What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-03 · 113 added, 184 removed, 248 unchanged (54% of the section changed)

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We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.

As of September 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.

As of March 31, 2021, approximately 7.8 million square feet, or approximately 80% of our total owned portfolio, was located in Atlanta, Dallas, Denver, Houston and Minneapolis.

The main factor that affects our real estate operations is the broad economic market conditions in the United States.

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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.

As we execute this strategy, our revenue and Funds From Operations are likely to decrease in the short term.

Proceeds from these potential dispositions would be used primarily for the repayment of debt, which will likely decrease our interest expense in the short term.

Further to this strategy, we previously announced that we entered into a purchase and sale agreement with respect to the following properties:

One and Two Ravinia Drive in Atlanta, Georgia;

and One Overton Park in Atlanta, Georgia.

Aggregate gross proceeds under the purchase and sale agreement would be approximately $219.5 million.

The potential sale of One and Two Ravinia Drive and

One Overton Park remain subject to customary closing conditions.

These dispositions are expected to close in the second quarter of 2021.

Trends and Uncertainties

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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

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.

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.

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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.

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 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.

See Part I, Item 1A.

“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

We have been following and directing our vendors to follow the guidelines from the Centers for Disease Control 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 September 30, 2020 and as of November 3, 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 October 31, 2020, we had collected approximately 98% of rental receipts due in October 2020.

During the three months ended March 31, 2021 and as of April 30, 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 March 31, 2021, we had collected in excess of approximately 99% of rental receipts due in March 2021.

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 $4.8 million as of September 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 September 30, 2020) will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

Cash, cash equivalents and restricted cash were $4.1 million as of March 31, 2021.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BAML Revolver ($572.5 million as of March 31, 2021) 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.

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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.

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.

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.

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

As of September 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.

As of March 31, 2021, our real estate portfolio was comprised of 33 operating properties, which we refer to as our operating properties, and one redevelopment property, which we refer to as our redevelopment property, that is in the process of being redeveloped.

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

Our 32 operating properties were approximately 85.6% leased as of September 30, 2020, a decrease from 87.6% leased as of December 31, 2019.

The 2.0% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded leasing completed during the nine months ended September 30, 2020.

As of September 30, 2020, we had approximately 1,376,000 square feet of vacancy in our operating properties compared to approximately 1,175,000 square feet of vacancy at December 31, 2019.

During the nine months ended September 30, 2020, we leased approximately 606,000 square feet of office space, of which approximately 259,000 square feet were with existing tenants, at a weighted average term of 7.8 years.

On average, tenant improvements for such leases were $33.80 per square foot, lease commissions were $10.71 per square foot and rent concessions were approximately six months of free rent.

Average GAAP base rents under such leases were $29.61 per square foot, or 11.8% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2019.

As of September 30, 2020, our three redevelopment properties included an approximately 111,000 square foot property known as Stonecroft in Chantilly, Virginia, 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.

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, as of September 30, 2020, 801 Marquette was approximately 91.8% leased, which we consider stabilized, and has been reclassified as an operating property.

Our 33 operating properties were approximately 81.9% leased as of March 31, 2021, a decrease from 85.0% leased as of December 31, 2020.

The 3.1% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded leasing completed during the three months ended March 31, 2021.

As of March 31, 2021, we had approximately 1,725,000 square feet of vacancy in our operating properties compared to approximately 1,397,000 square feet of vacancy at December 31, 2020.

During the three months ended March 31, 2021, we leased approximately 377,000 square feet of office space, of which approximately 370,000 square feet were with existing tenants, at a weighted average term of 9.3 years.

On average, tenant improvements for such leases were $18.67 per square foot, lease commissions were $10.23 per square foot and rent concessions were approximately nine months of free rent.

Average GAAP base rents under such leases were $28.46 per square foot, or 1.7% lower than average rents in the respective properties as applicable compared to the year ended December 31, 2020.

We reclassify redevelopment properties as operating properties when the property redevelopment is complete and leasing has stabilitized.

Given the length of the redevelopment and lease-up process, the reclassification of a property may take a significant amount of time.

As of March 31, 2021, our sole redevelopment property was an approximately 111,000 square foot property known as Stonecroft in Chantilly, Virginia.

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 September 30, 2020, we had incurred approximately $1.4 million in redevelopment costs.

We anticipate completing the redevelopment by June 30, 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.

As of March 31, 2021, we had incurred approximately $2.3 million in redevelopment costs.

We anticipate completing the redevelopment by July 31, 2021.

Our property known as Blue Lagoon in Miami, Florida, was substantially completed during the first quarter of 2021, and had previously been classified as a redevelopment property.

As of March 31, 2021, the property had leases signed and a tenant occupying approximately 73.1% of the rentable square feet 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 $39.9 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 September 30, 2020, we had incurred approximately $16.5 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 had occupied 100% of the property through December 31, 2018.

We completed the redevelopment during the three months ended June 30, 2020.

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 September 30, 2020, Forest Park was approximately 78.4% leased.

As of September 30, 2020, leases for approximately 0.8% and 8.2% of the square footage in our owned portfolio are scheduled to expire during 2020 and 2021, respectively.

As the fourth 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 fourth quarter of 2020 and potentially in future periods.

As of March 31, 2021, leases for approximately 4.9% and 8.8% of the square footage in our owned portfolio are scheduled to expire during 2021 and 2022, respectively.

As the second 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.

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 second 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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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.

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 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.

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Results of Operations

The following table shows financial results for the three months ended September 30, 2020 and 2019:

Three months ended September 30,

(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 (loss) before taxes

Tax expense on income

Net income (loss)

Comparison of the three months ended September 30, 2020 to the three months ended September 30, 2019:

Total revenues decreased by $6.3 million to $62.2 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $6.3 million arising primarily from the loss of rental income from leases that expired after September 30, 2019 and during the three months ended September 30, 2020, compared to the same period in 2019.

These decreases were partially offset by rental income earned from leases commencing after September 30, 2019.

Our leased space in our operating properties was 85.6% at September 30, 2020 and 89.7% at September 30, 2019.

Total expenses decreased by $2.2 million to $63.9 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $1.5 million.

● A decrease to depreciation and amortization of approximately $0.5 million.

● A decrease in general and administrative expenses of $0.1 million, which was primarily from lower personnel costs.

● A decrease in interest expense of approximately $0.1 million.

The decrease was primarily from lower interest rates during the three months ended September 30, 2020 compared to the same period in 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 $42,000 during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Net loss for the three months ended September 30, 2020 was $1.7 million compared to a net income of $2.4 million for the three months ended September 30, 2019, for the reasons described above.

The following table shows financial results for the nine months ended September 30, 2020 and 2019:

Nine months ended September 30,

The following table shows financial results for the three months ended March 31, 2021 and 2020:

Three months ended March 31,

(in thousands)

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Total expenses

Income (loss) before taxes on income

Tax expense on income

Net income (loss)

Comparison of the nine months ended September 30, 2020 to the nine months ended Septmber 30, 2019:

Total revenues decreased by $14.0 million to $186.0 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $12.2 million arising primarily from the loss of rental income from leases that expired after September 30, 2019 and during the nine months ended September 30, 2020 compared the same period in 2019.

These decreases were partially offset by rental income earned from leases commencing after September 30, 2019.

Our leased space in our operating properties was 85.6% at September 30, 2020 and 89.7% at September 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.

Total expenses decreased by $6.4 million to $190.6 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.

Loss before taxes

Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020:

Total revenues decreased by $3.9 million to $59.0 million for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $3.9 million arising primarily from the sale of a property and a tenant bankruptcy in December 2020 and other losses of rental income from leases that expired after March 31, 2020 and during the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

These decreases were partially offset by rental income earned from leases commencing after March 31, 2020.

Our leased space in our operating properties was 81.9% at March 31.

2021 and 85.4% at March 31, 2020.

Total expenses increased by $1.4 million to $65.4 million for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020.

The increase was primarily a result of:

● An increase to depreciation and amortization of approximately $2.0 million.

● An increase in general and administrative expenses of $0.6 million, which was primarily from higher professional fees and personnel costs.

These increases were partially offset by:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $0.8 million.

● A decrease in depreciation and amortization of approximately $1.2 million.

● A decrease in interest expense of approximately $0.4 million.

The decrease was primarily attributable to lower interest rates during the nine months ended September 30, 2020 compared to the same period in 2019.

The decrease was primarily from lower debt outstanding during the three months ended March 31, 2021 compared to the same period in 2020.

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 $74,000, and benefits from federal and other income taxes, which decreased by $112,000, during the nine months ended September 30, 2019 compared to the nine months ended September 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 nine months ended September 30, 2019.

Net loss for the nine months ended September 30, 2020 was $4.8 million compared to a net income of $2.8 million for the nine months ended September 30, 2019, for the reasons described above.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which increased $1,000 during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Net loss for the three months ended March 31, 2021 was $6.5 million compared to a net loss of $1.1 million for the three months ended March 31, 2020, for the reasons described above.

Non-GAAP Financial Measures

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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.

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 mortgage loans, 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.

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Three Months Ended

Nine Months Ended

September 30,

(in thousands):

Net income (loss)

Gain on sale of property

Depreciation and amortization

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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.

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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*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.

The information presented below provides the weighted average GAAP rent per square foot for the nine months ended September 30, 2020 for our properties and weighted occupancy square feet and percentages.

The information presented below provides the weighted average GAAP rent per square foot for the three months ended March 31, 2021 for our properties and weighted occupancy square feet and percentages.

GAAP rent includes the impact of tenant concessions and reimbursements.

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Percentage as of

September 30,

Rent per Occupied

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Square Feet (b)

Forest Park (c)

Loudoun Tech Center

Stonecroft (c)

Emperor Boulevard

Northwest Point

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Midwest total

Blue Lagoon Drive (c)

Blue Lagoon Drive

One Overton Park

Addison Circle

Collins Crossing

GAAP rent includes the impact of tenant concessions and reimbursements.

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Percentage as of

September 30,

Rent per Occupied

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Square Feet (b)

Collins Crossing

Eldridge Green

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Total Owned Properties

(a) Based on weighted occupied square feet for the nine months ended September 30, 2020, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the nine months ended September 30, 2020, per weighted occupied square foot.

(a) Based on weighted occupied square feet for the three months ended March 31, 2021, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the three months ended March 31, 2021, per weighted occupied square foot.

(c) We define redevelopment properties as properties being developed, redeveloped or where redevelopment is complete, but are in lease-up and that are not stabilized.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash were $4.8 million and $9.8 million at September 30, 2020 and December 31, 2019, respectively.

Cash, cash equivalents and restricted cash were $4.1 million and $4.2 million at March 31, 2021 and December 31, 2020, respectively.

The decrease of $0.1 million is attributable to $1.6 million provided by operating activities, less $16.0 million used for investing activities plus $14.3 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.

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 operating activities for the nine months ended September 30, 2020 of $56.0 million is primarily attributable to a net loss of $4.8 million plus the add-back of $66.3 million of non-cash expenses, plus an increase in accounts payable and accrued compensation of $2.8 million.

These increases were partially offset by an increase in payment of deferred leasing commissions of $6.2 million, an increase in lease acquisition costs of $1.5 million, an increase in prepaid expenses and other assets or $0.5 million and an increase in tenant rent receivables of $0.1 million.

Cash provided by operating activities for the three months ended March 31, 2021 of $1.6 million is primarily attributable to a net loss of $6.5 million plus the add-back of $23.1 million of non-cash expenses, plus a decrease in tenant rent receivables of $3.3 million.

These increases were partially offset by a decrease in accounts payable and accrued compensation of $12.1 million, an increase in payment of deferred leasing commissions of $5.1 million, an increase in tenant security deposits of $0.6 million and an increase in prepaid expenses and other assets of $0.5 million.

Investing Activities

Cash used for investing activities for the nine months ended September 30, 2020 of $62.0 million is primarily attributable to purchases of other real estate assets and office equipment investments of approximately $62.0 million.

Cash used for investing activities for the three months ended March 31, 2021 of $16.0 million is primarily attributable to purchases of other real estate assets and office equipment investments.

Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2020 of $1.0 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 $29.0 million.

Cash provided by financing activities for the three months ended March 31, 2021 of $14.3 million is primarily attributable to net borrowings on the BAML Revolver (as defined below) of $24.0 million and was partially offset by distributions paid to stockholders of $9.7 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 Company has the right to extend the maturity date of the JPM Term Loan by two additional six month periods, or until November 30, 2022, upon payment of a fee and satisfaction of certain customary conditions.

On December 24, 2020, the Company repaid $50 million 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 the LIBOR-based rate at September 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 September 30, 2020).

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 March 31, 2021) 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 March 31, 2021).

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 September 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 September 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 nine months ended September 30, 2020 was approximately 2.05% 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.

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 March 31, 2021, 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 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.

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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 September 30, 2020.

We were in compliance with the JPM Term Loan financial covenants as of March 31, 2021.

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”).

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, 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.

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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 September 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 September 30, 2020).

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 March 31, 2021) 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 March 31, 2021).

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.

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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 September 30, 2020, the effective interest rate on the BMO Term Loan was 3.64% per annum.

Accordingly, based upon the Company’s credit rating, as of March 31, 2021, the effective interest rate on the BMO Term Loan was 3.64% per annum.

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 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.

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 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 September 30, 2020.

We were in compliance with the BMO Term Loan financial covenants as of March 31, 2021.

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

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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 September 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 September 30, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at September 30, 2020).

As of March 31, 2021, there were borrowings of $27.5 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 March 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at March 31, 2021).

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 September 30, 2020).

Based upon the Company’s credit rating, as of September 30, 2020, the interest rate on the BAML Revolver was 1.35% per annum.

The weighted average interest rate on all amounts outstanding on the BAML Revolver during the nine months ended September 30, 2020 was approximately 1.76% per annum.

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

The facility fee is assessed against the total amount of the BAML Revolver, or $600 million (0.25% at March 31, 2021).

Based upon the Company’s credit rating, as of March 31, 2021, the interest rate on the BAML Revolver was 1.31% per annum.

The weighted average interest rate on all amounts outstanding on the BAML Revolver during the three months ended March 31, 2021 was approximately 1.31% per annum.

As of December 31, 2020, there were $3.5 million of 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, 2020 was approximately 1.65% per annum.

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● 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 September 30, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at September 30, 2020).

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 March 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at March 31, 2021).

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 September 30, 2020, the effective interest rate on the BAML Term Loan was 2.47% per annum.

Accordingly, based upon the Company’s credit rating, as of March 31, 2021, the effective interest rate on the BAML Term Loan was 2.47% per annum.

BAML Credit Facility General Information

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The Company was in compliance with the BAML Credit Facility financial covenants as of September 30, 2020.

The Company was in compliance with the BAML Credit Facility financial covenants as of March 31, 2021.

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;

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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.

On December 20, 2017, the Senior Notes were funded and proceeds were used to reduce the outstanding balance of the BAML Revolver.

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.

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

The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50;

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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 September 30, 2020.

The Company was in compliance with the Senior Notes financial covenants as of March 31, 2021.

Equity Securities

As of September 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.

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

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 September 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.

As of March 31, 2021, 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.

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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.

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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 September 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.

Additional information about our Sponsored REIT Loans outstanding as of March 31, 2021, 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 nine months ended September 30, 2020 and 2019, respectively, the rental income exceeded the expenses for each individual property, with the exception of Stonecroft for each of the three and nine months ended September 30, 2020 and 801 Marquette for each of the three and nine months ended September 30, 2019.

For the three months ended March 31, 2021 and 2020, respectively, the rental income exceeded the expenses for each individual property, with the exception of Stonecroft for the three months ended March 31, 2020.

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 $69,000 during the three months ended September 30, 2020.

We had no rental income and operating expenses of $514,000 during the nine months ended September 30, 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 resulted in approximately 129,800 of net rentable square feet for the property.

As of September 30, 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 three and nine months ended September 30, 2020.

We had rental income of $259,000 and operating expenses of $277,000 during the three months ended September 30, 2019 and rental income of $472,000 and operating expenses of $839,000 during the nine months ended September 30, 2019.

We had no rental income and operating expenses of $172,000 related to this property during the three months ended March 31, 2020.

Off-Balance Sheet Arrangements and Contractual Obligations

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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-Q

Item 2. Management’s Discussion and Analysis