Toggle SGML Header (+)


Section 1: 10-Q (FORM 10-Q)

10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 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. 1-35933
 
GRAMERCY PROPERTY TRUST
(Exact name of registrant as specified in its charter)
 
Maryland
 
56-2466617
(State or other jurisdiction
incorporation or organization)
 
(I.R.S. Employer of
Identification No.)
 
 
 
521 5th Avenue, 30th Floor, New York, NY 10175
(Address of principal executive offices – zip code)
 
(212) 297-1000
(Registrant’s telephone number, including area code)
 
Chambers Street Properties
47 Hulfish Street, Suite 210, Princeton, New Jersey 08542
(Former name, former address and former fiscal year, if changed since last report)
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 x      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 x      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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
 
(Do not check if a 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 x
The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 421,637,223 as of April 29, 2016.




GRAMERCY PROPERTY TRUST
FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I.
 
FINANCIAL INFORMATION
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3A.
 
ITEM 4.
 
PART II.
 
ITEM 1.
 
ITEM 1A.
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
ITEM 5.
 
ITEM 6.
 
 





Gramercy Property Trust
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
PART I.
FINANCIAL INFORMATION
ITEM I.
FINANCIAL STATEMENTS
 
March 31, 2016
 
December 31, 2015
Assets:
 

 
 

Real estate investments, at cost:
 

 
 

Land
$
683,110

 
$
702,557

Building and improvements
3,279,424

 
3,313,747

Less: accumulated depreciation
(114,389
)
 
(84,627
)
Total real estate investments, net
3,848,145

 
3,931,677

Cash and cash equivalents
67,124

 
128,031

Restricted cash
166,552

 
17,354

Investment in unconsolidated equity investments
527,269

 
580,000

Servicing advances receivable

 
1,382

Retained CDO bonds
8,786

 
7,471

Assets held for sale, net
10,548

 
420,485

Tenant and other receivables, net
43,209

 
34,234

Acquired lease assets, net of accumulated amortization of $84,671 and $54,323
631,048

 
682,174

Deferred costs, net of accumulated amortization of $1,558 and $892
17,152

 
13,950

Goodwill
3,477

 
3,568

Other assets
24,999

 
14,192

Total assets
$
5,348,309

 
$
5,834,518

Liabilities and Equity:
 
 
 
Liabilities:
 
 
 
Senior unsecured revolving credit facility
$
122,760

 
$
296,724

Exchangeable senior notes, net
107,205

 
106,581

Mortgage notes payable, net
491,360

 
530,222

Senior unsecured notes, net
148,935

 
99,124

Senior unsecured term loans, net
1,225,000

 
1,225,000

Total long-term debt, net
2,095,260

 
2,257,651

Accounts payable and accrued expenses
29,667

 
59,808

Dividends payable
46,790

 
8,980

Accrued interest payable
5,860

 
4,546

Deferred revenue
36,041

 
36,031

Below market lease liabilities, net of accumulated amortization of $21,240 and $17,083
238,115

 
242,456

Liabilities related to assets held for sale
376

 
291,364

Derivative instruments, at fair value
27,461

 
3,442

Other liabilities
9,060

 
8,271

Total liabilities
2,488,630

 
2,912,549

Commitments and contingencies

 

Noncontrolling interest in operating partnership
11,334

 
10,892

Equity:
 
 
 
Common shares, par value $0.01, 421,500,741 and 420,523,153 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively.
4,215

 
4,205

Series A cumulative redeemable preferred shares, par value $0.01, liquidation preference $87,500, 3,500,000 shares authorized, issued and outstanding at March 31, 2016.
84,394

 
84,394

Additional paid-in-capital
3,880,925

 
3,879,932

Accumulated other comprehensive loss
(20,527
)
 
(5,751
)
Accumulated deficit
(1,100,285
)
 
(1,051,454
)
Total shareholders' equity
2,848,722

 
2,911,326

Noncontrolling interest in other partnerships
(377
)
 
(249
)
Total equity
2,848,345

 
2,911,077

Total liabilities and equity
$
5,348,309

 
$
5,834,518


The accompanying notes are an integral part of these financial statements.
1



Gramercy Property Trust
Condensed Consolidated Statements of Operations
(Amounts in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2016
 
2015
Revenues
 

 
 

Rental revenue
$
92,095

 
$
31,190

Third-party management fees
5,046

 
8,186

Operating expense reimbursements
22,582

 
8,138

Investment income
443

 
238

Other income
379

 
183

Total revenues
120,545

 
47,935

Operating Expenses
 

 
 

Property operating expenses
24,169

 
8,383

Property management expenses
4,521

 
5,166

Depreciation and amortization
58,248

 
18,698

General and administrative expenses
7,722

 
4,773

Acquisition and merger-related expenses
410

 
3,506

Total operating expenses
95,070

 
40,526

Operating Income
25,475

 
7,409

Other Expense:
 
 
 
Interest expense
(21,953
)
 
(6,270
)
Equity in net loss of unconsolidated equity investments
(2,755
)
 
(1
)
Loss on extinguishment of debt
(5,757
)
 

Income (loss) from continuing operations before provision for taxes
(4,990
)
 
1,138

Provision for taxes
(703
)
 
(1,114
)
Income (loss) from continuing operations
(5,693
)
 
24

Income (loss) from discontinued operations
2,710

 
(62
)
Gain on extinguishment of debt
1,930

 

Income (loss) from discontinued operations
4,640

 
(62
)
Net loss
(1,053
)
 
(38
)
Net loss attributable to noncontrolling interest
120

 
42

Net income (loss) attributable to Gramercy Property Trust
(933
)
 
4

Preferred share dividends
(1,559
)
 
(1,559
)
Net loss available to common shareholders
$
(2,492
)
 
$
(1,555
)
Basic earnings per share:
 

 
 

Net loss from continuing operations, after preferred dividends
$
(0.02
)
 
$
(0.01
)
Net income from discontinued operations
0.01

 

Net loss available to common shareholders
$
(0.01
)
 
$
(0.01
)
Diluted earnings per share:
 

 
 

Net loss from continuing operations, after preferred dividends
$
(0.02
)
 
$
(0.01
)
Net income from discontinued operations
0.01

 

Net loss available to common shareholders
$
(0.01
)
 
$
(0.01
)
Basic weighted average common shares outstanding
420,181,216

 
149,115,357

Diluted weighted average common shares and common share equivalents outstanding
420,181,216

 
149,115,357

 

The accompanying notes are an integral part of these financial statements.
2



Gramercy Property Trust
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2016
 
2015
Net loss
$
(1,053
)
 
$
(38
)
Other comprehensive income (loss):
 
 
 
Unrealized gain on debt securities and derivative instruments:
 
 
 
Unrealized gain on available for sale debt securities
934

 
5,750

Unrealized loss on derivative instruments
(22,189
)
 
(2,132
)
Foreign currency translation adjustments
6,119

 
(218
)
Reclassification of unrealized loss of terminated derivative instruments into earnings
360

 

Other comprehensive income (loss)
(14,776
)
 
3,400

Comprehensive income (loss)
(15,829
)
 
3,362

Net loss attributable to noncontrolling interest
120

 
42

Other comprehensive (income) loss attributable to noncontrolling interest
48

 
(38
)
Comprehensive income (loss) attributable to Gramercy Property Trust
$
(15,661
)
 
$
3,366

 


The accompanying notes are an integral part of these financial statements.
3


Gramercy Property Trust
Condensed Consolidated Statements of Shareholders’ Equity (Deficit) and Noncontrolling Interests
(Amounts in thousands, except share data)

 
Common Shares
 
Preferred
Shares
 
Additional Paid-In-Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings / (Accumulated Deficit)
 
Total Gramercy Property Trust
 
Noncontrolling
interest
 
 
 
Shares
 
Par Value
 
 
 
 
 
 
 
Total
Balance at December 31, 2015
420,523,153

 
$
4,205

 
$
84,394

 
$
3,879,932

 
$
(5,751
)
 
$
(1,051,454
)
 
$
2,911,326

 
$
(249
)
 
$
2,911,077

Net loss

 

 

 

 

 
(933
)
 
(933
)
 
(112
)
 
(1,045
)
Change in net unrealized loss on derivative instruments

 

 

 

 
(22,189
)
 

 
(22,189
)
 

 
(22,189
)
Change in net unrealized gain on debt securities

 

 

 

 
934

 

 
934

 

 
934

Reclassification of unrealized gain of terminated derivative instruments into earnings

 

 

 

 
360

 

 
360

 

 
360

Share based compensation - fair value
860,103

 
9

 

 
1,510

 

 

 
1,519

 

 
1,519

Proceeds from share options exercised
47,844

 

 


 
167

 


 


 
167

 


 
167

Conversion of Legacy OP Units to common shares
69,641

 
1

 

 
523

 

 

 
524

 

 
524

Reallocation of noncontrolling interest in the operating partnership

 

 

 
(1,207
)
 

 

 
(1,207
)
 

 
(1,207
)
Foreign currency translation adjustment

 

 

 

 
6,119

 

 
6,119

 
(16
)
 
6,103

Dividends on preferred shares

 

 

 

 

 
(1,559
)
 
(1,559
)
 

 
(1,559
)
Dividends on common shares

 

 

 

 

 
(46,339
)
 
(46,339
)
 

 
(46,339
)
Balance at March 31, 2016
421,500,741

 
$
4,215

 
$
84,394

 
$
3,880,925

 
$
(20,527
)
 
$
(1,100,285
)
 
$
2,848,722

 
$
(377
)
 
$
2,848,345



The accompanying notes are an integral part of these financial statements.
4


Gramercy Property Trust
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)

 
Three Months Ended March 31,
 
2016
 
2015
Operating Activities:
 

 
 

Net loss
$
(1,053
)
 
$
(38
)
Adjustments to net cash provided by operating activities:
 

 
 

Depreciation and amortization
58,248

 
18,698

Amortization of acquired leases to rental revenue and expense
(163
)
 
(3,947
)
Amortization of deferred costs
2,675

 
601

Amortization of discounts and other fees
(1,109
)
 
(222
)
Amortization of lease inducement costs
86

 
44

Straight-line rent adjustment
(6,761
)
 
(2,172
)
Distributions received from unconsolidated equity investments
9,961

 
103

Equity in net loss of unconsolidated equity investments
2,755

 
1

Loss on extinguishment of debt
3,827

 

Amortization of share-based compensation
1,150

 
733

Changes in operating assets and liabilities:
 

 
 

Restricted cash
5,598

 
(451
)
Payment of capitalized leasing costs
(3,973
)
 
(143
)
Tenant and other receivables
(2,151
)
 
(6,124
)
Accrued interest
(8
)
 
(10
)
Other assets
(10,519
)
 
7,686

Accounts payable, accrued expenses and other liabilities
(33,738
)
 
(147
)
Deferred revenue
(3,077
)
 
3,841

Net cash provided by operating activities
21,748

 
18,443

Investing Activities:
 

 
 

Capital expenditures
(6,416
)
 
(1,196
)
Distributions received from unconsolidated equity investments
47,408

 

Proceeds from sale of real estate
416,094

 

Restricted cash held in escrow for 1031 exchange
(145,500
)
 

Contributions to unconsolidated equity investments
(4,790
)
 
(602
)
Acquisition of real estate
(52,874
)
 
(423,147
)
Restricted cash for tenant improvements
198

 
(5,631
)
Proceeds from repayments of servicing advances receivable
1,390

 

Net cash provided by (used in) investing activities
255,510

 
(430,576
)
Financing Activities:
 

 
 

Proceeds from unsecured term loans and revolving credit facility

 
235,000

Proceeds from unsecured credit facility
75,000

 

Proceeds from senior unsecured notes
50,000

 

Repayment of unsecured term loans and revolving credit facility
(250,000
)
 

Proceeds from mortgage notes payables
9,550

 

Repayment of mortgage notes payable
(198,189
)
 
(971
)
Offering costs

 
(331
)
Proceeds from sale of common stock

 
16,173

Payment of deferred financing costs
(551
)
 
(3,248
)
Payment of debt extinguishment costs
(13,803
)
 
 
Preferred shares dividends paid
(1,559
)
 
(1,559
)
Common shares dividends paid
(8,736
)
 
(9,354
)
Proceeds from exercise of stock options and employee purchase under the employee share purchase plan
167

 
14

Contributions from noncontrolling interests in other entities

 
169

Distribution to noncontrolling interest holders
(29
)
 
(117
)
Change in restricted cash from financing activities
(12
)
 
(12
)
Net cash provided by (used in) financing activities
(338,162
)
 
235,764

Net decrease in cash and cash equivalents
(60,904
)
 
(176,369
)
Decrease in cash and cash equivalents related to foreign currency translation
(3
)
 
15

Cash and cash equivalents at beginning of period
128,031

 
200,069

Cash and cash equivalents at end of period
$
67,124

 
$
23,715


The accompanying notes are an integral part of these financial statements.
5


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

 
1. Business and Organization
Gramercy Property Trust, or the Company or Gramercy, a Maryland real estate investment trust, or REIT, is a leading global investor and asset manager of commercial real estate. Gramercy specializes in acquiring and managing single-tenant, net leased industrial, office, and specialty properties. The Company focuses on income producing properties leased to high quality tenants in major markets in the United States and Europe.
Gramercy earns revenues primarily through three sources: (i) rental revenues on properties that it owns in the United States, (ii) asset management revenues on properties owned by third parties in the United States and Europe and (iii) pro-rata rental revenues on its unconsolidated equity investments in the United States, Europe, and Asia.
On December 17, 2015, Chambers Street Properties, or Chambers, a Maryland REIT, completed a merger, or the Merger, with Gramercy Property Trust Inc., or Legacy Gramercy, a Maryland corporation, pursuant to which Legacy Gramercy stockholders received 3.1898 common shares of beneficial interest of Chambers for each share of common stock of Legacy Gramercy held. Following the Merger, Chambers changed its name to “Gramercy Property Trust” and began trading on the New York Stock Exchange, or NYSE, using the “GPT” stock symbol.
In the Merger, Chambers was the legal acquirer and Legacy Gramercy was the accounting acquirer for financial reporting purposes. Thus, the financial information set forth herein subsequent to the close of the Merger on December 17, 2015 reflects results of the combined company, and financial information prior to the close of the Merger reflects Legacy Gramercy results. For this reason, period to period comparisons may not be meaningful. Refer to Note 4 for additional information on the Merger.
Unless the context requires otherwise, all references to “Company,” “Gramercy,” “we,” “our,” and “us” mean Legacy Gramercy and one or more of the Company’s subsidiaries for the period prior to the Merger closing and Gramercy Property Trust and one or more of the Company’s subsidiaries for periods following the Merger closing.
As of March 31, 2016, the Company owns, either directly or in an unconsolidated equity investment, a portfolio of 316 industrial, office, and specialty properties with 98.7% occupancy. Tenants include Bank of America, N.A., Healthy Way of Life II, LLC (d.b.a Life Time Fitness), Amazon.com, Inc., JPMorgan Chase Bank, N.A. Nuance Communications, Inc. and others. As of March 31, 2016, the Company’s asset management business, which operates under the name Gramercy Asset Management, manages for third-parties approximately $900,000 of commercial real estate assets, including approximately $459,000 of assets in Europe.
During the three months ended March 31, 2016, the Company acquired three properties aggregating 621,646 square feet in two separate transactions for a total purchase price of approximately $52,750.
During the three months ended March 31, 2016, the Company sold nine properties aggregating 2,095,194 square feet for total gross proceeds of approximately $531,500.
As of March 31, 2016, the Company’s wholly-owned portfolio of net leased properties is summarized as follows:
Property Type
Number of Properties
 
Rentable Square Feet
 
Occupancy
Industrial
154

 
34,384,245

 
98.4
%
Office
113

 
9,865,700

 
98.8
%
Specialty retail
9

 
1,187,258

 
100.0
%
Total
276

 
45,437,203

 
98.5
%

6


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code or IRC, and generally will not be subject to U.S. federal income taxes to the extent it distributes its taxable income, if any, to its shareholders. The Company has in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities.
The Company’s operating partnership, GPT Operating Partnership LP, or the Operating Partnership, indirectly owns (i) all of the Company’s consolidated real estate investments, (ii) the Company’s interests in unconsolidated investments and (iii) the entities, primarily a TRS, that conduct the Company’s third-party asset management operations. The Company is the sole general partner and 100% owner of the Operating Partnership. The Operating Partnership is the 100% owner of all of its direct and indirect subsidiaries, except that, as of March 31, 2016, third-party holders of limited partnership interests in Legacy Gramercy’s operating partnership, the entity that owns substantially all of Legacy Gramercy’s assets and investments, owned approximately 0.32% of the beneficial interest of the Company. These interests are referred to as the noncontrolling interests in Legacy Gramercy’s operating partnership. See Note 12 for more information on the Company’s noncontrolling interests.
2. Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The 2016 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited Consolidated Financial Statements at that date.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. During the first quarter of 2016, the Company adopted ASU 2015-03, Simplifying the Presentation of Debt Issuances Costs, which requires the Company to reclassify debt financing costs, which were previously accounted for on the deferred costs line within the asset section, and present them in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability, with the exception of deferred financing costs associated with the credit facility which remain in deferred costs in the asset section on the Condensed Consolidated Balance Sheets. Deferred financing costs totaling $6,389 have been reclassified in the December 31, 2015 Condensed Consolidated Balance Sheet from the deferred costs line and netted against the corresponding debt liability. See “Recently Issued Accounting Pronouncements” below for further discussion of the new accounting guidance for deferred financing costs.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the Company’s accounts and those of the Company’s subsidiaries which are wholly-owned or controlled by the Company, or entities which are variable interest entities, or VIEs, in which the Company is the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of each entity’s equity investment at risk to absorb losses.

7


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Entities which the Company does not control and are considered VIEs, but where the Company is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated. The equity interests of other limited partners in the Company’s operating partnerships are reflected as noncontrolling interests.
Real Estate Investments
The Company records acquired real estate investments as business combinations when the real estate is occupied, at least in part, at acquisition. Costs directly related to the acquisition of such investments are expensed as incurred. The Company allocates the purchase price of real estate to land, building, improvements and intangibles, such as the value of above- and below-market leases, and origination costs associated with the in-place leases at the acquisition date. The values of the above- and below-market leases are amortized and recorded as either an increase, in the case of below-market leases, or a decrease, in the case of above-market leases, to rental revenue over the remaining term of the associated lease. The values associated with in-place leases are amortized to depreciation and amortization expense over the remaining term of the associated lease.
The Company assesses the fair value of the leases at acquisition based upon estimated cash flow projections that utilize appropriate discount rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Additionally, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase at the time of acquisition.
Acquired real estate investments involving sale-leasebacks that have newly-originated leases are recorded as asset acquisitions and accordingly, transaction costs incurred in connection with the acquisition are capitalized. Acquired real estate investments which are under construction are considered build-to-suit transactions and other acquired real estate investments that do not meet the definition of a business combination are recorded at cost. In build-to-suit transactions, the Company engages a developer to construct a property or provides funds to a tenant to develop a property. The Company capitalizes the funds provided to the developer/tenant and real estate taxes, if applicable, during the construction period.
Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life at acquisition of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.
In leasing space, the Company may provide funding to the lessee through a tenant allowance. If the Company is considered the owner of the leasehold improvements constructed using a tenant allowance, the Company capitalizes the amount of the allowance and depreciates it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or if the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue.
The Company also reviews the recoverability of the property’s carrying value when circumstances indicate a possible impairment of the value of a property, expected to result from the property’s use and eventual disposition. If management determines impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded in the Condensed Consolidated Statements of Operations to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost of disposal. The estimated fair value of the asset becomes its new cost basis and if the asset is to be held and used, the new cost basis will be depreciated or amortized over its remaining useful life.

8


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Intangible Assets and Liabilities
The Company follows the acquisition method of accounting for business combinations. The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if vacant basis and identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates, the value of in-place leases, and above-market and below-market ground rent intangibles.
The above- and below-market lease values are amortized as a reduction of and increase to rental revenue, respectively, over the remaining non-cancelable terms of the respective leases. The value of in-place leases is amortized to depreciation and amortization expense over the remaining non-cancelable term of the respective leases. To the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material, the Company amortizes such below-market lease value into rental revenue over the renewal period. If a tenant terminates its lease prior to its contractual expiration and no future rental payments will be received, any unamortized balance of the market lease intangibles will be written off to rental revenue and any unamortized balance of the in-place lease intangibles will be written off to depreciation and amortization expense. The above- and below-market ground rent intangible values are amortized as a reduction of and increase to rent expense, respectively, over the remaining non-cancelable terms of the respective leases. If the Company terminates its lease prior to its contractual expiration and no future rent payments will be paid, any unamortized balance of the ground rent intangibles will be written off to rent expense.
Intangible assets and liabilities consist of the following:
 
March 31, 2016
 
December 31, 2015
Intangible assets:
 

 
 

In-place leases, net of accumulated amortization of $75,613 and $49,125
$
550,230

 
$
644,540

Above-market leases, net of accumulated amortization of $8,879 and $5,051
75,614

 
94,202

Below-market ground rent, net of accumulated amortization of $179 and $147
5,204

 
5,236

Amounts related to assets held for sale, net of accumulated amortization of $0

 
(61,804
)
Total intangible assets
$
631,048

 
$
682,174

Intangible liabilities:
 
 
 
Below-market leases, net of accumulated amortization of $21,068 and $16,934
$
234,617

 
$
255,452

Above-market ground rent, net of accumulated amortization of $172 and $149
3,498

 
3,522

Amounts related to liabilities of assets held for sale, net of accumulated amortization of $0

 
(16,518
)
Total intangible liabilities
$
238,115

 
$
242,456


9


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The following table provides the weighted-average amortization period as of March 31, 2016 for intangible assets and liabilities and the projected amortization expense for the next five years.
 
Weighted-Average Amortization Period
 
April 1 to December 31, 2016
 
2017
 
2018
 
2019
 
2020
In-place leases
9.5
 
$
75,472

 
$
86,996

 
$
74,517

 
$
61,701

 
$
49,432

Total to be included in depreciation and amortization expense

 
$
75,472

 
$
86,996

 
$
74,517

 
$
61,701

 
$
49,432

Above-market lease assets
7.5
 
$
11,295

 
$
13,173

 
$
11,553

 
$
9,987

 
$
7,557

Below-market lease liabilities
20.3
 
(12,380
)
 
(13,071
)
 
(12,768
)
 
(12,517
)
 
(12,250
)
Total to be included in rental revenue

 
$
(1,085
)
 
$
102

 
$
(1,215
)
 
$
(2,530
)
 
$
(4,693
)
 
 
 
 
 
 
 
 
 
 
 
 
Below-market ground rent
42.1
 
$
95

 
$
127

 
$
127

 
$
127

 
$
127

Above-market ground rent
37.3
 
(70
)
 
(94
)
 
(94
)
 
(94
)
 
(94
)
Total to be included in property operating expense

 
$
25

 
$
33

 
$
33

 
$
33

 
$
33

The Company recorded $27,560 and $7,997 of amortization of in-place lease intangible assets as part of depreciation and amortization for the three months ended March 31, 2016 and 2015, respectively. The Company recorded $181 and $3,945 of amortization of market lease intangible assets and liabilities as an increase (decrease) to rental revenue for the three months ended March 31, 2016 and 2015, respectively. The Company recorded $9 and $39 of amortization of ground rent intangible assets and liabilities as a reduction to other property operating expense for the three months ended March 31, 2016 and 2015, respectively.
Goodwill
Goodwill represents the fair value of the collaboration expected to be achieved upon consummation of a business combination and is measured as the excess of consideration transferred over the net assets acquired at acquisition date. The Company initially recognized goodwill of $3,887 related to the acquisition of Gramercy Europe Asset Management, however during the second quarter of 2015, as a result of finalization of the purchase price allocation for the acquisition, the Company decreased the amount allocated to goodwill by $85 and thus the final purchase price allocation to goodwill as a result of the acquisition was $3,802. The adjustment to goodwill for the finalized purchase price was primarily related to a reduction in the contract intangible value as well as an increase in the accrued income recorded for incentive fees. The carrying value of goodwill is adjusted each reporting period for the effect of foreign currency translation adjustments. The carrying value of goodwill at March 31, 2016 and December 31, 2015 was $3,477 and $3,568, respectively. The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company did not record any impairment on its goodwill during the three months ended March 31, 2016 or 2015.

10


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Unconsolidated Equity Investments
The Company accounts for substantially all of its unconsolidated equity investments under the equity method of accounting since it exercises significant influence, but does not unilaterally control the entities, and is not considered to be the primary beneficiary. In unconsolidated equity investments, the rights of the other investors are protective and participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investments. The investments are recorded initially at cost as unconsolidated equity investments, as applicable, and subsequently are adjusted for equity interest in net income (loss) and cash contributions and distributions. The amount of the investments on the Condensed Consolidated Balance Sheets is evaluated for impairment at each reporting period. None of the unconsolidated equity investment debt is recourse to the Company. Transactions with unconsolidated equity method entities are eliminated to the extent of the Company’s ownership in each such entity. Accordingly, the Company’s share of net income (loss) of these equity method entities is included in consolidated net income (loss).
The Company’s 5.07% investment in CBRE Strategic Partners Asia, the Company’s unconsolidated equity investment described more in Note 5, is presented in the Condensed Consolidated Financial Statements at fair value. CBRE Strategic Partners Asia is an investment company that accounts for its investments at fair value with changes in the fair value of the investments recorded in the statement of operations. See the “Fair Value Measurements” section of Note 2 as well as Note 9, “Fair Value Measurements,” for further discussion of the fair value accounting methodology used for CBRE Strategic Partners Asia.
Carrying values of the Company’s unconsolidated equity investments were $527,269 and $580,000 at March 31, 2016 and December 31, 2015, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Restricted Cash
The Company had restricted cash of $166,552 and $17,354 at March 31, 2016 and December 31, 2015, respectively, which primarily consists of proceeds from property sales held by qualified intermediaries to be used for tax-deferred, like-kind exchanges under IRC Section 1031, as well as reserves for certain capital improvements, leasing, interest and real estate tax and insurance payments as required by certain mortgage loan obligations.
Variable Interest Entities
During the first quarter of 2016, the Company adopted ASU 2015-02, Amendments to the Consolidation Analysis, which modified the analysis it must perform to determine whether it should consolidate certain types of legal entities. The Company’s operating partnerships, including both the GPT Operating Partnership, or the Operating Partnership, and Gramercy Operating Partnership, which is Legacy Gramercy’s operating partnership, are VIEs under the revised guidance and the Company is the primary beneficiary of each of them, because it holds majority ownership and exercises control over every aspect of the partnerships’ operations. Because the operating partnerships were already consolidated in the Company’s balance sheets, the revised guidance has no impact on the consolidated financial statements of the Company. The assets and liabilities of the Company and its operating partnerships are substantially the same, as the Company does not have any significant assets other than its investments in the operating partnerships. All of the Company's debt is also an obligation of the operating partnerships. There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption. In addition, there were no voting interest entities under prior existing guidance determined to be VIEs under the revised guidance.

11


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The Company had four consolidated VIEs as of March 31, 2016 and two consolidated VIEs as of December 31, 2015. The Company had four unconsolidated VIEs as of March 31, 2016 and December 31, 2015. The following is a summary of the Company’s involvement with VIEs as of March 31, 2016:
 
Company carrying
value-assets
 
Company carrying
value-liabilities
 
Face value of assets
held by the VIEs
 
Face value of liabilities
issued by the VIEs
Assets
 

 
 

 
 

 
 

Consolidated VIEs
 
 
 
 
 
 
 
Operating partnerships
$
5,348,309

 
$
2,488,630

 
$
5,348,309

 
$
2,488,630

Proportion Foods
$
8,329

 
$
550

 
$
8,329

 
$
8,820

Gramercy Europe Asset Management (European Fund Manager)
$
276

 
$
1,029

 
$
276

 
$
1,029

Unconsolidated VIEs
 
 
 
 
 
 
 
Gramercy Europe Asset Management (European Fund Carry Co.)
$

 
$

 
$
11

 
$
28

Retained CDO Bonds
$
8,786

 
$

 
$
1,202,885

 
$
1,197,539

The following is a summary of the Company’s involvement with VIEs as of December 31, 2015:
 
Company carrying
value-assets
 
Company carrying
value-liabilities
 
Face value of assets
held by the VIEs
 
Face value of liabilities
issued by the VIEs
Assets
 

 
 

 
 

 
 

Consolidated VIEs
 
 
 
 
 
 
 
Proportion Foods
$
7,949

 
$
16

 
$
7,949

 
$
8,183

Gramercy Europe Asset Management (European Fund Manager)
$
334

 
$
832

 
$
334

 
$
832

Unconsolidated VIEs
 
 
 
 
 
 
 
Gramercy Europe Asset Management (European Fund Carry Co.)
$

 
$

 
$
11

 
$
16

Retained CDO Bonds
$
7,471

 
$

 
$
1,382,373

 
$
1,282,583


12


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Consolidated VIEs
Proportion Foods
In December 2015, the Company entered into a non-recourse financing arrangement with Big Proportion Austin LLC, or BIG, for a build-to-suit industrial property in Round Rock, Texas, or Proportion Foods. Concurrently, the Company entered into a forward purchase agreement with BIG, pursuant to which the Company will acquire the property, which is 100% leased to Proportion Foods, upon substantial completion of the facility’s development. The Company has determined that Proportion Foods is a VIE, as the equity holders of the entity do not have controlling financial interests and the obligation to absorb losses. The Company controls the activities that most significantly affect the economic outcome of Proportion Foods through its financing arrangement to fund the property’s development and its forward purchase agreement with BIG. As such, the Company has concluded that it is the entity’s primary beneficiary and has consolidated the VIE. The Company has a note receivable from BIG related to the financing arrangement, which is a note payable for BIG and thus eliminates upon consolidation of the VIE.
The construction of the facility on the property is expected to be complete in December 2016 and the Company has committed $24,950 in financing for the construction. BIG is responsible for funding in excess of the $24,950 mortgage note. As of March 31, 2016, the Company has funded $8,270 for the property.
Gramercy Europe Asset Management (European Fund Manager)
In connection with the Company’s December 2014 investment in the Gramercy European Property Fund, the Company acquired equity interests in the entity, hereinafter European Fund Manager, which provides investment and asset management services to Gramercy European Property Fund. The Company has determined that European Fund Manager is a VIE, as the equity holders of that entity do not have controlling financial interests and the obligation to absorb losses. As Gramercy Europe Asset Management, through an investment advisory agreement with the VIE, controls the activities that most significantly affect the economic outcome of European Fund Manager, the Company has concluded that it is the entity’s primary beneficiary and has consolidated the VIE.
European Fund Manager is expected to generate net cash inflows for the Company in the form of management fees in the future, however, if the VIE’s cash inflows are not sufficient to cover its obligations, the Company may provide financial support for the VIE.
Unconsolidated VIEs
Gramercy Europe Asset Management (European Fund Carry Co.)
In connection with the Company’s December 2014 investment in the Gramercy European Property Fund, the Company acquired equity interests in the entity, hereinafter European Fund Carry Co., entitled to receive certain preferential distributions, if any, made from time-to-time by Gramercy European Property Fund. The Company has determined that European Fund Carry Co. is a VIE, as the equity holders of that entity do not have controlling financial interests and the obligation to absorb losses. Decisions that most significantly affect the economic performance of European Fund Carry Co. are decided by a majority vote of that VIE’s shareholders. As such, the Company does not have a controlling financial interest in the VIE and has accounted for it as an equity investment.
As of March 31, 2016 and December 31, 2015, European Fund Carry Co. had net assets of $(17) and $(5).
Investment in Retained CDO Bonds
The Retained CDO Bonds are non-investment grade subordinate bonds, preferred shares and ordinary shares of three collateralized debt obligations, or CDOs, which the Company recognized subsequent to the disposal of its Gramercy Finance segment, or Gramercy Finance, and exit from the commercial real estate finance business in March 2013. The Company is not obligated to provide any financial support to these CDOs. The Company’s maximum exposure to loss is limited to its interest in the Retained CDO Bonds and the Company does not control the activities that most significantly impact the VIE’s economic performance.

13


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Assets Held for Sale and Discontinued Operations
As of March 31, 2016 and December 31, 2015, the Company had one and six assets classified as held for sale, respectively, which represent legacy Chambers properties that qualified as held for sale as of the closing date of the Merger and are included within discontinued operations, in accordance with ASC 360, as these assets acquired in the Merger do not align with the Company’s investment strategy and therefore will be sold. Real estate investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less costs to sell. Once an asset is classified as held for sale, depreciation and amortization expense is no longer recorded. Refer to Note 3 for further information on the Company’s assets held for sale and discontinued operations.
Tenant and Other Receivables
Tenant and other receivables are derived from management fees, rental revenue and tenant reimbursements.
Management fees, including incentive management fees, are recognized as earned in accordance with the terms of the management agreements. The management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets.
Rental revenue is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.
Tenant and other receivables are recorded net of the allowances for doubtful accounts, which as of March 31, 2016 and December 31, 2015 were $261 and $204, respectively. The Company continually reviews receivables related to rent, tenant reimbursements, and management fees, including incentive fees, and determines collectability by taking into consideration the tenant or asset management clients’ payment history, the financial condition of the tenant or asset management client, business conditions in the industry in which the tenant or asset management client operates and economic conditions in the area in which the property or asset management client is located. In the event that the collectability of a receivable is in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable.
Deferred Costs
Deferred costs consist of deferred financing costs, deferred acquisition costs, and deferred leasing costs. Deferred costs are presented net of accumulated amortization.
The Company’s deferred financing costs are comprised of costs associated with the Company’s unsecured credit facilities and include commitment fees, issuance costs, and legal and other third-party costs associated with obtaining the related financing. Deferred financing costs are amortized on a straight-line or effective interest basis over the contractual terms of the respective agreements and the amortization is reflected as interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close. During the first quarter of 2016, the Company adopted accounting guidance related to the presentation of deferred financing costs on the balance sheet and reclassified amounts from the deferred costs line pertaining to debt arrangements other than its unsecured credit facilities, that were within the asset section, to instead be netted against the corresponding debt liability for all periods presented. See “Recently Issued Accounting Pronouncements” below for further discussion of the new accounting guidance for deferred financing costs.
The Company’s deferred acquisition costs consist primarily of lease inducement fees paid to secure acquisitions and are amortized on a straight-line basis over the related lease term as a reduction from rental revenue.

14


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The Company’s deferred leasing costs include direct costs, such as lease commissions, incurred to initiate and renew operating leases and are amortized on a straight-line basis over the related lease term as a reduction from rental revenue.
Fair Value Measurements
At March 31, 2016 and December 31, 2015, the Company measured its Retained CDO Bonds, derivative instruments, and CBRE Strategic Partners Asia on a recurring basis and measured its real estate investments classified as held for sale at Merger closing on a non-recurring basis. ASC 820-10, “Fair Value Measurements and Disclosures,” among other things, establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments and other assets and liabilities at fair value. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of these assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized in measuring the fair value of financial instruments and other assets and liabilities. The investment manager of CBRE Strategic Partners Asia applies valuation techniques for the Company’s investment carried at fair value based upon the application of the income approach, the direct market comparison approach, the replacement cost approach or third-party appraisals to the underlying assets held in the unconsolidated entity in determining the net asset value attributable to the Company’s ownership interest therein. The three broad levels defined are as follows:
Level I – This level is comprised of financial instruments and other assets and liabilities that have quoted prices that are available in liquid markets for identical assets or liabilities.
Level II – This level is comprised of financial instruments and other assets and liabilities for which quoted prices are available but which are traded less frequently and instruments that are measured at fair value using management’s judgment, where the inputs into the determination of fair value can be directly observed.
Level III – This level is comprised of financial instruments and other assets and liabilities that have little to no pricing observability as of the reported date. These financial instruments do not have active markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment and assumptions.
For a further discussion regarding fair value measurements see Note 9, “Fair Value Measurements.”
Revenue Recognition
Real Estate Investments
Rental revenue from leases on real estate investments is recognized on a straight-line basis over the term of the lease, regardless of when payments are contractually due. The excess of rental revenue recognized over the amounts contractually due according to the underlying leases are included in deferred revenue on the Condensed Consolidated Balance Sheets. For leases on properties that are under construction at the time of acquisition, the Company begins recognition of rental revenue upon completion of construction of the leased asset and delivery of the leased asset to the tenant.
The Company’s lease agreements with tenants also generally contain provisions that require tenants to reimburse the Company for real estate taxes, insurance costs, common area maintenance costs, and other property-related expenses. Under lease arrangements in which the Company is the primary obligor for these expenses, such amounts are recognized as both revenues and operating expenses for the Company. Under lease arrangements in which the tenant pays these expenses directly, such amounts are not included in revenues or expenses. These reimbursement amounts are recognized in the period in which the related expenses are incurred.

15


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The Company recognizes sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.
Asset Management Business
The Company’s asset and property management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets. The Company recognizes revenue for fees pursuant to its management agreements in the period in which they are earned. Management fees received prior to the date earned are included in deferred revenue on the Condensed Consolidated Balance Sheets.
Certain of the Company’s asset management contracts include provisions that may allow it to earn additional fees, generally described as incentive fees or profit participation interests, based on the achievement of a targeted valuation of the managed assets or the achievement of a certain internal rate of return on the managed assets. The Company recognizes incentive fees on its asset management contracts based upon the amount that would be due pursuant to the contract, if the contract were terminated at the reporting date. If the contract may be terminated at will, revenue will only be recognized for the amount that would be due pursuant to that termination. If the incentive fee is a fixed amount, only a proportionate share of revenue is recognized at the reporting date, with the remaining fees recognized on a straight-line basis over the measurement period. The values of incentive management fees are periodically evaluated by management. For the three months ended March 31, 2016, and 2015, the Company recognized incentive fees of $973 and $3,035, respectively.
Investment and Other Income
Investment income consists primarily of income accretion on the Company’s Retained CDO Bonds, which are measured at fair value on a quarterly basis using a discounted cash flow model. Other income primarily consists of interest income on servicing advances and realized foreign currency exchange gain (loss).
Share-Based Compensation Plans
The Company has share-based compensation plans, described more fully in Note 11. The Company accounts for share-based awards using the fair value recognition provisions. Awards of shares or restricted shares are expensed as compensation over the benefit period and may require inputs that are highly subjective and require significant management judgment and analysis to develop. The Company assumes a forfeiture rate which impacts the amount of aggregate compensation cost recognized. In accordance with the provisions of the Company’s share-based compensation plans, the Company accepts the return of shares of the Company’s common shares, at the current quoted market price to satisfy minimum statutory tax-withholding requirements related to shares that vested during the period. The Company also grants awards pursuant to its share-based compensation plans in the form of LTIP units, which are a class of limited partnership interests in the Company’s operating partnerships.
Foreign Currency
Gramercy Europe Asset Management operates an asset and property management business in the United Kingdom. The Company owns one property located in the United Kingdom and has unconsolidated equity investments in Europe and Asia. The Company also has euro-denominated borrowings outstanding under the multi-currency portion of its revolving credit facility. Refer to Note 5 for more information on the Company’s foreign unconsolidated equity investments.

16


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Translation
The Company has interests in the European Union and United Kingdom for which the functional currency is the euro and the British pound sterling, respectively. The Company performs the translation from the euro or the British pound sterling to the U.S. dollar for assets and liabilities using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The Company reports the gains and losses resulting from such translation as a component of other comprehensive income (loss). As of March 31, 2016 and 2015, the Company recorded net translation gains (losses) of $6,119 and $(218), respectively. These translation gains and losses are reclassified to earnings when the Company has substantially exited from all investments in the related currency.
Transaction Gains or Losses
A transaction gain or loss realized upon settlement of a foreign currency transaction will be included in earnings for the period in which the transaction is settled. Foreign currency intercompany transactions that are scheduled for settlement are included in the determination of net income.
Intercompany foreign currency transactions of a long-term nature that do not have a planned or foreseeable future settlement date, in which the entities to the transactions are consolidated or accounted for by the equity method in the Company’s financial statements, are not included in net income but are reported as a component of other comprehensive income (loss).
Net realized gains (losses) are recognized on foreign currency transactions in connection with the transfer of cash from or to foreign operations of subsidiaries or equity investments to the parent company. For the three months ended March 31, 2016 and 2015, the Company recognized net realized foreign currency transaction gains (losses) of $105 and $(6), respectively, on such transactions.
Derivative and Non-Derivative Hedging Instruments
In the normal course of business, the Company is exposed to the effect of interest rate changes and foreign exchange rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives and non-derivative net investment hedges. The Company uses a variety of derivative instruments that are considered “plain vanilla” derivatives to manage, or hedge, interest rate risk. The Company enters into hedging and derivative instruments that will be maximally effective in reducing the interest rate risk and foreign currency exchange rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company’s derivative and non-derivative hedging instruments typically include interest rate swaps, caps, collars and floors, as well as non-derivative net investment hedges. The Company expressly prohibits the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.
The Company recognizes all derivatives on the Condensed Consolidated Balance Sheets at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and shareholders’ equity prospectively, depending on future levels of the London Interbank Offered Rate, or LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

17


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The Company’s non-derivative hedging instrument, the foreign currency denominated tranche of the Company’s 2015 Revolving Credit Facility, is reported at carrying value on its Condensed Consolidated Balance Sheets. As the non-derivative net investment hedge is denominated in euros, the Company translates the carrying value in euros into its functional and reporting currency of U.S. dollars at the period-ending rate and reports this value in its financial statements, with the foreign currency translation adjustment associated with the hedged net investment reported in the cumulative translation adjustment within other comprehensive income (loss). Refer to Note 10 for more information on the Company’s derivative and non-derivative hedging instruments.
Other Assets
The Company makes payments for certain expenses such as insurance and property taxes in advance of the period in which it receives the benefit. These payments are classified as other assets and amortized over the respective period of benefit relating to the contractual arrangement. Other assets also includes deposits related to pending acquisitions and financing arrangements, as required by a seller or lender, respectively. Costs prepaid in connection with securing financing for a property are reclassified into deferred financing costs at the time the transaction is completed. Additionally, other assets includes costs of software purchased for internal use and as well as the value of contracts assumed by the Company pursuant to a business combination, such as asset or property management contracts.
Servicing Advances Receivable
The Company’s servicing advances receivable consisted of its accrual for the reimbursement of servicing advances, including expenses such as legal fees and professional fees incurred while the Company was the collateral manager of the CDOs, which were recognized as part of the disposal of Gramercy Finance in March 2013. For the three months ended March 31, 2016 and 2015, the Company received reimbursements from servicing advances of $1,390 and $0, respectively. As of March 31, 2016 and December 31, 2015, the servicing advances receivable was $0 and $1,382, respectively.
Retained CDO Bonds
The Retained CDO Bonds are non-investment grade subordinate bonds, preferred shares and ordinary shares of three CDOs, which the Company recognized at fair value and retained in March 2013 subsequent to the disposal of Gramercy Finance. Management estimated the timing and amount of cash flows expected to be collected and recognized an investment in the Retained CDO Bonds equal to the net present value of these discounted cash flows. There is no guarantee that the Company will realize any proceeds from this investment, or what the timing will be for the expected remaining life of the Retained CDO Bonds. The Company considers these investments to be not of high credit quality and does not expect a full recovery of interest and principal. Therefore, the Company has suspended interest income accruals on these investments. On a quarterly basis, the Company evaluates the Retained CDO Bonds to determine whether significant changes in estimated cash flows or unrealized losses on these investments, if any, reflect a decline in value which is other-than-temporary. If there is a decrease in estimated cash flows and the investment is in an unrealized loss position, the Company will record an other-than-temporary impairment, or OTTI, in the Condensed Consolidated Statements of Operations. To determine the component of the OTTI related to expected credit losses, the Company compares the amortized cost basis of the Retained CDO Bonds to the present value of the revised expected cash flows, discounted using the pre-impairment yield. Conversely, if the security is in an unrealized gain position and there is a decrease or significant increase in expected cash flows, the Company will prospectively adjust the yield using the effective yield method. Refer to Note 9 for further discussion regarding the fair value measurement of the Retained CDO Bonds. For the three months ended March 31, 2016 and 2015, the Company recognized no OTTI on its Retained CDO Bonds.

18


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

A summary of the Company’s Retained CDO Bonds as of March 31, 2016 is as follows:
Description
 
Number of Securities
 
Face Value
 
Amortized Cost
 
Gross Unrealized Gain
 
Other-than-temporary impairment
 
Fair Value
 
Weighted Average Expected Life
Available for Sale, Non- investment Grade:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Retained CDO Bonds
 
9

 
$
376,972

 
$
6,842

 
$
1,944

 
$

 
$
8,786

 
2.5
Total
 
9

 
$
376,972

 
$
6,842

 
$
1,944

 
$

 
$
8,786

 
2.5
The following table summarizes the activity related to credit losses on the Retained CDO Bonds for the three month period ended March 31, 2016 and for the year ended December 31, 2015:
 
2016
 
2015
Balance as of January 1, 2016 and January 1, 2015, respectively of credit losses on Retained CDO Bonds for which a portion of an OTTI was recognized in other comprehensive income
$
3,196

 
$
6,818

Additions to credit losses:

 

On Retained CDO Bonds for which an OTTI was not previously recognized

 

On Retained CDO Bonds for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income

 

On Retained CDO Bonds for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income

 

Reduction for credit losses:

 

On Retained CDO Bonds for which no OTTI was recognized in other comprehensive income at current measurement date

 

On Retained CDO Bonds sold during the period

 

On Retained CDO Bonds charged off during the period

 

For increases in cash flows expected to be collected that are recognized over the remaining life of the Retained CDO Bonds
(1,524
)
 
(3,622
)
Balance as of March 31, 2016 and December 31, 2015, respectively, of credit losses on Retained CDO Bonds for which a portion of an OTTI was recognized in other comprehensive income 
$
1,672

 
$
3,196

Income Taxes
The Company elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income, to shareholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that the Company distributes to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distributions to shareholders. However, the Company believes that it will be organized and will operate in such a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for U.S. federal income tax purposes. The Company is subject to certain state and local taxes. The Company’s TRSs are subject to federal, state and local taxes.
For the three months ended March 31, 2016 and 2015, the Company recorded $703 and $1,114 of income tax expense, respectively. Tax expense for each year is comprised of federal, state, local, and foreign taxes. Income taxes,

19


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

primarily related to the Company’s TRSs, are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if the Company believes it is more likely than not that all or a portion of a deferred tax asset will not be realized. Any increase or decrease in a valuation allowance is included in the tax provision when such a change occurs.
The Company’s policy for interest and penalties, if any, on material uncertain tax positions recognized in the financial statements is to classify these as interest expense and operating expense, respectively. As of March 31, 2016 and December 31, 2015, the Company did not incur any material interest or penalties.
Earnings Per Share
The Company presents both basic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net income available to vested common shareholders by the weighted average number of vested common shares outstanding during the period. The Company has adopted the two-class computation method, and thus includes all participating securities in the computation of basic shares for the periods in which the Company has net income available to vested common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, as long as their inclusion would not be anti-dilutive. Refer to Note 11 for further discussion of the computation of EPS.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, debt investments and accounts receivable. The Company places its cash investments in excess of insured amounts with high quality financial institutions.
Concentrations of credit risk also arise when a number of the Company’s tenants or asset management clients are engaged in similar business activities or are subject to similar economic risks or conditions that could cause their inability to meet contractual obligations to the Company. The Company regularly monitors its portfolio to assess potential concentrations of credit risk. Management believes the current credit risk portfolio is reasonably well diversified. One asset management client, KBS, accounted for 86% and 80% of the Company’s management fee income for the three months ended March 31, 2016 and 2015, respectively. Gramercy Europe Asset Management accounted for 13% of the Company’s management fee income, including European asset management fee income, for the three months ended March 31, 2016. One tenant, Bank of America, N.A., accounted for 11% and 37% of the Company’s rental revenue for the three months ended March 31, 2016 and 2015 respectively. Additionally, for the three months ended March 31, 2016, there were three states, California, Florida, and Texas, that each accounted for 10% or more of the Company’s rental revenue.
Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

20


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers, which creates a new Topic ASC 606, Revenue from Contracts with Customers. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires increased disclosures related to revenue recognition. The update was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective date so that it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption only permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will appropriately adopt and apply the guidance retrospectively for its fiscal year ended December 31, 2018 and the interim periods within that year. The Company is currently evaluating the guidance to determine the impact it may have on its Condensed Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out rights or participating rights. The guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance during the first quarter of 2016, which did not result in changes to the Company’s conclusions regarding consolidation of applicable entities.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which serves to simplify the presentation of debt issuance costs in a company’s financial statements. The amendments in the update require 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 liability. The update is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. In August 2015, the FASB issued ASU 2015-15, Interest – Imputation of Interest, which allows an entity to present the debt issuance costs from a line-of-credit arrangement as an asset. The Company adopted this guidance during the first quarter of 2016 and reclassified amounts in each period presented. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements as the update relates only to changes in financial statement presentation. See the “Reclassification” section above for further details on the adoption of this guidance.
In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The update requires companies to account for the software license element of a cloud computing arrangement consistent with the acquisition of other software licenses and other licenses of intangible assets. The update is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance during the first quarter of 2016. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The update will be effective beginning in the first quarter of 2019 and early adoption is permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its Condensed Consolidated Financial Statements.

21


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The update serves to simplify the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification of awards on the statement of cash flows. The guidance in the ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted for any interim or annual period. The Company has not elected early adoption of the amendments in the updates and expects that the new guidance will not have a material impact on its Condensed Consolidated Financial Statements.
3. Dispositions, Assets Held for Sale, and Discontinued Operations
Real Estate Dispositions
During the three months ended March 31, 2016, the Company sold nine properties. During the three months ended March 31, 2015, the Company did not sell any properties. The nine property sales in 2016 consisted of all office properties that comprised an aggregate 2,095,194 square feet and generated gross proceeds of $531,500. The Company did not recognize any gains or impairments on disposals during the three months ended March 31, 2016. Six of the property sales in 2016 were structured as like-kind exchanges within the meaning of Section 1031 of the IRC. As a result of the sales, the Company deposited $175,808 of the total sales proceeds into an IRC Section 1031 exchange escrow account with a qualified intermediary. The Company then used $30,301 of these funds as consideration for one property acquisition during the three months ended March 31, 2016. Five of the properties sold during the three months ended March 31, 2016, which were sold for gross proceeds of $386,000, represent properties assumed in the Merger that were designated as held for sale at the time of Merger closing, thus they are included in discontinued operations for all periods presented. Four of the properties sold during the three months ended March 31, 2016, which were sold for gross proceeds of $145,500, were also assumed in the Merger and were classified as held for sale at the time of disposition, however they are not included in discontinued operations as they did not meet the definition of discontinued operations.
Assets Held for Sale
The Company separately classifies properties held for sale in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations. The Company had one and six assets classified as held for sale as of March 31, 2016 and December 31, 2015, respectively. In the normal course of business the Company identifies non-strategic assets for sale. Changes in the market may compel the Company to decide to classify a property held for sale or classify a property that was designated as held for sale back to held for investment. During the three months ended March 31, 2016 and 2015, the Company did not reclassify any properties previously identified as held for sale to held for investment.

22


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The following table summarizes the assets held for sale and liabilities related to the assets held for sale as of March 31, 2016 and December 31, 2015:
Assets held for sale
March 31, 2016
 
December 31, 2015
Real estate investments
$
10,522

 
$
348,582

Acquired lease assets

 
61,804

Other assets
26

 
10,099

Total assets
10,548

 
420,485

Liabilities related to assets held for sale
 
 
 
Mortgage notes payable, net

 
260,704

Below-market lease liabilities

 
16,518

Other liabilities
376

 
14,142

Total liabilities
376

 
291,364

Net assets held for sale
$
10,172

 
$
129,121

Discontinued Operations
The following operating results for Gramercy Finance, the assets previously sold and the assets that were assumed in the Merger and simultaneously designated as held for sale for the three months ended March 31, 2016 and 2015 are included in discontinued operations for all periods presented:
 
Three Months Ended March 31,
 
2016
 
2015
Operating Results:
 

 
 

Revenues
$
5,857

 
$
(100
)
Operating expenses
(2,180
)
 
210

General and administrative expense
(12
)
 
(172
)
Interest expense
(955
)
 

Gain on extinguishment of debt
1,930

 

Net income (loss) from discontinued operations
$
4,640

 
$
(62
)
Discontinued operations have not been segregated in the Condensed Consolidated Statements of Cash Flows. The table below presents additional relevant information pertaining to results of discontinued operations for the three months ended March 31, 2016 and 2015, including depreciation, amortization, capital expenditures, and significant operating and investing noncash items:
 
Three Months Ended March 31,
 
2016
 
2015
Significant operating noncash items
$
(9,455
)
 
$

Increase in cash and cash equivalents related to foreign currency translation
275

 

Total
$
(9,180
)
 
$


23


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

4. Real Estate Investments
Property Acquisitions
During the three months ended March 31, 2016, the Company’s property acquisitions are summarized as follows:
Property Type
Number of Properties
 

Square Feet
 
Purchase Price
Industrial
3

 
621,646

 
$
52,750

Total
3

 
621,646

 
$
52,750

During the year ended December 31, 2015, the Company’s property acquisitions are summarized as follows:
Property Type(1)
Number of Properties
 
Square Feet
 
Purchase Price
Industrial(2)
95

 
23,972,916

 
$
1,561,828

Office(2)
53

 
8,496,686

 
1,864,235

Specialty retail
10

 
1,330,544

 
300,500

Total
158

 
33,800,146

 
$
3,726,563

(1)
Includes 104 properties acquired as part of the Merger, of which 60 were industrial properties that comprise 17,355,358 square feet and 44 were office properties that comprise 7,205,381 square feet.
(2)
The Company assumed mortgages on 17 of its property acquisitions in 2015. The unpaid principal value of the mortgages assumed at acquisition was $153,877. Additionally, the Company assumed 30 mortgages in connection with 29 properties acquired as part of the Merger in 2015. The unpaid principal value of the mortgages assumed with the Merger was $464,292, of which $254,291 was classified as held for sale upon closing of the Merger. Refer to Note 6 for more information on the Company’s debt obligations related to acquisitions.
The Company recorded revenues and net income for the three months ended March 31, 2016 of $652 and $464, respectively, related to its three real estate acquisitions during the period. The Company recorded revenues and net loss for the three months ended March 31, 2015 of $3,446 and $472, respectively, related to its 27 real estate acquisitions during the period.
Property Purchase Price Allocations
The Company is currently analyzing the fair value of the lease and real estate assets of ten of its property investments acquired in 2015, and accordingly, the purchase price allocations are preliminary and subject to change. The initial recording of the assets is summarized as follows:
 
 
 
 
Preliminary Allocations recorded
Period of Acquisition
 
Number of Acquisitions
 
Real Estate Assets
 
Intangible Assets
 
Intangible Liabilities
Year Ended December 31, 2015(1)
 
10
 
$
259,093

 
$

 
$

(1)
Allocations exclude the 104 properties acquired as part of the Merger Portfolio, which are separately disclosed below in the section, “Merger with Chambers.” Additionally, allocations include real estate assets of $7,947 for Proportion Foods, a consolidated VIE. Refer to Note 2 for more information on Proportion Foods.

24


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

During the three months ended March 31, 2016 and the year ended December 31, 2015, the Company finalized the purchase price allocations for five and 141 properties acquired in prior periods, respectively, for which the Company had recorded preliminary purchase price allocations at the time of acquisition. The aggregate changes from the preliminary purchase price allocations to the finalized purchase price allocations, in accordance with ASU 2015-16, which the Company adopted in the third quarter of 2015, are shown in the table below:
 
 
Preliminary Allocations recorded
 
Finalized Allocations recorded
Period Finalized
 
Number of Acquisitions
 
Real Estate Assets
 
Intangible Assets
 
Intangible Liabilities
 
Real Estate Assets
 
Intangible Assets
 
Intangible Liabilities
 
Increase (Decrease) to Rental Revenue
 
(Increase) Decrease to Depreciation and Amortization Expense
Three Months Ended March 31, 2016
 
5
 
$
63,309

 
$
2,084

 
$
184

 
$
56,656

 
$
8,553

 
$

 
$
(18
)
 
$
13

Year Ended December 31, 2015(1)
 
141
 
$
1,373,360

 
$
320,066

 
$
81,961

 
$
1,535,763

 
$
302,083

 
$
226,381

 
$
2,307

 
$
(205
)
(1)
Allocations for the year ended December 31, 2015 include the 67 properties acquired as part of the Bank of America Portfolio.
Pro Forma
The following table summarizes, on an unaudited pro forma basis, the Company’s combined results of operations for the three months ended March 31, 2016 and 2015 as though the acquisitions closed during the three months ended March 31, 2016 and 2015 were completed on January 1, 2015. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods. The table includes pro forma operating results for the assets acquired in the Merger.
 
Three Months Ended March 31,
 
2016
 
2015
Pro forma revenues
$
112,243

 
$
119,034

Pro forma net income available to common shareholders(1)
$
(7,558
)
 
$
8,910

Pro forma income per common share-basic
$
(0.02
)
 
$
0.06

Pro forma income per common share-diluted
$
(0.02
)
 
$
0.06

Pro forma common shares-basic
420,181,216

 
149,937,452

Pro forma common share-diluted
420,181,216

 
155,132,478

(1)
Net income for each period has been adjusted for acquisition costs related to the property acquisitions during the period.
Merger with Chambers
As described in Note 1, on December 17, 2015, the Company completed a merger transaction in which Legacy Gramercy merged with and into a subsidiary of Chambers. In accordance with ASC 805, Business Combinations, the Merger was accounted for as a reverse acquisition, with Chambers as the legal acquirer and Legacy Gramercy as the accounting acquirer for financial reporting purposes. At Merger closing, each share of Legacy Gramercy common stock, par value $0.001 per share, that was issued and outstanding immediately prior to the effective time of the Merger, was canceled and converted into the right to receive 3.1898 common shares, par value $0.01 per share, of the Company.

25


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Because the Merger is accounted for as a reverse acquisition, consideration for the Merger is computed as if Legacy Gramercy had issued its equity interests to Chambers shareholders. Consideration for the Merger was $1,829,241, based on Legacy Gramercy’s closing stock price of $24.63 on December 17, 2015, the number of Chambers common shares outstanding at the close of the Merger, and the Merger Agreement exchange ratio of 3.1898 set forth in the Agreement and Plan of Merger, dated as of July 1, 2015, related to the Merger, or the Merger Agreement.
The Company is in the process of completing the allocation of the purchase price for the Merger, which the Company expects to finalize later this year. The following table summarizes the preliminary purchase price allocation, which represents the current best estimate of acquisition date fair values of the assets acquired and liabilities assumed:
Assets
 
Investments:
 
Land
$
261,514

Buildings and improvements
1,651,462

Net investments
1,912,976

Cash and cash equivalents
24,687

Restricted cash
8,990

Unconsolidated equity investments
556,232

Tenant and other receivables, net
10,885

Acquired lease assets
387,988

Deferred costs and other assets
5,002

Assets held for sale
$
418,115

Total assets
$
3,324,875

Liabilities
 
Mortgage notes payable
$
218,945

Revolving credit facilities and term loans
860,000

Below-market lease liabilities
40,593

Accounts payable, accrued expenses, and other liabilities
87,106

Liabilities related to assets held for sale
288,990

Total liabilities
$
1,495,634

Estimated fair value of net assets acquired
$
1,829,241

The final allocation of the purchase price will be based on the Company’s assessment of the fair value of the acquired assets and liabilities and may differ significantly from the estimated preliminary allocation. During the three months ended March 31, 2016, the Company recorded adjustments to the preliminary purchase price allocation for Chambers as a result of further evaluation of the fair value of the assets acquired and liabilities assumed. The adjustments recorded resulted in a decrease to the allocation to assets acquired by $328 and a decrease to the allocation to liabilities assumed by $328. The preliminary purchase price allocation adjustments also resulted in an increase in net income of $7 to record adjustments to depreciation and amortization expense related to the adjustments on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2016.

26


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Acquisition of Gramercy Europe Asset Management
On December 19, 2014, the Company acquired ThreadGreen Europe Limited, a United Kingdom based property and asset management platform, which the Company subsequently renamed Gramercy Europe Limited, or Gramercy Europe Asset Management, for $3,755 and the issuance of 96,535 shares of the Company’s common stock, valued at $652 as of the date of closing. The Company accounted for the acquisition utilizing the acquisition method of accounting for business combinations. The Company initially recognized assets of $902, liabilities of $398, and goodwill of $3,887, as well as a $16 realized foreign currency transaction loss related to the acquisition and during the second quarter of 2015, the Company finalized the purchase price allocation, which resulted in an increase to the allocation to assets by $190, an increase to the allocation to liabilities by $105, a decrease to goodwill by $85, and a decrease to net income of $80 to record adjustments to amortization and incentive fees. The final allocation of the purchase price included assets of $1,092, liabilities of $503, and goodwill of $3,802. Goodwill represents the fair value of the collaboration expected to be achieved upon consummation of a business combination and is measured as the excess of consideration transferred over the net assets acquired at acquisition date. For more information on Gramercy Europe Asset Management, refer to Note 5.
5. Unconsolidated Equity Investments
The Company has investments in a variety of ventures. The Company will co-invest in entities that own multiple properties with various investors or with one partner. The Company may manage the ventures and collect asset and property management fees as well as incentive fees, otherwise known as profit participation, from its investment partners, or one of the other partners will manage the ventures for asset and property management fees as well as incentive fees. Depending on the structure of the venture, the Company’s voting interest may be different than its economic interest. As the Company does not control these ventures, the Company accounts for these investments under the equity method of accounting.
As a result of the Merger, the Company acquired an interest in four unconsolidated entities, the Duke Joint Venture, Goodman Europe Joint Venture, Goodman UK Joint Venture, and the CBRE Strategic Partners Asia, a real estate investment fund. The Company’s equity investment in the entities was fair valued on the Merger closing date, and the difference between the historical carrying value of the net assets and the fair value has been recorded as a basis difference. The basis difference will be amortized to equity in net income from joint ventures and equity investments over the remaining weighted-average useful life of the underlying assets of each entity.

27


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

As of March 31, 2016 and December 31, 2015, the Company owned properties through unconsolidated equity investments and had investment interests in these unconsolidated entities as follows:
 
 
 
 
 
 
 
 
As of March 31, 2016
 
As of December 31, 2015
Investment
 
Ownership %
 
Voting Interest %
 
Partner
 
Investment in Unconsolidated Equity Investment(1)
 
Number of Properties
 
Investment in Unconsolidated Equity Investment(1)
 
Number of Properties
Gramercy European Property Fund (2)
 
19.8
%
 
19.8
%
 
Various
 
$
26,228

 
15

 
$
23,381

 
12

Philips Joint Venture
 
25.0
%
 
25.0
%
 
Various
 

 
1

 

 
1

Duke Joint Venture
 
80.0
%
 
50.0
%
 
Duke Realty
 
291,324

 
9

 
352,932

 
13

Goodman Europe Joint Venture
 
80.0
%
 
50.0
%
 
Goodman Group
 
163,884

 
9

 
158,863

 
9

Goodman UK Joint Venture
 
80.0
%
 
50.0
%
 
Goodman Group
 
38,096

 
3

 
36,698

 
3

CBRE Strategic Partners Asia
 
5.07
%
 
5.07
%
 
Various
 
5,126

 
2

 
5,508

 
2

Morristown Joint Venture
 
50.0
%
 
50.0
%
 
21 South Street
 
2,611

 
1

 
2,618

 
1

Total
 
 
 
 
 
 
 
$
527,269

 
40

 
$
580,000

 
41

(1)
The amounts presented include basis differences of $101,236, $38,651 and $6,140, net of accumulated amortization, for the Duke Joint Venture, Goodman Europe Joint Venture, and Goodman UK Joint Venture, respectively, as of March 31, 2016. The amounts presented include basis differences of $136,198, $37,371, and $6,578, net of accumulated amortization, for the Duke Joint Venture, Goodman Europe Joint Venture, and Goodman UK Joint Venture, respectively, as of December 31, 2015.
(2)
Includes European Fund Carry Co., which has a carrying value of $(7) and $0 for the Company’s 25% interest as of March 31, 2016 and December 31, 2015, respectively.
The following is a summary of the Company’s unconsolidated equity investments for the three months ended March 31, 2016:
 
Unconsolidated Equity Investments
Balance as of December 31, 2015
$
580,000

Contributions to unconsolidated equity investments
2,471

Equity in net loss of unconsolidated equity investments, including adjustments for basis differences
(2,755
)
Other comprehensive income of unconsolidated equity investments
7,576

Distributions from unconsolidated equity investments
(57,368
)
Purchase price allocation adjustments
(2,655
)
Balance as of March 31, 2016
$
527,269

Gramercy European Property Fund
In December 2014, the Company, along with several equity investment partners, formed Gramercy European Property Fund, a private real estate investment fund, which targets single-tenant industrial, office and specialty retail assets throughout Europe. The equity investors, including the Company, have collectively committed approximately $401,145 (€352,500) in equity capital comprised of an initial commitment of approximately $287,345 (€252,500), including $56,900 (€50,000) from the Company and $230,445 (€202,500) from its equity investment partners, plus an additional $113,800 (€100,000) from certain equity investment partners, not including the Company, after the first $287,345 (€252,500) has been invested. As of March 31, 2016 and December 31, 2015, the Company contributed $28,134 (€25,358) and $25,663 (€23,160) to the Gramercy European Property Fund, respectively. During the three months ended March 31, 2016 and the year ended December 31, 2015, the Gramercy European Property Fund acquired three and 12 properties, respectively, located in Germany, the Netherlands, Poland, and the United Kingdom.

28


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Philips Building
The Philips Joint Venture is a fee interest in 200 Franklin Square Drive, a 199,900 square foot building located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc., a wholly-owned subsidiary of Royal Philips Electronics through December 2021, or the Philips Joint Venture. The property is financed by a $40,127 fixed rate mortgage note with maturity in September 2035. The loan had an anticipated repayment date in September 2015 and, as such, distributions from the property began paying down the loan in September 2015. During the three months ended March 31, 2016 and 2015 the Company received distributions of $0 and $103 from the joint venture, respectively.
Duke
The Duke Joint Venture invests in industrial and office properties located throughout the United States. The Company’s investment partner, Duke Realty, acts as the managing member of the Duke Joint Venture, is entitled to receive fees in connection with the services it provides to the Duke Joint Venture, including asset management, construction, development, leasing and property management services, and is entitled to a promoted interest in the Duke Joint Venture. The Company has joint approval rights with Duke over all major policy decisions. Pursuant to the Duke Amended and Restated Operating Agreement, the Company has the right to a call option to acquire Duke’s entire interest in the Duke Joint Venture, with the value of such interest based on the opinions of qualified appraisers and which the Company can exercise upon the occurrence and adoption by resolution of certain triggering events. Additionally, the Duke Joint Venture has certain rights to participate in the development of certain adjacent and nearby parcels of land currently owned by Duke. The Company received distributions of $53,807 from the Duke Joint Venture during the three months ended March 31, 2016.
Goodman Joint Ventures
The Goodman UK Joint Ventures invests in industrial properties in the United Kingdom and the Goodman Europe Joint Venture invests in industrial properties in France and Germany. The Goodman UK and Goodman Europe Joint Ventures pay certain fees to certain Goodman Group subsidiaries in connection with the services they provide to the Goodman UK and Goodman Europe Joint Ventures, including but not limited to investment advisory, development management and property management services. Goodman is entitled to a promoted interest in the Goodman UK and Goodman Europe Joint Ventures.
If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property for the Goodman UK and Goodman Europe Joint Ventures. After the initial investment period, either shareholder wishing to exit the Goodman Europe and Goodman UK Joint Venture may exercise a buy-sell option with respect to its entire interest. During the three months ended March 31, 2016, the Company received distributions of $0 and $3,561 from the Goodman UK Joint Venture and the Goodman Europe Joint Venture, respectively.
CBRE Strategic Partners Asia
CBRE Strategic Partners Asia is a real estate investment fund with investments in China. CBRE Strategic Partners Asia had an eight-year original term, which began on January 31, 2008 and may be extended for up to two one-year periods with the approval of two-thirds of the limited partners. CBRE Strategic Partners Asia’s commitment period has ended; however, it may call capital to fund operations, obligations and liabilities. For the three months ended March 31, 2016, no capital has been committed or distributed. In March 2016, the limited partners approved a one-year extension of the fund’s life. CBRE Strategic Partners Asia is managed by CBRE Investors SP Asia II, LLC, an affiliate of CBRE Global Investors. CBRE Strategic Partners Asia is not obligated to redeem the interests of any of its investors, including of the Company, prior to 2017. Except in certain limited circumstances such as transfers to affiliates or successor trustees or state agencies, the Company will not be permitted to sell its interest in CBRE Strategic Partners Asia without the prior written consent of the general partner, which the general partner may withhold in its sole discretion.
Morristown
On October 8, 2015, the Company contributed 50% of its interest in an office property located in Morristown, New Jersey to a joint venture the Company formed with 21 South Street, a subsidiary of Hampshire Partners Fund VIII LP. The Company sold the remaining 50% equity interest of the property to 21 South Street for gross proceeds of $2,600. In connection with the sale, the Company, entered into a joint venture agreement for the property with 21 South Street, or the Morristown Joint Venture. In October 2015, the Morristown Joint Venture entered into a leasing and construction management agreement with Prism Construction Management, LLC to manage the construction of specific improvements at the property.

29


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

The Condensed Consolidated Balance Sheets for the Company’s unconsolidated equity investments at March 31, 2016 are as follows:
 
As of March 31, 2016
 
Duke Joint Venture
 
Goodman UK Joint Venture
 
Goodman Europe Joint Venture
 
Gramercy European Property Fund
 
CBRE Strategic Partners Asia
 
Other(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 

Real estate assets, net(2)
$
342,437

 
$
41,011

 
$
287,922

 
$
282,178

 
$
109,554

 
$
50,423

 
$
1,113,525

Other assets
25,138

 
6,122

 
40,106

 
58,861

 
9,337

 
3,390

 
142,954

Total assets
$
367,575

 
$
47,133

 
$
328,028

 
$
341,039

 
$
118,891

 
$
53,813

 
$
1,256,479

Liabilities and members’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
 

Mortgages payable
$
12,992

 
$

 
$
127,137

 
$
170,431

 
$

 
$
40,127

 
$
350,687

Other liabilities
6,329

 
1,049

 
5,676

 
38,074

 
13,948

 
3,839

 
68,915

Total liabilities
19,321

 
1,049

 
132,813

 
208,505

 
13,948

 
43,966

 
419,602

Gramercy Property Trust equity
291,324

 
38,096

 
163,884

 
26,235

 
5,126

 
2,604

 
527,269

Other members’ equity
56,930

 
7,988

 
31,331

 
106,299

 
99,817

 
7,243

 
309,608

Liabilities and members’ equity
$
367,575

 
$
47,133

 
$
328,028

 
$
341,039

 
$
118,891

 
$
53,813

 
$
1,256,479

(1)
Includes Philips Joint Venture, Morristown Joint Venture, and European Fund Carry Co.
(2)
Includes REIT basis adjustments that were recorded by the Company to adjust the unconsolidated equity investments to fair value upon closing of the Merger.
The Condensed Consolidated Balance Sheets for the Company’s unconsolidated equity investments at December 31, 2015 are as follows:
 
As of December 31, 2015
 
Duke Joint Venture
 
Goodman UK Joint Venture
 
Goodman Europe Joint Venture
 
Gramercy European Property Fund
 
CBRE Strategic Partners Asia
 
Other(1)
 
Total
Assets:

 

 

 

 
 
 

 

Real estate assets, net(2)
$
443,313

 
$
42,584

 
$
276,925

 
$
236,312

 
$
109,554

 
$
50,698

 
$
1,159,386

Other assets
32,739

 
3,427

 
42,139

 
39,983

 
9,337

 
15,954

 
143,579

Total assets
$
476,052

 
$
46,011

 
$
319,064

 
$
276,295

 
$
118,891

 
$
66,652

 
$
1,302,965

Liabilities and members’ equity:

 

 

 

 

 

 
 
Mortgages payable
$
56,105

 
$

 
$
121,350

 
$
143,616

 
$

 
$
40,424

 
$
361,495

Other liabilities
6,035

 
1,783

 
8,622

 
14,581

 
13,948

 
16,540

 
61,509

Total liabilities
62,140

 
1,783

 
129,972

 
158,197

 
13,948

 
56,964

 
423,004

Gramercy Property Trust equity
352,932

 
36,698

 
158,863

 
23,385

 
5,508

 
2,614

 
580,000

Other members’ equity
60,980

 
7,530

 
30,229

 
94,713

 
99,435

 
7,074

 
299,961

Liabilities and members’ equity
$
476,052

 
$
46,011

 
$
319,064

 
$
276,295

 
$
118,891

 
$
66,652

 
$
1,302,965

(1)
Includes Philips Joint Venture, Morristown Joint Venture, and European Fund Carry Co.
(2)
Includes REIT basis adjustments that were recorded by the Company to adjust the unconsolidated equity investments to fair value upon closing of the Merger.


30


Gramercy Property Trust
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2016

Certain real estate assets in the Company’s unconsolidated equity investments are subject to mortgage loans. The following is a summary of the secured financing arrangements within the Company’s unconsolidated equity investments as of March 31, 2016:
 
 
 
 
 
 
 
 
 
 
Outstanding Balance(2)
Property
 
Unconsolidated Equity Investment
 
Ownership %
 
Interest Rate (1)
 
Maturity Date
 
March 31, 2016
 
December 31, 2015
Graben(3)
 
Goodman Europe Joint Venture
 
80.0%
 
2.39%
 
7/27/2017
 
$
35,392

 
$
33,781

Koblenz
 
Goodman Europe Joint Venture
 
80.0%
 
2.27%
 
12/12/2017
 
36,132

 
34,486

Durrholz
 
Gramercy European Property Fund
 
19.8%
 
1.20%
 
3/31/2020
 
13,451

 
12,937

Venray
 
Gramercy European Property Fund
 
19.8%
 
3.00%
 
12/2/2020
 
14,189

 
13,578

Bodenheim
 
Goodman Europe Joint Venture
 
80.0%
 
3.01%
 
11/25/2020
 
12,882

 
12,296

Bremen