Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, adverse changes in general economic or local market conditions, including as a result of the COVID-19 pandemic and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the markets in which we own properties, including energy-influenced markets such as Dallas, Denver and Houston, changes in interest rates as a result of economic market conditions or a downgrade in our credit rating, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, changes in energy prices, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, delays in construction schedules, unanticipated increases in construction costs, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. See Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A. “Risk Factors” below. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.
Overview
FSP Corp., or we or the Company, operates in a single reportable segment: real estate operations. The real estate operations market involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development. Our current strategy is to invest in infill and central business district office properties in the United States sunbelt and mountain west regions, as well as select opportunistic markets. We believe that the United States sunbelt and mountain west regions have macro-economic drivers that have the potential to increase occupancies and rents. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.
As of June 30, 2020, approximately 7.8 million square feet, or approximately 78% of our total owned portfolio, was located in Atlanta, Dallas, Denver, Houston and Minneapolis. From time-to-time we may dispose of our smaller, suburban office assets and replace them with larger infill and central business district office assets. As we execute this strategy, short term operating results could be adversely impacted. However, we believe that the transformed portfolio has the potential to provide higher profit and asset value growth over a longer period of time.
The main factor that affects our real estate operations is the broad economic market conditions in the United States. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on broader economic/market conditions. We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.
Trends and Uncertainties
COVID-19 Outbreak
Beginning in January 2020, there was a global outbreak of COVID-19, which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. It has already disrupted global travel
19
Table of Contents
and supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain. Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, as well as the effectiveness of any responses taken on a national and local level by government authorities and businesses. The travel restrictions, limits on hours of operations and/or closures of various businesses and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally, including in the markets where we own properties, and we expect them to have an adverse impact on our business. Many of our tenants are subject to various quarantine restrictions, and the restrictions could be in place for an extended period of time. The pandemic has had an adverse impact on economic and market conditions and triggered a global economic slowdown. The reduction in economic activity worldwide has had a significant negative effect on energy prices, which, if sustained, could have an adverse impact on occupancy and rental rates in energy-influenced markets such as Dallas, Denver and Houston, where we have a significant concentration of properties. However, the evolving nature of the pandemic makes it difficult to ascertain the long-term impact it will have on commercial real estate markets and our business. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to the performance of our properties and our financial results, such as the potential negative impact to leasing efforts and occupancy at our properties, the potential closure of certain of our assets for an extended period, uncertainty regarding future rent collection levels or requests for rent concessions from our tenants, the occurrence of a default under any of our debt agreements, the potential for increased borrowing costs, a potential downgrade in our credit rating that could lead to increased borrowing costs or reduce our access to funding sources in credit and capital markets, our ability to refinance existing indebtedness or to secure new sources of capital on favorable terms, fluctuations in our level of dividends, increased costs of operations, our ability to complete required capital expenditures in a timely manner and on budget, decrease in values of our real estate assets, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We are unable to estimate the impact the COVID-19 pandemic will have on our future financial results at this time. See also Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A. “Risk Factors” below.
We have been following and directing our vendors to follow the guidelines from the Centers for Disease Control (CDC) and other applicable authorities to minimize the spread of COVID-19 among our employees, tenants, vendors and visitors, as well as at our properties. We have implemented working from home policies for our employees . During the three months ended June 30, 2020 and as of August 4, 2020, all of our properties remained open for business. Although some of our tenants have requested rent concessions, and more tenants may request rent concessions or may not pay rent in the future, as of July 31, 2020, we had collected approximately 97% of rental receipts due in July 2020. Future rent concession requests or nonpayment of rent could lead to increased customer delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions and, may in some instances, seek extended lease terms, or lower occupancy, and/or capital expenditures, or reduced rental rates to maintain occupancies. We review each rent concession request on a case by case basis and may or may not provide rent concessions, depending on the specific circumstances involved. Cash, cash equivalents and restricted cash were $2.9 million as of June 30, 2020. Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BAML Revolver ($570 million as of June 30, 2020) will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties.
Economic Conditions
The economy in the United States is currently in an economic downturn with recessionary concerns as a result of the COVID-19 pandemic. Economic conditions directly affect the demand for office space, our primary income producing asset. The broad economic market conditions in the United States are typically affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, the pace of economic growth and/or recessionary concerns, uncertainty about government fiscal, monetary, trade and tax policies, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit, and interest rates. As of the date of this report, the impact of the COVID-19 pandemic and related fallout from containment and mitigation measures, such as work from home arrangements and the closing of various businesses, is disproportionately affecting current economic conditions in the United States.
20
Table of Contents
Real Estate Operations
Leasing
As of June 30, 2020, our real estate portfolio was comprised of 32 operating properties, which we refer to as our operating properties, and 3 redevelopment properties, which we refer to as our redevelopment properties, that are in the process of being redeveloped, or are completed but not yet stabilized. We collectively refer to our operating and our redevelopment properties as our owned portfolio. Our 32 operating properties were approximately 84.5% leased as of June 30, 2020, a decrease from 87.6% leased as of December 31, 2019. The 3.1% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded leasing completed during the six months ended June 30, 2020. As of June 30, 2020, we had approximately 1,476,000 square feet of vacancy in our operating properties compared to approximately 1,175,000 square feet of vacancy at December 31, 2019. During the six months ended June 30, 2020, we leased approximately 324,000 square feet of office space, of which approximately 158,000 square feet were with existing tenants, at a weighted average term of 6.1 years. On average, tenant improvements for such leases were $22.91 per square foot, lease commissions were $7.85 per square foot and rent concessions were approximately four months of free rent. Average GAAP base rents under such leases were $31.28 per square foot, or 10.3% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2019.
As of June 30, 2020, our three redevelopment properties included an approximately 130,000 square foot redevelopment property known as 801 Marquette in Minneapolis, Minnesota, an approximately 213,000 square foot property known as Blue Lagoon in Miami, Florida and an approximately 62,000 square foot property known as Forest Park in Charlotte, North Carolina. Given the length of the redevelopment and lease-up process, these properties are not classified as an operating property until, in some cases, years after we commence the project.
The redevelopment at 801 Marquette was substantially completed at the end of the second quarter of 2017 and is in the process of being leased up; however, it is not stabilized. As of June 30, 2020, we had leases signed and tenants occupying approximately 37.0% of the rentable square feet of the property. We expect to incur redevelopment and lease-up costs of $29.6 million, of which we had incurred approximately $23.1 million as of June 30, 2020.
The redevelopment of Blue Lagoon commenced in December 2018 following the maturity of a lease with a major tenant that occupied 100% of the property. On September 13, 2019, we entered into a lease agreement with a new tenant with an initial term of 16 years for approximately 156,000 square feet, or 73.1% of the property’s rentable square feet. We expect to incur total restoration, redevelopment and lease-up costs of $39.6 million, which include work on the roof of the building, costs to make the space suitable for multiple tenants and to increase parking at the property. As of June 30, 2020, we had incurred approximately $13.3 million in total redevelopment costs. We anticipate completing the redevelopment by the end of 2020.
The redevelopment of Forest Park commenced in January 2019 following the maturity of a lease with a tenant that occupied 100% of the property through December 31, 2018. We expect to incur total redevelopment and lease-up costs of $5.7 million, which include interior work to make the space suitable for multiple tenants. As of June 30, 2020, we had incurred approximately $1.1 million in redevelopment costs. We completed the redevelopment during the three months ended June 30, 2020. We have a lease with one tenant for approximately 22,000 square feet or approximately 35.6% of the total rentable square feet, for an initial term of 11 years.
As of June 30, 2020, leases for approximately 1.8% and 9.0% of the square footage in our owned portfolio are scheduled to expire during 2020 and 2021, respectively. As the third quarter of 2020 begins, we believe that our operating properties are well stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants. While leasing activity at our properties has continued, we believe that the COVID-19 pandemic and related containment and mitigation measures may limit or delay new tenant leasing during at least the third quarter of 2020 and potentially in future periods.
While we cannot generally predict when an existing vacancy in our owned portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates. Also, we believe the potential for any of our tenants to default on its lease or to seek the protection of
21
Table of Contents
bankruptcy exists. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.
Critical Accounting Policies
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.
Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations.
Recent Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company’s Sponsored REIT Loan (as defined in Note 2 of our consolidated financial statements) receivables are within the scope of this standard. The Company’s receivables associated with its real estate operating leases are not within the scope of this standard and our analysis was completed using a Probability of Default / Loss Given Default Model. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The ASU is intended to improve the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for all entities for annual periods beginning after December 15, 2019. This ASU amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. ASU 2018-13 will be effective for the Company as of January 1, 2020, and earlier adoption is permitted. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topics 326, Financial Instruments - Credit Losses, Topic 815 Derivatives and Hedging and Topic 825, Financial Instruments (“ASU 2019-04”). The ASU clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825). The new guidance is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently assessing the potential impact that the adoption of ASU 2020-04 may have on its consolidated financial statements.
22
Table of Contents
Results of Operations
The following table shows financial results for the three months ended June 30, 2020 and 2019:
Three months ended June 30,
(in thousands)
2020
2019
Change
Revenues:
Rental
$
60,398
$
65,485
$
(5,087)
Related party revenue:
Management fees and interest income from loans
405
1,322
(917)
Other
5
6
(1)
Total revenues
60,808
66,813
(6,005)
Expenses:
Real estate operating expenses
15,470
17,116
(1,646)
Real estate taxes and insurance
12,307
12,801
(494)
Depreciation and amortization
22,245
22,109
136
General and administrative
3,817
3,702
115
Interest
8,980
9,371
(391)
Total expenses
62,819
65,099
(2,280)
Income (loss) before taxes
(2,011)
1,714
(3,725)
Tax expense on income
64
81
(17)
Net income (loss)
$
(2,075)
$
1,633
$
(3,708)
Comparison of the three months ended June 30, 2020 to the three months ended June 30, 2019:
Revenues
Total revenues decreased by $6.0 million to $60.8 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decrease was primarily a result of:
● A decrease in rental revenue of approximately $5.1 million arising primarily from the loss of rental income from leases that expired after June 30, 2019 during the three months ended June 30, 2020 compared to the same period in 2019. These decreases were partially offset by rental income earned from leases commencing after June 30, 2019. Our leased space in our operating properties was 84.5% at June 30, 2020 and 88.1% at June 30, 2019.
● A decrease of approximately $0.9 million in interest income from Sponsored REIT Loans primarily as a result of repayment of approximately $51 million of these loans in June 2019.
Expenses
Total expenses decreased by $2.3 million to $62.8 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decrease was primarily a result of:
● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.1 million.
● A decrease in interest expense of approximately $0.4 million. The decrease was primarily attributable to lower interest rates during the three months ended June 30, 2020 compared to the same period in 2019.
These increases were partially offset by:
● An increase to depreciation and amortization of approximately $0.1 million.
23
Table of Contents
● An increase in general and administrative expenses of $0.1 million, which was primarily from personnel costs.
Tax expense on income
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $17,000 during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
Net loss
Net loss for the three months ended June 30, 2020 was $2.1 million compared to a net income of $1.6 million for the three months ended June 30, 2019, for the reasons described above.
24
Table of Contents
The following table shows financial results for the six months ended June 30, 2020 and 2019:
Six months ended June 30,
(in thousands)
2020
2019
Change
Revenues:
Rental
$
122,965
$
128,844
$
(5,879)
Related party revenue:
Management fees and interest income from loans
808
2,674
(1,866)
Other
18
11
7
Total revenues
123,791
131,529
(7,738)
Expenses:
Real estate operating expenses
32,768
34,842
(2,074)
Real estate taxes and insurance
24,069
24,903
(834)
Depreciation and amortization
44,583
45,354
(771)
General and administrative
7,342
7,211
131
Interest
18,043
18,739
(696)
Total expenses
126,805
131,049
(4,244)
Income (loss) before taxes on income
(3,014)
480
(3,494)
Tax expense on income
132
52
80
Net income (loss)
$
(3,146)
$
428
$
(3,574)
Comparison of the six months ended June 30, 2020 to the six months ended June 30, 2019:
Revenues
Total revenues decreased by $7.7 million to $123.8 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The decrease was primarily a result of:
● A decrease in rental revenue of approximately $5.9 million arising primarily from the loss of rental income from leases that expired after June 30, 2019 during the six months ended June 30, 2020 compared the same period in 2019. These decreases were partially offset by rental income earned from leases commencing after June 30, 2019. Our leased space in our operating properties was 84.5% at June 30, 2020 and 88.1% at June 30, 2019.
● A decrease of approximately $1.8 million in interest income from Sponsored REIT Loans primarily as a result of repayment of approximately $51 million of these loans in June 2019.
Expenses
Total expenses decreased by $4.2 million to $126.8 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The increase was primarily a result of:
● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.9 million.
● A decrease in depreciation and amortization of approximately $0.7 million.
● A decrease in interest expense of approximately $0.7 million. The decrease was primarily attributable to lower interest rates during the six months ended June 30, 2020 compared to the same period in 2019.
These decreases were partially offset by:
● An increase in general and administrative expenses of $0.1 million, which was primarily from personnel costs.
25
Table of Contents
Tax expense on income
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $32,000, and benefits from federal and other income taxes, which decreased by $112,000, during the six months ended June 30, 2019 compared to the six months ended June 30, 2020, primarily as a result of a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017 during the six months ended June 30, 2019.
Net loss
Net loss for the six months ended June 30, 2020 was $3.1 million compared to a net income of $0.4 million for the six months ended June 30, 2019, for the reasons described above.
26
Table of Contents
Non-GAAP Financial Measures
Funds From Operations
The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, hedge ineffectiveness, acquisition costs of newly acquired properties that are not capitalized and lease acquisition costs that are not capitalized plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income or loss (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT, may define this term in a different manner. We have included the NAREIT FFO definition as of May 17, 2016 in the table and note that other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income or loss and cash flows from operating, investing and financing activities in the consolidated financial statements.
The calculations of FFO are shown in the following table:
For the
For the
Three Months Ended
Six Months Ended
June 30,
June 30,
(in thousands):
2020
2019
2020
2019
Net income (loss)
$
(2,075)
$
1,633
$
(3,146)
$
428
Depreciation and amortization
22,170
22,028
44,435
45,161
NAREIT FFO
20,095
23,661
41,289
45,589
Lease Acquisition costs
99
108
197
290
Funds From Operations
$
20,194
$
23,769
$
41,486
$
45,879
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which we refer to as NOI. Management believes that investors are interested in this information. NOI is a non-GAAP financial measure that the Company defines as net income or loss (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, hedge ineffectiveness, gains or losses on the sale of assets and excludes non-property specific income and expenses. The information presented includes footnotes and the data is shown by region with properties owned in the periods presented, which we call Same Store. The comparative Same Store results include properties held for the periods presented and exclude properties that are non-operating, being developed or redeveloped, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees. NOI, as defined by the Company, may not be comparable to NOI reported by other REITs that define NOI differently. NOI should not be considered an alternative to
27
Table of Contents
net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions. The calculations of NOI are shown in the following table:
Net Operating Income (NOI)*
Rentable
Square
Six Months
Six Months
Feet
Three Months Ended
Ended
Three Months Ended
Ended
Inc
%
(in thousands)
or RSF
31-Mar-20
30-Jun-20
30-Jun-20
31-Mar-19
30-Jun-19
30-Jun-19
(Dec)
Change
Region
East
944
$
2,664
$
2,746
$
5,410
$
3,185
$
3,301
$
6,486
$
(1,076)
(16.6)
%
MidWest
1,557
5,485
5,088
10,573
5,163
5,174
10,337
236
2.3
%
South
4,387
13,290
13,025
26,315
14,272
15,196
29,468
(3,153)
(10.7)
%
West
2,620
11,463
11,211
22,674
10,559
11,240
21,799
875
4.0
%
Property NOI* from Operating Properties
9,508
32,902
32,070
64,972
33,179
34,911
68,090
(3,118)
(4.6)
%
Dispositions and Redevelopment Properties
405
(28)
126
98
(205)
(215)
(420)
518
0.8
%
Property NOI*
9,913
$
32,874
$
32,196
$
65,070
$
32,974
$
34,696
$
67,670
$
(2,600)
(3.8)
%
Same Store
$
32,902
$
32,070
$
64,972
$
33,179
$
34,911
$
68,090
$
(3,118)
(4.6)
%
Less Nonrecurring
Items in NOI* (a)
26
810
836
35
706
741
95
(0.2)
%
Comparative
Same Store
$
32,876
$
31,260
$
64,136
$
33,144
$
34,205
$
67,349
$
(3,213)
(4.8)
%
Six Months
Six Months
Three Months Ended
Ended
Three Months Ended
Ended
Reconciliation to Net Income (Loss)
31-Mar-20
30-Jun-20
30-Jun-20
31-Mar-19
30-Jun-19
30-Jun-19
Net loss
$
(1,071)
$
(2,075)
$
(3,146)
$
(1,205)
$
1,633
$
428
Add (deduct):
Management fee income
(478)
(446)
(924)
(677)
(645)
(1,322)
Depreciation and amortization
22,338
22,245
44,583
23,245
22,109
45,354
Amortization of above/below market leases
(73)
(75)
(148)
(112)
(81)
(193)
General and administrative
3,525
3,817
7,342
3,509
3,703
7,212
Interest expense
9,063
8,980
18,043
9,368
9,371
18,739
Interest income
(382)
(381)
(763)
(1,294)
(1,259)
(2,553)
Non-property specific items, net
(48)
131
83
140
(135)
5
Property NOI*
$
32,874
$
32,196
$
65,070
$
32,974
$
34,696
$
67,670
(a) Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability.
*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.
28
Table of Contents
The information presented below provides the weighted average GAAP rent per square foot for the six months ended June 30, 2020 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans.
Weighted
Occupied
Weighted
Year Built
Weighted
Percentage as of
Average
or
Net Rentable
Occupied
June 30,
Rent per Occupied
Property Name
City
State
Renovated
Square Feet
Sq. Ft.
2020 (a)
Square Feet (b)
Meadow Point
Chantilly
VA
1999
138,537
113,864
82.2
%
$
23.19
Innsbrook
Glen Allen
VA
1999
298,183
170,680
57.2
%
18.91
Loudoun Tech Center
Dulles
VA
1999
136,658
135,209
98.9
%
18.27
Stonecroft
Chantilly
VA
2008
111,469
-
—
%
—
Emperor Boulevard
Durham
NC
2009
259,531
259,531
100.0
%
32.37
East total
944,378
679,284
71.9
%
24.64
Northwest Point
Elk Grove Village
IL
1999
177,095
177,095
100.0
%
27.79
909 Davis Street
Evanston
IL
2002
195,098
182,104
93.3
%
41.14
River Crossing
Indianapolis
IN
1998
205,729
201,553
98.0
%
24.40
Timberlake
Chesterfield
MO
1999
234,496
224,319
95.7
%
27.24
Timberlake East
Chesterfield
MO
2000
117,036
117,036
100.0
%
26.67
121 South 8th Street
Minneapolis
MN
1974
297,209
263,208
88.6
%
22.76
Plaza Seven
Minneapolis
MN
1987
330,096
291,904
88.4
%
31.24
Midwest total
1,556,759
1,457,219
93.6
%
28.60
One Overton Park
Atlanta
GA
2002
387,267
320,928
82.9
%
24.30
Park Ten
Houston
TX
1999
157,460
112,962
71.7
%
26.01
Addison Circle
Addison
TX
1999
289,302
216,571
74.9
%
33.03
Collins Crossing
Richardson
TX
1999
300,887
239,265
79.5
%
26.79
Eldridge Green
Houston
TX
1999
248,399
248,399
100.0
%
29.81
Park Ten Phase II
Houston
TX
2006
156,746
135,068
86.2
%
28.16
Liberty Plaza
Addison
TX
1985
216,847
157,149
72.5
%
23.20
Legacy Tennyson Center
Plano
TX
1999/2008
207,049
190,154
91.8
%
29.90
One Legacy Circle
Plano
TX
2008
214,110
95,257
44.5
%
36.72
29
Table of Contents
The information presented below provides the weighted average GAAP rent per square foot for the six months ended June 30, 2020 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans.
Weighted
Occupied
Weighted
Year Built
Weighted
Percentage as of
Average
or
Net Rentable
Occupied
June 30,
Rent per Occupied
Property Name
City
State
Renovated
Square Feet
Sq. Ft.
2020 (a)
Square Feet (b)
One Ravinia Drive
Atlanta
GA
1985
386,602
334,140
86.4
%
$
27.27
Two Ravinia Drive
Atlanta
GA
1987
411,047
276,224
67.2
%
27.19
Westchase I & II
Houston
TX
1983/2008
629,025
351,814
55.9
%
29.46
Pershing Park Plaza
Atlanta
GA
1989
160,145
158,047
98.7
%
32.22
999 Peachtree
Atlanta
GA
1987
621,946
534,625
86.0
%
33.17
South Total
4,386,832
3,370,603
76.8
%
29.12
380 Interlocken
Broomfield
CO
2000
240,359
173,996
72.4
%
33.30
1999 Broadway
Denver
CO
1986
677,377
539,125
79.6
%
32.56
1001 17th Street
Denver
CO
1977/2006
655,420
642,770
98.1
%
36.79
600 17th Street
Denver
CO
1982
609,353
527,151
86.5
%
32.20
Greenwood Plaza
Englewood
CO
2000
196,236
196,236
100.0
%
25.10
390 Interlocken
Broomfield
CO
2002
241,512
238,107
98.6
%
33.73
West Total
2,620,257
2,317,385
88.4
%
33.20
Total Operating Properties
9,508,226
7,824,491
82.3
%
29.84
Redevelopment Properties (c)
Forest Park
Charlotte
NC
1999
62,212
—
—
%
—
Blue Lagoon Drive
Miami
FL
2002
213,182
—
—
%
—
801 Marquette Ave
Minneapolis
MN
1923/2017
129,821
48,021
37.0
%
28.37
Total Redevelopment Properties
405,215
48,021
11.9
%
28.37
Grand Total
9,913,441
7,872,512
79.4
%
$
29.83
(a) Based on weighted occupied square feet for the six months ended June 30, 2020, including month-to-month tenants, divided by the Property’s net rentable square footage.
(b) Represents annualized GAAP rental revenue for the six months ended June 30, 2020, per weighted occupied square foot.
(c) Redevelopment Properties include properties in the process of being redeveloped, or are completed but not yet stabilized.
30
Table of Contents
Liquidity and Capital Resources
Cash, cash equivalents and restricted cash were $2.9 million and $9.8 million at June 30, 2020 and December 31, 2019, respectively. The decrease of $6.9 million is attributable to $25.6 million provided by operating activities, less $43.2 million used for investing activities plus $10.7 million provided by financing activities. Management believes that existing cash, cash anticipated to be generated internally by operations and our existing debt financing will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties.
Operating Activities
Cash provided by operating activities for the six months ended June 30, 2020 of $25.6 million is primarily attributable to a net loss of $3.1 million plus the add-back of $44.8 million of non-cash expenses, less a decrease in accounts payable and accrued compensation of $11.1 million, an increase in payment of deferred leasing commissions of $3.7 million, an increase in lease acquisition costs of $0.8 million, an increase in tenant rent receivables of $0.3 million and a decrease in tenant security deposits of $0.2 million.
Investing Activities
Cash used for investing activities for the six months ended June 30, 2020 of $43.2 million is primarily attributable to purchases of other real estate assets and office equipment investments of approximately $43.2 million.
Financing Activities
Cash provided by financing activities for the six months ended June 30, 2020 of $10.7 million is primarily attributable to net borrowings on the BAML Revolver (as defined below) of $30.0 million and was partially offset by distributions paid to stockholders of $19.3 million.
JPM Term Loan
On August 2, 2018, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (the “JPM Credit Agreement”), which provides a single unsecured bridge loan in the aggregate principal amount of $150 million (the “JPM Term Loan”) that remains fully advanced and outstanding. The JPM Term Loan matures on November 30, 2021. The JPM Term Loan was previously evidenced by a Credit Agreement, dated November 30, 2016, among the Company, JPMorgan, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated October 18, 2017.
The JPM Term Loan bears interest at either (i) a number of basis points over a LIBOR-based rate depending on the Company’s credit rating (125.0 basis points over the LIBOR-based rate at June 30, 2020) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (25.0 basis points over the base rate at June 30, 2020).
31
Table of Contents
Although the interest rate on the JPM Term Loan is variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44% per annum on a $100 million portion of the JPM Term Loan until November 30, 2021. Accordingly, based upon the Company’s credit rating, as of June 30, 2020, the effective interest rate on a $100 million portion of the JPM Term Loan was 3.69% per annum.
Based upon the Company’s credit rating, as of June 30, 2020, the effective interest rate on the unhedged $50 million portion of the JPM Term Loan was 1.44% per annum. The weighted average interest rate on the unhedged $50 million portion of the JPM Term Loan during the six months ended June 30, 2020 was approximately 2.36% per annum. The weighted average interest rate on the JPM Term Loan during the year ended December 31, 2019 was approximately 3.54% per annum.
The JPM Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The JPM Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The JPM Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the JPM Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the JPM Credit Agreement immediately due and payable, and enforce any and all rights of the lenders or administrative agent under the JPM Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the JPM Term Loan financial covenants as of June 30, 2020.
BMO Term Loan
On September 27, 2018, the Company entered into a Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal (“BMO”), as administrative agent (the “BMO Credit Agreement”). The BMO Credit Agreement provides for a single, unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”) that remains fully advanced and outstanding. The BMO Term Loan consists of a $55 million tranche A term loan and a $165 million tranche B term loan. The tranche A term loan matures on November 30, 2021 and the tranche B term loan matures on January 31, 2024. The BMO Credit Agreement also includes an accordion feature that allows up to $100 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions. The BMO Term Loan was previously evidenced by an Amended and Restated Credit Agreement, dated October 29, 2014, among the Company, BMO, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated July 21, 2016, and a Second Amendment, dated October 18, 2017.
The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (125 basis points over LIBOR at June 30, 2020) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (25 basis points over the base rate at June 30, 2020).
Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into interest rate swap transactions. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum until August 26, 2020. On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39% per annum for the period beginning on August 26, 2020 and ending January 31, 2024. Accordingly, based upon the Company’s credit rating, as of June 30, 2020, the effective interest rate on the BMO Term Loan was 3.57% per annum.
32
Table of Contents
The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or the administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BMO Term Loan financial covenants as of June 30, 2020.
BAML Credit Facility
On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and extended the maturity of an existing term loan (the “BAML Term Loan”).
BAML Revolver Highlights
● The BAML Revolver is for borrowings, at the Company's election, of up to $600 million. Borrowings made pursuant to the BAML Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $600 million outstanding at any time.
● Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the initial maturity date of January 12, 2022. The Company has the right to extend the maturity date of the BAML Revolver by two additional six month periods, or until January 12, 2023, upon payment of a fee and satisfaction of certain customary conditions.
● The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.
As of June 30, 2020, there were borrowings of $30 million outstanding under the BAML Revolver. The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.20% over LIBOR at June 30, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at June 30, 2020). The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating. The facility fee is assessed against the total amount of the BAML Revolver, or $600 million (0.25% at June 30, 2020).
Based upon the Company’s credit rating, as of June 30, 2020, the interest rate on the BAML Revolver was 1.36% per annum. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the six months ended June 30, 2020 was approximately 2.01% per annum. As of December 31, 2019, there were no borrowings outstanding under the BAML Revolver. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2019 was approximately 3.67% per annum.
33
Table of Contents
BAML Term Loan Highlights
● The BAML Term Loan is for $400 million.
● The BAML Term Loan matures on January 12, 2023.
● The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.
● On September 27, 2012, the Company drew down the entire $400 million under the BAML Term Loan and such amount remains fully advanced and outstanding under the BAML Term Loan.
The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.35% over LIBOR at June 30, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at June 30, 2020).
Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into interest rate swap transactions. On July 22, 2016, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BAML Term Loan at 1.12% per annum for the period beginning on September 27, 2017 and ending on September 27, 2021. Accordingly, based upon the Company’s credit rating, as of June 30, 2020, the effective interest rate on the BAML Term Loan was 2.47% per annum.
BAML Credit Facility General Information
The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BAML Credit Facility provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BAML Credit Facility). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BAML Credit Facility financial covenants as of June 30, 2020.
The Company may use the proceeds of the loans under the BAML Credit Facility to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BAML Credit Facility.
Senior Notes
On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes. Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $200 million of senior unsecured notes consisting of (i) 3.99% Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) 4.26% Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $84 million (the “Series B Notes” and, together with the Series A Notes, the “Senior Notes”). On December 20, 2017, the Senior Notes were funded and the proceeds were used to reduce the outstanding balance of the BAML Revolver.
34
Table of Contents
The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BAML Credit Facility, the BMO Credit Agreement and the JPM Credit Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50; a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. The Company was in compliance with the Senior Notes financial covenants as of June 30, 2020.
Equity Securities
As of June 30, 2020, we had an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission relating to the offer and sale, from time to time, of an indeterminate amount of our debt securities, common stock, preferred stock or depository shares. From time to time, we expect to issue debt securities, common stock, preferred stock or depository shares under our existing automatic shelf registration statements or a different registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.
Contingencies
From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage. As of June 30, 2020, we had one loan outstanding for $21 million principal amount with one Sponsored REIT under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes. We anticipate that advances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or another other capital event.
We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
We intend to draw on the BAML Credit Facility in the future for a variety of corporate purposes, including the acquisition of properties that we acquire directly for our portfolio and for Sponsored REIT Loans as described below.
Loans to Sponsored REITs
Sponsored REIT Loans
From time to time we may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. We anticipate that advances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or another capital event. Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately two to three years.
35
Table of Contents
Our Sponsored REIT Loans subject us to credit risk. However, we believe that our position as asset manager of each of the Sponsored REITs helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REITs. Before making a Sponsored REIT Loan, we consider a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the applicable Sponsored REIT and local and national market conditions. These factors are subject to change and we do not apply a formula or assign relative weights to the factors. Instead, we make a subjective determination after considering such factors collectively.
Additional information about our Sponsored REIT Loans outstanding as of June 30, 2020, including a summary table of our Sponsored REIT Loans, is incorporated herein by reference to Part 1, Item 1, Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.
Other Consideration s
We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties. For the three and six months ended June 30, 2020 and 2019, respectively, the rental income exceeded the expenses for each individual property, with the exception of one property located in Chantilly, Virginia for each of the three and six months ended June 30, 2020 and one property located in Minneapolis, Minnesota for each of the three and six months ended June 30, 2019.
Our property located in Chantilly, Virginia (“Stonecroft”) had approximately 111,000 square feet of rentable space and became vacant in December 2019. We had no rental income and operating expenses of $274,000 during the three months ended June 30, 2020. We had no rental income and operating expenses of $446,000 during the six months ended June 30, 2020.
Our property located at 801 Marquette Avenue in Minneapolis, Minnesota (“801 Marquette Avenue”) had approximately 170,000 square feet of rentable space and became vacant in January 2016. On June 30, 2016, we commenced a redevelopment plan for the property and substantially completed the redevelopment in the second quarter of 2017. Redevelopment of 801 Marquette Avenue resulted in approximately 129,800 of net rentable square feet for the property. As of June 30, 2020, we have signed leases with two tenants that now occupy 48,000 square feet, or 37% of rentable square feet at the property. As a result, rental income exceeded operating expenses during the three and six months ended June 30, 2020. We had rental income of $129,000 and operating expenses of $277,000 during the three months ended June 30, 2019 and rental income of $214,000 and operating expenses of $563,000 during the six months ended June 30, 2019.
Off-Balance Sheet Arrangements and Contractual Obligations
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
36
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.