Investment in Real Estate

Acquisitions

The Company’s acquisitions are accounted for using the acquisition method. The results of operations for each of these acquisitions are included in the Company’s Consolidated Statements of Operations from the date of acquisition.

When we acquire properties that are considered business combinations, assets acquired and liabilities assumed are fair valued. Assets acquired and liabilities assumed include, but are not limited to, land, building and improvements, intangible assets related to above-and below-market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. The initial assignment 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 assignment are made within the measurement period, which typically does not exceed one year, within the Consolidated Balance Sheet.

We assess fair value based on level 2 and level 3 inputs within the fair value hierarchy, which includes estimated cash flow projections that utilize appropriate 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.

The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant. The fair value of acquired “above- and below-” market leases are based on the estimated cash flow projections utilizing discount rates that reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the extended term for any leases with below-market renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, we include estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related costs. Acquisition-related expenses associated with business combinations are expensed in the period incurred.

On July 1, 2016, the Company completed the acquisition of a 500,475-square-foot Class A tower located at 11601 Wilshire Boulevard in West Los Angeles, California for cash consideration of $311.0 million (before credits, prorations, and closing costs). Owned by an affiliate of Blackstone, the building has served as the Company’s corporate office since its IPO. The acquisition of this property provides the Company with an opportunity to create value through enhanced operations, the lease-up of vacant space, and re-leasing of space at market rents above those currently in-place.

Included in the Company’s consolidated financial statements for the three months ended September 30, 2016 were revenues and net loss from the 11601 Wilshire Boulevard property totaling $5.4 million and $1.8 million, respectively. The amounts were the same for the nine months ended September 30, 2016.

The Company is in the process of evaluating the terms of certain contracts associated with the property which affect the identification and valuation of assets acquired and liabilities assumed. The following table represents our aggregate preliminary purchase price accounting:



	11601 Wilshire Boulevard
Investment in real estate, net	$	300,430
Above-market leases⁽¹⁾	167
Deferred leasing costs and in-place intangibles⁽²⁾	13,884
Below-market leases⁽³⁾	(6,562		)
Net asset and liabilities assumed	$	307,919

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(1)	Represents weighted-average amortization period of 6.2 years.


(2)	Represents weighted-average amortization period of 5.6 years.


(3)	Represents weighted-average amortization period of 7.3 years.

The table below shows the pro forma financial information for the nine months ended September 30, 2016 and 2015 as if the 11601 Wilshire Boulevard property had been acquired as of January 1, 2015:



	Nine months ended September 30,
	2016		2015
Total revenues	$	483,193	$	382,327
Net income (loss)	11,608		(18,767		)

During 2015, the Company acquired 26 office properties totaling approximately 8.2 million square feet and two development parcels throughout Northern California. In addition, the Company also acquired 4th and Traction and 405 Mateo, both located in Los Angeles, California.

Dispositions

The following table summarizes the properties sold during the nine months ended September 30, 2016 and September 30, 2015. These properties were non-strategic assets to the Company’s portfolio:



Property	Date of Disposition	Number of Buildings	Square Feet	Sales Price⁽¹⁾ (in millions)
Bayhill Office Center	January 14, 2016	4	554,328	$	215.0
Patrick Henry Drive	April 7, 2016	1	70,520	19.0
One Bay Plaza	June 1, 2016	1	195,739	53.4
Total dispositions for the nine months ended September 30, 2016		6	820,587	$	287.4
First Financial	March 6, 2015	1	223,679	$	89.0
Bay Park Plaza	September 29, 2015	1	260,183	90.0
Total dispositions for the nine months ended September 30, 2015⁽²⁾		2	483,862	$	179.0

_________________


(1)	Represents gross sales price before certain credits, prorations and closing costs.


(2)	Excludes the disposition of 45% interest in 1455 Market Street office property on January 7, 2015.

The dispositions of these properties resulted in a gain of $8.5 million for the nine months ended September 30, 2016, and a gain of $8.4 million and $30.5 million for the three and nine months ended September 30, 2015, respectively. There were no disposition during the three months ended September 30, 2016.

The Company has not presented the operating results in net income (loss) from discontinued operations for these dispositions because they do not represent a strategic shift in the Company’s business. In addition, the Company reclassified the assets and liabilities related to these dispositions to assets and liabilities associated with real estate held for sale as of December 31, 2015.

Held for Sale

On April 25, 2016, the Company entered into an agreement to sell its 12655 Jefferson property for $80.0 million (before certain credits, prorations and closing costs). The Company determined that 12655 Jefferson met the criteria to be classified as held for sale and reclassified the balances related to such property within the Consolidated Balance Sheet as of September 30, 2016 and December 31, 2015.

The following table summarizes the components of assets and liabilities associated with real estate held for sale as of September 30, 2016 and December 31, 2015:



	September 30, 2016		December 31, 2015
ASSETS
Investment in real estate, net	$	58,915	$	313,344
Straight-line rent receivables, net	292		2,016
Deferred leasing costs and lease intangible assets, net	2,774		14,415
Other	342		525
Assets associated with real estate held for sale	$	62,323	$	330,300

LIABILITIES
Accounts payable and accrued liabilities	$	3,634	$	3,831
Other	10,908		12,960
Liabilities associated with real estate held for sale	$	14,542	$	16,791

Cost Capitalization

The Company recognized the following capitalized costs during the periods presented:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Capitalized personnel costs	$	2,351	$	2,227	$	6,989	$	5,063
Capitalized interest	2,960		1,279		8,414		4,561

Impairment of Long-Lived Assets

No impairment indicators have been noted and the Company recorded no impairment charges for the three and nine months ended September 30, 2016 and 2015.