Item 1. Financial Statements
Item 1. Financial Statements
Franklin Street Properties Corp.
Consolidated Balance Sheets
(Unaudited)
March 31,
December 31,
(in thousands, except share and par value amounts)
2021
2020
Assets:
Real estate assets:
Land
$
189,155
$
189,155
Buildings and improvements
1,954,838
1,938,629
Fixtures and equipment
13,308
12,949
2,157,301
2,140,733
Less accumulated depreciation
555,688
538,717
Real estate assets, net
1,601,613
1,602,016
Acquired real estate leases, less accumulated amortization of $ 53,670 and $ 55,447 , respectively
25,836
28,206
Cash, cash equivalents and restricted cash
4,113
4,150
Tenant rent receivables
4,337
7,656
Straight-line rent receivable
69,743
67,789
Prepaid expenses and other assets
5,873
5,752
Related party mortgage loan receivables
21,000
21,000
Office computers and furniture, net of accumulated depreciation of $ 1,459 and $ 1,443 , respectively
147
163
Deferred leasing commissions, net of accumulated amortization of $ 26,384 and $ 30,411 , respectively
56,771
56,452
Total assets
$
1,789,433
$
1,793,184
Liabilities and Stockholders’ Equity:
Liabilities:
Bank note payable
$
27,500
$
3,500
Term loans payable, less unamortized financing costs of $ 2,332 and $ 2,677 , respectively
717,668
717,323
Series A & Series B Senior Notes, less unamortized financing costs of $ 781 and $ 822 , respectively
199,219
199,178
Accounts payable and accrued expenses
63,456
72,058
Accrued compensation
1,390
3,918
Tenant security deposits
8,041
8,677
Lease liability
1,444
1,536
Other liabilities: derivative liabilities
13,698
17,311
Acquired unfavorable real estate leases, less accumulated amortization of $ 3,959 and $ 4,031 , respectively
1,433
1,592
Total liabilities
1,033,849
1,025,093
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $ .0001 par value, 20,000,000 shares authorized, none issued or outstanding
—
—
Common stock, $ .0001 par value, 180,000,000 shares authorized, 107,328,199 and 107,328,199 shares issued and outstanding , respectively
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11
Additional paid-in capital
1,357,131
1,357,131
Accumulated other comprehensive loss
( 13,698 )
( 17,311 )
Accumulated distributions in excess of accumulated earnings
( 587,860 )
( 571,740 )
Total stockholders’ equity
755,584
768,091
Total liabilities and stockholders’ equity
$
1,789,433
$
1,793,184
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended March 31,
(in thousands, except per share amounts)
2021
2020
Revenues:
Rental
$
58,623
$
62,567
Related party revenue:
Management fees and interest income from loans
410
403
Other
6
13
Total revenues
59,039
62,983
Expenses:
Real estate operating expenses
15,939
17,298
Real estate taxes and insurance
12,366
11,762
Depreciation and amortization
24,381
22,338
General and administrative
4,146
3,525
Interest
8,600
9,063
Total expenses
65,432
63,986
Loss before taxes
( 6,393 )
( 1,003 )
Tax expense
67
68
Net loss
$
( 6,460 )
$
( 1,071 )
Weighted average number of shares outstanding, basic and diluted
107,328
107,269
Net loss per share, basic and diluted
$
( 0.06 )
$
( 0.01 )
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
For the
Three Months Ended
March 31,
(in thousands)
2021
2020
Net loss
$
( 6,460 )
$
( 1,071 )
Other comprehensive income (loss):
Unrealized gain (loss) on derivative financial instruments
3,613
( 18,353 )
Total other comprehensive income (loss)
3,613
( 18,353 )
Comprehensive loss
$
( 2,847 )
$
( 19,424 )
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Accumulated
Distributions
Additional
other
in excess of
Total
Common Stock
Paid-In
comprehensive
accumulated
Stockholders’
(in thousands, except per share amounts)
Shares
Amount
Capital
income (loss)
earnings
Equity
Balance, December 31, 2019
107,269
$
11
$
1,356,794
$
( 4,682 )
$
( 565,727 )
$
786,396
Comprehensive loss
—
—
—
( 18,353 )
( 1,071 )
( 19,424 )
Distributions $ 0.09 per
share of common stock
—
—
—
—
( 9,654 )
( 9,654 )
Balance, March 31, 2020
107,269
$
11
$
1,356,794
$
( 23,035 )
$
( 576,452 )
$
757,318
Balance, December 31, 2020
107,328
$
11
$
1,357,131
$
( 17,311 )
$
( 571,740 )
$
768,091
Comprehensive income (loss)
—
—
—
3,613
( 6,460 )
( 2,847 )
Distributions $ 0.09 per
share of common stock
—
—
—
—
( 9,660 )
( 9,660 )
Balance, March 31, 2021
107,328
$
11
$
1,357,131
$
( 13,698 )
$
( 587,860 )
$
755,584
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31,
(in thousands)
2021
2020
Cash flows from operating activities:
Net loss
$
( 6,460 )
$
( 1,071 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense
25,088
23,086
Amortization of above and below market leases
( 32 )
( 73 )
Decrease in allowance for doubtful accounts
and write-off of accounts receivable
—
( 13 )
Changes in operating assets and liabilities:
Tenant rent receivables
3,319
255
Straight-line rents
( 1,904 )
( 966 )
Lease acquisition costs
( 50 )
( 470 )
Prepaid expenses and other assets
( 532 )
( 644 )
Accounts payable and accrued expenses
( 9,564 )
( 8,215 )
Accrued compensation
( 2,528 )
( 2,065 )
Tenant security deposits
( 636 )
269
Payment of deferred leasing commissions
( 5,056 )
( 2,892 )
Net cash provided by operating activities
1,645
7,201
Cash flows from investing activities:
Property improvements, fixtures and equipment
( 16,022 )
( 20,054 )
Net cash used in investing activities
( 16,022 )
( 20,054 )
Cash flows from financing activities:
Distributions to stockholders
( 9,660 )
( 9,654 )
Borrowings under bank note payable
36,500
35,000
Repayments of bank note payable
( 12,500 )
( 5,000 )
Net cash provided by financing activities
14,340
20,346
Net increase (decrease) in cash, cash equivalents and restricted cash
( 37 )
7,493
Cash, cash equivalents and restricted cash , beginning of year
4,150
9,790
Cash, cash equivalents and restricted cash , end of period
$
4,113
$
17,283
Supplemental disclosure of cash flow information:
Cash paid for:
Interest
$
5,870
$
5,899
Taxes
$
24
$
—
Non-cash investing activities:
Accrued costs for purchases of real estate assets
$
9,585
$
9,645
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards
Organization
Franklin Street Properties Corp. (“FSP Corp.” or the “Company”) holds, directly and indirectly, 100 % of the interest in FSP Investments LLC, FSP Property Management LLC, FSP Holdings LLC and FSP Protective TRS Corp . FSP Property Management LLC provides asset management and property management services. The Company also has a non-controlling common stock interest in two corporations organized to operate as real estate investment trusts (“REIT”). Collectively, the two REITs are referred to as the “Sponsored REITs”.
As of March 31, 2021, the Company owned and operated a portfolio of real estate consisting of 33 operating properties, one redevelopment property and two managed Sponsored REITs and held one promissory note secured by a mortgage on real estate owned by a Sponsored REIT. From time-to-time, the Company may acquire real estate or make additional secured loans. The Company may also pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, or for geographic or property specific reasons.
Properties
The following table summarizes the Company’s number of operating properties and rentable square feet of real estate. As of March 31, 2021 and March 31, 2020, the Company had one and three redevelopment properties, respectively, which are excluded from the table.
As of March 31,
2021
2020
Operating Properties:
Number of properties
33
32
Rentable square feet
9,548,810
9,506,513
Basis of Presentation
The unaudited consolidated financial statements of the Company include all of the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission.
The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or for any other period.
Financial Instruments
As disclosed in Note 4, the Company’s derivatives are recorded at fair value using Level 2 inputs. The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued expenses, accrued compensation, and tenant security deposits approximate their fair values based on their short-term
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maturity and the bank note and term loans payable approximate their fair values as they bear interest at variable interest rates or at rates that are at market for similar investments.
Cash, Cash Equ ivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows.
March 31,
March 31,
(in thousands)
2021
2020
Cash and cash equivalents
$
2,613
$
17,283
Restricted cash
1,500
—
Total cash, cash equivalents and restricted cash
$
4,113
$
17,283
Recent Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently assessing the potential impact that the adoption of ASU 2020-04 may have on its consolidated financial statements.
2. Related Party Transactions and Investments in Non-Consolidated Entities
Investment in Sponsored REITs:
At each of March 31, 2021 and December 31, 2020, the Company held a non-controlling common stock interest in two Sponsored REITs in which the Company no longer shares in economic benefit or risk.
Management fees and interest income from loans:
Asset management fees range from 1 % to 5 % of collected rents and the applicable contracts are cancellable with 30 days notice. Asset management fee income from non-consolidated entities amounted to approximately $ 16,000 and $ 21,000 for the three months ended March 31, 2021 and 2020, respectively.
From time to time the Company 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. The Company reviews the need for an allowance under CECL for Sponsored REIT Loans each reporting period. The Company regularly evaluates the extent and impact of any credit deterioration that could affect performance and the value of the secured property, as well as the financial and operating capability of the borrower. A property’s operating results and existing cash balances are considered and used to assess whether cash flows from operations are sufficient to cover the current and future operating and debt service requirements. The Company also evaluates the borrower’s competency in managing and operating the secured property and considers the overall economic environment, real estate sector and geographic sub-market in which the secured property is located. The Company applies normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment. None of the Sponsored REIT loans have been impaired.
The Company anticipates the Sponsored REIT Loan will be repaid at maturity or earlier from refinancing, long term financings of the underlying property, cash flows from the underlying property or some other capital event. The Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately two years .
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The following is a summary of the Sponsored REIT Loan outstanding as of March 31, 2021:
Maximum
Amount
Interest
(dollars in thousands, except footnotes)
Maturity
Amount
Outstanding
Rate at
Sponsored REIT
Location
Date
of Loan
31-Mar-21
31-Mar-21
Mortgage loan secured by property
FSP Monument Circle LLC (1)
Indianapolis, IN
6-Dec-22
$
21,000
$
21,000
7.51
%
$
21,000
$
21,000
(1) The interest rate is a fixed rate and this mortgage loan includes an origination fee of $ 164,000 and an exit fee of $ 38,000 when repaid by the borrower.
The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $ 394,000 and $ 382,000 for the three months ended March 31, 2021 and 2020, respectively. The financial instrument was classified within Level 3 of the fair value hierarchy and had a fair value of approximately $ 20.3 million as of March 31, 2021.
On December 6, 2020, the Company entered into a second amendment to the Sponsored REIT Loan which qualified as a troubled debt restructuring. The amendment extended the maturity date of the loan for two years and increased the interest rate from 7.19 % to 7.51 %. There were no commitments to lend additional funds to the Sponsored REIT and the loan is fully collateralized by the mortgage held on the Sponsored REIT's property. Repayment of the Sponsored REIT Loan outstanding with FSP Monument Circle LLC is expected to be provided substantially through the operation or sale of the collateral.
3. Bank Note Payable, Term Loans Payable and Senior Notes
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”). 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, and $ 100 million remains fully advanced and outstanding under the JPM Term Loan. 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, (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 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 March 31, 2021, the effective interest rate on the remaining $ 100 million portion of the JPM Term Loan was 3.69 % per annum.
The JPM Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in
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business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The JPM Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The JPM Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the JPM Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the JPM Credit Agreement immediately due and payable, and enforce any and all rights of the lenders or administrative agent under the JPM Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the JPM Term Loan financial covenants as of 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”). The BMO Credit Agreement provides for a single, unsecured term loan borrowing in the amount of $ 220 million (the “BMO Term Loan”) that remains fully advanced and outstanding. The BMO Term Loan consists of a $ 55 million tranche A term loan and a $ 165 million tranche B term loan. The tranche A term loan matures on November 30, 2021 and the tranche B term loan matures on January 31, 2024. The BMO Credit Agreement also includes an accordion feature that allows up to $ 100 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions. The BMO Term Loan was previously evidenced by an Amended and Restated Credit Agreement, dated October 29, 2014, among the Company, BMO, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated July 21, 2016, and a Second Amendment, dated October 18, 2017.
The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating ( 125 basis points over LIBOR at 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. 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 matured 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. 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 provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or the administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BMO Term Loan financial covenants as of March 31, 2021.
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BAML Credit Facility
On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and extended the maturity of an existing term loan (the “BAML Term Loan”).
BAML Revolver Highlights
● The BAML Revolver is for borrowings, at the Company's election, of up to $ 600 million. Borrowings made pursuant to the BAML Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $ 600 million outstanding at any time.
● Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the initial maturity date of January 12, 2022. The Company has the right to extend the maturity date of the BAML Revolver by two additional six month periods, or until January 12, 2023, upon payment of a fee and satisfaction of certain customary conditions.
● The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $ 500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.
As of March 31, 2021, there were $ 27.5 million of borrowings 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 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.
BAML Term Loan Highlights
● The BAML Term Loan is for $ 400 million.
● The BAML Term Loan matures on January 12, 2023.
● The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $ 500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.
● On September 27, 2012, the Company drew down the entire $ 400 million under the BAML Term Loan and such amount remains fully advanced and outstanding under the BAML Term Loan.
The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating ( 1.35 % over LIBOR at 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
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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 March 31, 2021, the effective interest rate on the BAML Term Loan was 2.47 % per annum.
BAML Credit Facility General Information
The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BAML Credit Facility provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BAML Credit Facility). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BAML Credit Facility financial covenants as of 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; to finance investments associated with Sponsored REITs to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BAML Credit Facility.
Senior Notes
On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes. Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $ 200 million of senior unsecured notes consisting of (i) 3.99 % Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $ 116 million (the “Series A Notes”) and (ii) 4.26 % Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $ 84 million (the “Series B Notes” and, together with the Series A Notes, the “Senior Notes”). On December 20, 2017, the Senior Notes were funded and the proceeds were used to reduce the outstanding balance of the BAML Revolver.
The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BAML Credit Facility, the BMO Credit Agreement and the JPM Credit Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50 ; a maximum leverage ratio and an unsecured leverage ratio of no more than 60 % ( 65 % if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. The Company was in compliance with the Senior Notes financial covenants as of March 31, 2021.
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4. Financial Instruments: Derivatives and Hedging
On July 22, 2016, the Company fixed the interest rate for the period beginning on September 27, 2017 and ending on September 27, 2021 on the BAML Term Loan (the “2017 Interest Rate Swap”). On March 7, 2019, the Company fixed the interest rate for the period beginning on March 29, 2019 and ending on November 30, 2021 on a $ 100 million portion of the JPM Term Loan (the “2019 JPM Interest Rate Swap”). On February 20, 2019, the Company fixed the interest rate for the period beginning August 26, 2020 and ending January 31, 2024 on the BMO Term Loan (the “2019 BMO Interest Rate Swap”). The variable rates that were fixed under the 2017 Interest Rate Swap, the 2019 JPM Interest Rate Swap and the 2019 BMO Interest Rate Swap (collectively referred to as the “Interest Rate Swaps”) are described in Note 3.
The Interest Rate Swaps qualify as cash flow hedges and have been recognized on the consolidated balance sheets at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. 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.
The following table summarizes the notional and fair value of the Company’s derivative financial instruments at March 31, 2021. The notional value is an indication of the extent of the Company’s involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.
Notional
Strike
Effective
Expiration
Fair Value (2) at
(in thousands)
Value
Rate
Date
Date
March 31, 2021
December 31, 2020
2017 Interest Rate Swap
$
400,000
1.12
%
Sep-17
Sep-21
$
( 1,981 )
$
( 2,947 )
2019 JPM Interest Rate Swap
$
100,000
2.44
%
Mar-19
Nov-21
$
( 1,540 )
$
( 2,102 )
2019 BMO Interest Rate Swap (1)
$
220,000
2.39
%
Aug-20
Jan-24
$
( 10,177 )
$
( 12,262 )
(1) The Notional Value will decrease to $ 165 million on November 30, 2021.
(2) Classified within Level 2 of the fair value hierarchy.
On March 31, 2021, the 2017 Interest Rate Swap, 2019 JPM Interest Rate Swap and 2019 BMO Interest Rate Swap were reported as liabilities with an aggregate fair value of approximately $ 13.7 million and are included in other liabilities: derivative liabilities in the consolidated balance sheet at March 31, 2021.
The gain/(loss) on the Company’s Interest Rate Swaps that was recorded in other comprehensive income (loss) (OCI) and the accompanying consolidated statements of operations as a component of interest expense for the three months ended March 31, 2021 and 2020, respectively, was as follows:
(in thousands)
Three Months Ended March 31,
Interest Rate Swaps in Cash Flow Hedging Relationships:
2021
2020
Amounts of gain (loss) recognized in OCI
$
807
$
( 18,389 )
Amounts of previously recorded gain/(loss) reclassified from OCI into Interest Expense
$
( 2,806 )
$
( 36 )
Total amount of Interest Expense presented in the consolidated statements of operations
$
8,600
$
9,063
Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. The Company estimates that approximately $ 7.1 million of the current balance held in accumulated other comprehensive income (loss) will be reclassified into earnings within the next 12 months.
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The Company is hedging the exposure to variability in anticipated future interest payments on existing debt.
The BMO Term Loan, BAML Term Loan and JPM Term Loan hedging transactions used derivative instruments that involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in either or both of the contracts. The Company requires its derivatives contracts to be with counterparties that have investment grade ratings. As a result, the Company does not anticipate that any counterparty will fail to meet its obligations. However, there can be no assurance that the Company will be able to adequately protect against the foregoing risks or that it will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk. The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the consolidated balance sheets.
The Company’s derivatives are recorded at fair value in other assets: derivative asset and other liabilities: derivative liability in the consolidated balance sheets and the effective portion of the derivatives’ fair value is recorded to other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).
5. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of Company shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at each of March 31, 2021 and 2020.
6. Stockholders’ Equity
As of March 31, 2021, the Company had 107,328,199 shares of common stock outstanding. The Company declared and paid dividends as follows (in thousands, except per share amounts):
Dividends Per
Total
Quarter Paid
Share
Dividends
First quarter of 2021
$
0.09
$
9,660
First quarter of 2020
$
0.09
$
9,654
Equity-Based Compensation
On May 20, 2002, the stockholders of the Company approved the 2002 Stock Incentive Plan (the “Plan”). The Plan is an equity-based incentive compensation plan, and provides for the grants of up to a maximum of 2,000,000 shares of the Company’s common stock (“Awards”). All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted Awards. Awards under the Plan are made at the discretion of the Company’s Board of Directors, and have no vesting requirements. Upon granting an Award, the Company will recognize compensation cost equal to the fair value of the Company’s common stock, as determined by the Company’s Board of Directors, on the date of the grant.
On June 4, 2020, the Company granted 58,998 shares under the Plan to non-employee directors at a compensation cost of approximately $ 337,000 , which was recognized during the year ended December 31, 2020 and is included in general and administrative expenses for such period. Such shares were fully vested on the date of issuance. There are currently 1,847,384 shares available for grant under the Plan .
Shares Available
Compensation
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(in thousands)
for Grant
Cost
Balance December 31, 2019
1,906,382
337,000
Shares granted 2020
( 58,998 )
337,000
Balance December 31, 2020
1,847,384
$
674,000
Shares granted 2021
-
-
Balance March 31, 2021
1,847,384
$
674,000
7. Income Taxes
General
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10 % of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”). In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20 % ( 25 % of taxable years beginning on or before December 31, 2017) of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25 % of the value of all of the Company’s assets. FSP Investments LLC and FSP Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code. The TRSs have gross amounts of net operating losses (“NOLs”) available to those taxable corporations of $ 4.6 million and $ 4.4 million as of each of December 31, 2020, and 2019 respectively. The NOLs created prior to 2018 will expire between 2030 and 2047 and the NOLs generated after 2017 will not expire. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured.
Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.
The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company and one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2017 and thereafter.
Net operating losses
Section 382 of the Code restricts a corporation’s ability to use NOLs to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs generated prior to December 31, 2018 will expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured. The gross amount of NOLs available to the Company was $ 13.0 million as of each of March 31, 2021 and December 31, 2020.
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Income Tax Expense
The Company is subject to a business tax known as the Revised Texas Franchise Tax. Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax. The Company recorded a provision for the Revised Texas Franchise Tax of $ 67,000 and $ 68,000 for the three months ended March 31, 2021 and 2020, respectively.
The income tax expense reflected in the consolidated statements of operations relates primarily to a franchise tax on the Company’s Texas properties.
For the Three Months Ended March 31,
(Dollars in thousands)
2021
2020
Revised Texas Franchise Tax
$
67
$
68
Other Taxes
—
—
Tax expense
$
67
$
68
Taxes on income are a current tax expense. No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.
8. Leases
Leases as a Lessor:
The Company is a lessor of commercial real estate with operations that include the leasing of office and industrial properties. Many of the leases with customers contain options to extend leases at a fair market rate and may also include options to terminate leases. The Company considers several inputs when evaluating the amount it expects to derive from its leased assets at the end of the lease terms, such as the remaining useful life, expected market conditions, fair value of lease payments, expected fair values of underlying assets, and expected deployment of the underlying assets. The Company’s strategy to address its risk for the residual value in its commercial real estate is to re-lease the commercial space.
The Company has elected to apply the practical expedient to not separate non-lease components from the related lease component of real estate leases. This combined component is primarily comprised of fixed lease payments, early termination fees, common area maintenance cost reimbursements, and parking lease payments. The Company applies ASC 842-Leases to the combined lease and non-lease components.
A minority of the Company’s leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in the CPI are not estimated as part of the Company’s measurement of straight-line rent revenue, to the extent that the actual CPI is greater or less than the CPI at lease commencement, there could be changes to realized income or loss.
For the three months ended March 31, 2021 and 2020, the Company recognized the following amounts of income relating to lease payments:
Income relating to lease payments:
Three Months Ended
(in thousands)
March 31, 2021
March 31, 2020
Income from leases (1)
$
56,709
$
61,529
$
56,709
$
61,529
(1) Amounts recognized from variable lease payments were $ 14,688 and $ 15,629 for the three months ended March 31, 2021 and 2020, respectively.
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9. Subsequent Events
On April 2, 2021, the Board of Directors of the Company declared a cash distribution of $ 0.09 per share of common stock payable on May 7, 2021 to stockholders of record on April 16, 2021.
On March 5, 2021, the Company entered into a Purchase and Sale Agreement with a third-party buyer for the disposition of three office properties located in Atlanta, Georgia for a purchase price of approximately $ 219.5 million. The buyer’s due diligence inspection period expired on April 15, 2021 and the Company had no assurance the sale was probable as of March 31, 2021. Assuming satisfaction of certain customary conditions to close, the closing of the sale of the properties is expected to take place on or about May 17, 2021; provided, however, that seller and buyer each have a one -time right to extend the closing date by up to thirty (30) days by providing notice to the other party at least three (3) business days prior to the then scheduled closing date.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.