What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-16 compared with 2020-02-11 · 152 added, 151 removed, 372 unchanged (45% of the section changed)

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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, economic conditions in the United States, changes in interest rates as a result of economic 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, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.

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, any inability to dispose of properties on acceptable terms and any delays in the timing of any such anticipated dispositions, 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 “Risk Factors” in Item 1A.

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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.

In 2021, we determined that further debt reduction would provide greater financial flexibility and potentially increase shareholder value.

Accordingly, we have adopted a strategy to dispose of certain properties in 2021 where we believe our valuation objective has been met.

Pursuant to this strategy we anticipate dispositions in 2021 will result in estimated aggregate gross proceeds in the range of $350 million to $450 million.

Proceeds from these potential dispositions would be used primarily for the repayment of debt.

Trends and Uncertainties

COVID-19 Pandemic

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 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 availability and effectiveness of vaccines, therapeutics and 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 the businesses of our tenants, 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 “Risk Factors” in Item 1A.

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 December 31, 2020 and as of February 5, 2021, 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 December 31, 2020, we had collected approximately 98% of rental receipts due in December 2020.

Future rent concession requests or nonpayment of rent could lead to increased rent delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions or lower occupancy, extended lease terms, increased tenant improvement 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 $4.2 million as of December 31, 2020.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BAML Revolver ($596.5 million as of December 31, 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 continuing to experience a period of economic growth, which directly affects the demand for office space, our primary income producing asset.

The broad economic market conditions in the United States are 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.

Any increase in interest rates could result in increased borrowing costs to us.

However, we could also benefit from any further improved economic fundamentals and increasing levels of employment.

that the economy is improving in many markets and appears to be in a broad-based upswing.

However, future economic factors may negatively affect real estate values, occupancy levels and property income.

The economy in the United States has been adversely impacted as a result of the COVID-19 pandemic.

Economic conditions directly affect the demand for office space, our primary income producing asset.

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 adversely affecting current economic conditions in the United States.

Real Estate Operations

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We collectively refer to our operating and our redevelopment properties as our owned portfolio.

Our 32 operating properties were approximately 87.6% leased as of December 31, 2019, a decrease from 89.0% as of December 31, 2018.

Our 32 operating properties were approximately 85.0% leased as of December 31, 2020, a decrease from 87.6% leased as of December 31, 2019.

The 2.6% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded leasing completed during the year ended December 31, 2020.

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During the year ended December 31, 2020, we leased approximately 1,130,000 square feet of office space, of which approximately 762,000 square feet were with existing tenants, at a weighted average term of 8.3 years.

On average, tenant improvements for such leases were $34.44 per square foot, lease commissions were $13.51 per square foot and rent concessions were approximately three months of free rent.

On average, tenant improvements for such leases were $34.07 per square foot, lease commissions were $11.36 per square foot and rent concessions were approximately five months of free rent.

Average GAAP base rents under such leases were $28.47 per square foot, or 7.7% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2019.

As of December 31, 2019, 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 placed in service 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 December 31, 2019, 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 $28.8 million, of which we had incurred approximately $23.0 million as of December 31, 2019.

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.

As of December 31, 2020, our two redevelopment properties included an approximately 111,000 square foot property known as Stonecroft in Chantilly, Virginia and an approximately 213,000 square foot property known as Blue Lagoon in Miami, Florida.

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.

Our property known as 801 Marquette in Minneapolis, Minnesota, which was substantially completed at the end of the second quarter of 2017, had been previously classified as a redevelopment property.

As of June 30, 2020, the property had leases signed and tenants occupying approximately 37% of the rentable square feet of the property.

On September 14, 2020, we entered into a lease agreement with a new tenant with an initial term of 16 years for approximately 71,000 square feet, or 54.8% of the property’s rentable square feet.

As a result, 801 Marquette was approximately 91.8% leased, which we consider stabilized, and has been reclassified as an operating property.

Our property known as Forest Park in Charlotte, North Carolina, which was substantially completed at the end of the second quarter of 2020, had previously been classified as a redevelopment property.

On July 20, 2020, a tenant lease commenced and occupies approximately 22,000 square feet, or approximately 34.5% of the total rentable square feet, with an initial term of 11 years.

On September 24, 2020, we entered into a lease agreement with a new tenant for approximately 28,200 square feet, or 43.9% of the rentable square feet at the property, with an initial term of 7 years.

As a result, as of December 31, 2020, Forest Park was approximately 78.4% leased, which we consider stabilized, and has been reclassified as an operating property.

The redevelopment of Stonecroft commenced in August 2020.

We expect to incur total redevelopment and lease-up costs of $18.5 million, which includes significant interior work to make the space suitable for multiple tenants, or to accommodate a tenant with accredited security requirements.

As of December 31, 2020, we had incurred approximately $1.8 million in redevelopment costs.

We anticipate completing the redevelopment by July 31, 2021.

The redevelopment of Blue Lagoon commenced in December 2018 following the maturity of a lease with a major tenant that had 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

We expect to incur total restoration, redevelopment and lease-up costs of $39.9 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 December 31, 2020, we had incurred approximately $20.4 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 $4.4 million, which include interior work to make the space suitable for multiple tenants.

As of December 31, 2019, we had incurred approximately $0.7 million in redevelopment costs.

We anticipate completing the redevelopment by June 30, 2020.

We anticipate completing the redevelopment by February 28, 2021.

As of December 31, 2020, leases for approximately 7.6% and 11.1% of the square footage in our owned portfolio are scheduled to expire during 2021 and 2022, respectively.

As the first quarter of 2021 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.

We believe that most of our largest property markets are now experiencing generally steady or improving rental conditions.

We are seeing increased potential leasing activity in the energy influenced market of Denver compared to the last several years.

We anticipate positive leasing activity within our operating properties throughout 2020.

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 first quarter of 2021 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 bankruptcy exists.

Also, we believe the potential exists for any of our tenants to default on its lease or to seek the protection of bankruptcy.

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.

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Real Estate Acquisition and Investment Activity

● we have continued to actively explore additional potential real estate investment opportunities.

● during the year ended December 31, 2019, we received approximately $1.1 million as full repayment of a Sponsored REIT Loan with FSP Satellite Place Corp.

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● on April 3, 2019 we received a cash distribution of approximately $1.0 million from the liquidating trust of East Wacker (defined below);

● we have continued to actively explore additional potential real estate investment opportunities and anticipate further real estate investments in the future.

● we received approximately $1.1 million in cash from Satellite Place, as partial prepayment of a Sponsored REIT Loan;

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The Company received an initial cash distribution of $5.9 million from the liquidating trust of Grand Boulevard on August 17, 2018;

● on September 24, 2018, an office property owned by a Sponsored REIT, FSP 303 East Wacker Drive Corp (East Wacker) was sold to a third party.

● on September 24, 2018, an office property owned by a Sponsored REIT, FSP 303 East Wacker Drive Corp.

(East Wacker) was sold to a third party.

We held an equity investment in East Wacker and received a liquidating distribution of its investment of $70.0 million on September 25, 2018.

We received an initial cash distribution of $69.0 million from the liquidating trust of East Wacker on September 27, 2018.

● on January 6, we received approximately $6.2 million in proceeds from the sale of a property located in Milpitas, California;

● on June 7, we received approximately $9.0 million in cash from FSP 1441 Main Street Corp.

as repayment in full of a Sponsored REIT Loan;

● during the year ended December 31, we received approximately $1.1 million in cash from Satellite Place, as partial prepayment of a Sponsored REIT Loan;

● on October 20, we received approximately $31.6 million in proceeds from the sale of a property located in Baltimore, Maryland.

Property Dispositions and Assets Held for Sale

During the three months ended June 30, 2017, we reached a decision to classify our office property located in Baltimore, Maryland as an asset held for sale.

The property was expected to sell within one year at a loss, which was

recorded as a provision for loss on a property held for sale of $20.5 million and was classified as an asset held for sale of $31.9 million at June 30, 2017.

During the three months ended September 30, 2017, we increased the provision for loss by $0.3 million to $20.7 million and the property was classified as an asset held for sale in the amount of $31.6 million at September 30, 2017.

We sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million.

During the three months ended December 31, 2016, we reached an agreement to sell an office property located in Milpitas, California.

The property was classified as an asset held for sale at December 31, 2016 and was sold on January 6, 2017 at a $2.3 million gain.

The disposal of these properties did not represent a strategic shift that has a major effect on the Company’s operations and financial results.

Accordingly, the properties remained classified within continuing operations for all periods presented.

We will continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time in the ordinary course of business.

The Company sold an office property located in Durham, North Carolina on December 23, 2020 with a sales price of approximately $89.7 million, at a gain of approximately $41.9 million.

The disposal of this property did not represent a strategic shift that has a major effect on the Company’s operations and financial results.

Accordingly, the property remained classified within continuing operations for all periods presented and there were no assets held for sale at December 31, 2020 or December 31, 2019.

As an important part of our total return strategy, we intend to be active in property dispositions when we believe that we have maximized value and that market conditions warrant such activity and, as a consequence, we continuously review and evaluate our portfolio of properties for potentially advantageous dispositions.

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Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts based on collectability.

We provided an allowance for doubtful accounts based on collectability.

Lessors recognize the effect of a change in their assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.

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If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off.

Inappropriate allocation of acquisition costs, or incorrect estimates of useful lives, could result

in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods, as is required by generally accepted accounting principles.

Inappropriate allocation of acquisition costs, or incorrect estimates of useful lives, could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods, as is required by generally accepted accounting principles.

Derivative Instruments

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Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability.

Cash flow hedges are accounted for by recording the fair value of the

derivative instrument on the balance sheet as either an asset or liability.

To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity.

Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings.

The ineffective portion of the derivatives’ fair value is recognized directly into earnings as “Other” in our income statement.

The ineffective portion of a derivative’s change in fair value will be recognized in earnings in the same period in which the hedged interest payments affect earnings, which may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.

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Some of our real estate properties are leased on a triple net basis, pursuant to non-cancelable, fixed term, operating leases.

Each time we enter a new lease or materially modify an existing lease we evaluate whether it is appropriately classified as a capital lease or as an operating lease.

The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue.

Each time we enter a new lease or materially modify an existing lease we evaluate whether it is appropriately classified as a financing lease or as an operating lease.

The classification of a lease as financing or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue.

These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a property, discount rates and future cash flows.

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Total expenses

Gain on sale of property

Income before taxes on income

Tax expense on income

Comparison of the year ended December 31, 2020 to the year ended December 31, 2019

Total revenues decreased by $23.2 million to $245.8 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $21.3 million arising primarily from the loss of rental income from leases that expired after December 31, 2019 and during the year ended December 31, 2020, compared to the year ended December 31, 2019.

In December 2020, a tenant filed for bankruptcy and was put on a cash basis resulting in a $3.1 million charge against revenue to write-off receivables from the lease.

These decreases were partially offset by rental income earned from leases commencing after December 31, 2019.

Our leased space in our operating properties was 85.0% at December 31, 2020 and 87.6% at December 31, 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.

Total expenses decreased by $7.4 million to $255.0 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $4.8 million.

● A decrease to depreciation and amortization of approximately $2.4 million.

● A decrease in interest expense of approximately $0.7 million.

The decrease was primarily from lower interest rates during the year ended December 31, 2020 compared to the year ended December 31, 2019.

These decreases were partially offset by:

● An increase in general and administrative expenses of $0.5 million, which was primarily attributable to an increase in public company related expenses.

Gain on sale of property

The Company sold an office property located in Durham, North Carolina on December 23, 2020 with a sales price of approximately $89.7 million, at a gain of approximately $41.9 million.

The Company did not sell any properties during the year ended December 31, 2019.

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 $144,000 and federal and other income taxes, which increased by $125,000, during the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily as a result of a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017 during the year ended December 31, 2019.

Net income for the year ended December 31, 2020 was $32.6 million compared to a net income of $6.5 million for the year ended December 31, 2019, for the reasons described above .

The following table shows financial results for the years ended December 31, 2019 and 2018.

Year ended December 31,

(in thousands)

Related party revenue:

Management fees and interest income from loans

Total revenues

Real estate operating expenses

Real estate taxes and insurance

Depreciation and amortization

General and administrative

Total expenses

Income before taxes on income and equity in

income of non-consolidated REITs

Tax expense on income

Taxes on income

Equity in income of non-consolidated REITs

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Net income for the year ended December 31, 2019 was $6.5 million compared to net income of $13.1 million for the year ended December 31, 2018, for the reasons described above.

The following table shows financial results for the years ended December 31, 2018 and 2017.

Year ended December 31,

(in thousands)

Related party revenue:

Management fees and interest income from loans

Total revenues

Real estate operating expenses

Real estate taxes and insurance

Depreciation and amortization

General and administrative

Total expenses

Gain (loss) on sale of properties

Income (loss) before taxes on income and equity in

income (loss) of non-consolidated REITs

Taxes on income

Equity in income (losses) of non-consolidated REITs

Net income (loss)

Comparison of the year ended December 31, 2018 to the year ended December 31, 2017

Total revenues decreased by approximately $3.7 million to $268.9 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $3.5 million arising primarily from the loss of rental income from leases that expired in 2018 and 2017 and from the loss of revenue from properties that we sold on January 6, 2017 and October 20, 2017.

The decrease was partially offset by rental income earned from leases commencing in 2018 and 2017.

Our leased space in our operating properties decreased 0.7% to 89.0% at December 31, 2018 compared to 89.7% at December 31, 2017, lease expirations exceeding new leases signed and partially as a result of classification of two properties as redevelopment properties.

● A decrease in management fee income of approximately $0.1 million primarily as a result of the liquidation of three Sponsored REITs during 2018 and one Sponsored REIT during 2017.

● A decrease in interest income from loans to Sponsored REITs of approximately $0.1 million as a result of repayments of Sponsored REIT Loans, which was partially offset by higher interest rates in 2018 compared to 2017.

Total expenses decreased by $1.9 million to $262.2 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017.

The decrease was primarily a result of:

● A decrease in depreciation and amortization of approximately $7.0 million, which were primarily attributable to the disposition of two properties during 2017.

● A decrease in real estate operating expenses of $0.5 million.

● A decrease in general and administrative expenses of $0.4 million as a result of decreases in personnel expenses.

We had 38 employees as of February 7, 2019 and December 31, 2018, and 39 employees as of December 31, 2017.

These decreases were partially offset by:

● An increase in interest expense of approximately $6.0 million to $38.4 million for the year ended December 31, 2018 compared to the same period in 2017.

The increase was primarily attributable to interest accruing on the Senior Notes (as defined below), which were issued on December 20, 2017 at a weighted average rate of approximately 4.10%, and used to reduce the outstanding balance on the BAML Revolver, a 0.19% increase in the average interest rate on the BAML Term Loan, higher short-term interest rates on the BAML Revolver and JPM Term Loan, and an increase in amortization of deferred financing costs during the year ended December 31, 2018, as compared to the same period in 2017.

Equity in income (loss) of non-consolidated REITs

Equity in income from non-consolidated REITs is $6.8 million for the year ended December 31, 2018 compared to equity in loss of $3.6 million during the year ended December 31, 2017.

The equity in income (loss) during the year ended December 31, 2018 consisted of equity in income from our preferred stock investment in East Wacker of $7.2 million, which sold its property on September 24, 2018, and was partially offset by equity in loss from our preferred stock investment in Grand Boulevard of $0.1 million, which sold its property on July 19, 2018.

In addition, during the three months ended June 30, 2018 and December 31, 2017, respectively, we recognized an impairment charge of $0.3 million and $2.5 million, respectively, which represented the other-than-temporary decline in the fair value below the carrying value of the Company’s investments in non-consolidated REITs.

Gains (loss) on sale of properties

During the three months ended December 31, 2016, we reached an agreement to sell an office property located in Milpitas, California.

The property was classified as an asset held for sale at December 31, 2016 and was sold on January 6, 2017 at a $2.3 million gain.

During the three months ended June 30, 2017, we reached a decision to classify our office property located in Baltimore, Maryland as an asset held for sale.

The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $20.5 million and the property was classified as an asset held for sale of $31.9 million at June 30, 2017.

We sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million.

Other expense of $1.9 million during the year ended December 31, 2017 was attributable to hedge ineffectiveness from our derivatives’ fair value prior to October 18, 2017.

The ineffective portion of the derivatives’ fair value was recognized directly into earnings each quarter as hedge ineffectiveness.

Taxes on income

Included in income taxes is the Revised Texas Franchise Tax, a tax on revenues from Texas properties, which decreased $36,000 and federal and other income taxes decreased $4,000 for year ended December 31, 2018 compared to the same period in 2017.

Net income (loss)

Net income for the year ended December 31, 2018 was $13.1 million compared to a net loss of $15.9 million for the year ended December 31, 2017, for the reasons described above.

Non-GAAP Financial Measures

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The calculations of FFO are shown in the following table:

For the Year Ended December 31,

For the Year December 31,

(in thousands):

(Gain) loss on sale of properties and properties held for sale

Gain on sale of property

Equity in income of non-consolidated REITs

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Net Operating Income (NOI)

The Company provides property performance based on 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 (the most directly comparable GAAP financial measure) plus 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 both periods, 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 net income as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions.

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 redevelopment properties.

We also exclude properties that have been placed in service, but that do not have operating activity for all periods presented, 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 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:

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Add (deduct):

Gain on sale of property

Management fee income

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Cash and cash equivalents were $4.2 million and $9.8 million at December 31, 2020 and December 31, 2019, respectively.

The decrease of $1.4 million is attributable to $81.9 million provided by operating activities, less $19.6 million used by investing activities and $63.7 million used in 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.

The decrease of $5.6 million is attributable to $68.5 million provided by operating activities, plus $11.0 million provided by investing activities and less $85.1 million used in 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, anticipated capital expenditures and anticipated payments of maturing debt for at least the next 12 months.

We have extension options on our JPM Term Loan and BAML Revolver (discussed below), which management expects to exercise, or we may seek to replace this indebtedness with new loans or extend the current loans.

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.

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Operating Activities

Cash provided by our operating activities of $81.9 million is primarily attributable to net income of $6.5 million plus the add-back of $84.8 million of non-cash expenses, an increase in accounts payable and accrued expenses of $4.3 million, an increase in tenant security deposits of $3.0 million, a decrease in prepaid expenses and other assets of $2.3 million and a decrease in tenant rent receivables of $0.1 million.

These increases were partially offset by a $15.1 million increase in payments of deferred leasing commissions and a $4.0 million increase in lease acquisition costs.

Cash provided by our operating activities of $68.5 million is primarily attributable to net income of $32.6 million excluding the gain on sale of a property of $41.9 million plus the add-back of $89.9 million of non-cash expenses and a $8.3 million increase in accounts payable and accrued expenses.

These increases were partially offset by a $13.7 million increase in payments of deferred leasing commissions, a $3.8 million increase in tenant rent receivables, a $2.1 million increase in lease acquisition costs, a $0.7 million decrease in tenant security deposits and a $0.1 million increase in prepaid and other assets.

Investing Activities

Cash used by investing activities for the year ended December 31, 2019 of $19.6 million is primarily attributable to purchases of other real estate assets and office equipment investments of approximately $70.7 million and an investment in a related party mortgage receivable of $2.4 million.

These uses were partially offset by repayments received from two related party mortgage receivables of $52.0 million and proceeds received from a liquidating trust of $1.5 million.

Cash provided by investing activities for the year ended December 31, 2020 of $11.0 million is primarily attributable to cash proceeds from the sale of an office property located in Durham, North Carolina of approximately $88.9 million and partially offset by capital expenditures and office equipment investments of approximately $77.9 million.

Financing Activities

Cash used in financing activities for the year ended December 31, 2019 of $63.7 million is primarily attributable to distributions paid to stockholders of $38.6 million, net repayments on the BAML Revolver (as defined below) of $25.0 million and an increase to deferred financing costs of $0.1 million.

Cash used in financing activities for the year ended December 31, 2020 of $85.1 million is primarily attributable to net repayments on the JPM Term Loan (as defined below) of $50.0 million and distributions paid to stockholders of $38.6 million and was partially offset by net borrowings on the BAML Revolver (as defined below) of $3.5 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.

On December 24, 2020, the Company repaid a $50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, so that $100 million remains fully advanced and outstanding under the JPM Term Loan.

The JPM Term Loan matures on November 30, 2021, which maturity date may be extended by two additional six-month periods, or until November 30, 2022 (subject to specified exceptions).

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 a LIBOR-based rate at December 31, 2019) 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 December 31, 2019).

points over the base rate depending on the Company’s credit rating (25.0 basis points over the base rate at December 31, 2020).

The margin over the LIBOR-based rate or base rate is determined based on the Company’s credit rating pursuant to the following grid:

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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 December 31, 2019, 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 December 31, 2019, the effective interest rate on the unhedged $50 million portion of the JPM Term Loan was 3.06% per annum.

The weighted average interest rate on the unhedged $50 million portion of the JPM Term Loan during the year ended December 31, 2019 was approximately 3.54% per annum.

Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44% per annum on the $100 million remaining portion of the JPM Term Loan until November 30, 2021.

Accordingly, based upon the Company’s credit rating, as of December 31, 2020, the effective interest rate on the JPM Term Loan was 3.69% per annum.

Based upon the Company’s credit rating, as of December 31, 2020, the weighted average interest rate on the unhedged $50 million portion of the JPM Term Loan during the year ended December 31, 2020 was approximately 1.90% per annum.

The $50 million portion of the JPM Term Loan was repaid on December 24, 2020.

The weighted average interest rate on the JPM Term Loan during the year ended December 31, 2019 was approximately 3.54% per annum.

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BMO Term Loan

On September 27, 2018, the Company entered into a Second Amended and Restated Credit Agreement among the Company, the lending institutions party thereto and Bank of Montreal, 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 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.

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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 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, which expired on 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.

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● 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 December 31, 2019, there were no borrowings outstanding under the BAML Revolver.

As of December 31, 2020, there was $3,500,000 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 December 31, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at December 31, 2020).

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Based upon the Company’s credit rating, as of December 31, 2020, the interest rate on the BAML Revolver was 1.34% per annum.

As of December 31, 2020 there were borrowings of $3.5 million outstanding under the BAML Revolver.

The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2020, was approximately 1.65% per annum.

As of December 31, 2018, there were borrowings of $25 million outstanding under the BAML Revolver at an interest rate of 3.63% per annum.

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.

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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.

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.

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.

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Equity Offering

As of December 31, 2019, we had an automatic shelf registration statement on Form S-3 on file 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.

From time to time, we expect to issue debt securities, common stock, preferred stock or depository shares under a registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.

Contingencies

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Instead, we make a subjective determination after considering such factors collectively.

Additional information about our Sponsored REIT Loans outstanding as of December 31, 2019, including a summary table of our Sponsored REIT Loans, is incorporated herein by reference to Note 3, “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.

Additional information about our Sponsored REIT Loan outstanding as of December 31, 2020, including a summary table of our Sponsored REIT Loans, is incorporated herein by reference to Note 3, “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 Considerations

We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties.

For the years ended December 31, 2019 and 2018, respectively, the rental income exceeded the expenses for each individual property, with the exception of one property located in Minneapolis, Minnesota for the years ended December 31, 2019 and 2018 and one property located in Houston, Texas for the year ended December 31, 2018.

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.

For the year ended December 31, 2020 and 2019, respectively, the rental income exceeded the expenses for each individual property, with the exception of Stonecroft for the year ended December 31, 2020 and 801 Marquette for the year ended December 31, 2019.

Stonecroft had approximately 111,000 square feet of rentable space and became vacant in December 2019.

We had no rental income and no operating expenses during the three months ended December 31, 2020 and we had no rental income and operating expenses of $514,000 for the year ended December 31, 2020.

801 Marquette 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 December 31, 2019, 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, we had rental income of $278,000 and operating expenses of $319,000 during the three months ended December 31, 2019.

Redevelopment of 801 Marquette resulted in approximately 129,800 of net rentable square feet for the property.

As of December 31, 2020, we have signed leases with three tenants for 119,000 square feet, or 91.8% of the rentable square feet of the property, for which two tenants leases have commenced and occupy 48,000 square feet, or 37% of rentable square feet at the property.

As a result, rental income exceeded operating expenses during the year ended December 31, 2020.

We had rental income of $278,000 and operating expenses of $319,000 during the three months ended December 31, 2019.

We had rental income of $750,000 and operating expenses of $1,158,000 during the year ended December 31, 2019.

We had rental income of $71,000 and had operating expenses of $302,000 during the year ended December 31, 2018.

The property located in Houston, Texas has approximately 157,000 square feet of rentable space and became substantially vacant on April 30, 2017 when two tenants vacated 155,000 square feet of space.

The property signed leases that commenced in 2019 for approximately 105,000 square feet, or 66.9% of the square feet of the property.

We had rental income of $156,000 and had operating expenses of $1,484,000 during the year ended December 31, 2018.

Rental Income Commitments

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Operating Lease

(1) No principal was outstanding on the BAML Revolver as of December 31, 2019.

(1) Amounts include principal and interest payments.

(2) Amounts reflect a facility fee calculated as 0.25% of the $600 million available to be drawn.

(3) Amounts include prinicipal and interest payments.

(4) Interest payments were estimated based on an interest rate swap with an effective interest rate of 3.69% per annum on $100 million as of December 31, 2019, and the variable rate in effect as of December 31, 2019, which was at an annual rate of 3.06% on $50 million as of December 31, 2019.

(3) Amounts include principal and interest payments.

(4) Interest payments were estimated based on an interest rate swap with an effective interest rate of 3.69% per annum on $100 million as of December 31, 2020.

(5) The BAML Term Loan has an interest rate swap with an effective interest rate of 2.47% per annum as of December 31, 2020, which was used for estimating interest.

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(6) The BMO Term Loan has an interest rate swap with an effective interest rate of 3.64% per annum as of December 31, 2020, which was used for estimating interest.

The swap expires on August 26, 2020.

Interest payments between August 26, 2020 and maturity have an interest swap with an effective interest rate of 3.64% per annum as of December 31, 2019, which was used for estimating interest.

The operating lease in the table above consists of our lease of corporate office space, which commenced September 1, 2010, and was amended on October 25, 2016.

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As of December 31, 2020, we had one Sponsored REIT Loan with $21 million principal amount outstanding.

Additional information about our Sponsored REIT Loan outstanding as of December 31, 2019, including a summary table of our Sponsored REIT Loan, is incorporated herein by reference to Note 3, “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.

Additional information about our Sponsored REIT Loan outstanding as of December 31, 2020, including a summary table of our Sponsored REIT Loan, is incorporated herein by reference to Note 3, “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.

Off-Balance Sheet Arrangements

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As of December 31, 2020, we had one Sponsored REIT Loan with $21 million principal amount outstanding.

Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis