Dividend Capital Diversified Property Fund Inc.
Dividend Capital Diversified Property Fund Inc. (Form: 10-Q, Received: 08/12/2016 15:47:46)
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
Quarterly   Report   Pursuant   to   Section 13   or   15(d) of   the   Securities   Exchange   Act   of   1934
For the quarterly period ended June 30, 2016
Or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                       to                       .
Commission File No. 000-52596
_______________________________________
DIVIDEND   CAPITAL   DIVERSIFIED   PROPERTY   FUND   INC.
(Exact name of registrant as specified in its charter)
_______________________________________
Maryland
30-0309068
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
518 Seventeenth Street, 17th Floor
Denver, CO
80202
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (303) 228-2200
_______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
☒  (Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒ 
As of August 5, 2016 , 126,508,749 unclassified shares of common stock (referred to as “Class E” shares), 1,901,422 shares of Class A common stock, 2,166,522 shares of Class W common stock, and 28,943,378 shares of Class I common stock of Dividend Capital Diversified Property Fund Inc., each with a par value $0.01 per share, were outstanding.

 

Table of Contents

Dividend Capital Diversified Property Fund Inc.
Quarterly Report on Form 10-Q
For the Three and Six Months Ended June 30, 2016
TABLE OF CONTENTS
 
 
Page
 


2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
DIVIDEND CAPITAL DIVERSIFIED PROPERTY FUND INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and footnoted information)
 
໿
໿

As of

June 30,
2016
 
December 31,
2015

(Unaudited)
 
 
ASSETS
 
 
 
Investments in real property
$
2,240,520

 
$
2,380,174

Accumulated depreciation and amortization
(469,341
)
 
(505,957
)
Total net investments in real property
1,771,179

 
1,874,217

Debt related investments, net
15,469

 
15,722

Total net investments
1,786,648

 
1,889,939

Cash and cash equivalents
17,088

 
15,769

Restricted cash
17,219

 
18,394

Other assets, net
33,344

 
36,789

Total Assets  
$
1,854,299

 
$
1,960,891

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued expenses (1)
$
37,978

 
$
39,645

Mortgage notes
464,564

 
585,864

Unsecured borrowings
556,555

 
511,905

Intangible lease liabilities, net
62,909

 
63,874

Other liabilities
47,393

 
33,652

Total Liabilities  
1,169,399

 
1,234,940

Equity:
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 159,543,936 and 164,124,057 shares issued and outstanding, as of June 30, 2016 and December 31, 2015, respectively (2)
1,595

 
1,641

Additional paid-in capital
1,430,673

 
1,470,859

Distributions in excess of earnings
(817,920
)
 
(832,681
)
Accumulated other comprehensive loss
(22,848
)
 
(11,014
)
Total stockholders’ equity
591,500

 
628,805

Noncontrolling interests
93,400

 
97,146

Total Equity  
684,900

 
725,951

Total Liabilities and Equity  
$
1,854,299

 
$
1,960,891

 
(1)
Includes approximately $2.4 million and $5.1 million that we owed to our Advisor and affiliates of our Advisor for services and reimbursement of certain expenses as of June 30, 2016 and December 31, 2015 , respectively.
(2)
See Note 8 for the number of shares outstanding of each class of common stock as of June 30, 2016 and December 31, 2015 .  

The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Table of Contents

DIVIDEND CAPITAL DIVERSIFIED PROPERTY FUND INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and footnoted information)
 

For the Three Months Ended June 30,
 
For the Six Months Ended June 30,

2016
 
2015
 
2016
 
2015
REVENUE:
 
 
 
 
 
 
 
Rental revenue
$
52,702

 
$
51,075

 
$
108,246

 
$
110,454

Debt related income
237

 
1,584

 
475

 
4,787

Total Revenue  
52,939

 
52,659

 
108,721

 
115,241

EXPENSES:
 

 
 

 
 
 
 
Rental expense
15,632

 
13,407

 
31,950

 
28,536

Real estate depreciation and amortization expense
20,198

 
19,738

 
40,034

 
40,554

General and administrative expenses (1)
2,338

 
2,944

 
4,958

 
5,680

Advisory fees, related party
3,671

 
4,497

 
7,436

 
8,796

Acquisition-related expenses
474

 
358

 
525

 
783

Impairment of real estate property (2)

 
224

 
587

 
1,624

Total Operating Expenses  
42,313

 
41,168

 
85,490

 
85,973

Other Income (Expenses):
 

 
 

 
 
 
 
Interest and other income
(69
)
 
163

 
(11
)
 
797

Interest expense
(10,422
)
 
(11,275
)
 
(21,383
)
 
(25,256
)
(Loss) gain on extinguishment of debt and financing commitments

 
(272
)
 
5,136

 
(1,168
)
Gain on sale of real property (3)

 

 
41,400

 
128,667

Net Income
135

 
107

 
48,373

 
132,308

Net income attributable to noncontrolling interests
(18
)
 
(37
)
 
(4,474
)
 
(8,655
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
117

 
$
70

 
$
43,899

 
$
123,653

NET INCOME PER BASIC AND DILUTED COMMON SHARE
$
0.00

 
$
0.00

 
$
0.27

 
$
0.68

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
 

 
 

 
 
 
 
Basic
161,209

 
183,157

 
162,581

 
181,247

Diluted
173,669

 
196,267

 
175,179

 
194,029

Distributions declared per common share
$
0.0893

 
$
0.0896

 
$
0.1785

 
$
0.1793

 
(1)
Includes approximately $1.6 million and $1.8 million  of reimbursable expenses incurred by our Advisor and its affiliates during the three months ended June 30, 2016 and 2015 , respectively, and approximately $3.5 million of reimbursable expenses incurred by our Advisor and its affiliates during the six months ended both June 30, 2016 and 2015.
(2)
Includes approximately $125,000 paid to our Advisor for advisory fees associated with the disposition of real properties during the three and six months ended June 30, 2015.
(3)
Includes approximately $1.8 million   and $4.5 million paid to our Advisor for advisory fees associated with the disposition of real properties during the six months ended June 30, 2016 and 2015, respectively.
    
The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Table of Contents

DIVIDEND CAPITAL DIVERSIFIED PROPERTY FUND INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)  
໿

For the Three Months Ended June 30,
 
For the Six Months Ended June 30,

2016
 
2015
 
2016
 
2015
Net Income
$
135

 
$
107

 
$
48,373

 
$
132,308

Other Comprehensive (Loss) Income:
 
 
 
 
 
 
 
Change from cash flow hedging derivatives
(3,703
)
 
2,572

 
(12,781
)
 
765

Comprehensive (loss) income
(3,568
)
 
2,679

 
35,592

 
133,073

Comprehensive loss (income) attributable to noncontrolling interests
266

 
(206
)
 
(3,527
)
 
(8,705
)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
(3,302
)
 
$
2,473

 
$
32,065

 
$
124,368


The accompanying notes are an integral part of these condensed consolidated financial statements.


5


DIVIDEND CAPITAL DIVERSIFIED PROPERTY FUND INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(In thousands)
໿
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Additional
Distributions
Other
 
 
 
 
 
Common Stock
Paid-in
in Excess of
Comprehensive
Noncontrolling
Total
 
Shares
Amount
Capital
Earnings
(Loss) Income
Interests
Equity
Balances, December 31, 2015
164,124

 
$
1,641

 
$
1,470,859

 
$
(832,681
)
 
$
(11,014
)
 
$
97,146

 
$
725,951

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
43,899

 

 
4,474

 
48,373

Unrealized change from cash flow hedging derivatives

 

 

 

 
(11,861
)
 
(920
)
 
(12,781
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock, net of offering costs
7,966

 
80

 
52,095

 

 

 

 
52,175

Issuance of common stock, stock-based compensation plans
32

 

 
306

 

 

 

 
306

Redemptions of common stock
(12,578
)
 
(126
)
 
(92,531
)
 

 

 

 
(92,657
)
Amortization of stock-based compensation

 

 
437

 

 

 

 
437

Distributions declared on common stock

 

 

 
(29,059
)
 

 

 
(29,059
)
Distributions on unvested Advisor RSUs

 

 

 
(79
)
 

 

 
(79
)
Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contributions of noncontrolling interests

 

 

 

 

 
2,426

 
2,426

Distributions declared to noncontrolling interests

 

 

 

 

 
(6,212
)
 
(6,212
)
Redemptions of noncontrolling interests

 

 
(493
)
 

 
27

 
(3,514
)
 
(3,980
)
Balances, June 30, 2016
159,544

 
$
1,595

 
$
1,430,673

 
$
(817,920
)
 
$
(22,848
)
 
$
93,400

 
$
684,900

The accompanying notes are an integral part of these condensed consolidated financial statements.


6


DIVIDEND CAPITAL DIVERSIFIED PROPERTY FUND INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

For the Six Months Ended June 30,

2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
48,373

 
$
132,308

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Real estate depreciation and amortization expense
40,034

 
40,554

Gain on disposition of real property
(41,400
)
 
(128,667
)
Impairment of real estate property
587

 
1,624

(Gain) loss on extinguishment of debt and financing commitments
(5,136
)
 
1,168

Other adjustments to reconcile net income to net cash provided by operating activities
3,608

 
1,473

Changes in operating assets and liabilities
(2,705
)
 
(592
)
Net cash provided by operating activities
43,361

 
47,868

INVESTING ACTIVITIES:
 
 
 
Acquisition of real property
(65,861
)
 
(132,221
)
Capital expenditures in real property
(11,531
)
 
(7,210
)
Proceeds from disposition of real property
175,965

 
323,030

Principal collections on debt related investments
231

 
30,394

Other investing activities
(828
)
 
(7,076
)
Net cash provided by investing activities
97,976

 
206,917

FINANCING ACTIVITIES:
 
 
 
Mortgage note proceeds
32,100



Mortgage note principal repayments
(140,494
)
 
(68,905
)
Defeasance of mortgage note borrowings

 
(53,267
)
Net proceeds from (repayments of) revolving line of credit borrowings
44,000

 
(75,000
)
Term loan borrowing repayments

 
(20,000
)
Other secured borrowing repayments


(25,796
)
Redemption of common shares
(94,973
)
 
(27,412
)
Distributions on common stock
(19,381
)
 
(21,180
)
Proceeds from sale of common stock
49,005

 
62,138

Offering costs for issuance of common stock
(3,819
)
 
(2,577
)
Distributions to noncontrolling interest holders
(3,830
)
 
(2,193
)
Redemption of OP Unit holder interests
(3,573
)
 
(918
)
Other financing activities
947

 
(5,217
)
Net cash used in financing activities  
(140,018
)
 
(240,327
)
NET INCREASE IN CASH AND CASH EQUIVALENTS  
1,319

 
14,458

CASH AND CASH EQUIVALENTS, beginning of period  
15,769

 
14,461

CASH AND CASH EQUIVALENTS, end of period  
$
17,088

 
$
28,919

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid for interest
$
20,501

 
$
24,211

Supplemental Disclosure of Noncash Investing and Financing Activities:
 
 
 
Common stock issued pursuant to the distribution reinvestment plan
$
10,192

 
$
10,585

Issuances of OP Units for beneficial interests
$

 
$
7,324

Non-cash principal collection on debt related investments *
$

 
$
11,228

Non-cash disposition of real property *
$
7,830

 
$
128,008

Non-cash repayment of mortgage note and other secured borrowings *
$

 
$
139,236

 
*
Represents the amount of sales proceeds and debt repayments from the disposition of real property or the repayment of borrowings that we did not receive or pay in cash, primarily due to the repayment or assumption of related borrowings by the purchaser or borrower at closing.
The accompanying notes are an integral part of these condensed consolidated financial statements.  

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2016
(Unaudited)




8


DIVIDEND CAPITAL DIVERSIFIED PROPERTY FUND INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2016
(Unaudited)
1. ORGANIZATION
Dividend Capital Diversified Property Fund Inc. is a Maryland corporation formed on April 11, 2005 to invest in a diverse portfolio of real property and real estate related investments. As used herein, “the Company,” “we,” “our” and “us” refer to Dividend Capital Diversified Property Fund Inc. and its consolidated subsidiaries and partnerships except where the context otherwise requires.
We operate in such a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes, and we utilize an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) organizational structure to hold all or substantially all of our assets through our operating partnership, Dividend Capital Total Realty Operating Partnership, L.P. (our “Operating Partnership”).
We are the sole general partner of our Operating Partnership. In addition, we have contributed 100% of the proceeds received from our offerings of common stock to our Operating Partnership in exchange for partnership units (“OP Units”) representing our interest as a limited partner of our Operating Partnership. Our Operating Partnership qualifies as a variable interest entity for accounting purposes and substantially all of the assets of the Company are held by our Operating Partnership, which, subject to certain Operating Partnership and subsidiary level financing restrictions, can be used to settle its obligations. Creditors of certain liabilities of our Operating Partnership have recourse to the Company. Under our Operating Partnership, we have variable interest entities that are joint ventures in which we have real estate investments. The accompanying condensed consolidated balance sheets included approximately $50.0 million and $76.9 million , after accumulated depreciation and amortization, in net investments in real property in these consolidated variable interest entities as of June 30, 2016 and December 31, 2015 , respectively. The accompanying condensed consolidated balance sheets include approximately $24.0 million and $50.1 million in mortgage notes in these consolidated variable interest entities as of June 30, 2016 and December 31, 2015 , respectively.
As of June 30, 2016 and December 31, 2015 , we owned approximately 92.9% and 92.8% , respectively, of the limited partnership interests in our Operating Partnership, and the remaining limited partnership interests in our Operating Partnership were owned by third-party investors. Our Operating Partnership has classes of OP Units that correspond to our four classes of common stock: Class E OP Units, Class A OP Units, Class W OP Units, and Class I OP Units. As of June 30, 2016 and December 31, 2015 , our Operating Partnership had issued and outstanding approximately 12.3 million and 12.8 million Class E OP Units held by third party investors, respectively, which represent limited partnership interests issued in connection with its private placement offerings. As of June 30, 2016 and December 31, 2015 , such Class E OP Units had a maximum approximate redemption value of $90.5 million and $95.6 million , respectively, based on the most recent selling price of our common stock pursuant to our primary offering.
Dividend Capital Total Advisors LLC (our “Advisor”), a related party, manages our day-to-day activities under the terms and conditions of an advisory agreement (as amended from time to time, the “Advisory Agreement”). Our Advisor and its affiliates receive various forms of compensation, reimbursements and fees for services relating to the investment and management of our real estate assets.
On July 12, 2012, the Securities and Exchange Commission (the “Commission”) declared effective our Registration Statement on Form S-11 (Registration Number 333-175989) (as amended, the “Prior Registration Statement”). The Prior Registration Statement applied to the offer and sale (the “Prior Offering”) of up to $3,000,000,000 of our shares of common stock, of which $2,250,000,000 of shares were expected to be offered to the public in a primary offering and $750,000,000 of shares were expected to be offered to our stockholders pursuant to an amended and restated distribution reinvestment plan (subject to our right to reallocate such amounts). In the Prior Offering, we offered to the public three classes of shares: Class A shares, Class W shares and Class I shares with net asset value (“NAV”) based pricing. On September 15, 2015, we terminated the Prior Offering. Through September 15, 2015, the date our Prior Offering terminated, we had raised gross proceeds of approximately $183.0 million from the sale of approximately 25.8 million shares in the Prior Offering, including approximately $3.4 million through our distribution reinvestment plan.

9


On September 16, 2015, the Commission declared effective our Registration Statement on Form S-11 (Registration Number 333-197767) (the “Follow-On Registration Statement”). The Follow-On Registration Statement applies to the Company’s follow-on “best efforts” offering of up to $1,000,000,000 of the Company’s Class A, Class I and Class W shares of common stock, of which $750,000,000 of shares are expected to be offered to the public in a primary offering and $250,000,000 of shares are expected to be offered to stockholders of the Company pursuant to its distribution reinvestment plan (subject to the Company’s right to reallocate such amounts) (the “Follow-On Offering”). As of June 30, 2016 , we had raised gross proceeds of approximately $65.0 million from the sale of approximately 8.8 million shares in the Follow-On Offering.
We are offering to sell any combination of Class A shares, Class W shares and Class I shares with a dollar value up to the maximum offering amount pursuant to the Follow-On Offering. We also sell shares of our unclassified common stock, which we refer to as “Class E” shares, pursuant to our distribution reinvestment plan offering registered on our Registration Statement on Form S-3 (Registration Number 333-162636). In the event of a liquidation event, such assets, or the proceeds therefrom, will be distributed ratably in proportion to the respective NAV for each class until the NAV for each class has been paid. Other than differing allocable fees and liquidation rights, Class E shares, Class A shares, Class W shares, and Class I shares have identical rights and privileges.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The accompanying interim condensed consolidated financial statements (herein referred to as “financial statements,” “balance sheets,” “statements of income,” “statements of comprehensive income,” “statement of equity,” or “statements of cash flows”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the Commission instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, these financial statements do not include all the information and disclosure required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments and eliminations, consisting only of normal recurring items necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of operating results for a full year. The unaudited information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited financial statements and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Commission on March 3, 2016. There have been no significant changes to the Company’s significant accounting policies during the six months ended  June 30, 2016 other than the updates described below.
Dealer Manager and Distribution Fees
We record a liability for dealer manager and distribution fees that we estimate that we may pay to Dividend Capital Securities LLC (our "Dealer Manager") in future periods for shares of our common stock sold pursuant to the Prior Offering and the Follow-On Offering with a corresponding reduction in proceeds received from the sale of our common stock. Accordingly, as of June 30, 2016, we recorded a liability for estimated future dealer manager and distribution fees of approximately $3.8 million . This liability included an immaterial amount related to shares issued prior to the three months ended June 30, 2016. See Note 9 for further discussion of our Dealer Manager and the dealer manager and distribution fees.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current period financial statement presentation. In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2015-03 (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance is effective for all reporting periods beginning after December 15, 2015 and requires retrospective application. As a result of adopting this guidance, we reclassified approximately $5.1 million and $1.2 million of net debt issuance costs to “unsecured borrowings” and “mortgage notes”, respectively, in the accompanying condensed consolidated balance sheet as of December 31, 2015 . We recorded approximately $4.4 million and $1.4 million of net debt issuance costs into “unsecured borrowings” and “mortgage notes”, respectively, in the accompanying condensed consolidated balance sheet as of June 30, 2016 .

10


New Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update 2016-13, which introduces a new model for recognizing credit losses for certain financial instruments, including loans, accounts receivable and debt securities. The new model requires an estimate of expected credit losses over the life of exposure to be recorded through the establishment of an allowance account, which is presented as an offset to the related financial asset. The expected credit loss is recorded upon the initial recognition of the financial asset. The guidance will be effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2019. Early application is permitted. The guidance will generally be adopted on a modified retrospective basis, with exceptions for certain types of financial assets. We do not anticipate the adoption will have a significant impact on our financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-05, which clarifies the effect of derivative contract novations on existing hedge accounting relationships. The guidance states that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”) does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The guidance will be effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. The guidance can be adopted on either a prospective basis or a modified retrospective basis. Earlier application is permitted. We do not anticipate the adoption will have a significant impact on our financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”), which amends the accounting guidance regarding lessees accounting, leveraged leases, and sale and leaseback transactions. The accounting applied by a lessor is largely unchanged under ASU 2016-02. The guidance will be effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2018. The guidance should be adopted using a modified retrospective transition, which will require application of ASU 2016-02 at the beginning of the earliest comparative period presented. Earlier application is permitted. We do not anticipate the adoption will have a significant impact on our consolidated financial statements.
Newly Adopted Accounting Pronouncements
In February 2015, the FASB issued Accounting Standards Update 2015-02 (“ASU 2015-02”), which amends certain guidance applicable to the consolidation of various legal entities, including variable interest entities. The amendments in ASU 2015-02 are effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. As a result of adopting this guidance as of January 1, 2016, our Operating Partnership qualifies as a variable interest entity.

11


3. INVESTMENTS IN REAL PROPERTY
Currently, our consolidated investments in real property consist of investments in office, industrial and retail properties. The following tables summarize our consolidated investments in real property as of June 30, 2016 and December 31, 2015 (amounts in thousands):
໿
Real Property
 
Land
 
Building and Improvements
 
Intangible Lease Assets
 
Total Investment Amount
 
Intangible Lease Liabilities
 
Net Investment Amount
As of June 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office
 
$
173,876

 
$
713,652

 
$
248,254

 
$
1,135,782

 
$
(18,577
)
 
$
1,117,205

Industrial
 
 
9,572

 
 
68,238

 
 
16,436

 
 
94,246

 
 
(344
)
 
 
93,902

Retail
 
 
295,935

 
 
599,951

 
 
114,606

 
 
1,010,492

 
 
(76,369
)
 
 
934,123

Total gross book value
 
 
479,383

 
 
1,381,841

 
 
379,296

 
 
2,240,520

 
 
(95,290
)
 
 
2,145,230

Accumulated depreciation/amortization
 
 

 
 
(196,444
)
 
 
(272,897
)
 
 
(469,341
)
 
 
32,381

 
 
(436,960
)
Total net book value
 
$
479,383

 
$
1,185,397

 
$
106,399

 
$
1,771,179

 
$
(62,909
)
 
$
1,708,270

As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office
 
$
203,889

 
$
833,655

 
$
310,629

 
$
1,348,173

 
$
(18,923
)
 
$
1,329,250

Industrial
 
 
9,572

 
 
65,307

 
 
16,436

 
 
91,315

 
 
(344
)
 
 
90,971

Retail
 
 
260,761

 
 
570,700

 
 
109,225

 
 
940,686

 
 
(74,282
)
 
 
866,404

Total gross book value
 
 
474,222

 
 
1,469,662

 
 
436,290

 
 
2,380,174

 
 
(93,549
)
 
 
2,286,625

Accumulated depreciation/amortization
 
 

 
 
(208,281
)
 
 
(297,676
)
 
 
(505,957
)
 
 
29,675

 
 
(476,282
)
Total net book value
 
$
474,222

 
$
1,261,381

 
$
138,614

 
$
1,874,217

 
$
(63,874
)
 
$
1,810,343

]]
]]
Acquisition
The following table summarizes our acquisition of real property during the six months ended June 30, 2016 (dollar amounts and square footage in thousands):
Real Property
 
Property Type
 
Market
 
Date of Acquisition
 
Acquired Ownership
 
Contract Price
 
Net Rentable Square Feet
 
Percent Leased
Suniland Shopping Center
 
Retail
 
South Florida
 
5/27/2016
 
100%
 
$
66,500

 
82

 
93.2
%
The following table summarizes the allocation of the fair value of the real property we acquired during the six months ended June 30, 2016 to land, building and improvements, intangible lease assets, and intangible lease liabilities (dollar amounts in thousands). We have not made any material adjustments related to this allocation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average
Amortization
Period (Years)
Real Property
 
Land
 
Building and Improvements
 
Intangible Lease Assets
 
Intangible Lease Liabilities
 
Total Fair Value
 
Prorations and Credits
 
Contract Price
 
Intangible Lease Assets
 
Intangible Lease Liabilities
Suniland Shopping Center
 
$
34,804

 
$
28,022

 
$
5,880

 
$
(2,113
)
 
$
66,593

 
$
(93
)
 
$
66,500

 
5.8
 
2.5
For the three and six months ended June 30, 2016 , our consolidated statements of income include revenue of approximately $379,000 and net operating income (“NOI”) of approximately $291,000 attributable to the real property acquired during the six months ended June 30, 2016 .

12


Dispositions
During the the six months ended June 30, 2016 and 2015 , we disposed of the following properties (dollar amounts and square footage in thousands): ໿
໿
໿
Property Type
 
Market
 
Ownership
 
Net Rentable Square Feet
 
Percentage Leased
 
Disposition Date
 
Contract Sales Price
 
Gain on Sale
During the six months ended June 30, 2016:
 
 
 
 
 
 
 
 
 
 
Office
 
Washington, DC
 
100%
 
574

 
100
%
 
2/18/2016
 
$
158,400

 
$
41,241

Office
 
Chicago, IL
 
80%
 
107

 
66
%
 
3/1/2016
 
9,850

 

Office
 
Chicago, IL
 
80%
 
199

 
81
%
 
3/1/2016
 
18,000

 
159

Total/ Weighted Average
 
 
 
880

 
92
%
 
 
 
$
186,250

 
$
41,400

During the six months ended June 30, 2015:
 
 
 
 
 
 
 
 
 
 
Retail
 
Pittsburgh, PA
 
100%
 
103

 
93
%
 
5/5/2015
 
$
12,500

 
$

Office and Industrial Portfolio (1)
 
Various  (1)
 
100%
 
2,669

 
100
%
 
3/11/2015
 
398,635

 
105,542

Office
 
Dallas, TX
 
100%
 
177

 
88
%
 
1/16/2015
 
46,600

 
23,125

Total/ Weighted Average
 
 
 
2,949

 
99
%
 
 
 
$
457,735

 
$
128,667

 
(1)
The portfolio includes six office properties comprising 1.1 million net rentable square feet located in the following markets: Los Angeles, CA ( three properties, of which one disposed property was a single building from a two-building office property), Northern New Jersey, Miami, FL, and Dallas, TX, and six industrial properties comprising 1.6 million net rentable square feet located in the following markets: Los Angeles, CA, Dallas, TX, Cleveland, OH, Chicago, IL, Houston, TX, and Denver, CO.
Real Property Impairment
During the six months ended June 30, 2016 , we recorded a $587,000 impairment charge related to a consolidated office property located in the Chicago, IL market, which we acquired in January 2007 and we held through a joint venture in which we were not the managing partner. We held an 80% ownership interest in the office property. We sold this property in March 2016. Prior to the disposition, the net book value of the property exceeded the contract sales price less the cost to sell by approximately $587,000 . Accordingly, we recorded an impairment charge to reduce the net book value of the property to our estimate of its fair value less the cost to sell.
During the three and six months ended June 30, 2015 , we recorded $224,000 and $1.6 million of impairment charges, respectively, related to a wholly owned retail property that we acquired in May 2007 in the Pittsburgh, PA market, which was classified as held for sale as of March 31, 2015 and disposed of in May 2015. As of March 31, 2015, the net book value of this retail property exceeded our estimate of the fair value of the property less the cost to sell by $1.4 million . Accordingly, we recorded an impairment to reduce the net book value of the property to our estimate of its fair value less the cost to sell. During the three months ended June 30, 2015, we recorded an additional impairment of $224,000 related to this retail property primarily due to additional capital expenditures and transaction costs incurred during the three months ended June 30, 2015.
In the calculation of our daily NAV, our real estate assets are carried at fair value using valuation methodologies consistent with ASC Topic 820, Fair Value Measurement and Disclosures (“ASC Topic 820”). As a result, the timing of valuation changes recorded in our NAV will not necessarily be the same as for impairment charges recorded to our consolidated financial statements prepared pursuant to GAAP. Since we determine our NAV daily, impairment charges pursuant to GAAP will likely always be delayed and potentially significantly delayed compared to the change in fair value of our properties included in the calculation of our daily NAV.

13


Rental Revenue
The following table summarizes the adjustments to rental revenue related to the amortization of above-market lease assets, below-market lease liabilities, and straight-line rental adjustments for the three and six months ended June 30, 2016 and 2015 . In addition, the following table summarizes tenant recovery income received from tenants for real estate taxes, insurance and other property operating expenses and recognized as rental revenue (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Straight-line rent adjustments
$
(205
)
 
$
(43
)
 
$
(446
)
 
$
(398
)
Above-market lease assets
(1,261
)
 
(1,256
)
 
(2,528
)
 
(2,616
)
Below-market lease liabilities
1,544

 
1,389

 
3,079

 
3,103

Total increase to rental revenue
$
78

 
$
90

 
$
105

 
$
89

Tenant recovery income (1)
$
9,996

 
$
8,573

 
$
20,560

 
$
18,738

 
(1)
Tenant recovery income presented in this table excludes real estate taxes that were paid directly by our tenants that are subject to triple net lease contracts. Such payments totaled approximately $876,000 and $1.5 million during the three months ended June 30, 2016 and 2015 , respectively, and approximately $2.3 million and $4.1 million during the six months ended June 30, 2016 and 2015 , respectively.
Concentration of Credit Risk
Concentration of credit risk with respect to our sources of revenue currently exists due to a small number of tenants whose rental payments to us make up a relatively high percentage of our rental revenue. Rental revenue from our lease with Charles Schwab & Co., Inc., as master tenant of one of our office properties, represented approximately $12.5 million , or 11.5% , of our total revenue for the six months ended June 30, 2016 .
The following is a summary of amounts related to the top five tenants based on annualized base rent, as of June 30, 2016 (dollar amounts and square feet in thousands):
Tenant
 
Locations
 
Industry
 
Annualized Base Rent  (1)
 
% of Total Annualized Base Rent
 
 Square Feet
 
% of Total Portfolio Square Feet
Charles Schwab & Co., Inc.
 
2
 
Securities, Commodities, Fin. Inv./Rel. Activities
 
$
23,410

 
13.8
%
 
602

 
7.2
%
Sybase
 
1
 
Publishing Information (except Internet)
 
18,692

 
11.0
%
 
405

 
4.8
%
Stop & Shop
 
15
 
Food and Beverage Stores
 
14,168

 
8.3
%
 
882

 
10.5
%
Novo Nordisk
 
1
 
Chemical Manufacturing
 
4,627

 
2.7
%
 
167

 
2.0
%
Seton Health Care
 
1
 
Hospitals
 
4,339

 
2.6
%
 
156

 
1.9
%
 
 
20
 
 
 
$
65,236

 
38.4
%
 
2,212

 
26.4
%
 
(1)
Annualized base rent represents the annualized monthly base rent of executed leases as of June 30, 2016 .
Our properties in New Jersey, Massachusetts, California, and Texas accounted for approximately 20% ,   20% ,   14% , and 12% respectively, of our total gross investment in real property portfolio as of June 30, 2016 . A deterioration of general economic or other relevant conditions, changes in governmental laws and regulations, acts of nature, demographics or other factors in any of those states or the geographical region in which they are located could result in the loss of tenants, a decrease in the demand for our properties and a decrease in our revenues from those markets, which in turn may have a disproportionate and material adverse effect on our results of operations and financial condition.

14


4. DEBT RELATED INVESTMENTS
As of both June 30, 2016 and December 31, 2015 , we had invested in three  debt related investments. The weighted average maturity of our debt related investments structured as mortgage notes as of June 30, 2016 was 2.8 years, based on our recorded net investments. The following table describes our debt related income for the three and six months ended June 30, 2016 and 2015 (dollar amounts in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Weighted Average Yield as of June 30, 2016 (1)
Investment Type
 
2016
 
2015
 
2016
 
2015
 
Mortgage notes (2)
 
$
237

 
$
730

 
$
475

 
$
3,143

 
6.1%
Mezzanine debt
 

 
854

 

 
1,644

 
N/A
Total
 
$
237

 
$
1,584

 
$
475

 
$
4,787

 
6.1%
 
(1)
Weighted average yield is calculated on an unlevered basis using the amount invested, current interest rates and accretion of premiums or discounts realized upon the initial investment for each investment type as of June 30, 2016 . As of June 30, 2016 , all of our debt related investments bear interest at fixed rates.
(2)
We had three debt related investments structured as mortgage notes repaid in full during the six months ended June 30, 2015 . During the six months ended June 30, 2015 , amounts recorded include early repayment fees received and accelerated amortization of deferred due diligence costs related to certain of these repayments.
Impairment
As of June 30, 2016 and December 31, 2015 , we did not have any allowance for loan loss. During the six months ended June 30, 2016 , we did not record any current period provision for loan loss or recoveries of amounts previously charged off. We did not have any debt related investments on non-accrual status as of June 30, 2016 or December 31, 2015 . We did not record any interest income related to our impaired debt related investment during the six months ended June 30, 2015 . We did not have any impaired debt related investment as of June 30, 2016 .
5. DEBT OBLIGATIONS
The following table describes our borrowings as of June 30, 2016 and December 31, 2015 (dollar amounts in thousands):

Principal Balance as of
 
Weighted Average Stated Interest Rate as of
 
Gross Investment Amount Securing Borrowings as of   (1)

June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
Fixed-rate mortgages (2)
$
465,292

 
$
580,959

 
5.2%
 
5.6%
 
$
801,064

 
$
1,016,560

Floating-rate mortgages (3)

 
7,890

 
—%
 
3.4%
 

 
16,618

Total secured borrowings
465,292

 
588,849

 
5.2%
 
5.5%
 
801,064

 
1,033,178

Line of credit (4)
211,000

 
167,000

 
1.9%
 
1.9%
 
 N/A

 
 N/A

Term loans (5)
350,000

 
350,000

 
2.6%
 
2.6%
 
 N/A

 
 N/A

Total unsecured borrowings
561,000

 
517,000

 
2.4%
 
2.4%
 
 N/A

 
 N/A

Total borrowings
$
1,026,292

 
$
1,105,849

 
3.6%
 
4.1%
 
 N/A

 
 N/A

Less: net debt issuance costs (6)
(5,864
)
 
(6,317
)
 
 
 
 
 
 

 
 

Add: mark-to-market adjustment on assumed debt
691

 
1,304

 
 
 
 
 
 

 
 

Less: GAAP principal amortization on restructured debt

 
(3,067
)
 
 
 
 
 
 
 
 
Total borrowings (net basis)
$
1,021,119

 
$
1,097,769

 
 
 
 
 
 
 
 
 
(1)
“Gross Investment Amount” as used here and throughout this document represents the allocated gross basis of real property after certain adjustments. Gross Investment Amount for real property (i) includes the effect of intangible lease liabilities, (ii) excludes accumulated depreciation and amortization, and (iii) includes the impact of impairments. 
(2)
Amount as of June 30, 2016 includes a floating-rate mortgage note that was subject to an interest rate spread of 1.60% over one-month LIBOR, which we have effectively fixed using an interest rate swap at 3.051% for the term of the borrowing.
(3)
As of December 31, 2015 , our floating rate mortgage note was subject to an interest rate spread of 3.00% over one-month LIBOR.
(4)
As of June 30, 2016 and December 31, 2015 , borrowings under our line of credit were subject to interest at a floating rate of 1.40% over one-month LIBOR. However, as of June 30, 2016 , we have effectively fixed the interest rate of approximately $20.3 million of the total of $211.0 million in borrowings using interest rate swaps, resulting in a weighted average interest rate on the total line of credit of 1.94% . As of December 31, 2015 , we had

15


effectively fixed the interest rate of approximately $25.4 million of the total of $167.0 million in borrowings using interest rate swaps, resulting in a weighted average interest rate on the total line of credit of 1.88% .
(5)
As of June 30, 2016 and December 31, 2015 , borrowings under our term loans were subject to interest at a weighted average floating rate of 1.52% over one-month LIBOR. However, we had effectively fixed the interest rates of the borrowings using interest rate swaps at 2.60% and 2.59% as of June 30, 2016 and December 31, 2015 , respectively.
(6)
See Note 2 for additional information related to the reclassification of net debt issuance costs in accordance with ASU 2015-03.
Mortgage Notes
As of June 30, 2016 ,   eight mortgage notes were interest-only and six mortgage notes were fully amortizing with outstanding principal balances of approximately $299.0 million and $166.3 million , respectively. None of our mortgage notes are recourse to us.
Credit Facility
On January 13, 2015 , we entered into a senior unsecured term loan and revolving line of credit (the “Facility”) with a syndicate of 14 lenders led by Bank of America, N.A., as Administrative Agent. The Facility provides us with the ability from time to time to increase the size of the Facility up to a total of $900 million less the amount of any prepayments under the term loan component of the Facility, subject to receipt of lender commitments and other conditions. The Facility includes a $400 million revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility contains a sublimit of $50 million for letters of credit and a sublimit of $50 million for swing line loans. The primary interest rate for the Revolving Credit Facility is based on LIBOR, plus a margin ranging from 1.40% to 2.30% , depending on our consolidated leverage ratio. The maturity date of the Revolving Credit Facility is January 31, 2019 and contains one   12 -month extension option that we may exercise upon (i) payment of an extension fee equal to 0.15% of the sum of the amount outstanding under the Revolving Credit Facility and the unused portion of the Revolving Credit Facility at the time of the extension, and (ii) compliance with the other conditions set forth in the credit agreement.
Borrowings under the Facility are available for general business purposes including, but not limited to, refinancing of existing indebtedness and financing the acquisition of permitted investments, including commercial properties. 
As of June 30, 2016 and  December 31, 2015 , the unused portion of the Facility was approximately $186.8 million and $230.8 million , respectively. As of both June 30, 2016 and December 31, 2015 , we were in compliance with all of our debt covenants and had full access to the unused portion of the Facility.
Repayment of Mortgage Notes
During the six months ended June 30, 2016 , we repaid five mortgage note borrowings in full during the respective free-prepayment periods prior to their scheduled maturities using proceeds from the Facility and the disposition of real properties. The following table describes these repayments in more detail (dollar amounts in thousands):
໿
Debt Obligation
 
Repayment Date
 
Balance Repaid/Extinguished
 
Interest Rate Fixed or Floating
 
Stated Interest Rate
 
Contractual Maturity Date
 
Collateral Type
 
Collateral Market
655 Montgomery
 
4/11/2016
 
$
55,683

 
Fixed
 
6.01%
 
6/11/2016
 
Office Property
 
San Francisco, CA
Jay Street
 
4/11/2016
 
23,500

 
Fixed
 
6.05%
 
7/11/2016
 
Office Property
 
Silicon Valley, CA
40 Boulevard (1)
 
3/1/2016
 
7,830

 
Floating
 
3.44%
 
3/11/2016
 
Office Property

Chicago, IL
Washington Commons (2)
 
2/1/2016
 
21,300

 
Fixed
 
5.94%
 
2/1/2016
 
Office Property

Chicago, IL
1300 Connecticut
 
1/12/2016
 
44,979

 
Fixed
 
6.81%
 
4/10/2016
 
Office Property

Washington, DC
Total/weighted average borrowings
 
 
 
$
153,292

 
 
 
6.11%
 
 
 
 
 
 
 
(1)
The mortgage note was subject to an interest rate of 3.0% over one-month LIBOR.
(2)
Amount presented includes a $5.1 million contingently payable mortgage note that was not ultimately required to be repaid. As a result of the transaction, we recognized a gain on extinguishment of debt and financing commitments of approximately $5.1 million during the six months ended June 30, 2016 .
໿
໿

16


The following table reflects our contractual debt maturities as of June 30, 2016 , specifically our obligations under our mortgage notes and unsecured borrowings (dollar amounts in thousands):
 
 
As of June 30, 2016
 
 
Mortgage Notes
 
Unsecured Borrowings
 
Total
Year Ending December 31,
 
Number of Borrowings Maturing
 
Outstanding Principal Balance
 
Number of Borrowings Maturing
 
Outstanding Principal Balance
 
Outstanding Principal Balance
2016
 
2
 
$
130,122

 
 
$

 
$
130,122

2017
 
6
 
206,660

 
 

 
206,660

2018
 
 
2,330

 
1
 
150,000

 
152,330

2019
 
 
2,570

 
1
 
211,000

 
213,570

2020
 
 
2,704

 
 

 
2,704

2021
 
1
 
11,570

 
 

 
11,570

2022
 
1
 
2,431

 
1
 
200,000

 
202,431

2023
 
1
 
30,474

 
 

 
30,474

2024
 
 
1,034

 
 

 
1,034

2025
 
1
 
71,094

 
 

 
71,094

Thereafter
 
2
 
4,303

 
 

 
4,303

Total
 
14
 
$
465,292

 
3
 
$
561,000

 
$
1,026,292

Less: net debt issuance costs (1)
 
 
 
(1,419
)
 
 
 
(4,445
)
 
 
Add: mark-to-market adjustment on assumed debt
 
 
 
691

 
 
 

 
 
Total borrowings (net basis)
 
 
 
$
464,564

 
 
 
$
556,555

 
 
 
(1)
See Note 2 for additional information related to the reclassification of net debt issuance costs in accordance with ASU 2015-03.
6. DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
We maintain risk management control systems to monitor interest rate risk attributable to both our outstanding and forecasted debt obligations. We generally seek to limit the impact of interest rate changes on earnings and cash flows by selectively utilizing derivative instruments to hedge exposures to changes in interest rates on our unsecured floating rate borrowings. While this hedging strategy is designed to minimize the impact on our net income (loss) and cash provided by operating activities from changes in interest rates, the overall returns on our investments may be reduced. Our board of directors has established policies and procedures regarding our use of derivative instruments for hedging or other purposes to achieve these risk management objectives.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from counterparties in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amounts. We have entered into and plan to enter into certain interest rate derivatives with the goal of mitigating our exposure to adverse fluctuations in the interest payments on our one-month LIBOR-indexed debt. Certain of our floating rate borrowings are not hedged and therefore, to an extent, we have ongoing exposure to interest rate movements.

17


The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges under ASC Topic 815 is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the next 12 months, we estimate that approximately $3.9 million will be reclassified as an increase to interest expense related to active effective hedges of existing floating-rate debt, and we estimate that approximately $2.0 million will be reclassified as an increase to interest expense related to effective forward started interest rate swaps where the hedging instrument has been terminated. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
The table below presents a reconciliation of the beginning and ending balances, between December 31, 2015 and June 30, 2016 , of our accumulated other comprehensive loss (“OCI”), net of amounts attributable to noncontrolling interests, related to the effective portion of our cash flow hedges as presented on our consolidated financial statements, as well as amounts related to our available-for-sale securities (amounts in thousands):  
 
Gains and Losses on Cash Flow Hedges
 
Unrealized Losses on Available-For-Sale Securities
 
Accumulated Other Comprehensive Loss
Beginning balance as of December 31, 2015
$
(9,967
)
 
$
(1,047
)
 
$
(11,014
)
Other comprehensive income:
 
 
 
 
 
Amount of loss reclassified from OCI into
interest expense (effective portion)
(net of tax benefit of $0)
2,317

 

 
2,317

Change in fair value recognized in OCI
(effective portion) (net of tax benefit of $0)
(15,098
)
 

 
(15,098
)
Net current-period other comprehensive income
(12,781
)
 

 
(12,781
)
Attribution of and other adjustments to OCI attributable to noncontrolling interests
944

 
3

 
947

Ending balance as of June 30, 2016
$
(21,804
)
 
$
(1,044
)
 
$
(22,848
)
Fair Values of Derivative Instruments
The valuation of interest rate derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
The majority of the inputs used to value our derivative instruments fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments associated with our derivative instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of potential default by us and our counterparties. As of June 30, 2016 , we had assessed the significance of the impact of the credit valuation adjustments and had determined that it was not significant to the overall valuation of our derivative instruments. As a result, we have determined that our derivative valuations are classified in Level 2 of the fair value hierarchy.
Designated Derivatives
As of June 30, 2016 and December 31, 2015 , we had 13 and 12 outstanding interest rate swaps, respectively, that were designated as cash flow hedges of interest rate risk, with a total notional amount of $403.3 million and $375.4 million , respectively. In addition, as of June 30, 2016 , we had (i) two interest rate swaps with a total notional amount of $100.0 million that will become effective in December 2016 and mature in January 2020 and (ii) two interest rate swaps with a total notional amount of $100.0 million that will become effective in December 2016 and mature in February 2022, all of which were designated as cash flow hedges of interest rate risk.

18


The table below presents the gross fair value of our designated derivative financial instruments as well as their classification on our accompanying condensed consolidated balance sheets as of June 30, 2016  and December 31, 2015 (amounts in thousands):

 
 
Fair Value of Asset Derivatives as of
 
 
 
Fair Value of Liability Derivatives as of

Balance Sheet Location
 
June 30, 2016
 
December 31, 2015
 
Balance Sheet Location
 
June 30, 2016
 
December 31, 2015
Interest rate contracts
Other assets, net (1)
 
$

 
$
197

 
Other liabilities (1)
 
$
(16,840
)
 
$
(3,303
)
Total derivatives
 
 
$

 
$
197

 
 
 
$
(16,840
)
 
$
(3,303
)
 
(1)
Although our derivative contracts are subject to master netting arrangements which serve as credit mitigants to both us and our counterparties under certain situations, we do not net our derivative fair values or any existing rights or obligations to cash collateral on our accompanying condensed consolidated balance sheets. If we did net our derivative fair values on our accompanying condensed consolidated balance sheets, the derivative fair values would be lowered by approximately $157,000 as of December 31, 2015 , resulting in net fair values of our asset derivatives of approximately $41,000 and net fair values of our liability derivatives of approximately $3.1 million as of December 31, 2015 . As of June 30, 2016, all of our derivative fair values were in liability positions, and therefore netting our derivative fair values would not have an impact.
Effect of Derivative Instruments on the Statements of Comprehensive Income
The table below presents the effect of our derivative financial instruments on our accompanying financial statements for the three and six months ended June 30, 2016 and 2015 (amounts in thousands):

For the Three Months Ended June 30,
 
For the Six Months Ended June 30,

2016
 
2015
 
2016
 
2015
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
Derivative type
Interest rate contracts
 
Interest rate contracts
 
Interest rate contracts
 
Interest rate contracts
Amount of (loss) gain recognized in OCI (effective portion)
$
(4,902
)
 
$
1,417

 
$
(15,098
)
 
$
(1,553
)
Location of loss reclassified from accumulated OCI into income (effective portion)
Interest
expense
 
Interest
expense
 
Interest
expense
 
Interest
expense
Amount of loss reclassified from accumulated OCI into income (effective portion)
$
1,199

 
$
1,155

 
$
2,317

 
$
2,318

Location of gain recognized in income (ineffective portion and amount excluded from effectiveness testing)
Interest and other income (expense)
 
 Interest and other income (expense)
 
Interest and other income (expense)
 
Interest and other income (expense)
Amount of gain recognized in income (ineffective portion and amount excluded from effectiveness testing)
$

 
$
128

 
$

 
$
117

Credit-Risk-Related Contingent Features
We have agreements with certain of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. We have agreements with certain other derivative counterparties that contain a provision whereby if we default on any of our indebtedness held by our Operating Partnership, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.
As of June 30, 2016 , the fair value of derivatives in a net liability position, which included accrued interest but excluded any credit valuation adjustments related to these agreements, was approximately $17.5 million . As of June 30, 2016 , we have not posted any collateral related to these agreements. If we had breached any of these provisions at June 30, 2016 , we could have been required to settle our obligations under the agreements at their termination value of $17.5 million .
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
We use the framework established in ASC Topic 820, to measure the fair value of our financial instruments as disclosed in the table below. The fair values estimated below are indicative of certain interest rate and other assumptions as of June 30, 2016 and December 31, 2015 , and may not take into consideration the effects of subsequent interest rate or other assumption fluctuations, or changes in the values of underlying collateral. The fair values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses approximate their carrying values because of the short-term nature of these instruments.

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The table below presents the carrying amounts and estimated fair values of our other financial instruments, other than derivatives which are disclosed in Note 6, as of June 30, 2016 and December 31, 2015 (amounts in thousands):  
໿

As of June 30, 2016
 
As of December 31, 2015

Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
Assets:
 
 
 
 
 
 
 
Fixed-rate debt related investments, net
$
15,469

 
$
16,408

 
$
15,722

 
$
16,526

Liabilities:
 
 
 
 
 
 
 
Fixed-rate mortgage notes (1)
$
464,564

 
$
473,676

 
$
577,978

 
$
576,432

Floating-rate mortgage notes

 

 
7,887

 
7,883

Floating-rate unsecured borrowings
556,555

 
556,555

 
511,905

 
511,905

 
(1) Amount includes a floating-rate mortgage note of approximately $32.5 million as of June 30, 2016 that was subject to an interest rate spread of 1.60% over one-month LIBOR, which we have effectively fixed using an interest rate swap at 3.051% for the term of the borrowing.
The methodologies used and key assumptions made to estimate fair values of the financial instruments, other than derivatives disclosed in Note 6, described in the above table are as follows:
Debt Related Investments — The fair value of our performing debt related investments are estimated using a discounted cash flow methodology. This method discounts estimated future cash flows using rates management determines best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Credit spreads and market interest rates used to determine the fair value of these instruments are based on unobservable Level 3 inputs which management has determined to be its best estimate of current market values.
Mortgage Notes and Other Borrowings — The fair value of our mortgage notes and other borrowings are estimated using a discounted cash flow analysis, based on our estimate of market interest rates. Credit spreads relating to the underlying instruments are based on unobservable Level 3 inputs, which we have determined to be our best estimate of current market spreads of similar instruments.
8. STOCKHOLDERS’ EQUITY
Common Stock
During the six months ended June 30, 2016 , we completed two self-tender offers, one on June 14, 2016 and the other on March 14, 2016 , pursuant to which we accepted for purchase approximately 6.8 million and 4.1 million unclassified shares of common stock, respectively, which we refer to as “Class E” shares, at a purchase price of $7.31 and $7.39 per share, respectively, for aggregate costs of approximately $49.5 million and $30.0 million , respectively.
During the six months ended June 30, 2016 , we raised approximately $33.9 million pursuant to a managed offering(the “Managed Offering”), in which we paid a primary dealer fee in the amount of up to 5.0% of the gross proceeds raised from the sale of Class I shares in the primary portion of the Follow-On Offering from May 11, 2016 through June 30, 2016, but only with respect to sales made by participating broker-dealers that we specifically approved as being eligible.

20


The following table describes the changes in each class of common shares during the six months ended June 30, 2016 (shares and dollar amounts in thousands):
໿

Class E
 
Class A
 
Class W
 
Class I
 
Total

Shares
 
Amount  (1)
 
Shares
 
Amount  (1)
 
Shares
 
Amount  (1)
 
Shares
 
Amount  (1)
 
Shares
 
Amount  (1)
Balances,
December 31, 2015
137,275

 
$
1,482,140

 
1,703

 
$
12,438

 
1,812

 
$
12,952

 
23,334

 
$
162,283

 
164,124

 
1,669,813

Issuance of common stock:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Shares sold

 

 
302

 
2,311

 
622

 
4,604

 
5,663

 
41,833

 
6,587

 
48,748

Distribution reinvestment plan
1,023

 
7,565

 
19

 
140

 
18

 
133

 
319

 
2,354

 
1,379

 
10,192

Stock-based compensation

 

 

 

 

 

 
32

 
744

 
32

 
744

Redemptions and repurchases of common stock
(11,825
)
 
(86,852
)
 
(140
)
 
(1,032
)
 
(333
)
 
(2,442
)
 
(280
)
 
(2,070
)
 
(12,578
)
 
(92,396
)
Balances,
June 30, 2016
126,473

 
$
1,402,853

 
1,884

 
$
13,857

 
2,119

 
$
15,247

 
29,068

 
$
205,144

 
159,544

 
$
1,637,101

 
(1)
Dollar amounts presented in this table represent the gross amount of proceeds from the sale of common shares, or the amount paid to stockholders to redeem or repurchase common shares, and do not include other costs and expenses accounted for within additional paid-in capital, such as selling commissions, dealer manager and distribution fees, offering and organizational costs, and other costs associated with our distribution reinvestment plans, share redemption programs, and self-tender offers.
໿
9. RELATED PARTY TRANSACTIONS
Advisory Agreement
Our day-to-day activities are managed by our Advisor, a related party, under the terms and conditions of the Advisory Agreement. Our Advisor is considered to be a related party as certain indirect owners and employees of our Advisor serve as two of our directors and all of our executive officers. The responsibilities of our Advisor cover all facets of our business, and include the selection and underwriting of our real property and debt related investments, the negotiations for these investments, the asset management and financing of these investments and the oversight of real property dispositions.
On June 23, 2016, we, our Operating Partnership and our Advisor entered into the Tenth Amended and Restated Advisory Agreement. Per the Advisory Agreement, in consideration for asset management services performed, we pay our Advisor an advisory fee comprised of two separate components: (1) a fixed amount that accrues daily in an amount equal to 1/365th of 1.15% of (a) the “Aggregate Fund NAV” (i.e., the aggregate net asset value or “NAV” of our Class E shares, Class A shares, Class W shares and Class I shares, along with the OP Units held by third parties) for such day and (b) the consideration received by us or our affiliate for selling Interests (defined below) in DST Properties (defined below) to third party investors, net of up-front fees and expense reimbursements payable out of gross sale proceeds from the sale of such Interests, including but not limited to sales commissions, dealer manager fees and non-accountable expense allowances, and (2) a performance component that is based on the annual non-compounded investment return provided to holders of “Fund Interests” (defined as our Class E shares, Class A shares, Class W shares, Class I shares, and OP Units held by third parties) such that our Advisor will receive 25% of the overall return in excess of 6% ; provided that in no event may the performance condition exceed 10% of the overall return for such year, and subject to certain other limitations. Additionally, our Advisor will provide us with a waiver of a portion of its fees generally equal to the amount of the performance component that would have been payable with respect to the Class E shares and the Class E OP Units held by third parties until the NAV of such shares or units exceeds $10.00 per share or unit, the benefit of which will be shared among all holders of Fund Interests.  
In addition, we will pay our Advisor a fee of 1.0% of the total consideration we receive upon the sale of real property assets (excluding DST Properties). For these purposes, a “sale” means any transaction or series of transactions whereby we or our Operating Partnership directly or indirectly (including through the sale of any interest in a joint venture or through a sale by a joint venture in which we hold an interest) sells, grants, transfers, conveys, or relinquishes its ownership of any real property or portion thereof, including the lease of any real property consisting of a building only, and including any event with respect to any real property which gives rise to a significant amount of insurance proceeds or condemnation awards.
Further, for providing a substantial amount of services in connection with the sale of a property (excluding DST Properties), as determined by a majority of our independent directors, we will pay our Advisor up to 50.0% of the reasonable, customary and competitive commission paid for the sale of a comparable real property, provided that such amount shall not exceed 1.0% of the contract price of the property sold and, when added to all other real estate commissions paid to unaffiliated

21


parties in connection with the sale, may not exceed the lesser of a competitive real estate commission or 6.0% of the sales price of the property.
In addition, pursuant to the Advisory Agreement, we will pay directly, or reimburse our Advisor and our Dealer Manager if they pay on our behalf any organizational and offering expenses (other than selling commissions, the dealer manager fee, distribution fees and non-transaction based compensation allocated to sales-related activities of employees of our Dealer Manager in connection with the offering) relating to any public offerings as and when incurred. After the termination of the primary portion of the offering and again after termination of the distribution reinvestment plan portion of the offering, our Advisor has agreed to reimburse us to the extent that total cumulative organization and offering expenses (including selling commissions, the dealer manager fee and distribution fees) that we incur exceed 15% of our gross proceeds from the applicable offering.
The Advisory Agreement also provides that we must reimburse our Advisor for any private offering organization and offering expenses, such as those of the DST Program, it incurs on our behalf, including Advisor personnel costs, unless it has agreed to receive a fee in lieu of reimbursement.
Subject to certain limitations, we reimburse our Advisor for all of the costs it incurs in connection with the services it provides to us, including, without limitation, our allocable share of the personnel (and related employment) costs and overhead (including, but not limited to, allocated rent paid to both third parties and an affiliate of the advisor, equipment, utilities, insurance, travel and entertainment, and other costs) incurred by our Advisor or its affiliates, including, but not limited to, total compensation, benefits and other overhead of all employees involved in the performance of such services.
The Advisory Agreement may be renewed for an unlimited number of successive one -year terms. The current term of the Advisory Agreement expires on June 30, 2017.
Public Offering Dealer Manager Agreement
Our Dealer Manager is distributing the shares of our common stock in our public offering on a “best efforts” basis. The Dealer Manager is an entity related to our Advisor and is a member of the Financial Industry Regulatory Authority, Inc., or FINRA. The Dealer Manager coordinates our distribution effort and manages our relationships with participating broker-dealers and financial advisors and provides assistance in connection with compliance matters relating to marketing our public offering.
On September 16, 2015, we entered into a Second Amended and Restated Dealer Manager Agreement (the “Second Amended Dealer Manager Agreement”) with our Dealer Manager. The Dealer Manager served as dealer manager for the Prior Offering and will serve as dealer manager for the Follow-On Offering. The Second Amended Dealer Manager Agreement is an amendment and restatement of the dealer manager agreement entered into by the Company and our Dealer Manager on February 8, 2013 in connection with the Prior Offering, as amended by Amendment No. 1 dated May 31, 2013, Amendment No. 2 dated June 26, 2013 and Amendment No. 3 dated March 20, 2014. The purpose of the Second Amended Dealer Manager Agreement is to engage our Dealer Manager with respect to the Follow-On Offering. As amended, the Second Amended Dealer Manager Agreement may be made to apply to future offerings by naming them in a schedule to the agreement, with the consent of the Company and our Dealer Manager. Pursuant to the Second Amended Dealer Manager Agreement, we pay (i) selling commissions on Class A shares sold in the primary offering of up to 3.0% of the public offering price per share, (ii) a dealer manager fee which accrues daily in an amount equal to 1/365th of 0.6% of our NAV per share of Class A and Class W shares outstanding and an amount equal to 1/365th of 0.1% of our NAV per share of Class I shares outstanding on such day on a continuous basis, and (iii) a distribution fee which accrues daily in an amount equal to 1/365th of 0.5% of our NAV per Class A share outstanding on such day on a continuous basis. Subject to FINRA limitations on underwriting compensation, we will continue to pay the dealer manager fee and distribution fee until the earlier to occur of the following: (i) a listing of the class of such shares on a national securities exchange or (ii) such shares no longer being outstanding.
Pursuant to the Second Amended Dealer Manager Agreement, we may pay to our Dealer Manager a primary dealer fee in the amount of up to 5.0% of the gross proceeds raised from the sale of Class I shares in the primary offering, provided that (i) the total gross proceeds raised with respect to which the primary dealer fee will apply may not exceed $100,000,000 , subject to further increase by our board of directors, in its discretion; (ii) the primary dealer fee will only be paid with respect to sales made by participating broker-dealers specifically approved by us as being eligible; and (iii) the primary dealer fee will only be paid with respect to sales made at times approved by us. Our Dealer Manager may reallow a portion of the primary dealer fee to the participating broker-dealers involved in selling such Class I shares based on the portion of the gross proceeds raised from their customers. Our Dealer Manager will consider the primary dealer fee to be underwriting compensation. The primary dealer fee will be paid by us and will not be considered to be a class-specific expense.
On May 11, 2016, we notified our Dealer Manager that we would pay a primary dealer fee in the amount of up to 5.0% of the gross proceeds raised from the sale of Class I shares in the primary portion of the Follow-On Offering from May 11, 2016 through June 30, 2016 (the “Managed Offering Term”), but only with respect to sales made by participating broker-

22


dealers that we specifically approved as being eligible (“Primary Dealers”). The maximum primary dealer fee we will pay our Dealer Manager is now $7.5 million , although in the future we may provide for additional primary dealer fee payments. During the six months ended June 30, 2016, we raised approximately $33.9 million pursuant to a “Managed Offering”, in which we paid a primary dealer fee in the amount of up to 5.0% of the gross proceeds raised from the sale of Class I shares in the primary portion of the Follow-On Offering from May 11, 2016 through June 30, 2016, but only with respect to sales made by participating broker-dealers that we specifically approved as being eligible.
We conducted three distinct similar “managed offerings” in 2015, 2014, and 2013, in which we raised approximately $50.8 million , $44.0 million , and $27.1 million , respectively. During the three and six months ended June 30, 2016 , we incurred primary dealer fees earned from the gross proceeds raised pursuant to the Managed Offering of approximately $1.7 million , of which approximately $170,000 was retained by our Dealer Manager. During the three and six months ended June 30, 2015, we incurred primary dealer fees of approximately $2.5 million , of which approximately $254,000 was retained by our Dealer Manager.
Property Management Agreement
On June 23, 2016, we and Dividend Capital Property Management LLC (the “Property Manager”) agreed to terminate the property management agreement dated January 9, 2006, with the Property Manager (the “Property Management Agreement”) as no services were being provided by the Property Manager under the Property Management Agreement. The Property Manager waived the notice period for termination so that the Property Management Agreement terminated immediately.
Restricted Stock Unit Agreements 
We have entered into Restricted Stock Unit Agreements (the “Advisor RSU Agreements”) with our Advisor. The purposes of our Advisor RSU Agreements are to promote an alignment of interests among our stockholders, our Advisor and the personnel of our Advisor and its affiliates, and to promote retention of the personnel of our Advisor and its affiliates. Each restricted stock unit that we grant pursuant to our Advisor RSU Agreements (the "Company RSUs") will, upon vesting, be settled in one share of our Class I common stock. The Company RSUs are subject to specified vesting and settlement provisions and, upon settlement in Class I shares of Company common stock, require offsets of advisory fees and expenses otherwise payable from the Company to our Advisor based on the NAV per Class I share on the grant date of the applicable Company RSU. As of June 30, 2016 , our Advisor had approximately 115,000 shares of Class I common stock issued upon settlement of Company RSUs that remained subject to fee offset.
Vesting and Payment Offset
Following specified vesting provisions, an equal percentage of the Company RSUs vest on each of the applicable vesting dates. On each vesting date, an offset amount (each, an “Offset Amount”) will be calculated and deducted on a pro rata basis over the next 12 months from the cash payments otherwise due and payable to our Advisor under our then-current Advisory Agreement for any fees or expense reimbursements. Each Offset Amount equals the number of Company RSUs vesting on such date multiplied by the NAV per Class I share publicly disclosed by us (“the “Class I NAV”) as of the end of the applicable grant date (the “Grant Date NAV per Class I Share”). Each Offset Amount will always be calculated based on the Grant Date NAV per Class I Share, even beyond the initial grant and vesting date. At the end of each 12-month period following each vesting date, if the Offset Amount has not been fully realized by offsets from the cash payments otherwise due and payable to our Advisor under the Advisory Agreement, our Advisor shall promptly pay any shortfall to us.
The chart below shows the grant dates, vesting dates, number of unvested and unsettled shares as of June 30, 2016 , and Grant Date NAV per Class I Share (share amounts in thousands).
Award
 
Grant Date
 
Vesting Dates
 
Number of Unvested Shares
 
Grant Date NAV per Class I Share
Company RSU
 
4/7/2014
 
4/14/2017
 
123

 
$
6.96

Company RSU
 
2/25/2015
 
4/14/2017
 
30

 
7.18