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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 June 30, 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 160,795,797 as of July 26, 2018.



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 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 June 30, 2018, the Company owned 96.42% of the outstanding general and limited partnership interest in the Operating Partnership. As of June 30, 2018, noncontrolling investors owned approximately 3.58% 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
 
June 30, 2018
 
December 31, 2017
Assets:
 

 
 

Real estate investments, at cost:
 

 
 

Land
$
1,008,704

 
$
1,023,908

Building and improvements
4,849,168

 
4,863,916

Less: accumulated depreciation
(410,020
)
 
(333,151
)
Total real estate investments, net
5,447,852

 
5,554,673

Cash and cash equivalents
59,741

 
30,231

Restricted cash
12,026

 
12,723

Investment in unconsolidated equity investments
147,282

 
70,214

Assets held for sale, net

 
402

Tenant and other receivables, net
94,260

 
88,750

Acquired lease assets, net of accumulated amortization of $265,990 and $220,473
537,824

 
598,559

Other assets
134,763

 
100,484

Total assets
$
6,433,748

 
$
6,456,036

Liabilities and Equity:
 
 
 
Liabilities:
 
 
 
Senior unsecured revolving credit facility
$
441,773

 
$
357,162

Mortgage notes payable, net
499,215

 
563,521

Senior unsecured notes, net
496,990

 
496,785

Senior unsecured term loans, net
1,448,330

 
1,448,152

Total long-term debt, net
2,886,308

 
2,865,620

Accounts payable and accrued expenses
45,774

 
59,619

Dividends payable
62,601

 
61,971

Below market lease liabilities, net of accumulated amortization of $33,302 and $28,978
148,661

 
166,491

Other liabilities
54,462

 
50,002

Total liabilities
$
3,197,806

 
$
3,203,703

Commitments and contingencies

 

Noncontrolling interest in the Operating Partnership
156,293

 
113,530

Equity:
 
 
 
Common shares, par value $0.01, 160,792,820 and 160,686,822 issued and outstanding at June 30, 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 June 30, 2018 and December 31, 2017
84,394

 
84,394

Additional paid-in-capital
4,406,445

 
4,409,677

Accumulated other comprehensive income
29,125

 
12,776

Accumulated deficit
(1,442,153
)
 
(1,369,872
)
Total shareholders' equity
3,079,419

 
3,138,582

Noncontrolling interest in other entities
230

 
221

Total equity
$
3,079,649

 
$
3,138,803

Total liabilities and equity
$
6,433,748

 
$
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 
 
 
Rental revenue
$
119,177

 
$
108,261

 
$
241,422

 
$
211,543

Operating expense reimbursements
22,346

 
19,628

 
45,656

 
39,996

Third-party management fees
2,374

 
1,638

 
5,164

 
6,230

Other income
1,698

 
1,838

 
2,833

 
3,590

Total revenues
145,595

 
131,365

 
295,075

 
261,359

Operating expenses
 

 
 

 
 

 
 
Depreciation and amortization
68,479

 
62,176

 
139,995

 
124,393

Property operating expenses
26,018

 
23,219

 
53,106

 
46,405

General and administrative expenses
8,862

 
9,100

 
18,548

 
17,856

Property management expenses
2,616

 
2,435

 
5,158

 
5,519

Merger-related expenses
1,945

 

 
1,945

 

Total operating expenses
107,920

 
96,930

 
218,752

 
194,173

Operating income
37,675

 
34,435

 
76,323

 
67,186

Other expenses:
 
 
 
 
 
 
 
Interest expense
(25,597
)
 
(23,239
)
 
(51,089
)
 
(46,295
)
Other-than-temporary impairment

 

 

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

 

 

 
(809
)
Net impairment recognized in earnings

 

 

 
(4,890
)
Gain on derivative instruments
14,970

 

 
14,970

 

Equity in net income (loss) of unconsolidated equity investments
(1,838
)
 
248

 
(2,764
)
 
154

Gain on extinguishment of debt
83

 
268

 
83

 
60

Impairment losses
(4,601
)
 
(5,580
)
 
(4,601
)
 
(18,351
)
Income (loss) from continuing operations before provision for taxes
20,692

 
6,132

 
32,922

 
(2,136
)
Benefit (provision) for taxes
62

 
(147
)
 
(559
)
 
49

Income (loss) from continuing operations
20,754

 
5,985

 
32,363

 
(2,087
)
Loss from discontinued operations

 
(28
)
 

 
(52
)
Income (loss) before net gain on disposals
20,754

 
5,957

 
32,363

 
(2,139
)
Net gain on disposals
4,523

 
2,002

 
20,778

 
19,379

Net income
25,277

 
7,959

 
53,141

 
17,240

Net (income) loss attributable to noncontrolling interest
(845
)
 
113

 
(1,647
)
 
(41
)
Net income attributable to Gramercy Property Trust
24,432

 
8,072

 
51,494

 
17,199

Preferred share dividends
(1,558
)
 
(1,558
)
 
(3,117
)
 
(3,117
)
Net income available to common shareholders
$
22,874

 
$
6,514

 
$
48,377

 
$
14,082

Basic earnings per share:
 

 
 

 
 
 
 
Net income from continuing operations, after preferred dividends
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Loss from discontinued operations

 

 

 

Net income available to common shareholders
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Diluted earnings per share:
 

 
 

 
 
 
 
Net income from continuing operations, after preferred dividends
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Loss from discontinued operations

 

 

 

Net income available to common shareholders
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Basic weighted average common shares outstanding
160,420,278

 
148,542,916

 
160,414,240

 
144,746,251

Diluted weighted average common shares outstanding
160,433,351

 
149,914,443

 
160,425,291

 
145,965,936

 

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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
25,277

 
$
7,959

 
$
53,141

 
$
17,240

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on available for sale debt securities
667

 
1,251

 
619

 
(1,569
)
Cumulative effect of accounting change

 

 
103

 

Unrealized gain (loss) on derivative instruments
4,990

 
(2,692
)
 
27,040

 
1,686

Reclassification of unrealized gain (loss) on terminated derivative instruments into earnings
(11,017
)
 
271

 
(10,749
)
 
539

Foreign currency translation adjustments
(1,182
)
 
1,101

 
(664
)
 
1,792

Other comprehensive income (loss)
$
(6,542
)
 
$
(69
)
 
$
16,349

 
$
2,448

Comprehensive income
$
18,735

 
$
7,890

 
$
69,490

 
$
19,688

Net (income) loss attributable to noncontrolling interest
(845
)
 
113

 
(1,647
)
 
(41
)
Other comprehensive (income) loss attributable to noncontrolling interest
(233
)
 
25

 
464

 
14

Comprehensive income attributable to Gramercy Property Trust
$
17,657

 
$
8,028

 
$
68,307

 
$
19,661

 

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)
 
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

 

 

 

 

 
51,494

 
51,494

 

 
51,494

Cumulative effect of accounting changes

 

 

 

 
103

 
560

 
663

 

 
663

Change in net unrealized gain on derivative instruments

 

 

 

 
27,040

 

 
27,040

 

 
27,040

Change in net unrealized gain on debt securities

 

 

 

 
619

 

 
619

 

 
619

Reclassification of unrealized gain on terminated derivative instruments into earnings

 

 

 

 
(10,749
)
 

 
(10,749
)
 

 
(10,749
)
Offering costs

 

 

 
(40
)
 

 

 
(40
)
 

 
(40
)
Issuance of shares - share purchase plan
1,374

 

 

 

 

 

 

 

 

Share-based compensation - fair value
95,223

 
1

 

 
4,045

 

 

 
4,046

 

 
4,046

Dividend reinvestment program proceeds
3,363

 

 

 
81

 

 

 
81

 

 
81

Conversion of OP Units to common shares
6,038

 

 

 
130

 

 

 
130

 

 
130

Reallocation of noncontrolling interest in the Operating Partnership

 

 

 
(7,448
)
 

 

 
(7,448
)
 

 
(7,448
)
Foreign currency translation adjustment

 

 

 

 
(664
)
 

 
(664
)
 

 
(664
)
Contributions to noncontrolling interest in other partnerships

 

 

 

 

 

 

 
9

 
9

Dividends on preferred shares

 

 

 

 

 
(3,117
)
 
(3,117
)
 

 
(3,117
)
Dividends on common shares

 

 

 

 

 
(121,218
)
 
(121,218
)
 

 
(121,218
)
Balance at June 30, 2018
160,792,820

 
$
1,608

 
$
84,394

 
$
4,406,445

 
$
29,125

 
$
(1,442,153
)
 
$
3,079,419

 
$
230

 
$
3,079,649


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


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

 
Six Months Ended June 30,
 
2018
 
2017
Operating Activities:
 

 
 

Net income
$
53,141

 
$
17,240

Adjustments to net cash provided by operating activities:
 
 
 
Depreciation and amortization
139,995

 
124,393

Amortization of market lease intangibles
(1,705
)
 
(5,227
)
Amortization of deferred costs
1,652

 
1,274

Amortization of discounts and other fees
(1,219
)
 
33

Straight-line rent adjustment
(12,828
)
 
(14,718
)
Other-than-temporary impairment on retained bonds

 
4,890

Impairment losses
4,601

 
18,351

Gain on derivative instruments
(14,970
)
 

Net gain on disposals
(20,778
)
 
(19,379
)
Distributions received from unconsolidated equity investments
555

 
689

Equity in net (income) loss of unconsolidated equity investments
2,764

 
(154
)
Gain on extinguishment of debt
(83
)
 
(60
)
Amortization of share-based compensation
3,804

 
4,058

Changes in operating assets and liabilities:
 
 
 
Payment of capitalized leasing costs
(11,453
)
 
(6,008
)
Tenant and other receivables
7,347

 
20,031

Other assets
(488
)
 
(3,125
)
Accounts payable and accrued expenses
(6,464
)
 
(14,331
)
Other liabilities
4,412

 
(1,895
)
Net cash provided by operating activities
148,283

 
126,062

Investing Activities:
 
 
 
Capital expenditures
(64,518
)
 
(46,119
)
Proceeds from sales of real estate
127,081

 
207,553

Contributions to unconsolidated equity investments
(46,065
)
 
(7,400
)
Acquisition of real estate
(34,722
)
 
(284,689
)
Funding of loan investments
(14,756
)
 

Proceeds received from loan investments
4,271

 

Net cash used in investing activities
(28,709
)
 
(130,655
)
Financing Activities:
 
 
 
Proceeds from unsecured term loan and credit facility
330,179

 
155,000

Repayment of unsecured term loans and credit facility
(245,000
)
 
(155,000
)
Proceeds from mortgage notes payable

 
2,582

Repayment of mortgage notes payable
(63,263
)
 
(58,014
)
Offering costs

 
(12,346
)
Proceeds from sale of common shares

 
305,763

Payment of deferred financing costs

 
(213
)
Proceeds from settlement of forward starting swap
14,970

 

Preferred share dividends paid
(3,117
)
 
(3,117
)
Common share dividends paid
(121,175
)
 
(106,377
)
Distribution to noncontrolling interest in the Operating Partnership
(3,176
)
 
(205
)
Other financing activities
(78
)
 

Net cash provided by (used in) financing activities
(90,660
)
 
128,073

Net increase in cash, cash equivalents, and restricted cash
28,914

 
123,480

Decrease in cash, cash equivalents, and restricted cash related to foreign currency translation
(101
)
 
(78
)
Cash, cash equivalents, and restricted cash at beginning of period
42,954

 
80,433

Cash, cash equivalents, and restricted cash at end of period
$
71,767

 
$
203,835


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)

 
June 30, 2018
 
December 31, 2017
Assets:
 

 
 

Real estate investments, at cost:
 

 
 

Land
$
1,008,704

 
$
1,023,908

Building and improvements
4,849,168

 
4,863,916

Less: accumulated depreciation
(410,020
)
 
(333,151
)
Total real estate investments, net
5,447,852

 
5,554,673

Cash and cash equivalents
59,741

 
30,231

Restricted cash
12,026

 
12,723

Investment in unconsolidated equity investments
147,282

 
70,214

Assets held for sale, net

 
402

Tenant and other receivables, net
94,260

 
88,750

Acquired lease assets, net of accumulated amortization of $265,990 and $220,473
537,824

 
598,559

Other assets
134,763

 
100,484

Total assets
$
6,433,748

 
$
6,456,036

Liabilities and Partners’ Capital:
 
 
 
Liabilities:
 
 
 
Senior unsecured revolving credit facility
$
441,773

 
$
357,162

Mortgage notes payable, net
499,215

 
563,521

Senior unsecured notes, net
496,990

 
496,785

Senior unsecured term loans, net
1,448,330

 
1,448,152

Total long-term debt, net
2,886,308

 
2,865,620

Accounts payable and accrued expenses
45,774

 
59,619

Dividends and distributions payable
62,601

 
61,971

Below market lease liabilities, net of accumulated amortization of $33,302 and $28,978
148,661

 
166,491

Other liabilities
54,462

 
50,002

Total liabilities
$
3,197,806

 
$
3,203,703

Commitments and contingencies

 

Limited partner interest in the Operating Partnership (5,959,858 and 4,398,935 limited partner common units outstanding at June 30, 2018 and December 31, 2017, respectively)
156,293

 
113,530

Partners’ Capital:
 
 
 
Series A cumulative redeemable preferred units, liquidation preference $87,500, and 3,500,000 units issued and outstanding at June 30, 2018 and December 31, 2017
84,394

 
84,394

GPT partners’ capital (1,663,870 and 1,650,858 general partner common units and 159,128,950 and 159,035,964 limited partner common units outstanding at June 30, 2018 and December 31, 2017, respectively)
2,965,900

 
3,041,412

Accumulated other comprehensive income
29,125

 
12,776

Total GPTOP partners' capital
3,079,419

 
3,138,582

Noncontrolling interest in other entities
230

 
221

Total partners’ capital
$
3,079,649

 
$
3,138,803

Total liabilities and partners’ capital
$
6,433,748

 
$
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 
 
 
Rental revenue
$
119,177

 
$
108,261

 
$
241,422

 
$
211,543

Operating expense reimbursements
22,346

 
19,628

 
45,656

 
39,996

Third-party management fees
2,374

 
1,638

 
5,164

 
6,230

Other income
1,698

 
1,838

 
2,833

 
3,590

Total revenues
145,595

 
131,365

 
295,075

 
261,359

Operating expenses
 
 
 
 
 
 
 
Depreciation and amortization
68,479

 
62,176

 
139,995

 
124,393

Property operating expenses
26,018

 
23,219

 
53,106

 
46,405

General and administrative expenses
8,862

 
9,100

 
18,548

 
17,856

Property management expenses
2,616

 
2,435

 
5,158

 
5,519

Acquisition costs and merger-related expenses
1,945

 

 
1,945

 

Total operating expenses
107,920

 
96,930

 
218,752

 
194,173

Operating income
37,675

 
34,435

 
76,323

 
67,186

Other expenses:
 
 
 
 
 
 
 
Interest expense
(25,597
)
 
(23,239
)
 
(51,089
)
 
(46,295
)
Other-than-temporary impairment

 

 

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

 

 

 
(809
)
Net impairment recognized in earnings

 

 

 
(4,890
)
 Gain on derivative instruments
14,970

 

 
14,970

 

Equity in net income (loss) of unconsolidated equity investments
(1,838
)
 
248

 
(2,764
)
 
154

Gain on extinguishment of debt
83

 
268

 
83

 
60

Impairment losses
(4,601
)
 
(5,580
)
 
(4,601
)
 
(18,351
)
Income (loss) from continuing operations before provision for taxes
20,692

 
6,132

 
32,922

 
(2,136
)
Benefit (provision) for taxes
62

 
(147
)
 
(559
)
 
49

Income (loss) from continuing operations
20,754

 
5,985

 
32,363

 
(2,087
)
Loss from discontinued operations

 
(28
)
 

 
(52
)
Income (loss) before net gain on disposals
20,754

 
5,957

 
32,363

 
(2,139
)
Net gain on disposals
4,523

 
2,002

 
20,778

 
19,379

Net income
25,277

 
7,959

 
53,141

 
17,240

Net loss attributable to noncontrolling interest in other partnerships

 
137

 

 
17

Net income attributable to GPTOP
25,277

 
8,096

 
53,141

 
17,257

 Preferred unit distributions
(1,558
)
 
(1,558
)
 
(3,117
)
 
(3,117
)
Net income available to common unitholders
$
23,719

 
$
6,538

 
$
50,024

 
$
14,140

Basic earnings per unit:
 

 
 

 
 

 
 

Net income from continuing operations, after preferred unit distributions
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Loss from discontinued operations

 

 

 

Net income available to common unitholders
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Diluted earnings per unit:
 
 
 
 
 

 
 

Net income from continuing operations, after preferred unit distributions
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Loss from discontinued operations

 

 

 

Net income available to common unitholders
$
0.14

 
$
0.04

 
$
0.30

 
$
0.09

Basic weighted average common units outstanding
166,355,043

 
149,103,359

 
165,904,457

 
145,336,798

Diluted weighted average common units outstanding
166,368,116

 
150,474,886

 
165,915,508

 
146,556,483


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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
25,277

 
$
7,959

 
$
53,141

 
$
17,240

Other comprehensive income (loss):
 
 
 
 
 

 
 
Unrealized gain (loss) on available for sale debt securities
667

 
1,251

 
619

 
(1,569
)
Cumulative effect of accounting change

 

 
103

 

Unrealized gain (loss) on derivative instruments
4,990

 
(2,692
)
 
27,040

 
1,686

Reclassification of unrealized gain (loss) on terminated derivative instruments into earnings
(11,017
)
 
271

 
(10,749
)
 
539

Foreign currency translation adjustments
(1,182
)
 
1,101

 
(664
)
 
1,792

Other comprehensive income (loss)
$
(6,542
)
 
$
(69
)
 
$
16,349

 
$
2,448

Comprehensive income
$
18,735

 
$
7,890

 
$
69,490

 
$
19,688

Net loss attributable to noncontrolling interest in other partnerships

 
137

 

 
17

Other comprehensive loss attributable to noncontrolling interest in other partnerships

 
25

 

 
25

Comprehensive income attributable to GPTOP
$
18,735

 
$
8,052

 
$
69,490

 
$
19,730



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)
 
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

 
51,494

 

 

 
51,494

 

 
51,494

Cumulative effect of accounting changes

 
560

 

 
103

 
663

 

 
663

Change in net unrealized gain on derivative instruments

 

 

 
27,040

 
27,040

 

 
27,040

Change in net unrealized gain on debt securities

 

 

 
619

 
619

 

 
619

Reclassification of unrealized gain of terminated derivative instruments into earnings

 

 

 
(10,749
)
 
(10,749
)
 

 
(10,749
)
Offering costs

 
(40
)
 

 

 
(40
)
 

 
(40
)
Issuance of common units resulting from issuance of shares under the share purchase plan
1,374

 

 

 

 

 

 

Share-based compensation - fair value
95,223

 
4,046

 

 

 
4,046

 

 
4,046

Distribution reinvestment program proceeds
3,363

 
81

 

 

 
81

 

 
81

Conversion of OP Units to common units
6,038

 
130

 

 

 
130

 

 
130

Reallocation of limited partner interest in the Operating Partnership

 
(7,448
)
 

 

 
(7,448
)
 

 
(7,448
)
Foreign currency translation adjustment

 

 

 
(664
)
 
(664
)
 

 
(664
)
Contributions to noncontrolling interest in other partnerships

 

 

 

 

 
9

 
9

Distributions on preferred units

 
(3,117
)
 

 

 
(3,117
)
 

 
(3,117
)
Distributions on common units

 
(121,218
)
 

 

 
(121,218
)
 

 
(121,218
)
Balance at June 30, 2018
160,792,820

 
$
2,965,900

 
$
84,394

 
$
29,125

 
$
3,079,419

 
$
230

 
$
3,079,649


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)


 
Six Months Ended June 30,
 
2018
 
2017
Operating Activities:
 

 
 

Net income
$
53,141

 
$
17,240

Adjustments to net cash provided by operating activities:
 
 
 
Depreciation and amortization
139,995

 
124,393

Amortization of market lease intangibles
(1,705
)
 
(5,227
)
Amortization of deferred costs
1,652

 
1,274

Amortization of discounts and other fees
(1,219
)
 
33

Straight-line rent adjustment
(12,828
)
 
(14,718
)
Other-than-temporary impairment on retained bonds

 
4,890

Impairment of real estate investments
4,601

 
18,351

Gain on derivative instruments
(14,970
)
 

Net gain on disposals
(20,778
)
 
(19,379
)
Distributions received from unconsolidated equity investments
555

 
689

Equity in net (income) loss of unconsolidated equity investments
2,764

 
(154
)
Gain on extinguishment of debt
(83
)
 
(60
)
Amortization of share-based compensation
3,804

 
4,058

Changes in operating assets and liabilities:
 
 
 
Payment of capitalized leasing costs
(11,453
)
 
(6,008
)
Tenant and other receivables
7,347

 
20,031

Other assets
(488
)
 
(3,125
)
Accounts payable and accrued expenses
(6,464
)
 
(14,331
)
Other liabilities
4,412

 
(1,895
)
Net cash provided by operating activities
148,283

 
126,062

Investing Activities:
 
 
 
Capital expenditures
(64,518
)
 
(46,119
)
Proceeds from sales of real estate
127,081

 
207,553

Contributions to unconsolidated equity investments
(46,065
)
 
(7,400
)
Acquisition of real estate
(34,722
)
 
(284,689
)
Funding of loan investments
(14,756
)
 

Proceeds received from loan investments
4,271

 

Net cash used in investing activities
(28,709
)
 
(130,655
)
Financing Activities:
 
 
 
Proceeds from unsecured term loan and credit facility
330,179

 
155,000

Repayment of unsecured term loans and credit facility
(245,000
)
 
(155,000
)
Proceeds from mortgage notes payable

 
2,582

Repayment of mortgage notes payable
(63,263
)
 
(58,014
)
Offering costs

 
(12,346
)
Proceeds from issuance of common units

 
305,763

Payment of deferred financing costs

 
(213
)
Proceeds from settlement of forward starting swap
14,970

 

Preferred unit distributions paid
(3,117
)
 
(3,117
)
Common unit distributions paid
(121,175
)
 
(106,377
)
Distribution to limited partnership interest in the Operating Partnership
(3,176
)
 
(205
)
Other financing activities
(78
)
 

Net cash provided by (used in) financing activities
(90,660
)
 
128,073

Net increase in cash, cash, and restricted cash equivalents
28,914

 
123,480

Decrease in cash, cash equivalents, and restricted cash related to foreign currency translation
(101
)
 
(78
)
Cash, cash equivalents, and restricted cash at beginning of period
42,954

 
80,433

Cash, cash equivalents, and restricted cash at end of period
$
71,767

 
$
203,835


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)
June 30, 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 June 30, 2018, third-party holders of limited partnership interests owned approximately 3.58% 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 June 30, 2018, the Company’s wholly-owned portfolio consisted of 355 properties comprising 81,134,150 rentable square feet with 96.7% occupancy. As of June 30, 2018, the Company had ownership interests in 33 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 June 30, 2018, the Company managed approximately $2,364,000 of commercial real estate assets, including approximately $1,617,000 of assets in Europe.
During the six months ended June 30, 2018, the Company acquired three properties aggregating 550,522 square feet for a total purchase price of approximately $32,690 and placed one development property into service with 126,722 square feet. During the six months ended June 30, 2018, the Company sold 14 properties and one land parcel that was part of another asset aggregating 1,890,057 square feet for total gross proceeds of approximately $130,983.
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.
Pending Mergers
On May 6, 2018, the Company and the Operating Partnership entered into an Agreement and Plan of Merger, or the Merger Agreement, with BRE Glacier Parent L.P., or Parent, BRE Glacier L.P., or Merger Sub I, and BRE Glacier Acquisition L.P., or Merger Sub II, all of which are affiliates of Blackstone Real Estate Partners VIII L.P., an affiliate of The Blackstone Group L.P. Pursuant to the Merger Agreement, Merger Sub II will merge with and into the Operating Partnership, or the Partnership Merger, and the Company will merge with and into Merger Sub I, or the Company Merger, and, together with the Partnership Merger, the Mergers. Following the Mergers, Merger Sub I and the Operating Partnership will continue as the surviving entities and the separate existence of the Company and Merger Sub II will cease. The Merger Agreement, the Mergers, and the other transactions contemplated thereby were unanimously approved by the Company’s board of trustees. Pursuant to the Merger Agreement, the closing of the Mergers will take place on the third business day after satisfaction of waiver of the conditions to the Merger (other than those conditions that by their nature are to be satisfied or waived at the closing, but subject to the satisfaction or waiver of such conditions) or at such other date as mutually agreed to by the parties to the Merger Agreement; however, Parent may on one or more occasions elect to delay the closing to a date that is on or prior to October 10, 2018.

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)
June 30, 2018

Pursuant to the terms and conditions in the Merger Agreement, each of the Company’s common shares, other than shares owned by Parent, Merger Sub I or any subsidiary of Parent, the Company or Merger Sub I and any award of restricted Company common shares, that is issued and outstanding immediately prior to the effective time of the Company Merger will automatically be converted into the right to receive an amount in cash equal to $27.50, plus, if the Mergers are consummated after October 15, 2018, a per diem amount of approximately $0.004 for each day from and after such date until, but not including, the closing date, or the Merger Consideration, without interest. Pursuant to the terms and conditions in the Merger Agreement, each of the Company’s 7.125% Series A Preferred Shares, or the Series A Preferred Shares, issued and outstanding immediately prior to the effective time of the Company Merger will be redeemed as of the closing date of the Company Merger through the payment of an amount, without interest, equal to $25.00 plus accrued and unpaid dividends, if any, until, but not including, the closing date. 
At the effective time of the Partnership Merger, each outstanding Class A Unit of the Operating Partnership, or OP Unit, other than OP Units held by the Company or any of the Company’s subsidiaries or Parent, Merger Sub II, or any of their respective subsidiaries, that is issued and outstanding immediately prior to the effective time of the Partnership Merger will automatically be converted into, and will be cancelled in exchange for, the right to receive an amount in cash equal to the Merger Consideration, without interest, or in lieu of receiving the Merger Consideration, each qualifying holder of an OP Unit may elect to receive one newly created Series B Cumulative Preferred Unit in the surviving partnership for each OP Unit of such holder. Additionally, each unvested unit of limited partnership interest in the Operating Partnership granted by the Company pursuant to its share-based compensation plans, or LTIP Unit, will vest pursuant to its terms on the day prior to the effective time of the Partnership Merger and each vested LTIP Unit (including those that vest on the day prior to the effective time of the Partnership Merger) will be converted into an OP Unit immediately prior to the effective time of the Partnership Merger and treated as an OP Unit as previously described.
In addition, each award of restricted common shares and each restricted share unit, or RSU, award that is outstanding immediately prior to the effective time of the Company Merger will be cancelled in exchange for a cash payment in an amount equal to (i) the number of Company common shares subject to the restricted share or RSU award at that time multiplied by (ii) the Merger Consideration, less any applicable withholding taxes. Each option to purchase Company common shares will be cancelled in exchange for a cash payment in an amount equal to (i) the number of Company common shares subject to the option immediately prior to the effective time of the Company Merger multiplied by (ii) the excess (if any) of the Merger Consideration over the per share exercise price applicable to the option, less any applicable withholding taxes.
The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by the Company to, in all material respects, use commercially reasonable efforts to carry on its business in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Mergers. The obligations of the parties to consummate the Mergers are not subject to any financing condition or the receipt of any financing by Parent, Merger Sub I, or Merger Sub II.
The consummation of the Mergers is subject to certain customary closing conditions, including, among others, approval of the Company Merger and the other transactions contemplated by the Merger Agreement by the affirmative vote of the holders of Company common shares entitled to cast not less than a majority of all of the votes entitled to be cast on the matter, or the Company Requisite Vote. The Company will convene a shareholders’ meeting for purposes

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)
June 30, 2018

of obtaining the Company Requisite Vote on August 9, 2018, as described in its definitive proxy statement filed on June 27, 2018.
Upon a termination of the Merger Agreement, under certain circumstances, the Company will be required to pay a termination fee to Parent of $138,000. Upon termination of the Merger Agreement in certain other circumstances, Parent will be required to pay the Company a termination fee up to $414,000.
This description of certain terms of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is included as an exhibit to our definitive proxy statement on Schedule 14A which was filed on June 27, 2018.
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.
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 $19, net cash used in investing activities changed by $26,523, and net cash provided by financing activities changed by $880, for the six months ended June 30, 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 for which the Company is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have

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)
June 30, 2018

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.
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 expensed 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

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)
June 30, 2018

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 the estimated cost of disposal. These assessments are recorded 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.

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)
June 30, 2018

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 June 30,
 
2018
 
2017
Cash and cash equivalents
$
59,741

 
$
163,509

Restricted cash
12,026

 
40,326

Total cash, cash equivalents, and restricted cash
$
71,767

 
$
203,835

Variable Interest Entities
The Company had five consolidated VIEs and two unconsolidated VIEs as of June 30, 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 June 30, 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 June 30, 2018 and December 31, 2017, the Company’s carrying value of the Lakemont Development Investment was $4,765 and $4,584, respectively.
The Company’s two unconsolidated VIEs as of June 30, 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 June 30, 2018 and December 31, 2017, the Company’s carrying value of the Retained CDO Bonds was $6,792 and $5,527, respectively.
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 allowance for doubtful accounts, which as of June 30, 2018 and December 31, 2017 was $692 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

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)
June 30, 2018

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 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"

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)
June 30, 2018

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 and six months ended June 30, 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, operating expense reimbursements, third-party management fees, 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.
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

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)
June 30, 2018

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.
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 June 30, 2018 and December 31, 2017, the carrying value of the Company’s loan investments was $33,169 and $22,154, respectively, which represents the cost, net of accumulated amortization of loan costs. As of June 30, 2018, the loan investments had a weighted average interest rate of 11.36%. The Company evaluates its loan investments for possible credit losses each period. There were no loan reserves recorded during the three and six months ended June 30, 2018 and all of the Company’s loan investments were performing in accordance with the terms of the relevant investments as of June 30, 2018.
Goodwill
The Company recognized goodwill of $3,802 related to the acquisition of Gramercy Europe Limited in December 2014, 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. Based on the prevailing operating results and projected outlook for Gramercy Europe Limited as of June 30, 2018, the Company determined the fair value of Gramercy Europe Limited was less than its carrying value and thus recorded an impairment loss of $3,293 on its goodwill during the three and six months ended June 30, 2018. The fair value of Gramercy Europe Limited was determined using the income approach, wherein projections of discounted cash flows were based on factors such as forecasts of future real estate investments, operating results, management fees, and discount, promote hurdle and capitalization rates. The carrying value of goodwill at June 30, 2018 and December 31, 2017 was $0 and $3,272, respectively.

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)
June 30, 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 and six months ended June 30, 2018, the Company did not recognize any OTTI on its Retained CDO Bonds. For the three months ended June 30, 2017, the Company did not recognize any OTTI on its Retained CDO Bonds and for the six months ended June 30, 2017, the Company recognized OTTI of $4,890 on its Retained CDO Bonds.
A summary of the Company’s Retained CDO Bonds as of June 30, 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

 
$
332,360

 
$
5,756

 
$
1,036

 
$

 
$
6,792

 
0.8
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 and six months ended June 30, 2018, there were no tenants that accounted for 10.0% or more of the Company's rental revenue. Additionally, during the three and six months ended June 30, 2018, there were two states, Illinois and Texas, that each accounted for 10.0% or more of the Company’s rental revenue.

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)
June 30, 2018

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 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-

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)
June 30, 2018

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:
 
June 30, 2018
 
December 31, 2017
 
Square feet1
 
Number of properties
 
Investment
 
Square feet1
 
Number of properties
 
Investment
Operating properties2
81,134,150

 
353

 
$
5,828,172

 
82,146,063

 
363

 
$
5,857,906

Land parcels

 
2

 
7,075

 

 
2

 
7,075

Less accumulated depreciation
 
 
 
 
(410,020
)
 
 
 
 
 
(333,151
)
Total operating properties and land parcels
 
 
 
 
$
5,425,227

 
 
 
 
 
$
5,531,830

Development properties
1,653,300

 
6

 
22,625

 
1,630,022

 
6

 
22,843

Total
82,787,450

 
361