TIER REIT Announces Second Quarter 2018 Financial Results

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.

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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:

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)

TIER REIT, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)

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

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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.

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

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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.

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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