Investment in Real Estate

A summary of the activity of our investment in real estate including investment in real estate held for sale (Bayhill, First Financial and Tierrasanta) is as follows:



	Year Ended December 31, 2015			Year Ended December 31, 2014			Year Ended December 31, 2013
Investment in real estate
Beginning balance	$	2,239,741		$	2,035,330		$	1,475,955
Acquisitions	3,699,289			114,008			538,322
Improvements, capitalized costs	198,561			128,018			89,707
Disposal	(13,556		)	(23,977		)	(9,638		)
Cost of property sold	(147,509		)	(13,638		)	(59,016		)
Ending Balance	5,976,526			2,239,741			2,035,330
Reclassification to assets associated with real estate held for sale	(206,990		)	(68,446		)	(82,305		)
Total Investment in real estate	$	5,769,536		$	2,171,295		$	1,953,025

Accumulated depreciation
Beginning balance	$	(142,561	)	$	(116,342	)	$	(85,184	)
Depreciation expense	(151,066		)	(50,044		)	(41,454		)
Disposals	12,999			22,310			4,837
Cost of property sold	7,904			1,515			5,459
Ending Balance	(272,724		)	(142,561		)	(116,342		)
Reclassification to assets associated with real estate held for sale	3,650			7,904			7,931
Total Accumulated depreciation	$	(269,074	)	$	(134,657	)	$	(108,411	)

Acquisitions

When the Company acquires properties that are considered business combinations, the purchase price is allocate to various components of the acquisition based upon the fair value of each component. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which typically does not exceed one year. The Company assesses fair value based on level 2 and level 3 inputs within the fair value hierarchy, which includes estimated cash flow projections that utilize discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. Acquisition-related expenses are expensed in the period incurred. The results of operations of each acquisition have been included in the Company’s financial statements from the date of acquisition.

During 2015, the Company early adopted ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends ASC 805, Business Combinations.

On April 1, 2015, the Company completed the EOP Acquisition which consisted of 26 high-quality office assets totaling approximately 8.2 million square feet and two development parcels located throughout the San Francisco Peninsula, Redwood Shores, Palo Alto Silicon Valley and North San Jose submarkets. The total consideration paid before certain credits, proration, and closing costs was a cash payment equal to $1.75 billion (financed with proceeds received from the Company’s January 2015 common equity offering and $1.3 billion of new term debt), an aggregate of 63,474,791 shares of our common of the Company and common units in the Operating Partnership.

On May 22, 2015, the Company acquired a three-story, 120,937-square-foot former manufacturing facility known as 4th & Traction in Los Angeles, California for $49.3 million (before certain credits, prorations and closing costs). The Company funded this off-market transaction with proceeds from its unsecured revolving credit facility.

On August 17, 2015, the Company completed the acquisition of 405 Mateo, a three-building, 83,285-square-foot redevelopment project in Downtown Los Angeles’ Arts District for $40.0 million (before credits, prorations, and closing costs). The Company funded this transaction with proceeds from its unsecured revolving credit facility.

Included in the Company’s consolidated financial statements for the year ended December 31, 2015 were revenues and net loss from the EOP Acquisition totaling $254.9 million and $0.1 million, respectively. There was no revenue generated by 405 Mateo or 4th & Traction as they are redevelopment projects with no current revenue stream.

The Company is in the process of finalizing the purchase price allocation for the acquisitions made in 2015. The determination of the final values may result in adjustments to the values presented. The following table represents our aggregate preliminary purchase price allocation for each of these acquisitions:



	EOP Northern California Portfolio			4th & Traction		405 Mateo
Date of Acquisition	April 1, 2015			May 22, 2015		August 17, 2015		Total
Consideration paid
Cash consideration	$	1,715,346		$	49,250	$	40,000	$	1,804,596
Common stock	87			—		—		87
Additional paid-in capital	285,358			—		—		285,358
Non-controlling common units in the Operating Partnership	1,814,936			—		—		1,814,936
Total consideration	$	3,815,727		$	49,250	$	40,000	$	3,904,977
Allocation of consideration paid
Investment in real estate, net	$	3,610,039		$	49,250	40,000		$	3,699,289
Above-market leases⁽¹⁾	28,759			—		—		28,759
Below-market ground leases⁽²⁾	52,065			—		—		52,065
Deferred leasing costs and in-place intangibles⁽³⁾	225,431			—		—		225,431
Below-market leases⁽⁴⁾	(99,472		)	—		—		(99,472		)
Above-market ground leases⁽⁵⁾	(1,095		)	—		—		(1,095		)
Total consideration paid	$	3,815,727		$	49,250	$	40,000	$	3,904,977

________________


(1)	Represents weighted-average amortization period of 3.0 years.


(2)	Represents weighted-average amortization period of 27.7 years.


(3)	Represents weighted-average amortization period of 3.6 years.


(4)	Represents weighted-average amortization period of 4.3 years.


(5)	Represents weighted-average amortization period of 25.4 years.

During 2014, we acquired the following properties: Merrill Place, 3402 Pico Blvd. and 12655 Jefferson. The results of operations for each of these acquisitions are included in our consolidated statements of operations from the date of acquisition. The following table represents our final purchase price accounting for each of these acquisitions:



	Merrill Place			3402 Pico Blvd.		12655 Jefferson
Date of Acquisition	February 12, 2014			February 28, 2014		October 17, 2014		Total
Consideration paid
Cash consideration	$	57,034		$	18,546	$	38,000	$	113,580
Total consideration	$	57,034		$	18,546	$	38,000	$	113,580
Allocation of consideration paid
Investment in real estate, net	$	57,508		$	18,500	$	38,000	$	114,008
Above-market leases⁽¹⁾	173			—		—		173
Deferred leasing costs and lease intangibles⁽²⁾	3,163			—		—		3,163
Below-market leases⁽³⁾	(3,315		)	—		—		(3,315		)
Other (liabilities) asset assumed, net	(495		)	46		—		(449		)
Total consideration paid	$	57,034		$	18,546	$	38,000	$	113,580

________________


(1)	Represents weighted-average amortization period of 7.6 years.


(2)	Represents weighted-average amortization period of 4.8 years.


(3)	Represents weighted-average amortization period of 5.8 years.

The table below shows the pro forma financial information (unaudited) for the years ended December 31, 2015 and 2014 as if the EOP Northern California Properties had been acquired as of January 1, 2014.



	Year Ended December 31,
	2015			2014
Total revenues	$	599,441		$	572,277
Net loss	$	(6,252	)	$	26,293

Dispositions

On September 29, 2015, the Company sold its Bay Park Plaza office property in Burlingame, California for $90.0 million (before certain credits, prorations and closing costs). This property was part of the EOP Acquisition, therefore, no reclassification to held for sale for the prior period balances are necessary. The Company recognized a gain on sale of $8.4 million related to this disposition.

On March 6, 2015, the Company sold its First Financial office property for $89.0 million (before certain credits, prorations, and closing costs) and therefore, reclassified First Financial’s asset and liabilities to held for sale. The Company recognized a gain on sale of $22.1 million related to this disposition.

On July 16, 2014, the Company sold its Tierrasanta property for $19.5 million (before certain credits, prorations, and closing costs) and therefore, reclassified Tierrasanta’s assets and liabilities to held for sale. The Company recognized a gain on sale of $5.5 million.

On July 12, 2013, the Company sold its City Plaza property for approximately $56.0 million (before certain credits, prorations, and closing costs). The Company reclassified City Plaza’s results of operations for the years ended December 31, 2015, 2014 and 2013 to discontinued operations on its consolidated statements of operations. The Company recognized an impairment loss of $5.6 million for the year ended December 31, 2013.

Pursuant to the Company’s adoption of ASU No. 2014-08 in 2014, the Company has not presented the operating results in net income (loss) from discontinued operations for disposals listed above except for the City Plaza property. The following table sets forth the discontinued operations for the years ended December 31, 2015, 2014 and 2013 for the City Plaza:



	Year Ended December 31,
	2015		2014			2013
Total office revenues	$	—	$	—		$	4,321
Office operating expenses	—		(164		)	(1,961		)
Depreciation and amortization	—		—			(789		)
(Loss) income from discontinued operations	$	—	$	(164	)	$	1,571

Held for sale

On December 10, 2015, the Company entered into a purchase and sale agreement to sell its Bayhill property for $215.0 million (before certain credits, prorations, and closing costs), which is included in our office property segment.

As a result, the Company has reclassified its assets and liabilities to held for sale as of December 31, 2015. This property was part of the EOP Acquisition, therefore, no reclassification of prior period balances are necessary. The transaction closed on January 14, 2016 and has been included in Note 13, “Subsequent Events.”

The following table summarizes the components that comprise the assets and liabilities associated with real estate held for sale as of December 31, 2015 and 2014:



	Year Ended December 31,
	2015		2014
ASSETS
Investment in real estate, net	$	203,340	$	60,542
Restricted cash	—		2,839
Straight-line rent receivables	1,788		2,151
Deferred leasing costs and lease intangibles, net	10,867		2,457
Other	400		176
Assets associated with real estate held for sale	$	216,395	$	68,165

LIABILITIES AND EQUITY
Liabilities:
Notes payable	$	—	$	42,080
Accounts payable and accrued liabilities	2,188		322
Other	11,104		443
Liabilities associated with real estate held for sale	$	13,292	$	42,845