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

Document
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, 2018
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)
Commission File No. 33-219049 (GPT Operating Partnership LP)
Gramercy Property Trust
GPT Operating Partnership LP
(Exact name of registrant as specified in its charter) 

Gramercy Property Trust
 
Maryland
 
56-2466617
GPT Operating Partnership LP
 
Delaware
 
56-2466618
 
 
(State or other jurisdiction
incorporation or organization)
 
(I.R.S. Employer of
Identification No.)
 
 
 
 
 
90 Park Avenue, 32nd Floor, New York, NY 10016
(Address of principal executive offices – zip code)
 
 
 
 
 
(212) 297-1000
(Registrant’s telephone number, including area code)
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. 
Gramercy Property Trust    Yes x      No ¨        GPT Operating Partnership LP Yes x      No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). 
Gramercy Property Trust    Yes x      No ¨        GPT Operating Partnership LP Yes x      No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Gramercy Property Trust
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
GPT Operating Partnership LP
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company ¨
Emerging growth company ¨
(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Gramercy Property Trust    Yes ¨      No x        GPT Operating Partnership LP Yes ¨      No x

The number of shares outstanding of Gramercy Property Trust’s common shares of beneficial interest, $0.01 par value, was 160,785,498 as of April 27, 2018.



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2018 of Gramercy Property Trust and GPT Operating Partnership LP. Unless stated otherwise or the context otherwise requires, references to "Gramercy Property Trust," the "Company" or "Gramercy" mean Gramercy Property Trust and its consolidated subsidiaries; and references to "GPT Operating Partnership LP," the "Operating Partnership" or "GPTOP" mean GPT Operating Partnership LP and its consolidated subsidiaries. The terms "we," "our" and "us" mean the Company and all the entities owned or controlled by the Company, including the Operating Partnership.
The Company is a Maryland real estate investment trust, or REIT, which operates as a self-administered and self-managed entity and is the sole general partner of the Operating Partnership. As the general partner of the Operating Partnership, the Company has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.
As of March 31, 2018, the Company owned 96.75% of the outstanding general and limited partnership interest in the Operating Partnership. As of March 31, 2018, noncontrolling investors owned approximately 3.25% of the outstanding limited partnership interest in the Operating Partnership. We refer to these interests as the noncontrolling interests in the Operating Partnership.
The Company and the Operating Partnership are managed and operated as one entity. The financial results of the Operating Partnership are consolidated into the financial statements of the Company. The Company has no significant assets other than its investment in the Operating Partnership. Substantially all of the Company’s assets are held by, and its operations are conducted through, the Operating Partnership. Therefore, the assets and liabilities of the Company and the Operating Partnership are substantially the same.
Noncontrolling interests in the Operating Partnership, shareholders' equity of the Company and partners' capital of the Operating Partnership are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
Combined reports enhance investors' understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
Combined reports eliminate duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the Company's disclosure applies to both the Company and the Operating Partnership; and
Combined reports create time and cost efficiencies through the preparation of one combined report instead of two separate reports.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
Consolidated financial statements; and
The following notes to the consolidated financial statements:
Note 9, Shareholders' Equity (Deficit) of the Company;
Note 10, Partners' Capital of the Operating Partnership; and
Note 11, Noncontrolling Interests.



This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of the Company and the Operating Partnership, respectively, in order to establish that the Chief Executive Officer and the Chief Financial Officer of the Company, in both their capacity as the principal executive officer and principal financial officer of the Company and the principal executive officer and principal financial officer of the general partner of the Operating Partnership, have made the requisite certifications and that the Company and the Operating Partnership are compliant with Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended.



GRAMERCY PROPERTY TRUST
FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I.
 
ITEM 1.
 
 
 
Financial Statements of Gramercy Property Trust
 
 
 
 
 
 
 
 
 
 
 
 
Financial Statements of GPT Operating Partnership LP
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
PART II.
 
ITEM 1.
 
ITEM 1A.
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
ITEM 5.
 
ITEM 6.
 
 


Gramercy Property Trust
Consolidated Balance Sheets
(Unaudited, amounts in thousands, except share and per share data)


PART I.
FINANCIAL INFORMATION
ITEM I.
FINANCIAL STATEMENTS
 
March 31, 2018
 
December 31, 2017
Assets:
 

 
 

Real estate investments, at cost:
 

 
 

Land
$
1,009,568

 
$
1,023,908

Building and improvements
4,821,301

 
4,863,916

Less: accumulated depreciation
(368,815
)
 
(333,151
)
Total real estate investments, net
5,462,054

 
5,554,673

Cash and cash equivalents
41,964

 
30,231

Restricted cash
15,041

 
12,723

Investment in unconsolidated equity investments
99,113

 
70,214

Assets held for sale, net
402

 
402

Tenant and other receivables, net
92,525

 
88,750

Acquired lease assets, net of accumulated amortization of $241,939 and $220,473
563,213

 
598,559

Other assets
127,664

 
100,484

Total assets
$
6,401,976

 
$
6,456,036

Liabilities and Equity:
 
 
 
Liabilities:
 
 
 
Senior unsecured revolving credit facility
$
292,543

 
$
357,162

Mortgage notes payable, net
559,473

 
563,521

Senior unsecured notes, net
496,887

 
496,785

Senior unsecured term loans, net
1,448,241

 
1,448,152

Total long-term debt, net
2,797,144

 
2,865,620

Accounts payable and accrued expenses
60,151

 
59,619

Dividends payable
62,380

 
61,971

Below market lease liabilities, net of accumulated amortization of $31,201 and $28,978
159,544

 
166,491

Other liabilities
55,873

 
50,002

Total liabilities
$
3,135,092

 
$
3,203,703

Commitments and contingencies

 

Noncontrolling interest in the Operating Partnership
137,800

 
113,530

Equity:
 
 
 
Common shares, par value $0.01, 160,782,765 and 160,686,822 issued and outstanding at March 31, 2018 and December 31, 2017, respectively
1,608

 
1,607

Series A cumulative redeemable preferred shares, par value $0.01, liquidation preference $87,500, and 3,500,000 shares authorized, issued and outstanding at March 31, 2018 and December 31, 2017
84,394

 
84,394

Additional paid-in-capital
4,411,605

 
4,409,677

Accumulated other comprehensive income
35,667

 
12,776

Accumulated deficit
(1,404,416
)
 
(1,369,872
)
Total shareholders' equity
3,128,858

 
3,138,582

Noncontrolling interest in other entities
226

 
221

Total equity
$
3,129,084

 
$
3,138,803

Total liabilities and equity
$
6,401,976

 
$
6,456,036


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

Gramercy Property Trust
Consolidated Statements of Operations
(Unaudited, amounts in thousands, except share and per share data)


 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 

 
 

Rental revenue
$
122,245

 
$
103,282

Operating expense reimbursements
23,310

 
20,368

Third-party management fees
2,790

 
4,592

Other income
1,135

 
1,752

Total revenues
149,480

 
129,994

Operating Expenses
 

 
 

Depreciation and amortization
71,516

 
62,217

Property operating expenses
27,088

 
23,186

General and administrative expenses
9,686

 
8,756

Property management expenses
2,542

 
3,084

Total operating expenses
110,832

 
97,243

Operating income
38,648

 
32,751

Other Expenses:
 
 
 
Interest expense
(25,492
)
 
(23,056
)
Other-than-temporary impairment

 
(4,081
)
Portion of impairment recognized in other comprehensive loss

 
(809
)
Net impairment recognized in earnings

 
(4,890
)
Equity in net loss of unconsolidated equity investments
(926
)
 
(94
)
Loss on extinguishment of debt

 
(208
)
Impairment of real estate investments

 
(12,771
)
Income (loss) from continuing operations before provision for taxes
12,230

 
(8,268
)
Provision for taxes
(621
)
 
196

Income (loss) from continuing operations
11,609

 
(8,072
)
Loss from discontinued operations

 
(24
)
Income (loss) before net gain on disposals
11,609

 
(8,096
)
Net gain on disposals
16,255

 
17,377

Net income
27,864

 
9,281

Net income attributable to noncontrolling interest
(802
)
 
(154
)
Net income attributable to Gramercy Property Trust
27,062

 
9,127

Preferred share dividends
(1,559
)
 
(1,559
)
Net income available to common shareholders
$
25,503

 
$
7,568

Basic earnings per share:
 

 
 

Net income from continuing operations, after preferred dividends
$
0.16

 
$
0.05

Net income from discontinued operations

 

Net income available to common shareholders
$
0.16

 
$
0.05

Diluted earnings per share:
 

 
 

Net income from continuing operations, after preferred dividends
$
0.16

 
$
0.05

Net income from discontinued operations

 

Net income available to common shareholders
$
0.16

 
$
0.05

Basic weighted average common shares outstanding
160,408,136

 
140,907,399

Diluted weighted average common shares outstanding
160,416,900

 
141,875,619

 

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

Gramercy Property Trust
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, amounts in thousands)


 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
27,864

 
$
9,281

Other comprehensive income (loss):
 
 
 
Unrealized loss on available for sale debt securities
(48
)
 
(2,820
)
Cumulative effect of accounting change
103

 

Unrealized gain on derivative instruments
22,050

 
4,378

Reclassification of unrealized gain on terminated derivative instruments into earnings
268

 
268

Foreign currency translation adjustments
518

 
691

Other comprehensive income
$
22,891

 
$
2,517

Comprehensive income
$
50,755

 
$
11,798

Net income attributable to noncontrolling interest
(802
)
 
(154
)
Other comprehensive (income) loss attributable to noncontrolling interest
697

 
(11
)
Comprehensive income attributable to Gramercy Property Trust
$
50,650

 
$
11,633

 


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


Gramercy Property Trust
Consolidated Statement of Shareholders’ Equity (Deficit) and Noncontrolling Interest
(Unaudited, 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
 
Total
 
Shares
 
Par Value
 
 
 
 
 
 
 
Balance at December 31, 2017
160,686,822

 
$
1,607

 
$
84,394

 
$
4,409,677

 
$
12,776

 
$
(1,369,872
)
 
$
3,138,582

 
$
221

 
$
3,138,803

Net income

 

 

 

 

 
27,062

 
27,062

 

 
27,062

Cumulative effect of accounting changes

 

 

 

 
103

 
560

 
663

 

 
663

Change in net unrealized gain on derivative instruments

 

 

 

 
22,050

 

 
22,050

 

 
22,050

Change in net unrealized loss on debt securities

 

 

 

 
(48
)
 

 
(48
)
 

 
(48
)
Reclassification of unrealized gain on terminated derivative instruments into earnings

 

 

 

 
268

 

 
268

 

 
268

Offering costs

 

 

 
(39
)
 

 

 
(39
)
 

 
(39
)
Share based compensation - fair value
88,094

 
1

 

 
2,023

 

 

 
2,024

 

 
2,024

Dividend reinvestment program proceeds
1,811

 

 

 
46

 

 

 
46

 

 
46

Conversion of OP Units to common shares
6,038

 

 

 
130

 

 

 
130

 

 
130

Reallocation of noncontrolling interest in the Operating Partnership

 

 

 
(232
)
 

 

 
(232
)
 

 
(232
)
Foreign currency translation adjustment

 

 

 

 
518

 

 
518

 

 
518

Contributions to noncontrolling interest in other partnerships

 

 

 

 

 

 

 
5

 
5

Dividends on preferred shares

 

 

 

 

 
(1,559
)
 
(1,559
)
 

 
(1,559
)
Dividends on common shares

 

 

 

 

 
(60,607
)
 
(60,607
)
 

 
(60,607
)
Balance at March 31, 2018
160,782,765

 
$
1,608

 
$
84,394

 
$
4,411,605

 
$
35,667

 
$
(1,404,416
)
 
$
3,128,858

 
$
226

 
$
3,129,084



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


Gramercy Property Trust
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)

 
Three Months Ended March 31,
 
2018
 
2017
Operating Activities:
 

 
 

Net income
$
27,864

 
$
9,281

Adjustments to net cash provided by operating activities:
 
 
 
Depreciation and amortization
71,516

 
62,217

Amortization of market lease intangibles
(392
)
 
(547
)
Amortization of deferred costs
825

 
615

Amortization of discounts and other fees
(632
)
 
(409
)
Straight-line rent adjustment
(7,025
)
 
(7,260
)
Other-than-temporary impairment on retained bonds

 
4,890

Impairment of real estate investments

 
12,771

Net gain on disposals
(16,255
)
 
(17,377
)
Distributions received from unconsolidated equity investments

 
352

Equity in net loss of unconsolidated equity investments
926

 
94

Loss on extinguishment of debt

 
208

Amortization of share-based compensation
1,856

 
2,054

Changes in operating assets and liabilities:
 
 
 
Payment of capitalized leasing costs
(4,526
)
 
(3,790
)
Tenant and other receivables
3,253

 
11,707

Other assets
(1,401
)
 
(4,368
)
Accounts payable and accrued expenses
(8,050
)
 
(9,755
)
Other liabilities
4,864

 
(2,204
)
Net cash provided by operating activities
72,823

 
58,479

Investing Activities:
 
 
 
Capital expenditures
(17,825
)
 
(18,429
)
Proceeds from sales of real estate
108,032

 
33,053

Contributions to unconsolidated equity investments
(5,856
)
 
(2,650
)
Acquisition of real estate
(10,971
)
 
(99,612
)
Net cash provided by (used in) investing activities
73,380

 
(87,638
)
Financing Activities:
 
 
 
Proceeds from unsecured term loan and credit facility
164,922

 
60,000

Repayment of unsecured term loans and credit facility
(230,000
)
 
(5,000
)
Proceeds from mortgage notes payable

 
2,582

Repayment of mortgage notes payable
(3,545
)
 
(3,915
)
Offering costs

 
(606
)
Proceeds from sale of common shares

 
20,081

Payment of deferred financing costs

 
(252
)
Preferred share dividends paid
(1,559
)
 
(1,559
)
Common share dividends paid
(60,568
)
 
(53,025
)
Distribution to noncontrolling interest in the Operating Partnership
(1,402
)
 
(118
)
Other financing activities
(138
)
 

Net cash provided by (used in) financing activities
(132,290
)
 
18,188

Net increase (decrease) in cash, cash equivalents, and restricted cash
13,913

 
(10,971
)
Increase (decrease) in cash, cash equivalents, and restricted cash related to foreign currency translation
138

 
(105
)
Cash, cash equivalents, and restricted cash at beginning of period
42,954

 
80,433

Cash, cash equivalents, and restricted cash at end of period
$
57,005

 
$
69,357


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

GPT Operating Partnership LP
Consolidated Balance Sheets
(Unaudited, amounts in thousands, except unit and per unit data)

 
March 31, 2018
 
December 31, 2017
Assets:
 

 
 

Real estate investments, at cost:
 

 
 

Land
$
1,009,568

 
$
1,023,908

Building and improvements
4,821,301

 
4,863,916

Less: accumulated depreciation
(368,815
)
 
(333,151
)
Total real estate investments, net
5,462,054

 
5,554,673

Cash and cash equivalents
41,964

 
30,231

Restricted cash
15,041

 
12,723

Investment in unconsolidated equity investments
99,113

 
70,214

Assets held for sale, net
402

 
402

Tenant and other receivables, net
92,525

 
88,750

Acquired lease assets, net of accumulated amortization of $241,939 and $220,473
563,213

 
598,559

Other assets
127,664

 
100,484

Total assets
$
6,401,976

 
$
6,456,036

Liabilities and Partners’ Capital:
 
 
 
Liabilities:
 
 
 
Senior unsecured revolving credit facility
$
292,543

 
$
357,162

Mortgage notes payable, net
559,473

 
563,521

Senior unsecured notes, net
496,887

 
496,785

Senior unsecured term loans, net
1,448,241

 
1,448,152

Total long-term debt, net
2,797,144

 
2,865,620

Accounts payable and accrued expenses
60,151

 
59,619

Dividends and distributions payable
62,380

 
61,971

Below market lease liabilities, net of accumulated amortization of $31,201 and $28,978
159,544

 
166,491

Other liabilities
55,873

 
50,002

Total liabilities
$
3,135,092

 
$
3,203,703

Commitments and contingencies

 

Limited partner interest in the Operating Partnership (5,388,995 and 4,398,935 limited partner common units outstanding at March 31, 2018 and December 31, 2017, respectively)
137,800

 
113,530

Partners’ Capital:
 
 
 
Series A cumulative redeemable preferred units, liquidation preference $87,500, and 3,500,000 units issued and outstanding at March 31, 2018 and December 31, 2017
84,394

 
84,394

GPT partners’ capital (1,658,060 and 1,650,858 general partner common units and 159,124,705 and 159,035,964 limited partner common units outstanding at March 31, 2018 and December 31, 2017, respectively)
3,008,797

 
3,041,412

Accumulated other comprehensive income
35,667

 
12,776

Total GPTOP partners' capital
3,128,858

 
3,138,582

Noncontrolling interest in other entities
226

 
221

Total partners’ capital
$
3,129,084

 
$
3,138,803

Total liabilities and partners’ capital
$
6,401,976

 
$
6,456,036



The accompanying notes are an integral part of these financial statements.
6

GPT Operating Partnership LP
Consolidated Statements of Operations
(Unaudited, amounts in thousands, except unit and per unit data)

 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 

 
 

Rental revenue
$
122,245

 
$
103,282

Operating expense reimbursements
23,310

 
20,368

Third-party management fees
2,790

 
4,592

Other income
1,135

 
1,752

Total revenues
149,480

 
129,994

Operating Expenses
 
 
 
Depreciation and amortization
71,516

 
62,217

Property operating expenses
27,088

 
23,186

General and administrative expenses
9,686

 
8,756

Property management expenses
2,542

 
3,084

Total operating expenses
110,832

 
97,243

Operating income
38,648

 
32,751

Other Expenses:
 
 
 
Interest expense
(25,492
)
 
(23,056
)
Other-than-temporary impairment

 
(4,081
)
Portion of impairment recognized in other comprehensive loss

 
(809
)
Net impairment recognized in earnings

 
(4,890
)
Equity in net loss of unconsolidated equity investments
(926
)
 
(94
)
Loss on extinguishment of debt

 
(208
)
Impairment of real estate investments

 
(12,771
)
Income (loss) from continuing operations before provision for taxes
12,230

 
(8,268
)
Provision for taxes
(621
)
 
196

Income (loss) from continuing operations
11,609

 
(8,072
)
Loss from discontinued operations

 
(24
)
Income (loss) before net gain on disposals
11,609

 
(8,096
)
Net gain on disposals
16,255

 
17,377

Net income
27,864

 
9,281

Net income attributable to noncontrolling interest in other partnerships

 
(120
)
Net income attributable to GPTOP
27,864

 
9,161

 Preferred unit distributions
(1,559
)
 
(1,559
)
Net income available to common unitholders
$
26,305

 
$
7,602

Basic earnings per unit:
 

 
 

Net income from continuing operations, after preferred unit distributions
$
0.16

 
$
0.05

Net income from discontinued operations

 

Net income available to common unitholders
$
0.16

 
$
0.05

Diluted earnings per unit:
 
 
 
Net income from continuing operations, after preferred unit distributions
$
0.16

 
$
0.05

Net income from discontinued operations

 

Net income available to common unitholders
$
0.16

 
$
0.05

Basic weighted average common units outstanding
165,448,866

 
141,527,985

Diluted weighted average common units outstanding
165,457,630

 
142,496,205


The accompanying notes are an integral part of these financial statements.
7

GPT Operating Partnership LP
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, amounts in thousands)


 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
27,864

 
$
9,281

Other comprehensive income (loss):
 
 
 
Unrealized loss on available for sale debt securities
(48
)
 
(2,820
)
Cumulative effect of accounting change
103

 

Unrealized gain on derivative instruments
22,050

 
4,378

Reclassification of unrealized gain on terminated derivative instruments into earnings
268

 
268

Foreign currency translation adjustments
518

 
691

Other comprehensive income
$
22,891

 
$
2,517

Comprehensive income
$
50,755

 
$
11,798

Net income attributable to noncontrolling interest in other partnerships

 
(120
)
Comprehensive income attributable to GPTOP
$
50,755

 
$
11,678



The accompanying notes are an integral part of these financial statements.
8

GPT Operating Partnership LP
Consolidated Statement of Partners' Capital
(Unaudited, amounts in thousands, except unit data)


 
Partners' Interest
 
Series A Preferred Units
 
Accumulated Other Comprehensive Income (Loss)
 
Total GPTOP
 
Noncontrolling Interest
 
 
 
Common Units
 
Common Unitholders
 
 
 
 
 
Total
Balance at December 31, 2017
160,686,822

 
$
3,041,412

 
$
84,394

 
$
12,776

 
$
3,138,582

 
$
221

 
$
3,138,803

Net income

 
27,062

 

 

 
27,062

 

 
27,062

Cumulative effect of accounting changes

 
560

 

 
103

 
663

 

 
663

Change in net unrealized gain on derivative instruments

 

 

 
22,050

 
22,050

 

 
22,050

Change in net unrealized loss on debt securities

 

 

 
(48
)
 
(48
)
 

 
(48
)
Reclassification of unrealized gain of terminated derivative instruments into earnings

 

 

 
268

 
268

 

 
268

Offering costs

 
(39
)
 

 

 
(39
)
 

 
(39
)
Share based compensation - fair value
88,094

 
2,024

 

 

 
2,024

 

 
2,024

Distribution reinvestment program proceeds
1,811

 
46

 

 

 
46

 

 
46

Conversion of OP Units to common units
6,038

 
130

 

 

 
130

 

 
130

Reallocation of limited partner interest in the Operating Partnership

 
(232
)
 

 

 
(232
)
 

 
(232
)
Foreign currency translation adjustment

 

 

 
518

 
518

 

 
518

Contributions to noncontrolling interest in other partnerships

 

 

 

 

 
5

 
5

Distributions on preferred units

 
(1,559
)
 

 

 
(1,559
)
 

 
(1,559
)
Distributions on common units

 
(60,607
)
 

 

 
(60,607
)
 

 
(60,607
)
Balance at March 31, 2018
160,782,765

 
$
3,008,797

 
$
84,394

 
$
35,667

 
$
3,128,858

 
$
226

 
$
3,129,084


The accompanying notes are an integral part of these financial statements.
9

GPT Operating Partnership LP
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)


 
Three Months Ended March 31,
 
2018
 
2017
Operating Activities:
 

 
 

Net income
$
27,864

 
$
9,281

Adjustments to net cash provided by operating activities:
 
 
 
Depreciation and amortization
71,516

 
62,217

Amortization of market lease intangibles
(392
)
 
(547
)
Amortization of deferred costs
825

 
615

Amortization of discounts and other fees
(632
)
 
(409
)
Straight-line rent adjustment
(7,025
)
 
(7,260
)
Other-than-temporary impairment on retained bonds

 
4,890

Impairment of real estate investments

 
12,771

Gain on sale of properties
(16,255
)
 
(17,377
)
Distributions received from unconsolidated equity investments

 
352

Equity in net loss of unconsolidated equity investments
926

 
94

Loss on extinguishment of debt

 
208

Amortization of share-based compensation
1,856

 
2,054

Changes in operating assets and liabilities:
 
 
 
Payment of capitalized leasing costs
(4,526
)
 
(3,790
)
Tenant and other receivables
3,253

 
11,707

Other assets
(1,401
)
 
(4,368
)
Accounts payable and accrued expenses
(8,050
)
 
(9,755
)
Other liabilities
4,864

 
(2,204
)
Net cash provided by operating activities
72,823

 
58,479

Investing Activities:
 
 
 
Capital expenditures
(17,825
)
 
(18,429
)
Proceeds from sales of real estate
108,032

 
33,053

Contributions to unconsolidated equity investments
(5,856
)
 
(2,650
)
Acquisition of real estate
(10,971
)
 
(99,612
)
Net cash provided by (used in) investing activities
73,380

 
(87,638
)
Financing Activities:
 
 
 
Proceeds from unsecured term loan and credit facility
164,922

 
60,000

Repayment of unsecured term loans and credit facility
(230,000
)
 
(5,000
)
Proceeds from mortgage notes payable

 
2,582

Repayment of mortgage notes payable
(3,545
)
 
(3,915
)
Offering costs

 
(606
)
Proceeds from issuance of common units

 
20,081

Payment of deferred financing costs

 
(252
)
Preferred unit distributions paid
(1,559
)
 
(1,559
)
Common unit distributions paid
(60,568
)
 
(53,025
)
Distribution to limited partnership interest in the Operating Partnership
(1,402
)
 
(118
)
Other financing activities
(138
)
 

Net cash provided by (used in) financing activities
(132,290
)
 
18,188

Net increase (decrease) in cash, cash equivalents, and restricted cash
13,913

 
(10,971
)
Increase (decrease) in cash, cash equivalents, and restricted cash related to foreign currency translation
138

 
(105
)
Cash, cash equivalents, and restricted cash at beginning of period
42,954

 
80,433

Cash, cash equivalents, and restricted cash at end of period
$
57,005

 
$
69,357


The accompanying notes are an integral part of these financial statements.
10

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018


1. Business and Organization
Gramercy Property Trust, or the Company or Gramercy, a Maryland real estate investment trust, or REIT, together with its subsidiary, GPT Operating Partnership LP, or the Operating Partnership, is a leading global investor and asset manager of commercial real estate. Gramercy specializes in acquiring and managing high quality, income producing commercial real estate leased to high quality tenants in major markets in the United States and Europe.
Gramercy earns revenues primarily through rental revenues on properties that it owns in the United States. The Company also owns unconsolidated equity investments in the United States, Europe, and Asia. The Company's operations are conducted primarily through the Operating Partnership. As of March 31, 2018, third-party holders of limited partnership interests owned approximately 3.25% of the Operating Partnership. These interests are referred to as the noncontrolling interests in the Operating Partnership. See Note 11 for more information on the Company’s noncontrolling interests.
As of March 31, 2018, the Company’s wholly-owned portfolio consisted of 362 properties comprising 80,884,942 rentable square feet with 97.3% occupancy. As of March 31, 2018, the Company had ownership interests in 20 properties held in unconsolidated equity investments in the United States and Europe and one property held through the investment in CBRE Strategic Partners Asia. As of March 31, 2018, the Company managed approximately $1,960,000 of commercial real estate assets, including approximately $1,408,000 of assets in Europe.
During the three months ended March 31, 2018, the Company acquired one property with 162,056 square feet for a purchase price of approximately $10,550 and placed one development property into service with 126,722 square feet. During the three months ended March 31, 2018, the Company sold five properties and one warehouse from another asset aggregating 1,546,091 square feet for total gross proceeds of approximately $111,012.
Unless the context requires otherwise, all references to “Company," "Gramercy,” “we,” “our” and “us” mean Gramercy Property Trust and its subsidiaries, including the Operating Partnership and its consolidated subsidiaries.
2. Significant Accounting Policies
Basis of Quarterly Presentation
The accompanying 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, they do 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 2018 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2017 of the Company and the Operating Partnership. The Consolidated Balance Sheets at December 31, 2017 were derived from the audited Consolidated Financial Statements at that date.

11

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

Reclassifications
Certain prior year balances have been reclassified to conform with the current year presentation. During the fourth quarter of 2017, the Company adopted Accounting Standards Update, or ASU, No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash and cash equivalents to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the Consolidated Statements of Cash Flows. As a result of the adoption, net cash provided by operating activities changed by $235, net cash used in investing activities changed by $(947), and net cash provided by financing activities changed by $909, for the three months ended March 31, 2017.
Principles of Consolidation
The 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.
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 Partnership are reflected as noncontrolling interests. See Note 11 for more information on the Company’s noncontrolling interests.
Real Estate Investments
Real Estate Acquisitions
The Company evaluates its acquisitions of real estate, including equity interests in entities that predominantly hold real estate assets, to determine if the acquired assets meet the definition of a business and need to be accounted for as a business combination, or alternatively, should be accounted for as an asset acquisition. An integrated set of assets and activities acquired does not meet the definition of a business if either (i) substantially all the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets, or (ii) the asset and activities acquired do not contain at least an input and a substantive process that together significantly contribute to the ability to create outputs. The Company expects that its acquisitions of real estate will continue to not meet the definition of a business.
Acquisitions of real estate that do not meet the definition of a business, including sale-leaseback transactions that have newly-originated leases and real estate investments under construction, or build-to-suit investments, are recorded as asset acquisitions. The accounting for asset acquisitions is similar to the accounting for business combinations, except that the acquisition consideration, including acquisition costs, is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. Based on this allocation methodology, asset acquisitions do not result in the recognition of goodwill or a bargain purchase. The Company incurs internal transaction costs, which are direct, incremental internal costs related to acquisitions, that are recorded within general and administrative expense. Additionally, for build-to-suit investments in which the Company may engage a developer to construct a property or provide 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.

12

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

To determine the fair value of assets acquired and liabilities assumed in an acquisition, which generally include 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 Company utilizes various estimates, processes and information to determine the as-if-vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, and discounted cash flow analyses. 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. The Company assesses the fair value of leases assumed at acquisition based upon estimated cash flow projections that utilize appropriate discount rates and available market information. Refer to the policy section "Intangible Assets and Liabilities" for more information on the Company’s accounting for intangibles.
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.
For transactions that qualify as business combinations, the Company recognizes the assets acquired and liabilities assumed at fair value, including the value of intangible assets and liabilities, and any excess or deficit of the consideration transferred relative to the fair value of the net assets acquired is recorded as goodwill or a bargain purchase gain, as appropriate. Acquisition costs of business combinations are expensed as incurred.
Capital Improvements
In leasing space, the Company may provide funding to the lessee through a tenant allowance. Certain improvements are capitalized when they are determined to increase the useful life of the building. During construction of qualifying projects, the Company capitalizes project management fees as permitted to be charged under the lease, if incremental and identifiable. In accounting for tenant allowances, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership of such improvements. If the Company is considered the owner of the leasehold improvements, the Company capitalizes the amount of the tenant 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 in the event 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.
Impairments and Disposals
The Company reviews the recoverability of a property’s carrying value when circumstances indicate a possible impairment of the value of a property, such as an adverse change in future expected occupancy or a significant decrease in the market price of an asset. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as changes in strategy resulting in an increased or decreased holding period, expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment exists due to the inability to recover the carrying value of a property, for properties to be held and used, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property 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. These assessments are recorded

13

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

as an impairment loss in the Consolidated Statements of Operations in the period the determination is made. The estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset to be held and used, the new cost basis will be depreciated or amortized over the remaining useful life of that asset.
The Company recognizes sales of real estate properties upon closing, at which time the Company transfers control of the assets to the purchaser. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is based on the transaction price and is recognized using the full accrual method upon closing.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company's restricted cash primarily consists of reserves for certain capital improvements, leasing, interest and real estate tax and insurance payments as required by certain mortgage note obligations, as well as proceeds from property sales held by qualified intermediaries to be used for tax-deferred, like-kind exchanges under section 1031 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sums to the total of the same such amounts shown in the Consolidated Statements of Cash Flows.
 
As of March 31,
 
2018
 
2017
Cash and cash equivalents
$
41,964

 
$
56,256

Restricted cash
15,041

 
13,101

Total cash, cash equivalents, and restricted cash
$
57,005

 
$
69,357

Variable Interest Entities
The Company had five consolidated VIEs and two unconsolidated VIEs as of March 31, 2018 and December 31, 2017, which were determined based on the structure and control provisions of each entity.
The Company’s five consolidated VIEs as of March 31, 2018 and December 31, 2017 included the Operating Partnership and four land parcels in Fort Mill, South Carolina acquired by an investment entity formed in December 2017, on which it will fund the development of four industrial facilities, or the Lakemont Development Investment. The Company has a 95.0% interest in the Lakemont Development Investment and will acquire the seller’s retained 5.0% interest when the properties are developed and leased. As of March 31, 2018 and December 31, 2017, the Company’s carrying value of the Lakemont Development Investment was $4,674 and $4,584, respectively.
Unconsolidated VIEs
The Company’s two unconsolidated VIEs as of March 31, 2018 and December 31, 2017 included its retained non-investment grade subordinate bonds, preferred shares and ordinary shares of two collateralized debt obligations, or CDOs, which are collectively herein referred to as the Retained CDO Bonds. Refer to the “Other Assets” section of this Note 2 and also to Note 7 for more information on the accounting and valuation of the Retained CDO Bonds. As of March 31, 2018 and December 31, 2017, the Company’s carrying value of the Retained CDO Bonds was $5,800 and $5,527, respectively.

14

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

Tenant and Other Receivables
Tenant and other receivables are derived from rental revenue, tenant reimbursements, and management fees.
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, 2018 and December 31, 2017 were $670 and $638, 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, as appropriate.
Intangible Assets and Liabilities
As discussed above in policy section, "Real Estate Acquisitions," the Company follows the acquisition method of accounting for its asset acquisitions and business combinations and thus allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. Management also considers information obtained about each property as a result of its pre-acquisition due diligence.
Above-market and below-market lease values for properties acquired are recorded based on the present value of the difference between the contractual amount to be paid pursuant to each in-place lease and management’s estimate of the fair market lease rate for each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The present value calculation utilizes a discount rate that reflects the risks associated with the leases acquired. The above-market 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. 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.
The aggregate value of in-place leases represents the costs of leasing costs, other tenant related costs, and lost revenue that the Company did not have to incur by acquiring a property that is already occupied. Factors considered by management in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period. Management also estimates costs to execute similar leases including leasing commissions and other related expenses. The value of in-place leases is amortized to

15

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

depreciation and amortization expense over the remaining non-cancelable term of the respective leases. In no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease prior to its contractual expiration and no future rental payments will be received, any unamortized balance of the in-place lease intangible will be written off to depreciation and amortization expense.
Above-market and below-market ground rent intangibles are recorded for properties acquired in which the Company is the lessee pursuant to a ground lease assumed at acquisition. The above-market and below-market ground rent intangibles are valued similarly to above-market and below-market leases, except that, because the Company is the lessee as opposed to the lessor, the above-market and below-market ground lease values are amortized as a reduction of and increase to rent expense, respectively, over the remaining non-cancelable terms of the respective leases.
Refer to Note 3 for further information on the Company’s intangible assets and liabilities.
Revenue
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
The Company adopted ASC Topic 606, which is described below in the section “Recently Issued Accounting Pronouncements,” on January 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting guidance in ASC Topic 605. As a result of adoption, the Company recorded an increase to its opening retained earnings balance of $663 as of January 1, 2018, which represents the cumulative impact of the new guidance and is related to the Company’s sale of real estate to Strategic Office Partners in 2016. There was no impact to revenues recorded for the three months ended March 31, 2018 as a result of adoption of the new revenue guidance.
Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s primary sources of revenue include rental revenue, third-party management fees, operating expense reimbursements, and other income, which are disaggregated on the Consolidated Statements of Operations and are described in detail below.
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. 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, the Company recognizes such amounts as both revenues and operating expenses. 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.

16

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

Management Fees
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. Deferred revenue from management fees received prior to the date earned are included in other liabilities on the Consolidated Balance Sheets. For management fee agreements that include multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price, which is primarily determined based on the prices charged to customers.
Certain of the Company’s asset management contracts and agreements with its unconsolidated equity investments include provisions that allow it to earn additional fees, generally described as incentive fees or promoted interests, based on the achievement of a targeted valuation or the achievement of a certain internal rate of return on the managed assets held by third parties or the equity investment. The Company’s incentive fees are accounted for as variable consideration and revenue is recognized for them based on the Company’s estimate of the expected amount to which it will be entitled in exchange for its services. The Company recognizes promoted interest in the period in which it is determined to be appropriately earned pursuant to the terms of the specific agreement. The values of incentive fees and promoted interest fees are periodically evaluated by management.
Other Income
Other income primarily consists of income accretion on the Company’s Retained CDO Bonds, realized foreign currency exchange gains (losses), and interest income.
Foreign Currency
The Company's European management platform performs asset and property management services in Europe. The Company has unconsolidated equity investments in Europe and Asia and previously had two wholly-owned properties in Canada until their dispositions in March 2017. The Company also has borrowings outstanding in euros and British pounds sterling under the multicurrency portion of its revolving credit facility. Refer to Note 4 for more information on the Company’s foreign unconsolidated equity investments.
Other Assets
The Company includes prepaid expenses, capitalized software costs, contract intangible assets, deferred costs, loan investments, goodwill, derivative assets, and Retained CDO Bonds in other assets.

17

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

Loan Investments
The Company may originate loans related to specific real estate development projects. In October 2017, the Company entered into an agreement to provide a mezzanine construction loan facility with a maximum commitment of $250,000 to an industrial developer as borrower. As of March 31, 2018 and December 31, 2017, the carrying value of the Company’s loan investments was $22,437 and $22,154, respectively, which represents the cost, net of accumulated amortization of loan costs. As of March 31, 2018, the loan investments had a weighted average interest rate of 10.47%. The Company evaluates its loan investments for possible credit losses each period. There were no loan reserves recorded during the three months ended March 31, 2018 and all of the Company’s loan investments were performing in accordance with the terms of the relevant investments as of March 31, 2018.
Goodwill
The Company recognized goodwill of $3,802 related to the acquisition of Gramercy Europe Limited, which it adjusts each reporting period for the effect of foreign currency translation adjustments and tests for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The carrying value of goodwill at March 31, 2018 and December 31, 2017 was $3,394 and $3,272, respectively. The Company did not record any impairment on its goodwill during the three months ended March 31, 2018.
Retained CDO Bonds
The Retained CDO Bonds are non-investment grade subordinate bonds, preferred shares and ordinary shares of two CDOs. 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. The Company classifies the Retained CDO Bonds as available for sale. 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 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 effective 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 7 for further discussion regarding the fair value measurement of the Retained CDO Bonds. For the three months ended March 31, 2018 and 2017, the Company recognized OTTI on its Retained CDO Bonds of $0 and $4,890, respectively.
A summary of the Company’s Retained CDO Bonds as of March 31, 2018 is as follows:
Number of Securities
 
Face Value
 
Amortized Cost
 
Gross Unrealized Gain
 
Other-Than-Temporary Impairment
 
Fair Value
 
Weighted Average Expected Life (years)
6

 
$
329,597

 
$
5,431

 
$
369

 
$

 
$
5,800

 
1.1

18

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

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. During the three months ended March 31, 2018 and 2017, there were no tenants that accounted for 10.0% or more of the Company's rental revenue. Additionally, for the three months ended March 31, 2018, there were three states, Illinois, Texas, and Florida, that each accounted for 10.0% or more of the Company’s rental revenue.
Use of Estimates
The preparation of financial statements in conformity with 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.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09 (Topic 606), Revenue from Contracts with Customers, which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration it expects to receive in exchange for those goods or services. In April 2016 and February 2017, the FASB issued ASU 2016-10 and ASU 2017-05, respectively, which further clarified the new revenue recognition guidance under ASC Topic 606. The Company adopted the guidance on January 1, 2018 using the modified retrospective method, which did not have a material impact on its Consolidated Financial Statements. Refer to the “Revenue” section above for further detail.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and to record changes in instruments specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. The update is effective for fiscal years beginning after December 15, 2017, and for interim periods therein. The Company adopted this standard in the first quarter of 2018 and the adoption did not have a material impact on its Consolidated Financial Statements. Refer to Note 8 for more information.
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’s accounting for leases in which it is a lessor, which represents most of its leasing arrangements, will be largely unchanged under ASU 2016-02; however, the Company is a lessee in several operating and ground leases and the accounting for these arrangements is more significantly impacted by the new standard. Pursuant to the new guidance, lessees are required

19

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The Company is continuing to evaluate the impact of adopting the new leases standard on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments, which serves to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard in the first quarter of 2018 and the adoption did not have a material impact on its Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting. The amendment provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. The guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company adopted this standard in the first quarter of 2018 and the adoption did not have a material impact on its Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. In the first quarter of 2018, the Company early adopted this standard and the adoption did not have a material impact on its Consolidated Financial Statements.
3. Real Estate Investments
Investments in real estate properties consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
Square feet1
 
Number of properties
 
Investment
 
Square feet1
 
Number of properties
 
Investment
Operating properties2
80,884,942

 
360

 
$
5,811,702

 
82,146,063

 
363

 
$
5,857,906

Land parcels

 
2

 
7,075

 

 
2

 
7,075

Less accumulated depreciation
 
 
 
 
(368,815
)
 
 
 
 
 
(333,151
)
Total operating properties and land parcels
 
 
 
 
$
5,449,962

 
 
 
 
 
$
5,531,830

Development properties
1,503,300

 
5

 
12,092

 
1,630,022

 
6

 
22,843

Total
82,388,242

 
367

 
$
5,462,054

 
83,776,085

 
371

 
$
5,554,673

1.
Represents rentable square feet for operating properties and projected rentable square feet upon completion for development properties.
2.
Includes development properties that have been completed as of the end of the period.

20

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

Acquisitions:
Real estate acquisition activity for the three months ended March 31, 2018 and 2017 was as follows:
 
Three Months Ended March 31,
 
2018
 
2017
Number of operating properties
1

 
7

Rentable square feet of operating properties
162,056

 
2,257,311

Total purchase price of all acquisitions
$
10,550

 
$
124,672

The total value of the properties acquired during the three months ended March 31, 2018 was comprised of $10,197 of real estate assets and $635 of intangible assets, including acquisition costs capitalized for the asset acquisitions. In addition to the operating property acquisition noted above, during the three months ended March 31, 2018 the Company also placed into service one development property which comprised 126,722 rentable square feet.
Dispositions:
Real estate disposition activity for the three months ended March 31, 2018 and 2017 was as follows:
 
Three Months Ended March 31,
 
2018
 
2017
Number of properties1
5

 
7

Rentable square feet
1,546,091

 
487,872

Gross proceeds
$
111,012

 
$
51,683

Impairment of real estate investments related to asset dispositions during the period2
$

 
$

Net gain on disposals
$
16,255

 
$
17,377

1.
During the three months ended March 31, 2018, the Company sold five properties and one warehouse from another asset.
2.
Although there were no impairments recognized related to assets disposed during the three months ended March 31, 2018 and 2017, as presented in the table, the Company recognized impairments on real estate investments of $12,771 during the three months ended March 31, 2017 related to properties held as of March 31, 2017, for which the Company determined there were nonrecoverable declines in value.

21

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

Intangibles:
Intangible assets and liabilities consisted of the following:
 
Weighted average amortization period (years)
 
March 31, 2018
 
December 31, 2017
Intangible assets:
 
 
 

 
 

In-place leases, net of accumulated amortization of $214,664 and $194,836
9.3
 
$
513,423

 
$
545,782

Above-market leases, net of accumulated amortization of $26,854 and $25,229
6.8
 
43,979

 
46,713

Below-market ground rent, net of accumulated amortization of $421 and $408
17.5
 
5,811

 
6,064

Total intangible assets
 
 
$
563,213

 
$
598,559

Intangible liabilities:
 
 
 
 
 
Below-market leases, net of accumulated amortization of $30,685 and $28,516
39.5
 
$
152,758

 
$
159,652

Above-market ground rent, net of accumulated amortization of $516 and $462
32.0
 
6,786

 
6,839

Total intangible liabilities
 
 
$
159,544

 
$
166,491

The following table provides the projected amortization expense of the intangible assets and liabilities for the next five years:
 
April 1 to December 31, 2018
 
2019
 
2020
 
2021
 
2022
Depreciation and amortization expense
$
70,211

 
$
84,228

 
$
70,822

 
$
59,528

 
$
46,652

Rental revenue increase
$
(1,571
)
 
$
(2,520
)
 
$
(4,004
)
 
$
(4,168
)
 
$
(6,260
)
The Company recorded $26,159 and $24,172 of amortization of in-place lease intangible assets as part of depreciation and amortization expense for the three months ended March 31, 2018 and 2017, respectively. The Company recorded $494 and $621 of amortization of market lease intangible assets and liabilities as an increase to rental revenue for the three months ended March 31, 2018 and 2017, respectively.
Assets Held for Sale
In the normal course of business, the Company identifies non-strategic assets for sale. The Company separately classifies properties held for sale in its Consolidated Financial Statements. As of March 31, 2018 and December 31, 2017, the Company had one asset classified as held for sale, which had a net asset value of $402, all of which represented the value contained in real estate investments. 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.

22

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

Discontinued Operations
The Company did not have significant discontinued operations for the three months ended March 31, 2018. The Company’s discontinued operations for the three months ended March 31, 2017 were related to the assets assumed in the Company’s merger transaction in 2015 and simultaneously designated as held for sale.
4. 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 earn fees, such as asset and property management fees, incentive fees, and promoted interest for its services, or one of the other partners will manage the ventures for similar such fees. Depending on the structure of the venture, the Company’s voting interest may be different than its economic interest.
The Company accounts for substantially all of its unconsolidated equity investments under the equity method of accounting because 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 and contributions and distributions. The amount of the investments on the 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 of these equity method entities is included in consolidated net income.
As of March 31, 2018 and December 31, 2017, the Company owned properties through unconsolidated equity investments and had investment interests in these unconsolidated entities as follows:
 
 
As of March 31, 2018
 
As of December 31, 2017
Investment
 
Ownership %
 
Voting Interest %
 
Partner
 
Investment in Unconsolidated Equity Investment 1
 
No. of Properties
 
Investment in Unconsolidated Equity Investment 1
 
No. of Properties
Strategic Office Partners
 
25.0
%
 
25.0
%
 
TPG Real Estate
 
$
28,792

 
13

 
$
28,243

 
13

E-Commerce JV
 
51.0
%
 
50.0
%
 
Ample Glow Investments
 
43,502

 
2

 
17,798

 

Goodman UK JV
 
80.0
%
 
50.0
%
 
Goodman Group
 
15,980

 
1

 
15,768

 
1

Gramercy European Property Fund III
 
19.9
%
 
50.0
%
 
Various
 
5,363

 
2

 
2,949

 

Other2
 
5.1% - 50.0%

 
5.1% - 50.0%

 
Various
 
5,476

 
3

 
5,456

 
3

Total
 
 
 
 
 
 
 
$
99,113

 
21

 
$
70,214

 
17

1.
The amounts presented include a basis difference of $2,011 and $1,943, net of accumulated amortization, for the Goodman UK JV as of March 31, 2018 and December 31, 2017, respectively. The amounts presented include a basis difference of $(3,916), net of accumulated amortization, for the E-Commerce JV as of March 31, 2018.
2.
Includes CBRE Strategic Partners Asia, the Philips JV, and the Morristown JV.

23

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

The following is a summary of the Company’s unconsolidated equity investments for the three months ended March 31, 2018:
 
Unconsolidated Equity Investments
Balance at January 1, 2018
$
70,214

Contributions to unconsolidated equity investments
28,731

Equity in net loss of unconsolidated equity investments, including adjustments for basis differences
(926
)
Other comprehensive income of unconsolidated equity investments
431

Cumulative effect of accounting change
663

Balance at March 31, 2018
$
99,113

Strategic Office Partners
In August 2016, the Company partnered with TPG Real Estate, or TPG, to form Strategic Office Partners, an unconsolidated equity investment created for the purpose of acquiring, owning, operating, leasing and selling single-tenant office properties located in high-growth metropolitan areas in the United States. The Company provides asset and property management, accounting, construction, and leasing services to Strategic Office Partners, for which it earns management fees and is entitled to a promoted interest. TPG and the Company have committed an aggregate $400,000 to Strategic Office Partners, including $100,000 from the Company. During the three months ended March 31, 2018, the Company did not make any contributions to or receive any distributions from Strategic Office Partners.
E-Commerce JV
In November 2017, the Company formed a joint venture with an investment partner, which will acquire, own and manage Class A distribution centers leased to leading e-commerce tenants on long-term leases across the United States, or the E-Commerce JV. The Company has joint control over the E-Commerce JV, which is shared equally with its investment partner. The Company provides asset and property management and accounting services to the E-Commerce JV, for which it earns management fees. The Company has committed capital to fund its initial acquisition of six properties, as well as the acquisition of additional properties in the future, subject to the partners' approval. The Company's pro rata funding commitment for the initial six properties is estimated at approximately $110,000, of which approximately $80,000 will be funded in OP Units issued to the seller of the property and approximately $30,000 will be funded in cash. During the three months ended March 31, 2018, the E-Commerce JV acquired two properties. During the three months ended March 31, 2018, the Company contributed $1,130 in cash and OP Units valued at approximately $25,141 to the E-Commerce JV.
Goodman UK JV
The Goodman UK JV invests in industrial properties in the United Kingdom. During the three months ended March 31, 2018 and 2017, the Company received no distributions from the Goodman UK JV.

24

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

European Investment Funds
Gramercy European Property Fund III
In October 2017, the Company formed a new European investment fund with several other equity investment partners, or the Gramercy European Property Fund III, which has total initial capital commitments of $323,359 (€262,622) from all investors, of which the Company’s initial capital commitment is $64,257 (€52,187), representing an interest of approximately 19.9%. The Company provides asset and property management and accounting services to the Gramercy European Property Fund III, for which it is entitled to management fees and a promoted interest. During the three months ended March 31, 2018, the Gramercy European Property Fund III acquired two properties. During the three months ended March 31, 2018, the Company contributed $2,460 (€1,977) to the Gramercy European Property Fund III.
Gramercy European Property Fund
In July 2017, the Gramercy European Property Fund sold 100.0% of its assets to a third party, and, concurrently, the Company sold its 5.1% direct interest in the Goodman Europe JV to the same entity that acquired the Gramercy European Property Fund's assets. In connection with the sale transactions, the Company's management contract arrangement with the Gramercy European Property Fund was terminated; however, the Company continues to manage the assets for the new owner through June 2018.
The following are the balance sheets for the Company’s unconsolidated equity investments at March 31, 2018:
 
Strategic Office Partners
 
E-Commerce JV
 
Goodman UK JV
 
Gramercy European Property Fund III
 
Other1
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, net2
$
264,099

 
$
149,895

 
$
19,150

 
$
62,284

 
$
108,993

Other assets
80,897

 
48,894

 
1,751

 
5,428

 
18,421

Total assets
$
344,996

 
$
198,789

 
$
20,901

 
$
67,712

 
$
127,414

Liabilities and members' equity:
 
 
 
 
 
 
 
 
 
Mortgage notes payable
$
213,699

 
$
108,473

 
$

 
$
35,873

 
$
38,341

Other liabilities
16,698

 
5,018

 
732

 
4,850

 
19,043

Total liabilities
230,397

 
113,491

 
732

 
40,723

 
57,384

Company's equity
28,792

 
43,502

 
15,980

 
5,363

 
5,476

Other members' equity
85,807

 
41,796

 
4,189

 
21,626

 
64,554

Liabilities and members' equity
$
344,996

 
$
198,789

 
$
20,901

 
$
67,712

 
$
127,414

1.
Includes CBRE Strategic Partners Asia, the Philips JV, and the Morristown JV.
2.
Includes basis adjustments recorded by the Company to adjust the unconsolidated equity investments to fair value.

25

Gramercy Property Trust and GPT Operating Partnership LP
Notes to Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share and per unit data)
March 31, 2018

The following are the balance sheets for the Company’s unconsolidated equity investments at December 31, 2017:
 
Strategic Office Partners
 
E-Commerce JV
 
Goodman UK JV
 
Other1
Assets:
 
 
 
 
 
 
 
Real estate assets, net2
$
265,014

 
$

 
$
18,633

 
$
107,949

Other assets
78,243

 
35,727

 
1,473

 
34,022

Total assets
$
343,257

 
$
35,727

 
$
20,106

 
$
141,971

Liabilities and members' equity:
 
 
 
 
 
 
 
Mortgage notes payable
$
213,205

 
$

 
$

 
$
38,662

Other liabilities
15,002

 
830

 
203

 
19,329

Total liabilities
228,207

 
830

 
203

 
57,991

Company's equity
28,243

 
17,798

 
15,768

 
8,405

Other members' equity
86,807

 
17,099

 
4,135

 
75,575