Company Quick10K Filing
Quick10K
Hines Global REIT
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-09-10 Shareholder Vote, Regulation FD, Exhibits
8-K 2019-07-23 Other Events, Exhibits
8-K 2019-06-07 Other Events
8-K 2019-05-23 Enter Agreement, Officers, Exhibits
8-K 2019-03-21 Enter Agreement, Exhibits
8-K 2019-03-13 Regulation FD, Exhibits
8-K 2019-03-04 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-14 Other Events, Exhibits
8-K 2019-02-04 M&A, Other Events, Exhibits
8-K 2018-12-19 Regulation FD, Other Events, Exhibits
8-K 2018-12-05 Officers
8-K 2018-11-21 M&A, Exhibits
8-K 2018-11-15 Enter Agreement
8-K 2018-11-08 Other Events
8-K 2018-11-06 M&A, Exhibits
8-K 2018-10-18 Regulation FD, Exhibits
8-K 2018-10-10 Enter Agreement
8-K 2018-10-02 Enter Agreement
8-K 2018-10-01 Other Events
8-K 2018-09-04 Other Events
8-K 2018-08-24 M&A, Exhibits
8-K 2018-08-01 Other Events
8-K 2018-07-24 Enter Agreement
8-K 2018-07-17 Shareholder Vote, Regulation FD, Other Events, Exhibits
8-K 2018-06-01 Other Events
8-K 2018-05-01 Other Events
8-K 2018-04-20 Regulation FD, Other Events, Exhibits
8-K 2018-04-02 Other Events
8-K 2018-02-26 Amendment
8-K 2018-02-01 Other Events
8-K 2018-01-18 Regulation FD, Exhibits
8-K 2018-01-02 Regulation FD, Other Events, Exhibits
LNGG Linn Energy 6,140
JWA Wiley John & Sons 2,508
CFDB Central Federal Bancshares 21
PETV Petvivo Holdings 8
CDIF Cardiff Lexington 3
HRST Harvest Oil Gas 0
VRIAC Voya Retirement Insurance & Annuity 0
CFSC Caterpillar Financial Services 0
USPB US Premium Beef 0
FIND Findex Com 0
HGRI 2019-06-30
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii- Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 hgr06302019exhibit311.htm
EX-31.2 hgr06302019exhibit312.htm
EX-32.1 hgr06302019exhibit321.htm

Hines Global REIT Earnings 2019-06-30

HGRI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 hgr_0630201910-q.htm HINES GLOBAL REIT 6.30.2019 10-Q Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

(Mark One)
 
þ 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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 number: 000-53964
 

 Hines Global REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland
26-3999995
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2800 Post Oak Boulevard
 
Suite 5000
 
Houston, Texas
77056-6118
(Address of principal executive offices)
(Zip code)

(888) 220-6121
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Exchange Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ   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.

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer þ 
 
Smaller reporting company ☐
Emerging growth 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). Yes   No þ 
 
 As of August 6, 2019, approximately 263.8 million shares of the registrant’s common stock were outstanding.

 



TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited):
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
Item 1. 
Item 1A. 
Item 2.
Item 3. 
Item 4. 
Item 5. 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
June 30, 2019
 
December 31, 2018
 
(In thousands, except per share amounts)
ASSETS
 
 
 
Investment property, net
$
1,550,520

 
$
1,769,955

Cash and cash equivalents
57,373

 
244,277

Restricted cash
12,910

 
16,740

Tenant and other receivables, net
61,202

 
68,639

Intangible lease assets, net
108,985

 
226,593

Right-of-use asset, net
94,995

 

Deferred leasing costs, net
165,073

 
158,378

Deferred financing costs, net
966

 
364

Other assets
17,004

 
14,765

Total assets
$
2,069,028

 
$
2,499,711

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued expenses
$
110,174

 
$
128,397

Due to affiliates
5,505

 
7,968

Intangible lease liabilities, net
51,335

 
55,521

Other liabilities
22,706

 
23,728

Distributions payable

 
14,468

Notes payable, net
781,260

 
676,767

Total liabilities
970,980

 
906,849

 
 
 
 
Commitments and contingencies (Note 10)

 

 
 
 
 
Equity:
 
 
 
Stockholders’ equity:
 
 
 
Preferred shares, $.001 par value; 500,000 preferred shares authorized, none issued or outstanding as of June 30, 2019 and December 31, 2018

 

Common stock, $.001 par value; 1,500,000 shares authorized, 264,068 and 267,073 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
264

 
267

Additional paid-in capital
2,391,123

 
2,409,529

Accumulated distributions in excess of earnings
(1,168,777
)
 
(688,475
)
Accumulated other comprehensive income (loss)
(125,063
)
 
(128,927
)
Total stockholders’ equity
1,097,547

 
1,592,394

Noncontrolling interests
501

 
468

Total equity
1,098,048

 
1,592,862

Total liabilities and equity
$
2,069,028

 
$
2,499,711


See notes to the condensed consolidated financial statements.

1


HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three and Six Months Ended June 30, 2019 and 2018
(UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share amounts)
Revenues:
 

 
 

 
 
 
 
Rental revenue
$
43,889

 
$
80,718

 
$
89,745

 
$
160,610

Other revenue
2,172

 
4,424

 
4,549

 
9,031

Total revenues
46,061

 
85,142

 
94,294

 
169,641

Expenses:
 

 
 

 
 

 
 

Property operating expenses
12,255

 
18,635

 
24,983

 
40,168

Real property taxes
6,163

 
10,950

 
12,951

 
21,304

Property management fees
1,197

 
1,805

 
2,345

 
3,572

Depreciation and amortization
12,863

 
29,426

 
26,307

 
63,423

Asset management fees
6,571

 
8,782

 
13,351

 
17,641

General and administrative expenses
1,833

 
3,073

 
4,427

 
5,975

Impairment losses
7,185

 
5,105

 
7,185

 
5,105

Total expenses
48,067

 
77,776

 
91,549

 
157,188

Other income (expenses):
 

 
 

 
 

 
 

Gain (loss) on derivative instruments

 
467

 
(126
)
 
818

Gain (loss) on sale of real estate investments
(1,412
)
 
58,655

 
190,777

 
58,674

Foreign currency gains (losses)
618

 
(7,141
)
 
1,017

 
(8,361
)
Interest expense
(7,860
)
 
(15,218
)
 
(15,207
)
 
(30,217
)
Other income (expenses)
95

 
146

 
1,365

 
409

Income (loss) before benefit (provision) for income taxes
(10,565
)
 
44,275

 
180,571

 
33,776

Benefit (provision) for income taxes
81

 
1,161

 
355

 
1,478

Net income (loss)
(10,484
)
 
45,436

 
180,926

 
35,254

Net (income) loss attributable to noncontrolling interests
19

 
774

 
10

 
776

Net income (loss) attributable to common stockholders
$
(10,465
)
 
$
46,210

 
$
180,936

 
$
36,030

Basic and diluted income (loss) per common share
$
(0.04
)
 
$
0.17

 
$
0.68

 
$
0.13

Weighted average number of common shares outstanding
264,201

 
272,621

 
264,613

 
272,985

Net comprehensive income (loss):
 

 
 

 
 

 
 

Net income (loss)
$
(10,484
)
 
$
45,436

 
$
180,926

 
$
35,254

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
(1,812
)
 
(33,789
)
 
3,863

 
(24,134
)
Net comprehensive income (loss)
(12,296
)
 
11,647

 
184,789

 
11,120

Net comprehensive (income) loss attributable to noncontrolling interests
24

 
819

 
11

 
778

Net comprehensive income (loss) attributable to common stockholders
$
(12,272
)
 
$
12,466

 
$
184,800

 
$
11,898


See notes to the condensed consolidated financial statements.

2


HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2019
(UNAUDITED)
(In thousands)
 
Common Shares
 
Amount
 
Additional Paid-in Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interests
Balance as of
January 1, 2019
267,073

 
$
267

 
$
2,409,529

 
$
(688,475
)
 
$
(128,927
)
 
$
1,592,394

 
$
468

Contribution from noncontrolling interest

 

 

 

 

 

 
97

Distributions declared

 

 

 
(661,238
)
 

 
(661,238
)
 
(53
)
Redemption of common shares
(2,648
)
 
(3
)
 
(16,298
)
 

 

 
(16,301
)
 

Issuer costs

 

 
(8
)
 

 

 
(8
)
 

Net income (loss)

 

 

 
191,401

 

 
191,401

 
9

Foreign currency translation adjustment

 

 

 

 
5,671

 
5,671

 
4

Balance as of March 31, 2019
264,425

 
$
264

 
$
2,393,223

 
$
(1,158,312
)
 
$
(123,256
)
 
$
1,111,919

 
$
525

Redemption of common shares
(357
)
 

 
(2,091
)
 

 

 
(2,091
)
 

Issuer costs

 

 
(9
)
 

 

 
(9
)
 

Net income (loss)

 

 

 
(10,465
)
 

 
(10,465
)
 
(19
)
Foreign currency translation adjustment

 

 

 

 
(1,807
)
 
(1,807
)
 
(5
)
Balance as of June 30, 2019
264,068

 
$
264

 
$
2,391,123

 
$
(1,168,777
)
 
$
(125,063
)
 
$
1,097,547

 
$
501


See notes to the condensed consolidated financial statements.


3


HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2018
(UNAUDITED)
(In thousands)

 
Common Shares
 
Amount
 
Additional Paid-in Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interests
Balance as of
January 1, 2018
274,255

 
$
274

 
$
2,471,004

 
$
(968,158
)
 
$
(128,869
)
 
$
1,374,251

 
$
1,307

Cumulative effect of accounting changes

 

 

 
1,365

 

 
1,365

 
898

Issuance of common shares
2,512

 
3

 
22,611

 

 

 
22,614

 

Contribution from noncontrolling interest

 

 

 

 

 

 
70

Distributions declared

 

 

 
(44,420
)
 

 
(44,420
)
 
(60
)
Redemption of common shares
(3,658
)
 
(4
)
 
(32,191
)
 

 

 
(32,195
)
 

Issuer costs

 

 
(29
)
 

 

 
(29
)
 

Net income (loss)

 

 

 
(10,180
)
 

 
(10,180
)
 
(3
)
Foreign currency translation adjustment

 

 

 

 
9,611

 
9,611

 
44

Balance as of March 31, 2018
273,109

 
$
273

 
$
2,461,395

 
$
(1,021,393
)
 
$
(119,258
)
 
$
1,321,017

 
$
2,256

Issuance of common shares
2,431

 
2

 
21,976

 

 

 
21,978

 

Distributions declared

 

 

 
(44,301
)
 

 
(44,301
)
 
(52
)
Redemption of common shares
(3,081
)
 
(3
)
 
(26,648
)
 

 

 
(26,651
)
 

Issuer costs

 

 
(10
)
 

 

 
(10
)
 

Net income (loss)

 

 

 
46,210

 

 
46,210

 
(774
)
Foreign currency translation adjustment

 

 

 

 
(35,606
)
 
(35,606
)
 
(45
)
Foreign currency translation adjustment reclassified into earnings.

 

 

 

 
1,863

 
1,863

 

Balance as of June 30, 2018
272,459

 
$
272

 
$
2,456,713

 
$
(1,019,484
)
 
$
(153,001
)
 
$
1,284,500

 
$
1,385


See notes to the condensed consolidated financial statements.


4


HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2019 and 2018
(UNAUDITED)
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
(In thousands)
Net income (loss)
$
180,926

 
$
35,254

Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization
33,498

 
69,786

Foreign currency (gains) losses
(1,017
)
 
8,361

(Gain) on the sale of real estate investments
(190,777
)
 
(58,674
)
Impairment losses
7,185

 
5,105

(Gain) loss on derivative instruments
126

 
(818
)
Changes in assets and liabilities:
 
 
 
Change in other assets
(2,265
)
 
(4,222
)
Change in tenant and other receivables
(1,242
)
 
1,807

Change in deferred leasing costs
(22,365
)
 
(28,816
)
Change in accounts payable and accrued expenses
(7,568
)
 
(27,556
)
Change in other liabilities
(3,575
)
 
(567
)
Change in due to affiliates
(2,541
)
 
(2,915
)
Net cash used in operating activities
(9,615
)
 
(3,255
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from the sale of real estate investments
453,758

 
82,097

Capital expenditures at operating properties and developments
(38,246
)
 
(32,322
)
Net cash from investing activities
415,512

 
49,775

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Contribution from noncontrolling interest
97

 
70

Redemption of common shares
(25,941
)
 
(60,750
)
Payments of issuer costs
(19
)
 
(62
)
Distributions paid to stockholders and noncontrolling interests
(675,758
)
 
(332,614
)
Proceeds from notes payable
182,000

 
141,000

Payments on notes payable
(76,103
)
 
(91,181
)
Change in security deposit liability
584

 
557

Deferred financing costs paid
(1,938
)
 
(263
)
Payments related to interest rate contracts

 
(33
)
Net cash used in financing activities
(597,078
)
 
(343,276
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
447

 
(4,388
)
Net change in cash, cash equivalents, and restricted cash
(190,734
)
 
(301,144
)
Cash, cash equivalents, and restricted cash, beginning of period
261,017

 
418,210

Cash, cash equivalents, and restricted cash, end of period
$
70,283

 
$
117,066


See notes to the condensed consolidated financial statements.

5


HINES GLOBAL REIT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2019 and 2018

1.  ORGANIZATION

The accompanying interim unaudited condensed consolidated financial information has been prepared according to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted according to such rules and regulations. For further information, refer to the financial statements and footnotes for the year ended December 31, 2018 included in Hines Global REIT, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly and in conformity with GAAP the financial position of Hines Global REIT, Inc. as of June 30, 2019, the results of operations for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months ended June 30, 2019 and 2018 have been included.  The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Hines Global REIT, Inc. (the “Company”) was formed as a Maryland corporation on December 10, 2008, under the General Corporation Law of the state of Maryland for the purpose of engaging in the business of investing in and owning commercial real estate properties and other real estate investments. The Company conducts substantially all of its operations through Hines Global REIT Properties, LP (the “Operating Partnership”) and subsidiaries of the Operating Partnership. The Company operates in a manner to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. The business of the Company is managed by Hines Global REIT Advisors LP (the “Advisor”), an affiliate of Hines Interests Limited Partnership (“Hines”), pursuant to the Advisory Agreement between the Company, the Advisor and the Operating Partnership (the “Advisory Agreement”).

The Company raised the equity capital for its real estate investments through two public offerings from August 5, 2009 through April 11, 2014, which included primary offering shares as well as shares issued through its distribution reinvestment plan. The Company terminated its offering of primary offering shares in April 2014, but continued to issue shares through its distribution reinvestment plan (the “DRP Offering”) from April 24, 2014 to August 2018. Collectively, through these public offerings, the Company received gross offering proceeds of approximately $3.1 billion from the sale of 313.3 million shares, which was invested in the Company’s real estate portfolio.

In recent years, the Company has concentrated its efforts on actively managing its assets and exploring a variety of strategic opportunities focused on enhancing the composition of its portfolio and its total return potential for its stockholders. On April 23, 2018, in connection with its review of potential strategic alternatives available to the Company, the Company’s board of directors determined that it is in the best interest of the Company and its stockholders to sell all or substantially all of the Company’s properties and assets and for the Company to liquidate and dissolve pursuant to a Plan of Liquidation and Dissolution (the “Plan of Liquidation”). The principal purpose of the Plan of Liquidation is to provide liquidity to the Company’s stockholders by selling the Company’s assets, paying its debts and distributing the net proceeds from liquidation to the Company’s stockholders.

As required by Maryland law and the Company’s charter, the Plan of Liquidation was approved by the affirmative vote of the holders of at least a majority of the shares of the Company’s common stock outstanding and entitled to vote thereon at the Company’s annual meeting of stockholders held on July 17, 2018. In accordance with Maryland law, the Plan of Liquidation provides the Company’s board of directors with the authority to modify or amend the Plan of Liquidation without further action by the Company’s stockholders to the extent permitted by then-current law and to terminate the Plan of Liquidation for any reason, provided that the board of directors may not terminate the Plan of Liquidation after Articles of Dissolution have been filed with and accepted for record by the State Department of Assessments and Taxation of Maryland. If the sale of all or substantially all of the Company’s assets is completed as expected, the Company expects to make one or more additional liquidating distributions to its stockholders during the period of the liquidation process and to make the final liquidating distribution to its stockholders on or before a date that is within 24 months after stockholder approval of the Plan of Liquidation. There can be no assurances regarding the timing or amounts of any additional liquidating distributions or that the Company will make the final distribution on or before July 17, 2020.  In addition, even if the Company sells all of its assets by July 17, 2020, it may determine not to distribute all distributable cash by that date and may establish a reserve to provide for any remaining obligations and to cover its expenses as it completes its wind down and dissolution.

Through August 14, 2019, the Company has paid aggregate return of capital distributions of $4.00 per share to its stockholders, which included $2.83 per share of liquidating distributions pursuant to the Plan of Liquidation. See “Note 5 — Distributions” for additional information regarding these distributions.


6


Because the Plan of Liquidation follows the Company’s initial business plan and given the Company’s board of directors has the authority to modify, amend, or terminate the Plan of Liquidation without further action by the Company’s stockholders, these financial statements have not been prepared on the liquidation basis of accounting.

The Company sold its interests in six properties for an aggregate sales price of $1.0 billion during 2017, 20 properties in 2018 for an aggregate sales price of $1.7 billion, and two properties in the first quarter of 2019 for an aggregate sales price of $477.8 million. As of June 30, 2019, the Company owned interests in 12 real estate investments, consisting of the following types of investments:

Domestic office investments (3 investments)
Domestic other investments (4 investments)
International office investments (4 investments)
International other investments (1 investments)

As of August 14, 2019, the Company has $720.6 million of debt scheduled to mature within a year. The Company does not have sufficient cash on hand or other legally binding commitments that can be utilized to repay such debt. In evaluating the Company’s current and projected sources of liquidity to meet the obligations of such debt, the Company has assessed its available options and has determined that its plan is to repay such obligations with proceeds from the sale of assets pursuant to the Plan of Liquidation. To the extent such proceeds are not sufficient, the Company has determined it is probable that it will either meet the covenant requirements necessary to exercise the extension options on its Revolving Credit Facility (as defined in Note 4) or that market-based alternatives to refinance the maturing debt will be available and that these actions will provide the necessary cash flows to repay the maturing debt.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Described below are certain of the Company’s significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified in the instructions for Form 10-Q. Please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a complete listing of all of its significant accounting policies.

Other Assets

Other assets included the following (in thousands):
 
 
June 30, 2019
 
December 31, 2018
Prepaid expenses
 
$
2,506

 
$
1,770

Deferred tax assets
 
14,195

 
12,654

Other
 
303

 
341

Other assets
 
$
17,004

 
$
14,765


Revenue Recognition
 
Rental payments are generally paid by the tenants prior to the beginning of each month or quarter to which they relate. As of June 30, 2019 and December 31, 2018, respectively, the Company recorded liabilities of $11.7 million and $15.5 million related to prepaid rental payments, which were included in other liabilities in the accompanying Condensed Consolidated Balance Sheets. The Company recognizes rental revenue on a straight-line basis over the life of the lease, including rent holidays, if any. Straight-line rent receivable was $41.6 million and $44.0 million as of June 30, 2019 and December 31, 2018, respectively. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of acquisition or lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenant and other receivables in the accompanying Condensed Consolidated Balance Sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred based upon the tenant lease provisions. Revenues relating to lease termination fees are recognized on a straight-line basis amortized from the time that a tenant’s right to occupy the leased space is modified through the end of the revised lease term.

Other revenues consist primarily of parking revenue. Parking revenue represents amounts generated from contractual and transient parking and is recognized in accordance with contractual terms or as services are rendered.


7


Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 which requires companies that lease assets to recognize on the balance sheet the right-of-use assets and related lease liabilities (“ASC 842”). The accounting by companies that own the assets leased by the lessee (the lessor) is largely unchanged from previous GAAP. The Company adopted ASC 842 as of January 1, 2019, and is using the modified retrospective approach. No adjustment to opening retained earnings was required.

In July 2018, the FASB issued ASU 2018-11, which allows lessors to account for lease and non-lease components by class of underlying assets, as a single lease component if certain criteria are met. Also, the new standard indicates that companies are permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption in lieu of restating prior periods in accordance with ASC 842 and provides other optional practical expedients.

Upon adoption, the Company has elected the following practical expedients:

The transition method in which the application date of January 1, 2019 is the beginning of the reporting period that the Company first applied the new guidance.
The practical expedient package which allows an entity not to reassess (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; (3) initial direct costs for any existing leases.
As an accounting policy election, a lessor may choose not to separate the non-lease components, by class of underlying assets, from the lease components and instead account for both types of components as a single component under certain conditions.
As an accounting policy election, a lessee may choose not to separate the non-lease components, by class of underlying assets, from the lease components and instead account for both types of components as a single component. The Company elected to apply the practical expedient for all of its leases to account for the lease and non-lease components as a single, combined operating lease component.

The Company completed its evaluation of the impact that the adoption of ASC 842 will have on the Company’s consolidated financial statements relating to its leases from both the lessee and lessor perspective. Based on the Company’s analysis, the Company identified the following changes to result from its adoption of ASC 842:

Lessor Accounting

The Company is entitled to receive tenant reimbursements for operating expenses for common area maintenance (“CAM”). Based on guidance in these ASUs, CAM reimbursement revenue is defined as a non-lease component, which would be accounted for in accordance with ASC 606. However, the Company elected to apply the practical expedient for all of its leases to account for the lease and non-lease components as a single, combined operating lease component.

Capitalization of leasing costs is limited to initial direct costs. Initial direct costs have been defined as incremental costs of a lease that would not have been incurred if the lease had not been obtained. Legal costs are no longer capitalized, but expensed as incurred. There is no change in the Company’s accounting for lease inducements and commissions.

The Company’s existing leases continue to be classified as operating leases, however, leases entered into or modified after January 1, 2019 may be classified as either operating or sales-type leases, based on specific classification criteria. The Company believes all of its leases will continue to be classified as operating leases, and all operating leases will continue to have a similar pattern of recognition as under current GAAP.

Lessee Accounting

The Company has two ground lease agreements in which the Company is the lessee for land underneath 25 Cabot Square. The Company previously recognized an amount related to these ground leases as part of the allocation of the purchase price of 25 Cabot Square, which was recorded to intangible lease assets, net. The leases have remaining terms of 198 years and 973 years. Upon adoption of ASC 842 on January 1, 2019, the Company reclassified approximately £58.3 million (approximately $74.4 million converted using an exchange rate of $1.28 per GBP on January 1, 2019) from intangible lease assets, net to right-of-use asset in the Company’s Condensed Consolidated Balance Sheets. No lease liability was recorded since the payments required under the lease are immaterial.


8


The Company has a ground lease agreement in which the Company is the lessee for land underneath New City that is currently accounted for as an operating lease. The lease currently ends in December 2089 and has fixed payments. The rental expense associated with this lease was $0.2 million and $0.2 million for the six months ended June 30, 2019, and 2018, respectively. The Company previously recognized an amount related to this ground lease as part of the allocation of the purchase price of New City, which was recorded to intangible lease assets, net. Upon adoption of ASC 842 on January 1, 2019, the Company recorded a right-of-use asset and lease liability of approximately $3.6 million in right-of-use asset, net and other liabilities, respectively, in the Company’s Condensed Consolidated Balance Sheets and reclassified an additional 65.1 million Polish zloty (“PLN”) (approximately $17.3 million converted using an exchange rate of $0.27 per PLN on January 1, 2019) from intangible lease assets, net to right-of-use asset in the Company’s Condensed Consolidated Balance Sheets.

The Company’s estimate of the amount of the right-of-use asset and lease liability included assumptions for the discount rate, which is based on the incremental borrowing rate of the lease contract. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a term similar to the lease.  Since the term of the New City ground lease is much longer than a typical borrowing, we derived the incremental borrowing rate of 6.4%, as the spread in a current financing quote for the property plus the applicable base rate corresponding to the longest term available in the base rate market. A reconciliation of our lease liabilities on an undiscounted cash flow basis for the ground lease at New City as of June 30, 2019, for the period from July 1, 2019 through December 31, 2019 and for each of the years ending December 31, 2020 through December 31, 2024 are as follows (in thousands):

 
Lease Payments
July 1, 2019 through December 31, 2019
$

2020
238

2021
238

2022
238

2023
238

2024
238

Thereafter
15,475

Total
$
16,665

Lease liabilities (included in other liabilities)
$
3,678

Undiscounted excess amount
$
12,987


New Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, "Changes to the Disclosure Requirements for Fair Value Measurement." This ASU amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. The ASU also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company is currently assessing the impact the adoption of this guidance will have on its financial statements.


9


3. INVESTMENT PROPERTY
 
Investment property consisted of the following amounts as of June 30, 2019 and December 31, 2018 (in thousands):

 
June 30, 2019
 
December 31, 2018
Buildings and improvements (1)
$
1,301,796

 
$
1,475,007

Less: accumulated depreciation
(149,642
)
 
(172,659
)
Buildings and improvements, net
1,152,154

 
1,302,348

Land
398,366

 
467,607

Investment property, net
$
1,550,520

 
$
1,769,955


(1)
Included in buildings and improvements was approximately $20.1 million of construction-in-progress related to the Company’s development at Summit III. In 2019, the Company commenced construction of Summit III, a new 374,220 square foot building at the Summit property. The office space has been fully pre-leased to a single tenant. The construction project is expected to be completed in 2020.

Recent Dispositions of Real Estate Investments

In January 2019, the Company completed the sale of 55M Street for a contract sales price of $135.3 million. The Company recognized a gain on sale of this asset of $17.4 million net of disposition fees, which was recorded in gain on sale of real estate investments on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

In February 2019, the Company completed the sale of 550 Terry Francois for a contract sales price of $342.5 million. The Company recognized a gain on sale of this asset of $175.0 million net of disposition fees, which was recorded in gain on sale of real estate investments on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

As of June 30, 2019, the cost basis and accumulated amortization related to lease intangibles were as follows (in thousands):

 
Lease Intangibles
 
 In-Place Leases (1)
 
Out-of-Market
Lease Assets
 
Out-of-Market
Lease Liabilities
 
 
 
Cost
$
267,935

 
$
22,533

 
$
(94,810
)
Less: accumulated amortization
(166,012
)
 
(15,471
)
 
43,475

Net
$
101,923

 
$
7,062

 
$
(51,335
)

(1)
The Company adopted ASC 842 beginning January 1, 2019 and reclassified certain assets from intangible lease assets, net to right-of-use asset, net in the Company’s Condensed Consolidated Balance Sheets. The amounts reclassified from intangible lease assets included $93.5 million in gross cost, net of $1.8 million of accumulated amortization. See “Note 2 — Summary of Significant Accounting Policies” for more information on the adoption of ASC 842.

As of December 31, 2018, the cost basis and accumulated amortization related to lease intangibles were as follows (in thousands):

 
Lease Intangibles
 
 
 
Out-of-Market
Lease Assets
 
Out-of-Market
Lease Liabilities
 
In-Place Leases
 
 
Cost
$
404,662

 
$
26,072

 
$
(99,434
)
Less: accumulated amortization
(187,581
)
 
(16,560
)
 
43,913

Net
$
217,081

 
$
9,512

 
$
(55,521
)

Amortization expense of in-place leases was $4.0 million and $14.2 million for the three months ended June 30, 2019 and 2018, respectively. Net amortization of out-of-market leases resulted in increases to rental revenue of $1.1 million and $3.6 million for the three months ended June 30, 2019 and 2018, respectively.


10


Amortization expense of in-place leases was $8.5 million and $32.5 million for the six months ended June 30, 2019 and 2018, respectively. Net amortization of out-of-market leases resulted in increases to rental revenue of $2.1 million and $5.8 million for the six months ended June 30, 2019 and 2018, respectively.

Anticipated amortization of in-place leases and out-of-market leases, net, for the period from July 1, 2019 through December 31, 2019 and for each of the years ending December 31, 2020 through December 31, 2023 are as follows (in thousands):

 
In-Place
Leases
 
Out-of-Market
Leases, Net
July 1, 2019 through December 31, 2019
$
7,740

 
$
(2,155
)
2020
$
14,437

 
$
(4,136
)
2021
$
12,341

 
$
(3,778
)
2022
$
11,034

 
$
(2,945
)
2023
$
10,204

 
$
(2,625
)

Leases
 
The Company’s leases are generally for terms of 15 years or less and may include multiple options to extend the lease term upon tenant election. The Company’s leases typically do not include an option to purchase. Generally, the Company does not expect the value of its real estate assets to be impacted materially at the end of any individual lease term, as the Company is typically able to re-lease the space and real estate assets tend to hold their value over a long period of time. Tenant terminations prior to the lease end date occasionally result in a one-time termination fee based on the remaining unpaid lease payments including variable payments and could be material to the tenant. Many of the Company’s leases have increasing minimum rental rates during the terms of the leases through escalation provisions. In addition, the majority of the Company’s leases provide for separate billings for variable rent, such as, reimbursements of real estate taxes, maintenance and insurance and may include an amount based on a percentage of the tenants’ sales.  Total billings related to expense reimbursements from tenants for the three and six months ended June 30, 2019 was $12.3 million and $24.5 million, respectively, which is included in rental revenue on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company has entered into non-cancelable lease agreements with tenants for space. As of June 30, 2019, the approximate fixed future minimum rentals for the period from July 1, 2019 through December 31, 2019, for each of the years ending December 31, 2020 through December 31, 2023 and for the period thereafter are as follows (in thousands):

 
Fixed Future Minimum Rentals
July 1, 2019 through December 31, 2019
$
67,798

2020
134,741

2021
141,508

2022
135,248

2023
121,762

Thereafter
882,738

Total
$
1,483,795


During the six months ended June 30, 2019 and 2018, the Company did not earn more than 10% of its total rental revenue from any individual tenant.


11


4. DEBT FINANCING
 
As of June 30, 2019 and December 31, 2018, the Company had approximately $782.5 million and $678.1 million of principal outstanding, respectively, with a weighted average years to maturity of 0.8 years and 0.9 years, respectively, and a weighted average interest rate of 3.5% and 3.4%, respectively. The following table describes the Company’s debt outstanding at June 30, 2019 and December 31, 2018 (in thousands, except percentages):
Description
 
Origination or Assumption Date
 
Maturity Date
 
Interest Rate Description
 
Interest Rate as of
June 30, 2019
 
Principal Outstanding at June 30, 2019
 
Principal Outstanding at December 31, 2018
Secured Mortgage Debt
 
 
 
 
 
 
 
 
 
 
 
 
Minneapolis Retail Center
 
8/2/2012
 
8/10/2019
(1) 
Fixed
 
3.50
%
 
$
65,500

 
$
65,500

New City
 
3/28/2013
 
3/18/2021
 
Variable, subject to interest rate cap
 
2.30
%
 
73,399

 
74,861

Perspective Défense
 
6/21/2013
 
7/25/2020
(2) 
Variable, subject to interest rate cap
 
2.50
%
 
79,562

 
80,108

25 Cabot Square
 
3/26/2014
 
3/26/2020
 
Fixed
 
3.50
%
 
157,039

 
157,583

Other Notes Payable
 
 
 
 
 
 
 
 

 
 
 
 
JPMorgan Chase Revolving Credit Facility - Revolving Loan
 
4/13/2012
 
3/4/2020
 
Variable
 
3.91
%
 
182,000

 

JPMorgan Chase Revolving Credit Facility - Term Loan
 
5/22/2013
 
3/4/2020
 
Variable
 
3.87
%
 
225,000

 
300,000

Total Principal Outstanding
 
 
 
 
 
 
 
$
782,500

 
$
678,052

Unamortized Deferred Financing Costs(3)
 
 
 
 
 
 
 
 
 
$
(1,240
)
 
$
(1,285
)
Notes Payable, net
 
 
 
 
 
 
 
$
781,260

 
$
676,767


(1)In August 2019, the Company paid off the secured mortgage loan related to Minneapolis Retail Center.

(2)In June 2019, the loan was amended and the maturity date was extended to July 25, 2020.

(3)Includes unamortized deferred financing costs related to the secured mortgage debt and the term loan commitment of the JPMorgan Chase Revolving Credit Facility. Unamortized deferred financing costs related to the revolving loan commitment of the JPMorgan Chase Revolving Credit Facility are included in deferred financing costs, net on the Company’s Condensed Consolidated Balance Sheets.

The variable-rate debt has interest rates ranging from the LIBOR or EURIBOR screen rate plus 1.45% to 2.50% per annum. As of June 30, 2019, $138.2 million of the Company’s variable-rate debt was capped at strike rates ranging from 1.00% to 2.00%. Additionally, as of December 31, 2018, $140.0 million of our variable rate debt was capped at strike rates ranging from 1.00% to 2.00%.

JPMorgan Chase Revolving Credit Facility

In April 2012, the Operating Partnership entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent for itself and various lenders named in the Credit Agreement. The Company refers to the Revolving Loan Commitment and Term Loan Commitment collectively as the “Revolving Credit Facility.” As amended in June 2015, the borrowings may be denominated in U.S. dollars, British pound sterling, Euros, Australian dollars or Canadian dollars with up to $920.0 million maximum amount available under the Revolving Credit Facility.

In March 2019, the Company entered into an amendment to its Revolving Credit Facility, which resulted in the following changes:

a decrease in total commitments to $725.0 million, including $225.0 million to the term loan commitment (“Term Loan Commitment”), and $500.0 million available under the revolving loan commitment (“Revolving Loan Commitment”);
extended the maturity date to March 4, 2020, subject to three additional six-month extensions at the Company’s option and subject to the satisfaction of certain conditions.

During the six months ended June 30, 2019, the Company made draws of approximately $182.0 million and payments of $75.0 million on the Revolving Credit Facility. From July 1, 2019 through August 14, 2019, the Company made additional borrowings of $77.0 million under the Revolving Credit Facility, resulting in an outstanding principal balance of $484.0 million as of August 14, 2019.

12



Financial Covenants

The Company's mortgage agreements and other loan documents for the debt described in the table above contain customary events of default, with corresponding grace periods, including payment defaults, cross-defaults to other agreements and bankruptcy-related defaults, and customary covenants, including limitations on liens and indebtedness and maintenance of certain financial ratios. In addition, the Company has executed customary recourse carve-out guarantees of certain obligations under its mortgage agreements and the other loan documents.  The Company is not aware of any instances of noncompliance with financial covenants as of June 30, 2019.

Principal Payments on Debt
 
The Company is required to make the following principal payments on its outstanding notes payable for period July 1, 2019 through December 31, 2019, and each of the years ending December 31, 2020 through December 31, 2023 and for the period thereafter (amounts are in thousands):

 
Payments due by Year
 
July 1, 2019 through December 31, 2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Principal payments
$
66,644

(1) 
$
645,889

 
$
69,967

 
$

 
$

 
$


(1)
Includes Minneapolis Retail Center debt of $65.5 million that was paid off in August 2019 using proceeds from the Revolving Credit Facility that is set to mature in 2020.

5.  DISTRIBUTIONS

The Company declared distributions for the months of January 2018 through December 2018 at an amount equal to $0.0541667 per share, per month ($0.65 per share on an annualized basis). Approximately $0.45 per share of these distributions were designated as a return of a portion of the stockholders’ invested capital as described further below.

From January 2018 through February 2019, the Company paid aggregate return of capital distributions (“Return of Capital Distributions”) to stockholders totaling approximately $4.00 per share, which represented a return of a portion of the stockholders’ invested capital. These Return of Capital Distributions were made up of the following:

a $1.05 per share special distribution (the “Special Distribution”) declared to all stockholders of record as of December 30, 2017 and paid in January 2018. The Special Distribution was funded with a portion of the net proceeds received from the strategic sale of six assets during 2017.
$0.12 per share resulting from a portion of the monthly distributions declared for the months of January 2018 through June 2018, (approximately $0.02 per share, per month), which were designated by our board of directors as a return of a portion of the stockholders’ invested capital and, as such, reduced the stockholders’ remaining investment in the Company.
Approximately $0.33 per share resulting from the monthly liquidating distributions declared for the months of July 2018 through December 2018 ($0.541667 per share, per month), which were designated as liquidating distributions and, as such, reduced the stockholders’ remaining investment in the Company.
a $2.50 per share designated liquidating distribution declared to all stockholders of record as of February 13, 2019 and paid in February 2019.

On July 17, 2018, in connection with the stockholder approval of the Plan of Liquidation, the board of directors determined to suspend the distribution reinvestment plan indefinitely effective as of August 31, 2018. As a result of the suspension of the distribution reinvestment plan, all distributions paid after August 31, 2018 were paid to stockholders in cash. Additionally, because the Company already sold a significant number of assets and its expectation is to sell all of its remaining assets in the time frame set forth under its Plan of Liquidation, the Company determined to stop paying monthly distributions for periods after December 2018. The Company intends to fund all future liquidating distributions with proceeds from the sale of its remaining properties in addition to any distributable cash from the operating income of its remaining properties.

13



The table below outlines the Company’s total distributions declared to stockholders and noncontrolling interests for each of the quarters ended during 2019 and 2018, including the breakout between the distributions declared in cash and those reinvested pursuant to the Company’s distribution reinvestment plan (in thousands).

 
 
Stockholders
 
Noncontrolling Interests
 
Distributions for the three months ended
 
Cash Distributions
 
Distributions Reinvested
 
Total Declared
 
Distributions Declared per Common Share
 
Total Declared
 
2019
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
$

 
$

 
$

 
$

 
$

 
March 31, 2019
 
661,238

 

 
661,238

 
2.50

 
53

 
Total
 
$
661,238

 
$

 
$
661,238

 
$
2.50

 
$
53

 
2018
 

 
 
 
 
 
 
 
 
 
December 31, 2018
 
$
43,586

 
$

 
$
43,586

 
$
0.1625

 
$
134

 
September 30, 2018
 
36,970

 
7,187

 
44,157

 
0.1625

 
11,769

(1) 
June 30, 2018
 
22,457

 
21,844

 
44,301

 
0.1625

 
52

 
March 31, 2018
 
22,126

 
22,294

 
44,420

 
0.1625

 
60

 
Total
 
$
125,139

 
$
51,325

 
$
176,464

 
$
0.65

 
$
12,015

 

(1)
For the three months ended September 30, 2018, distributions declared to noncontrolling interests included a distribution totaling $11.6 million to an affiliate of Hines, who was the Company’s joint venture partner in the WaterWall joint venture, as a result of the sale of WaterWall Place.

6.  RELATED PARTY TRANSACTIONS

The table below outlines fees and expense reimbursements incurred that are payable by the Company to the Advisor, Hines and its affiliates for the periods indicated below and amounts unpaid as of June 30, 2019 and December 31, 2018 (in thousands):
 
Incurred
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Unpaid as of
Type and Recipient
2019
 
2018
 
2019
 
2018
 
June 30, 2019
 
December 31, 2018
Asset Management Fee- the Advisor and affiliates of Hines
$
6,571

 
$
8,782

 
$
13,351

 
$
17,641

 
$
1,972

 
$
2,495

Disposition Fee- the Advisor
$

 
$
1,533

 
$
4,777

 
$
1,533

 

 

Other (1) 
$
1,146

 
$
1,393

 
$
2,635

 
$
2,888

 
722

 
2,089

Property Management Fee- Hines
$
1,014

 
$
1,597

 
$
2,007

 
$
3,128

 
100

 
125

Development/Construction Management Fee- Hines
$
444

 
$
456

 
$
1,016

 
$
939

 
399

 
314

Leasing Fee- Hines
$
349

 
$
913

 
$
543

 
$
1,219

 
2,017

 
2,361

Expense Reimbursement- Hines (with respect to management and operations of the Company’s properties)
$
2,229

 
$
2,448

 
$
4,062

 
$
4,888

 
295

 
584

Due to Affiliates
 
 
 
 
 
 
 
 
$
5,505

 
$
7,968


(1)
Includes amounts the Advisor paid on behalf of the Company such as general and administrative expenses and issuer costs.  These amounts are generally reimbursed to the Advisor during the month following the period in which they are incurred.

Summit Development Agreement

In March 2019, the Company entered into a Development Management Agreement with Hines, the Company’s sponsor, for the construction and development of an office building at the Summit in Bellevue, Washington. Hines will be paid a project administration fee equal to 2.5% of the qualified construction costs.

14



7.  FAIR VALUE MEASUREMENTS

Financial Instruments Fair Value Disclosures
 
As of June 30, 2019, the Company estimated that the fair value of its notes payable, which had a book value (excluding any unamortized discount or premium) of $782.5 million, was $783.4 million. As of December 31, 2018, the Company estimated that the fair value of its notes payable, which had a book value of $678.1 million, was $679.3 million. Management has utilized available market information, such as interest rate and spread assumptions of notes payable with similar terms and remaining maturities, to estimate the amounts required to be disclosed. Although the Company has determined the majority of the inputs used to value its notes payable fall within Level 2 of the fair value hierarchy, the credit quality adjustments associated with its fair value of notes payable utilize Level 3 inputs. However, as of June 30, 2019, the Company has assessed the significance of the impact of the credit quality adjustments on the overall valuations of its fair market value of notes payable and has determined that they are not significant. As a result, the Company has determined these financial instruments utilize Level 2 inputs. Since such amounts are estimates that are based on limited available market information for similar transactions, there can be no assurance that the disclosed values could be realized.

Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, tenant and other receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable.  The carrying value of these items reasonably approximates their fair value based on their highly-liquid nature and/or short-term maturities. Due to the short-term nature of these instruments, Level 1 inputs are utilized to estimate the fair value of the cash and cash equivalents and restricted cash and Level 2 inputs are utilized to estimate the fair value of the remaining financial instruments.

Financial Instruments Measured on a Nonrecurring Basis

Certain long-lived assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments (i.e., impairments) in certain circumstances. The inputs associated with the valuation of long-lived assets are generally included in Level 3 of the fair value hierarchy.  

Impairment of Investment Property

Investment properties are reviewed for impairment at each reporting period if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company determined that one of its properties was impaired for the six months ended June 30, 2019 as a result of deteriorating market conditions.

For the year ended December 31, 2018, the Company determined that three of its properties (two of which were measured using executed purchase and sale agreements which are considered level 2 inputs, and one of which was measured using level 3 inputs) were impaired as a result of deteriorating market conditions.

The changes in assumptions resulted in the net book value of the assets exceeding the projected undiscounted cash flows for the property. As a result, these properties were written down to fair value. The following table summarizes activity for the properties measured at fair value, on a non-recurring basis as of June 30, 2019 and December 31, 2018 (in thousands).

 
 
Basis of Fair Value Measurements
As of
 
Description
 
Fair Value of Assets
 
Quoted Prices
In Active
Markets for
Identical Items
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Impairment
Loss
June 30, 2019
 
Investment property
 
$
120,896

 
$

 
$

 
$
120,896

 
$
7,185

December 31, 2018
 
Investment property
 
$
138,550

 
$

 
$
68,250

 
$
70,300

 
$
19,180



15


The Company’s estimated fair value of the property measured using level 3 inputs was based on comparisons of recent market activity and discounted cash flow models, which include estimates of property-specific inflows and outflows over a specific holding period.  Significant unobservable quantitative inputs used in determining the fair value of the investment property for the period ended June 30, 2019 include: a discount rate of 7.21%; a capitalization rate of 6.25%; stabilized occupancy rate of 91.8%; and a current market rental rate of $25.00 per square foot.  Significant unobservable quantitative inputs used in determining the fair value of the investment property for the period ended December 31, 2018 include: a discount rate of 9.00%; a capitalization rate of 8.00%; stabilized occupancy rate of 90.0%; and a current market rental rate of $25.00 per square foot.  These inputs are based on the location, type and nature of each property, current and anticipated market conditions, and management’s knowledge and expertise in real estate.

8. REPORTABLE SEGMENTS

The Company’s real estate investments are geographically diversified and management evaluates the operating performance of each at an individual investment level and considers each investment to be an operating segment. The Company has aggregated all of its operating segments into four reportable segments based on the location of the segment and the underlying asset class. Management has aggregated the Company’s investments that are not office properties in “other” based on the geographic location of the investment, due to the Company’s ownership of interests in various different types of investments that do not stand alone as their own reportable segment. The Company’s reporting segments consist of the following, based on the Company’s investments as of June 30, 2019:

Domestic office investments (3 investments)
Domestic other investments (4 investments)
International office investments (4 investments)
International other investments (1 investments)

The tables below provide additional information related to each of the Company’s segments, geographic location and a reconciliation to the Company’s net income (loss), as applicable. “Corporate-Level Accounts” includes amounts incurred by the corporate-level entities which are not allocated to any of the reportable segments (all amounts are in thousands, except for percentages):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Total Revenue
 
 
 
 
 
 
 
Domestic office investments
$
14,650

 
$
33,033

 
$
31,492

 
$
65,696

Domestic other investments
18,604

 
25,172

 
37,264

 
45,275

International office investments
11,972

 
17,654

 
23,963

 
39,163

International other investments
835

 
9,283

 
1,575

 
19,507

Total Revenue
$
46,061

 
$
85,142

 
$
94,294

 
$
169,641


For the three and six months ended June 30, 2019 and 2018 the Company’s total revenue was attributable to the following countries:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Total Revenue
 
 
 
 
 
 
 
United States
72
%
 
69
%
 
73
%
 
66
%
United Kingdom
15
%
 
7
%
 
14
%
 
9
%
Poland
5
%
 
6
%
 
5
%
 
7
%
Russia
5
%
 
3
%
 
5
%
 
3
%
France
3
%
 
1
%
 
3
%
 
1
%
Australia
%
 
8
%
 
%
 
8
%
Germany
%
 
6
%
 
%
 
6
%


16


For the three and six months ended June 30, 2019 and 2018, the Company’s property revenues in excess of expenses by segment was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Property revenues in excess of expenses (1)
 
 
 
 
 
 
 
Domestic office investments
$
8,704

 
$
20,758

 
$
18,871

 
$
41,660

Domestic other investments
11,229

 
16,530

 
22,632

 
27,970

International office investments
5,935

 
10,118

 
11,533

 
21,350

International other investments
578

 
6,346

 
979

 
13,617

Property revenues in excess of expenses
$
26,446

 
$
53,752

 
$
54,015

 
$
104,597


(1)
Revenues less property operating expenses, real property taxes and property management fees.

As of June 30, 2019 and December 31, 2018, the Company’s total assets by segment was as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Total Assets
 
 
 
Domestic office investments
$
656,261

 
$
913,982

Domestic other investments
700,968

 
715,919

International office investments
663,196

 
640,319

International other investments
34,636

 
33,905

Corporate-level accounts
13,967

 
195,586

Total Assets
$
2,069,028

 
$
2,499,711


As of June 30, 2019 and December 31, 2018, the Company’s total assets were attributable to the following countries:
 
June 30, 2019
 
December 31, 2018
Total Assets
 
 
 
United States
67
%
 
73
%
United Kingdom
18
%
 
14
%
Poland
6
%
 
5
%
France
6
%
 
5
%
Russia
3
%
 
2
%
Australia
%
 
1
%


17


For the three and six months ended June 30, 2019 and 2018, the reconciliation of the Company’s total property revenues in excess of expenses to the Company’s net income (loss) is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Reconciliation to property revenues in excess of expenses
 
 
 
 
 
 
 
Net income (loss)
$
(10,484
)
 
$
45,436

 
$
180,926

 
$
35,254

Depreciation and amortization
12,863

 
29,426

 
26,307

 
63,423

Asset management fees
6,571

 
8,782

 
13,351

 
17,641

General and administrative expenses
1,833

 
3,073

 
4,427

 
5,975

Impairment Losses
7,185

 
5,105

 
7,185

 
5,105

(Gain) loss on derivatives

 
(467
)
 
126

 
(818
)
(Gain) loss on sale of real estate investments
1,412

 
(58,655
)
 
(190,777
)
 
(58,674
)
Foreign currency (gains) losses
(618
)
 
7,141

 
(1,017
)
 
8,361

Interest expense
7,860

 
15,218

 
15,207

 
30,217

Other (income) expenses
(95
)
 
(146
)
 
(1,365
)
 
(409
)
(Benefit) provision for income taxes
(81
)
 
(1,161
)
 
(355
)
 
(1,478
)
Total property revenues in excess of expenses
$
26,446

 
$
53,752

 
$
54,015

 
$
104,597


9. SUPPLEMENTAL CASH FLOW DISCLOSURES

Supplemental cash flow disclosures for the six months ended June 30, 2019 and 2018 (in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid for interest
$
12,964

 
$
28,585

Cash paid for taxes
$
1,357

 
$
18,939

Supplemental Schedule of Non-Cash Activities
 
 
 
Distributions declared and unpaid
$

 
$
14,759

Distributions reinvested
$

 
$
44,591

Shares tendered for redemption
$
591

 
$
9,790

Assumption of mortgage upon disposition of property
$

 
$
64,875

Accrued capital additions
$
8,920

 
$
7,512



18


10. COMMITMENTS AND CONTINGENCIES

In May 2018, Puget Sound Energy renewed its lease for its space in The Summit located in Bellevue, Washington. In connection with this lease, the Company committed to fund $9.7 million of tenant inducements, to be paid in future periods. As of June 30, 2019, $1.9 million of the Company’s commitment remained unfunded and is recorded in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheet.

In September 2018, WeWork signed a lease for space in The Summit located in Bellevue, Washington. In connection with this lease, the Company committed to fund $14.0 million of tenant inducements, to be paid in future periods. As of June 30, 2019, $4.3 million of the Company’s commitment remained unfunded and is recorded in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheet.

In December 2018, Amazon signed a lease for space in the new building that is being constructed at The Summit property, which is located in Bellevue, Washington. In connection with this lease, the Company committed to fund $40.7 million of tenant inducements, to be paid in future periods. As of June 30, 2019, $40.7 million of the Company’s commitment remained unfunded and is recorded in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheet. See “Note 3 — Investment Property” for more information on the building construction project.

The Company may be subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on the Company’s condensed consolidated financial statements.

*****


19


Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report on Form 10-Q.  The following discussion should also be read in conjunction with our audited consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements include statements concerning future financial performance and distributions, future debt and financing levels, investment objectives, payments to Hines Global REIT Advisors Limited Partnership (the “Advisor”), and its affiliates and other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto as well as all other statements that are not historical statements. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

The forward-looking statements included in this Quarterly Report on Form 10-Q are based on our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, the availability of future financing and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying forward-looking statements could prove to be inaccurate. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, pay additional liquidating distributions to our shareholders and maintain the value of any real estate investments and real estate-related investments in which we may hold an interest, may be significantly hindered.


20


The following are some of the risks and uncertainties, which could cause actual results to differ materially from those presented in certain forward-looking statements:
 
 
Whether we will be able to complete the sale of all or substantially all of our assets as expected;
 
 
Unanticipated difficulties, expenditures or delays relating to our implementation of our Plan of Liquidation and Dissolution (the “Plan of Liquidation”), which may reduce or delay our payment of additional liquidating distributions to our stockholders;
 
 
Risks associated with the potential response of tenants, business partners and competitors to our adoption and implementation of the Plan of Liquidation;
 
 
Risks associated with legal proceedings that may be instituted against us and others related to the Plan of Liquidation;
 
 
Competition for tenants, including competition with affiliates of Hines Interests Limited Partnership (“Hines”);
 
 
Our reliance on our Advisor, Hines and affiliates of Hines for our day-to-day operations and the management of our real estate investments, and our Advisor’s ability to attract and retain high-quality personnel who can provide service at a level acceptable to us;
 
 
Risks associated with conflicts of interests that result from our relationship with our Advisor and Hines, as well as conflicts of interests certain of our officers and directors face relating to the positions they hold with other entities;
 
 
The potential need to fund tenant improvements, lease-up costs or other capital expenditures, as well as increases in property operating expenses and costs of compliance with environmental matters or discovery of previously undetected environmentally hazardous or other undetected adverse conditions at our properties;
 
 
The amount and timing of additional liquidating distributions we may pay is uncertain and cannot be assured;
 
 
Risks associated with debt and our ability to secure financing;
 
 
Risks associated with adverse changes in general economic or local market conditions, including terrorist attacks and other acts of violence, which may affect the markets in which we and our tenants operate;
 
 
Catastrophic events, such as hurricanes, earthquakes, tornadoes and terrorist attacks; and our ability to secure adequate insurance at reasonable and appropriate rates;
 
 
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to fund our operating expenses and other capital expenditures;
 
 
Changes in governmental, tax, real estate and zoning laws and regulations and the related costs of compliance and increases in our administrative operating expenses, including expenses associated with operating as a public company;
 
 
International investment risks, including the burden of complying with a wide variety of foreign laws and the uncertainty of such laws, the tax treatment of transaction structures, political and economic instability, foreign currency fluctuations, and inflation and governmental measures to curb inflation may adversely affect our operations and our ability to make distributions;
 
 
The lack of liquidity associated with our assets;
 
 
Our ability to continue to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes;
 
 
Risks related to the United Kingdom's pending exit from the European Union (“Brexit”), including, but not limited to the decline of revenue derived from, and the market value of, our properties located in the United Kingdom and continental Europe; and
 
 

Our ability to refinance or sell our properties located in the United Kingdom and continental Europe may be impacted by the economic and political uncertainty following the approval of “Brexit” by a majority of votes in the United Kingdom in June 2016 and the subsequent notice of departure sent by the United Kingdom to the European Union in March 2017, commencing the two-year period of negotiations to determine the terms of the United Kingdom’s relationship with the European Union after the exit, including, among other things, the terms of trade between the United Kingdom and the European Union. Without further agreement, the United Kingdom will formally leave the European Union on May 22, 2019.

These risks are more fully discussed in, and all forward-looking statements should be read in light of, all of the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.


21


You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report on Form 10-Q may increase with the passage of time. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. Each forward-looking statement speaks only as of the date of the particular statement, and we do not undertake to update any forward-looking statement.

Executive Summary

Hines Global REIT, Inc. (“Hines Global” and, together with its consolidated subsidiaries, “we”, “us” or the “Company”) was incorporated under the Maryland General Corporation Law on December 10, 2008, primarily for the purpose of investing in a diversified portfolio of quality commercial real estate properties and other real estate investments located throughout the United States and internationally. Hines Global raised the equity capital for its real estate investments through two public offerings from August 2009 through April 2014, and through its distribution reinvestment plan (the “DRP Offering”) from April through August 2018. Collectively, through its public offerings, Hines Global raised gross offering proceeds of approximately $3.1 billion, including the DRP Offering, all of which was invested in the Company’s real estate portfolio.

We invested the proceeds from our public offerings into a diverse portfolio of real estate investments. In recent years, we have concentrated our efforts on actively managing our assets and exploring a variety of strategic opportunities focused on enhancing the composition of our portfolio and its total return potential for its stockholders.  On April 23, 2018, in connection with its review of potential strategic alternatives available to the Company, our board of directors determined that it is in the best interest of the Company and its stockholders to sell all or substantially all of our properties and assets and for the Company to liquidate and dissolve pursuant to the Plan of Liquidation. The principal purpose of the liquidation is to provide liquidity to our stockholders by selling the Company’s assets, paying its debts and distributing the net proceeds from liquidation to our stockholders. As required by Maryland law and our charter, the Plan of Liquidation was approved by the affirmative vote of the holders of at least a majority of the shares of our common stock outstanding and entitled to vote thereon at the Company’s annual meeting of stockholders held on July 17, 2018.

In April 2018, our board of directors estimated that, in addition to regular operating distributions paid to our stockholders, if we are able to successfully implement the Plan of Liquidation, then after the sale of all or substantially all of our assets and the payment of all of our outstanding liabilities, we will have made total Return of Capital Distributions to our stockholders of approximately $10.00 to $11.00 per share of the our common stock, consisting of three components: (i) the $1.05 per share Special Distribution paid to stockholders in January 2018 (the “Special Distribution”); (ii) the $0.12 per share of return of invested capital distributions paid to stockholders for the six months ended June 30, 2018 (the “Return of Invested Capital Distributions”); and (iii) the range of liquidating distributions to be made pursuant to the Plan of Liquidation of $8.83 to $9.83 per share, estimated by our board of directors in April 2018, and we have made liquidating distributions of approximately $2.83 per share to date.

From January 2018 through February 2019, we paid Return of Capital Distributions totaling approximately $4.00 per share, consisting of the $1.05 per share Special Distribution, the $0.12 per share Return of Invested Capital Distributions, $0.33 per share monthly liquidating distributions paid between August 2018 and January 2019, and the $2.50 per share liquidating distribution paid in February 2019. We expect to make the final liquidating distribution on or before a date that is within 24 months after stockholder approval of the Plan of Liquidation. However, there can be no assurances regarding the timing or amounts of any further liquidating distributions or that we will make the final distribution on or before July 17, 2020. In addition, even if we sell all of our assets by July 17, 2020, we may determine not to distribute all distributable cash by that date and may establish a reserve to provide for any remaining obligations and to cover our expenses as we complete our wind down and dissolution.

At the peak of our acquisition phase, we owned interests in 45 properties. We sold interests in six properties for an aggregate sales price of $1.0 billion during 2017, 20 properties for an aggregate sales price of $1.7 billion during 2018 and two additional properties in the first quarter of 2019 for an aggregate sales price of $477.8 million. As of June 30, 2019, we owned 12 properties in our portfolio that include the following investments:

Domestic office investments (3 investments)
Domestic other investments (4 investments)
International office investments (4 investments)
International other investments (1 investments)


22


Our portfolio is comprised of approximately 68% domestic and 32% international investments and our current investment types encompass approximately 60% office, 39% retail, and 1% industrial based on the estimated values of our investments as of June 30, 2019, which were based on the appraised values of our real estate investments as of December 31, 2018.

The following table provides additional information regarding each of the properties in which we owned an interest as of June 30, 2019.

Property
 
Location
 
Investment Type
 
Date Acquired/ Net Purchase Price (in millions) (1)
 
Estimated Going-in Capitalization Rate (2)
 
Leasable Square Feet
 
Percent Leased
Domestic Office Investments
 
 
 
 
 
 
 
 
 
 
 
Campus at Marlborough
 
Marlborough, Massachusetts
 
Office
 
10/2011; $103.0
 
8.0%
 
531,916

 
71
%
 
Riverside Center
 
Boston, Massachusetts
 
Office
 
3/2013; $197.1
 
5.7%
 
509,702

 
99
%
 
The Summit (3)
 
Bellevue, Washington
 
Office
 
3/2015; $316.5
 
5.6%
 
539,576

 
98
%
 
Total for Domestic Office Investments
 
 
 
 
 
 
 
1,581,194

 
89
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic Other Investments
 
 
 
 
 
 
 
 

 
 

 
Minneapolis Retail Center
 
Minneapolis, Minnesota
 
Retail
 
8/2012 & 12/2012; $130.6
 
6.5%
 
398,585

 
95
%
 
The Markets at Town Center

Jacksonville, Florida

Retail

7/2013; $135.0

5.9%