Market Overview

TIER REIT Announces Second Quarter 2018 Financial Results

Share:

Net Loss for Second Quarter 2018 of $0.17 per Diluted Common Share

FFO, Excluding Certain Items, for Second Quarter 2018 of $0.40 per
Diluted Common Share

11.2% Same Store Cash NOI Growth for Second Quarter 2018

Increases 2018 Outlook

Domain 12 - In Leases For Entirety of Building

Domain 10 - Expect to Commence Development Fourth Quarter 2018

TIER REIT, Inc. (NYSE:TIER), a Dallas-based real estate investment
trust that specializes in owning and operating best-in-class office
properties in select U.S. markets, today announced financial and
operating results for the quarter ended June 30, 2018.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20180807005891/en/

Rendering of Domain 10, Domain 9, and Domain 12 (from left to right) at The Domain in Austin, Texas  ...

Rendering of Domain 10, Domain 9, and Domain 12 (from left to right) at The Domain in Austin, Texas (Photo: Business Wire)

Second Quarter 2018 and Recent Highlights

  • Recognized net loss of $0.17 per diluted common share
  • Reported Funds from Operations (FFO) attributable to common
    stockholders of $0.39 per diluted common share
  • Reported FFO, Excluding Certain Items, attributable to common
    stockholders of $0.40 per diluted common share
  • Recognized Same Store Cash NOI Growth of 11.2% over second quarter 2017
  • Raised $66.96 million of gross equity proceeds from the sale of
    approximately 2.84 million shares of common stock through our
    at-the-market equity offering program (the "ATM Program")

"We are pleased to announce our strong second quarter results, which
were ahead of our expectations," stated Scott W. Fordham, Chief
Executive Officer of TIER REIT. "Tenant demand continues to grow,
especially in Austin and at The Domain, where TIER controls over 75% of
the competitive office space and substantially all of the available land
for office development in the heart of The Domain's premier amenities."

Mr. Fordham continued, "We are now in leases for the entirety of our
recently commenced Domain 12 development, which is a 320,000 square foot
office tower expected to deliver fourth quarter 2019. Further, we have
active letters of intent from prospective tenants totaling over 350,000
square feet for Domain 10, a fully designed and permitted 300,000 square
foot office project. As a result, we expect to commence development of
Domain 10 in the fourth quarter."

"We've raised approximately $67 million of gross proceeds through our
ATM Program to bolster our balance sheet," added Mr. Fordham, "and
together with our planned dispositions, we are well positioned to
capitalize on our robust development pipeline."

Second Quarter Financial Results

For the second quarter of 2018, net loss attributable to common
stockholders was $8.3 million, or $0.17 per diluted common share, as
compared to net income of $4.0 million, or $0.08 per diluted common
share, for the second quarter of 2017.

For the second quarter of 2018, Nareit-defined FFO attributable to
common stockholders was $18.8 million, or $0.39 per diluted common
share, as compared to $18.7 million, or $0.39 per diluted common share,
for the second quarter of 2017.

For the second quarter of 2018, FFO attributable to common stockholders,
excluding certain items, was $19.5 million, or $0.40 per diluted common
share, as compared to $19.8 million, or $0.41 per diluted common share,
for the second quarter of 2017.

Property Results

Our occupancy at June 30, 2018, was 89.4%, reflecting no change from
March 31, 2018.

During the second quarter of 2018, we leased 94,000 square feet, which
included 48,000 square feet of renewals, 23,000 square feet of
expansions, and 23,000 square feet of new leasing.

During the second quarter of 2018, we provided rent abatements of $0.8
million to tenants at One & Two Eldridge Place and Three Eldridge Place,
partially offset by $0.4 million in business interruption insurance
proceeds recorded in the second quarter, related to Hurricane Harvey. We
anticipate we will receive remaining business interruption insurance
proceeds in subsequent quarters.

Real Estate Activity

Development of Domain 12 commenced in May 2018. Domain 12 will contain
320,000 rentable square feet and is located in Austin, Texas, adjacent
to our Domain 11 development property. We announced today that we are in
leases for the entirety of the building.

Additionally, we announced today that we expect to commence development
of Domain 10, a 300,000 square foot office building in Austin, Texas, in
the fourth quarter.

Capital Markets Activity

Since April 1, 2018, we have sold 2,841,551 shares of common stock for
total gross proceeds under the ATM Program of $66.96 million, or $65.73
million net of commissions and issuance costs. Of that amount, 901,300
shares were issued during the last week of the second quarter, while the
remainder was issued subsequent to the second quarter. Proceeds from the
ATM Program are being utilized as additional funding for our Austin
development activities and repayment of the revolving balance of our
credit facility.

On May 4, 2018, our board of directors authorized a distribution of
$0.18 per share of common stock for the second quarter of 2018, which
was paid on June 29, 2018.

On August 3, 2018, our board of directors authorized a distribution of
$0.18 per share of common stock for the third quarter of 2018, which
will be paid on September 28, 2018.

2018 Outlook

We have updated our 2018 outlook and assumptions, as follows:

 
2018 Outlook
        Prior   Updated
Projected net loss per basic & diluted common share       ($0.29) - ($0.24)   ($0.28) - ($0.24)
Adjustments:
Real estate depreciation and amortization $2.02 $2.03
Gain on remeasurement of investment in unconsolidated entities ($0.23) ($0.22)
Gain on sale of depreciable real estate       ($0.25)   ($0.24)
Projected FFO per diluted common share $1.25 - $1.30 $1.29 - $1.33
Adjustments:
Reversal of Fifth Third Center default interest $0.05 $0.05
Loss on early extinguishment of debt1       $0.19   $0.18
Projected FFO, excluding certain items, per diluted common share $1.49 - $1.54 $1.52 - $1.56
 
Assumptions used in 2018 outlook above:
Dispositions $145mm - $270mm $145mm - $270mm
Strategic acquisitions $164mm $164mm
Same store cash NOI growth 7.5% - 8.5% 7.5% - 8.5%
Same store NOI growth 1.0% - 2.0% 1.5% - 2.5%
Straight line rent and lease incentive revenue $5.0mm - $6.0mm $5.0mm - $6.0mm
Above- and below-market rent amortization $5.5mm - $6.5mm $5.5mm - $6.5mm
General & administrative expenses, excluding certain items $21.0mm - $22.0mm $21.0mm - $22.0mm
Year-end occupancy 89.5% - 91.5% 89.5% - 91.5%
Weighted average common shares outstanding - diluted       48.5mm   49.8mm
 

1 Represents the loss from write-off of deferred
financing costs upon recast of our credit facility on January 18, 2018

Supplemental Information

A copy of our supplemental information regarding our financial results
and operations for the quarter ended June 30, 2018, is available on our
Investor Relations website at www.tierreit.com/ir,
or by contacting our Investor Relations department by email at ir@tierreit.com.

Conference Call

A conference call will be held on Wednesday, August 8, 2018, at 11:00
a.m. Eastern time/10:00 a.m. Central time to discuss matters pertaining
to this release. Callers in the U.S. or Canada may join the conference
call by dialing 877.407.0789.

A live, listen-only webcast and subsequent replay will also be available
on our Investor Relations website at www.tierreit.com/ir.

About TIER REIT, Inc.

TIER REIT, Inc. is a publicly traded (NYSE:TIER), self-managed,
Dallas-based real estate investment trust focused on owning quality,
well-managed commercial office properties in dynamic markets throughout
the U.S. Our vision is to be the premier owner and operator of
best-in-class office properties in TIER1 submarkets, which are primarily
higher density and amenity-rich locations within select, high-growth
metropolitan areas that offer a walkable experience to various
amenities. Our mission is to provide unparalleled, TIER ONE Property
Services to our tenants and outsized total return through stock price
appreciation and dividend growth to our stockholders.

For additional information regarding TIER REIT, please visit www.tierreit.com
or call 972.483.2400.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of the federal securities laws relating to the business and
financial outlook of TIER REIT that are based on our current
expectations, estimates, forecasts and projections and are not
guarantees of future performance. These forward-looking statements
include discussion and analysis of the financial condition of us and our
subsidiaries, including our ability to rent space on favorable terms,
our ability to address debt maturities and fund our capital
requirements, our intentions to acquire, develop, and sell certain
properties, the value of our assets, our anticipated capital
expenditures, the amount and timing of any anticipated future cash
distributions to our stockholders, and other matters. Words such as
"may," "will," "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates," "outlook," "would," "could," "should,"
"objectives," "strategies," "opportunities," "goals," "position,"
"future," "vision," "mission," "strive," "project" and variations of
these words and similar expressions are intended to identify
forward-looking statements.

Actual results may differ materially from those expressed in these
forward-looking statements, and you should not place undue reliance on
any such statements. Factors that could cause actual results to vary
materially from those expressed in forward-looking statements include
changes in real estate conditions and in the capital markets, as well as
the risk factors included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2017, and in our other filings with the
Securities and Exchange Commission. Forward-looking statements in this
press release speak only as of the date on which such statements were
made and, except as required by law, we undertake no obligation to
update any such statements that may become untrue because of subsequent
events.

TIER REIT, Inc.
Consolidated Balance Sheets
(in
thousands, except share and per share amounts)

       

June 30,
2018

December 31,
2017

Assets
Real estate
Land $ 156,517 $ 139,951
Land held for development 45,059 45,059
Buildings and improvements, net 1,160,273 1,061,418
Real estate under development   72,965     29,525  
Total real estate 1,434,814 1,275,953
Cash and cash equivalents 8,359 13,800
Restricted cash 14,086 8,510
Accounts receivable, net 80,755 81,129
Prepaid expenses and other assets 17,124 28,112
Investments in unconsolidated entities 31,714 31,852
Deferred financing fees, net 3,211 1,387
Lease intangibles, net 106,058 87,047
Assets associated with real estate held for sale       53,348  
Total assets $ 1,696,121   $ 1,581,138  
Liabilities and equity
Liabilities
Notes payable, net $ 886,260 $ 794,538
Accounts payable and accrued liabilities 82,816 81,166
Acquired below-market leases, net 25,910 17,942
Other liabilities 6,545 7,567
Obligations associated with real estate held for sale       2,354  
Total liabilities   1,001,531     903,567  
Commitments and contingencies
Equity
Preferred stock, $.0001 par value per share; 17,500,000 shares
authorized at June 30, 2018, and December 31, 2017, respectively,
none outstanding
Convertible stock, $.0001 par value per share; 1,000 shares
authorized, none outstanding
Common stock, $.0001 par value per share; 382,499,000 shares
authorized, 48,574,724 and 47,623,324 shares issued and outstanding
at June 30, 2018, and December 31, 2017, respectively
5 5
Additional paid-in capital 2,632,635 2,609,540
Cumulative distributions and net loss attributable to common
stockholders
(1,953,466 ) (1,936,960 )
Accumulated other comprehensive income   12,462     4,218  
Stockholders' equity   691,636     676,803  
Noncontrolling interests   2,954     768  
Total equity   694,590     677,571  
Total liabilities and equity $ 1,696,121   $ 1,581,138  
 
 

TIER REIT, Inc.
Consolidated Statements of
Operations and Comprehensive Income (Loss)

(in thousands,
except share and per share amounts)

     
Three Months Ended

June 30,
2018

 

June 30,
2017

Rental revenue $ 53,990   $ 54,552  
Expenses
Property operating expenses 12,395 13,930
Interest expense 8,369 8,235
Real estate taxes 9,074 8,753
Property management fees 97 72
General and administrative 5,377 5,626
Depreciation and amortization   27,134     22,652  
Total expenses   62,446     59,268  
Interest and other income   550     783  
Loss before income taxes, equity in operations of investments,
and gains (losses)
(7,906 ) (3,933 )
Benefit (provision) for income taxes (214 ) 149
Equity in operations of investments       6,556  
Income (loss) before gains (losses)   (8,120 )   2,772  
Gain (loss) on sale of assets (90 ) 1,262
Loss on remeasurement of investment in unconsolidated entities   (152 )    
Net income (loss) (8,362 ) 4,034
Noncontrolling interests   85     (3 )
Net income (loss) attributable to common stockholders $ (8,277 ) $ 4,031  
Weighted average common shares outstanding - basic 47,684,152 47,536,320
Weighted average common shares outstanding - diluted 47,684,152 47,875,418
 
Basic income (loss) per common share $ (0.17 ) $ 0.08
Diluted income (loss) per common share $ (0.17 ) $ 0.08
 
Distributions declared per common share $ 0.18 $ 0.18
 
Comprehensive income (loss):
Net income (loss) $ (8,362 ) $ 4,034
Other comprehensive income (loss): unrealized income (loss) on
interest rate derivatives
  1,984     (1,301 )
Comprehensive income (loss) (6,378 ) 2,733
Comprehensive (income) loss attributable to noncontrolling interests   84     (2 )
Comprehensive income (loss) attributable to common stockholders $ (6,294 ) $ 2,731  
 
 

Calculations of FFO and FFO, excluding certain items
(in
thousands, except per share amounts)

     
Three Months Ended

June 30,
2018

 

June 30,
2017

Net income (loss) $ (8,362 ) $ 4,034
Noncontrolling interests   85     (3 )
Net income (loss) attributable to common stockholders (8,277 ) 4,031

Adjustments:

Real estate depreciation and amortization from consolidated
properties
27,011 22,557
Real estate depreciation and amortization from unconsolidated
properties
131
Real estate depreciation and amortization - noncontrolling interests (782 )
Loss (gain) on sale of depreciable real estate 90 (7,975 )
Loss on remeasurement of investment in unconsolidated entities 152
Noncontrolling interests   610     (9 )
FFO attributable to common stockholders 18,804 18,735
 
 

Adjustments:

Severance charges 108 451
Interest rate hedge ineffectiveness expense (income) (1) (29 )
Default interest (2)   609     609  
FFO attributable to common stockholders, excluding certain items $ 19,521   $ 19,766  
Weighted average common shares outstanding - basic 47,684 47,536
Weighted average common shares outstanding - diluted 48,534 47,875
Net income (loss) per common share - diluted $ (0.17 ) $ 0.08
FFO per common share - diluted $ 0.39 $ 0.39
FFO, excluding certain items, per common share - diluted $ 0.40 $ 0.41

______________________

During the three months ended June 30, 2018, we provided rent abatements
of approximately $0.8 million to tenants as a result of Hurricane
Harvey. These abatements were a reduction to "rental revenue" on our
condensed consolidated statements of operations and comprehensive income
(loss) for the three months ended June 30, 2018. These rent abatements
were offset by approximately $0.4 million of business interruption
insurance proceeds for the three months ended June 30, 2018. We
anticipate we will receive remaining business interruption insurance
proceeds in subsequent quarters.

(1)       Interest rate swaps are adjusted to fair value through other
comprehensive income (loss). However, because our interest rate
swaps do not have a LIBOR floor while the hedged debt is subject to
a LIBOR floor, the portion of the change in fair value of our
interest rate swaps attributable to this mismatch is reclassified to
interest rate hedge ineffectiveness expense. We adopted new
accounting guidance on January 1, 2018, that eliminates the
requirement to separately measure and report hedge ineffectiveness
expense.
 
(2) We have a non-recourse loan in default which subjects us to incur
default interest at a rate that is 500 basis points higher than the
stated interest rate. Although there can be no assurance, we
anticipate that when this property is sold or when ownership of this
property is conveyed to the lender, this default interest will be
forgiven.
 
 

Same Store NOI and Same Store Cash NOI
(in thousands,
except property count and percentages)

     
Three Months Ended

June 30,
2018

 

June 30,
2017

Same Store Revenue:
Rental revenue (1) $ 44,549 $ 43,813

Less: Lease termination fees

  (375 )   (30 )
  44,174     43,783  
 
Same Store Expenses:
Property operating expenses (less tenant improvement demolition
costs)
10,931 10,717
Real estate taxes 7,144 7,612
Property management fees   25     31  
Property Expenses   18,100     18,360  
Same Store NOI $ 26,074   $ 25,423  
 
Increase in Same Store NOI 2.6 %
 
Same Store NOI $ 26,074 $ 25,423
Less:
Straight-line rent revenue adjustment 42 (1,944 )
Above- and below-market rent amortization   (1,057 )   (950 )
Same Store Cash NOI $ 25,059   $ 22,529  
 
Increase in Same Store Cash NOI 11.2 %
 
Reconciliation of net income (loss) to Same Store NOI and Same Store
Cash NOI
Net income (loss) $ (8,362 ) $ 4,034

Adjustments:

Interest expense 8,369 8,235
Tenant improvement demolition costs 25 34
General and administrative 5,377 5,626
Depreciation and amortization 27,134 22,652
Interest and other income (550 ) (783 )
Provision (benefit) for income taxes 214 (149 )
Equity in operations of investments (6,556 )
Loss (gain) on sale of assets 90 (1,262 )
Loss on remeasurement of investment in unconsolidated entities 152
Net operating income of non-same store properties (6,000 ) (6,378 )
Lease termination fees   (375 )   (30 )
Same Store NOI 26,074 25,423
Straight-line rent revenue adjustment 42 (1,944 )
Above- and below-market rent amortization   (1,057 )   (950 )
Same Store Cash NOI $ 25,059   $ 22,529  
 
Operating properties 15
Rentable square feet (% owned) 5,807

______________

Excludes certain operating properties that were not owned or not fully
operational during the entirety of the comparable periods. Our Domain 2
and Domain 7 properties (two properties in which we acquired full
ownership in January 2017) are included above as consolidated and at
100% in both periods.

(1)  

During the three months ended June 30, 2018, we provided rent
abatements of approximately $0.8 million to tenants as a result of
Hurricane Harvey. These rent abatements were offset by
approximately $0.4 million of business interruption insurance
proceeds for the three months ended June 30, 2018. We anticipate
we will receive remaining business interruption insurance proceeds
in subsequent quarters.

 
 

Non-GAAP Financial Measures

We compute our financial results in accordance with accounting
principles generally accepted in the United States of America (GAAP).
Although Funds from Operations and Funds from Operations, excluding
certain items, are non-GAAP financial measures, we believe that these
calculations are helpful to stockholders and potential investors and are
widely recognized measures of real estate investment trust performance.
We have provided a reconciliation of the non-GAAP financial measures to
the most directly comparable GAAP measure in tables included in this
press release.

Funds from Operations (FFO)

Historical cost accounting for real estate assets in accordance with
GAAP implicitly assumes that the value of real estate diminishes
predictably over time. Since real estate values have historically risen
or fallen with market conditions, many industry investors and analysts
have considered the presentation of operating results for real estate
companies that use historical cost accounting alone to be insufficient
for evaluating operating performance. FFO is a non-GAAP financial
measure that is widely recognized as a measure of a REIT's operating
performance. We use FFO as defined by the National Association of Real
Estate Investment Trusts (Nareit) which is net income (loss), computed
in accordance with GAAP, excluding gains (or losses) from sales of
property and impairments of depreciable real estate (including
impairments of investments in unconsolidated entities which resulted
from measurable decreases in the fair value of the depreciable real
estate held by the unconsolidated entity), plus depreciation and
amortization of real estate assets, and after related adjustments for
unconsolidated entities and noncontrolling interests. The determination
of whether impairment charges have been incurred is based partly on
anticipated operating performance and hold periods. Estimated
undiscounted cash flows from a property, derived from estimated future
net rental and lease revenues, net proceeds on the sale of the property,
and certain other ancillary cash flows, are taken into account in
determining whether an impairment charge has been incurred. While
impairment charges for depreciable real estate are excluded from net
income (loss) in the calculation of FFO as described above, impairments
reflect a decline in the value of the applicable property that we may
not recover.

We believe that the use of FFO, together with the required GAAP
presentations, is helpful in understanding our operating performance
because it excludes real estate-related depreciation and amortization,
gains and losses from property dispositions, and impairments of
depreciable real estate assets, and as a result, when compared period to
period, reflects the impact on operations from trends in occupancy
rates, rental rates, operating costs, development activities, general
and administrative expenses, and interest costs, which are not
immediately apparent from net income. Factors that impact FFO include
fixed costs, yields on cash held in accounts, income from portfolio
properties and other portfolio assets, interest rates on debt financing,
and operating expenses.

We also evaluate FFO, excluding certain items. The items excluded relate
to certain non-operating activities or certain non-recurring activities
that may create significant FFO volatility and affect the comparability
of FFO across periods. We believe it is useful to evaluate FFO excluding
these items because it provides useful information in analyzing
comparability between reporting periods and in assessing the
sustainability of our operating performance.

FFO and FFO, excluding certain items, should not be considered as
alternatives to net income (loss), or as indicators of our liquidity,
nor are they indicative of funds available to fund our cash needs,
including our ability to make distributions. Additionally, the exclusion
of impairments limits the usefulness of FFO and FFO, excluding certain
items, as historical operating performance measures since an impairment
charge indicates that operating performance has been permanently
affected. FFO and FFO, excluding certain items, are non-GAAP
measurements and should be reviewed in connection with other GAAP
measurements. Our FFO and FFO, excluding certain items, as presented may
not be comparable to amounts calculated by other REITs that do not
define FFO in accordance with the current Nareit definition, or
interpret it differently, or that identify and exclude different items
related to non-operating activities or certain non-recurring activities.

Same Store NOI and Same Store Cash NOI

Same Store NOI is equal to rental revenue, less lease termination fee
income, property operating expenses (excluding tenant improvement
demolition costs), real estate taxes, and property management expenses
for our same store properties and is considered a non-GAAP financial
measure. Same Store Cash NOI is equal to Same Store NOI less non-cash
revenue items including straight-line rent adjustments and the
amortization of above- and below-market rent. The same store properties
include our operating office properties not held for sale and owned and
operated for the entirety of both periods being compared and include our
comparable ownership percentage in each period for properties in which
we own an unconsolidated interest that is accounted for using the equity
method. We view Same Store NOI and Same Store Cash NOI as important
measures of the operating performance of our properties because they
allow us to compare operating results of properties owned and operated
for the entirety of both periods being compared and therefore eliminate
variations caused by acquisitions or dispositions during such periods.

Same Store NOI and Same Store Cash NOI presented by us may not be
comparable to Same Store NOI or Same Store Cash NOI reported by other
REITs that do not define Same Store NOI or Same Store Cash NOI exactly
as we do. We believe that in order to facilitate a clear understanding
of our operating results, Same Store NOI and Same Store Cash NOI should
be examined in conjunction with net income (loss) as presented in our
consolidated financial statements and notes thereto. Same Store NOI and
Same Store Cash NOI should not be considered as an indicator of our
ability to make distributions, as alternatives to net income (loss) as
an indication of our performance, or as a measure of cash flows or
liquidity.

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