assumptions, conditions and qualifications are incorporated herein by reference. With respect to all questions of fact on which our opinion is based, we have assumed the initial and continuing truth, accuracy and completeness of: (i) the information set forth in the Form 8-K, in the Form 10-K, in the Form 10-Q, or in the exhibits thereto; and (ii) representations made to us by officers of the Company or contained in the Form 8-K, in the Form 10-K, in the Form 10-Q, or in the exhibits thereto, in each such instance without regard to qualifications such as to the best knowledge of or in the belief of. We have not independently verified such information.
We have relied upon, but not independently verified, the foregoing assumptions. If any of the foregoing assumptions are inaccurate or incomplete for any reason, or if the transactions described in the Form 8-K, in the Form 10-K, in the Form 10-Q, or in the exhibits thereto have been or are consummated in a manner that is inconsistent with the manner contemplated therein, our opinion as expressed below may be adversely affected and may not be relied upon.
Based upon and subject to the foregoing: (i) we are of the opinion that the discussions with respect to Tax Laws matters and ERISA Laws matters in the sections of Item 1 of the Form 10-K captioned Material United States Federal Income Tax Considerations and ERISA Plans, Keogh Plans and Individual Retirement Accounts, as supplemented by the discussion in the section of Item 8.01 of the Form 8-K captioned Material United States Federal Income Tax Consequences of the Transaction, in all material respects are, subject to the limitations set forth therein, the material Tax Laws considerations and the material ERISA Laws considerations relevant to holders of the securities of the Company discussed therein (the Securities); and (ii) we hereby confirm that the opinions of counsel referred to in said sections represent our opinions on the subject matters thereof.
Our opinion above is limited to the matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other matters or any other transactions. Further, we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented or assumed herein or any subsequent changes in Tax Laws or ERISA Laws.
This opinion is rendered to you in connection with the filing of the Form 8-K. This opinion may not be relied upon for any other purpose, or furnished to, quoted or relied upon by any other person, firm or corporation for any purpose, without our prior written consent, except that (i) this opinion may be furnished or quoted to judicial or regulatory authorities having jurisdiction over you, and (ii) this opinion may be relied upon by purchasers and holders of the Securities currently entitled to rely on it pursuant to applicable provisions of federal securities law. Purchasers and holders of the Securities are urged to consult their own tax advisors or
Government Properties Income Trust
June 28, 2017
Page 3
counsel, particularly with respect to their particular tax consequences of acquiring, holding and disposing of the Securities, which may vary for investors in different tax situations. We hereby consent to the filing of a copy of this opinion as an exhibit to the Form 8-K, which is incorporated by reference in the Companys Registration Statement on Form S-3 (File No. 333-212431) under the Securities Act of 1933, as amended (the Act), and to the references to our firm in the Form 8-K and the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or under the rules and regulations of the SEC promulgated thereunder.
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Very truly yours, |
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/s/ Sullivan & Worcester LLP |
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SULLIVAN & WORCESTER LLP |
Exhibit 10.1
CITIGROUP GLOBAL MARKETS INC.
388 Greenwich Street
New York, New York 10013
As of June 27, 2017
GOVERNMENT PROPERTIES INCOME TRUST
Two Newton Place
255 Washington Street, Suite 300
Newton, Massachusetts 02458-2076
Attention: |
Mark L. Kleifges |
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Treasurer and Chief Financial Officer |
Government Properties Income Trust
$750,000,000 Senior Unsecured Bridge Loan
COMMITMENT LETTER
Ladies and Gentlemen:
Government Properties Income Trust, a Maryland real estate investment trust (the Company or you ), has advised Citigroup Global Markets Inc. ( CGMI ), on behalf of Citi (as defined below) (together with any additional Lender which may become a Commitment Party after the date hereof pursuant to a joinder to this Commitment Letter, a Commitment Party , and collectively, the Commitment Parties , we or us ) that, in connection with the Acquisition described below, the Company intends to obtain a $750,000,000 senior unsecured bridge loan (the Facility ). In connection with the foregoing, CGMI, on behalf of Citi, is pleased to advise you of Citis commitment to provide the entire principal amount of the Facility (such commitment amount being $750,000,000), subject only to the conditions set forth in Section 1(c) of this Commitment Letter (this commitment letter, collectively with Annex I hereto, and as amended or otherwise modified from time to time, this Commitment Letter ) and the section entitled Conditions Precedent to Funding contained in Annex I attached hereto. The commitments of the Commitment Parties hereunder are several and not joint. Citi is referred to herein as the Initial Lender .
Further, CGMI (in such capacity, the Arranger ) is pleased to inform the Company of its agreement to act as sole lead arranger and sole bookrunner for the Facility, subject only to the conditions set forth in Section 1(c) of this Commitment Letter and the section entitled Conditions Precedent to Funding contained in Annex I attached hereto. In addition, CGMI is pleased to inform the Company of Citis agreement to act as sole administrative agent for the Facility (in such capacity, the Administrative Agent ), subject to the terms and conditions of this Commitment Letter. For purposes of this Commitment Letter, Citi shall mean CGMI, Citibank, N.A., Citicorp USA, Inc., Citicorp North America, Inc. and/or any of their affiliates as Citi may determine to be appropriate to provide the services contemplated herein.
The Company has informed us that the Company intends to acquire (the Acquisition ) 100% of the outstanding equity interests in First Potomac Realty Trust, a Maryland real estate investment trust (the Target ). The Acquisition of the Target will be effected pursuant to (i) a merger of the Targets subsidiary, First Potomac Realty Investment Limited Partnership ( FP LP ), with and into a newly formed subsidiary of the Company, with FP LP as the surviving entity, followed by a merger of the Target with and into a wholly-owned subsidiary of the Company, with such subsidiary being the surviving entity, or (ii) by means of a tender offer for all outstanding common shares of the Target. In addition to financing the Acquisition as described in the preceding sentence, the proceeds of the Facility will be used to pay costs and expenses incurred in connection with the Acquisition, the Facility and related transactions. Capitalized terms not defined herein shall have the meanings given thereto in Annex I.
Section 1. Engagement; Matters Related to Engagement; Conditions Precedent. (a) The Company hereby engages the Arranger, on an exclusive basis, to act as sole lead arranger and sole bookrunner in connection with the Facility. The parties agree that Citi will act as the sole administrative agent with respect to the Facility. Citi shall have left placement in any and all marketing materials or other documentation
used in connection with the Facility (and shall hold the leading role and responsibilities conventionally associated with such left placement).
(b) The Company acknowledges that the Arranger has been engaged, in its capacity as such, solely to provide the services set forth in this Commitment Letter. In rendering such services, the Arranger shall act as an independent contractor, and any obligations of the Arranger arising out of its engagement hereunder shall be owed solely to the Company.
(c) The obligations of the Arranger and its affiliates and each Commitment Party and its affiliates hereunder are several and not joint and are subject solely to satisfaction of the following conditions: (i) the negotiation, execution and delivery by the Borrower and the Guarantors (if any) of customary definitive documentation with respect to the Facility, based on documentation relating to the Existing Credit Facility, consistent with the terms and conditions of this Commitment Letter, with such changes as are described in Annex I and otherwise reasonably satisfactory to the Arranger and its counsel and each Commitment Party and its counsel, as applicable (as amended or otherwise modified from time to time, the Operative Documents ); (ii) the payment in full of all fees, expenses and other amounts due and payable by the Borrower on or prior to the Closing Date (which fees and expenses shall have been invoiced at least two business days prior to being due and payable) under this Commitment Letter (which amounts may be offset against the proceeds of the Facility); (iii) the execution and delivery by the Company of this Commitment Letter; and (iv) the satisfaction of the other conditions precedent to the initial funding of the Facility contained in the section entitled Conditions Precedent to Funding in Annex I.
Notwithstanding anything in this Commitment Letter, the Fee Letter or any other letter agreement or other undertaking concerning the financing of the Acquisition to the contrary, (i) the only representations and warranties which shall be a condition to availability and funding of the Facility on the Closing Date shall be (A) such of the representations made by the Target or its affiliates in the Acquisition Agreement that are material to the interests of the Lenders, but only to the extent that you have the right to terminate your obligations under the Acquisition Agreement as a result of a breach of such representations in the Acquisition Agreement (the Acquisition Agreement Representations ) and (B) the Specified Representations (as defined below) and (ii) the terms of the Operative Documents shall be in a form such that they do not impair availability of the Facility on the Closing Date if the conditions expressly set forth in Section 1(c) of this Commitment Letter and the conditions contained in the section entitled Conditions Precedent to Funding in Annex I are satisfied (it being acknowledged that delivery of guaranties (if any) to be provided by the Target and any subsidiary of the Target that is required to become a Guarantor shall be effected on the Closing Date substantially simultaneously with the consummation of the Acquisition). For purposes hereof, Specified Representations means the representations and warranties made by the Company and each Guarantor (if any) in the Operative Documents as to corporate status, corporate power and authority to enter into the Operative Documents; the due authorization, execution, delivery and enforceability of the Operative Documents; the Operative Documents not conflicting with charter documents of the Company and each Guarantor (if any) or law; solvency as of the Closing Date of the Company and its subsidiaries on a consolidated basis (in the manner consistent with Exhibit B attached to Annex I hereto); Federal Reserve margin regulations; use of proceeds of the Facility not violating anti-money laundering, anti-terrorism and anti-bribery laws, the Patriot Act or OFAC; and the Investment Company Act. This paragraph, and the provisions herein, shall be referred to as the Certain Funds Provisions .
Each of the parties hereto agrees that this Commitment Letter is a binding and enforceable agreement with respect to the subject matter contained herein, including an agreement to negotiate in good faith the Operative Documents by the parties hereto in a manner consistent with this Commitment Letter, it being understood and agreed that the commitments provided hereunder and the funding of the Facility on the Closing Date are subject solely to the conditions precedent set forth in Section 1(c) and the conditions precedent contained in the section entitled Conditions Precedent to Funding in Annex I. The parties hereto agree to use good faith efforts to negotiate and finalize the Operative Documents reasonably in advance of the anticipated Closing Date.
Section 2. Commitment Termination. This Commitment Letter and the commitments hereunder will terminate on the earlier to occur of (a) December 31, 2017, and (b) the date the Operative Documents become effective (in which case the commitments shall survive under the Operative Documents) (such earlier date, the Termination Date ). The Initial Lenders commitments hereunder shall be superseded by the commitments in respect of the Facility set forth in the Operative Documents.
Section 3. Syndication. The Arranger reserves the right, before or after the execution of the Operative Documents, to syndicate all or a portion of the Facility to one or more financial institutions and institutional lenders that will become parties to the Operative Documents as Lenders, provided that each such financial institution or institutional lender to whom any portion of the Facility is syndicated on or before the execution of the Operative Documents shall be reasonably satisfactory to you (it being understood that after the execution of the Operative Documents the provisions of the Operative Documents shall govern your rights to approve such financial institutions and institutional lenders; provided that in the absence of a default or an event of default under the Operative Documents, this Commitment Letter or the Fee Letter, your consent (not to be unreasonably withheld or delayed) will be required in the case of any assignment of all or a portion of the Facility or any commitments in respect thereof to any person or entity other than a Lender, an affiliate of a Lender or an Approved Fund (as defined in the Existing Credit Facility)). The Company understands (i) that the Arranger intends to commence such syndication efforts promptly and (ii) the Arranger may elect to appoint one or more agents to assist it in such syndication efforts. The Arranger agrees that any such agent will be reasonably satisfactory to you.
The Arranger will manage all aspects of the syndication of the Facility in consultation with the Company, including the timing of all offers to potential Lenders, the determination of all amounts offered to potential Lenders, the selection of Lenders (subject to the Companys consent rights provided herein), the allocation of commitments among the Lenders, the assignment of any titles and the compensation to be provided to the Lenders (which shall not exceed the amounts agreed to by the Company herein and in the Fee Letter).
The commitments of the Commitment Parties hereunder shall be reduced, on a ratable basis, dollar-for-dollar as and when commitments for the Facility are received from Lenders approved by the Arranger and, to the extent expressly provided herein, by the Borrower; provided that, notwithstanding any other provision in this Commitment Letter, with respect to any assignment to any Lender, no Commitment Party shall be relieved, released or novated from its obligations hereunder (including its obligation to fund the Facility on the Closing Date) in connection with any syndication or assignment of the Facility to any Lender including its commitment in respect thereof, until after the Closing Date has occurred; provided further that the Commitment Parties shall be relieved of such obligations to the extent of the commitment of any Lender that executes a joinder to this Commitment Letter and becomes a Commitment Party hereunder (provided that such joinder is also executed by the Borrower).
Until the earliest of (x) the termination of the syndication of the Facility as determined by the Arranger, (y) the consummation of a Successful Syndication (as defined in the Fee Letter, defined below) and (z) 90 days after the Closing Date (such period, the Syndication Period ), the Company shall assist the Arranger in forming a syndicate reasonably acceptable to the Arranger and the Company. The Companys assistance in forming such syndicate shall include but not be limited to: (a) making senior management, representatives and advisors of the Company available (and using commercially reasonable efforts to cause senior management, representatives and advisors of the Target to be made available) to participate in a reasonable number of informational meetings with potential Lenders at times and places to be mutually agreed; (b) using commercially reasonable efforts to ensure that the syndication effort benefits from the Companys existing lending relationships; (c) assisting (including using commercially reasonable efforts to cause its affiliates and advisors to assist) in the preparation of a customary confidential information memorandum for the Facility and other customary marketing materials to be used in connection with the syndication of the Facility; (d) providing the Arranger with customary projections of the Company and its subsidiaries, including updated projections of the Company and its subsidiaries, from time to time reasonably requested by the Arranger during the Syndication Period; and (e) promptly providing the Arranger with customary and reasonably available information about the Company and its subsidiaries and their businesses (and the Company will use its commercially reasonable efforts to obtain such information from the Target and its subsidiaries (to the extent relating to the Target and such subsidiaries)) to the extent reasonably requested by the Arranger and reasonably deemed necessary by them to successfully complete the syndication of the Facility. Without limiting your obligations to assist with the syndication efforts as set forth herein, the Commitment Parties agree that the commitments of the Commitment Parties to fund the Facility on the Closing Date are not conditioned upon the Companys compliance with the foregoing or the commencement, conduct or completion of the syndication of the Facility or the completion of a Successful Syndication and in no event shall the successful syndication of the Facility constitute a condition to the availability of the Facility on the Closing Date.
The Company acknowledges that (i) the Arranger may make available any Information and Projections (each as defined in Section 8) (collectively, the Company Materials ) on a confidential basis to potential Lenders by posting the Company Materials on IntraLinks ® , Debtdomain ® , the Internet or another similar electronic system (the Platform ) and (ii) certain of the potential Lenders may be public side Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to you) (each, a Public Lender ). The Company agrees that (A) at the request of the Arranger, it will prepare a version of the information package and presentation to be provided to potential Lenders that does not contain material non-public information concerning you, your affiliates or any securities of any thereof for purposes of United States federal and state securities laws; (B) all Company Materials that are to be made available to Public Lenders will be clearly and conspicuously marked PUBLIC which, at a minimum, will mean that the word PUBLIC will appear prominently on the first page thereof; (C) by marking Company Materials PUBLIC, the Company will be deemed to have authorized the Arranger and the proposed Lenders to treat such Company Materials as not containing any material non-public information (although they may be confidential or proprietary) with respect to you, your affiliates or any securities of any thereof for purposes of United States federal and state securities laws; (D) all Company Materials marked PUBLIC are permitted to be made available through a portion of the Platform designated Public Lender, and (E) the Arranger will be entitled to treat any Company Materials that are not marked PUBLIC as being suitable only for posting on a portion of the Platform not designated Public Lender.
It is understood that in connection with your assistance described above, you will provide customary authorization letters (in the case of a public-side version of the Company Materials, containing a customary representation as to the absence of material non-public information therefrom) authorizing the distribution of the Company Materials to prospective Lenders.
To ensure an orderly and effective syndication of the Facility, the Company agrees that, during the Syndication Period, the Company will not and will not permit any of its subsidiaries to, syndicate or issue,
attempt to syndicate or issue, announce or authorize the announcement of the syndication or issuance of, any debt security or commercial bank or other debt facility (including any renewals thereof) other than the Facility, without the prior written consent of the Arranger; provided, however, that the foregoing shall not limit the Companys or any subsidiarys ability to issue common equity, preferred equity, public or 144/Regulation S debt securities, non-recourse property level secured debt or other mortgage financing, any revolving credit indebtedness incurred under the Existing Credit Facility (as defined in Annex I) (including, provided that there has been a Successful Syndication, pursuant to any increase in commitments thereunder) or in the ordinary course of business, any capitalized leases or purchase money financings, any equity or debt securities or other debt issued to finance the Acquisition or any debt incurred to refinance or replace any indebtedness of the Target assumed in connection with the Acquisition.
The Company agrees that no additional agents, co-agents or lead arrangers will be appointed, or other titles conferred, without the consent of the Arranger (such consent not to be unreasonably withheld). The Company further agrees that no Lender will receive any compensation of any kind for its participation in the Facility, except as expressly provided in this Commitment Letter and the Fee Letter.
Section 4. Fees. The Company will pay (or cause to be paid) the non-refundable fees (when due and payable) set forth in (a) Annex I and (b) without duplication, any separate letter agreement executed and delivered by the Company and to which the Arranger and/or the Administrative Agent is a party, as the same may be amended from time to time (individually or collectively, as the context may require, and as amended or otherwise modified from time to time, the Fee Letter ) in accordance with the terms thereof. The Company agrees that the Commitment Parties shall be granted the benefit of most favored nation treatment with respect to any beneficial terms whether economic or otherwise) granted to any Lender or any affiliate of any Lender to induce such Lender to extend its commitment to the Facility (exclusive of any such grant that would violate Section 106 of the Bank Holding Company Act Amendments of 1970, 12 U.S.C. 1972). Such most favored nation treatment shall not, however, require the Arranger, the Commitment Parties or their respective affiliates to accept any term or condition that is less favorable to them than those presently existing. Upon its execution and delivery, the terms of the Fee Letter shall become an integral part of the Arrangers and each Commitment Partys obligations hereunder and constitute part of this Commitment Letter for all purposes hereof. Each of the fees described in this Commitment Letter and Annex I shall be nonrefundable when paid except as expressly set forth therein.
Section 5. Indemnification. You agree to indemnify and hold harmless the Arranger, each Commitment Party, each Lender and each of their respective affiliates and each of their respective officers, directors, partners, employees, agents, advisors and representatives (each, an Indemnified Person , and collectively, the Indemnified Persons ) from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable and documented fees and disbursements of a single counsel to the Arranger, the Commitment Parties and their affiliates and of a single reasonably necessary special and local counsel for each applicable jurisdiction and, solely in the case of an actual or perceived conflict of interest, one additional counsel in each applicable jurisdiction to the affected person or entity), joint or several, that may be incurred by or asserted or awarded against any Indemnified Person (including, without limitation, in connection with, any investigation, litigation or proceeding or the preparation of any defense in connection therewith) in each case arising out of or in connection with or relating to this Commitment Letter or the Operative Documents or the transactions contemplated hereby or thereby, or any use made or proposed to be made with the proceeds of the Facility, or any untrue statement or alleged untrue statement of a material fact contained in, or omissions or alleged omissions from any filing with any governmental agency or similar statements or omissions in or from any information furnished by the Company or any of its subsidiaries or affiliates to any of the Indemnified Person or any other person or entity in connection with the Facility or any commitment in respect thereof, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Persons gross negligence, willful misconduct or bad faith breach of a material provision of this Commitment Letter. In the case of an investigation, litigation or proceeding to which the indemnity in this paragraph applies, such indemnity shall be effective, whether or
not such investigation, litigation or proceeding is brought by the Company, the Target, any of your or their affiliates, any of your or their respective security holders or creditors, an Indemnified Person or any other person or entity, or an Indemnified Person is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The reimbursement and indemnity obligations of the Company under this paragraph will be in addition to any liability which the Company may otherwise have, will extend upon the same terms and conditions to any affiliate of the Arranger and any Commitment Party and the partners, directors, agents, employees, and controlling persons or entities (if any), as the case may be, of the Arranger or any Commitment Party and any such affiliate, and will be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Arranger, each Commitment Party, any such affiliate and any such person or entity.
If any action, litigation, proceeding or investigation is commenced as to which any of the Indemnified Persons proposes to demand indemnification, they shall notify the Company with reasonable promptness; provided, however , that any failure by any of the Indemnified Persons to so notify the Company shall not relieve the Company from its obligations hereunder. The Indemnified Persons shall have the right to retain counsel of their choice (which counsel shall be reasonably acceptable to the Company and limited to a single counsel to the Arranger, the Commitment Parties and their affiliates and of a single reasonably necessary special and local counsel for each applicable jurisdiction and, solely in the case of an actual or perceived conflict of interest, one additional counsel in each applicable jurisdiction to the affected person or entity), and the Company shall jointly and severally pay the reasonable and documented fees, expenses and disbursement of such counsel; and such counsel shall, to the extent consistent with its professional responsibilities, cooperate with the Company and any counsel designated by the Company. Without the prior written consent of the applicable Indemnified Person, the Company shall not settle or compromise any claim with respect to such Indemnified Person under this section, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise or consent includes, as an unconditional term thereof, the giving by the claimant to each of the applicable Indemnified Persons of an unconditional and irrevocable release from all liability in respect of such claim.
None of the Company or any of your affiliates or any Indemnified Person shall have any liability (whether direct or indirect, in contract, tort or otherwise) arising out of, related to or in connection with the transactions contemplated hereby for special, indirect, consequential or punitive damages, provided that nothing contained in this sentence shall limit your indemnity and reimbursement obligations to the extent such special, indirect, punitive or consequential damages are included in any third party claim in connection with which such Indemnified Person is entitled to indemnification hereunder. It is further agreed that in connection with the transactions contemplated hereby the Arranger and each Commitment Party shall have liability only to you and shall have no third party liability to any other person or entity.
The Company acknowledges that information and documents relating to the Facility may be transmitted through the Platform. No Indemnified Person will be liable to the Company or any of its affiliates or any of their respective security holders or creditors for any damages arising from the use by unauthorized persons or entities of information or other materials sent through the Platform that are intercepted by such persons or entities, except to the extent such damages are found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Persons gross negligence, willful misconduct or bad faith breach of a material provision of this Commitment Letter.
Section 6. Costs and Expenses. You shall pay or reimburse the Arranger and each Commitment Party on demand for all reasonable and documented out-of-pocket costs and expenses incurred by the Arranger and its affiliates or such Commitment Party and its affiliates, as applicable (whether incurred before or after the date hereof), in connection with the Facility and the preparation, negotiation, execution and delivery of this Commitment Letter and the Operative Documents, including, without limitation, the reasonable and documented fees and disbursements of counsel (limited to a single counsel to the Arranger, the Commitment Parties and their affiliates and of a single reasonably necessary special and local counsel for each applicable jurisdiction), regardless of whether any of the transactions contemplated hereby are
consummated. The Company further agrees to pay all reasonable and documented out-of-pocket costs and expenses of the Arranger and its affiliates and each Commitment Party and its affiliates (including, without limitation, reasonable fees and disbursements of counsel (limited to a single counsel to the Arranger, the Commitment Parties and their affiliates and of a single reasonably necessary special and local counsel for each applicable jurisdiction and, solely in the case of an actual or perceived conflict of interest, one additional counsel in each applicable jurisdiction to the affected person or entity)) incurred in connection with the enforcement of any of its rights or remedies hereunder.
Section 7. Confidentiality. (a) By accepting delivery of this Commitment Letter, the Company agrees that this Commitment Letter and the Fee Letter are for its confidential use only and that neither their existence nor the terms hereof or thereof will be disclosed by it to any person or entity. Notwithstanding the foregoing, (i) the Company may disclose this Commitment Letter and the Fee Letter (provided that the Fee Letter is redacted in a manner reasonably satisfactory to the Arranger) to the Target and its officers, directors, employees, affiliates, independent auditors, legal counsel and other advisors on a confidential basis in connection with the Acquisition and the other transactions contemplated hereby, (ii) the Company may disclose this Commitment Letter and the Fee Letter to its officers, directors, employees, affiliates, independent auditors, legal counsel and other advisors on a confidential basis in connection with the transactions contemplated hereby, (iii) the Company may disclose this Commitment Letter as may be required by law, or compelled in a judicial or administrative proceeding or as otherwise required by law or requested by a governmental authority, (iv) the Company may disclose this Commitment Letter to rating agencies, on a confidential basis, (v) following the Companys acceptance of the provisions hereof and its return of an executed counterpart of this Commitment Letter to the Arranger as provided below, the Company may file a copy of any portion of this Commitment Letter (but not the Fee Letter) in any public record in which it is required by law to be filed, (vi) the Company may make such other public disclosures of any of the terms and conditions hereof as the Company is required by law to make, including but not limited to any filings with the Securities and Exchange Commission and any other applicable regulatory authorities and stock exchanges; (vii) the Company may disclose this Commitment Letter (but not the Fee Letter) in any offering memoranda relating to any issuance and sale by the Company of unsecured notes (the Notes ) in a public offering or in a Rule 144A or other private placement, (viii) the Company may disclose the fees as part of the Projections, pro forma information or a generic disclosure of aggregate sources and uses related to fee amounts related to the Acquisition and the other transactions contemplated thereby to the extent customary or required in any public release or filing relating to the Acquisition and the other transactions contemplated thereby, and (ix) the Company may disclose any terms and conditions hereof with our prior written consent.
(b) We will treat as confidential all confidential information provided to us by or on behalf of you hereunder, provided that nothing herein shall prevent us from disclosing any such information (i) as may be required by law, or compelled in a judicial or administrative proceeding or as otherwise required by law or requested by a governmental authority, (ii) to the extent that such information becomes publicly available other than by reason of disclosure by us in violation of this paragraph, (iii) to the Arrangers, each Commitment Partys or such Lenders affiliates, head office, branches and representative offices, and their officers, directors, employees, independent auditors, legal counsel, agents and other advisors and service providers on a confidential basis, and (iv) to actual or potential assignees or participants in the Facility who agree to be bound by the terms of this paragraph or substantially similar confidentiality provisions, provided that our confidentiality obligations under this sentence shall terminate on the earlier of (x) the Closing Date and (y) one year following the date of this Commitment Letter, provided that for the avoidance of doubt, the confidentiality undertakings set forth in this paragraph shall automatically terminate and be superseded by the provisions of the Operative Documents upon the effectiveness thereof. We further advise you that we will not make available to you confidential information that we may have obtained or may obtain from any other customer.
(c) Notwithstanding any other provision in this agreement or any other document, the parties hereby agree that each party (and each employee, representative, or other agent of each party) may disclose to any and all persons and entities, without limitation of any kind, the United States tax treatment and United
States tax structure of the transaction and all materials of any kind (including opinions or other tax analyses) that are provided to each party relating to such United States tax treatment and United States tax structure.
Section 8. Representations and Warranties of the Company. You represent and warrant (which representation and warranty shall be deemed to be to your knowledge with respect to information relating to the Target and its subsidiaries and their respective businesses) that (a) all information, other than Projections (as defined below) and information of a general economic or industry nature, that has been or will hereafter be made available to the Arranger, any Commitment Party, any Lender or any potential Lender by or on behalf of the Company, or any of your representatives in connection with the transactions contemplated hereby (the Information ), when taken as a whole, is and will be complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements were or are made and (b) all financial projections (taking into account the consummation of the transactions contemplated hereby), if any, that have been or will be prepared by or on behalf of the Company, or any of your representatives and made available to the Arranger, any Commitment Party, any Lender or any potential Lender (the Projections ) have been or will be prepared in good faith based upon assumptions that are believed by you to be reasonable at the time made and at the time the related financial projections are made available to the Arranger or the Commitment Parties. If, at any time from the date hereof until the termination of this Commitment Letter, any of the representations and warranties in the preceding sentence would not be accurate and complete in any material respect if the Information or Projections were being furnished, and such representations and warranties were being made, at such time, then the Company will promptly supplement the Information and or Projections so that such representations and warranties contained in this paragraph remain accurate and complete in all material respects under those circumstances.
In issuing this Commitment Letter and in arranging the Facility, including the syndication of the Facility, the Arranger and the Commitment Parties will be entitled to use, and to rely on the accuracy of, the Information furnished to them by or on behalf of the Company, its affiliates and any of your or their respective representatives without responsibility for independent verification thereof.
Section 9. No Third Party Reliance, Not a Fiduciary, Etc. The agreements of the Arranger and each Commitment Party hereunder and of any Lender that issues a commitment to provide financing under the Facility are made solely for your benefit and the benefit of the Arranger, such Commitment Party or such Lender, as applicable, and may not be relied upon or enforced by any other person or entity. Please note that those matters that are not covered or made clear herein are subject to mutual agreement of the parties. You may not assign or delegate any of your rights or obligations hereunder without the Arrangers and each Commitment Partys prior written consent.
You hereby acknowledge that the Arranger and each Commitment Party is acting pursuant to a contractual relationship on an arms length basis, and the parties hereto do not intend that the Arranger or any Commitment Party act or be responsible as a fiduciary to you, your management, stockholders, creditors or any other person or entity, in each case in connection with the transactions contemplated hereby. The Arranger and each Commitment Party hereby expressly disclaims any fiduciary relationship to you in connection with the transactions contemplated hereby and agrees they are each responsible for making their own independent judgments with respect to any transactions entered into between them. You also hereby acknowledge that neither the Arranger nor any Commitment Party has advised or is advising you as to any legal, accounting, regulatory or tax matters, and that you are consulting your own advisors concerning such matters to the extent you deem it appropriate.
You understand that the Arranger and its affiliates and each Commitment Party and its affiliates (in each case, collectively, a Group ) are engaged in a wide range of financial services and businesses (including investment management, financing, securities trading, corporate and investment banking and research) and that no Group is required to restrict its activities as a result of this Commitment Letter except
to the extent required by applicable law. Members of each Group and businesses within such Group generally act independently of each other, both for their own account and for the account of clients. Accordingly, there may be situations where parts of a Group and/or their clients either now have or may in the future have interests, or take actions that may conflict with your interests. For example, a Group may, in the ordinary course of business, engage in trading in financial products or undertake other investment businesses for their own account or on behalf of other clients, including without limitation, trading in or holding long, short or derivative positions in securities, loans or other financial products of you or your affiliates or other entities connected with the Facility or the transactions contemplated hereby.
You also acknowledge that none of the Commitment Parties or their respective affiliates has any obligation to use in connection with the transactions contemplated by this Commitment Letter, or to furnish to you, the Company or your or their respective subsidiaries, confidential information obtained by the Commitment Parties and their respective affiliates from other persons or entities. This Commitment Letter and the Fee Letter are not intended to create a fiduciary relationship among the parties hereto or thereto.
You acknowledge that you have retained Citi as financial advisor (in such capacity, Buy-Side Financial Advisor ) in connection with the Acquisition. You agree not to assert any claim you might allege based on any actual or potential conflicts of interest that might be asserted to arise or result from, on the one hand, the engagement of any such Buy-Side Financial Advisor and, on the other hand, our and our affiliates relationships with you as described and referred to herein.
Section 10. Assignments. The Company may not assign or delegate any of its rights or obligations under this Commitment Letter without the Arrangers prior written consent, and any attempted assignment without such consent shall be void ab initio .
Section 11. Amendments. This Commitment Letter may not be amended or any provision hereof waived or modified except by an instrument in writing signed by each party hereto.
Section 12. Governing Law, Etc. THIS COMMITMENT LETTER, AND ALL RIGHTS, REMEDIES, OBLIGATIONS, CLAIMS, CONTROVERSIES, DISPUTES OR CAUSES OF ACTION (WHETHER IN CONTRACT, TORT OR OTHERWISE) THAT MAY BE BASED UPON, ARISE OUT OF OR RELATE IN ANY WAY TO THIS COMMITMENT LETTER, OR THE NEGOTIATION, EXECUTION OR PERFORMANCE OF THIS COMMITMENT LETTER OR THE TRANSACTIONS CONTEMPLATED HEREBY, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY PRINCIPLE OF CONFLICTS OF LAW THAT COULD REQUIRE THE APPLICATION OF ANY OTHER LAW; PROVIDED, HOWEVER, THAT (A) THE INTERPRETATION OF THE DEFINITION OF COMPANY MATERIAL ADVERSE EFFECT AND WHETHER OR NOT A COMPANY MATERIAL ADVERSE EFFECT HAS OCCURRED, (B) THE DETERMINATION OF THE ACCURACY OF ANY ACQUISITION AGREEMENT REPRESENTATIONS AND WHETHER AS A RESULT OF ANY INACCURACY THEREOF YOU HAVE THE RIGHT TO TERMINATE (OR DECLINE TO PERFORM) YOUR OBLIGATIONS UNDER THE ACQUISITION AGREEMENT, AND (C) THE DETERMINATION OF WHETHER THE ACQUISITION HAS BEEN CONSUMMATED IN ACCORDANCE WITH THE TERMS OF THE ACQUISITION AGREEMENT AND, IN ANY CASE, CLAIMS OR DISPUTES ARISING OUT OF ANY SUCH INTERPRETATION OR DETERMINATION OR ANY ASPECT THEREOF, IN EACH CASE, FOR THE PURPOSES OF THIS COMMITMENT LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. This Commitment Letter sets forth the entire agreement among the parties with respect to the matters addressed herein and supersedes all prior communications, written or oral, with respect hereto. This Commitment Letter may be executed in any number of counterparts, each of which, when so executed, shall be deemed to be an original and all of which, taken together, shall constitute one and the same Commitment Letter. Delivery of an executed
counterpart of a signature page to this Commitment Letter by telecopier or other electronic transmission (including PDFs) shall be as effective as delivery of a manually executed counterpart of this Commitment Letter. The reimbursement (if applicable), indemnification, sharing of information, jurisdiction, governing law, venue, waiver of jury trial, syndication and confidentiality provisions (except as expressly set forth in Section 7(b)) contained herein and in the Fee Letter shall remain in full force and effect regardless of whether any Operative Documents shall be executed and delivered and notwithstanding the termination or expiration of this Commitment Letter or the commitments hereunder, provided that your obligations under this Commitment Letter (but not the Fee Letter, and other than your obligations with respect to (a) assistance to be provided in connection with the syndication of such commitments during the Syndication Period and (b) confidentiality) shall automatically terminate and be superseded by the provisions of the Operative Documents upon the effectiveness thereof, and you shall automatically be released from all liability in connection therewith at such time.
Section 13. Taxes; Payments. All payments under this Commitment Letter (including without limitation, the Fee Letter) will, except as otherwise provided herein, be made in U.S. Dollars in New York, New York and will be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto.
To the fullest extent permitted by law, the Company will make all payments hereunder regardless of any defense or counterclaim, including, without limitation, any defense or counterclaim based on any law, rule or policy which is now or hereafter promulgated by any governmental authority or regulatory body and which may adversely affect the Companys obligation to make, or the right of the Arranger or any Commitment Party to receive, such payments.
Section 14. WAIVER OF JURY TRIAL, ETC. EACH PARTY HERETO IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, LITIGATION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS COMMITMENT LETTER OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE ACTIONS OF THE PARTIES HERETO IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT HEREOF.
The Company hereby irrevocably and unconditionally agrees that it will not commence any action, litigation or other proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, arising out of or relating to this Commitment Letter or the transactions contemplated hereby, against the Administrative Agent, the Arranger, the Commitment Parties or any other Indemnified Persons in any forum other than the courts of the State of New York sitting in New York County, and of the United States District Court of the Southern District of New York, and any appellate court from any thereof and each party hereto irrevocably and unconditionally submits to the jurisdiction of such courts, and each party hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in any such New York State court or, to the extent permitted or required by law, in such Federal court. Each party hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
Each party hereto irrevocably and unconditionally waives, to the fullest extent permitted by law, (i) any objection that it may now or hereafter have to the laying of venue of any action, litigation or proceeding arising out of or relating to this Commitment Letter or the transactions contemplated hereby in any New York State or Federal court specified in the preceding paragraph, and (ii) the defense of an inconvenient forum to the maintenance of such action, litigation or proceeding in any such court.
A final judgment in any such action, litigation or proceeding will be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing herein will affect the right of the Administrative Agent, the Arranger, any Commitment Party or any other Indemnified
Persons to serve legal process in any other manner permitted by law or affect the right of the Administrative Agent, the Arranger, any Commitment Party or any other Indemnified Persons to bring any action, litigation or proceeding arising out of or relating to this Commitment Letter or the transactions contemplated hereby against the Company or its property in the courts of any jurisdiction.
Section 15. Time of Essence. Time shall be of the essence whenever and wherever a date or period of time is prescribed or referred to in this Commitment Letter.
Section 16. Patriot Act Compliance. The Commitment Parties hereby notify you that pursuant to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56 (signed into law October 26, 2001) (the Patriot Act ), the Arranger, the Commitment Parties and the Lenders are required to obtain, verify and record information that identifies the Company and each affiliate thereof that is a party to the Operative Documents, which information includes the name, address, tax identification number and other information regarding the Company and such affiliates that will allow the Arranger, such Commitment Party or such Lender to identify the Company and each such affiliate in accordance with the Patriot Act. This notice is given in accordance with the requirements of the Patriot Act and is effective as to the Arranger, the Commitment Parties and the Lenders.
Section 17. Power, Authority and Binding Effect. Each of the parties hereto represents and warrants to each of the other parties hereto that (a) it has all requisite power and authority to enter into this Commitment Letter and the Fee Letter and (b) each of this Commitment Letter and the Fee Letter has been duly and validly authorized by all necessary corporate action on the part of such party, has been duly executed and delivered by such party and constitutes a legally valid and binding agreement of such party, enforceable against it in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally. For the avoidance of doubt, this Commitment Letter supersedes and replaces any commitment letter previously issued by the Arranger on behalf of the Initial Lender in respect of the Facility.
Section 18. Acknowledgement and Consent to Bail-In of EEA Financial Institutions. Each of the parties hereto hereby agrees to the provisions in attached Annex II, which provisions are incorporated into and made a part of this Commitment Letter as though fully set forth herein.
[Balance of Page Intentionally Left Blank.]
Please indicate the acceptance by the Company of the provisions hereof by signing a copy of this Commitment Letter and the Fee Letter and returning them to David Bouton, Managing Director, Citigroup Global Markets Inc., 390 Greenwich Street, New York, New York 10013 or via electronic transmission to david.bouton@citi.com, at or before 11:59 p.m. (New York City time) one (1) business day after the date hereof, the time at which the obligations of the Commitment Parties set forth above (if not so accepted prior thereto) will terminate. If the Company elects to deliver this Commitment Letter and/or the Fee Letter by electronic transmission, please arrange for executed originals to follow to counsel for CGMI.
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Very truly yours, |
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CITIGROUP GLOBAL MARKETS INC. |
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/s/ Christopher J. Albano |
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Name: Christopher J. Albano |
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Title: Authorized Signatory |
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ACCEPTED AND AGREED |
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on June 27, 2017: |
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GOVERNMENT PROPERTIES INCOME TRUST |
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By |
/s/ David M. Blackman |
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Name: David M. Blackman |
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Title: President and Chief Operating Officer |
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SIGNATURE PAGE TO GOVERNMENT PROPERTIES INCOME TRUST COMMITMENT LETTER
ANNEX I
SUMMARY OF TERMS
[see attached pages.]
Annex I
Summary of Terms and Conditions
GOVERNMENT PROPERTIES INCOME TRUST
$750,000,000 Senior Unsecured Bridge Loan
BORROWER: |
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Government Properties Income Trust (the Borrower). |
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GUARANTORS: |
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Consistent with the Existing Credit Facility (defined below). |
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EXISTING CREDIT FACILITY: |
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The existing $1.3 billion senior unsecured revolving credit and term loan facilities extended pursuant to that certain Credit Agreement dated as of November 21, 2014 by and among the Borrower, the financial institutions party thereto, as lenders, Wells Fargo Bank, National Association, as administrative agent, and the other agents and arrangers party thereto, as the same may be amended, amended and restated, restated, modified or replaced with the approval in writing of the lenders thereunder as required pursuant thereto, provided that such approving lenders include, among others, persons or entities that constitute Commitment Parties holding at least a majority of aggregate commitments under the Commitment Letter (as defined below) (the Existing Credit Facility). Capitalized terms used and not defined herein are used as defined in the Existing Credit Facility. |
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SOLE LEAD ARRANGER AND SOLE BOOKRUNNER: |
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The Sole Lead Arranger and Sole Bookrunner will be Citigroup Global Markets Inc. (CGMI or the Arranger). |
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ADMINISTRATIVE AGENT: |
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An affiliate of CGMI will act as the administrative agent (the Administrative Agent). |
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LENDERS: |
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Syndicate of Lenders acceptable to the Arranger and Borrower (collectively, the Lenders). |
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FACILITY: |
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$750,000,000 (the Facility Amount) senior unsecured bridge loan (the Bridge Loan). |
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AVAILABILITY: |
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The Facility Amount will be disbursed in a single drawing on the Closing Date. |
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PURPOSE: |
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To consummate the acquisition (the Acquisition) by the Borrower of 100% of the outstanding equity interests in First Potomac Realty Trust (the Target), and for the payment of costs and expenses incurred in connection with the Acquisition, the Bridge Loan and related transactions. |
AMORTIZATION: |
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Interest only during the term of the Bridge Loan (except as provided in the Mandatory Prepayments section below). The outstanding principal balance of the Bridge Loan will be due in full on the Maturity Date. |
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MATURITY: |
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The Bridge Loan shall mature 364 days after the Closing Date (the Maturity Date). |
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OPTIONAL PREPAYMENT: |
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The Borrower may prepay the Bridge Loan, in whole or in part, at any time without fees, premiums or penalty, subject to customary reimbursement of the Lenders pro rata breakage and redeployment costs associated with any LIBOR borrowings prepaid on a date other than the last day of the applicable interest period. |
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MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS: |
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An amount equal to the following amounts shall be applied to prepay the Bridge Loan, without fees, premiums or penalty (other than customary breakage and redeployment costs associated with any LIBOR borrowings prepaid on a date other than the last day of the applicable interest period) (and, prior to the Closing Date, the commitments pursuant to the Commitment Letter relating to the Bridge Loan to which the Arranger and the Borrower are parties (the Commitment Letter) or the definitive loan documentation for the Bridge Loan, as applicable, shall be permanently and automatically reduced by an amount equal to): 100% of the Net Cash Proceeds (as defined below) of all (i) Capital Raising Transactions (as defined below), (ii) Material Asset Sales (as defined below) and (iii) cash equity contributions to the Borrower, in each case on or after the date of the Commitment Letter. |
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A Capital Raising Transaction shall be public or 144A common equity, preferred equity (including preferred equity convertible into common stock), or debt securities (including debt securities convertible into common stock) or other unsecured debt for borrowed money issued or guaranteed by the Borrower; provided, however, that Capital Raising Transaction shall not include (i) intercompany debt among the Borrower and/or its subsidiaries; (ii) borrowings under the Existing Credit Facility (including, provided that there shall have been a Successful Syndication of the Bridge Loan, pursuant to any increase in commitments thereunder); and (iii) any debt incurred to refinance or replace any indebtedness of the Target assumed in connection with the Acquisition. Other customary carveouts to be agreed by the parties. |
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A Material Asset Sale shall mean any non-ordinary course asset sale by the Borrower or any of its subsidiaries generating Net Cash Proceeds in excess of $5,000,000 in any transaction. |
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$750,000,000 Senior Unsecured Bridge Loan |
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Net Cash Proceeds shall mean (a) with respect to any asset sale, the aggregate amount of all cash (which term, for the purpose of this definition, shall include cash equivalents) proceeds (including any cash proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment or otherwise, but only as and when received) actually received in respect of such asset sale, including property insurance or condemnation proceeds paid on account of any loss of any property or assets, net of (1) all reasonable attorneys fees, accountants fees, brokerage, consultant and other customary fees and commissions, title and recording tax expenses and other reasonable fees and expenses incurred in connection therewith, (2) all taxes paid or reasonably estimated to be payable as a result thereof, (3) all payments made, and all installment payments required to be made, with respect to any obligation (A) that is secured by any assets subject to such asset sale, in accordance with the terms of any Operative Document or instrument with respect to a lien upon such assets, or (B) that must by its terms, or in order to obtain a necessary consent to such asset sale, or by applicable law, be repaid (including pursuant to any mandatory prepayment or redemption requirement) out of the proceeds from such asset sale, (4) all distributions and other payments required to be made to minority interest holders in subsidiaries or joint ventures as a result of such asset sale, or to any other person or entity (other than the Borrower or any of its subsidiaries) owning a beneficial interest in the assets disposed of in such asset sale, and (5) the amount of any reserves established by the Borrower or any of its subsidiaries in accordance with GAAP to fund purchase price or similar adjustments, indemnities or liabilities, contingent or otherwise, reasonably estimated to be payable in connection with such asset sale (provided that to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds); and (b) with respect to any equity issuance or debt incurrence, the aggregate amount of all cash proceeds actually received in respect of such equity issuance or debt incurrence, net of reasonable fees, expenses, costs, underwriting discounts and commissions incurred in connection therewith and net of taxes paid or reasonably estimated by the Borrower to be payable as a result thereof. |
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Upon each repayment or prepayment of the Bridge Loan, the aggregate Bridge Loan commitments of the Lenders shall be automatically and permanently reduced, on a pro rata basis, by the amount of such repayment or prepayment. Amounts repaid may not be reborrowed. Once terminated, a Bridge Loan commitment may not be reinstated. |
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INTEREST RATE: |
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Pricing (the Applicable Margin) will be determined in accordance with the pricing grid as set forth in the attached Exhibit A. |
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If the Borrower obtains ratings from Moodys, S&P and Fitch that are not equivalent, the Applicable Margin shall be determined by the lower of the highest two ratings. If the Borrower obtains ratings from only Moodys and S&P, the Applicable Margin shall be determined by the higher of the two ratings. If the Borrower obtains ratings from only one of S&P or Moodys plus Fitch, the Applicable Margin shall be determined by the S&P or Moodys rating. If the Borrower shall cease to have a Credit Rating from |
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$750,000,000 Senior Unsecured Bridge Loan |
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S&P or Moodys, the Applicable Margin shall be determined based on Level 5 of such grid. |
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LIBOR means, with respect to any LIBOR Loan for any Interest Period, the rate of interest obtained by dividing (i) the ICE Benchmark Administration Limited LIBOR Rate (ICE LIBOR), as published by Reuters (or another commercially available source providing quotations of ICE LIBOR, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, on the date that is two Business Days prior to the first day of such Interest Period and having a maturity equal to such Interest Period; provided that if such rate of interest is less than zero, such rate shall be deemed to be zero, by (ii) a percentage equal to 1 minus the stated maximum rate (stated as a decimal) of all reserves, if any, required to be maintained with respect to Eurocurrency funding (currently referred to as Eurocurrency liabilities) as specified in Regulation D of the Board of Governors of the Federal Reserve System (or against any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Loans is determined or any applicable category of extensions of credit or other assets which includes loans by an office of any Lender outside of the United States of America). Any change in such maximum rate shall result in a change in LIBOR on the date on which such change in such maximum rate becomes effective. |
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Interest Period means with respect to each LIBOR Loan, each period commencing on the date such LIBOR Loan is made, or in the case of the continuation of a LIBOR Loan the last day of the preceding Interest Period for such Loan, and ending 7 days thereafter or on the numerically corresponding day in the first, third or sixth calendar month thereafter, as the Borrower may select in a notice of borrowing, notice of continuation or notice of conversion, as the case may be, except that each Interest Period (other than an Interest Period having a duration of 7 days) that commences on the last business day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last business day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period would otherwise end after the Maturity Date, such Interest Period shall end on the Maturity Date; and (ii) each Interest Period that would otherwise end on a day which is not a business day shall end on the immediately following business day (or, if such immediately following business day falls in the next calendar month, on the immediately preceding business day). |
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Base Rate means the LIBOR Market Index Rate; provided, that if for any reason the LIBOR Market Index Rate is unavailable, Base Rate shall mean the per annum rate of interest equal to the Federal Funds Rate plus one and one-half of one percent (1.50%). |
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LIBOR Market Index Rate means, for any day, LIBOR as of that day that would be applicable for a LIBOR Loan having a one-month Interest Period determined at approximately 11:00 a.m. Eastern Standard time for such day (or if such day is not a business day, the immediately preceding |
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$750,000,000 Senior Unsecured Bridge Loan |
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business day). The LIBOR Market Index Rate shall be determined on a daily basis. |
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Interest will be payable monthly, computed on the actual days elapsed in a 360 day year. |
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Bridge Loan documentation will include customary provisions (a) protecting the Lenders against increased costs or loss of yield resulting from changes in reserve, tax, capital adequacy and other requirements of law, and (b) indemnifying the Lenders for breakage costs incurred in connection with, among other things, any failure to borrow a LIBOR loan, or any repayment of a LIBOR loan on a day other than the last day of an interest period with respect thereto. While an event of default exists, the interest rate on all outstanding obligations will be equal to the Base Rate plus the Applicable Margin plus 2.0%. The loan documentation will contain customary provisions addressing the Foreign Account Tax Compliance Act. |
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CERTAIN FEES: |
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As set forth in Exhibit A. |
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FINANCIAL COVENANTS: |
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Same as, and limited to those contained in, the Existing Credit Facility. |
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OTHER COVENANTS: |
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Same as, and limited to those contained in, the Existing Credit Facility. |
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REPORTING REQUIREMENTS: |
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Same as, and limited to those contained in, the Existing Credit Facility. |
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INDEMNIFICATION: |
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Same as Existing Credit Facility. |
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CONDITIONS PRECEDENT TO FUNDING: |
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Limited to those conditions set forth in Section 1(c) of the Commitment Letter, plus the conditions set forth below (the date upon which all such conditions precedent to funding shall be satisfied and the funding of the Bridge Loan occurs, the Closing Date): |
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The Administrative Agent shall have received (a) customary legal opinions as reasonably required by the Administrative Agent, (b) evidence of authorization and organizational documents with respect to the Borrower and the Guarantors (if any) consisting of (i) applicable certificates or articles of incorporation, formation, organization, limited partnership or other comparable organizational instrument of the Borrower and each Guarantor (if any) certified by the secretary of state, (ii) incumbency certificate for the Borrower and each Guarantor (if any), (iii) copies of applicable organizational documents of the Borrower and each Guarantor (if any) certified by an officer of the Borrower or such Guarantor (if any), as applicable and (iv) customary good standing certificates (with respect to the applicable jurisdiction of incorporation or organization of the Borrower and each Guarantor (if |
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any)), (c) customary insurance certificates or other evidence of insurance coverage and (d) a customary borrowing notice. |
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2. |
The substantially concurrent consummation of the Acquisition on or prior to the Closing Date in accordance in all material respects with that certain Agreement and Plan of Merger, dated as of June 27, 2017 (such agreement, including all exhibits and schedules thereto, the Acquisition Agreement), by and among Government Properties Income Trust, GOV New Oppty REIT, GOV New Oppty LP, First Potomac Realty Trust and First Potomac Realty Investment Limited Partnership, without amendment, modification or waiver thereof or any consent thereunder (including any change in the definition of Company Material Adverse Effect or lender protective provisions or in the purchase price (excluding any adjustments provided for in the Acquisition Agreement) which is materially adverse to the Lenders (unless consented to by the Arranger). |
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On the Closing Date, there shall not exist any event, change, or occurrence arising after the date of the Acquisition Agreement that, individually or in the aggregate, constitutes a Company Material Adverse Effect (as defined in the Acquisition Agreement). |
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To the extent reasonably requested at least 10 business days prior to the Closing Date, the Administrative Agent shall have received at least three business days prior to the Closing Date all documentation and other information with respect to the Borrower and the Guarantors (if any) that the Administrative Agent or the Arranger reasonably determines is required by U.S. regulatory authorities under applicable know your customer and anti-money laundering rules and regulations, including the PATRIOT Act. |
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The Arranger shall have received (a) audited financial statements for the Target and its consolidated subsidiaries for the fiscal year most recently ended at least 90 days before the Closing Date (without any qualified opinion thereon) and (b) to the extent available, unaudited financial statements for the Target and its consolidated subsidiaries for each completed fiscal quarter since the date of such audited financial statements ending at least 45 days before the Closing Date, which shall be prepared in accordance with, or reconciled to, U.S. generally accepted accounting principles. In addition, the Arranger shall have received pro forma financial statements giving effect to the Acquisition to the extent required pursuant to Regulation S-X under the Securities Act of 1933, as amended, to be filed with the SEC on or prior to the consummation of the Acquisition, provided that the Borrower shall be deemed to have satisfied this requirement to the extent that such pro forma financial statements have been filed and are publicly available electronically at www.sec.gov (or a successor web site thereto). |
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6. |
The Specified Representations shall be true and correct in all material respects as of the Closing Date. |
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The Acquisition Agreement Representations shall be true and correct in all respects as of the Closing Date except to the extent that the Borrower would not have the right to terminate its obligations under the Acquisition Agreement as a result of a breach of such representations in the Acquisition Agreement. |
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The Lenders shall have received a solvency certificate from the chief financial officer of the Company in the form attached hereto as Schedule I. |
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REPRESENTATIONS AND WARRANTIES: |
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Subject in all respects to the Certain Funds Provisions, same as, and limited to those contained in, the Existing Credit Facility. |
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EVENTS OF DEFAULT: |
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Same as, and limited to those contained in, the Existing Credit Facility. |
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ASSIGNMENTS/ PARTICIPATIONS: |
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Same as Existing Credit Facility; provided that, notwithstanding any other provision in the Operative Documents, but subject to the provisions of the Commitment Letter, with respect to any assignment to any Lender, no Commitment Party (as defined in the Commitment Letter) shall be relieved, released or novated from its obligations under the Commitment Letter (including its obligation to fund the Facility on the Closing Date) in connection with any syndication or assignment of the Facility to any Lender, including its commitments in respect thereof, until after the Closing Date has occurred. |
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WAIVERS AND AMENDMENTS: |
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Same as Existing Credit Facility. |
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EXPENSES: |
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The Borrower will pay all reasonable and documented out-of-pocket costs and expenses associated with the preparation, due diligence, administration, syndication and enforcement of all documentation executed in connection with the Bridge Loan, including, without limitation, the reasonable and documented legal fees of Shearman & Sterling LLP, counsel to the Administrative Agent, the Arranger and the Commitment Party, regardless of whether or not the Bridge Loan is closed. The Borrower will also pay the reasonable and documented expenses of each Lender in connection with the workout or enforcement of any loan documentation for the Bridge Loan. |
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GOVERNING LAW: |
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New York. |
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OTHER: |
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Subject in all respects to the Certain Funds Provisions, the definitive documentation for the Bridge Loan shall include customary representations regarding anti-corruption laws, and, consistent with the Existing Credit Facility, waivers by each party to its right to trial by jury and submission by each party to State of New York jurisdiction. This Summary of Terms and Conditions is intended only as an outline of certain of the material terms of the Facility and does not purport to summarize all of the conditions, covenants, representations, warranties and other provisions that would be contained in definitive documentation for the Facility contemplated hereby. |
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The Loan documentation shall include: |
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Waiver by each of the parties of its right to a trial by jury. |
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Submission by each of the parties to State of New York jurisdiction. |
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Normal agency, set-off and sharing language. |
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Receipt and verification of all necessary information in connection with the USA Patriot Act, Know Your Customer and other customary requirements. |
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Customary defaulting lender provisions. |
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Customary provisions regarding OFAC, sanctions and anti-corruption laws. |
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Customary European Union bail-in provisions. |
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EXHIBIT A
PRICING GRID
RATINGS: S&P AND
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THE
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THE
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THE
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THE
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BELOW
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LEVEL |
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Level I |
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Level II |
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Level III |
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Level IV |
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Level V |
APPLICABLE MARGIN* |
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90.0 |
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97.5 |
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115.0 |
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140.0 |
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190.0 |
*: In basis points per annum
All margins and fees change as of the first day of the month following the rating classification changes.
FUNDING FEE: |
Due and payable to the Administrative Agent on the Closing Date for the account of each Lender in an amount equal to each such Lender's final allocated commitment that is funded on the Closing Date (but only if the Closing Date occurs), multiplied by 35 bps. |
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DURATION FEE: |
Due and payable to the Administrative Agent for the ratable benefit of the Lenders on each of (i) the 90 th day following the Closing Date in an amount equal to 25 bps multiplied by the aggregate principal amount of the Facility outstanding as of such date, (ii) the 180 th day following the Closing Date in an amount equal to 50 bps multiplied by the aggregate principal amount of the Facility outstanding as of such date, and (iii) the 270 th day following the Closing Date in an amount equal to 75 bps multiplied by the aggregate principal amount of the Facility outstanding as of such date. |
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TICKING FEE: |
Due and payable to the Administrative Agent, for the ratable account of the Commitment Parties, 12.5 bps per annum of the daily average undrawn commitments of the Commitment Parties in respect of the Facility under the Commitment Letter, accruing from the date that is 120 days from the date hereof until the earlier of (x) the Closing Date and (y) the termination or expiration of the commitments under the Commitment Letter in accordance with the terms thereof. The Ticking Fee shall be earned and payable on such earlier date. |
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EXHIBIT B
FORM OF SOLVENCY CERTIFICATE
[ · ], 20
This Solvency Certificate is being executed and delivered pursuant to Section [ · ] of that certain [ · ] 1 (the Loan Agreement); the terms defined therein being used herein as therein defined.
I, [ · ], the [chief financial officer/equivalent officer] of the Company, in such capacity and not in an individual capacity, hereby certify that I am the [chief financial officer/equivalent officer] of the Company and that I am generally familiar with the businesses and assets of the Company and its subsidiaries (taken as a whole), I have made such other investigations and inquiries as I have deemed appropriate and I am duly authorized to execute this Solvency Certificate on behalf of the Company pursuant to the Loan Agreement.
I further certify, in my capacity as [chief financial officer/equivalent officer] of the Company, and not in my individual capacity, as of the date hereof and after giving effect to the [Acquisition] and the incurrence of the indebtedness and obligations being incurred in connection with the Loan Agreement and the [Acquisition], that, (i) the sum of the debt (including contingent liabilities) of the Company and its subsidiaries, taken as a whole, does not exceed the present fair saleable value of the assets (at a fair valuation) of the Company and its subsidiaries, taken as a whole; (ii) the capital of the Company and its subsidiaries, taken as a whole, is not unreasonably small in relation to the business of the Company and its subsidiaries, taken as a whole, contemplated as of the date hereof; and (iii) the Company and its subsidiaries, taken as a whole, do not intend to incur, or believe that they will incur, debts including current obligations beyond their ability to pay such debt as they mature in the ordinary course of business.
[Remainder of page intentionally left blank]
1 NTD: Describe the Credit Agreement
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IN WITNESS WHEREOF, I have executed this Solvency Certificate on the date first written above.
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By: |
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Name: |
[ · ] |
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Title: |
[ · ] |
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ANNEX II
ACKNOWLEDGEMENT AND CONSENT TO BAIL-IN OF EEA FINANCIAL INSTITUTIONS
Notwithstanding anything to the contrary in this Commitment Letter or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under this Commitment Letter, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by (a) the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and (b) the effects of any Bail-In Action on any such liability, including, if applicable, (i) a reduction in full or in part or cancellation of any such liability, (ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Commitment Letter or (iii) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.
As used in this Annex II, the terms listed below shall have the respective meanings set forth below (such meanings to be equally applicable to both the singular and plural forms of the terms defined). The capitalized terms used herein without definition have the respective meanings given to them in the Commitment Letter (as defined below) including Annex I attached hereto.
Bail-In Action means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
Bail-In Legislation means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.
Commitment Letter means, collectively (a) the letter agreement dated as of the date hereof (as amended or otherwise modified from time to time) among Citigroup Global Markets Inc. and Government Properties Income Trust regarding a $750 million senior unsecured bridge loan, and (b) the Fee Letter under and as defined therein.
EEA Financial Institution means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
EEA Member Country means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
EEA Resolution Authority means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
EU Bail-In Legislation Schedule means the EU Bail-In Legislation Schedule published
by the Loan Market Association (or any successor Person), as in effect from time to time.
Write-Down and Conversion Powers means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Trustees
First Potomac Realty Trust:
We consent to the incorporation by reference in the registration statement (No. 333-212431) on Form S-3 of Government Properties Income Trust of our reports dated February 23, 2017, with respect to the consolidated balance sheets of First Potomac Realty Trust as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2016, the related financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2016, which reports appear in the Form 8-K of Government Properties Income Trust dated June 27, 2017.
/s/ KPMG LLP |
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McLean, Virginia |
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June 28, 2017 |
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Exhibit 99.1
FOR IMMEDIATE RELEASE
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Contact: Christopher Ranjitkar, Director, Investor Relations (617) 219-1473 |
Government Properties Income Trust to Acquire First Potomac Realty Trust for Approximately $1.4 Billion
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Newton, MA (June 28, 2017): Government Properties Income Trust (Nasdaq: GOV) today announced that its Board of Trustees has unanimously approved a definitive merger agreement to acquire all of the outstanding common shares of First Potomac Realty Trust (NYSE: FPO) for an aggregate transaction value of approximately $1.4 billion, including $11.15 per FPO common share in cash and the repayment or assumption of FPO debt. This transaction is subject to the approval of at least a majority of FPOs common shareholders and other customary conditions and is expected to close prior to year end 2017.
David Blackman, President and Chief Operating Officer of GOV, made the following statement:
The acquisition of FPO enables GOV to expand its business strategy to include the acquisition, ownership and operation of office properties leased to both government and private sector tenants in the metropolitan Washington, D.C. market area. The metropolitan Washington, D.C. market area is one of the largest office markets in the U.S. and the nations largest beneficiary of spending by the U.S. government. Outside of the metropolitan Washington, D.C. market area, GOV will continue to focus on acquiring, owning and operating office properties that are majority leased to government tenants.
In addition to this transaction providing GOV with new potential growth opportunities, we expect to realize approximately $11 million of annual general and administrative expense savings compared to FPO on a stand alone basis. We are also pleased that we were able to achieve an attractive per share purchase price.
GOV believes FPO has high quality office and industrial properties that are well located primarily in the metropolitan Washington, D.C. market area. FPOs portfolio includes 39 properties (74 buildings) with approximately 6.5 million square feet that was 92.2% leased as of March 31, 2017 (including two joint venture properties which are 50% and 51% owned by FPO). As of March 31, 2017, government and other investment grade rated tenants represented approximately 43.9% of FPOs total annualized rental income.
As of March 31, 2017 and pro forma for GOVs acquisition of FPO, GOVs portfolio and selected operating metrics would have been:
· $4.1 billion of consolidated gross assets;
· 113 properties (170 buildings) with approximately 18.0 million square feet that are 94.1% leased for 4.9 years based on weighted average annualized rental income;
· 71.7% of total annualized rental income from government and other investment grade rated tenants;
· 59.9% of total annualized rental income from government tenants;
· properties located in 31 states and Washington, D.C.; and
· 54.3% of total annualized rental income from the metropolitan Washington, D.C. market area.
Transaction Structure and Financing
The cash consideration to be paid to FPO shareholders will be $11.15 per FPO common share, or approximately $683 million in aggregate. The remaining transaction value includes the expected repayment of approximately $418 million of FPO debt and assumption of approximately $232 million of FPO mortgage debt, and the payment of transaction fees and expenses, net of FPO cash on hand. FPO has agreed that it will not pay any distributions to its shareholders before the closing of the transaction. GOVs distributions to its shareholders will not be impacted by the transaction.
GOV expects to finance this transaction on a long term basis with the sale of common shares, additional debt, including senior unsecured notes, mortgage financing and/or bank debt, and/or with proceeds from the sale of certain properties. Pending the completion of GOVs long term financing plan, GOV may use borrowings under its existing revolving credit facility and under a new 364 day, fully committed bridge loan facility (subject to certain customary conditions) for up to $750 million to finance the transaction.
Based on GOVs preliminary estimate of 2018 net operating income attributable to the FPO properties (including the estimated pro-rata net operating income from two unconsolidated joint venture properties) and subject to completion of GOVs accounting analysis, GOV believes that the estimated acquisition cap rate is approximately 7.0%. GOV believes this transaction will be accretive to GOVs normalized funds from operations per share after 2018 and approximately leverage neutral on a debt to gross assets basis after completion of GOVs long term financing plan.
This transaction is subject to the approval of at least a majority of FPOs common shareholders and other customary conditions. As part of the agreed transaction terms, GOV has the option to pursue the acquisition of FPO in a tender offer for all of the outstanding FPO common shares, which may decrease the time required to close the transaction. The transaction is expected to close prior to year end 2017.
Advisors
Citigroup is acting as exclusive financial advisor to GOV and Sullivan & Worcester LLP is serving as legal counsel to GOV. Joint Lead Arrangers for the bridge loan facility are Citigroup, Bank of America, N.A., Morgan Stanley and UBS Investment Bank.
Conference Call
GOV will host a conference call today at 10:00 a.m. Eastern Time to discuss todays announcement. This call will be accompanied by an investor presentation that has been made available on GOVs website (www.govreit.com) and will be filed with the Securities and Exchange Commission, or SEC.
The conference call telephone number is 877-328-1172. Participants calling from outside the United States and Canada should dial 412-317-5418. No pass code is necessary to access the call from either number. Participants should dial in about 15 minutes prior to the scheduled start of the call.
A live audio webcast of the conference call will also be available in a listen-only mode on GOVs website, www.govreit.com. Participants wanting to access the webcast should visit GOVs website about five minutes before the call. The transcription, recording and retransmission in any way of GOVs conference call are strictly prohibited without the prior written consent of GOV.
About Government Properties Income Trust
GOV is a real estate investment trust, or REIT, which primarily owns properties located throughout the United States that are majority leased to the U.S. government and other government tenants. GOV is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, Massachusetts.
The expected offering of GOVs common shares will be made pursuant to GOVs effective shelf registration statement filed with the SEC. The offering will be made only by means of a prospectus and a related preliminary prospectus supplement. Before you invest, you should read the prospectus in that registration statement, the related preliminary prospectus supplement and other documents GOV has filed or will file with the SEC for more complete information about GOV and the offering. You may get these documents for free by visiting the SECs website at www.sec.gov. Alternatively, GOV or any underwriter participating in the offering will arrange to send you the prospectus and the related preliminary prospectus supplement if you request it from Citigroup, c/o Broadridge Financial Solutions, 1155 Long Island Avenue, Edgewood, NY 11717, telephone: (800) 831-9146; BofA Merrill Lynch, Attention: Prospectus Department, NC1-004-03-43, 200 North College Street, 3rd Floor, Charlotte, NC 28255-0001, email: dg.prospectus_requests@baml.com; Morgan Stanley, Attention: Prospectus Department, 180 Varick Street, 2nd Floor, New York, NY 10014; or UBS Investment Bank, Attention: Prospectus Department, 1285 Avenue of the Americas, New York, NY, 10019 or by calling (888) 827-7275.
This press release shall not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of any securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.
This press release is for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell FPO common shares. We have not commenced a tender offer for FPO common shares pursuant to the terms of the merger agreement described herein or otherwise. If we commence a tender offer for FPO common shares, we will file with the SEC a tender offer statement on Schedule TO, and FPO will file with the SEC a solicitation/recommendation statement on Schedule 14D-9 with respect to such tender offer. ANY SUCH TENDER OFFER MATERIALS (INCLUDING AN OFFER TO PURCHASE, A RELATED LETTER OF TRANSMITTAL AND CERTAIN OTHER OFFER DOCUMENTS) AND THE SOLICITATION/RECOMMENDATION STATEMENT OF FPO ON SCHEDULE 14D-9 WILL CONTAIN IMPORTANT INFORMATION. HOLDERS OF FPO COMMON SHARES
SHOULD READ THESE DOCUMENTS CAREFULLY IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION THAT HOLDERS OF FPO COMMON SHARES SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING TENDERING THEIR SECURITIES. Copies of these documents, if and when filed with the SEC, will be available free of charge at the SECs website at www.sec.gov. In addition to these documents, FPO files annual, quarterly and current reports and other information with the SEC. You may read and copy any reports or other information filed by FPO at the SEC public reference room at 100 F Street, N.E., Washington, D.C. 20549. FPOs filings with the SEC are also available for free at the SECs website at www.sec.gov.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS PRESS RELEASE CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER GOV USES WORDS SUCH AS BELIEVE, EXPECT, ANTICIPATE, INTEND, PLAN, ESTIMATE, WILL, MAY AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, GOV IS MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON GOVS PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY GOVS FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FOR EXAMPLE:
· THIS PRESS RELEASE STATES THAT GOVS BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED A DEFINITIVE MERGER AGREEMENT TO ACQUIRE FPO AND THAT THE TRANSACTION IS EXPECTED TO CLOSE BEFORE YEAR END 2017. THE TRANSACTION IS SUBJECT TO APPROVAL BY AT LEAST A MAJORITY OF FPOS COMMON SHAREHOLDERS AND OTHER CUSTOMARY CONDITIONS. SOME OF THESE CONDITIONS MAY BE DELAYED OR MAY NOT BE SATISFIED. ACCORDINGLY, THE TRANSACTION MAY NOT CLOSE BEFORE YEAR END 2017 OR AT ALL, OR THE TERMS OF THE TRANSACTION MAY CHANGE.
· IN THIS PRESS RELEASE, MR. BLACKMAN STATES THAT THE ACQUISITION OF FPO WILL ENABLE GOV TO EXPAND ITS BUSINESS STRATEGY TO INCLUDE THE ACQUISITION, OWNERSHIP AND OPERATION OF OFFICE PROPERTIES LEASED TO BOTH GOVERNMENT AND PRIVATE SECTOR TENANTS IN THE METROPOLITAN WASHINGTON, D.C. MARKET AREA. AN IMPLICATION OF THIS STATEMENT MAY BE THAT GOV WILL ACQUIRE ADDITIONAL PROPERTIES IN THE METROPOLITAN WASHINGTON, D.C. MARKET AREA. IN FACT, GOV MAY BE UNABLE TO IDENTIFY PROPERTIES IT WANTS TO BUY, TO AGREE WITH THE OWNERS OF THE IDENTIFIED PROPERTIES ON PURCHASE TERMS OR TO ARRANGE NECESSARY PURCHASE FINANCING. ACCORDINGLY, GOV MAY NOT BUY ANY ADDITIONAL OFFICE PROPERTIES IN THE METROPOLITAN WASHINGTON, D.C. MARKET AREA.
· IN THIS PRESS RELEASE, MR. BLACKMAN STATES THAT GOV WILL CONTINUE TO FOCUS ON ACQUIRING, OWNING AND OPERATING OFFICE PROPERTIES THAT ARE MAJORITY LEASED TO GOVERNMENT TENANTS OUTSIDE OF THE METROPOLITAN WASHINGTON, D.C. MARKET AREA. AN IMPLICATION OF THIS STATEMENT MAY BE THAT GOV WILL
ACQUIRE ADDITIONAL OFFICE PROPERTIES THAT ARE MAJORITY LEASED TO GOVERNMENT TENANTS OUTSIDE OF THE METROPOLITAN WASHINGTON, D.C. MARKET AREA. IN FACT, GOV MAY BE UNABLE TO IDENTIFY OFFICE PROPERTIES THAT ARE MAJORITY LEASED TO GOVERNMENT TENANTS THAT IT WANTS TO BUY, TO AGREE WITH THE OWNERS OF THE IDENTIFIED PROPERTIES ON PURCHASE TERMS OR TO ARRANGE NECESSARY PURCHASE FINANCING. ACCORDINGLY, GOV MAY NOT ACQUIRE ANY ADDITIONAL PROPERTIES THAT ARE MAJORITY LEASED TO GOVERNMENT TENANTS.
· IN THIS PRESS RELEASE, MR. BLACKMAN STATES THAT GOV EXPECTS TO REALIZE APPROXIMATELY $11 MILLION OF ANNUAL GENERAL AND ADMINISTRATIVE EXPENSE SAVINGS COMPARED TO FPO ON A STAND ALONE BASIS. GOVS MANAGEMENT AGREEMENT WITH THE RMR GROUP LLC SETS THE FEES THAT GOV PAYS IN LIEU OF CERTAIN GENERAL AND ADMINISTRATIVE EXPENSES PURSUANT TO A COMPLEX FORMULA BASED UPON THE LOWER OF GOVS MARKET CAPITALIZATION OR HISTORICAL COST OF CERTAIN OF GOVS ASSETS. ALSO, GOV MAY PAY INCENTIVE FEES TO THE RMR GROUP LLC IN CERTAIN CIRCUMSTANCES BASED UPON TOTAL RETURNS REALIZED BY GOVS SHAREHOLDERS COMPARED TO AN INDEX OF TOTAL RETURNS OF CERTAIN OTHER REITS. SOME OF THESE CALCULATIONS WILL DEPEND UPON FUTURE MARKET PRICES OF GOVS SECURITIES AND OTHER REITS SECURITIES WHICH ARE BEYOND GOVS CONTROL. ACCORDINGLY, THE AMOUNT OF ANNUAL GENERAL AND ADMINISTRATIVE EXPENSE SAVINGS WHICH GOV MAY REALIZE CANNOT BE PRECISELY CALCULATED; AND, IN FACT, GOV MAY REALIZE MORE OR LESS SAVINGS OR NO SAVINGS, AND THE ANNUAL GENERAL AND ADMINISTRATIVE EXPENSES GOV INCURS AS A RESULT OF THE TRANSACTION MAY BE HIGHER THAN FPO INCURRED OR WOULD INCUR ON A STAND ALONE BASIS.
· THIS PRESS RELEASE STATES THAT GOV CURRENTLY EXPECTS TO REPAY APPROXIMATELY $418 MILLION OF FPO DEBT AND ASSUME APPROXIMATELY $232 MILLION OF FPO MORTGAGE DEBT. REPAYMENTS AND ASSUMPTIONS OF DEBT MAY REQUIRE THE CONSENT OF DEBT HOLDERS UNDER CERTAIN CIRCUMSTANCES. GOV CAN PROVIDE NO ASSURANCE THAT ANY CONSENTS OF DEBT HOLDERS REQUIRED IN CONNECTION WITH THE TRANSACTION WILL BE OBTAINED. ACCORDINGLY, GOV MAY ASSUME FPO DEBT THAT GOV CURRENTLY EXPECTS TO REPAY AND MAY REPAY FPO MORTGAGE DEBT THAT GOV CURRENTLY EXPECTS TO ASSUME.
· THIS PRESS RELEASE STATES THAT GOV EXPECTS TO FINANCE ITS ACQUISITION OF FPO ON A LONG TERM BASIS BY THE SALE OF COMMON SHARES, THE ISSUANCE OF ADDITIONAL DEBT, INCLUDING SENIOR UNSECURED NOTES, MORTGAGE FINANCINGS AND/OR BANK DEBT, AND/OR THE SALE OF CERTAIN PROPERTIES. THE FINAL TYPES OF FINANCING AND THE COSTS OF GOVS FINANCING WILL DEPEND UPON MANY FACTORS, INCLUDING MARKET CONDITIONS BEYOND GOVS CONTROL. GOV CAN PROVIDE NO ASSURANCES REGARDING THE TYPES OR COSTS OF FINANCINGS THAT MAY RESULT FROM THE TRANSACTION.
· THIS PRESS RELEASE STATES THAT GOV BELIEVES ITS ESTIMATED CAP RATE FOR THE
FPO ACQUISITION IS APPROXIMATELY 7.0%, BASED ON GOVS PRELIMINARY ESTIMATE OF 2018 NET OPERATING INCOME ATTRIBUTABLE TO THE FPO PROPERTIES. FOR THESE PURPOSES, WE DEFINE CAP RATE AS THE GAAP EARNINGS FROM THE ACQUIRED PROPERTIES (FOR BOTH CONSOLIDATED PROPERTIES AND A PRO RATA SHARE OF UNCONSOLIDATED JOINT VENTURE PROPERTIES) BEFORE DEPRECIATION, AMORTIZATION, INTEREST AND AN ALLOCABLE SHARE OF CORPORATE OFFICE GENERAL AND ADMINISTRATIVE EXPENSE, DIVIDED BY THE AGGREGATE TRANSACTION VALUE (INCLUDING A PRO RATA SHARE OF NON-RECOURSE UNCONSOLIDATED JOINT VENTURE INDEBTEDNESS AND ADJUSTED FOR OTHER TANGIBLE PROPERTIES AND LIABILITIES, BUT EXCLUDING TRANSACTION COSTS). GOVS CALCULATION OF ITS PRELIMINARY ESTIMATED ACQUISITION CAP RATE FOR THE TRANSACTION RELIES UPON GOVS PRELIMINARY ESTIMATE OF THE 2018 NET OPERATING INCOME ATTRIBUTABLE TO THE FPO PROPERTIES, WHICH IS INHERENTLY UNCERTAIN AND BASED UPON GOVS CURRENT ASSUMPTIONS REGARDING THE 2018 OPERATIONS OF THE FPO PROPERTIES AND INFORMATION AVAILABLE IN FPOS PUBLIC FILINGS AND ADDITIONAL INFORMATION MADE AVAILABLE TO GOV BY FPO DURING THE PROCESS LEADING TO SIGNING OF THE MERGER AGREEMENT. GOV HAS NOT COMPLETED ITS OWN DETAILED ACCOUNTING ANALYSIS OF FPOS PROPERTY LEVEL EARNINGS, WHICH COULD RESULT IN REVISIONS THAT LOWER GOVS PRELIMINARY ESTIMATE OF 2018 NET OPERATING INCOME ATTRIBUTABLE TO THE FPO PROPERTIES. ALSO, PROPERTY LEVEL EARNINGS FROM FPOS PROPERTIES MAY DECREASE BEFORE OR AFTER THE TRANSACTION CLOSES. MOREOVER, ALTERNATIVE METHODS OF CALCULATING CAP RATES, SUCH AS METHODS THAT UTILIZE CASH BASED ACCOUNTS, WOULD RESULT IN A DIFFERENT CAP RATE. ACCORDINGLY, THE ACQUISITION CAP RATE ULTIMATELY REALIZED BY GOV ON THE TRANSACTION MAY BE LOWER THAN THE CAP RATE ESTIMATED IN THIS PRESS RELEASE.
· THIS PRESS RELEASE STATES THAT GOV BELIEVES THAT THE TRANSACTION WILL BE ACCRETIVE TO GOVS NORMALIZED FUNDS FROM OPERATIONS PER SHARE AFTER 2018. NORMALIZED FUNDS FROM OPERATIONS IS A NON-GAAP FINANCIAL MEASURE THAT HAS BEEN HISTORICALLY REPORTED BY GOV. NORMALIZED FUNDS FROM OPERATIONS IS CALCULATED BY ADJUSTING FUNDS FROM OPERATIONS (WHICH IS ALSO A NON-GAAP FINANCIAL MEASURE), AS DEFINED BY THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS, AS DESCRIBED IN GOVS EARNINGS REPORTS AND PERIODIC FILINGS WITH THE SEC. THE ACCRETION TO NORMALIZED FUNDS FROM OPERATIONS PER SHARE THAT GOV CURRENTLY EXPECTS TO REALIZE AFTER 2018 DEPENDS UPON MANY FACTORS, SUCH AS THE TYPES AND COSTS OF LONG TERM FINANCING THAT GOV ULTIMATELY USES TO FUND THE TRANSACTION, THE RENTS GOV WILL RECEIVE FROM ITS EXISTING PROPERTIES AND FROM THE PROPERTIES NOW OWNED BY FPO, OCCUPANCY AND OTHER FACTORS. MOST OF THESE FACTORS WILL BE MATERIALLY IMPACTED BY MARKET CONDITIONS BEYOND GOVS CONTROL. ACCORDINGLY, GOV CAN PROVIDE NO ASSURANCE THAT THE TRANSACTION WILL BE ACCRETIVE TO GOVS NORMALIZED FUNDS FROM OPERATIONS PER SHARE AFTER 2018, AND, IN FACT, GOV MAY EXPERIENCE DILUTION TO ITS NORMALIZED FUNDS FROM OPERATIONS PER SHARE AS A RESULT OF THIS TRANSACTION.
· GOVS CURRENT EXPECTATION THAT THE TRANSACTION WILL BE APPROXIMATELY LEVERAGE NEUTRAL ON A DEBT TO GROSS ASSETS BASIS AFTER COMPLETION OF GOVS LONG TERM FINANCING PLAN IS BASED UPON GOVS CURRENT BELIEFS REGARDING THE TYPES AND COSTS OF GOVS LONG TERM FINANCING FOR THE TRANSACTION. THE TYPES AND COSTS OF THE LONG TERM FINANCING WHICH GOV USES FOR THE TRANSACTION WILL DEPEND IN LARGE PART ON MARKET CONDITIONS WHICH ARE BEYOND GOVS CONTROL. ACCORDINGLY, INVESTORS ARE CAUTIONED TO CONSIDER THIS STATEMENT SKEPTICALLY. IN FACT, GOVS LEVERAGE MAY INCREASE AS A RESULT OF THE TRANSACTION.
· THIS PRESS RELEASE STATES THAT GOV HAS THE OPTION TO OFFER TO PURCHASE ALL OF FPOS COMMON SHARES IN A TENDER OFFER WHICH MAY DECREASE THE TIME REQUIRED TO CLOSE GOVS ACQUISITION OF FPO. THIS STATEMENT MAY IMPLY THAT GOV WILL MAKE A TENDER OFFER FOR FPO COMMON SHARES AND, IF SO, THAT THE TENDER OFFER WILL FACILITATE AN EARLIER CLOSING DATE FOR THE ACQUISITION. GOVS DECISION AS TO WHETHER TO MAKE A TENDER OFFER WILL DEPEND ON CERTAIN FACTORS GOV DETERMINES TO BE RELEVANT TO THAT DECISION, INCLUDING THE AVAILABILITY OF PERMANENT FINANCING, THE AGREEMENT OF CERTAIN FPO DEBT HOLDERS TO ACCEPT EXPEDITED DEBT ASSUMPTION OR REPAYMENT AND OTHER FACTORS. FURTHER, FACTORS BEYOND GOVS CONTROL COULD DELAY THE CLOSING OF ANY TENDER OFFER. THERE CAN BE NO ASSURANCE THAT GOV WILL DECIDE TO MAKE A TENDER OFFER FOR FPO SHARES, OR THAT IF IT DOES, SUCH TENDER OFFER WILL DECREASE THE TIME REQUIRED FOR GOV TO COMPLETE ITS ACQUISITION OF FPO.
· IN THIS PRESS RELEASE, MR. BLACKMAN STATES THAT GOV ACHIEVED AN ATTRACTIVE PER SHARE PURCHASE PRICE. IN FACT, THE PURCHASE PRICE PER SHARE TO BE PAID BY GOV MAY NOT BE ATTRACTIVE FOR A NUMBER OF FACTORS, INCLUDING CERTAIN OF THE FACTORS DESCRIBED ABOVE.
THE INFORMATION CONTAINED IN GOVS FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION RISK FACTORS IN GOVS PERIODIC REPORTS, OR INCORPORATED BY REFERENCE THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE GOVS ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN OR IMPLIED BY GOVS FORWARD LOOKING STATEMENTS. GOVS FILINGS WITH THE SEC ARE AVAILABLE ON THE SECS WEBSITE AT WWW.SEC.GOV.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY LAW, GOV DOES NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
(END)
Exhibit 99.2
FOR IMMEDIATE RELEASE
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Contact: |
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Christopher Ranjitkar, Director, Investor Relations |
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(617) 219-1410 |
Government Properties Income Trust Announces Proposed Public Offering of 25,000,000 Common Shares
Newton, MA (June 28, 2017): Government Properties Income Trust (Nasdaq: GOV) today announced that it has commenced a public offering of 25,000,000 of its common shares. GOV expects to use the net proceeds from this offering to fund, in part, its previously announced acquisition of First Potomac Realty Trust, or FPO. Pending the consummation of the FPO acquisition and the use of proceeds described above GOV may repay amounts outstanding under its unsecured revolving credit facility or invest the net proceeds from this offering in short term investments consistent with its intention to maintain its qualification for taxation as a REIT. It is contemplated that the underwriters will also be granted a 30-day option to purchase up to an additional 3,750,000 common shares.
The joint bookrunning managers for this offering are Citigroup, BofA Merrill Lynch, Morgan Stanley and UBS Investment Bank.
This press release is neither an offer to sell nor a solicitation of an offer to buy shares, nor shall there be any sale of these securities in any state or jurisdiction in which the offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction. The preliminary prospectus supplement relating to this offering and related prospectus are expected to be filed with the Securities and Exchange Commission (SEC) and copies can be obtained by contacting the offices of: Citigroup, c/o Broadridge Financial Solutions, 1155 Long Island Avenue, Edgewood, NY 11717, or by calling (800) 831-9146; BofA Merrill Lynch, Attention: Prospectus Department, NC1-004-03-43, 200 North College Street, 3rd Floor, Charlotte, NC 28255-0001, email: dg.prospectus_requests@baml.com; Morgan Stanley, Attention: Prospectus Department, 180 Varick Street, 2nd Floor, New York, NY 10014; or UBS Securities LLC, Attention: Prospectus Department, 1285 Avenue of the Americas, New York, NY, 10019 or by calling (888) 827-7275.
A Maryland Real Estate Investment Trust with transferable shares of beneficial interest listed on the Nasdaq.
No shareholder, Trustee or officer is personally liable for any act or obligation of the Trust.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS PRESS RELEASE CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER GOV USES WORDS SUCH AS BELIEVE, EXPECT, ANTICIPATE, INTEND, PLAN, ESTIMATE, WILL, MAY, AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, GOV IS MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON GOVS PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY GOVS FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FOR EXAMPLE:
· ALTHOUGH THIS PRESS RELEASE REFERS TO AN OFFERING OF 25,000,000 COMMON SHARES, GREATER OR LESS THAN 25,000,000 COMMON SHARES MAY BE SOLD OR THIS OFFERING MAY BE WITHDRAWN.
· IF GOV AGREES TO SELL COMMON SHARES IN THIS OFFERING, THE CLOSING OF THIS OFFERING WILL BE SUBJECT TO VARIOUS CONDITIONS AND CONTINGENCIES AS ARE CUSTOMARY IN UNDERWRITING AGREEMENTS IN THE UNITED STATES. IF THESE CONDITIONS ARE NOT SATISFIED OR THE SPECIFIED CONTINGENCIES DO NOT OCCUR, THIS OFFERING MAY BE DELAYED OR MAY NOT BE COMPLETED.
· THIS PRESS RELEASE STATES THAT GOV CONTEMPLATES THAT THE UNDERWRITERS WILL BE GRANTED AN OPTION TO PURCHASE UP TO AN ADDITIONAL 3,750,000 COMMON SHARES. AN IMPLICATION OF THIS STATEMENT MAY BE THAT THIS OPTION MAY BE EXERCISED IN WHOLE OR IN PART. IN FACT, GOV DOES NOT KNOW WHETHER THE UNDERWRITERS WOULD EXERCISE THIS OPTION, OR ANY PART OF IT.
· THIS PRESS RELEASE STATES THAT GOV EXPECTS TO USE THE NET PROCEEDS FROM THIS OFFERING TO FUND, IN PART, ITS ACQUISITION OF FPO. THIS ACQUISITION IS SUBJECT TO CUSTOMARY CONDITIONS AND CONTINGENCIES, INCLUDING APPROVAL BY THE HOLDERS OF A MAJORITY OF THE OUTSTANDING FPO COMMON SHARES. WE CANNOT BE SURE THAT SUCH CONDITIONS AND CONTINGENCIES WILL BE SATISFIED. IN THE EVENT THE FPO ACQUISITION IS NOT CONSUMMATED, GOV EXPECTS TO USE THE NET PROCEEDS TO REPAY AMOUNTS OUTSTANDING UNDER ITS UNSECURED REVOLVING CREDIT FACILITY AND FOR GENERAL BUSINESS PURPOSES.
FOR THESE REASONS, AMONG OTHERS, INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.
(end)
Exhibit 99.4
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in our periodic reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with GAAP.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and trustees; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework established in the updated Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that our internal control over financial reporting was effective as of December 31, 2016.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report appearing on the next page of this Exhibit 99.4. KPMGs report expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2016.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders
First Potomac Realty Trust:
We have audited First Potomac Realty Trusts internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First Potomac Realty Trusts management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Potomac Realty Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of First Potomac Realty Trust and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February 23, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
McLean, Virginia
February 23, 2017
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders
First Potomac Realty Trust:
We have audited the accompanying consolidated balance sheets of First Potomac Realty Trust and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule of real estate and accumulated depreciation. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Potomac Realty Trust and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First Potomac Realty Trusts internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2017 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ KPMG LLP
McLean, Virginia
February 23, 2017
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2016 and 2015
(Amounts in thousands, except per share amounts)
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2016 |
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2015 |
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Assets: |
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|
|
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Rental property, net |
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$ |
1,059,272 |
|
|
$ |
1,130,266 |
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Assets held-for-sale |
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13,176 |
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90,674 |
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Cash and cash equivalents |
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14,144 |
|
|
13,527 |
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||
Escrows and reserves |
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1,419 |
|
|
2,514 |
|
||
Accounts and other receivables, net of allowance for doubtful accounts of $655 and $876, respectively |
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6,892 |
|
|
9,868 |
|
||
Accrued straight-line rents, net of allowance for doubtful accounts of $414 and $105, respectively |
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42,745 |
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36,888 |
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Notes receivable |
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|
|
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34,000 |
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||
Investment in affiliates |
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49,392 |
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48,223 |
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Deferred costs, net |
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42,712 |
|
|
36,537 |
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Prepaid expenses and other assets |
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5,389 |
|
|
6,950 |
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Intangible assets, net |
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25,106 |
|
|
32,959 |
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Total assets |
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$ |
1,260,247 |
|
|
$ |
1,442,406 |
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Liabilities: |
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|
|
|
|
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Mortgage loans, net |
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$ |
296,212 |
|
|
$ |
307,769 |
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Unsecured term loan, net |
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299,404 |
|
|
299,404 |
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Unsecured revolving credit facility, net |
|
141,555 |
|
|
116,865 |
|
||
Liabilities held-for-sale |
|
|
|
|
1,513 |
|
||
Accounts payable and other liabilities |
|
43,904 |
|
|
47,972 |
|
||
Accrued interest |
|
1,537 |
|
|
1,603 |
|
||
Rents received in advance |
|
6,234 |
|
|
6,003 |
|
||
Tenant security deposits |
|
4,982 |
|
|
4,982 |
|
||
Deferred market rent, net |
|
1,792 |
|
|
2,154 |
|
||
Total liabilities |
|
795,620 |
|
|
788,265 |
|
||
Noncontrolling interests in the Operating Partnership |
|
28,244 |
|
|
28,813 |
|
||
Equity: |
|
|
|
|
|
|
||
Preferred Shares, $0.001 par value per share, 50,000 shares authorized; |
|
|
|
|
|
|
||
7.750% Series A Preferred Shares, $25 per share liquidation preference, 0 and 6,400 shares issued and outstanding, respectively |
|
|
|
|
160,000 |
|
||
Common shares, $0.001 par value per share, 150,000 shares authorized; 58,319 and 57,718 shares issued and outstanding, respectively |
|
58 |
|
|
58 |
|
||
Additional paid-in capital |
|
913,367 |
|
|
907,220 |
|
||
Noncontrolling interests in a consolidated partnership |
|
|
|
|
800 |
|
||
Accumulated other comprehensive loss |
|
(844 |
) |
|
(2,360 |
) |
||
Dividends in excess of accumulated earnings |
|
(476,198 |
) |
|
(440,390 |
) |
||
Total equity |
|
436,383 |
|
|
625,328 |
|
||
Total liabilities, noncontrolling interests and equity |
|
$ |
1,260,247 |
|
|
$ |
1,442,406 |
|
See accompanying notes to consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2016, 2015 and 2014
(Amounts in thousands, except per share amounts)
|
|
2016 |
|
2015 |
|
2014 |
||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|||
Rental |
|
$ |
129,225 |
|
|
$ |
139,006 |
|
|
$ |
128,226 |
|
Tenant reimbursements and other |
|
31,109 |
|
|
33,840 |
|
|
33,426 |
|
|||
Total revenues |
|
160,334 |
|
|
172,846 |
|
|
161,652 |
|
|||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|||
Property operating |
|
38,554 |
|
|
44,093 |
|
|
43,252 |
|
|||
Real estate taxes and insurance |
|
19,808 |
|
|
19,745 |
|
|
17,360 |
|
|||
General and administrative |
|
16,976 |
|
|
25,450 |
|
|
21,156 |
|
|||
Acquisition costs |
|
|
|
|
|
|
|
2,681 |
|
|||
Depreciation and amortization |
|
60,862 |
|
|
66,624 |
|
|
61,796 |
|
|||
Impairment of rental property |
|
2,772 |
|
|
60,826 |
|
|
3,956 |
|
|||
Total operating expenses |
|
138,972 |
|
|
216,738 |
|
|
150,201 |
|
|||
Operating income (loss) |
|
21,362 |
|
|
(43,892 |
) |
|
11,451 |
|
|||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|||
Interest expense |
|
26,370 |
|
|
26,797 |
|
|
24,696 |
|
|||
Interest and other income |
|
(2,348 |
) |
|
(6,794 |
) |
|
(6,799 |
) |
|||
Equity in earnings of affiliates |
|
(2,294 |
) |
|
(1,825 |
) |
|
(775 |
) |
|||
Loss (gain) on sale of rental property |
|
1,155 |
|
|
(29,477 |
) |
|
(21,230 |
) |
|||
Loss on debt extinguishment / modification |
|
48 |
|
|
1,824 |
|
|
|
|
|||
Total other expenses (income) |
|
22,931 |
|
|
(9,475 |
) |
|
(4,108 |
) |
|||
(Loss) income from continuing operations |
|
(1,569 |
) |
|
(34,417 |
) |
|
15,559 |
|
|||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|||
(Loss) income from operations |
|
|
|
|
(975 |
) |
|
146 |
|
|||
Loss on debt extinguishment |
|
|
|
|
(489 |
) |
|
|
|
|||
Gain on sale of rental property |
|
|
|
|
857 |
|
|
1,338 |
|
|||
(Loss) income from discontinued operations |
|
|
|
|
(607 |
) |
|
1,484 |
|
|||
Net (loss) income |
|
(1,569 |
) |
|
(35,024 |
) |
|
17,043 |
|
|||
Less: Net loss (income) attributable to noncontrolling interests |
|
502 |
|
|
2,058 |
|
|
(199 |
) |
|||
Net (loss) income attributable to First Potomac Realty Trust |
|
(1,067 |
) |
|
(32,966 |
) |
|
16,844 |
|
|||
Less: Dividends on preferred shares |
|
(3,053 |
) |
|
(12,400 |
) |
|
(12,400 |
) |
|||
Less: Issuance costs on redeemed preferred shares |
|
(5,515 |
) |
|
|
|
|
|
|
|||
Net (loss) income attributable to common shareholders |
|
$ |
(9,635 |
) |
|
$ |
(45,366 |
) |
|
$ |
4,444 |
|
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|||
(Loss) income from continuing operations |
|
$ |
(0.17 |
) |
|
$ |
(0.78 |
) |
|
$ |
0.05 |
|
(Loss) income from discontinued operations |
|
|
|
|
(0.01 |
) |
|
0.02 |
|
|||
Net (loss) income |
|
$ |
(0.17 |
) |
|
$ |
(0.79 |
) |
|
$ |
0.07 |
|
Weighted average common shares outstanding basic |
|
57,581 |
|
|
57,982 |
|
|
58,150 |
|
|||
Weighted average common shares outstanding diluted |
|
57,581 |
|
|
57,982 |
|
|
58,220 |
|
See accompanying notes to consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2016, 2015 and 2014
(Amounts in thousands)
|
|
2016 |
|
2015 |
|
2014 |
||||||
Net (loss) income |
|
$ |
(1,569 |
) |
|
$ |
(35,024 |
) |
|
$ |
17,043 |
|
Unrealized gain on derivative instruments |
|
1,584 |
|
|
1,317 |
|
|
1,289 |
|
|||
Unrealized loss on derivative instruments |
|
|
|
|
(367 |
) |
|
(696 |
) |
|||
Total comprehensive income (loss) |
|
15 |
|
|
(34,074 |
) |
|
17,636 |
|
|||
Net loss (income) attributable to noncontrolling interests |
|
502 |
|
|
2,058 |
|
|
(199 |
) |
|||
Net gain from derivative instruments attributable to noncontrolling interests |
|
(68 |
) |
|
(42 |
) |
|
(25 |
) |
|||
Comprehensive income (loss) attributable to First Potomac Realty Trust |
|
$ |
449 |
|
|
$ |
(32,058 |
) |
|
$ |
17,412 |
|
See accompanying notes to consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Equity
Years ended December 31, 2016, 2015 and 2014
(Amounts in thousands)
|
|
Series A
|
|
Common
|
|
Additional
|
|
Noncontrolling
|
|
Accumulated
|
|
Dividends in
|
|
Total Equity |
||||||||||||||
Balance at December 31, 2013 |
|
$ |
160,000 |
|
|
$ |
59 |
|
|
$ |
911,533 |
|
|
$ |
781 |
|
|
$ |
(3,836 |
) |
|
$ |
(329,246 |
) |
|
$ |
739,291 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,043 |
|
|
17,043 |
|
|||||||
Net unrealized gain on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
593 |
|
|
|
|
|
593 |
|
|||||||
Net income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
(199 |
) |
|
(224 |
) |
|||||||
Dividends paid to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,198 |
) |
|
(35,198 |
) |
|||||||
Dividends on preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,400 |
) |
|
(12,400 |
) |
|||||||
Accrued common dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
(66 |
) |
|||||||
Restricted stock expense |
|
|
|
|
|
|
|
2,860 |
|
|
|
|
|
|
|
|
|
|
|
2,860 |
|
|||||||
Exercise of stock options |
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
174 |
|
|||||||
Stock option and employee stock purchase plan expense |
|
|
|
|
|
|
|
536 |
|
|
|
|
|
|
|
|
|
|
|
536 |
|
|||||||
Issuance of common stock, net of net settlements |
|
|
|
|
|
|
|
(397 |
) |
|
|
|
|
|
|
|
|
|
|
(397 |
) |
|||||||
Adjustment of common Operating Partnership units to fair value |
|
|
|
|
|
|
|
(1,424 |
) |
|
|
|
|
|
|
|
|
|
|
(1,424 |
) |
|||||||
Net contributions to noncontrolling interest in consolidated joint ventures |
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
|
|
|
|
|
117 |
|
|||||||
Balance at December 31, 2014 |
|
160,000 |
|
|
59 |
|
|
913,282 |
|
|
898 |
|
|
(3,268 |
) |
|
(360,066 |
) |
|
710,905 |
|
|||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
(35,024 |
) |
|
(35,026 |
) |
|||||||
Net unrealized gain on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
950 |
|
|
|
|
|
950 |
|
|||||||
Net (income) loss attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
2,058 |
|
|
2,016 |
|
|||||||
Dividends paid to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,080 |
) |
|
(35,080 |
) |
|||||||
Dividends on preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,400 |
) |
|
(12,400 |
) |
|||||||
Accrued common dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117 |
|
|
117 |
|
|||||||
Restricted stock expense |
|
|
|
|
|
|
|
3,442 |
|
|
|
|
|
|
|
|
5 |
|
|
3,447 |
|
|||||||
Exercise of stock options |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|||||||
Share repurchases |
|
|
|
|
(1 |
) |
|
(10,179 |
) |
|
|
|
|
|
|
|
|
|
|
(10,180 |
) |
|||||||
Stock option and employee stock purchase plan expense |
|
|
|
|
|
|
|
1,245 |
|
|
|
|
|
|
|
|
|
|
|
1,245 |
|
|||||||
Issuance of common stock, net of net settlements |
|
|
|
|
|
|
|
(1,393 |
) |
|
|
|
|
|
|
|
|
|
|
(1,393 |
) |
|||||||
Adjustment of common Operating Partnership units to fair value |
|
|
|
|
|
|
|
797 |
|
|
|
|
|
|
|
|
|
|
|
797 |
|
|||||||
Net distributions from noncontrolling interest in consolidated joint ventures |
|
|
|
|
|
|
|
|
|
|
(96 |
) |
|
|
|
|
|
|
|
(96 |
) |
|||||||
Balance at December 31, 2015 |
|
160,000 |
|
|
58 |
|
|
907,220 |
|
|
800 |
|
|
(2,360 |
) |
|
(440,390 |
) |
|
625,328 |
|
|||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
|
|
|
(1,569 |
) |
|
(1,643 |
) |
|||||||
Net unrealized gain on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,584 |
|
|
|
|
|
1,584 |
|
|||||||
Net (income) loss attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
502 |
|
|
434 |
|
|||||||
Dividends paid to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,137 |
) |
|
(26,137 |
) |
|||||||
Accrued common dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
(36 |
) |
|||||||
Dividends on preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,053 |
) |
|
(3,053 |
) |
|||||||
Redemption of preferred shares |
|
(160,000 |
) |
|
|
|
|
5,485 |
|
|
|
|
|
|
|
|
(5,515 |
) |
|
(160,030 |
) |
|||||||
Restricted stock expense |
|
|
|
|
|
|
|
1,964 |
|
|
|
|
|
|
|
|
|
|
|
1,964 |
|
|||||||
Stock option and employee stock purchase plan expense |
|
|
|
|
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
193 |
|
|||||||
Issuance of common stock, net of net settlements |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
97 |
|
|||||||
Adjustment of common Operating Partnership units to fair value |
|
|
|
|
|
|
|
(1,592 |
) |
|
|
|
|
|
|
|
|
|
|
(1,592 |
) |
|||||||
Net distributions from noncontrolling interest in consolidated joint venture |
|
|
|
|
|
|
|
|
|
|
(726 |
) |
|
|
|
|
|
|
|
(726 |
) |
|||||||
Balance at December 31, 2016 |
|
$ |
|
|
|
$ |
58 |
|
|
$ |
913,367 |
|
|
$ |
|
|
|
$ |
(844 |
) |
|
$ |
(476,198 |
) |
|
$ |
436,383 |
|
See accompanying notes to consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2016, 2015 and 2014
(Amounts in thousands)
|
|
2016 |
|
2015 |
|
2014 |
||||||
Cash flow from operating activities: |
|
|
|
|
|
|
|
|
|
|||
Net (loss) income |
|
$ |
(1,569 |
) |
|
$ |
(35,024 |
) |
|
$ |
17,043 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|||
Gain on sale of rental property |
|
|
|
|
(857 |
) |
|
(1,338 |
) |
|||
Depreciation and amortization |
|
|
|
|
1,222 |
|
|
3,665 |
|
|||
Depreciation and amortization |
|
61,896 |
|
|
67,729 |
|
|
62,843 |
|
|||
Stock based compensation |
|
2,314 |
|
|
4,865 |
|
|
3,731 |
|
|||
Bad debt expense |
|
830 |
|
|
580 |
|
|
1,110 |
|
|||
Amortization of deferred market rent |
|
301 |
|
|
138 |
|
|
(14 |
) |
|||
Amortization of financing costs and discounts |
|
1,588 |
|
|
1,482 |
|
|
1,445 |
|
|||
Equity in earnings of affiliates |
|
(2,294 |
) |
|
(1,825 |
) |
|
(775 |
) |
|||
Distributions from investments in affiliates |
|
1,424 |
|
|
1,490 |
|
|
1,356 |
|
|||
Impairment of rental property |
|
2,772 |
|
|
60,826 |
|
|
3,956 |
|
|||
Loss (gain) on sale of rental property |
|
1,155 |
|
|
(29,477 |
) |
|
(21,230 |
) |
|||
Loss on debt extinguishment / modification |
|
|
|
|
664 |
|
|
|
|
|||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|||
Escrows and reserves |
|
784 |
|
|
296 |
|
|
4,693 |
|
|||
Accounts and other receivables |
|
2,453 |
|
|
(7 |
) |
|
1,475 |
|
|||
Accrued straight-line rents |
|
(6,476 |
) |
|
(8,722 |
) |
|
(7,968 |
) |
|||
Prepaid expenses and other assets |
|
913 |
|
|
285 |
|
|
326 |
|
|||
Tenant security deposits |
|
(748 |
) |
|
(849 |
) |
|
677 |
|
|||
Accounts payable and accrued expenses |
|
9,524 |
|
|
7,921 |
|
|
1,227 |
|
|||
Accrued interest |
|
(68 |
) |
|
(115 |
) |
|
56 |
|
|||
Rents received in advance |
|
(307 |
) |
|
(1,767 |
) |
|
1,984 |
|
|||
Deferred costs |
|
(11,893 |
) |
|
(8,473 |
) |
|
(11,309 |
) |
|||
Total adjustments |
|
64,168 |
|
|
95,406 |
|
|
45,910 |
|
|||
Net cash provided by operating activities |
|
62,599 |
|
|
60,382 |
|
|
62,953 |
|
|||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|||
Investment in note receivable |
|
|
|
|
|
|
|
(9,000 |
) |
|||
Principal payments from note receivable |
|
34,000 |
|
|
29,720 |
|
|
176 |
|
|||
Proceeds from sale of rental property |
|
143,159 |
|
|
129,247 |
|
|
97,701 |
|
|||
Change in escrow and reserve accounts |
|
312 |
|
|
176 |
|
|
|
|
|||
Additions to rental property and furniture, fixtures and equipment |
|
(45,068 |
) |
|
(52,955 |
) |
|
(39,338 |
) |
|||
Additions to construction in progress |
|
(11,863 |
) |
|
(20,895 |
) |
|
(11,451 |
) |
|||
Acquisition of rental property and associated intangible assets |
|
|
|
|
|
|
|
(150,731 |
) |
|||
Investment in affiliates |
|
(300 |
) |
|
(405 |
) |
|
(1,988 |
) |
|||
Distributions from investments in affiliates |
|
|
|
|
|
|
|
3,075 |
|
|||
Net cash provided by (used in) investing activities |
|
120,240 |
|
|
84,888 |
|
|
(111,556 |
) |
|||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|||
Financing costs |
|
(319 |
) |
|
(4,476 |
) |
|
(870 |
) |
|||
Issuance of debt |
|
238,408 |
|
|
195,956 |
|
|
250,518 |
|
|||
Repayments of debt |
|
(227,044 |
) |
|
(277,108 |
) |
|
(147,577 |
) |
|||
Contributions from consolidated joint venture partners |
|
|
|
|
|
|
|
213 |
|
|||
Distributions to consolidated joint venture partners |
|
(726 |
) |
|
(96 |
) |
|
(96 |
) |
|||
Dividends to common shareholders |
|
(26,137 |
) |
|
(35,080 |
) |
|
(35,198 |
) |
|||
Dividends to preferred shareholders |
|
(4,603 |
) |
|
(12,400 |
) |
|
(12,400 |
) |
|||
Distributions to noncontrolling interests |
|
(1,166 |
) |
|
(1,574 |
) |
|
(1,578 |
) |
|||
Repurchases of common shares |
|
|
|
|
(10,180 |
) |
|
|
|
|||
Redemption of preferred shares |
|
(160,000 |
) |
|
|
|
|
|
|
|||
Redemption of operating partnership units |
|
(635 |
) |
|
(134 |
) |
|
|
|
|||
Proceeds from stock option exercises |
|
|
|
|
26 |
|
|
174 |
|
|||
Net cash (used in) provided by financing activities |
|
(182,222 |
) |
|
(145,066 |
) |
|
53,186 |
|
|||
Net increase (decrease) in cash and cash equivalents |
|
617 |
|
|
204 |
|
|
4,583 |
|
|||
Cash and cash equivalents, beginning of year |
|
13,527 |
|
|
13,323 |
|
|
8,740 |
|
|||
Cash and cash equivalents, end of year |
|
$ |
14,144 |
|
|
$ |
13,527 |
|
|
$ |
13,323 |
|
See accompanying notes to consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
Years ended December 31, 2016, 2015 and 2014
Supplemental disclosure of cash flow information is as follows (amounts in thousands):
|
|
2016 |
|
2015 |
|
2014 |
||||||
Cash paid for interest, net |
|
$ |
24,550 |
|
|
$ |
25,129 |
|
|
$ |
23,083 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|||
Debt assumed in connection with the acquisition of rental property |
|
|
|
|
|
|
|
37,269 |
|
|||
Value of common shares retired to settle employee income tax obligation |
|
137 |
|
|
1,781 |
|
|
487 |
|
|||
Change in fair value of the outstanding common Operating Partnership units |
|
1,592 |
|
|
(797 |
) |
|
1,424 |
|
|||
Issuance of common Operating Partnership units in connection with the acquisition of rental property |
|
|
|
|
|
|
|
40 |
|
|||
Change in accruals: |
|
|
|
|
|
|
|
|
|
|||
Additions to rental property and furniture, fixtures and equipment |
|
(3,561 |
) |
|
795 |
|
|
653 |
|
|||
Additions to development and redevelopment |
|
(5,576 |
) |
|
4,408 |
|
|
(275 |
) |
Cash paid for interest on indebtedness is net of capitalized interest of $0.7 million, $1.9 million and $3.2 million in 2016, 2015 and 2014, respectively.
During 2016, 2015 and 2014, certain of our employees surrendered common shares owned by them valued at $0.1 million, $1.8 million and $0.5 million, respectively, to satisfy their statutory minimum federal income tax obligations associated with the vesting of restricted common shares of beneficial interest.
Noncontrolling interests in First Potomac Realty Investment Limited Partnership, our operating partnership (the Operating Partnership) are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. At December 31, 2016 and 2015, we recorded adjustments of $6.1 million and $4.0 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.
No common Operating Partnership units were issued during 2016 or 2015. During 2014, we issued 3,125 common Operating Partnership units at a fair value of $40 thousand to the seller of 840 First Street, NE to satisfy our contingent consideration obligation related to the acquisition of the property.
At December 31, 2016, 2015 and 2014, we accrued $6.1 million, $9.9 million and $9.3 million, respectively, of capital expenditures related to rental property and furniture, fixtures and equipment in accounts payable. At December 31, 2016, 2015 and 2014, we accrued $0.1 million, $5.7 million and $1.3 million, respectively, of capital expenditures related to development and redevelopment in accounts payable.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
First Potomac Realty Trust (the Company) is a leader in the ownership, management, redevelopment and development of office and business park properties in the greater Washington, D.C. region. The Companys focus is owning and operating properties that it believes can benefit from its market knowledge and intensive operational skills with a focus on increasing their profitability and value. The Companys portfolio primarily contains a mix of single-tenant and multi-tenant office properties and business parks. Office properties are single-story and multi-story buildings that are primarily for office use, and business parks contain buildings with office features combined with some industrial property space. The Company separates its properties into four distinct reporting segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments.
References in these consolidated financial statements to we, our, us, the Company or First Potomac, refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.
We conduct our business through our Operating Partnership. We are the sole general partner of, and, as of December 31, 2016, owned 95.8% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying consolidated financial statements, are limited partnership interests that are owned by unrelated parties.
At December 31, 2016, we wholly owned properties totaling 6.7 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. We also owned land that can support 0.6 million square feet of additional development. Our consolidated properties were 92.6% occupied by 384 tenants at December 31, 2016. We do not include square footage of properties in development or redevelopment in our occupancy calculation. At December 31, 2016, none of our 6.7 million square feet owned through our properties was in development or redevelopment. We derive substantially all of our revenue from leases of space within our properties. As of December 31, 2016, our largest tenant was the U.S. Government, which accounted for 16% of our total annualized cash basis rent, and the U.S. Government combined with government contractors accounted for 27% of our total annualized cash basis rent as of December 31, 2016. We operate so as to qualify as a real estate investment trust (REIT) for federal income tax purposes.
For the year ended December 31, 2016, we had consolidated total revenues of $160.3 million and consolidated total assets of $1.3 billion. Financial information related to our four reporting segments is set forth in note 17, Segment Information , to our consolidated financial statements.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
Our consolidated financial statements include our accounts and the accounts of our Operating Partnership, which we consider to be a variable interest entity (VIE), and the subsidiaries in which we or our Operating Partnership has a controlling interest, which includes First Potomac Management, LLC, a wholly-owned subsidiary that manages the majority of our properties. All intercompany balances and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires our management team to make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible, future cash flows, discount and capitalization rate assumptions used to fair value acquired properties and to test impairment of certain long-lived assets and goodwill, derivative valuations, market lease rates, lease-up periods, leasing and tenant improvement costs used to fair value intangible assets acquired and probability weighted cash flow analysis used to fair value contingent liabilities. Actual results could differ from those estimates.
(c) Revenue Recognition and Accounts Receivable
We generate substantially all of our revenue from leases on our properties. We recognize rental revenue on a straight-line basis over the term of our leases, which includes fixed-rate renewal periods leased at below market rates at acquisition or inception. Accrued straight-line rents represent the difference between rental revenue recognized on a straight-line basis over the term of the respective lease agreements and the rental payments contractually due for leases that contain abatement or fixed periodic increases. We consider current information, credit quality, historical trends, economic conditions and other events regarding the tenants ability to pay their obligations in determining if amounts due from tenants, including accrued straight-line rents, are ultimately collectible. The uncollectible portion of the amounts due from tenants, including accrued straight-line rents, is charged to Property operating expense in our consolidated statements of operations in the period in which the determination is made and to allowance for doubtful accounts in Accounts and other receivables and/or Accrued straight-line rents on our consolidated balance sheets. During 2016, 2015 and 2014, we incurred charges of $0.8 million, $0.6 million and $1.1 million, respectively, related to anticipated uncollectible amounts from tenants, including accrued straight-line rents. We consider similar criteria in assessing impairment associated with outstanding loans or notes receivable and whether any allowance for anticipated credit loss is appropriate.
Tenant leases generally contain provisions under which the tenants reimburse us for a portion of property operating expenses and real estate taxes incurred by us. Such reimbursements are recognized in the period in which the expenses are incurred. We record a provision for losses on estimated uncollectible accounts receivable based on our analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination when the related lease or portion thereof is cancelled, the collectability of the fee is reasonably assured and we have possession of the terminated space. We recognized lease termination fees included in Tenant reimbursements and other revenues in our consolidated statements of operations of $0.1 million, $0.1 million and $1.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
(d) Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents.
(e) Escrows and Reserves
Escrows and reserves represent cash restricted for debt service, real estate taxes, insurance, leasing commissions and tenant improvements. We reflect cash inflows and outflows from our escrows and reserves accounts related to debt service, real estate taxes, insurance and leasing commissions within net cash provided by operating activities and our cash inflows and outflows related to tenant improvements within net cash used by investing activities on our consolidated statements of cash flows.
(f) Deferred Costs
Leasing costs related to the execution of tenant leases and lease incentives are deferred and amortized ratably over the term of the related leases. Accumulated amortization of these combined costs was $26.3 million and $22.0 million at December 31, 2016 and 2015, respectively.
The following table sets forth scheduled future amortization for deferred leasing costs at December 31, 2016 (amounts in thousands):
|
|
Deferred
|
|
Deferred
|
||||
2017 |
|
$ |
5,464 |
|
|
$ |
1,500 |
|
2018 |
|
4,915 |
|
|
1,473 |
|
||
2019 |
|
4,118 |
|
|
1,399 |
|
||
2020 |
|
3,363 |
|
|
1,327 |
|
||
2021 |
|
2,649 |
|
|
1,265 |
|
||
Thereafter |
|
6,689 |
|
|
6,006 |
|
||
|
|
$ |
27,198 |
|
|
$ |
12,970 |
|
(1) Excludes the amortization of $1.8 million of leasing costs that have yet to be placed in-service as the associated tenants have not moved into their related spaces and, therefore, the period over which the leasing costs will be amortized has yet to be determined.
(2) Excludes the amortization of $0.7 million of lease incentive costs that have yet to be placed in-service as the associated tenants have not moved into their related spaces and, therefore, the period over which the lease incentive costs will be amortized has yet to be determined.
(g) Rental Property
Rental property is initially recorded at fair value, when acquired in a business combination, or initial cost when constructed or acquired in an asset purchase. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of our assets, by class, are as follows:
|
Buildings |
|
39 years |
|
Building improvements |
|
5 to 20 years |
|
Furniture, fixtures and equipment |
|
5 to 15 years |
|
Tenant improvements |
|
Shorter of the useful life of the asset or the term of the related lease |
We regularly review market conditions for possible impairment of a propertys carrying value. When circumstances such as adverse market conditions, changes in managements intended holding period or potential sale to a third party indicate a possible impairment of the carrying value of a property, an impairment analysis is performed. We assess potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the propertys use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs to maintain the operating capacity, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Further, we will record an impairment loss if we expect to dispose of a property in the near term, at a price below carrying value. In such an event, we will record an impairment loss based on the difference between a propertys carrying value and its projected sales price less any estimated costs to sell.
We will classify a building as held-for-sale in accordance with GAAP in the period in which we have made the decision to dispose of the building, our Board of Trustees or a designated delegate has approved the sale, there is a binding contract pursuant to which the buyer has significant money at risk, or high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash, and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. We will cease recording depreciation on a building once it has been classified as held-for-sale. In the second quarter of 2014, we prospectively adopted
Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), which impacts the presentation of operations and gains or losses from disposed properties and properties classified as held-for-sale. ASU 2014-08 states that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entitys operations or financial results. The operations of the following properties are reflected within discontinued operations in our consolidated statements of operations for all periods presented: (i) all properties that were sold prior to the adoption of ASU 2014-08; (ii) two properties (West Park and Patrick Center) that were classified as held-for-sale in previously issued financial statements prior to our adoption of ASU 2014-08 and were subsequently sold; and (iii) our Richmond, Virginia portfolio, which included Chesterfield Business Center, Hanover Business Center, Park Central, Virginia Technology Center and a three-acre parcel of undeveloped land (the Richmond Portfolio).
If the building does not qualify as a discontinued operation under ASU 2014-08, we will classify the buildings operating results, together with any impairment charges and any gains or losses on the sale of the building, in continuing operations for all periods presented in our consolidated statements of operations. We will classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheet for the period the held-for-sale criteria were met.
If the building does qualify as a discontinued operation under ASU 2014-08, we will classify the buildings operating results, together with any impairment charges and any gains or losses on the sale of the building, in discontinued operations in our consolidated statements of operations for all periods presented and classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the disposed or held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.
We recognize the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when assumed or incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.
We capitalize interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include our investments in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. We will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. We also capitalize direct compensation costs of our construction personnel who manage the development and redevelopment projects, but only to the extent the employees time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. We do not capitalize any other general and administrative costs such as office supplies, office rent expense or an overhead allocation to our development or redevelopment projects. Capitalized compensation costs were immaterial during 2016, 2015 and 2014. Capitalization of interest ends when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. We place redevelopment and development assets into service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.
(h) Purchase Accounting
Acquisitions of rental property, including any associated intangible assets, are measured at fair value at the date of acquisition. Any liabilities assumed or incurred are recorded at their fair value at the time of acquisition. The fair value of the acquired property is allocated between land and building (on an as-if vacant basis) based on managements estimate of the fair value of
those components for each type of property and to tenant improvements based on the depreciated replacement cost of the tenant improvements, which approximates their fair value. The fair value of the in-place leases is recorded as follows:
· the fair value of leases in-place on the date of acquisition is based on absorption costs for the estimated lease-up period in which vacancy and foregone revenue are avoided due to the presence of the acquired leases;
· the fair value of above and below-market in-place leases based on the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the assumed lease and the estimated market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases, which range from one to fourteen years; and
· the fair value of intangible tenant or customer relationships.
Our determination of these fair values requires us to estimate market rents for each of the leases and make certain other assumptions. These estimates and assumptions affect the rental revenue, and depreciation and amortization expense recognized for these leases and associated intangible assets and liabilities.
(i) Investment in Affiliates
We may continue to grow our portfolio by entering into ownership arrangements with third parties for which we do not have a controlling interest. The structure of the arrangement may affect our accounting treatment as the entities may qualify as VIE based on disproportionate voting to equity interests, or other factors . In determining whether to consolidate an entity, we assess the structure and intent of the entity relationship as well its power to direct major decisions regarding the entitys operations. When our investment in an entity meets the requirements for the equity method of accounting, we will record our initial investment in our consolidated balance sheets as Investment in affiliates. The initial investment in the entity is adjusted to recognize our share of earnings, losses, distributions received from the entity or additional contributions. Basis differences, if any, are recognized over the depreciable life of the ventures assets as an adjustment to Equity in (earnings) losses of affiliates in our consolidated statements of operations. Our respective share of all earnings or losses from the entity will be recorded in our consolidated statements of operations as Equity in (earnings) losses of affiliates.
When we are deemed to have a controlling interest in a partially-owned entity, we will consolidate all of the entitys assets, liabilities, operating results and cash flows within our consolidated financial statements. The cash contributed to the consolidated entity by the third party, if any, will be reflected in the permanent equity section of our consolidated balance sheets to the extent the associated ownership interests are not mandatorily redeemable. The amount will be recorded based on the third partys initial investment in the consolidated entity and will be adjusted to reflect the third partys share of earnings or losses in the consolidated entity and for any distributions received or additional contributions made by the third party. The earnings or losses from the entity attributable to the third party will be recorded in our consolidated statements of operations as a component of Net loss (income) attributable to noncontrolling interests.
( j) Sales of Rental Property
We account for sales of rental property in accordance with the requirements for full profit recognition, which occurs when the sale is consummated, the buyer has made adequate initial and continuing investments in the property, our receivable is not subject to future subordination, and we do not have substantial continuing involvement with the property. Once the requirements for full profit recognition are achieved, the related assets and liabilities are removed from the balance sheet and the resultant gain or loss is recorded in the period the sale is consummated. For sales transactions that do not meet the criteria for full profit recognition, we account for the transactions as partial sales or financing arrangements required by GAAP. For sales transactions with continuing involvement after the sale, if the continuing involvement with the property is limited by the terms of the sales contract, profit is recognized at the time of sale and is reduced by the maximum exposure to loss related to the nature of the continuing involvement. Sales to entities in which we have or receive an interest are accounted for as partial sales.
For sales transactions that do not meet sale criteria, we evaluate the nature of the continuing involvement, including put and call provisions, if present, and account for the transaction as a financing arrangement, profit-sharing arrangement, leasing arrangement or other alternate method of accounting rather than as a sale, based on the nature and extent of the continuing involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method is most appropriate based on the substance of the transaction.
(k) Intangible Assets
Intangible assets include the fair value of acquired tenant or customer relationships and the fair value of in-place leases at acquisition. Customer relationship fair values are determined based on our evaluation of the specific characteristics of each tenants lease and our overall relationship with the tenant. Characteristics we consider include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenants credit quality and expectations of lease renewals. The fair value of customer relationship intangible assets is amortized to expense over the lesser of the initial lease term and any expected renewal periods or the remaining useful life of the building. We determine the fair value of the in-place leases at acquisition by estimating the leasing commissions avoided by having in-place tenants and the operating income that would have not been recognized during the estimated time required to lease the space occupied by existing tenants at the acquisition date. The fair value attributable to existing tenants is amortized to expense over the initial term of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease fair value is charged to expense by the date of termination.
Deferred market rent liability consists of the acquired leases with below-market rents at the date of acquisition. The fair value attributed to deferred market rent assets, which consist of above-market rents at the date of acquisition, is recorded as a component of deferred costs. Above and below-market lease fair values are determined on a lease-by-lease basis based on the present value (using a discounted rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the lease and the estimated market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases including any below-market fixed rate renewal periods. The capitalized below-market lease fair values are amortized as an increase to rental revenue over the initial term and any below-market fixed-rate renewal periods of the related leases. Capitalized above-market lease fair values are amortized as a decrease to rental revenue over the initial term of the related leases.
In conjunction with our initial public offering and related formation transactions, First Potomac Management, Inc. contributed all of the capital interests in First Potomac Management LLC. The $2.1 million fair value of the in-place workforce acquired has been classified as goodwill and is included as a component of Intangible assets, net on the consolidated balance sheets. In 2011, we recognized additional goodwill of $4.8 million representing the residual difference between the consideration transferred for the purchase of 840 First Street, NE, which was acquired in March 2011, and the acquisition date fair value of the identifiable assets acquired and liabilities assumed and deferred taxes representing the difference between the fair value of acquired assets at acquisition and the carryover basis used for income tax purposes. In accordance with accounting requirements regarding goodwill and other intangibles, all acquired goodwill that relates to the operations of a reporting unit and is used in determining the fair value of a reporting unit is allocated to our appropriate reporting unit in a reasonable and consistent manner.
We assess goodwill for impairment annually at the end of our fiscal year and in interim periods if certain events occur indicating the carrying value may be impaired. We perform our analysis for potential impairment of goodwill in accordance with GAAP and are permitted to make a qualitative assessment of whether it is more likely than not that a reporting units fair value is less than its carrying amount before applying the two-step goodwill impairment test for that reporting unit. We assess the impairment of our goodwill based on such qualitative factors as general economic conditions, industry and market conditions, market competiveness, overall financial performance (such as negative cash flows) and other entity specific events. As of December 31, 2016, we concluded that it was more likely than not that the fair value of our reporting units exceeded its carrying value, and as a result, we determined that it was unnecessary to perform any additional testing for goodwill impairment. No goodwill impairment losses were recognized during 2016, 2015 and 2014.
(l) Derivative Instruments
We are exposed to certain risks arising from business operations and economic factors. We use derivative financial instruments to manage exposures that arise from business activities in which our future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. We do not use derivatives for trading or speculative purposes and we intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:
· available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;
· the duration of the hedge may not match the duration of the related liability;
· the party owing money in the hedging transaction may default on its obligation to pay; and
· the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign its side of the hedging transaction.
We may designate a derivative as either a hedge of the cash flows from a debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair value. For effective hedging relationships, the effective portion of the change in the fair value of the assets or liabilities is recorded within equity (cash flow hedge) or through earnings (fair value hedge). Ineffective portions of derivative transactions will result in changes in fair value recognized in earnings. For a cash flow hedge, we record our proportionate share of unrealized gains or losses on our derivative instruments associated with our unconsolidated joint ventures within equity and Investment in affiliates on our consolidated balance sheets. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees.
(m) Income Taxes
We have elected to be taxed as a REIT. To maintain our status as a REIT, we are required to distribute at least 90% of our ordinary taxable income annually to our shareholders and meet other organizational and operational requirements. As a REIT, we will not be subject to federal income tax and any non-deductible excise tax if we distribute at least 100% of our REIT taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We have certain subsidiaries, including a taxable REIT subsidiary (TRS) and an entity that has elected to be taxed as a REIT (which indirectly owns 500 First Street, NW) that may be subject to federal, state or local taxes, as applicable. Our subsidiary REIT will not be subject to federal income tax so long as it meets the REIT qualification requirements and distributes 100% of its REIT taxable income to its shareholders. Our TRS was inactive in 2016, 2015 and 2014. See note 8, Income Taxes, for further information.
We account for deferred income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting basis of assets and liabilities and their respective tax bases and for operating losses, capital losses and tax credit carryovers based on tax rates to be effective when amounts are realized or settled. We will recognize deferred tax assets only to the extent that it is more likely than not that they will be realized based on available evidence, including future reversals of existing temporary differences, future projected taxable income and tax planning strategies. We may recognize a tax benefit from an uncertain tax position when it is more-likely-than-not (defined as a likelihood of more than 50%) that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite our belief that our filing position is supportable, the benefit of that tax position is not recognized in the
statements of operations. We recognize interest and penalties, as applicable, related to unrecognized tax benefits as a component of income tax expense. We recognize unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the applicable taxing authority, or by expiration of the applicable statute of limitation. For the years ended December 31, 2016, 2015 and 2014, we did not have any uncertain tax positions.
(n) Share-Based Payments
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. For options awards, we use a Black-Scholes option-pricing model. Expected volatility is based on an assessment of our realized volatility over the preceding period that is equivalent to the awards expected life. The expected term represents the period of time the options are anticipated to remain outstanding as well as our historical experience for groupings of employees that have similar behavior and considered separately for valuation purposes. For non-vested share awards that vest over a predetermined time period, we use the outstanding share price at the date of issuance to fair value the awards. For non-vested shares awards that vest based on market conditions, we use a Monte Carlo simulation (risk-neutral approach) to determine the value and derived service period of each tranche. The expense associated with the share-based awards will be recognized over the period during which an employee is required to provide services in exchange for the award the requisite service period (usually the vesting period). The fair value for all share-based payment transactions are recognized as a component of income or loss from continuing operations.
(o) Notes Receivable
We record loans to owners of real estate properties, which can be collateralized by interest in the real estate property, as Notes receivable in our consolidated balance sheets. These loans are recorded net of any discount or issuance costs, which are amortized over the life of the respective note receivable using the effective interest method. We record interest earned from notes receivable and amortization of any discount costs or issuance costs within Interest and other income in our consolidated statements of operations.
We will establish a provision for anticipated credit losses associated with our notes receivable when we anticipate that we may be unable to collect any contractually due amounts. This determination is based upon such factors as delinquencies, loss experience, collateral quality and current economic or borrower conditions. Any estimated losses are recorded as a charge to earnings to establish an allowance for credit losses that we estimate to be adequate based on these factors. During the second quarter of 2016, we received the full repayment of a mezzanine loan with an outstanding principal balance of $34.0 million. We did not have any notes receivable outstanding at December 31, 2016. Based on the review of the above criteria, we did not record an allowance for credit losses for our notes receivable during 2016, 2015 and 2014.
(p) Application of New Accounting Standards
In January 2016, we adopted Accounting Standards Update No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (ASU 2015-01), which eliminates the concept of extraordinary items from GAAP and the requirement that an entity separately report extraordinary items in the income statement. ASU 2015-01 also requires that entities continue to evaluate whether items are unusual in nature or infrequent in occurrence for presentation and disclosure purposes. The adoption of ASU 2015-01 did not have a material impact on our consolidated financial statements and related disclosures.
In January 2016, we adopted ASU No. 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02). This standard amends certain guidance applicable to the consolidation of various legal entities, including VIEs. In determining the method of accounting for partially owned joint ventures, we evaluate the characteristics of associated entities and determine whether an entity is a VIE and, if so, determine which party is the primary beneficiary by analyzing whether we have both the power to direct the entitys significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entitys
operations, the entitys financing and capital structure, and contractual relationship and terms, including consideration of governance and decision making rights. We consolidate a VIE when we have determined that we are the primary beneficiary.
We evaluated the application of ASU 2015-02 and concluded that no change was required to our accounting for any of our interests in less-than-wholly owned joint ventures. We continued to consolidate our joint venture in Storey Park, which was sold on July 25, 2016, as described in note 15(b), Noncontrolling Interests in a Consolidated Partnership , as it continued to meet the definition and certain criteria as a VIE in which we were considered to be the primary beneficiary.
Under ASU 2015-02, our Operating Partnership now meets the definition of a VIE, we are the primary beneficiary, and, accordingly, we continue to consolidate the Operating Partnership. Our sole significant asset is our investment in the Operating Partnership and, consequently, substantially all of our assets and liabilities represent assets and liabilities of the Operating Partnership. All of our debt is an obligation of the Operating Partnership and may only be settled with the assets of the Operating Partnership.
In January 2016, we adopted Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. ASU 2015-03 is applied on a retrospective basis, which resulted in the reclassification of our debt issuance costs from previously presented balances. The guidance did not have a material impact on our consolidated financial statements and related disclosures.
In January 2016, we adopted Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after the acquisition of a business combination. The acquirer would instead recognize measurement-period adjustments in the reporting period in which the adjustment is identified. The adoption of ASU 2015-16 did not have a material impact on our consolidated financial statements and related disclosures.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. In July 2015, the FASB deferred by one year the mandatory effective date of ASU 2014-09 from January 1, 2017 to January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have begun to evaluate each of the revenue streams under the new model and the pattern of recognition is not expected to change significantly. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15), which requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entitys ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The guidance became effective for annual periods ending after December 15, 2016. The adoption of ASU 2014-15 is not expected to have an impact on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires, among other things, entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for periods beginning after December 15, 2017; early adoption is not permitted. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), which requires a lessee to record on the balance sheet a right-of-use asset with a corresponding lease liability created by lease terms of more than 12 months. Additional qualitative and quantitative disclosures will also be required. The guidance will become effective for periods beginning after December 15, 2018 and will be applied using a modified retrospective transition method. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) , which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance became effective for periods beginning after December 15, 2016 and early adoption is permitted. ASU 2016-09 permits the use of the cumulative-effect and prospective methods. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) . The guidance addresses eight classification issues related to the statement of cash flows, including debt prepayment or debt extinguishment costs and distributions received from equity-method investees. The guidance will become effective for periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 requires the use of a retrospective transition method to each period presented. If such retrospective transition is impracticable for certain issues, the adoption of ASU 2016-15 for the applicable issues may be applied prospectively as of the earliest date practicable. The guidance is not expected to have a material impact on our consolidated financial statements or related disclosures.
In October 2016, the FASB issued Accounting Standards Update No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control (ASU 2016-17), which requires a single decision maker or service provider, in evaluating whether it is the primary beneficiary, to consider on a proportionate basis indirect interests held through related parties under common control. ASU 2016-17 was effective for periods beginning after December 15, 2016. ASU 2016-17 requires the use of a retrospective transition method beginning with the earliest annual period in which ASU 2015-02 was adopted. The adoption of ASU 2016-17 will not have a material impact on our consolidated financial statements or related disclosures.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for periods beginning after December 15, 2017 and early adoption is permitted. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
(q) Reclassifications
Certain prior year asset and debt balances have been reclassified to conform to the current year presentation as a result of adopting ASU 2015-03 in January 2016, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability and which is applied on a retrospective basis. See note 2(p), Summary of Significant Accounting Policies - Application of New Accounting Standards for more information.
(3) Earnings Per Common Share
Basic earnings or loss per common share (EPS) is calculated by dividing net income or loss attributable to common shareholders by the weighted average common shares outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented, which include stock options and non-vested shares. We apply the two-class method for determining EPS as our outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. Our excess of
distributions over earnings related to participating securities is shown as a reduction in total earnings attributable to common shareholders in our computation of EPS.
The following table sets forth the computation of our basic and diluted earnings per common share (amounts in thousands, except per share amounts):
|
|
2016 |
|
2015 |
|
2014 |
||||||
Numerator for basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|||
(Loss) income from continuing operations |
|
$ |
(1,569 |
) |
|
$ |
(34,417 |
) |
|
$ |
15,559 |
|
(Loss) income from discontinued operations |
|
|
|
|
(607 |
) |
|
1,484 |
|
|||
Net (loss) income |
|
(1,569 |
) |
|
(35,024 |
) |
|
17,043 |
|
|||
Less: Net loss (income) from continuing operations attributable to noncontrolling interests |
|
502 |
|
|
2,032 |
|
|
(135 |
) |
|||
Less: Net loss (income) from discontinued operations attributable to noncontrolling interests |
|
|
|
|
26 |
|
|
(64 |
) |
|||
Net (loss) income attributable to First Potomac Realty Trust |
|
(1,067 |
) |
|
(32,966 |
) |
|
16,844 |
|
|||
Less: Dividends on preferred shares |
|
(3,053 |
) |
|
(12,400 |
) |
|
(12,400 |
) |
|||
Less: Issuance costs of redeemed preferred shares (1) |
|
(5,515 |
) |
|
|
|
|
|
|
|||
Net (loss) income attributable to common shareholders |
|
(9,635 |
) |
|
(45,366 |
) |
|
4,444 |
|
|||
Less: Allocation to participating securities |
|
(232 |
) |
|
(241 |
) |
|
(314 |
) |
|||
Net (loss) income attributable to common shareholders |
|
$ |
(9,867 |
) |
|
$ |
(45,607 |
) |
|
$ |
4,130 |
|
Denominator for basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|||
Weighted average common shares outstanding basic |
|
57,581 |
|
|
57,982 |
|
|
58,150 |
|
|||
Weighted average common shares outstanding diluted |
|
57,581 |
|
|
57,982 |
|
|
58,220 |
|
|||
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|||
(Loss) income from continuing operations attributable to common shareholders |
|
$ |
(0.17 |
) |
|
$ |
(0.78 |
) |
|
$ |
0.05 |
|
(Loss) income from discontinued operations attributable to common shareholders |
|
|
|
|
(0.01 |
) |
|
0.02 |
|
|||
Net (loss) income |
|
$ |
(0.17 |
) |
|
$ |
(0.79 |
) |
|
$ |
0.07 |
|
(1) Represents the original issuance costs associated with the redemption of 6.4 million 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares (the 7.750% Series A Preferred Shares) during the year ended December 31, 2016.
In accordance with GAAP regarding earnings per common share, we did not include the following potential weighted average common shares in our calculation of diluted earnings per common share as they are anti-dilutive for the periods presented (amounts in thousands):
|
|
2016 |
|
2015 |
|
2014 |
|||
Stock option awards |
|
960 |
|
|
1,020 |
|
|
1,122 |
|
Non-vested share awards |
|
669 |
|
|
310 |
|
|
398 |
|
|
|
1,629 |
|
|
1,330 |
|
|
1,520 |
|
(4) Rental Property
Rental property represents buildings and related improvements, net of accumulated depreciation, and developable land that are wholly owned or owned by an entity in which we have a controlling interest. All of our rental properties are located within the greater Washington, D.C. region. Rental property consists of the following at December 31 (dollars in thousands):
|
|
2016 (1) |
|
2015 (2) |
||||
Land and land improvements |
|
$ |
282,923 |
|
|
$ |
280,149 |
|
Buildings and improvements |
|
824,867 |
|
|
793,184 |
|
||
Construction in progress |
|
4,605 |
|
|
97,361 |
|
||
Tenant improvements |
|
189,031 |
|
|
168,946 |
|
||
Furniture, fixtures and equipment |
|
408 |
|
|
410 |
|
||
|
|
1,301,834 |
|
|
1,340,050 |
|
||
Less: accumulated depreciation |
|
(242,562 |
) |
|
(209,784 |
) |
||
|
|
$ |
1,059,272 |
|
|
$ |
1,130,266 |
|
(1) Excludes rental property totaling $13.2 million at December 31, 2016 related to One Fair Oaks, which was classified as held-for-sale at December 31, 2016 and was sold on January 9, 2017.
(2) Excludes rental property totaling $90.6 million at December 31, 2015 related to the NOVA Non-Core Portfolio (defined in note 9(a), Dispositions ), which was classified as held-for-sale at December 31, 2015 and was sold on March 25, 2016.
Depreciation of rental property is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets range from 5 to 39 years or, in the case of tenant improvements, the shorter of the useful life of the asset or the term of the underlying lease.
Development and Redevelopment Activity
We will place completed development and redevelopment assets in service upon the earlier of one year after major construction activity is deemed to be substantially complete or upon occupancy. We construct office buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. At December 31, 2016, we owned developable land that can accommodate 0.6 million square feet of additional building space, of which 34 thousand is located in the Washington, D.C. reporting segment, 0.1 million in the Maryland reporting segment, 0.4 million in the Northern Virginia reporting segment and 0.1 million in the Southern Virginia reporting segment.
During the third quarter of 2014, we signed a lease for 167,000 square feet at a to-be-constructed building (the NOVA build-to-suit) in our Northern Virginia reporting segment, which was on vacant land that we had in our portfolio. We substantially completed construction of the new building in the first quarter of 2016, and we substantially completed construction of the tenant improvements during the third quarter of 2016. We commenced revenue recognition in August 2016, at which time the building was placed in-service. At December 31, 2016, our total investment in the newly constructed building, excluding tenant improvements and leasing commission costs, was $35.0 million, which related to the costs of construction of the building and included the original cost basis of the applicable portion of the vacant land of $5.2 million.
On August 4, 2011, we formed a joint venture, in which we had a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment. At the time, the site was leased to Greyhound Lines, Inc. (Greyhound), which subsequently relocated its operations. Greyhounds lease expired on August 31, 2013, at which time the property was placed into development with the anticipation of developing a mixed-use project on the 1.6 acre site, which could accommodate up to 712,000 square feet. On July 25, 2016, our consolidated joint venture sold Storey Park for a contractual purchase price of $54.5 million, which generated net proceeds of $52.7 million. In June 2016, we recorded a $2.8 million impairment charge based on the sales price, less estimated selling costs. On January 1, 2016, we ceased capitalizing expenses associated with the development project as we began marketing the property for sale. See note 9, Dispositions , for more information.
During 2016, other than the NOVA build-to-suit, we did not place in-service any completed development or redevelopment space. At December 31, 2016, we did not have any completed development or redevelopment space that had yet to be placed in-service.
(5) Investment in Affiliates
We own an interest in several joint ventures that own properties. We do not control the activities that are most significant to the joint ventures. As a result, the assets, the liabilities and the operating results of these noncontrolled joint ventures are not consolidated within our consolidated financial statements. Our investments in these joint ventures are recorded as Investment in affiliates on our consolidated balance sheets. Our investment in affiliates consisted of the following (dollars in thousands):
|
|
Reporting Segment |
|
Ownership
|
|
Investment at
|
|
Investment at
|
|||||
Prosperity Metro Plaza |
|
Northern Virginia |
|
51 |
% |
|
$ |
26,414 |
|
|
$ |
24,909 |
|
1750 H Street, NW |
|
Washington, D.C. |
|
50 |
% |
|
14,625 |
|
|
15,168 |
|
||
Aviation Business Park (1) |
|
Maryland |
|
50 |
% |
|
5,941 |
|
|
5,899 |
|
||
Rivers Park I and II (1)(2) |
|
Maryland |
|
25 |
% |
|
2,413 |
|
|
2,247 |
|
||
|
|
|
|
|
|
|
$ |
49,392 |
|
|
$ |
48,223 |
|
(1) In January 2017, the unconsolidated joint ventures that own these properties entered into a binding contract to sell Aviation Business Park and Rivers Park I and II, which are all located in our Maryland reporting segment. We anticipate completing the sale in March 2017; however, we can provide no assurances regarding the timing or pricing of such sale, or that such sale will ultimately occur.
(2) Rivers Park I and Rivers Park II are owned through two separate unconsolidated joint ventures.
The following table provides a summary of the mortgage debt held by our unconsolidated joint ventures (dollars in thousands):
|
|
FPO Ownership |
|
Effective Interest Rate |
|
Maturity Date |
|
Principal Balance at
|
|
Principal Balance at
|
||||
Rivers Park I and II (2) |
|
25% |
|
LIBOR + 1.90% (3) |
|
September 2017 |
|
$ |
28,000 |
|
|
$ |
28,000 |
|
1750 H Street, NW (4) |
|
50% |
|
3.92% |
|
August 2024 |
|
32,000 |
|
|
32,000 |
|
||
Prosperity Metro Plaza (5) |
|
51% |
|
3.91% |
|
December 2029 |
|
50,000 |
|
|
50,000 |
|
||
Weighted Average/Total |
|
|
|
3.60% |
|
|
|
$ |
110,000 |
|
|
$ |
110,000 |
|
(1) Reflects the entire balance of the debt secured by the properties, not our portion of the debt.
(2) The loan is repayable in full, without penalty, at any time during the term of the loan. Of the outstanding principal balance, $2.8 million is recourse to us. We believe the fair value of the potential liability to us related to the recourse debt is inconsequential as the likelihood of our need to perform under the debt agreement is remote.
(3) At December 31, 2016, LIBOR was 0.77%. All references to LIBOR in the financial statements refer to one-month LIBOR.
(4) The loan requires interest-only payments with a constant interest rate over the life of the loan. The loan is repayable in full, without penalty, on or after August 1, 2021.
(5) The loan requires interest-only payments through December 2024, at which time the loan requires principal and interest payments through its maturity date. The loan in repayable in full without penalty on or after June 1, 2029.
The net assets of our unconsolidated joint ventures consisted of the following at December 31 (dollars in thousands):
|
|
2016 |
|
2015 |
||||
Assets: |
|
|
|
|
|
|
||
Rental property, net |
|
$ |
189,245 |
|
|
$ |
193,243 |
|
Cash and cash equivalents |
|
9,887 |
|
|
5,992 |
|
||
Other assets |
|
20,726 |
|
|
16,490 |
|
||
Total assets |
|
219,858 |
|
|
215,725 |
|
||
Liabilities: |
|
|
|
|
|
|
||
Mortgage loans, net (1)(2) |
|
109,372 |
|
|
109,273 |
|
||
Other liabilities |
|
8,674 |
|
|
7,214 |
|
||
Total liabilities |
|
118,046 |
|
|
116,487 |
|
||
Net assets |
|
$ |
101,812 |
|
|
$ |
99,238 |
|
(1) Of the total mortgage debt that encumbers our unconsolidated properties, $2.8 million is recourse to us. We believe the fair value of the potential liability to us under this guaranty is inconsequential as the likelihood of our need to perform under the debt agreement is remote.
(2) In the first quarter of 2016, our unconsolidated joint ventures adopted ASU 2015-03, which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying value of the respective debt liability and which is applied on a retrospective basis. Mortgage loans, net at December 31, 2016 and 2015 included $0.6 million and $0.7 million, respectively, of unamortized deferred financing costs.
Our share of earnings or losses related to our unconsolidated joint ventures is recorded in our consolidated statements of operations as Equity in earnings of affiliates.
The following table summarizes the results of operations of our unconsolidated joint ventures at December 31, which, due to our varying ownership interests in the joint ventures and the varying operations of the joint ventures, may not be reflective of the amounts recorded in our consolidated statements of operations (dollars in thousands):
|
|
2016 |
|
2015 |
|
2014 |
||||||
Total revenues |
|
$ |
24,704 |
|
|
$ |
24,255 |
|
|
$ |
23,285 |
|
Total operating expenses |
|
(7,770 |
) |
|
(7,660 |
) |
|
(7,408 |
) |
|||
Net operating income |
|
16,934 |
|
|
16,595 |
|
|
15,877 |
|
|||
Depreciation and amortization |
|
(8,044 |
) |
|
(8,718 |
) |
|
(9,893 |
) |
|||
Interest expense, net |
|
(3,995 |
) |
|
(3,909 |
) |
|
(3,890 |
) |
|||
Provision for income taxes |
|
|
|
|
|
|
|
(63 |
) |
|||
Contingent consideration charge |
|
|
|
|
|
|
|
126 |
|
|||
Net income |
|
$ |
4,895 |
|
|
$ |
3,968 |
|
|
$ |
2,157 |
|
We earn various fees from several of our joint ventures, which include management fees, leasing commissions and construction management fees. We recognize fees only to the extent of the third party ownership interest in our unconsolidated joint ventures. We recognized fees from our unconsolidated joint ventures of $0.6 million, $0.7 million, and $0.7 million in 2016, 2015 and 2014, respectively, which are reflected within Tenant reimbursements and other revenues in our consolidated statements of operations.
(6) Notes Receivable
On June 2, 2016, the owners of 950 F Street, NW, a ten-story, 287,000 square-foot office/retail building located in Washington, D.C., prepaid a mezzanine loan that was secured by a portion of the owners interest in the property and had an outstanding balance of $34.0 million. The mezzanine loan, which had a fixed interest rate of 9.75% was scheduled to mature on April 1, 2017
and had been prepayable since December 21, 2015. In addition to the prepayment of the loans entire principal balance, we received interest through June 24, 2016 and an exit fee upon the loans prepayment. We recognized $0.2 million of accelerated income in the second quarter of 2016 related to the payment of the exit fee, which is reflected in Interest and other income in our consolidated statement of operations for the year ended December 31, 2016. We used the proceeds from the prepayment of the note receivable to redeem the remaining 0.6 million 7.750% Series A Preferred Shares outstanding and to pay down a portion of our unsecured revolving credit facility.
On February 24, 2015, the owners of Americas Square, a 461,000 square foot office complex located in Washington, D.C., prepaid a mezzanine loan that had an outstanding balance of $29.7 million. The loan had a fixed-interest rate of 9.0% and was scheduled to mature on May 1, 2016. With the prepayment of the loan, we received a yield maintenance payment of $2.4 million, which is reflected within Interest and other income on our consolidated statement of operations for the year ended December 31, 2015.
We recorded interest income related to our notes receivable of $1.6 million, $3.7 million and $6.1 million during 2016, 2015, and 2014, respectively, which is included within Interest and other income in our consolidated statements of operations.
(7) Intangible Assets and Deferred Market Rent Liabilities
Intangible assets and deferred market rent liabilities consisted of the following at December 31 (amounts in thousands):
|
|
2016 |
|
2015 |
||||||||||||||||||||
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
Gross
|
|
Accumulated
|
|
Net
|
||||||||||||
In-place leases |
|
$ |
38,804 |
|
|
$ |
(25,423 |
) |
|
$ |
13,381 |
|
|
$ |
45,901 |
|
|
$ |
(26,961 |
) |
|
$ |
18,940 |
|
Customer relationships |
|
663 |
|
|
(663 |
) |
|
|
|
|
663 |
|
|
(601 |
) |
|
62 |
|
||||||
Leasing commissions |
|
9,499 |
|
|
(5,882 |
) |
|
3,617 |
|
|
10,612 |
|
|
(5,485 |
) |
|
5,127 |
|
||||||
Legal leasing fees |
|
299 |
|
|
(193 |
) |
|
106 |
|
|
344 |
|
|
(177 |
) |
|
167 |
|
||||||
Deferred market rent assets |
|
2,880 |
|
|
(1,808 |
) |
|
1,072 |
|
|
3,558 |
|
|
(1,825 |
) |
|
1,733 |
|
||||||
Goodwill |
|
6,930 |
|
|
|
|
|
6,930 |
|
|
6,930 |
|
|
|
|
|
6,930 |
|
||||||
|
|
$ |
59,075 |
|
|
$ |
(33,969 |
) |
|
$ |
25,106 |
|
|
$ |
68,008 |
|
|
$ |
(35,049 |
) |
|
$ |
32,959 |
|
Deferred market rent liability |
|
$ |
4,173 |
|
|
$ |
(2,381 |
) |
|
$ |
1,792 |
|
|
$ |
4,869 |
|
|
$ |
(2,715 |
) |
|
$ |
2,154 |
|
We recognized $7.0 million, $10.6 million, and $10.3 million of amortization expense on intangible assets for the years ended December 31, 2016, 2015 and 2014, respectively. Through the net amortization of deferred market rent assets and deferred market rent liabilities, we recognized a $0.3 million reduction of rental revenue in 2016, a $0.1 million reduction of rental revenue in 2015 and an additional $14 thousand of revenue in 2014. Losses due to the termination of tenant leases and defaults, which resulted in the write-offs of all related lease-level and intangible assets, were $3.0 million, $0.5 million and $1.1 million during 2016, 2015 and 2014, respectively.
The projected net amortization of intangible assets and deferred market liabilities as of December 31, 2016 are as follows (amounts in thousands):
2017 |
|
$ |
4,114 |
|
2018 |
|
2,646 |
|
|
2019 |
|
2,361 |
|
|
2020 |
|
2,147 |
|
|
2021 |
|
1,463 |
|
|
Thereafter |
|
3,653 |
|
|
|
|
$ |
16,384 |
|
(8) Income Taxes
We own properties in Washington, D.C. that are subject to income-based franchise taxes at an effective rate of 9.975% as a result of conducting business in Washington, D.C. Our deferred tax assets and liabilities associated with our properties were primarily associated with differences in the GAAP and tax basis of rental property, particularly acquisition costs, but also included intangible assets and deferred market rent assets and liabilities that were associated with properties located in Washington, D.C. We will recognize deferred tax assets only to the extent that it is more likely than not that deferred tax assets will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.
During the third quarter of 2012, there was a change in tax regulations in Washington, D.C. that required us to file a unitary tax return, which allowed for a deduction for dividends paid to shareholders. The change in tax regulations resulted in us prospectively measuring all of our deferred tax assets and deferred tax liabilities using the effective tax rate (0%) expected to be in effect as these timing differences reverse; therefore, we did not record a benefit from income taxes during 2016, 2015 or 2014. At both December 31, 2016 and 2015, we had recorded an estimated receivable of $1.2 million within Accounts and other receivables in our consolidated balance sheets for an expected tax refund associated with our 2011 tax payments and the estimated payments made in 2012 arising from the change in regulations in 2012. At December 31, 2016 and 2015, we did not have any recorded deferred tax assets or deferred tax liabilities. We also have interests in an unconsolidated joint venture that owns rental property in Washington, D.C. that is subject to the franchise tax. The impact for income taxes related to this unconsolidated joint venture is reflected within Equity in earnings of affiliates in our consolidated statements of operations.
We did not record a valuation allowance against our deferred tax assets for any period presented. We did not recognize any deferred tax assets or liabilities as a result of uncertain tax positions and had no material net operating loss, capital loss or alternative minimum tax carryovers for any of the periods presented. There was no benefit or provision for income taxes associated with our discontinued operations for any of the periods presented.
As we believe we both qualify as a REIT and will not be subject to federal income tax, a reconciliation between the income tax provision calculated at the statutory federal income tax rate and the actual income tax provision has not been provided.
(9) Dispositions
During the second quarter of 2014, we prospectively adopted ASU 2014-08, which states that a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entitys operations and financial results. All other disposed properties will have their operating results reflected within continuing operations on our consolidated statements of operations for all periods presented.
We have had, and will have, no continuing involvement with any of our disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income based taxes. Other than the properties discussed below in this note 9, Dispositions, we did not dispose of or enter into any agreements to sell any other properties during 2016, 2015 and 2014.
(a) Disposed or Held-for-Sale Properties within Continuing Operations
The following table is a summary of property dispositions or held-for-sale properties whose operating results are included in continuing operations in our consolidated statements of operations for the periods presented (dollars in thousands):
|
|
Reporting
|
|
Disposition
|
|
Property Type |
|
Square
|
|
Net Sale
|
|||
One Fair Oaks (1) |
|
Northern Virginia |
|
1/9/2017 |
|
Office |
|
214,214 |
|
|
$ |
13,255 |
|
Storey Park (2) |
|
Washington, D.C. |
|
7/25/2016 |
|
Land |
|
|
|
|
52,659 |
|
|
NOVA Non-Core Portfolio (3) |
|
Northern Virginia |
|
3/25/2016 |
|
Various |
|
945,745 |
|
|
90,501 |
|
|
Cedar Hill I and III |
|
Northern Virginia |
|
12/23/2015 |
|
Office |
|
102,632 |
|
|
25,939 |
|
|
Newington Business Park Center |
|
Northern Virginia |
|
12/17/2015 |
|
Industrial |
|
255,600 |
|
|
31,409 |
|
|
Rumsey Center |
|
Maryland |
|
7/28/2015 |
|
Business Park |
|
135,015 |
|
|
14,956 |
|
|
Owings Mills Business Park |
|
Maryland |
|
10/16/2014 |
|
Business Park |
|
180,475 |
|
|
12,417 |
|
|
Corporate Campus at Ashburn Center |
|
Northern Virginia |
|
6/26/2014 |
|
Business Park |
|
194,184 |
|
|
39,910 |
|
(1) One Fair Oaks was classified as held-for-sale at December 31, 2016.
(2) This development site could have supported up to 712,000 rentable square feet.
(3) Consists of Van Buren Office Park, Herndon Corporate Center, Windsor at Battlefield, Reston Business Campus, Enterprise Center, Gateway Centre Manassas, Linden Business Center and Prosperity Business Center (collectively, the NOVA Non-Core Portfolio).
At December 31, 2016, One Fair Oaks met our held-for-sale criteria and, therefore, the assets of the building were classified within Assets held-for-sale on our consolidated balance sheet. The assets classified within held-for-sale as of December 31, 2016 primarily consisted of $17.6 million in building and building improvements, $1.6 million of land and $6.0 million of accumulated depreciation. No material liabilities were classified as held-for-sale at December 31, 2016.
On July 25, 2016, we sold Storey Park, a development site located in our Washington, D.C reporting segment that was 97% owned by us through a consolidated joint venture, for net proceeds of $52.7 million. We used the proceeds from the sale to prepay, without penalty, the $22.0 million loan encumbering the Storey Park land (the Storey Park Land Loan), to make a distribution to our 3% joint venture partner for their allocable share of the joint ventures net assets and to pay down a portion of the outstanding balance of our unsecured revolving credit facility.
At December 31, 2015, the NOVA Non-Core Portfolio met our held-for-sale criteria and, therefore, the assets of the buildings were classified within Assets held-for-sale and the liabilities of the buildings, which included one mortgage that was defeased in March 2016, were classified within Liabilities held-for-sale on our consolidated balance sheet. The majority of the assets classified within assets held-for-sale as of December 31, 2015 consisted of $25.2 million in land and land improvements, $88.0 million in buildings and building improvements, $14.4 million in tenant improvements and $37.0 million of accumulated depreciation. Assets held-for-sale also consisted of immaterial amounts of accrued straight-line rents, net of allowance for doubtful accounts, deferred costs, net of accumulated amortization, and prepaid expenses and other assets.
On February 17, 2017, we sold Plaza 500, a 503,000 square-foot office building located in Northern Virginia, for net proceeds of $72.5 million. The sale of Plaza 500 represented the divestiture of our last industrial property. We used the proceeds from the sale to pay down a portion of the outstanding balance under our unsecured revolving credit facility. Plaza 500 did not meet the criteria to be classified as held-for-sale at December 31, 2016.
In addition, in January 2017, the unconsolidated joint ventures that own Aviation Business Park and Rivers Park I and II entered into a binding contract to sell Aviation Business Park and Rivers Park I and II, which are all located in Maryland. We anticipate completing the sale in March 2017; however, we can provide no assurances regarding the timing or pricing of such sale, or that such sale will ultimately occur.
The following table summarizes the aggregate results of operations for the disposed or held-for-sale properties that are included in continuing operations for the periods presented (dollars in thousands):
|
|
2016 |
|
2015 |
|
2014 |
|||||||
Revenues |
|
$ |
11,156 |
|
|
$ |
29,773 |
|
|
$ |
31,027 |
|
|
Property operating expenses |
|
(4,307 |
) |
|
(10,353 |
) |
|
(11,055 |
) |
|
|||
Depreciation and amortization |
|
(1,070 |
) |
|
(10,310 |
) |
|
(11,289 |
) |
|
|||
Interest expense, net of interest income |
|
(436 |
) |
|
(465 |
) |
|
(843 |
) |
|
|||
Loss on debt extinguishment |
|
(48 |
) |
|
|
|
|
|
|
|
|||
Impairment of rental property |
|
(2,772 |
) |
|
(60,826 |
) |
|
|
|
|
|||
Income (loss) from operations of disposed property |
|
2,523 |
|
|
(52,181 |
) |
|
7,840 |
|
|
|||
(Loss) gain on sale of rental property |
|
(1,155 |
) |
|
29,477 |
|
|
21,230 |
|
|
|||
Net income (loss) from continuing operations |
|
$ |
1,368 |
|
|
$ |
(22,704 |
) |
|
$ |
29,070 |
|
|
(b) Discontinued Operations
The following table is a summary of property dispositions whose operating results are reflected as discontinued operations in our consolidated statements of operations for the periods presented (dollars in thousands):
|
|
Reporting Segment |
|
Disposition
|
|
Property Type |
|
Square
|
|
Net Sale
|
|||
Richmond Portfolio (1) |
|
Southern Virginia |
|
3/19/2015 |
|
Business Park |
|
827,900 |
|
|
$ |
53,768 |
|
Patrick Center |
|
Maryland |
|
4/16/2014 |
|
Office |
|
66,269 |
|
|
10,888 |
|
|
West Park |
|
Maryland |
|
4/2/2014 |
|
Office |
|
28,333 |
|
|
2,871 |
|
|
Girard Business Center and Gateway Center |
|
Maryland |
|
1/29/2014 |
|
Business Park and Office |
|
341,973 |
|
|
31,616 |
|
(1) Consists of Chesterfield Business Center, Hanover Business Center, Park Central, Virginia Technology Center and a three-acre parcel of undeveloped land.
In March 2015, we sold our Richmond, Virginia portfolio, which was located in our Southern Virginia reporting segment. The Richmond Portfolio consisted of Chesterfield Business Center, Hanover Business Center, Park Central, Virginia Technology Center and a three-acre parcel of undeveloped land, and in the aggregate was comprised of 19 buildings totaling 827,900 square feet. With the sale of our Richmond Portfolio, we no longer owned any properties in the Richmond, Virginia area and had strategically exited the Richmond market. As such, in accordance with ASU 2014-08, our Richmond Portfolio was classified as held-for-sale at December 31, 2014 and the operating results of the Richmond Portfolio are reflected within discontinued operations for each of the periods presented.
The following table summarizes the results of operations of properties included in discontinued operations for the years ended December 31 (dollars in thousands):
|
|
2016 |
|
2015 |
|
2014 |
||||||
Revenues |
|
$ |
|
|
|
$ |
877 |
|
|
$ |
7,688 |
|
Property operating expenses |
|
|
|
|
(638 |
) |
|
(3,612 |
) |
|||
Depreciation and amortization |
|
|
|
|
(1,222 |
) |
|
(3,662 |
) |
|||
Net interest income (expense) |
|
|
|
|
8 |
|
|
(268 |
) |
|||
(Loss) income from operations of disposed property |
|
|
|
|
(975 |
) |
|
146 |
|
|||
Loss on debt extinguishment |
|
|
|
|
(489 |
) |
|
|
|
|||
Gain on sale of rental property |
|
|
|
|
857 |
|
|
1,338 |
|
|||
Net (loss) income from discontinued operations |
|
$ |
|
|
|
$ |
(607 |
) |
|
$ |
1,484 |
|
(10) Debt
Our borrowings consisted of the following at December 31 (dollars in thousands):
|
|
2016 (1) |
|
2015 (1)(2) |
||||
Mortgage loans, net effective interest rates ranging from 4.22% to 6.01%, maturing at various dates through September 2030 (3)(4) |
|
$ |
296,212 |
|
|
$ |
307,769 |
|
Unsecured term loan, net effective interest rates ranging from LIBOR plus 1.45% to LIBOR plus 1.80%, with staggered maturity dates ranging from December 2020 to December 2022 (3) |
|
299,404 |
|
|
299,404 |
|
||
Unsecured revolving credit facility, net effective interest rate of LIBOR plus 1.50%, maturing December 2019 (3) |
|
141,555 |
|
|
116,865 |
|
||
|
|
$ |
737,171 |
|
|
$ |
724,038 |
|
(1) In the first quarter of 2016, we adopted ASU 2015-03, which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying value of the respective debt liability and is applied on a retrospective basis. The balances include a total of $6.2 million and $8.0 million of unamortized deferred financing costs at December 31, 2016 and 2015, respectively.
(2) Excludes $0.2 million of mortgage debt that was classified within Liabilities held-for-sale on our consolidated balance sheet at December 31, 2015. See note 9, Dispositions , for further discussion.
(3) At December 31, 2016, LIBOR was 0.77%. All references to LIBOR in the consolidated financial statements refer to one-month LIBOR.
(4) At December 31, 2016 and 2015, the mortgage loans balance includes two construction loans. At December 31, 2015, the mortgage loans balance includes two construction loans and the Storey Park Land Loan, which was repaid in July 2016.
(a) Mortgage Loans
The following table provides a summary of our mortgage debt, which includes two construction loans and, for the year ended December 31, 2015, the Storey Park Land Loan (dollars in thousands):
Encumbered Property |
|
Contractual
|
|
Effective
|
|
|
Maturity
|
|
December
|
|
December
|
||||||
Storey Park Land Loan (1)(2) |
|
LIBOR + 2.50% |
|
|
LIBOR + 2.50% |
|
|
October 2016 |
|
|
$ |
|
|
|
$ |
22,000 |
|
Hillside I and II (3) |
|
5.75% |
|
|
4.62% |
|
|
December 2016 |
|
|
|
|
|
12,368 |
|
||
440 First Street, NW Construction Loan (1)(4) |
|
LIBOR + 2.50% |
|
|
LIBOR + 2.50% |
|
|
May 2017 |
|
|
32,216 |
|
|
32,216 |
|
||
Redland II & III |
|
4.20% |
|
|
4.64% |
|
|
November 2017 |
|
|
63,214 |
|
|
64,543 |
|
||
Northern Virginia Construction Loan (1)(5) |
|
LIBOR + 1.85% |
|
|
LIBOR + 1.85% |
|
|
September 2019 |
|
|
34,584 |
|
|
9,176 |
|
||
840 First Street, NE |
|
5.72% |
|
|
6.01% |
|
|
July 2020 |
|
|
35,201 |
|
|
35,888 |
|
||
Battlefield Corporate Center |
|
4.26% |
|
|
4.40% |
|
|
November 2020 |
|
|
3,353 |
|
|
3,526 |
|
||
1211 Connecticut Avenue, NW |
|
4.22% |
|
|
4.47% |
|
|
July 2022 |
|
|
28,503 |
|
|
29,110 |
|
||
1401 K Street, NW |
|
4.80% |
|
|
4.93% |
|
|
June 2023 |
|
|
35,556 |
|
|
36,224 |
|
||
11 Dupont Circle, NW |
|
4.05% |
|
|
4.22% |
|
|
September 2030 |
|
|
66,780 |
|
|
66,780 |
|
||
Principal balance |
|
|
|
|
4.41% |
(6) |
|
|
|
|
299,407 |
|
|
311,831 |
|
||
Unamortized fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
||
Unamortized deferred financing costs (7) |
|
|
|
|
|
|
|
|
|
|
(3,195 |
) |
|
(4,234 |
) |
||
Total balance, net |
|
|
|
|
|
|
|
|
|
|
$ |
296,212 |
|
|
$ |
307,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Debt Classified within Liabilities Held-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Gateway Centre Manassas Building I (8) |
|
7.35% |
|
|
5.88% |
|
|
November 2016 |
|
|
$ |
|
|
|
$ |
212 |
|
Unamortized fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
||
Total balance, net |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
213 |
|
(1) At December 31, 2016, LIBOR was 0.77%.
(2) The Storey Park Land Loan encumbered the Storey Park land and was entered into by our 97% owned consolidated joint venture that owned Storey Park. On July 25, 2016, our consolidated joint venture sold Storey Park and the Storey Park Land Loan was concurrently repaid with proceeds from the sale.
(3) On October 6, 2016, we used available cash to prepay, without penalty, the Hillside I and II loan.
(4) This construction loan (the 440 First Street, NW Construction Loan) is collateralized by 440 First Street, NW. In May 2016, we extended the maturity date by one year to May 30, 2017. We can repay all or a portion of the construction loan, without penalty, at any time during the term of the loan. At December 31, 2016, per the terms of the loan agreement, 50% of the outstanding principal balance and all of the outstanding accrued interest were recourse to us.
(5) This construction loan has a borrowing capacity of up to $43.7 million and is collateralized by the NOVA build-to-suit (the Northern Virginia Construction Loan), which was placed in-service in August 2016. We can repay all or a portion of the Northern Virginia Construction loan, without penalty, at any time during the term of the loan.
(6) Represents the weighted average interest rate on total mortgage debt.
(7) In the first quarter of 2016, we adopted ASU 2015-03, which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying value of the respective debt liability and is applied on a retrospective basis.
(8) The mortgage loan that encumbered Gateway Centre Manassas, which was included in the NOVA Non-Core Portfolio and sold on March 25, 2016, was classified within Liabilities held-for-sale on our December 31, 2015 consolidated balance sheet. In February 2016, we used $0.2 million in available cash to defease the outstanding balance of the mortgage loan.
Northern Virginia Construction Loan
On September 1, 2015, we entered into the Northern Virginia Construction Loan, which is collateralized by the NOVA build-to-suit (which was placed in-service in August 2016). The loan has a borrowing capacity of up to $43.7 million, of which we borrowed $34.6 million and $9.2 million at December 31, 2016 and 2015, respectively. The loan has a variable interest rate of
LIBOR plus a spread of 1.85% and matures on September 1, 2019. We can repay all or a portion of the Northern Virginia Construction Loan, without penalty, at any time during the term of the loan.
With the exception of the 440 First Street, NW Construction Loan, our mortgage debt is recourse solely to specific assets. We had 8 and 11 consolidated properties that secured mortgage debt at December 31, 2016 and 2015, respectively.
We have originated the following mortgage and construction loans since January 1, 2015 (dollars in thousands):
Month |
|
Year |
|
Property |
|
Effective
|
|
Principal
|
||||
September |
|
2015 |
|
Northern Virginia Construction Loan |
|
LIBOR + 1.85% |
(1) |
$ |
34,584 |
|
(2) |
|
August |
|
2015 |
|
11 Dupont Circle, NW |
|
4.22% |
|
66,780 |
|
|
|
(1) At December 31, 2016, LIBOR was 0.77%.
(2) The loan has a borrowing capacity of up to $43.7 million, of which we borrowed $25.4 million and $9.2 million during 2016 and 2015, respectively.
We have repaid the following mortgage and land loans since January 1, 2015 (dollars in thousands):
Month |
|
Year |
|
Property |
|
Effective
|
|
Principal
|
|||
October |
|
2016 |
|
Hillside I and II |
|
4.62 |
% |
|
$ |
12,199 |
|
August |
|
2016 |
|
Storey Park Land Loan |
|
LIBOR + 2.50% |
(1) |
|
22,000 |
|
|
February |
|
2016 |
|
Gateway Centre Manassas |
|
5.88 |
% |
|
174 |
|
|
July |
|
2015 |
|
Jackson National Life Loan |
|
5.19 |
% |
|
64,230 |
|
|
March |
|
2015 |
|
Hanover Business Center Building D |
|
6.63 |
% |
|
65 |
|
|
March |
|
2015 |
|
Chesterfield Business Center Buildings C,D,G and H |
|
6.63 |
% |
|
202 |
|
|
March |
|
2015 |
|
Hanover Business Center Building C |
|
6.63 |
% |
|
460 |
|
|
March |
|
2015 |
|
Chesterfield Business Center Buildings A,B,E and F |
|
6.63 |
% |
|
1,584 |
|
|
March |
|
2015 |
|
Airpark Business Center |
|
6.63 |
% |
|
864 |
|
(1) At December 31, 2016, LIBOR was 0.77%.
(b) Unsecured Term Loan and Unsecured Revolving Credit Facility
On December 4, 2015, we amended, restated and consolidated our unsecured revolving credit facility and our unsecured term loan. The amendments extended the maturity date of the unsecured term loans three $100 million tranches to December 2020, June 2021 and December 2022 from October 2018, October 2019 and October 2020, respectively and the maturity date of the unsecured revolving credit facility to December 2019 from October 2017, with two, six-month extensions at our option. As part of the amendments, we reduced the interest rate spreads on our unsecured term loan and our unsecured revolving credit facility, reduced the capitalization rates used to calculate gross asset value in the financial covenants and amended the covenant package to more closely align with our corporate goals. During the fourth quarter of 2015, the Company incurred $1.8 million of debt modification charges related to amending and restating the unsecured revolving credit facility and unsecured term loan.
The table below shows the outstanding balances and the interest rates of the three tranches of the $300.0 million unsecured term loan at December 31, 2016 and 2015 (dollars in thousands):
|
|
Maturity Date |
|
Interest Rate (1) |
|
December 31, 2016 |
|
December 31, 2015 |
||||
Tranche A |
|
December 2020 |
|
LIBOR + 1.45% |
|
$ |
100,000 |
|
|
$ |
100,000 |
|
Tranche B |
|
June 2021 |
|
LIBOR + 1.45% |
|
100,000 |
|
|
100,000 |
|
||
Tranche C |
|
December 2022 |
|
LIBOR + 1.80% |
|
100,000 |
|
|
100,000 |
|
||
Total |
|
|
|
|
|
300,000 |
|
|
300,000 |
|
||
Unamortized deferred financing costs (2) |
|
|
|
|
|
(596 |
) |
|
(596 |
) |
||
Total, net |
|
|
|
|
|
$ |
299,404 |
|
|
$ |
299,404 |
|
(1) At December 31, 2016, LIBOR was 0.77%. The interest rate spread is subject to change based on our maximum total indebtedness ratio. For more information, see note 10(e), Debt Financial Covenants .
(2) In the first quarter of 2016, we adopted ASU-2015-03, which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying value of the respective debt liability and is applied on a retrospective basis.
The weighted average borrowings outstanding under the unsecured revolving credit facility were $154.9 million with a weighted average interest rate of 1.9% during 2016 compared with $165.5 million and 1.9%, respectively, during 2015. Our maximum outstanding borrowings were $204.0 million and $218.0 million during 2016 and 2015, respectively. At December 31, 2016, outstanding borrowings under the unsecured revolving credit facility were $144.0 million with a weighted average interest rate of 2.2%. Our outstanding borrowings under the unsecured revolving credit facility do not include $2.4 million of unamortized deferred financing costs that are deducted from the facilitys balance in the December 31, 2016 consolidated balance sheet in accordance with ASU 2015-03, which we adopted in the first quarter of 2016. At December 31, 2016, LIBOR was 0.77% and the applicable spread on our unsecured revolving credit facility was 150 basis points. The available capacity under the unsecured revolving credit facility was $150.9 million as of the date of this filing. We are required to pay a commitment fee at an annual rate of 0.15% of the unused capacity if our usage exceeds 50% of our total capacity under the revolving credit facility, or 0.25% if our usage does not exceed 50%. For more information, see note 10(e) Debt Financial Covenants . As of December 31, 2016, we were in compliance with all the financial covenants of the unsecured revolving credit facility.
(d) Interest Rate Swap Agreements
At December 31, 2016, we fixed LIBOR, at a weighted average interest rate of 1.4%, on $240.0 million of our variable rate debt through nine interest rate swap agreements. In July 2016, two swaps that together fixed LIBOR at a weighted average interest rate of 1.8% on $60.0 million of variable rate debt expired. See note 11, Derivative Instruments , for more information about our interest rate swap agreements.
(e) Financial Covenants
The credit agreement governing our unsecured revolving credit facility and unsecured term loan contains various restrictive covenants, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. The agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations under the agreement to be immediately due and payable
Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. These covenants relate to our allowable leverage, minimum tangible net worth, fixed charge coverage and other financial metrics. As of December 31, 2016, we were in compliance with the covenants of our amended, restated and consolidated unsecured revolving credit facility and unsecured term loan, the 440 First Street, NW Construction Loan and the Northern Virginia Construction Loan.
Our continued ability to borrow under the unsecured revolving credit facility is subject to compliance with financial and operating covenants, and a failure to comply with any of these covenants could result in a default under the credit facility.
These debt agreements also contain cross-default provisions that would be triggered if we were in default under other loans, including mortgage loans, in excess of certain amounts. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our shareholders.
Our unsecured revolving credit facility and unsecured term loan are subject to interest rate spreads that float based on the quarterly measurement of our maximum consolidated total indebtedness to gross asset value ratio. Based on our leverage ratio at December 31, 2016, the applicable interest rate spreads on the unsecured revolving credit facility and the unsecured term loan will remain unchanged.
(f) Aggregate Debt Maturities
Our aggregate debt maturities as of December 31, 2016, are as follows (dollars in thousands):
|
|
Debt Maturities |
||
2017 |
|
$ |
97,672 |
|
2018 |
|
2,354 |
|
|
2019 |
|
181,055 |
|
|
2020 |
|
137,203 |
|
|
2021 |
|
101,598 |
|
|
Thereafter |
|
223,525 |
|
|
Total contractual principal balance |
|
$ |
743,407 |
|
Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using the effective interest method. These costs are presented as a direct deduction from the carrying value of the respective debt liability (dollars in thousands).
|
|
Deferred
|
||
2017 |
|
$ |
1,540 |
|
2018 |
|
1,399 |
|
|
2019 |
|
1,365 |
|
|
2020 |
|
400 |
|
|
2021 |
|
400 |
|
|
Thereafter |
|
1,132 |
|
|
Total deferred financing costs |
|
$ |
6,236 |
|
(11) Derivative Instruments
Our interest rate swap agreements are designated as cash flow hedges and we record the effective portion of any unrealized gains associated with the change in fair value of the swap agreements within Accumulated other comprehensive loss and Prepaid expenses and other assets and the effective portion of any unrealized losses within Accumulated other comprehensive loss and Accounts payable and other liabilities on our consolidated balance sheets. We record our proportionate share of any unrealized gains or losses on our cash flow hedges associated with our unconsolidated joint ventures within Accumulated other comprehensive loss and Investment in affiliates on our consolidated balance sheets. We record any gains or losses incurred as a result of each interest rate swap agreements fixed rate deviating from our respective loans contractual rate within Interest expense in our consolidated statements of operations. We did not have any material ineffectiveness associated with our cash flow hedges in 2016, 2015 and 2014.
We enter into interest rate swap agreements to hedge our exposure on our variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate; however, the swap agreements do not affect the contractual spreads associated with each variable debt instruments applicable interest rate. At December 31, 2016, we fixed LIBOR at a weighted average interest rate of 1.4% on $240.0 million of our variable rate debt through nine interest rate swap agreements that are summarized below (dollars in thousands):
Maturity Date |
|
Notional
|
|
Interest Rate
|
|
Fixed LIBOR
|
|||||
July 2017 |
|
$ |
30,000 |
|
|
LIBOR |
|
|
2.093 |
% |
|
July 2017 |
|
30,000 |
|
|
LIBOR |
|
|
2.093 |
% |
|
|
July 2017 |
|
25,000 |
|
|
LIBOR |
|
|
1.129 |
% |
|
|
July 2017 |
|
12,500 |
|
|
LIBOR |
|
|
1.129 |
% |
|
|
July 2017 |
|
50,000 |
|
|
LIBOR |
|
|
0.955 |
% |
|
|
July 2018 |
|
12,500 |
|
|
LIBOR |
|
|
1.383 |
% |
|
|
July 2018 |
|
30,000 |
|
|
LIBOR |
|
|
1.660 |
% |
|
|
July 2018 |
|
25,000 |
|
|
LIBOR |
|
|
1.394 |
% |
|
|
July 2018 |
|
25,000 |
|
|
LIBOR |
|
|
1.135 |
% |
|
|
Total/Weighted Average |
|
$ |
240,000 |
|
|
|
|
|
1.442 |
% |
|
In July 2016, two swap agreements that together fixed LIBOR at a weighted average interest rate of 1.8% on $60.0 million of variable rate debt expired.
Amounts reported in Accumulated other comprehensive loss on our consolidated balance sheet at December 31, 2016 related to derivatives will be reclassified to Interest expense on our consolidated statements of operations as interest payments are made on our variable-rate debt. We reclassified accumulated other comprehensive losses as an increase to interest expense of $2.8 million, $4.0 million and $4.1 million in 2016, 2015 and 2014, respectively. At December 31, 2016, we estimated that $0.9 million of our accumulated other comprehensive loss will be reclassified as an increase to interest expense over the following twelve months.
(12) Fair Value Measurements
Our application of GAAP outlines a valuation framework and creates a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and a reporting entitys own assumptions about market data (unobservable inputs). The required disclosures increase the consistency and comparability of fair value measurements and the related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability between willing third parties at the measurement date (an exit price). In accordance with GAAP, certain assets and liabilities must be measured at fair value, and we provide the necessary disclosures that are required for items measured at fair value as outlined in the accounting requirements regarding fair value.
Financial assets and liabilities, as well as those non-financial assets and liabilities requiring fair value measurement, are measured using inputs from three levels of the fair value hierarchy.
The three levels are as follows:
Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs, only used to the extent that observable inputs are not available, reflect our assumptions about the pricing of an asset or liability.
In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of our consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of December 31, 2016 and 2015 (dollars in thousands):
|
|
Balance at
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
||||||||
Recurring Measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative instrument-swap liabilities |
|
$ |
906 |
|
|
$ |
|
|
|
$ |
906 |
|
|
$ |
|
|
|
|
Balance at
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
||||||||
Non-recurring Measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Impaired real estate assets |
|
$ |
104,625 |
|
|
$ |
|
|
|
$ |
90,625 |
|
|
$ |
14,000 |
|
Recurring Measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative instrument-swap liabilities |
|
2,491 |
|
|
|
|
|
2,491 |
|
|
|
|
||||
We did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured at fair value on a recurring basis during the years ended December 31, 2016 and 2015. Also, no transfers into or out of fair value measurement levels for assets or liabilities that are measured on a recurring basis occurred during the years ended December 31, 2016 and 2015.
Impairment of Rental Property
We regularly review market conditions for possible impairment of a propertys carrying value. When circumstances such as adverse market conditions, changes in managements intended holding period or potential sale to a third party indicate a possible impairment of a property, an impairment analysis is performed.
In March 2016, we sold our NOVA Non-Core Portfolio, which is located in our Northern Virginia reporting segment. Based on the anticipated sales price, less estimated selling costs, we recorded an impairment charge of $26.9 million for the fourth quarter of 2015, and we recorded an additional loss on the sale of $1.2 million in the first quarter of 2016. See note 9, Dispositions for more information.
CACI International, which fully leased One Fair Oaks in our Northern Virginia reporting segment, had a lease that terminated on December 31, 2016. In connection with our fourth quarter reporting for 2015, we evaluated the potential loss of cash flow at One Fair Oaks and the anticipated challenges of re-leasing the property, and as a result, we recorded an impairment charge of $33.9 million to bring the property to its estimated fair value. We estimated the fair value of the property using a discounted cash flow analysis and comparable sales information. In our analysis, we estimated the future net cash flows from the property using an income-based valuation of the building as vacant. The expected useful life and holding period was based on the age of the property and our current plan for the property as well as experience with similar properties. The capitalization rate was estimated using rates from external market research and comparable market transactions, and the discount rate was estimated using a risk adjusted rate of return. On January 9, 2017, we sold One Fair Oaks for net proceeds of $13.3 million. See note 9, Dispositions for more information.
We incurred impairment charges of $2.8 million, $60.8 million and $4.0 million during 2016, 2015 and 2014, respectively. The total impairment charges incurred during 2016 related to our sale of Storey Park in July 2016 and during 2015 related to the aforementioned NOVA Non-Core Portfolio and One Fair Oaks, which are all reflected within continuing operations in our consolidated statements of operations. The $4.0 million of impairment charges incurred during 2014 related to disposed properties that are reflected within continuing operations on our consolidated statements of operations. See note 9, Dispositions , for more information.
Interest Rate Derivatives
At December 31, 2016, we had hedged $240.0 million of our variable rate debt through nine interest rate swap agreements. See note 11, Derivative Instruments, for more information about our interest rate swap agreements.
The interest rate derivatives are fair valued based on prevailing market yield curves on the measurement date and also incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees. We use a third party to assist in valuing our interest rate swap agreements. A daily snapshot of the market is taken to obtain close of business rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their historical values. Any rate that has changed by more than normal mean and related standard deviation would be considered an outlier and flagged for further investigation. The rates are then compiled through a valuation process that generates daily valuations, which are used to value our interest rate swap agreements. Our interest rate swap derivatives are effective cash flow hedges and the effective portion of the change in fair value is recorded in the equity section of our consolidated balance sheets as Accumulated other comprehensive loss.
Financial Instruments
The carrying amounts of cash equivalents, accounts and other receivables, accounts payable and other liabilities, with the exception of any items listed above, approximate their fair values due to their short-term maturities. We determine the fair value of our notes receivable and debt instruments by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. We deem the fair value measurement of our debt instruments as a Level 2 measurement as we use quoted interest rates for similar debt instruments to value our debt instruments. We also use quoted market interest rates for similar notes to value our notes receivable, which we consider a Level 2 measurement as we do not believe notes receivable trade in an active market.
The carrying amount and estimated fair value of our notes receivable and debt instruments at December 31 are as follows (amounts in thousands):
|
|
2016 |
|
2015 |
||||||||||||
|
|
Carrying Value (1) |
|
Fair Value |
|
Carrying Value (1) |
|
Fair Value |
||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Notes receivable (2) |
|
$ |
|
|
|
$ |
|
|
|
$ |
34,000 |
|
|
$ |
34,000 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage debt (3) |
|
$ |
299,407 |
|
|
$ |
300,927 |
|
|
$ |
312,216 |
|
|
$ |
298,541 |
|
Unsecured term loan |
|
300,000 |
|
|
300,000 |
|
|
300,000 |
|
|
300,000 |
|
||||
Unsecured revolving credit facility |
|
144,000 |
|
|
144,000 |
|
|
120,000 |
|
|
120,000 |
|
||||
Total |
|
$ |
743,407 |
|
|
$ |
744,927 |
|
|
$ |
732,216 |
|
|
$ |
718,541 |
|
(1) In the first quarter of 2016, we adopted ASU 2015-03, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the respective debt liability and which is applied on a retrospective basis. The debt balances exclude a combined total of $6.2 million and $8.0 million of unamortized deferred financing costs at December 31, 2016 and 2015, respectively.
(2) The note receivable was prepaid on June 2, 2016. See note 5, Notes Receivable , for more information regarding the prepayment of the note receivable.
(3) Includes $0.2 million of mortgage debt that was classified within Liabilities held-for-sale on our consolidated balance sheet at December 31, 2015. See note 9, Dispositions for more information.
(13) Commitments and Contingencies
(a) Operating Leases
Our rental properties are subject to non-cancelable operating leases generating future minimum contractual rent payments due from tenants, which as of December 31, 2016 are as follows (dollars in thousands):
|
|
Future minimum
|
||
2017 |
|
$ |
114,009 |
|
2018 |
|
106,865 |
|
|
2019 |
|
96,101 |
|
|
2020 |
|
82,139 |
|
|
2021 |
|
66,787 |
|
|
Thereafter |
|
195,825 |
|
|
|
|
$ |
661,726 |
|
Our consolidated properties were 92.6% occupied by 384 tenants at December 31, 2016. We do not include square footage of properties in development or redevelopment in our occupancy calculation. At December 31, 2016, none of our 6.7 million square feet owned through our properties was in development or redevelopment.
We rent office space for our corporate headquarters under a non-cancelable operating lease, which we entered into in 2005. The lease agreement for our corporate headquarters will expire on January 31, 2021.
During the fourth quarter of 2012, we subleased 5,000 square feet of our corporate office space to one tenant, which commenced in January 2013. Subsequent to commencement of the sublease, we entered into two amendments to the sublease, which expanded the subleased premise by 4,000 square feet with the last sublease amendment commencing in December 2015. The subtenants lease will expire in January 2018.
Rent expense incurred under the terms of the corporate office leases, net of subleased revenue, was $1.5 million, $1.6 million and $1.8 million for the years ended December 31, 2016, 2015 and 2014.
Future minimum rental payments under our corporate office leases as of December 31, 2016 are summarized as follows, net of sublease revenue (dollars in thousands):
|
|
Future minimum
|
||
2017 |
|
$ |
1,469 |
|
2018 |
|
1,906 |
|
|
2019 |
|
1,995 |
|
|
2020 |
|
2,049 |
|
|
2021 |
|
175 |
|
|
|
|
$ |
7,594 |
|
(b) Legal Proceedings
We are subject to legal proceedings and claims arising in the ordinary course of our business, for which, we carry various forms of insurance to protect the Company. In the opinion of our management and legal counsel, the amount of ultimate liability with respect to these claims will not have a material impact on our financial position, results of operations or cash flows.
(c) Capital Commitments
As of December 31, 2016, we had contractual construction in progress obligations, which included amounts accrued at December 31, 2016, of $3.1 million. The amount of contractual construction in progress obligations are primarily related to development activities at 540 Gaither Road at Redland in our Maryland reporting segment. As of December 31, 2016, we had contractual rental property and furniture, fixtures and equipment obligations of $5.5 million outstanding, which included amounts accrued at December 31, 2016. The amount of contractual rental property and furniture, fixtures and equipment obligations at December 31, 2016 are related to tenant improvement and capital improvement costs for various properties across our reporting segments, including significant tenant improvements at Atlantic Corporate Park and capital improvements at 11 Dupont Circle, NW. We anticipate meeting our contractual obligations related to our construction activities with cash from our operating activities. In the event cash from our operating activities is not sufficient to meet our contractual obligations, we can access additional capital through our unsecured revolving credit facility.
We remain liable, solely to the extent of our proportionate ownership percentage, to fund any capital shortfalls or commitments from properties owned through unconsolidated joint ventures.
We have various obligations to certain local municipalities associated with our development projects that will require completion of specified site improvements, such as sewer and road maintenance, grading and other general landscaping work. As of December 31, 2016, we remained liable to those local municipalities for $2.3 million in the event that we do not complete the specified work. We intend to complete the site improvements in satisfaction of these obligations.
(d) Insurance
We carry insurance coverage on our properties with policy specifications and insured limits that we believe are adequate given the relative risk of loss, cost of the coverage and standard industry practice. However, certain types of losses (such as from terrorism, earthquakes and floods) may be either uninsurable or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity and floods. Should a property sustain damage as a result of a terrorist act, earthquake or flood, we may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties.
(14) Equity
In December 2015, our Board of Trustees authorized the redemption of some or all of our 6.4 million outstanding 7.750% Series A Preferred Shares. On January 19, 2016 and April 27, 2016, we used proceeds from dispositions to redeem 2.2 million shares and 3.6 million shares, respectively, of our 7.750% Series A Preferred Shares at a redemption price of $25.00 per share, plus accrued dividends up to the applicable dates of redemption. On July 6, 2016, we used proceeds from the repayment of the 950 F Street, NW mezzanine loan to redeem the remaining 0.6 million outstanding shares of our 7.750% Series A Preferred Shares at a redemption price of $25.00 per share, plus accrued dividends up to the date of redemption. The 7.750% Series A Preferred Shares (NYSE: FPO-PA) were delisted from trading on the New York Stock Exchange (the NYSE) upon redemption of the remaining 0.6 million outstanding shares on July 6, 2016.
In July 2015, our Board of Trustees authorized a share repurchase program that allowed us to acquire up to five million of our common shares of beneficial interest from time to time through July 2016 in open market transactions at prevailing prices or in negotiated private transactions. We were not obligated to acquire any particular amount of common shares and the share repurchase program was subject to suspension by the Board of Trustees at any time. During 2015, we repurchased 924,198 shares at a weighted average share price of $10.99 for a total purchase price of $10.2 million, utilizing proceeds from dispositions. During the year ended December 31, 2016, we did not repurchase any common shares under the share repurchase program. We are no longer authorized to repurchase common shares under the previously authorized share repurchase program, which expired at the end of July 2016.
We declared and paid total dividends of $0.45 per common share to common shareholders during 2016 and $0.60 per common share to common shareholders during both 2015 and 2014. During 2016, we declared and paid accrued dividends at a rate of 7.750% on the $25 face value per share of our 7.750% Series A Preferred Shares. The 7.750% Series A Preferred Shares were redeemed during 2016 with the last redemption occurring on July 6, 2016, at which time our 7.750% Series A Preferred Shares were delisted from the NYSE. All 7.750% Series A Preferred Shares redeemed during 2016 received a payment of dividends accrued up to, but not including, their applicable date of redemption. We declared and paid dividends of $1.9375 per share on our Series A Preferred Shares during both 2015 and 2014. On January 24, 2017, we declared a dividend of $0.10 per common share, equating to an annualized dividend of $0.40 per common share. The dividend was paid on February 15, 2017 to common shareholders of record as of February 8, 2017. Dividends on all non-vested share awards are recorded as a reduction of shareholders equity. For each dividend paid by us on our common shares and, when applicable, preferred shares, the Operating Partnership distributes an equivalent distribution on our common and preferred Operating Partnership units, respectively.
Our unsecured revolving credit facility and unsecured term loan, the 440 First Street, NW Construction Loan and the Northern Virginia Construction Loan contain certain restrictions that include, among other things, requirements to maintain specified coverage ratios and other financial covenants, which may limit our ability to make distributions to our common and preferred shareholders, except for distributions required to maintain our qualification as a REIT.
For federal income tax purposes, dividends paid to shareholders may be characterized as ordinary income, return of capital or capital gains. The characterization of the dividends declared on our common and preferred shares for 2016, 2015 and 2014 are as follows:
|
|
Common Shares |
|
Preferred Shares |
||||||||||||||
|
|
2016 |
|
2015 |
|
2014 |
|
2016 |
|
2015 |
|
2014 |
||||||
Ordinary income (1) |
|
|
|
|
52.01 |
% |
|
72.42 |
% |
|
|
|
|
72.89 |
% |
|
100.00 |
% |
Return of capital |
|
100.00 |
% |
|
28.64 |
% |
|
27.58 |
% |
|
100.00 |
% |
|
|
|
|
|
|
Capital gains |
|
|
|
|
19.35 |
% |
|
|
|
|
|
|
|
27.11 |
% |
|
|
|
(1) The dividends classified above as ordinary income do not represent qualified dividend income and, therefore, are not eligible for reduced rates.
(15) Noncontrolling Interests
(a) Noncontrolling Interests in the Operating Partnership
Noncontrolling interests relate to the common interests in the Operating Partnership not owned by us. Interests in the Operating Partnership are owned by limited partners who contributed buildings and other assets to the Operating Partnership in exchange for common Operating Partnership units. Limited partners have the right to tender their units for redemption in exchange for, at our option, our common shares on a one-for-one basis or cash based on the fair value of our common shares at the date of redemption. Unitholders receive a distribution per unit equivalent to the dividend per common share. Differences between amounts paid to redeem noncontrolling interests and their carrying values are charged or credited to equity. As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests are recorded outside of permanent equity.
Noncontrolling interests are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. Based on the closing price of our common shares at December 31, 2016, the cost to acquire, through cash purchase or issuance of our common shares, all of the outstanding common Operating Partnership units not owned by us would be $27.9 million. At December 31, 2016 and 2015, we recorded adjustments of $6.1 million and $4.0 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.
We owned 95.8% of the outstanding common Operating Partnership units at December 31, 2016 and 95.7% of the outstanding common Operating Partnership units at December 31, 2015 and 2014.
At December 31, 2016, 2,545,602 of the total common Operating Partnership units, or 4.2%, were not owned by us. During 2016 and 2015, 73,467 and 11,508 common Operating Partnership units, respectively were redeemed with available cash. There were no common Operating Partnership units redeemed for cash in 2014. No common Operating Partnership units were redeemed for common shares in 2016, 2015 or 2014. During the first quarter of 2014, we issued 3,125 common Operating Partnership units to the seller of 840 First Street, NE to satisfy a contingent consideration obligation related to the acquisition of the property.
The redeemable noncontrolling interests in the Operating Partnership for the three years ended December 31 are as follows (dollars in thousands):
|
|
Redeemable
|
|
||
Balance at December 31, 2014 |
|
$ |
33,332 |
|
|
Net loss |
|
(2,056 |
) |
|
|
Changes in ownership, net |
|
(931 |
) |
|
|
Distributions to owners |
|
(1,574 |
) |
|
|
Other comprehensive income |
|
42 |
|
|
|
Balance at December 31, 2015 |
|
28,813 |
|
|
|
Net loss |
|
(428 |
) |
|
|
Changes in ownership, net |
|
957 |
|
|
|
Distributions to owners |
|
(1,166 |
) |
|
|
Other comprehensive income |
|
68 |
|
|
|
Balance at December 31, 2016 |
|
$ |
28,244 |
|
|
(b) Noncontrolling Interests in a Consolidated Partnership
When we are deemed to have a controlling interest in a partially-owned entity, we will consolidate all of the entitys assets, liabilities and operating results within our consolidated financial statements. The net assets contributed to the consolidated entity by the third party, if any, will be reflected within permanent equity in our consolidated balance sheets to the extent they are not mandatorily redeemable. The amount will be recorded based on the third partys initial investment in the consolidated entity and will be adjusted to reflect the third partys share of earnings or losses in the consolidated entity and any distributions received or additional contributions made by the third party. The earnings or losses from the entity attributable to the third party are recorded as a component of Net loss (income) attributable to noncontrolling interests on our consolidated statements of operations.
On August 4, 2011, we formed a joint venture, in which we had a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment, which was placed into development in August 2013. Storey Park was sold July 25, 2016, at which time all assets and liabilities owned by the joint venture were either sold or settled at the time of disposition and the remaining proceeds from the sale were distributed to the joint venture partners in accordance with the terms of the joint venture agreement. See note 9, Dispositions , for more information.
(16) Benefit Plans
(a) Share-Based Payments
We have issued share-based payments in the form of stock options and non-vested shares as permitted in our 2003 Equity Compensation Plan (the 2003 Plan), which was amended in 2005, 2007 and July 2013, and expired in September 2013. We have also issued share-based compensation in the form of stock options and non-vested shares as permitted in our 2009 Equity Compensation Plan (the 2009 Plan), which was amended in 2010, 2011, 2013 and 2016. In 2016 and 2011, we received shareholder approval to authorize an additional 4.1 million and 4.5 million shares, respectively, for issuance under the 2009 Plan. The compensation plans provide for the issuance of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Stock options granted under the plans are non-qualified, and all employees and non-employee trustees are eligible to receive grants. Under the terms of the amendment to the 2009 Plan, every stock option granted by us reduces the awards available for issuance on a one-for-one basis. However, for every restricted award issued, the awards available for issuance are reduced by 3.44 awards. At December 31, 2016, we had 11.5 million share
equity awards authorized under the 2009 Plan and, of those awards, 4.8 million common share equity awards remained available for issuance by us.
We record costs related to our share-based compensation based on the grant-date fair value calculated in accordance with GAAP. We recognize share-based compensation costs on a straight-line basis over the requisite service period for each award and these costs are recorded within General and administrative expense or Property operating expense in our consolidated statements of operations based on the employees job function.
Stock Options Summary
As of December 31, 2016, 2.4 million stock options have been awarded of which 0.9 million stock options remained outstanding. During the first quarter of 2016, we issued 95,000 stock options to our non-officer employees. The stock options have a ten-year contractual life and vest 25% on the first anniversary of the date of grant and 6.25% in each subsequent calendar quarter. We recognized compensation expense associated with stock option awards in the amount of $0.2 million, $1.2 million and $0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. Compensation expense associated with our stock option awards for the year ended December 31, 2015 includes a $0.8 million charge related to the accelerated vesting of 0.3 million options in accordance with the separation agreement for our former Chief Executive Officer.
A summary of our stock option activity for the three years ended December 31 is presented below:
|
|
Options |
|
Weighted
|
|
Weighted Average
|
|
Aggregate
|
||||
Outstanding at December 31, 2013 |
|
1,089,292 |
|
|
$ |
15.83 |
|
|
6.6 years |
|
$ |
109,151 |
Granted |
|
135,250 |
|
|
11.61 |
|
|
|
|
|
||
Exercised |
|
(17,171 |
) |
|
10.10 |
|
|
|
|
|
||
Expired |
|
(57,500 |
) |
|
19.08 |
|
|
|
|
|
||
Forfeited |
|
(98,512 |
) |
|
14.49 |
|
|
|
|
|
||
Outstanding at December 31, 2014 |
|
1,051,359 |
|
|
15.33 |
|
|
6.3 years |
|
$ |
181,352 |
|
Granted |
|
119,500 |
|
|
12.48 |
|
|
|
|
|
||
Exercised |
|
(2,750 |
) |
|
9.30 |
|
|
|
|
|
||
Expired |
|
(59,000 |
) |
|
22.44 |
|
|
|
|
|
||
Forfeited |
|
(145,971 |
) |
|
15.06 |
|
|
|
|
|
||
Outstanding at December 31, 2015 |
|
963,138 |
|
|
14.59 |
|
|
6.1 years |
|
$ |
59,002 |
|
Granted |
|
95,000 |
|
|
11.03 |
|
|
|
|
|
||
Expired |
|
(11,850 |
) |
|
26.60 |
|
|
|
|
|
||
Forfeited |
|
(140,851 |
) |
|
12.87 |
|
|
|
|
|
||
Outstanding at December 31, 2016 |
|
905,437 |
|
|
$ |
14.34 |
|
|
4.7 years |
|
$ |
35,700 |
Exercisable at December 31: |
|
|
|
|
|
|
|
|
|
|
||
2016 |
|
773,067 |
|
|
$ |
14.81 |
|
|
4.1 years |
|
$ |
35,700 |
2015 |
|
805,259 |
|
|
15.06 |
|
|
5.6 years |
|
59,002 |
||
2014 |
|
552,620 |
|
|
16.49 |
|
|
5.1 years |
|
102,039 |
||
Options expected to vest, subsequent to December 31, 2016 |
|
110,528 |
|
|
$ |
11.64 |
|
|
8.3 years |
|
$ |
|
The following table summarizes information about our stock options at December 31, 2016:
|
|
|
|
Options Outstanding |
|
Options Exercisable |
||||||||
Year
|
|
Range of
|
|
Options |
|
Weighted Average
|
|
Weighted
|
|
Options |
|
Weighted
|
||
2007 |
|
$29.11 - 29.24 |
|
21,500 |
|
0.0 years |
|
$ |
29.14 |
|
21,500 |
|
$ |
29.14 |
2008 |
|
17.29 |
|
22,250 |
|
1.0 year |
|
17.29 |
|
22,250 |
|
17.29 |
||
2009 |
|
9.30 |
|
21,377 |
|
2.0 years |
|
9.30 |
|
21,377 |
|
9.30 |
||
2010 |
|
12.57 |
|
25,892 |
|
3.0 years |
|
12.57 |
|
25,892 |
|
12.57 |
||
2011 |
|
17.12 |
|
27,500 |
|
4.0 years |
|
17.12 |
|
27,500 |
|
17.12 |
||
2012 |
|
13.54 - 15.00 |
|
537,750 |
|
3.9 years |
|
14.90 |
|
537,750 |
|
14.87 |
||
2013 |
|
12.73 |
|
43,686 |
|
6.0 years |
|
12.73 |
|
40,975 |
|
12.73 |
||
2014 |
|
11.61 |
|
61,936 |
|
7.0 years |
|
11.61 |
|
42,743 |
|
11.61 |
||
2015 |
|
12.48 |
|
75,046 |
|
8.0 years |
|
12.48 |
|
33,080 |
|
12.48 |
||
2016 |
|
11.03 |
|
68,500 |
|
9.0 years |
|
11.03 |
|
|
|
11.03 |
||
|
|
|
|
905,437 |
|
4.7 years |
|
14.34 |
|
773,067 |
|
14.81 |
||
As of December 31, 2016, we had $0.2 million of unrecognized compensation cost, net of estimated forfeitures, related to stock option awards. We anticipate this cost will be recognized over a weighted average period of approximately 2.2 years. We calculate the grant date fair value of option awards using a Black-Scholes option-pricing model. Expected volatility is based on an assessment of our realized volatility over the preceding period that is equivalent to the awards expected life, which in our opinion, gives an accurate indication of future volatility. The expected term represents the period of time the options are anticipated to remain outstanding as well as our historical experience for groupings of employees that have similar behavior and are considered separately for valuation purposes. The risk-free rate is based on the U.S. Treasury rate at the time of grant for instruments of similar term.
The weighted average assumptions used in the fair value determination of stock options granted to employees for the years ended December 31 are summarized as follows:
|
|
2016 |
|
2015 |
|
2014 |
Risk-free interest rate |
|
1.73% |
|
1.61% |
|
1.72% |
Expected volatility |
|
27.0% |
|
29.2% |
|
39.0% |
Expected dividend yield |
|
3.63% |
|
4.79% |
|
4.66% |
Weighted average expected life of options |
|
5.0 years |
|
5.0 years |
|
5.0 years |
The weighted average grant date fair value of the stock options issued in 2016, 2015 and 2014 was $1.87, $1.96 and $2.67, respectively.
Option Exercises
No options were exercised during 2016. We received $26 thousand and $174 thousand from the exercise of stock options during 2015 and 2014, respectively. Shares issued as a result of stock option exercises are provided by the issuance of new shares. The total intrinsic value of options exercised was $7 thousand and $43 thousand during 2015 and 2014, respectively.
Non-Vested Share Awards
We issue non-vested common share awards that either vest over a specific time period that is identified at the time of issuance or vest upon the achievement of specific performance goals that are identified at the time of issuance. We issue new common shares, subject to restrictions, upon each grant of non-vested common share awards. In January 2016, we granted a total of 290,000 non-vested common shares to our executive officers. The awards have a five-year term and vest in one-quarter increments on the second through fifth anniversaries of the grant date. In February 2016, we granted a total of 103,429 non-
vested common shares to our officers, which will vest ratably on an annual basis over a three-year period from the grant date. In July 2016, we granted a total of 181,357 non-vested performance-based common shares to our officers. The number of shares that will be earned will be determined at the end of 2018, based upon the achievement of specified market performance goals measured over the performance period from February 22, 2016 (the date we announced our 2016 Strategic Plan) through December 31, 2018. Of the shares earned, 50% will vest on February 1, 2019 and the remaining earned shares will vest on February 1, 2020. Any shares that are not earned will be forfeited.
In November 2015, we entered into separation agreements with our former Chief Executive Officer and Chief Investment Officer. Pursuant to the terms of their respective separation agreements, all of the former officers non-vested restricted share awards, which totaled an aggregate 229,171 restricted shares, vested on November 8, 2015, their date of separation. We incurred $1.2 million of compensation expense related to the accelerated vesting of the former officers non-vested restricted share awards.
Independent members of our Board of Trustees received annual grants of restricted common shares as a component of compensation for serving on our Board of Trustees. In May 2016, we granted 36,828 non-vested common shares to our non-employee trustees, all of which will vest on the earlier of the first anniversary of the grant date or the date of our 2017 annual meetings of our shareholders, subject to continued service by the trustee until that date. In October 2016, our Board of Trustees appointed a new non-employee trustee. We granted 3,508 non-vested common shares to the new trustee, which will vest on the earlier of May 24, 2017 or the date of our 2017 annual meetings of our shareholders, subject to continued service by the trustee until that date. We recognized $0.3 million of compensation expense associated with trustee restricted share awards for the year ended December 31, 2016, and $0.4 million for both years ended December 31, 2015 and 2014.
We recognized a total $2.1 million, $3.6 million and $3.2 million of compensation expense associated with all of our non-vested common share awards in 2016, 2015 and 2014, respectively. Compensation expense associated with our non-vested common shares for 2015 included $1.2 million of expense related to the accelerated vesting of the restricted shares associated with the departure of two former officers in 2015. Dividends on all non-vested common share awards are recorded as a reduction of equity. We apply the two-class method for determining EPS as our outstanding non-vested common shares with non-forfeitable dividend rights are considered participating securities. Our excess of dividends over earnings related to participating securities are shown as a reduction in net income or loss attributable to common shareholders in our computation of EPS.
A summary of our non-vested common share awards at December 31, 2016 is as follows:
|
|
Non-vested
|
|
Weighted Average
|
|
Non-vested at December 31, 2013 |
|
637,662 |
|
$ |
13.33 |
Granted |
|
164,675 |
|
12.84 |
|
Vested |
|
(137,924) |
|
14.21 |
|
Expired |
|
(29,514) |
|
10.21 |
|
Forfeited |
|
(11,478) |
|
13.04 |
|
Non-vested at December 31, 2014 |
|
623,421 |
|
13.16 |
|
Granted |
|
152,598 |
|
11.79 |
|
Vested |
|
(401,888) |
|
13.16 |
|
Expired |
|
(133,371) |
|
12.61 |
|
Forfeited |
|
(48,378) |
|
13.30 |
|
Non-vested at December 31, 2015 |
|
192,382 |
|
12.42 |
|
Granted |
|
615,122 |
|
9.40 |
|
Vested |
|
(91,007) |
|
12.14 |
|
Expired |
|
(1,630) |
|
12.21 |
|
Forfeited |
|
(3,493) |
|
9.54 |
|
Non-vested at December 31, 2016 |
|
711,374 |
|
$ |
9.85 |
As of December 31, 2016, we had $4.9 million of unrecognized compensation cost related to non-vested common shares. We anticipate this cost will be recognized over a weighted average period of 3.2 years.
We value our non-vested time-based awards issued in 2016, 2015 and 2014 at the grant date fair value, which is the market price of our common shares. For the non-vested performance-based common share awards granted in July 2016, we used a Monte Carlo Simulation (risk-neutral approach) to determine the number of shares that may be issued pursuant to the award as these awards were deemed to have a market condition. The risk-free interest rate assumptions used in the Monte Carlo Simulation were determined based on the zero coupon risk-free rate for the time frame of 0.25 years to 3 years, which ranged from 0.48% to 0.96%, respectively. The volatility used for our common share price in the Monte Carlo Simulation varied between 24.10% and 26.20%. We did not issue any non-vested performance-based awards in 2015 or 2014.
The weighted average grant date fair value of the shares issued in 2016, 2015 and 2014 were $9.40, $11.79 and $12.84, respectively. The total fair value of shares vested were $1.1 million, $5.3 million and $2.0 million during 2016, 2015 and 2014, respectively. We issue new shares, subject to restrictions, upon each grant of non-vested common share awards.
(b) 401(k) Plan
We have a 401(k) defined contribution plan covering all employees in accordance with the Internal Revenue Code. The maximum employer or employee contribution cannot exceed the IRS limits for the plan year. In 2014, we amended the eligibility requirements of the plan, allowing employees to contribute after 60 days of consecutive service. Employee contributions vest immediately. Employer contributions begin one year after the employees start of service and vest ratably over four years. For the three years ended December 31, 2016, 2015 and 2014, we matched up to 6% of each employees contributions. We pay for administrative expenses and matching contributions with available cash. Our plan does not allow for us to make additional discretionary contributions. Our contributions were $0.5 million for the year ended December 31, 2016 and $0.6 million for both of the years ended December 31, 2015 and 2014. The employer match payable to the 401(k) plan was fully funded as of December 31, 2016.
(c) Employee Share Purchase Plan
In 2009, our common shareholders approved the First Potomac Realty Trust 2009 Employee Share Purchase Plan (the Plan). The Plan allows participating employees to acquire our common shares, at a discounted price, through payroll deductions or cash contributions. Under the Plan, a total of 200,000 common shares may be issued and the offering periods of the Plan cannot exceed five years. Currently, each offering period commences on the first day of each calendar quarter (offering date) and ends on the last business day of the calendar quarter (purchase date) in which the offering period commenced. The purchase price at which common shares will be sold in any offering period will be the lower of: a) 85 percent of the fair value of common shares on the offering date or b) 85 percent of the fair value of the common shares on the purchase date. The first offering period began during the fourth quarter of 2009. We issued common shares of 7,585, 5,843 and 8,950 under the Plan during the years ended December 31, 2016, 2015 and 2014, respectively, which resulted in compensation expense totaling $10 thousand, $11 thousand and $20 thousand, respectively.
(17) Segment Information
Our reportable segments consist of four distinct reporting and operational segments within the greater Washington, D.C. region in which we operate: Washington, D.C., Maryland, Northern Virginia and Southern Virginia. We evaluate the performance of our segments based on the operating results of the properties located within each segment, which excludes large non-recurring gains and losses, gains or losses from sale of rental property, interest expense, general and administrative costs, acquisition costs or any other indirect corporate expense to the segments. In addition, the segments do not have significant non-cash items reporting in their operating results other than the impact of straight-line revenue and the amortization deferred market rents, deferred lease incentives and deferred tenant improvement reimbursements. There are no inter-segment sales or transfers recorded between segments.
The results of continuing operations for our four reporting segments for the three years ended December 31 are as follows (dollars in thousands):
|
|
2016 |
||||||||||||||||||
|
|
Washington, D.C. |
|
Maryland |
|
Northern Virginia |
|
Southern Virginia |
|
Consolidated |
||||||||||
Number of buildings |
|
6 |
|
|
34 |
|
|
15 |
|
|
19 |
|
|
74 |
|
|||||
Square feet |
|
918,266 |
|
|
1,886,183 |
|
|
1,885,958 |
|
|
2,023,858 |
|
|
6,714,265 |
|
|||||
Total revenues |
|
$ |
45,062 |
|
|
$ |
44,710 |
|
|
$ |
40,658 |
|
|
$ |
29,904 |
|
|
$ |
160,334 |
|
Property operating expense |
|
(11,538 |
) |
|
(9,794 |
) |
|
(9,716 |
) |
|
(7,506 |
) |
|
(38,554 |
) |
|||||
Real estate taxes and insurance |
|
(9,375 |
) |
|
(3,881 |
) |
|
(4,075 |
) |
|
(2,477 |
) |
|
(19,808 |
) |
|||||
Total property operating income |
|
$ |
24,149 |
|
|
$ |
31,035 |
|
|
$ |
26,867 |
|
|
$ |
19,921 |
|
|
101,972 |
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,862 |
) |
|||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,976 |
) |
|||||
Impairment of rental property |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,772 |
) |
|||||
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,931 |
) |
|||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,569 |
) |
||||
Total assets (1) |
|
$ |
445,528 |
|
|
$ |
332,655 |
|
|
$ |
302,769 |
|
|
$ |
161,563 |
|
|
$ |
1,260,247 |
|
Capital expenditures (2) |
|
$ |
13,971 |
|
|
$ |
5,308 |
|
|
$ |
33,847 |
|
|
$ |
3,269 |
|
|
$ |
56,931 |
|
|
|
2015 |
||||||||||||||||||
|
|
Washington, D.C. |
|
|
Maryland |
|
|
Northern Virginia |
|
|
Southern Virginia |
|
|
Consolidated |
|
|||||
Number of buildings (3) |
|
6 |
|
|
34 |
|
|
40 |
|
|
19 |
|
|
99 |
|
|||||
Square feet (3) |
|
918,375 |
|
|
1,885,630 |
|
|
2,661,448 |
|
|
2,023,639 |
|
|
7,489,092 |
|
|||||
Total revenues |
|
$ |
44,553 |
|
|
$ |
44,226 |
|
|
$ |
55,230 |
|
|
$ |
28,837 |
|
|
$ |
172,846 |
|
Property operating expense |
|
(11,363 |
) |
|
(11,457 |
) |
|
(13,540 |
) |
|
(7,733 |
) |
|
(44,093 |
) |
|||||
Real estate taxes and insurance |
|
(8,238 |
) |
|
(3,540 |
) |
|
(5,540 |
) |
|
(2,427 |
) |
|
(19,745 |
) |
|||||
Total property operating income |
|
$ |
24,952 |
|
|
$ |
29,229 |
|
|
$ |
36,150 |
|
|
$ |
18,677 |
|
|
109,008 |
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,624 |
) |
|||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,450 |
) |
|||||
Impairment of rental property |
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,826 |
) |
|||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
9,475 |
|
|||||
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
(607 |
) |
|||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(35,024 |
) |
||||
Total assets (1)(4) |
|
$ |
517,928 |
|
|
$ |
341,375 |
|
|
$ |
374,299 |
|
|
$ |
167,447 |
|
|
$ |
1,442,406 |
|
Capital expenditures (2) |
|
$ |
12,930 |
|
|
$ |
9,003 |
|
|
$ |
43,125 |
|
|
$ |
7,961 |
|
|
$ |
73,850 |
|
|
|
2014 |
||||||||||||||||||
|
|
Washington, D.C. |
|
Maryland |
|
Northern Virginia |
|
Southern Virginia |
|
Consolidated |
||||||||||
Number of buildings (3) |
|
6 |
|
|
38 |
|
|
49 |
|
|
38 |
|
|
131 |
|
|||||
Square feet (3) |
|
917,008 |
|
|
1,999,332 |
|
|
3,021,509 |
|
|
2,852,298 |
|
|
8,790,147 |
|
|||||
Total revenues |
|
$ |
33,959 |
|
|
$ |
45,767 |
|
|
$ |
53,645 |
|
|
$ |
28,281 |
|
|
$ |
161,652 |
|
Property operating expense |
|
(9,683 |
) |
|
(11,482 |
) |
|
(13,352 |
) |
|
(8,735 |
) |
|
(43,252 |
) |
|||||
Real estate taxes and insurance |
|
(5,583 |
) |
|
(3,907 |
) |
|
(5,592 |
) |
|
(2,278 |
) |
|
(17,360 |
) |
|||||
Total property operating income |
|
$ |
18,693 |
|
|
$ |
30,378 |
|
|
$ |
34,701 |
|
|
$ |
17,268 |
|
|
101,040 |
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,796 |
) |
|||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,156 |
) |
|||||
Acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,681 |
) |
|||||
Impairment of rental property |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,956 |
) |
|||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,108 |
|
|||||
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,484 |
|
|||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,043 |
|
||||
Total assets (1)(4) |
|
$ |
503,530 |
|
|
$ |
359,603 |
|
|
$ |
439,803 |
|
|
$ |
228,234 |
|
|
$ |
1,612,300 |
|
Capital expenditures (2) |
|
$ |
23,422 |
|
|
$ |
10,185 |
|
|
$ |
7,816 |
|
|
$ |
8,436 |
|
|
$ |
50,789 |
|
(1) Total assets include our investment in properties that are owned through joint ventures that are not consolidated within our consolidated financial statements. For more information on our unconsolidated investments, including locations within our reportable segments, see note 5, Investment in Affiliates . Corporate assets not allocated to any of our reportable segments totaled $17,732, $41,357 and $81,130 at December 31, 2016, 2015 and 2014, respectively.
(2) Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $536, $831 and $930 at December 31, 2016, 2015 and 2014, respectively.
(3) Excludes Storey Park, our 97% owned consolidated joint venture within our Washington, DC reporting segment, which was in development during 2014 and 2015 and was sold in July 2016.
(4) Total assets at December 31, 2015 and 2014 have been restated to exclude a total of $7.9 million and $6.2 million, respectively of unamortized deferred financing costs that are now deducted from the respective debt liability in accordance with ASU 2015-03, which we adopted in the first quarter of 2016.
(18) Quarterly Financial Information (unaudited)
|
|
2016 (1) |
||||||||||||||
|
|
First |
|
Second |
|
Third |
|
Fourth |
||||||||
(amounts in thousands, except per share amounts) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
||||||||
Revenues |
|
$ |
42,697 |
|
|
$ |
38,493 |
|
|
$ |
40,172 |
|
|
$ |
38,972 |
|
Operating expenses |
|
36,337 |
|
|
35,681 |
|
|
32,295 |
|
|
34,658 |
|
||||
Operating income |
|
6,360 |
|
|
2,812 |
|
|
7,877 |
|
|
4,314 |
|
||||
(Loss) income from continuing operations |
|
(101 |
) |
|
(1,992 |
) |
|
2,242 |
|
|
(1,717 |
) |
||||
Less: Net loss (income) attributable to noncontrolling interests |
|
147 |
|
|
390 |
|
|
(107 |
) |
|
71 |
|
||||
Net income (loss) attributable to First Potomac Realty Trust |
|
46 |
|
|
(1,602 |
) |
|
2,135 |
|
|
(1,646 |
) |
||||
Less: Dividends on preferred shares |
|
(2,248 |
) |
|
(794 |
) |
|
(11 |
) |
|
|
|
||||
Less: Issuance costs on redeemed preferred shares |
|
(1,904 |
) |
|
(3,095 |
) |
|
(517 |
) |
|
|
|
||||
Net (loss) income attributable to common shareholders |
|
$ |
(4,106 |
) |
|
$ |
(5,491 |
) |
|
$ |
1,607 |
|
|
$ |
(1,646 |
) |
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income |
|
$ |
(0.07 |
) |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
|
$ |
(0.03 |
) |
|
|
2015 (1) |
||||||||||||||
|
|
First |
|
Second |
|
Third |
|
Fourth |
||||||||
(amounts in thousands, except per share amounts) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
||||||||
Revenues |
|
$ |
43,849 |
|
|
$ |
43,039 |
|
|
$ |
42,854 |
|
|
$ |
43,104 |
|
Operating expenses |
|
40,016 |
|
|
37,268 |
|
|
37,079 |
|
|
102,375 |
|
||||
Operating income (loss) |
|
3,833 |
|
|
5,771 |
|
|
5,775 |
|
|
(59,271 |
) |
||||
Income (loss) from continuing operations |
|
1,099 |
|
|
476 |
|
|
3,997 |
|
|
(39,990 |
) |
||||
Loss from discontinued operations |
|
(607 |
) |
|
|
|
|
|
|
|
|
|
||||
Less: Net loss (income) attributable to noncontrolling interests |
|
112 |
|
|
114 |
|
|
(38 |
) |
|
1,870 |
|
||||
Net income (loss) attributable to First Potomac Realty Trust |
|
604 |
|
|
590 |
|
|
3,959 |
|
|
(38,120 |
) |
||||
Less: Dividends on preferred shares |
|
(3,100 |
) |
|
(3,100 |
) |
|
(3,100 |
) |
|
(3,100 |
) |
||||
Net (loss) income attributable to common shareholders |
|
$ |
(2,496 |
) |
|
$ |
(2,510 |
) |
|
$ |
859 |
|
|
$ |
(41,220 |
) |
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
(Loss) income from continuing operations |
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.72 |
) |
Loss from discontinued operations |
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
||||
Net (loss) income |
|
$ |
(0.04 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.72 |
) |
(1) These figures are rounded to the nearest thousand, which may impact cross-footing in reconciling to full year totals.
We did not sell any common shares in 2016 or 2015. The sum of the basic and diluted earnings per common share for the four quarters in the periods presented differs from the annual earnings per common share calculation due to the required method of computing the weighted average number of common shares in the respective periods.
SCHEDULE III
FIRST POTOMAC REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2016
(Amounts in thousands)
Property |
|
Location (1) |
|
Date Acquired |
|
Property Type (2) |
|
Encumbrances at
|
|
|
Maryland |
|
|
|
|
|
|
|
|
|
|
Snowden Center |
|
Columbia |
|
Oct 2002 |
|
BP |
|
$ |
|
|
Metro Park North |
|
Rockville |
|
Dec 2004 |
|
Office |
|
|
|
|
Gateway 270 West |
|
Clarksburg |
|
Jul 2006 |
|
BP |
|
|
|
|
Indian Creek Court |
|
Beltsville |
|
Aug 2006 |
|
BP |
|
|
|
|
Ammendale Commerce Center |
|
Beltsville |
|
Mar 2007 |
|
BP |
|
|
|
|
Annapolis Business Center |
|
Annapolis |
|
Jun 2007 |
|
Office |
|
|
|
|
Cloverleaf Center |
|
Germantown |
|
Oct 2009 |
|
Office |
|
|
|
|
Redland II & III |
|
Rockville |
|
Nov 2010 |
|
Office |
|
63,214 |
|
|
TenThreeTwenty |
|
Columbia |
|
Feb 2011 |
|
Office |
|
|
|
|
Hillside I and II |
|
Columbia |
|
Nov 2011 |
|
Office |
|
|
|
|
540 Gaither Road (Redland I) |
|
Rockville |
|
Oct 2013 |
|
Office |
|
|
|
|
Total Maryland |
|
|
|
|
|
|
|
63,214 |
|
|
Washington, D.C. |
|
|
|
|
|
|
|
|
|
|
500 First Street, NW |
|
Capitol Hill |
|
Jun 2010 |
|
Office |
|
|
|
|
440 First Street, NW |
|
Capitol Hill |
|
Dec 2010 |
|
Office |
|
32,216 |
|
|
1211 Connecticut Ave, NW |
|
CBD |
|
Dec 2010 |
|
Office |
|
28,503 |
|
|
840 First Street, NE |
|
NoMA |
|
Mar 2011 |
|
Office |
|
35,201 |
|
|
1401 K Street, NW |
|
East End |
|
Apr 2014 |
|
Office |
|
35,556 |
|
|
11 Dupont Circle, NW |
|
CBD |
|
Sep 2014 |
|
Office |
|
66,780 |
|
|
Total Washington, D.C. |
|
|
|
|
|
|
|
198,256 |
|
|
Northern Virginia |
|
|
|
|
|
|
|
|
|
|
Plaza 500 |
|
Alexandria |
|
Dec 1997 |
|
I |
|
|
|
|
403/405 Glenn Drive |
|
Sterling |
|
Oct 2005 |
|
BP |
|
|
|
|
Sterling Park Business Center |
|
Sterling |
|
Feb 2006 |
|
BP |
|
|
|
|
Davis Drive |
|
Sterling |
|
Aug 2006 |
|
BP |
|
|
|
|
Three Flint Hill |
|
Oakton |
|
Apr 2010 |
|
Office |
|
|
|
|
Atlantic Corporate Park |
|
Sterling |
|
Nov 2010 |
|
Office |
|
|
|
|
1775 Wiehle Avenue |
|
Reston |
|
Jun 2014 |
|
Office |
|
|
|
|
Northern Virginia build-to-suit |
|
Northern Virginia |
|
|
|
|
|
34,584 |
|
|
Total Northern Virginia |
|
|
|
|
|
|
|
34,584 |
|
|
Southern Virginia |
|
|
|
|
|
|
|
|
|
|
Crossways Commerce Center |
|
Chesapeake |
|
Dec 1999 |
|
BP |
|
|
|
|
Greenbrier Technology Center II |
|
Chesapeake |
|
Oct 2002 |
|
BP |
|
|
|
|
Norfolk Business Center |
|
Norfolk |
|
Oct 2002 |
|
BP |
|
|
|
|
Crossways II |
|
Chesapeake |
|
Oct 2004 |
|
BP |
|
|
|
|
Norfolk Commerce Park II |
|
Norfolk |
|
Oct 2004 |
|
BP |
|
|
|
|
1434 Crossways Boulevard |
|
Chesapeake |
|
Aug 2005 |
|
BP |
|
|
|
|
Crossways I |
|
Chesapeake |
|
Feb 2006 |
|
BP |
|
|
|
|
Crossways Commerce Center IV |
|
Chesapeake |
|
May 2006 |
|
BP |
|
|
|
|
Gateway II |
|
Norfolk |
|
Nov 2006 |
|
BP |
|
|
|
|
Greenbrier Circle Corporate Center |
|
Chesapeake |
|
Jan 2007 |
|
BP |
|
|
|
|
Greenbrier Technology Center I |
|
Chesapeake |
|
Jan 2007 |
|
BP |
|
|
|
|
Battlefield Corporate Center |
|
Chesapeake |
|
Oct 2010 |
|
BP |
|
3,353 |
|
|
Greenbrier Towers |
|
Chesapeake |
|
Jul 2011 |
|
Office |
|
|
|
|
Total Southern Virginia |
|
|
|
|
|
|
|
3,353 |
|
|
Land held for future development |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total Consolidated Portfolio |
|
|
|
|
|
|
|
$ |
299,407 |
|
Initial Costs |
|
Gross Amount at End of Year |
|||||||||||||||||
Land |
|
Building and
|
|
Since Acquisition |
|
Land |
|
Building and
|
|
Total |
|
Accumulated
|
|||||||
$ |
3,404 |
|
$ |
12,824 |
|
$ |
5,159 |
|
$ |
3,404 |
|
$ |
17,983 |
|
$ |
21,387 |
|
$ |
7,878 |
9,220 |
|
32,056 |
|
3,138 |
|
9,220 |
|
35,194 |
|
44,414 |
|
11,175 |
|||||||
18,302 |
|
20,562 |
|
9,049 |
|
18,302 |
|
29,611 |
|
47,913 |
|
8,741 |
|||||||
5,673 |
|
17,168 |
|
12,946 |
|
5,672 |
|
30,115 |
|
35,787 |
|
10,750 |
|||||||
2,398 |
|
7,659 |
|
6,763 |
|
2,398 |
|
14,422 |
|
16,820 |
|
6,275 |
|||||||
6,101 |
|
12,602 |
|
681 |
|
6,102 |
|
13,282 |
|
19,384 |
|
3,267 |
|||||||
7,097 |
|
14,211 |
|
3,144 |
|
7,097 |
|
17,355 |
|
24,452 |
|
3,539 |
|||||||
17,272 |
|
63,480 |
|
15,134 |
|
17,271 |
|
78,615 |
|
95,886 |
|
19,109 |
|||||||
2,041 |
|
5,327 |
|
14,403 |
|
2,041 |
|
19,730 |
|
21,771 |
|
4,626 |
|||||||
3,302 |
|
10,926 |
|
3,618 |
|
3,301 |
|
14,545 |
|
17,846 |
|
1,759 |
|||||||
6,458 |
|
19,831 |
|
616 |
|
6,753 |
|
20,152 |
|
26,905 |
|
3,346 |
|||||||
81,268 |
|
216,646 |
|
74,651 |
|
81,561 |
|
291,004 |
|
372,565 |
|
80,465 |
|||||||
25,806 |
|
33,883 |
|
628 |
|
25,995 |
|
34,322 |
|
60,317 |
|
7,048 |
|||||||
|
|
15,300 |
|
51,633 |
|
9,122 |
|
57,811 |
|
66,933 |
|
7,279 |
|||||||
27,077 |
|
17,520 |
|
11,937 |
|
27,077 |
|
29,457 |
|
56,534 |
|
4,790 |
|||||||
16,846 |
|
60,905 |
|
9,879 |
|
16,846 |
|
70,784 |
|
87,630 |
|
12,618 |
|||||||
29,506 |
|
23,269 |
|
12,809 |
|
29,506 |
|
36,078 |
|
65,584 |
|
2,875 |
|||||||
15,744 |
|
64,832 |
|
5,788 |
|
15,744 |
|
70,620 |
|
86,364 |
|
5,147 |
|||||||
114,979 |
|
215,709 |
|
92,674 |
|
124,290 |
|
299,072 |
|
423,362 |
|
39,757 |
|||||||
6,265 |
|
35,433 |
|
7,548 |
|
6,265 |
|
42,981 |
|
49,246 |
|
20,515 |
|||||||
3,940 |
|
12,547 |
|
4,417 |
|
3,940 |
|
16,964 |
|
20,904 |
|
6,037 |
|||||||
14,656 |
|
10,750 |
|
23,482 |
|
20,010 |
|
28,878 |
|
48,888 |
|
10,410 |
|||||||
1,614 |
|
3,611 |
|
2,871 |
|
1,646 |
|
6,450 |
|
8,096 |
|
2,133 |
|||||||
|
|
13,653 |
|
24,608 |
|
4,181 |
|
34,080 |
|
38,261 |
|
9,639 |
|||||||
5,895 |
|
11,655 |
|
22,080 |
|
5,895 |
|
33,735 |
|
39,630 |
|
7,057 |
|||||||
3,542 |
|
30,575 |
|
211 |
|
3,541 |
|
30,786 |
|
34,328 |
|
3,370 |
|||||||
5,241 |
|
|
|
49,343 |
|
|
|
54,584 |
|
54,584 |
|
|
|||||||
41,153 |
|
118,224 |
|
134,560 |
|
45,478 |
|
248,458 |
|
293,937 |
|
59,161 |
|||||||
5,160 |
|
23,660 |
|
14,124 |
|
5,160 |
|
37,784 |
|
42,944 |
|
17,333 |
|||||||
1,365 |
|
5,119 |
|
1,347 |
|
1,365 |
|
6,466 |
|
7,831 |
|
2,921 |
|||||||
1,323 |
|
4,967 |
|
1,411 |
|
1,324 |
|
6,377 |
|
7,701 |
|
2,936 |
|||||||
1,036 |
|
6,254 |
|
1,503 |
|
1,036 |
|
7,757 |
|
8,793 |
|
2,606 |
|||||||
1,221 |
|
8,693 |
|
4,387 |
|
1,221 |
|
13,080 |
|
14,301 |
|
5,459 |
|||||||
4,447 |
|
24,739 |
|
4,582 |
|
4,815 |
|
28,953 |
|
33,768 |
|
8,871 |
|||||||
2,657 |
|
11,597 |
|
2,875 |
|
2,646 |
|
14,483 |
|
17,129 |
|
4,990 |
|||||||
1,292 |
|
3,899 |
|
756 |
|
1,292 |
|
4,655 |
|
5,947 |
|
1,703 |
|||||||
1,320 |
|
2,293 |
|
610 |
|
1,320 |
|
2,904 |
|
4,223 |
|
1,060 |
|||||||
4,164 |
|
18,984 |
|
6,113 |
|
4,164 |
|
25,097 |
|
29,261 |
|
7,338 |
|||||||
2,024 |
|
7,960 |
|
2,381 |
|
2,024 |
|
10,341 |
|
12,365 |
|
3,465 |
|||||||
1,860 |
|
6,071 |
|
804 |
|
1,881 |
|
6,854 |
|
8,735 |
|
1,414 |
|||||||
2,997 |
|
9,173 |
|
6,406 |
|
2,997 |
|
15,579 |
|
18,576 |
|
3,024 |
|||||||
30,866 |
|
133,409 |
|
47,299 |
|
31,245 |
|
180,330 |
|
211,574 |
|
63,120 |
|||||||
343 |
|
|
|
6 |
|
349 |
|
|
|
349 |
|
|
|||||||
|
|
|
|
47 |
|
|
|
47 |
|
47 |
|
59 |
|||||||
$ |
268,609 |
|
$ |
683,988 |
|
$ |
349,237 |
|
$ |
282,923 |
|
$ |
1,018,911 |
|
$ |
1,301,834 |
|
$ |
242,562 |
(1) CBD=Central Business District; NoMA=North of Massachusetts Avenue
(2) I=Industrial; BP=Business Park
(3) Includes the unamortized fair value adjustments recorded at acquisition upon the assumption of mortgage loans.
Depreciation of rental property is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets range from 5 to 39 years or to the term of the underlying lease. The tax basis of our rental property assets was $1,435 million and $1,547 million at December 31, 2016 and 2015, respectively.
(a) Reconciliation of Rental Property (1)
The following table reconciles the rental property investments for the years ended December 31 (amounts in thousands):
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Beginning balance |
|
$ |
1,340,050 |
|
|
$ |
1,504,372 |
|
|
$ |
1,330,180 |
|
Acquisitions of rental property (2) |
|
|
|
|
|
|
|
170,823 |
|
|||
Capital expenditures (3) |
|
56,030 |
|
|
73,125 |
|
|
49,860 |
|
|||
Impairments |
|
|
|
|
(51,521 |
) |
|
(3,956 |
) |
|||
Dispositions of rental property |
|
(55,625 |
) |
|
(59,652 |
) |
|
(30,916 |
) |
|||
Assets held-for-sale |
|
(19,407 |
) |
|
(127,907 |
) |
|
(643 |
) |
|||
Other (4) |
|
(19,214 |
) |
|
1,633 |
|
|
(10,976 |
) |
|||
Ending balance |
|
$ |
1,301,834 |
|
|
$ |
1,340,050 |
|
|
$ |
1,504,372 |
|
(b) Reconciliation of Accumulated Depreciation (1)
The following table reconciles the accumulated depreciation on the rental property investments for the years ended December 31 (amounts in thousands):
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Beginning balance |
|
$ |
209,784 |
|
|
$ |
215,499 |
|
|
$ |
185,725 |
|
Depreciation of rental property |
|
44,952 |
|
|
49,772 |
|
|
47,625 |
|
|||
Assets held-for-sale |
|
31,034 |
|
|
(16,400 |
) |
|
(1,631 |
) |
|||
Dispositions of rental property |
|
(37,001 |
) |
|
(35,964 |
) |
|
(5,712 |
) |
|||
Other (4) |
|
(6,207 |
) |
|
(3,123 |
) |
|
(10,508 |
) |
|||
Ending balance |
|
$ |
242,562 |
|
|
$ |
209,784 |
|
|
$ |
215,499 |
|
(1) Excludes rental property and applicable accumulated depreciation at December 31, 2016 related to the One Fair Oaks, which was classified as held-for-sale at December 31, 2016 and was sold on January 9, 2017. Also excludes the rental property and applicable accumulated depreciation at December 31, 2015 related to the NOVA Non-Core Portfolio, which was classified as held-for-sale at December 31, 2015 and was sold on March 24, 2016.
(2) For more information on our acquisitions, including the assumption of liabilities and other non-cash items, see the supplemental disclosure of cash flow information accompanying our consolidated statements of cash flows.
(3) Represents cash paid for capital expenditures.
(4) Includes accrued increases to rental property investments, fully depreciated assets that were written-off during the year and other immaterial transactions.
Exhibit 99.5
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
|
|
March 31, 2017 |
|
December 31, 2016 |
||
|
|
(unaudited) |
|
|
||
Assets: |
|
|
|
|
||
Rental property, net |
|
$ |
1,024,605 |
|
$ |
1,059,272 |
Assets held-for-sale |
|
|
|
13,176 |
||
Cash and cash equivalents |
|
13,269 |
|
14,144 |
||
Escrows and reserves |
|
2,348 |
|
1,419 |
||
Accounts and other receivables, net of allowance for doubtful accounts of $922 and $655, respectively |
|
5,611 |
|
6,892 |
||
Accrued straight-line rents, net of allowance for doubtful accounts of $471 and $414, respectively |
|
45,211 |
|
42,745 |
||
Investment in affiliates |
|
42,314 |
|
49,392 |
||
Deferred costs, net |
|
41,603 |
|
42,712 |
||
Prepaid expenses and other assets |
|
5,414 |
|
5,389 |
||
Intangible assets, net |
|
23,622 |
|
25,106 |
||
Total assets |
|
$ |
1,203,997 |
|
$ |
1,260,247 |
Liabilities: |
|
|
|
|
||
Mortgage loans, net |
|
$ |
295,523 |
|
$ |
296,212 |
Unsecured term loan, net |
|
299,433 |
|
299,404 |
||
Unsecured revolving credit facility, net |
|
48,758 |
|
141,555 |
||
Accounts payable and other liabilities |
|
40,897 |
|
43,904 |
||
Accrued interest |
|
1,470 |
|
1,537 |
||
Rents received in advance |
|
6,493 |
|
6,234 |
||
Tenant security deposits |
|
4,831 |
|
4,982 |
||
Deferred market rent, net |
|
1,716 |
|
1,792 |
||
Total liabilities |
|
699,121 |
|
795,620 |
||
|
|
|
|
|
||
Noncontrolling interests in the Operating Partnership |
|
27,516 |
|
28,244 |
||
Equity: |
|
|
|
|
||
Common shares, $0.001 par value per share, 150,000 shares authorized; 58,716 and 58,319 shares issued and outstanding, respectively |
|
59 |
|
58 |
||
Additional paid-in capital |
|
916,460 |
|
913,367 |
||
Accumulated other comprehensive loss |
|
(273) |
|
(844) |
||
Dividends in excess of accumulated earnings |
|
(438,886) |
|
(476,198) |
||
Total equity |
|
477,360 |
|
436,383 |
||
Total liabilities, noncontrolling interests and equity |
|
$ |
1,203,997 |
|
$ |
1,260,247 |
See accompanying notes to condensed consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except per share amounts)
|
|
Three Months Ended March 31, |
||||
|
|
2017 |
|
2016 |
||
Revenues: |
|
|
|
|
||
Rental |
|
$ |
30,818 |
|
$ |
33,844 |
Tenant reimbursements and other |
|
7,005 |
|
8,853 |
||
Total revenues |
|
37,823 |
|
42,697 |
||
Operating expenses: |
|
|
|
|
||
Property operating |
|
9,958 |
|
11,537 |
||
Real estate taxes and insurance |
|
4,661 |
|
5,216 |
||
General and administrative |
|
4,497 |
|
4,578 |
||
Depreciation and amortization |
|
14,566 |
|
15,006 |
||
Total operating expenses |
|
33,682 |
|
36,337 |
||
Operating income |
|
4,141 |
|
6,360 |
||
Other expenses (income) |
|
|
|
|
||
Interest expense |
|
6,344 |
|
6,816 |
||
Interest and other income |
|
(210) |
|
(1,003) |
||
Equity in earnings of affiliates |
|
(4,223) |
|
(555) |
||
(Gain) loss on sale of rental property |
|
(42,799) |
|
1,155 |
||
Loss on debt extinguishment |
|
|
|
48 |
||
Total other expenses (income) |
|
(40,888) |
|
6,461 |
||
Net income (loss) |
|
45,029 |
|
(101) |
||
Less: Net (income) loss attributable to noncontrolling interests |
|
(1,884) |
|
147 |
||
Net income attributable to First Potomac Realty Trust |
|
43,145 |
|
46 |
||
Less: Dividends on preferred shares |
|
|
|
(2,248) |
||
Less: Issuance costs of redeemed preferred shares |
|
|
|
(1,904) |
||
Net income (loss) attributable to common shareholders |
|
$ |
43,145 |
|
$ |
(4,106) |
Basic and diluted earnings per common share: |
|
|
|
|
||
Net income (loss) attributable to common shareholders - basic |
|
$ |
0.75 |
|
$ |
(0.07) |
Net income (loss) attributable to common shareholders - dilutive |
|
$ |
0.74 |
|
$ |
(0.07) |
Weighted average common shares outstanding: |
|
|
|
|
||
Basic |
|
57,635 |
|
57,542 |
||
Diluted |
|
57,907 |
|
57,542 |
See accompanying notes to condensed consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(Amounts in thousands)
|
|
Three Months Ended March 31, |
||||
|
|
2017 |
|
2016 |
||
Net income (loss) |
|
$ |
45,029 |
|
$ |
(101) |
Unrealized gain on derivative instruments |
|
596 |
|
169 |
||
Unrealized loss on derivative instruments |
|
|
|
(1,031) |
||
Total comprehensive income (loss) |
|
45,625 |
|
(963) |
||
Net (income) loss attributable to noncontrolling interests |
|
(1,884) |
|
147 |
||
Net (gain) loss from derivative instruments attributable to noncontrolling interests |
|
(25) |
|
36 |
||
Comprehensive income (loss) attributable to First Potomac Realty Trust |
|
$ |
43,716 |
|
$ |
(780) |
See accompanying notes to condensed consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
|
|
Three Months Ended March 31, |
||||
|
|
2017 |
|
2016 |
||
Cash flows from operating activities: |
|
|
|
|
||
Net income (loss) |
|
$ |
45,029 |
|
$ |
(101) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
||
Depreciation and amortization |
|
14,823 |
|
15,303 |
||
Stock based compensation |
|
829 |
|
488 |
||
Bad debt expense |
|
324 |
|
105 |
||
Amortization of deferred market rent |
|
50 |
|
79 |
||
Amortization of financing costs and discounts |
|
434 |
|
472 |
||
Equity in earnings of affiliates |
|
(4,223) |
|
(555) |
||
Distributions from investments in affiliates |
|
|
|
425 |
||
(Gain) loss on sale of rental property |
|
(42,799) |
|
1,155 |
||
Changes in assets and liabilities: |
|
|
|
|
||
Escrows and reserves |
|
(929) |
|
375 |
||
Accounts and other receivables |
|
1,007 |
|
1,358 |
||
Accrued straight-line rents |
|
(2,883) |
|
(1,725) |
||
Prepaid expenses and other assets |
|
(6) |
|
205 |
||
Tenant security deposits |
|
(129) |
|
(748) |
||
Accounts payable and accrued expenses |
|
(1,474) |
|
(2,313) |
||
Accrued interest |
|
(67) |
|
39 |
||
Rents received in advance |
|
259 |
|
70 |
||
Deferred costs |
|
(1,171) |
|
(682) |
||
Total adjustments |
|
(35,955) |
|
14,051 |
||
Net cash provided by operating activities |
|
9,074 |
|
13,950 |
||
Cash flows from investing activities: |
|
|
|
|
||
Proceeds from sale of rental property, net |
|
85,754 |
|
90,501 |
||
Change in escrow and reserve accounts |
|
|
|
246 |
||
Additions to rental property and furniture, fixtures and equipment |
|
(6,569) |
|
(17,502) |
||
Additions to construction in progress |
|
(242) |
|
(5,141) |
||
Proceeds from sale of rental property owned through unconsolidated joint ventures, net |
|
11,301 |
|
|
||
Net cash provided by investing activities |
|
90,244 |
|
68,104 |
||
Cash flows from financing activities: |
|
|
|
|
||
Financing costs |
|
|
|
(245) |
||
Issuance of debt |
|
4,000 |
|
80,243 |
||
Repayments of debt |
|
(97,891) |
|
(93,119) |
||
Dividends to common shareholders |
|
(5,815) |
|
(8,701) |
||
Dividends to preferred shareholders |
|
|
|
(2,776) |
||
Distributions to noncontrolling interests |
|
(255) |
|
(393) |
||
Income tax obligation payments made on behalf of employees |
|
(232) |
|
(122) |
||
Redemption of preferred shares |
|
|
|
(55,000) |
||
Redemption of operating partnership units |
|
|
|
(319) |
||
Net cash used in financing activities |
|
(100,193) |
|
(80,432) |
||
Net (decrease) increase in cash and cash equivalents |
|
(875) |
|
1,622 |
||
Cash and cash equivalents, beginning of period |
|
14,144 |
|
13,527 |
||
Cash and cash equivalents, end of period |
|
$ |
13,269 |
|
$ |
15,149 |
See accompanying notes to condensed consolidated financial statements.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows Continued
(unaudited)
Supplemental disclosure of cash flow information for the three months ended March 31, is as follows (dollars in thousands):
|
|
2017 |
|
2016 |
||||
Cash paid for interest, net |
|
$ |
5,975 |
|
|
$ |
6,251 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
||
Change in fair value of the outstanding common Operating Partnership units |
|
(2,383 |
) |
|
(1,324 |
) |
||
Value of common shares retired to settle employee tax obligation |
|
232 |
|
|
122 |
|
||
Changes in accruals: |
|
|
|
|
|
|
||
Additions to rental property and furniture, fixtures and equipment |
|
(1,610 |
) |
|
421 |
|
||
Additions to development and redevelopment |
|
474 |
|
|
(1,190 |
) |
Cash paid for interest on indebtedness is net of capitalized interest of $22 thousand and $0.2 million for the three months ended March 31, 2017 and 2016, respectively.
During the three months ended March 31, 2017 and 2016, certain of our employees surrendered common shares owed them valued at $0.2 million and $0.1 million, respectively, to satisfy their statutory minimum tax obligation associated with the vesting of restricted common shares of beneficial interest.
Noncontrolling interests in First Potomac Realty Investment Limited Partnership, our operating partnership (the Operating Partnership), are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. At March 31, 2017 and 2016, we recorded adjustments of $3.7 million and $2.9 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.
At March 31, 2017 and 2016, we accrued $4.6 million and $10.3 million, respectively, of capital expenditures related to rental property and furniture, fixtures and equipment in accounts payable. At March 31, 2017 and 2016, we accrued $0.6 million and $4.5 million, respectively, of capital expenditures related to development and redevelopment in accounts payable.
FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Description of Business
First Potomac Realty Trust (the Company) is a leader in the ownership, management, redevelopment and development of office and business park properties in the greater Washington, D.C. region. The Companys focus is owning and operating properties that the Company believes can benefit from its market knowledge and intensive operational skills with a focus on increasing their profitability and value. The Companys portfolio primarily contains a mix of single-tenant and multi-tenant office properties and business parks. Office properties are single-story and multi-story buildings that are primarily for office use, and business parks contain buildings with office features combined with some industrial property space. The Company separates its properties into four distinct reporting segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments.
References in these unaudited condensed consolidated financial statements to we, our, us, the Company or First Potomac, refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.
We conduct our business through our Operating Partnership. We are the sole general partner of, and, as of March 31, 2017, owned 95.8% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests that are owned by unrelated parties.
At March 31, 2017, we wholly owned properties totaling 6.0 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.4 million square feet through two unconsolidated joint ventures. We also owned land that can support 0.4 million square feet of additional development. Our consolidated properties were 92.4% occupied by 372 tenants at March 31, 2017. We do not include the square footage of properties in development or redevelopment, which totaled 0.1 million square feet at March 31, 2017, in our occupancy calculation. We derive substantially all of our revenue from leases of space within our properties. As of March 31, 2017, our largest tenant was the U.S. Government, which accounted for 14.0% of our total annualized cash basis rent, and the U.S. Government combined with government contractors accounted for 20.9% of our total annualized cash basis rent as of March 31, 2017. We operate so as to qualify as a real estate investment trust (REIT) for federal income tax purposes.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
Our unaudited condensed consolidated financial statements include our accounts and the accounts of our Operating Partnership, which we consider to be a variable interest entity (VIE), and the subsidiaries in which we or our Operating Partnership has a controlling interest, which includes First Potomac Management, LLC, a wholly-owned subsidiary that manages the majority of our properties. All intercompany balances and transactions have been eliminated in consolidation.
We have condensed or omitted certain information and note disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP) in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016 and as updated from time to time in our other filings with the SEC.
In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly our financial position as of March 31, 2017 and the results of our operations, our comprehensive income (loss) and our cash flows for the three months ended March 31, 2017 and
2016. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions and the impact of acquisitions and dispositions throughout the year, as well as the seasonality of certain operating expenses such as utilities expense and snow and ice removal costs.
(b) Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires our management team to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible, future cash flows, discount and capitalization rate assumptions used to fair value acquired properties and to test impairment of certain long-lived assets and goodwill, derivative valuations, market lease rates, lease-up periods, leasing and tenant improvement costs used to fair value intangible assets acquired and probability weighted cash flow analysis used to fair value contingent liabilities. Actual results could differ from those estimates.
(c) Rental Property
Rental property is initially recorded at fair value, when acquired in a business combination, or initial cost when constructed or acquired in an asset purchase. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of our assets, by class, are as follows:
|
Buildings |
39 years |
|
Building improvements |
5 to 20 years |
|
Furniture, fixtures and equipment |
5 to 15 years |
|
Lease related intangible assets |
The term of the lease |
|
Tenant improvements |
Shorter of the useful life of the asset or the term of the related lease |
We regularly review market conditions for possible impairment of a propertys carrying value. When circumstances such as adverse market conditions, changes in managements intended holding period or potential sale to a third party indicate a possible impairment of the carrying value of a property, an impairment analysis is performed. We assess potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the propertys use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs to maintain the operating capacity, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Further, we will record an impairment loss if we expect to dispose of a property in the near term at a price below carrying value. In such an event, we will record an impairment loss based on the difference between a propertys carrying value and its projected sales price less any estimated costs to sell.
We will classify a building as held-for-sale in accordance with GAAP in the period in which we have made the decision to dispose of the building, our Board of Trustees or a designated delegate has approved the sale, there is a binding contract pursuant to which the buyer has significant money at risk, or high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash, and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. We will cease recording depreciation on a building once it has been classified as held-for-sale.
We will also determine whether the disposal of a building qualifies as a discontinued operation in accordance with GAAP by assessing whether the disposal of the building, or group of buildings, represents a strategic shift that has, or will have, a major effect on the Companys operations or financial results. If the building does not qualify as a discontinued operation in accordance with GAAP, we will classify the buildings operating results, together with any impairment charges and any gains or losses on the sale of the building, in continuing operations for all periods presented in our consolidated statements of operations. We will classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheet for the period the held-for-sale criteria were met.
If the building does qualify as a discontinued operation under GAAP, we will classify the buildings operating results, together with any impairment charges and any gains or losses on the sale of the building, in discontinued operations in our consolidated statements of operations for all periods presented and classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the disposed or held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.
We recognize the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when assumed or incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.
We capitalize interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include our investments in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. We will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. We also capitalize direct compensation costs of our construction personnel who manage the development and redevelopment projects, but only to the extent the employees time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. We do not capitalize any other general and administrative costs such as office supplies, office rent expense or an overhead allocation to our development or redevelopment projects. Capitalized compensation costs were immaterial for the three months ended March 31, 2017 and 2016. Capitalization of interest ends when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity if the property is not occupied. We place redevelopment and development assets into service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.
(d) Application of New Accounting Standards
In January 2017, we adopted Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15), which requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entitys ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The adoption of ASU 2014-15 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.
In January 2017, we adopted Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) , which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 requires us to classify cash payments made on behalf of employees for taxes owed on the vesting of restricted common shares, for which we withhold vested common shares owed to the employee in an amount that equates to the value of the employees tax obligation, as a financing activity on our statements of
cash flows. We elected to adopt ASU 2016-09 retrospectively and the adoption of ASU 2016-09 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.
In January 2017, we adopted Accounting Standards Update No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control (ASU 2016-17), which requires a single decision maker or service provider, in evaluating whether it is the primary beneficiary, to consider on a proportionate basis indirect interests held through related parties under common control. The adoption of ASU 2016-17 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.
In January 2017, we adopted Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which was issued by the Financial Accounting Standards Board (FASB) in January 2017. ASU 2017-01 provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We anticipate ASU 2017-01 will change our accounting treatment of future property acquisitions; however, the adoption of ASU 2017-01 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. In July 2015, the FASB deferred by one year the mandatory effective date of ASU 2014-09 from January 1, 2017 to January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have begun to evaluate each of the revenue streams under the new model and the pattern of recognition is not expected to change significantly. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires, among other things, entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for periods beginning after December 15, 2017; early adoption is not permitted. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), which requires a lessee to record on the balance sheet a right-of-use asset with a corresponding lease liability created by lease terms of more than 12 months. Additional qualitative and quantitative disclosures will also be required. The guidance will become effective for periods beginning after December 15, 2018 and will be applied using a modified retrospective transition method. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) . The guidance addresses eight classification issues related to the statement of cash flows, including debt prepayment or debt extinguishment costs and distributions received from equity-method investees. The guidance will become effective for periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 requires the use of a retrospective transition method to each period presented. If such retrospective transition is impracticable for certain issues, the adoption of ASU 2016-15 for the applicable issues may be applied prospectively as of the earliest date practicable. The guidance is not expected to have a material impact on our consolidated financial statements or related disclosures.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for periods
beginning after December 15, 2017 and early adoption is permitted. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. ASU 2017-04 is effective for periods beginning after December 15, 2019 and early adoption is permitted for measurement dates after January 1, 2017. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
In February 2017, the FASB issued Accounting Standards Update No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (ASU 2017-05), which clarifies the guidance in Subtopic 610-20 on accounting for derecognition of a nonfinancial asset. The update also defines in-substance nonfinancial assets and includes guidance on partial sales of nonfinancial assets. The amendments in ASU 2017-05 are to be applied at the same time that ASU 2014-09 is applied. We are currently evaluating the impact that ASU 2017-05 will have on our consolidated financial statements and related disclosures.
(e) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation, primarily as a result of adopting ASU 2016-09 in January 2017. See note 2(d), Summary of Significant Accounting Policies - Application of New Accounting Standards for more information.
(3) Earnings Per Common Share
Basic earnings or loss per common share (EPS) is calculated by dividing net income or loss attributable to common shareholders by the weighted average common shares outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented, which include stock options and non-vested shares. We apply the two-class method for determining EPS as our outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. Our excess of distributions over earnings related to participating securities is shown as a reduction in total earnings attributable to common shareholders in our computation of EPS.
The following table sets forth the computation of our basic and diluted earnings per common share (dollars in thousands, except per share amounts):
|
|
Three Months Ended March 31, |
||||||
|
|
2017 |
|
|
2016 |
|
||
Numerator for basic and diluted earnings per common share: |
|
|
|
|
|
|
||
Net income (loss) |
|
$ |
45,029 |
|
|
$ |
(101 |
) |
Less: Net (income) loss attributable to noncontrolling interests |
|
(1,884 |
) |
|
147 |
|
||
Net income attributable to First Potomac Realty Trust |
|
43,145 |
|
|
46 |
|
||
Less: Dividends on preferred shares |
|
|
|
|
(2,248 |
) |
||
Less: Issuance costs of redeemed preferred shares (1) |
|
|
|
|
(1,904 |
) |
||
Net income (loss) attributable to common shareholders |
|
43,145 |
|
|
(4,106 |
) |
||
Less: Allocation to participating securities |
|
(55 |
) |
|
(73 |
) |
||
Net income (loss) attributable to common shareholders |
|
$ |
43,090 |
|
|
$ |
(4,179 |
) |
Denominator for basic and diluted earnings per common share: |
|
|
|
|
|
|
||
Weighted average common shares outstanding - basic |
|
57,635 |
|
|
57,542 |
|
||
Weighted average common shares outstanding - diluted |
|
57,907 |
|
|
57,542 |
|
||
Basic and diluted earnings per common share: |
|
|
|
|
|
|
||
Net income (loss) attributable to common shareholders - basic |
|
$ |
0.75 |
|
|
$ |
(0.07 |
) |
Net income (loss) attributable to common shareholders - diluted |
|
$ |
0.74 |
|
|
$ |
(0.07 |
) |
(1) Represents the original issuance costs associated with the redemption of 2.2 million 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares (the 7.750% Series A Preferred Shares) during the three months ended March 31, 2016.
In accordance with GAAP regarding earnings per common share, we did not include the following potential weighted average common shares in our calculation of diluted earnings per common share as they are anti-dilutive for the periods presented (amounts in thousands):
|
|
Three Months Ended March 31, |
||||
|
|
2017 |
|
|
2016 |
|
Stock option awards |
|
879 |
|
|
1,018 |
|
Non-vested share awards |
|
595 |
|
|
484 |
|
|
|
1,474 |
|
|
1,502 |
|
(4) Rental Property
Rental property represents wholly-owned buildings and related improvements, net of accumulated depreciation, and developable land. All of our rental properties are located within the greater Washington, D.C. region. Rental property consists of the following (dollars in thousands):
|
|
March 31, 2017 |
|
|
December 31, 2016 (1) |
|
||
Land and land improvements |
|
$ |
269,920 |
|
|
$ |
282,923 |
|
Buildings and improvements |
|
766,394 |
|
|
824,867 |
|
||
Construction in progress |
|
29,793 |
|
|
4,605 |
|
||
Tenant improvements |
|
185,264 |
|
|
189,031 |
|
||
Furniture, fixtures and equipment |
|
374 |
|
|
408 |
|
||
|
|
1,251,745 |
|
|
1,301,834 |
|
||
Less: accumulated depreciation |
|
(227,140 |
) |
|
(242,562 |
) |
||
|
|
$ |
1,024,605 |
|
|
$ |
1,059,272 |
|
(1) Excludes rental property totaling $13.2 million at December 31, 2016 related to One Fair Oaks, which was classified as held-for-sale at December 31, 2016 and was sold on January 9, 2017.
Development and Redevelopment Activity
We will place completed development and redevelopment assets in-service upon the earlier of one year after major construction activity is deemed to be substantially complete or upon occupancy. We construct office buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. At March 31, 2017, we owned developable land that can accommodate 0.4 million square feet of additional building space, of which 34 thousand is located in the Washington, D.C. reporting segment, 0.1 million in the Maryland reporting segment, 0.2 million in the Northern Virginia reporting segment and 0.1 million in the Southern Virginia reporting segment.
In March 2017, the sole tenant of 540 Gaither Road at Redland (Redland I) exercised its early termination option and vacated the 133,895 square-foot building, which is located in our Maryland reporting segment. Upon the tenant vacating Redland I, the building was placed into redevelopment. At March 31, 2017, our total investment in the building under redevelopment was $23.6 million, which included the $23.0 million total original cost basis of the building and land. The majority of costs incurred as of March 31, 2017 in excess of the original cost basis of the building and land related to site planning and design costs.
During the first quarter of 2017, we did not place in-service any completed development or redevelopment space. At March 31, 2017, we did not have any completed development or redevelopment space that had yet to be placed in-service.
(5) Investment in Affiliates
We own an interest in several unconsolidated joint ventures, two of which currently own properties. We do not control the activities that are most significant to the joint ventures. As a result, the assets, the liabilities and the operating results of these non-controlled joint ventures are not consolidated within our unaudited condensed consolidated financial statements. Our investments in these joint ventures are recorded as Investment in affiliates on our consolidated balance sheets. On March 7, 2017, three of our unconsolidated joint ventures collectively sold Aviation Business Park, a 120,284 square-foot office building, and Rivers Park I and II, a 307,984 square-foot business park, which were all located in our Maryland reporting segment. Based on our percentage ownership of the joint ventures, our share of gross proceeds from the sale totaled $19.0 million, which generated $18.4 million of net proceeds. We used the net proceeds from the sale to repay $7.0 million (our proportionate share) of mortgage debt encumbering Rivers Park I and II, and the remainder was used to repay a portion of the outstanding balance under our unsecured revolving credit facility. We have had, and will have, no continuing involvement in the ownership decisions of any of the unconsolidated joint ventures disposed properties subsequent to their disposal.
Our investment in affiliates consisted of the following (dollars in thousands):
|
|
Reporting Segment |
|
Ownership
|
|
Investment at
|
|
Investment at
|
||
Prosperity Metro Plaza |
|
Northern Virginia |
|
51% |
|
$ |
26,772 |
|
$ |
26,414 |
1750 H Street, NW |
|
Washington, D.C. |
|
50% |
|
14,594 |
|
14,624 |
||
Aviation Business Park (1) |
|
Maryland |
|
50% |
|
482 |
|
5,941 |
||
Rivers Park I and II (1)(2) |
|
Maryland |
|
25% |
|
466 |
|
2,413 |
||
|
|
|
|
|
|
$ |
42,314 |
|
$ |
49,392 |
(1) The unconsolidated joint ventures that owned Aviation Business Park and Rivers Park I and II sold these properties on March 7, 2017. Our investment in these joint ventures at March 31, 2017 is primarily comprised of our share of cash that has not yet been distributed.
(2) Rivers Park I and Rivers Park II were owned through two separate unconsolidated joint ventures.
The following table provides a summary of the mortgage debt held by our unconsolidated joint ventures (dollars in thousands):
|
|
FPO
|
|
Effective Interest
|
|
Maturity Date |
|
Principal Balance at
|
|
Principal Balance at
|
||
Rivers Park I and II (2) |
|
25% |
|
LIBOR + 1.90% (3) |
|
September 2017 |
|
$ |
|
|
$ |
28,000 |
1750 H Street, NW (4) |
|
50% |
|
3.92% |
|
August 2024 |
|
32,000 |
|
32,000 |
||
Prosperity Metro Plaza (5) |
|
51% |
|
3.91% |
|
December 2029 |
|
50,000 |
|
50,000 |
||
Weighted Average / Total |
|
|
|
3.91% |
|
|
|
$ |
82,000 |
|
$ |
110,000 |
(1) Reflects the entire balance of the debt secured by the properties, not our portion of the debt.
(2) The unconsolidated joint ventures that owned Rivers Park I and II sold these properties on March 7, 2017. The unconsolidated joint venture partners used net proceeds from the sale to repay the mortgage debt encumbering the properties. At December 31, 2016, $2.8 million of the outstanding mortgage balance was recourse to us.
(3) At March 31, 2017, LIBOR was 0.98%. All references to LIBOR in the condensed consolidated financial statements refer to one-month LIBOR.
(4) The loan requires interest-only payments with a constant interest rate over the life of the loan. The loan is repayable in full, without penalty, on or after August 1, 2021.
(5) The loan requires interest-only payments through December 2024, at which time the loan requires principal and interest payments through its maturity date. The loan is repayable in full, without penalty, on or after June 1, 2029.
The net assets of our unconsolidated joint ventures consisted of the following (dollars in thousands):
|
|
March 31, 2017 |
|
December 31, 2016 |
||
Assets: |
|
|
|
|
||
Rental property, net |
|
$ |
144,065 |
|
$ |
189,245 |
Cash and cash equivalents |
|
11,122 |
|
9,887 |
||
Other assets |
|
16,472 |
|
20,726 |
||
Total assets |
|
171,659 |
|
219,858 |
||
Liabilities: |
|
|
|
|
||
Mortgage loans, net (1)(2) |
|
81,416 |
|
109,372 |
||
Other liabilities |
|
6,503 |
|
8,674 |
||
Total liabilities |
|
87,919 |
|
118,046 |
||
Net assets |
|
$ |
83,740 |
|
$ |
101,812 |
(1) Of the total mortgage debt that encumbers our unconsolidated properties, none was recourse to us at March 31, 2017 and $2.8 million was recourse to us at December 31, 2016.
(2) Mortgage loans, net at both March 31, 2017 and December 31, 2016 included $0.6 million of unamortized deferred financing costs
Our share of earnings or losses related to our unconsolidated joint ventures is recorded in our consolidated statements of operations as Equity in earnings of affiliates. The following table summarizes the results of operations of our unconsolidated joint ventures for the periods presented, of which, our proportionate share is reflected in Equity in earnings of affiliates in our consolidated statements of operations based on our varying ownership interests in the unconsolidated joint ventures (dollars in thousands):
|
|
Three Months Ended March 31, |
||||
|
|
2017 |
|
2016 |
||
Total revenues |
|
$ |
5,679 |
|
$ |
6,290 |
Total operating expenses |
|
(1,937) |
|
(2,166) |
||
Net operating income |
|
3,742 |
|
4,124 |
||
Depreciation and amortization |
|
(1,863) |
|
(1,966) |
||
Interest expense, net |
|
(962) |
|
(993) |
||
Gain on sale of rental property |
|
10,324 |
|
|
||
Net income |
|
$ |
11,241 |
|
$ |
1,165 |
The following table summarizes the results of operations of Aviation Business Park and Rivers Park I and II, which were sold in March 2017, of which, our proportionate share is reflected in Equity in earnings of affiliates in our consolidated statements of operations based on our varying ownership interests in the unconsolidated joint ventures that owned the respective properties (dollars in thousands):
|
|
Three Months Ended March 31, |
||||
|
|
2017 |
|
2016 |
||
Total revenues |
|
$ |
1,113 |
|
$ |
1,631 |
Total operating expenses |
|
(275) |
|
(641) |
||
Net operating income |
|
838 |
|
990 |
||
Depreciation and amortization |
|
(420) |
|
(643) |
||
Interest expense, net |
|
(146) |
|
(175) |
||
Income from operations of disposed properties |
|
272 |
|
172 |
||
Gain on sale of rental property |
|
10,324 |
|
|
||
Net income |
|
$ |
10,596 |
|
$ |
172 |
We earn various fees from several of our joint ventures, which include management fees, leasing commissions and construction management fees. We recognize fees only to the extent of the third party ownership interest in our unconsolidated joint ventures. We recognized fees from our unconsolidated joint ventures of $0.1 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively, which are reflected within Tenant reimbursements and other revenues on our consolidated statements of operations.
(6) Dispositions
We will report a disposed or held-for-sale property or group of properties in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on our operations and financial results. All other disposed properties will have their operating results reflected within continuing operations on our consolidated statements of operations for all periods presented.
We have had, and will have, no continuing involvement with any of our disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income based taxes. Other than the properties discussed below in this note 6, Dispositions , and in note 5, Investment in Affiliates , we did not dispose of or enter into any agreements to sell any other properties during the three months ended March 31, 2017 and 2016.
Disposed or Held-for-Sale Properties within Continuing Operations
The following table is a summary of property dispositions whose operating results are included in continuing operations in our consolidated statements of operations for the periods presented (dollars in thousands):
Property |
|
Reporting
|
|
Disposition
|
|
Property Type |
|
Square Feet |
|
Net Sale
|
|
Plaza 500 |
|
Northern Virginia |
|
2/17/2017 |
|
Industrial |
|
502,830 |
|
$ |
72,499 |
One Fair Oaks (1) |
|
Northern Virginia |
|
1/9/2017 |
|
Office |
|
214,214 |
|
13,255 |
|
Storey Park (2) |
|
Washington, D.C. |
|
7/25/2016 |
|
Land |
|
|
|
52,659 |
|
NOVA Non-Core Portfolio (3) |
|
Northern Virginia |
|
3/25/2016 |
|
Various |
|
945,745 |
|
90,501 |
(1) One Fair Oaks was classified as held-for-sale at December 31, 2016, and the building was vacant at the time of sale.
(2) This development site could have supported up to 712,000 rentable square feet.
(3) Consists of Van Buren Office Park, Herndon Corporate Center, Windsor at Battlefield, Reston Business Campus, Enterprise Center, Gateway Centre Manassas, Linden Business Center and Prosperity Business Center (collectively, the NOVA Non-Core Portfolio).
On February 17, 2017, we sold Plaza 500 for net proceeds of $72.5 million and recorded a gain on sale of $42.7 million. The sale of Plaza 500 represented the divestiture of our last industrial property. We used the proceeds to pay down a portion of the outstanding balance under our unsecured revolving credit facility.
On January 9, 2017, we sold One Fair Oaks for net proceeds of $13.3 million and recorded a gain on sale of $0.1 million. We used the proceeds to pay down a portion of the outstanding balance under our unsecured revolving credit facility. One Fair Oaks met our held-for-sale criteria at December 31, 2016 and, therefore, the assets of the building were classified within Assets-held-for-sale on our consolidated balance sheet at December 31, 2016. The assets classified within held-for-sale as of December 31, 2016 primarily consisted of $17.6 million in building and building improvements, $1.6 million of land, and $6.0 million of accumulated depreciation. No material liabilities were classified as held-for-sale at December 31, 2016.
The following table summarizes the aggregate results of operations for the disposed or held-for-sale properties that are included in continuing operations for the periods presented (dollars in thousands):
|
|
Three Months Ended March 31, |
||||
|
|
2017 |
|
2016 |
||
Revenues |
|
$ |
804 |
|
$ |
7,043 |
Property operating expenses |
|
(304) |
|
(2,823) |
||
Depreciation and amortization |
|
(289) |
|
(1,343) |
||
Interest expense |
|
|
|
(184) |
||
Loss on debt extinguishment |
|
|
|
(48) |
||
Income from operations of disposed property |
|
211 |
|
2,645 |
||
Gain (loss) on sale of rental property (1) |
|
42,799 |
|
(1,155) |
||
Net income from continuing operations |
|
$ |
43,010 |
|
$ |
1,490 |
(1) During the first quarter of 2017, we recorded a $0.1 million gain on the sale of One Fair Oaks and a $42.7 million gain on the sale of Plaza 500. During the first quarter of 2016, we recorded a $1.2 million loss on the sale of the NOVA Non-Core Portfolio.
(7) Debt
Our debt consisted of the following (dollars in thousands):
|
|
March 31, 2017 (1) |
|
December 31, 2016 (1) |
||
Mortgage loans, net, effective interest rates ranging from 4.22% to 6.01%, maturing at various dates through September 2030 (2)(3) |
|
$ |
295,523 |
|
$ |
296,212 |
Unsecured term loan, net, effective interest rates ranging from LIBOR plus 1.45% to LIBOR plus 1.80%, with staggered maturity dates ranging from December 2020 to December 2022 (2) |
|
299,433 |
|
299,404 |
||
Unsecured revolving credit facility, net, effective interest rate of LIBOR plus 1.50%, maturing December 2019 (2) |
|
48,758 |
|
141,555 |
||
Total |
|
$ |
643,714 |
|
$ |
737,171 |
(1) The balances include a total of $5.8 million and $6.2 million of unamortized deferred financing costs at March 31, 2017 and December 31, 2016, respectively.
(2) At March 31, 2017, LIBOR was 0.98%.
(3) The balances at March 31, 2017 and December 31, 2016 include two construction loans.
(a) Mortgage Loans
The following table provides a summary of our mortgage debt, which includes two construction loans (dollars in thousands):
Encumbered Property |
|
Contractual
|
|
Effective
|
|
Maturity
|
|
March 31,
|
|
December 31, 2016 |
|
|||
440 First Street, NW Construction Loan (1)(2) |
|
LIBOR + 2.50% |
|
LIBOR + 2.50% |
|
|
May 2017 |
|
$ |
32,216 |
|
$ |
32,216 |
|
Redland II and III |
|
4.20% |
|
4.64% |
|
|
November 2017 |
|
62,873 |
|
63,214 |
|
||
Northern Virginia Construction Loan (3) |
|
LIBOR + 1.85% |
|
LIBOR + 1.85% |
|
|
September 2019 |
|
34,584 |
|
34,584 |
|
||
840 First Street, NE |
|
5.72% |
|
6.01% |
|
|
July 2020 |
|
35,023 |
|
35,201 |
|
||
Battlefield Corporate Center |
|
4.26% |
|
4.40% |
|
|
November 2020 |
|
3,309 |
|
3,353 |
|
||
1211 Connecticut Avenue, NW |
|
4.22% |
|
4.47% |
|
|
July 2022 |
|
28,347 |
|
28,503 |
|
||
1401 K Street, NW |
|
4.80% |
|
4.93% |
|
|
June 2023 |
|
35,384 |
|
35,556 |
|
||
11 Dupont Circle, NW |
|
4.05% |
|
4.22% |
|
|
September 2030 |
|
66,780 |
|
66,780 |
|
||
Principal balance |
|
|
|
4.45% |
(4) |
|
|
|
298,516 |
|
299,407 |
|
||
Unamortized deferred financing costs |
|
|
|
|
|
|
|
|
(2,993) |
|
(3,195 |
) |
||
Total balance, net |
|
|
|
|
|
|
|
|
$ |
295,523 |
|
$ |
296,212 |
|
(1) At March 31, 2017, LIBOR was 0.98%.
(2) This construction loan is collateralized by 440 First Street, NW. In May 2016, we extended the maturity date by one year to May 30, 2017. We can repay all or a portion of the construction loan, without penalty, at any time during the term of the loan. At March 31, 2017, per the terms of the loan agreement, 50% of the outstanding principal balance and all of the outstanding accrued interest were recourse to us.
(3) This construction loan has a borrowing capacity of up to $43.7 million and is collateralized by the NOVA build-to-suit, which was placed in-service in the third quarter of 2016. We can repay all or a portion of the Northern Virginia Construction Loan, without penalty, at any time during the term of the loan.
(4) Represents the weighted average interest rate on total mortgage debt.
(b) Unsecured Term Loan and Unsecured Revolving Credit Facility
The table below shows the outstanding balances and the interest rates of the three tranches of the $300.0 million unsecured term loan and the unsecured revolving credit facility at March 31, 2017 and December 31, 2016 (dollars in thousands):
|
|
Maturity Date |
|
Interest Rate (1) |
|
March 31, 2017 |
|
December 31, 2016 |
|
||
Unsecured Term Loan |
|
|
|
|
|
|
|
|
|
||
Tranche A |
|
December 2020 |
|
LIBOR + 1.45% |
|
$ |
100,000 |
|
$ |
100,000 |
|
Tranche B |
|
June 2021 |
|
LIBOR + 1.45% |
|
100,000 |
|
100,000 |
|
||
Tranche C |
|
December 2022 |
|
LIBOR + 1.80% |
|
100,000 |
|
100,000 |
|
||
Total |
|
|
|
|
|
300,000 |
|
300,000 |
|
||
Unamortized deferred financing costs |
|
|
|
|
|
(567) |
|
(596) |
|
||
Total, net |
|
|
|
|
|
$ |
299,433 |
|
$ |
299,404 |
|
|
|
|
|
|
|
|
|
|
|
||
Unsecured Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
||
Outstanding borrowings |
|
December 2019 (2) |
|
LIBOR + 1.50% (3) |
|
$ |
51,000 |
|
$ |
144,000 |
|
Unamortized deferred financing costs |
|
|
|
|
|
(2,242) |
|
(2,445) |
|
||
Total, net |
|
|
|
|
|
$ |
48,758 |
|
$ |
141,555 |
|
(1) Reflects the interest rate spreads at March 31, 2017. At March 31, 2017, LIBOR was 0.98%. The interest rate spread is subject to change based on our maximum total indebtedness ratio. For more information, see note 7( d ), Debt Financial Covenants .
(2) The maturity date of the unsecured revolving credit facility may be extended for two, six-month terms at our option.
(3) At March 31, 2017, our outstanding borrowings under the unsecured revolving credit facility had a weighted average interest rate of 2.5%.
During the three months ended March 31, 2017, we repaid $97.0 million of the outstanding balance under the unsecured revolving credit facility. In January 2017, we used the net proceeds from the sale of One Fair Oaks and available cash to repay $14.0 million of the outstanding balance under our unsecured revolving credit facility. In February 2017, we used a portion of the net proceeds from the sale of Plaza 500 to repay $70.0 million of the outstanding balance under our unsecured revolving credit facility. In March 2017, we used our proportionate share of the net proceeds from the sale of Aviation Business Park and Rivers Park I and II to repay $7.0 million of the mortgage loan that encumbered Rivers Park I and II (our proportionate share) and the remainder was used, together with available cash, to repay $13.0 million of the outstanding balance under our unsecured revolving credit facility. During the three months ended March 31, 2017, we borrowed $4.0 million under the unsecured revolving credit facility for general corporate purposes.
For the three months ended March 31, 2017, our weighted average borrowings outstanding under the unsecured revolving credit facility were $96.6 million with a weighted average interest rate of 2.3% compared with weighted average borrowings of $169.5 million and a weighted average interest rate of 1.9% for the three months ended March 31, 2016. Our maximum outstanding borrowings were $144.0 million and $193.0 million during the three months ended March 31, 2017 and 2016, respectively.
As of the date of this filing, we had $51.0 million outstanding and $172.0 million available capacity under the unsecured revolving credit facility. We are required to pay a commitment fee at an annual rate of 0.15% of the unused capacity if our usage exceeds 50% of our total capacity under the revolving credit facility, or 0.25% if our usage does not exceed 50%.
(c) Interest Rate Swap Agreements
At March 31, 2017, we had nine interest rate swap agreements outstanding that collectively fixed LIBOR, at a weighted average interest rate of 1.4%, on $240.0 million of our variable rate debt. See note 8, Derivative Instruments , for more information about our interest rate swap agreements.
(d) Financial Covenants
The credit agreement governing our unsecured revolving credit facility and unsecured term loan contains various restrictive covenants, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. The agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations under the agreement to be immediately due and payable.
Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. These covenants relate to our allowable leverage, minimum tangible net worth, fixed charge coverage and other financial metrics. As of March 31, 2017, we were in compliance with the covenants of our amended, restated and consolidated unsecured revolving credit facility and unsecured term loan, the 440 First Street, NW Construction Loan and the Northern Virginia Construction Loan.
Our continued ability to borrow under the unsecured revolving credit facility is subject to compliance with financial and operating covenants, and a failure to comply with any of these covenants could result in a default under the credit facility. These debt agreements also contain cross-default provisions that would be triggered if we were in default under other loans, including mortgage loans, in excess of certain amounts. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our shareholders.
Our unsecured revolving credit facility and unsecured term loan are subject to interest rate spreads that float based on the quarterly measurement of our maximum consolidated total indebtedness to gross asset value ratio. Based on our leverage ratio at March 31, 2017, the applicable interest rate spreads on the unsecured revolving credit facility and the unsecured term loan will remain unchanged.
(8) Derivative Instruments
We are exposed to certain risks arising from business operations and economic factors. We use derivative financial instruments to manage exposures that arise from business activities in which our future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. We do not use derivatives for trading or speculative purposes and we intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:
· available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;
· the duration of the hedge may not match the duration of the related liability;
· the party owing money in the hedging transaction may default on its obligation to pay; and
· the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign its side of the hedging transaction.
We enter into interest rate swap agreements to hedge our exposure on our variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate; however, the swap agreements do not affect the contractual spreads associated with each variable debt instruments applicable interest rate.
At March 31, 2017, we had nine interest rate swap agreements outstanding that collectively fixed LIBOR, at a weighted average interest rate of 1.4%, on $240.0 million of our variable rate debt. Our interest rate swap agreements are summarized below (dollars in thousands):
Maturity Date |
|
Notional
|
|
Interest Rate
|
|
Fixed LIBOR
|
|
|
July 2017 |
|
$ |
30,000 |
|
LIBOR |
|
2.093% |
|
July 2017 |
|
30,000 |
|
LIBOR |
|
2.093% |
|
|
July 2017 |
|
25,000 |
|
LIBOR |
|
1.129% |
|
|
July 2017 |
|
12,500 |
|
LIBOR |
|
1.129% |
|
|
July 2017 |
|
50,000 |
|
LIBOR |
|
0.955% |
|
|
July 2018 |
|
12,500 |
|
LIBOR |
|
1.383% |
|
|
July 2018 |
|
30,000 |
|
LIBOR |
|
1.660% |
|
|
July 2018 |
|
25,000 |
|
LIBOR |
|
1.394% |
|
|
July 2018 |
|
25,000 |
|
LIBOR |
|
1.135% |
|
|
Total/Weighted Average |
|
$ |
240,000 |
|
|
|
1.442% |
|
Our interest rate swap agreements are designated as cash flow hedges and we record the effective portion of any unrealized gains associated with the change in fair value of the swap agreements within Accumulated other comprehensive loss and Prepaid expenses and other assets and the effective portion of any unrealized losses within Accumulated other comprehensive loss and Accounts payable and other liabilities on our consolidated balance sheets. We record any gains or losses incurred as a result of each interest rate swap agreements fixed rate deviating from our respective loans contractual rate within Interest expense in our consolidated statements of operations. We did not have any material ineffectiveness associated with our cash flow hedges during the three months ended March 31, 2017 and 2016.
Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to Interest expense on our consolidated statements of operations as interest payments are made on our variable-rate debt. We reclassified accumulated other comprehensive losses as an increase to interest expense of $0.4 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we estimated that $0.4 million of our accumulated other comprehensive loss will be reclassified as an increase to interest expense over the following twelve months.
(9) Fair Value Measurements
Our application of GAAP outlines a valuation framework and creates a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and a reporting entitys own assumptions about market data (unobservable inputs). The required disclosures increase the consistency and comparability of fair value measurements and the related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability between willing third parties at the measurement date (an exit price). In accordance with GAAP, certain assets and liabilities must be measured at fair value, and we provide the necessary disclosures that are required for items measured at fair value as outlined in the accounting requirements regarding fair value.
Financial assets and liabilities, as well as those non-financial assets and liabilities requiring fair value measurement, are measured using inputs from three levels of the fair value hierarchy.
The three levels are as follows:
Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs, only used to the extent that observable inputs are not available, reflect our assumptions about the pricing of an asset or liability.
In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of our consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of March 31, 2017 and December 31, 2016 (dollars in thousands):
|
|
Balance at
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
Recurring Measurements: |
|
|
|
|
|
|
|
|
|
||||
Derivative instrument-swap assets |
|
$ |
68 |
|
$ |
|
|
$ |
68 |
|
$ |
|
|
Derivative instrument-swap liabilities |
|
378 |
|
|
|
378 |
|
|
|
||||
|
|
Balance at
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
Recurring Measurements: |
|
|
|
|
|
|
|
|
|
||||
Derivative instrument-swap liabilities |
|
$ |
906 |
|
$ |
|
|
$ |
906 |
|
$ |
|
|
We did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured at fair value on a recurring basis during the three months ended March 31, 2017 and 2016. Also, no transfers into or out of fair value measurement levels for assets or liabilities that are measured on a recurring basis occurred during the three months ended March 31, 2017 and 2016.
Interest Rate Derivatives
At March 31, 2017, we had hedged $240.0 million of our variable rate debt through nine interest rate swap agreements. See note 8, Derivative Instruments , for more information about our interest rate swap agreements.
The interest rate derivatives are fair valued based on prevailing market yield curves on the measurement date and also incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees. We use a third party to assist in valuing our interest rate swap agreements. A daily snapshot of the market is taken to obtain close of business rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their historical values. Any rate that has changed by more than normal mean and related standard deviation would be considered an outlier and flagged for further investigation. The rates are then compiled through a valuation process that generates daily valuations, which are used to value our interest rate swap agreements. Our interest rate swap derivatives are effective cash flow hedges and the effective portion of the change in fair value is recorded in the equity section of our consolidated balance sheets as Accumulated other comprehensive loss.
Financial Instruments
The carrying amounts of cash equivalents, accounts and other receivables, accounts payable and other liabilities, with the exception of any items listed above, approximate their fair values due to their short-term maturities. We determine the fair value of our debt instruments by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. We deem the fair value measurement of our debt instruments as a Level 2 measurement as we use quoted interest rates for similar debt instruments to value our debt instruments.
The carrying amount and estimated fair value of our debt instruments are as follows (dollars in thousands):
|
|
March 31, 2017 |
|
December 31, 2016 |
|
||||||||
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Mortgage debt |
|
$ |
298,516 |
|
$ |
296,923 |
|
$ |
299,407 |
|
$ |
300,927 |
|
Unsecured term loan |
|
300,000 |
|
300,000 |
|
300,000 |
|
300,000 |
|
||||
Unsecured revolving credit facility |
|
51,000 |
|
51,000 |
|
144,000 |
|
144,000 |
|
||||
Total |
|
$ |
649,516 |
|
$ |
647,923 |
|
$ |
743,407 |
|
$ |
744,927 |
|
(1) The debt balances exclude a combined total of $5.8 million and $6.2 million of unamortized deferred financing costs at March 31, 2017 and December 31, 2016, respectively.
(10) Equity
In December 2015, our Board of Trustees authorized the redemption of some or all of our 6.4 million outstanding 7.750% Series A Preferred Shares. On January 19, 2016 and April 27, 2016, we used proceeds from dispositions to redeem 2.2 million shares and 3.6 million shares, respectively, of our 7.750% Series A Preferred Shares at a redemption price of $25.00 per share, plus accrued dividends up to the applicable dates of redemption. On July 6, 2016, we used proceeds from the repayment of a mezzanine loan to redeem the remaining 0.6 million outstanding shares of our 7.750% Series A Preferred Shares at a redemption price of $25.00 per share, plus accrued dividends up to the date of redemption. The 7.750% Series A Preferred Shares (NYSE: FPO-PA) were delisted from trading on the New York Stock Exchange upon redemption of the remaining 0.6 million outstanding shares on July 6, 2016.
On January 24, 2017, we declared a dividend of $0.10 per common share, equating to an annualized dividend of $0.40 per common share. The dividend was paid on February 15, 2017 to common shareholders of record as of February 8, 2017. We record dividends on non-vested share awards as a reduction of shareholders equity. Dividends paid on non-vested share awards that subsequently do not vest are recorded as compensation expense in the period in which they are forfeited or expire. For each dividend paid by us on our common shares and, when applicable, preferred shares, the Operating Partnership distributes an equivalent distribution on our common and preferred Operating Partnership units, respectively.
On April 25, 2017, we declared a dividend of $0.10 per common share, equating to an annualized dividend of $0.40 per common share. The dividend will be paid on May 15, 2017 to common shareholders of record as of May 8, 2017.
Our unsecured revolving credit facility and unsecured term loan, the 440 First Street, NW Construction Loan and the Northern Virginia Construction Loan contain certain restrictions that include, among other things, requirements to maintain specified coverage ratios and other financial covenants, which may limit our ability to make distributions to our common and preferred shareholders, except for distributions required to maintain our qualification as a REIT.
As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests associated with the Operating Partnership are recorded outside of permanent equity. Our equity and redeemable noncontrolling interests are as follows (dollars in thousands):
|
|
Total Equity |
|
Redeemable
|
|
||
Balance at December 31, 2016 |
|
$ |
436,383 |
|
$ |
28,244 |
|
Net income |
|
43,145 |
|
1,884 |
|
||
Changes in ownership, net |
|
3,076 |
|
(2,382) |
|
||
Distributions to owners |
|
(5,815) |
|
(255) |
|
||
Other comprehensive income, net |
|
571 |
|
25 |
|
||
Balance at March 31, 2017 |
|
$ |
477,360 |
|
$ |
27,516 |
|
|
|
First
|
|
Non-redeemable
|
|
Total Equity |
|
Redeemable
|
|
||||
Balance at December 31, 2015 |
|
$ |
624,528 |
|
$ |
800 |
|
$ |
625,328 |
|
$ |
28,813 |
|
Net income (loss) |
|
46 |
|
(14) |
|
32 |
|
(133) |
|
||||
Changes in ownership, net |
|
(53,145) |
|
|
|
(53,145) |
|
(1,644) |
|
||||
Distributions to owners |
|
(10,948) |
|
|
|
(10,948) |
|
(393) |
|
||||
Other comprehensive loss, net |
|
(826) |
|
|
|
(826) |
|
(36) |
|
||||
Balance at March 31, 2016 |
|
$ |
559,655 |
|
$ |
786 |
|
$ |
560,441 |
|
$ |
26,607 |
|
(1) Our 97% owned consolidated joint venture sold Storey Park on July 25, 2016, at which time all assets and liabilities owned by the joint venture were either sold or settled at the time of disposition and the remaining proceeds from the sale were distributed to the joint venture partners in accordance with the terms of the joint venture agreement. See note 6, Dispositions , for more information.
A summary of our accumulated other comprehensive loss is as follows (dollars in thousands):
|
|
2017 |
|
2016 |
|
||
Beginning balance at January 1, |
|
$ |
(844) |
|
$ |
(2,360) |
|
Net unrealized gain (loss) on derivative instruments |
|
596 |
|
(862) |
|
||
Net (gain) loss attributable to noncontrolling interests |
|
(25) |
|
36 |
|
||
Ending balance at March 31, |
|
$ |
(273) |
|
$ |
(3,186) |
|
(11) Noncontrolling Interests
(a) Noncontrolling Interests in the Operating Partnership
Noncontrolling interests relate to the common interests in the Operating Partnership not owned by us. Interests in the Operating Partnership are owned by limited partners who contributed buildings and other assets to the Operating Partnership in exchange for common Operating Partnership units. Limited partners have the right to tender their units for redemption in exchange for, at our option, our common shares on a one-for-one basis or cash based on the fair value of our common shares at the date of redemption. Unitholders receive a distribution per unit equivalent to the dividend per common share. Differences between amounts paid to redeem noncontrolling interests and their carrying values are charged or credited to equity. As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests are recorded outside of permanent equity.
Noncontrolling interests are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for
issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. Based on the closing price of our common shares at March 31, 2017, the cost to acquire, through cash purchase or issuance of our common shares, all of the outstanding common Operating Partnership units not owned by us would be $26.2 million. At March 31, 2017 and December 31, 2016, we recorded adjustments of $3.7 million and $6.1 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.
At March 31, 2017, 2,545,602 of the total common Operating Partnership units, or 4.2%, were not owned by us. During the three months ended March 31, 2017, no common Operating Partnership units were redeemed with available cash. During the three months ended March 31, 2016, 38,539 common Operating Partnership units were redeemed with available cash. No common Operating Partnership units were redeemed for common shares during the three months ended March 31, 2017 or 2016.
(b) Noncontrolling Interests in a Consolidated Partnership
When we are deemed to have a controlling interest in a partially-owned entity, we will consolidate all of the entitys assets, liabilities and operating results within our condensed consolidated financial statements. The net assets contributed to the consolidated entity by the third party, if any, will be reflected within permanent equity in our consolidated balance sheets to the extent they are not mandatorily redeemable. The amount will be recorded based on the third partys initial investment in the consolidated entity and will be adjusted to reflect the third partys share of earnings or losses in the consolidated entity and any distributions received or additional contributions made by the third party. The earnings or losses from the entity attributable to the third party are recorded as a component of Net (income) loss attributable to noncontrolling interests on our consolidated statements of operations.
On August 4, 2011, we formed a joint venture, in which we had a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment, which was placed into development in August 2013. Storey Park was sold July 25, 2016, at which time all assets and liabilities owned by the joint venture were either sold or settled at the time of disposition and the remaining proceeds from the sale were distributed to the joint venture partners in accordance with the terms of the joint venture agreement. See note 6, Dispositions , for more information.
(12) Share-Based Payments
We record costs related to our share-based compensation based on the grant date fair value calculated in accordance with GAAP. We recognize share-based compensation costs on a straight-line basis over the requisite service period for each award and these costs are recorded within General and administrative expense or Property operating expense in our consolidated statements of operations based on the employees job function.
Non-Vested Share Awards
We issue non-vested common share awards that either vest over a specific time period that is identified at the time of issuance or vest upon the achievement of specific performance goals that are identified at the time of issuance. We issue new common shares, subject to restrictions, upon each grant of non-vested common share awards. During the first quarter of 2017, we granted a total of 160,349 non-vested time-based common shares to our officers and employees. The time-based awards will vest ratably on an annual basis over a three-year period from the grant date. In February 2017, we granted a total of 257,937 non-vested performance-based common shares to our officers. The number of shares that will be earned under the February 2017 performance-based awards will be determined at the end of 2019, based upon the achievement of specified market performance goals measured over the performance period from January 1, 2017 through December 31, 2019. Of the shares earned, 50% will vest on February 1, 2020 and the remaining earned shares will vest on February 1, 2021. Any shares that are not earned will be forfeited.
We recognized compensation expense associated with all of our non-vested common share awards of $0.8 million and $0.4 million during the three months ended March 31, 2017 and 2016. Dividends on all non-vested common share awards are recorded as a reduction of equity. We apply the two-class method for determining EPS as our outstanding non-vested common shares with non-forfeitable dividend rights are considered participating securities. Our excess of distributions over earnings related to participating securities is shown as a reduction in total earnings attributable to common shareholders in our computation of EPS.
A summary of our non-vested common share awards at March 31, 2017 is as follows:
|
|
Non-vested
|
|
Weighted
|
|
|
Non-vested at December 31, 2016 |
|
711,374 |
|
$ |
9.85 |
|
Granted |
|
418,286 |
|
8.54 |
|
|
Vested |
|
(80,179) |
|
10.99 |
|
|
Expired |
|
(1,630) |
|
12.38 |
|
|
Forfeited |
|
(991) |
|
11.03 |
|
|
Non-vested at March 31, 2017 |
|
1,046,860 |
|
$ |
9.23 |
|
We value our non-vested time-based share awards at the grant date fair value, which is the market price of our common shares. For the non-vested performance-based common share awards granted in February 2017, we used a Monte Carlo Simulation (risk-neutral approach) to determine the number of shares that may be issued pursuant to the award as these awards were deemed to have a market condition. The risk-free interest rate assumptions used in the Monte Carlo Simulation were determined based on the zero coupon risk-free rate for the time frame of 0.25 years to 3 years, which ranged from 0.70% to 1.60%, respectively. The volatility used for our common share price in the Monte Carlo Simulation varied between 25.82% and 22.93%. Based on the Monte Carlo Simulation, the weighted average grant date fair value of the February 2017 non-vested performance-based common share awards was $7.11.
As of March 31, 2017, we had $7.6 million of unrecognized compensation cost related to non-vested common shares. We anticipate this cost will be recognized over a weighted-average period of 3.2 years.
(13) Segment Information
Our reportable segments consist of four distinct reporting and operational segments within the greater Washington, D.C. region in which we operate: Washington, D.C., Maryland, Northern Virginia and Southern Virginia. We evaluate the performance of our segments based on the operating results of the properties located within each segment, which excludes large non-recurring gains and losses, gains or losses from sale of rental property, interest expense, general and administrative costs, acquisition costs or any other indirect corporate expense to the segments. In addition, the segments do not have significant non-cash items in their operating results other than the impact of straight-line revenue and the amortization of deferred market rents, deferred lease incentives and deferred tenant improvement reimbursements. There are no inter-segment sales or transfers recorded between segments.
The results of operations of our four reporting segments for the three months ended March 31, 2017 and 2016 are as follows (dollars in thousands):
|
|
Three Months Ended March 31, 2017 |
|
|||||||||||||
|
|
Washington, D.C. |
|
Maryland (1) |
|
Northern Virginia |
|
Southern
|
|
Consolidated |
|
|||||
Number of buildings |
|
6 |
|
34 |
|
12 |
|
19 |
|
71 |
|
|||||
Square feet |
|
917,643 |
|
1,886,177 |
|
1,168,990 |
|
2,023,858 |
|
5,996,668 |
|
|||||
Total revenues |
|
$ |
11,722 |
|
$ |
11,235 |
|
$ |
7,312 |
|
$ |
7,554 |
|
$ |
37,823 |
|
Property operating expense |
|
(3,139) |
|
(2,657) |
|
(1,956) |
|
(2,206) |
|
(9,958) |
|
|||||
Real estate taxes and insurance |
|
(2,292) |
|
(982) |
|
(741) |
|
(646) |
|
(4,661) |
|
|||||
Total property operating income |
|
$ |
6,291 |
|
$ |
7,596 |
|
$ |
4,615 |
|
$ |
4,702 |
|
23,204 |
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
(14,566) |
|
|||||
General and administrative |
|
|
|
|
|
|
|
|
|
(4,497) |
|
|||||
Other income |
|
|
|
|
|
|
|
|
|
40,888 |
|
|||||
Net income |
|
|
|
|
|
|
|
|
|
$ |
45,029 |
|
||||
Total assets (2) |
|
$ |
443,800 |
|
$ |
322,738 |
|
$ |
260,564 |
|
$ |
159,487 |
|
$ |
1,203,997 |
|
Capital expenditures (3) |
|
$ |
1,522 |
|
$ |
2,350 |
|
$ |
2,295 |
|
$ |
606 |
|
$ |
6,810 |
|
|
|
|
|
|||||||||||||
|
|
Three Months Ended March 31, 2016 |
|
|||||||||||||
|
|
Washington, D.C. |
|
Maryland |
|
Northern Virginia |
|
Southern
|
|
Consolidated |
|
|||||
Number of buildings |
|
6 |
|
34 |
|
14 |
|
19 |
|
73 |
|
|||||
Square feet |
|
918,566 |
|
1,885,630 |
|
1,715,730 |
|
2,023,858 |
|
6,543,784 |
|
|||||
Total revenues |
|
$ |
11,290 |
|
$ |
11,587 |
|
$ |
12,307 |
|
$ |
7,513 |
|
$ |
42,697 |
|
Property operating expense |
|
(2,968) |
|
(3,235) |
|
(3,320) |
|
(2,014) |
|
(11,537) |
|
|||||
Real estate taxes and insurance |
|
(2,372) |
|
(929) |
|
(1,297) |
|
(618) |
|
(5,216) |
|
|||||
Total property operating income |
|
$ |
5,950 |
|
$ |
7,423 |
|
$ |
7,690 |
|
$ |
4,881 |
|
25,944 |
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
(15,006) |
|
|||||
General and administrative |
|
|
|
|
|
|
|
|
|
(4,578) |
|
|||||
Other expenses |
|
|
|
|
|
|
|
|
|
(6,461) |
|
|||||
Net loss |
|
|
|
|
|
|
|
|
|
$ |
(101) |
|
||||
Total assets (2) |
|
$ |
468,561 |
|
$ |
338,553 |
|
$ |
294,480 |
|
$ |
166,015 |
|
$ |
1,359,943 |
|
Capital expenditures (3) |
|
$ |
4,910 |
|
$ |
959 |
|
$ |
15,757 |
|
$ |
897 |
|
$ |
22,643 |
|
(1) Redland I within our Maryland reporting segment was placed into redevelopment during March 2017.
(2) Total assets include our investment in properties that are owned through joint ventures that are not consolidated within our condensed consolidated financial statements. For more information on our unconsolidated investments, including location within our reportable segments, see note 5, Investment in Affiliates . Corporate assets not allocated to any of our reportable segments totaled $17.4 million and $92.3 million at March 31, 2017 and 2016, respectively.
(3) Capital expenditures for corporate assets not allocated to any of our reportable segments were immaterial for the three months ended March 31, 2017 and $0.1 million for the three months ended March 31, 2016.
Exhibit 99.6
Government Properties Income Trust
Unaudited Pro Forma Condensed Consolidated Financial Statements
Introduction to Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial statements give effect to: (i) the proposed offering, or the Offering, by Government Properties Income Trust, or GOV, of 25,000,000 of its common shares of beneficial interest, or Common Shares; (ii) GOVs proposed acquisition of First Potomac Realty Trust, or FPO, and its operating partnership and majority owned subsidiary, First Potomac Realty Investment Limited Partnership, or FPO LP, pursuant to that certain Agreement and Plan of Merger, or the Merger Agreement, dated as of June 27, 2017, by and among FPO, FPO LP, GOV and GOV NEW OPPTY REIT and GOV NEW OPPTY LP; and (iii) other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of certain customary conditions, GOV NEW OPPTY LP will merge with and into FPO LP, with FPO LP surviving (such merger, the Partnership Merger) and, immediately following the Partnership Merger, FPO will merge with and into GOV NEW OPPTY REIT, with GOV NEW OPPTY REIT surviving as GOVs direct, wholly owned subsidiary (such merger, the REIT Merger, and, together with the Partnership Merger and the other transactions contemplated by the Merger Agreement, the Transaction). Following the REIT Merger, FPO LP will be GOVs indirect, majority owned subsidiary. The Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements have not been consummated and remain subject to conditions and contingencies.
The unaudited pro forma condensed consolidated balance sheet as of March 31, 2017 reflects GOVs financial position as if the Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements were completed as of March 31, 2017. The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2016 and the three months ended March 31, 2017 reflect the results of GOVs operations as if the Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements were completed as of January 1, 2016. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with (i) the unaudited condensed consolidated financial statements and related notes thereto as of and for the three months ended March 31, 2017 of (a) GOV, which are included in GOVs Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, as filed with the Securities and Exchange Commission, or SEC, on April 27, 2017, and (b) FPO, which are included as Exhibit 99.5 to this Current Report on Form 8-K; and (ii) the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2016 of (a) GOV, which are included in GOVs Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on February 22, 2017, and (b) FPO, which are included as Exhibit 99.4 to this Current Report on Form 8-K.
The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only. In the opinion of management, all adjustments necessary to reflect the effects of the Offering, the Transaction and the other transactions described in the notes to the unaudited pro forma condensed consolidated financial statements have been included and are based upon available information and assumptions that management believes are reasonable. GOV expects to finance the Transaction on a long term basis with the sale of Common Shares, including through the Offering, additional debt, including senior unsecured notes, mortgage financing and / or bank debt, and /or with proceeds from the sale of certain properties. The unaudited pro forma condensed consolidated financial statements assume that the Transaction is initially financed with the net proceeds of the
Offering and borrowings under GOVs existing revolving credit facility and under a new bridge loan facility, or the Bridge Loan Facility. Upon completion of GOVs expected long term Transaction financing, GOVs financial position and results of operations may be significantly different than what is presented in the unaudited pro forma condensed consolidated financial statements. Furthermore, the allocation of the estimated Transaction purchase price reflected in the unaudited pro forma condensed consolidated financial statements and described in the notes thereto is based upon GOVs preliminary estimates of the fair value of assets acquired and liabilities assumed by GOV pursuant to the Transaction. Actual amounts allocated to assets acquired and liabilities assumed could change significantly from those presented in the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of GOVs expected financial position or results of operations for any future period. Differences could result from numerous factors, including future changes in GOVs portfolio of investments, capital structure, property level operating expenses and revenues, including rents expected to be received on GOVs existing leases or leases GOV may enter into during and after 2017, changes in interest rates and other reasons. The allocation of the estimated purchase price, which includes estimated acquisition related costs, is based on preliminary estimates and may change significantly following the completion of (i) third party appraisals and (ii) GOVs further analysis of acquired in place leases and building valuations. Actual future results are likely to be different from amounts presented in the unaudited pro forma condensed consolidated financial statements and such differences could be significant.
Government Properties Income Trust
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2017
(amounts in thousands, except per share data)
Government Properties Income Trust
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Year Ended December 31, 2016
(amounts in thousands, except per share data)
|
|
|
|
|
|
FPO |
|
|
|
Other |
|
|
|
||||||
|
|
GOV |
|
FPO |
|
Property Sale |
|
Financing |
|
Pro Forma |
|
GOV |
|
||||||
|
|
Historical |
|
Historical |
|
Adjustments (5)(C) |
|
Adjustments (5)(D) |
|
Adjustments |
|
Pro Forma |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Rental Income |
|
$ |
258,180 |
|
$ |
160,334 |
|
$ |
(17,810 |
) |
$ |
|
|
$ |
11,494 |
(5)(E) |
$ |
412,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Real estate taxes |
|
30,703 |
|
18,992 |
|
(1,481 |
) |
|
|
|
|
48,214 |
|
||||||
Utility expenses |
|
17,269 |
|
8,168 |
|
(745 |
) |
|
|
|
|
24,692 |
|
||||||
Other operating expenses |
|
54,290 |
|
31,202 |
|
(2,081 |
) |
|
|
|
(5)(F) |
83,411 |
|
||||||
Depreciation and amortization |
|
73,153 |
|
60,862 |
|
(2,709 |
) |
|
|
39,553 |
(5)(G) |
170,859 |
|
||||||
Acquisition related costs |
|
1,191 |
|
|
|
|
|
|
|
|
|
1,191 |
|
||||||
General and administrative |
|
14,897 |
|
16,976 |
|
|
|
|
|
(10,040 |
) (5)(F) |
21,833 |
|
||||||
Loss on impairment of real estate |
|
|
|
2,772 |
|
(2,772 |
) |
|
|
|
|
|
|
||||||
Total expenses |
|
191,503 |
|
138,972 |
|
(9,788 |
) |
|
|
29,513 |
|
350,200 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Operating income (loss) |
|
66,677 |
|
21,362 |
|
(8,022 |
) |
|
|
(18,019 |
) |
61,998 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Dividend income |
|
971 |
|
|
|
|
|
|
|
|
|
971 |
|
||||||
Interest and other income |
|
158 |
|
2,348 |
|
|
|
|
|
|
|
2,506 |
|
||||||
Interest expense |
|
(45,060 |
) |
(26,370 |
) |
436 |
|
(1,797 |
) |
|
|
(72,791 |
) |
||||||
Gain (loss) on early extinguishment of debt |
|
104 |
|
(48 |
) |
48 |
|
|
|
|
|
104 |
|
||||||
Gain on issuance of shares by Select Income REIT |
|
86 |
|
|
|
|
|
|
|
|
|
86 |
|
||||||
Income (loss) before income taxes and equity in earnings (losses) of investees, net |
|
22,936 |
|
(2,708 |
) |
(7,538 |
) |
(1,797 |
) |
(18,019 |
) |
(7,126 |
) |
||||||
Income tax expense |
|
(101 |
) |
|
|
|
|
|
|
|
|
(101 |
) |
||||||
Equity in earnings (losses) of investees, net |
|
35,518 |
|
2,294 |
|
(340 |
) |
|
|
(3,484 |
) (5)(H) |
33,988 |
|
||||||
Gain (loss) on sale of property |
|
|
|
(1,155 |
) |
1,155 |
|
|
|
|
|
|
|
||||||
Income (loss) from continuing operations |
|
58,353 |
|
(1,569 |
) |
(6,723 |
) |
(1,797 |
) |
(21,503 |
) |
(26,761 |
) |
||||||
Less: Net loss attributable to noncontrolling interests |
|
|
|
502 |
|
|
|
|
|
(502 |
) (5)(I) |
|
|
||||||
Income (loss) from continuing operations attributable to common shareholders |
|
$ |
58,353 |
|
$ |
(1,067 |
) |
$ |
(6,723 |
) |
$ |
(1,797 |
) |
$ |
(22,005 |
) |
$ |
(26,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Weighted average common shares outstanding (diluted) |
|
71,071 |
|
|
|
|
|
25,000 |
|
|
|
96,071 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income from continuing operations attributable to GOV per common share |
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
$ |
0.28 |
|
Government Properties Income Trust
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Three Months Ended March 31, 2017
(amounts in thousands, except per share data)
|
|
|
|
|
|
FPO |
|
|
|
Other |
|
|
|
||||||
|
|
GOV |
|
FPO |
|
Property Sale |
|
Financing |
|
Pro Forma |
|
GOV |
|
||||||
|
|
Historical |
|
Historical |
|
Adjustments (5)(C) |
|
Adjustments (5)(D) |
|
Adjustments |
|
Pro Forma |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Rental Income |
|
$ |
69,296 |
|
$ |
37,823 |
|
$ |
(804 |
) |
$ |
|
|
$ |
3,537 |
(5)(E ) |
$ |
109,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Real estate taxes |
|
8,177 |
|
4,471 |
|
(116 |
) |
|
|
|
|
12,532 |
|
||||||
Utility expenses |
|
4,606 |
|
2,031 |
|
(2 |
) |
|
|
|
|
6,635 |
|
||||||
Other operating expenses |
|
13,992 |
|
8,117 |
|
(186 |
) |
|
|
|
(5)(F) |
21,923 |
|
||||||
Depreciation and amortization |
|
20,505 |
|
14,566 |
|
(289 |
) |
|
|
12,042 |
(5)(G) |
46,824 |
|
||||||
General and administrative |
|
3,962 |
|
4,497 |
|
|
|
|
|
(2,763 |
) (5)(F ) |
5,696 |
|
||||||
Total expenses |
|
51,242 |
|
33,682 |
|
(593 |
) |
|
|
9,279 |
|
93,610 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Operating income (loss) |
|
18,054 |
|
4,141 |
|
(211 |
) |
|
|
(5,742 |
) |
16,242 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Dividend income |
|
304 |
|
|
|
|
|
|
|
|
|
304 |
|
||||||
Interest and other income |
|
61 |
|
210 |
|
|
|
|
|
|
|
271 |
|
||||||
Interest expense |
|
(13,581 |
) |
(6,344 |
) |
|
|
(557 |
) |
|
|
(20,482 |
) |
||||||
Income (loss) before income taxes and equity in earnings (losses) of investees, net |
|
4,838 |
|
(1,993 |
) |
(211 |
) |
(557 |
) |
(5,742 |
) |
(3,665 |
) |
||||||
Income tax expense |
|
(18 |
) |
|
|
|
|
|
|
|
|
(18 |
) |
||||||
Equity in earnings (losses) of investees, net |
|
2,739 |
|
4,223 |
|
(3,895 |
) |
|
|
(802 |
) (5)(H) |
2,265 |
|
||||||
Gain on sale of property |
|
|
|
42,799 |
|
(42,799 |
) |
|
|
|
|
|
|
||||||
Income (loss) from continuing operations |
|
7,559 |
|
45,029 |
|
(46,905 |
) |
(557 |
) |
(6,544 |
) |
(1,418 |
) |
||||||
Less: Net income attributable to noncontrolling interests |
|
|
|
(1,884 |
) |
|
|
|
|
1,884 |
(5)(I) |
|
|
||||||
Income (loss) from continuing operations attributable to common shareholders |
|
$ |
7,559 |
|
$ |
43,145 |
|
$ |
(46,905 |
) |
$ |
(557 |
) |
$ |
(4,660 |
) |
$ |
(1,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Weighted average common shares outstanding (diluted) |
|
71,094 |
|
|
|
|
|
25,000 |
|
|
|
96,094 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income (loss) from continuing operations attributed to GOV per common share |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
$ |
(0.01 |
) |
(1) Basis of Presentation :
As of March 31, 2017, GOV owned 74 properties (96 buildings), excluding one property (one building) classified as discontinued operations, with approximately 11.5 million rentable square feet. As of March 31, 2017, FPO owned 39 properties (74 buildings) with approximately 6.5 million rentable square feet, including equity interests in two properties (three buildings) subject to joint venture arrangements that are accounted for as equity method investments in FPOs historical financial statements. The unaudited pro forma condensed consolidated financial statements include GOVs and FPOs accounts and the accounts of their respective consolidated subsidiaries. All intercompany transactions and balances have been eliminated. Certain reclassifications have been made to FPOs historical financial statements to conform to GOVs financial statement presentation.
(2) The Offering :
Reflects GOVs issuance of 25,000,000 Common Shares pursuant to the Offering at an assumed public offering price of $21.90 per Common Share (the closing price of the Common Shares on The NASDAQ Stock Market LLC on June 27, 2017), net of a 4.25% underwriting discount and other estimated expenses payable by GOV in connection with the Offering, with such net proceeds being used to partially fund the cash portion of the Transaction consideration. Net proceeds from the Offering were calculated as follows (dollars in thousands):
Gross proceeds from the Offering, net of underwriting discount |
|
$ |
524,231 |
|
Other estimated Offering expenses payable by GOV |
|
(500 |
) |
|
Net proceeds |
|
$ |
523,731 |
|
|
|
|
|
|
Common Shares |
|
$ |
250 |
|
Additional paid-in capital |
|
523,481 |
|
|
Net proceeds |
|
$ |
523,731 |
|
(3) The Transaction and Related Transactions :
The adjustments represent the effects of the Transaction for estimated total consideration of approximately $1.4 billion, including the assumption of approximately $231.7 million of aggregate principal balance of mortgage notes payable and approximately $49.2 million of estimated acquisition related costs. In order to reflect only those assets acquired and liabilities assumed by GOV pursuant to the Transaction, certain pro forma adjustments have been made to FPOs historical financial statements to adjust for dispositions of properties by FPO during 2016 and the first quarter of 2017, as described in Note (5)(C).
GOV expects to fund the cash portion of the Transaction consideration with the net proceeds of the Offering and borrowings under GOVs existing revolving credit facility and under the Bridge Loan Facility.
The following summarizes the estimated total consideration, funding sources and net purchase price for the Transaction as if it had occurred on March 31, 2017 (dollars in thousands):
The following summarizes the preliminary purchase price allocation for the Transaction as if it had occurred on March 31, 2017 (dollars in thousands):
Land |
|
$ |
297,951 |
|
Buildings and improvements |
|
758,646 |
|
|
Acquired real estate leases |
|
291,294 |
|
|
Investment in affiliates |
|
52,166 |
|
|
Cash |
|
13,269 |
|
|
Restricted cash |
|
2,348 |
|
|
Rents receivable |
|
5,611 |
|
|
Other assets |
|
3,102 |
|
|
Total assets |
|
1,424,387 |
|
|
Mortgage notes payable, including fair value adjustments (1) |
|
(231,360 |
) |
|
Accounts payable and accrued expenses |
|
(29,913 |
) |
|
Assumed real estate lease obligations |
|
(12,792 |
) |
|
Net assets acquired |
|
1,150,322 |
|
|
Assumed net working capital liability |
|
5,583 |
|
|
Assumed mortgage notes payable, including fair value adjustments (1) |
|
231,360 |
|
|
Estimated purchase price (2) |
|
$ |
1,387,265 |
|
(1) The aggregate principal balance of the related mortgage notes payable was $231.7 million as of March 31, 2017.
(2) The allocation of the estimated purchase price, which includes estimated acquisition related costs, is based on preliminary estimates and may change significantly following the completion of (i) third party appraisals and (ii) GOVs further analysis of acquired in place leases and building valuations.
GOV adopted Financial Accounting Standards Board Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business , or ASU No. 2017-01, on January 1, 2017. In accordance with ASU No. 2017-01, GOV will account for the Transaction as an acquisition of assets with GOV treated as the acquirer of FPO
and FPO LP for accounting purposes. Accordingly, the assets acquired and liabilities assumed will be recorded as of the closing of the Transaction, or the Closing, at their respective fair value, and added to those of GOV. For purposes of the unaudited pro forma condensed consolidated financial statements, GOV allocated: (i) a portion of the purchase price of the FPO properties to land and buildings and improvements based on determinations of the fair values of those properties assuming those properties are vacant; (ii) a portion of the purchase price of the FPO properties to above market and below market leases based on the present value (using an estimated discount interest rate which reflects the risks associated with acquired in place leases at the time the FPO properties are expected to be acquired by GOV) of the difference, if any, between (x) the contractual amounts to be paid pursuant to the acquired in place leases and (y) estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective in place leases; and (iii) a portion of the purchase price of the FPO properties to acquired in place leases based upon market estimates to lease up the properties based on leases in place at the time of acquisition. In making these allocations, GOV considered factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time the FPO properties are expected to be acquired by GOV. Consolidated financial statements of GOV issued subsequent to the Closing will include FPO assets acquired by GOV pursuant to the Transaction from the Closing date, but not for prior periods.
(4) Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet Adjustments :
(A) The adjustments represent the preliminary purchase price allocation for the Transaction as if it had occurred on March 31, 2017, assuming a total purchase price of approximately $1.4 billion and including the assumption of approximately $231.7 million aggregate principal balance of mortgage notes payable and approximately $49.2 million of estimated acquisition related costs.
Additional adjustments have been made to record acquired land, buildings and improvements, acquired real estate leases and assumed real estate lease obligations at their estimated fair value, as described in Note (3). Further adjustments include:
(i) Investment in affiliates : Adjustment of $9.9 million to reflect the estimated fair value of FPOs equity interests in two existing joint ventures as if GOV acquired these interests on March 31, 2017.
(ii) Rents receivable, net : Adjustment of $45.2 million to eliminate FPOs accumulated straight line rent receivable balance for tenant leases. FPOs pro forma rents receivable balance of $5.6 million represents the fair value of accounts receivable from tenants as of March 31, 2017.
(iii) Deferred leasing costs, net : Adjustment of $41.6 million to eliminate FPOs unamortized deferred leasing costs.
(iv) Other assets, net : Adjustments to eliminate fair value adjustments of $0.1 million related to FPOs interest rate swap agreements that are expected to be terminated at the Closing and to eliminate $2.2 million of leasehold improvements related to FPOs corporate and regional offices and certain other FPO assets.
(v) Accounts payable and accrued expenses : Adjustments of $23.8 million to eliminate the following FPO balances: (1) $19.1 million of deferred income; (2) $3.6 million of accrued straight line rent liabilities; and (3) $1.0 million of accrued interest expected to be paid at the Closing.
Additional adjustments have been made to reflect the expected repayment at the Closing of: (1) $51.0 million of outstanding borrowings under FPOs revolving credit facility; (2) FPOs $300.0 million unsecured term loan; and (3) two FPO mortgage notes payable with an aggregate outstanding principal balance of approximately $66.8 million. In May 2017, FPO repaid at maturity one of these mortgage notes with an outstanding principal balance of $32.2 million at March 31, 2017. A $0.4 million adjustment was also made to decrease the carrying value of FPOs mortgage notes payable to reflect the effect of current market interest rates on the estimated fair value of FPOs fixed rate mortgages expected to be assumed by GOV at the Closing.
Pursuant to the Merger Agreement, units of limited partnership interest in FPO LP (other than those held by FPO) will be converted into the right to receive cash consideration of $11.15 per limited partnership unit , except that holders of FPO LP limited partnership interests may instead elect to have their units of limited partnership interests in FPO LP converted into an equal number of units of preferred limited partnership interests in FPO LP. The adjustment to eliminate FPOs obligation for noncontrolling interests in FPO LP reflects GOVs assumption that all of the issued and outstanding units of limited partnership interest in FPO LP (other than those held by FPO) will be converted into the right to receive the cash consideration.
(B) The adjustments represent the Offering, as described in Note (2), borrowings under GOVs existing revolving credit facility and under the Bridge Loan Facility, net of $1.9 million of estimated debt issuance costs, and the aggregate net adjustment to GOVs and FPOs respective outstanding revolving credit facility balances. The aggregate net revolving credit facility adjustment includes borrowings of $590.0 million under GOVs existing revolving credit facility to partially fund the cash portion of the Transaction consideration and the expected repayment of outstanding borrowings under FPOs revolving credit facility of $51.0 million at the Closing. There were $160.0 million and $155.0 million in outstanding borrowings and $590.0 million and $595.0 million in available borrowings under GOVs existing revolving credit facility as of both March 31, 2017 and June 21, 2017, respectively.
(5) Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income Adjustments :
(C) From the period from January 1, 2016 through March 31, 2017, FPO sold four properties and equity interests in three unconsolidated joint venture arrangements. The pro forma adjustments related to those dispositions are as follows:
Rental income : Adjustment to eliminate rental income for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.
Real estate taxes, utility expenses and other operating expenses : Adjustment to eliminate property operating expenses for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.
Depreciation and amortization : Adjustment to eliminate depreciation and amortization for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.
Loss on impairment of real estate : Adjustment to eliminate loss on impairment of real estate for a property sold during 2016 as if that property was sold as of January 1, 2016.
Interest expense : Adjustment to eliminate $0.4 million of interest expense related to a mortgage note repaid in connection with the sale of a property during 2016 as if that property was sold and the mortgage note repaid as of January 1, 2016.
Loss on extinguishment of debt : Adjustment to eliminate a loss on extinguishment of debt related to a mortgage note repaid in connection with the sale of a property during 2016 as if that property was sold and the mortgage note repaid as of January 1, 2016.
Equity in earnings (losses) of investees, net : Adjustment to eliminate the equity in earnings of investees for 2016 and the first quarter of 2017 related to the equity interests in three unconsolidated joint venture arrangements which were sold in March 2017 as if those interests were sold as of January 1, 2016.
Gain (loss) on sale of property : Adjustment to eliminate gain or loss, as applicable, on sale for the properties sold during 2016 and the first quarter of 2017 as if those properties were sold as of January 1, 2016.
(D) The adjustments represent the effect on interest expense of the assumed borrowings under GOVs existing revolving credit facility and under the Bridge Loan Facility to partially fund the cash portion of the Transaction consideration, as described in Note (4)(B), and the expected repayment of outstanding FPO debt balances, as described in Note (4)(A).
Estimated interest expense related to borrowings under GOVs revolving credit facility is determined as follows (dollars in thousands, except percentages):
|
|
For the Three
|
|
For the Year
|
|
||
Estimated incremental borrowings on revolving credit facility |
|
$ |
590,000 |
|
$ |
590,000 |
|
Interest rate (1) |
|
2.44 |
% |
2.44 |
% |
||
Annual interest expense |
|
$ |
14,396 |
|
$ |
14,396 |
|
Percent of annual days adjusted |
|
25.0 |
% |
100.0 |
% |
||
Total adjustment |
|
$ |
3,559 |
|
$ |
14,396 |
|
(1) Contractual interest rate is LIBOR plus a 125 basis point spread subject to adjustment based on GOVs credit ratings.
An increase or decrease in the variable interest rate of 1 / 8 of a percent would increase or decrease, respectively, annual interest expense under the revolving credit facility interest expense by approximately $0.7 million.
Estimated interest expense related to borrowings under the Bridge Loan Facility is determined as follows (dollars in thousands):
|
|
For The Three
|
|
For the Year
|
|
||
Borrowings under Bridge Loan Facility |
|
$ |
36,591 |
|
$ |
36,591 |
|
Interest rate (1) |
|
2.59 |
% |
2.59 |
% |
||
Interest expense before amortization of debt issuance costs |
|
$ |
948 |
|
$ |
948 |
|
Amortization of related debt issuance costs (2) |
|
1,850 |
|
1,850 |
|
||
Annual interest expense |
|
$ |
2,798 |
|
$ |
2,798 |
|
Percent of annual days in period |
|
25.0 |
% |
100.0 |
% |
||
Estimated interest expense |
|
$ |
700 |
|
$ |
2,798 |
|
(1) Contractual interest rate is LIBOR plus a 140 basis points spread subject to adjustment based on GOVs credit ratings.
(2) The Bridge Loan Facility matures on the first anniversary of the Closing. Pro forma interest expense excludes additional fees payable under the Bridge Loan Facility if borrowings remain outstanding for 90 days or more as follows (dollars in thousands):
Days Outstanding |
|
Basis Points |
|
Additional Fees |
|
|
At least 90 days but less than 180 days |
|
25 |
|
$ |
91 |
|
At least 180 days but less than 270 days |
|
50 |
|
183 |
|
|
At least 270 days |
|
75 |
|
274 |
|
|
Total |
|
150 |
|
$ |
549 |
|
An increase or decrease in the variable interest rate of 1 / 8 of a percent would increase or decrease, respectively, estimated annual interest expense under the Bridge Loan Facility by approximately $0.04 million.
The estimated increase in interest expense resulting from assumed borrowings under GOVs existing revolving credit facility and under the Bridge Loan Facility has been partially offset by the effect of the expected repayment at the Closing of $51.0 million of outstanding borrowings under FPOs revolving credit facility, FPOs $300.0 million unsecured term loan and two FPO mortgages notes with an aggregate outstanding principal balance of approximately $66.8 million as if those repayments had occurred as of January 1, 2016. The decrease in interest expense associated with these expected repayments is $15.4 million and $3.7 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively.
The increase of 25,000,000 Common Shares as described in Note (2) assumes the Offering to partially fund the cash portion of the Transaction was completed on January 1, 2016.
(E) The adjustments represent non-cash straight line rent and non-cash amortization of above and below market leases related to acquired FPO leases. The calculation of non-cash straight line rent assumes that the term of the acquired FPO leases commenced as of January 1, 2016. Capitalized acquired above and below market lease values are amortized as a reduction or an increase, respectively, to rental income over the weighted average lease term. The weighted average lease term for above and below market leases is 4.9 years and 6.7 years, respectively, as of March 31, 2017. The components of the rental income adjustment are as follows (dollars in thousands):
|
|
For the Three
|
|
For the Year
|
|
||
Non-cash, straight line rent adjustments |
|
$ |
3,779 |
|
$ |
12,363 |
|
Non-cash, net above and below market lease amortization |
|
(242 |
) |
(869 |
) |
||
|
|
$ |
3,537 |
|
$ |
11,494 |
|
(F) GOV has no employees. The personnel and various services GOV requires to operate its business are provided to it by The RMR Group LLC, or RMR LLC. GOV has two agreements with RMR LLC to provide management services to it: (i) a business management agreement, which relates to its business generally; and (ii) a property management agreement, which relates to its property level operations.
FPOs historical other operating expenses include costs incurred by FPO to manage its properties. Under the terms of GOVs property management agreement, GOV will pay RMR LLC a property management fee equal to 3% of gross rents collected for the FPO properties and reimburse RMR LLC for allocated personnel and certain other costs to manage the FPO properties. No pro forma adjustment has been included in the unaudited condensed consolidated statements of income related to property management costs as GOVs estimated costs to manage the FPO properties under the RMR LLC property management agreement are currently expected to approximate FPOs historical property management costs for the FPO properties.
The adjustment to general and administrative expense eliminates FPOs historical general and administrative expenses of $17.0 million and $4.5 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively, and includes general and administrative expenses of $6.9 million and $1.7 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively, based on GOVs contractual obligation under its business management agreement with RMR LLC. The business management fee under GOVs business management agreement with RMR LLC is based upon a percentage of the lower of GOVs total real estate investments or total market capitalization, both as described in GOVs business management agreement with RMR LLC. GOV currently expects not to incur any additional recurring general and administrative expenses as a direct result of the Transaction.
(G) The adjustment eliminates FPOs historical depreciation and amortization expenses of $58.2 million and $14.3 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively, net of depreciation and amortization of FPO properties sold during 2016 and 2017 as described in Note (5)(C). The adjustment also includes estimated depreciation and amortization expenses based on the preliminary purchase price allocation described in Note (3) of $97.7 million and $26.3 million for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively. Real estate investments are depreciated on a straight line basis over estimated useful lives generally ranging up to 40 years. Capitalized acquired in place leases, exclusive of the value of acquired above market and below market lease values, are amortized on a straight line basis over the 6.3 year weighted average remaining lease term at March 31, 2017.
(H) The adjustment to FPOs historical equity in earnings of investees for the equity interests in two joint venture arrangements that GOV expects to acquire pursuant to the Transaction reflects the depreciation and amortization expense based on the estimated fair value of those interests at the
Closing date, as well as the effect of other pro forma adjustments, including non-cash straight line rent and non-cash net above and below market leases.
(I) The adjustment to eliminate FPOs historical equity in earnings of investees net (income) loss attributable to noncontrolling interests reflects the assumed conversion of all of the issued and outstanding units of limited partnership interest in FPO LP (other than those held by FPO) into the right to receive cash consideration of $11.15 per limited partnership unit (see Note (4)(A)).
GOV has been operating so as to qualify for taxation as a real estate investment trust for U.S. federal and state income tax purposes. Therefore, certain activities, including the Transaction, are not subject to U.S. federal income tax. Accordingly, no adjustment to pro forma income tax expense has been reflected in the unaudited pro forma combined statements of operations.