What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-04 · 182 added, 124 removed, 237 unchanged (56% of the section changed)

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Accordingly, readers are cautioned not to place undue reliance on forward-looking statements.

Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, adverse changes in general economic or local market conditions, including as a result of the COVID-19 pandemic and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the markets in which we own properties, including energy-influenced markets such as Dallas, Denver and Houston, changes in interest rates as a result of economic market conditions or a downgrade in our credit rating, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, changes in energy prices, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, delays in construction schedules, unanticipated increases in construction costs, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.

Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, adverse changes in general economic or local market conditions, including as a result of the COVID-19 pandemic and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the markets in which we own properties, including energy-influenced markets such as Dallas, Denver and Houston, uncertainty relating to the completion and timing of the disposition of the properties under agreement, changes in interest rates as a result of economic market conditions or a downgrade in our credit rating, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, changes in energy prices, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, delays in construction schedules, unanticipated increases in construction costs, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.

See Part I, Item 1A.

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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 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.

As of June 30, 2021, approximately 6.6 million square feet, or approximately 79% 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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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.

Further to this strategy, on May 27, 2021, we sold One Ravinia, Two Ravinia and One Overton Park in Atlanta Georgia for aggregate gross proceeds of approximately $219.5 million.

On June 29, 2021, we sold Loudoun Technology Center in

Sterling, Virginia for gross proceeds of approximately $17.25 million.

During the three months ended June 30, 2021, we repaid approximately $155 million of term loan indebtedness and the approximately $47.5 million that had been drawn under our revolving line of credit.

On July 9, 2021, we entered into a Purchase and Sale Agreement with a third-party buyer for the disposition of two office properties located in Chantilly, Virginia for a purchase price of approximately $40 million.

Assuming satisfaction of certain customary conditions to close, including successful completion by the buyer of a due diligence inspection period, the closing of the sale of the properties is expected to take place on or about September 9, 2021.

On July 13, 2021, we entered into a Purchase and Sale Agreement with a third-party buyer for the disposition of two properties located in Chesterfield, Missouri for a purchase price of approximately $67 million.

On June 15, 2021, the credit rating for our senior unsecured debt was downgraded by Moody’s Investor Service to Ba1 from Baa3.

The interest rate applicable to borrowings under our credit facilities is based in part on the rating of our debt.

We anticipate that as a result of this downgrade we will incur an additional approximately $1.6 million in additional interest costs over the balance of 2021 and $3.3 million in additional interest costs over a full twelve month period based on our borrowings as of June 30, 2021.

Trends and Uncertainties

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It has already disrupted global travel supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain.

Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, as well as the availability and effectiveness of vaccines, therapeutics and any responses taken on a national and local level by government authorities and businesses.

The travel restrictions, limits on hours of operations and/or closures of various businesses and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally, including in the markets where we own properties, and we expect them to have an adverse impact on our business.

Many of our tenants are subject to various quarantine restrictions, and the restrictions could be in place for an extended period of time.

The pandemic has had an adverse impact on economic and market conditions and triggered a global economic slowdown.

The reduction in economic activity worldwide has had a significant negative effect on energy prices, which, if sustained, could have an adverse impact on occupancy and rental rates in energy-influenced markets such as Dallas, Denver and Houston, where we have a significant concentration of properties.

Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, including the spread of more contagious variants of the virus, 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 significantly disrupted business activity globally, including in the markets where we own properties.

Many of our tenants have been subject to various quarantine restrictions, and do not fully occupy the space that they lease.

The pandemic has had an adverse impact on economic and market conditions in various sectors of the economy.

However, the evolving nature of the pandemic makes it difficult to ascertain the long-term impact it will have on commercial real estate markets and our business.

Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to the performance of our properties and our financial results, such as the potential negative impact to the businesses of our tenants, the potential negative impact to leasing efforts and occupancy at our properties, the potential closure of certain of our assets for an extended period, uncertainty regarding future rent collection levels or requests for rent concessions from our tenants, the occurrence of a default under any of our debt agreements, the potential for increased borrowing costs, a potential downgrade in our credit rating that could lead to increased borrowing costs or reduce our access to funding sources in credit and capital markets, our ability to refinance existing indebtedness or to secure new sources of capital on favorable terms, fluctuations in our level of dividends, increased costs of operations, our ability to complete required capital expenditures in a timely manner and on budget, decrease in values of our real estate assets, changes in law and/or regulation, and uncertainty regarding government and regulatory policy.

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, 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.

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We have implemented working from home policies for our employees.

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.

During the six months ended June 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, we have collected in excess of 99% of rental receipts due in the first half of 2021.

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 $4.1 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.

Cash, cash equivalents and restricted cash were $24.2 million as of June 30, 2021.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BAML Revolver ($600 million as of June 30, 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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Real Estate Operations

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.

As of June 30, 2021, our real estate portfolio was comprised of 29 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 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.

Our 29 operating properties were approximately 79.5% leased as of June 30, 2021, a decrease from 85.0% leased as of December 31, 2020.

The 5.5% decrease in leased space was a result of the impact from the disposition of four properties in the second quarter of 2021 and of lease expirations and terminations, which exceeded leasing completed during the six months ended June 30, 2021.

As of June 30, 2021, we had approximately 1,684,000 square feet of vacancy in our operating properties compared to approximately 1,397,000 square feet of vacancy at December 31, 2020.

During the six months ended June 30, 2021, we leased approximately 563,000 square feet of office space, of which approximately 465,000 square feet were with existing tenants, at a weighted average term of 8.3 years.

On average, tenant improvements for such leases were $16.62 per square foot, lease commissions were $10.03 per square foot and rent concessions were approximately eight months of free rent.

Average GAAP base rents under such leases were $29.51 per square foot, or 0.8% higher 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.

As of June 30, 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 March 31, 2021, we had incurred approximately $2.3 million in redevelopment costs.

We anticipate completing the redevelopment by July 31, 2021.

We expect to incur redevelopment costs (excluding lease-up costs) of $4.5 million, which includes significant interior work to make the space suitable for multiple tenants.

As of June 30, 2021, we had incurred approximately $3.0 million in redevelopment costs.

We anticipate completing the redevelopment by August 31, 2021.

On July 9, 2021, we entered into a Purchase and Sale Agreement with a third-party buyer for the disposition of Stonecroft and our other office property located in Chantilly, Virginia for a purchase price of approximately $40 million.

However, if the sale of Stonecroft does not occur, we expect to incur additional lease-up and stabilization costs prior to the property becoming an operating property.

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.

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.

As of June 30, 2021, the property had leases signed and a tenant occupying approximately 73.1% of the rentable square feet of the property.

As of June 30, 2021, leases for approximately 1.7% and 8.4% of the square footage in our owned portfolio are scheduled to expire during 2021 and 2022, respectively.

As the third quarter of 2021 begins, we believe that our operating properties are stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants.

While leasing activity at our properties has continued, we believe that the COVID-19 pandemic and related containment and mitigation measures may limit or delay new tenant leasing during at least the third quarter of 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 exists for any of our tenants to default on its lease or to seek the protection

of bankruptcy.

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.

In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.

Dispositions of Properties

We sold three office properties located in Atlanta, Georgia on May 27, 2021 with an aggregate sales price of approximately $219.5 million, at a net gain of approximately $22.7 million.

We sold an office property in Dulles, Virginia on June 29, 2021 at a loss of $2.1 million.

We used the proceeds of the dispositions principally to repay outstanding indebtedness.

The dispositions of these properties did not represent a strategic shift that has a major effect on our operations and financial results.

Atlanta, Georgia is in the sunbelt region of the United States, and our current strategy is to continue to invest in this region.

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

Critical Accounting Policies

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Results of Operations

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

Three months ended March 31,

The following table shows financial results for the three months ended June 30, 2021 and 2020:

Three months ended June 30,

(in thousands)

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Total expenses

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.

Loss on extinguishment of debt

Gain on sale of properties, net

Income (loss) before taxes

Net income (loss)

Comparison of the three months ended June 30, 2021 to the three months ended June 30, 2020:

Total revenues decreased by $4.7 million to $56.1 million for the three months ended June 30, 2021, as compared to the three months ended June 30, 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 interest expense of approximately $0.4 million.

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

● A decrease in rental revenue of approximately $4.7 million arising primarily from the sale of four properties and a tenant bankruptcy in December 2020 and other losses of rental income from leases that expired after June 30, 2020 and during the three months ended June 30, 2021, compared to the three months ended June 30, 2020.

These decreases were partially offset by rental income earned from leases commencing after June 30, 2020.

Our leased space in our operating properties was 79.5% at June 30, 2021 and 84.5% at June 30, 2020.

Total expenses decreased by $2.4 million to $60.4 million for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020.

The decrease was primarily a result of:

● An decrease in real estate operating expenses and real estate taxes and insurance of approximately $0.5 million.

● A decrease in depreciation and amortization of approximately $3.1 million.

These decreases were partially offset by:

● An increase in general and administrative expenses of $0.1 million, which was primarily from higher professional fees.

● An increase to interest expense of approximately $1.1 million.

The increase was primarily from interest swap breakage costs of $1.9 million related to the repayment of $155 million in term loan debt on June 4, 2021.

These increases were partially offset by lower interest expense as a result of lower debt outstanding during the three months ended June 30, 2021 compared to the same period in 2020.

Loss on extinguishment of debt

During the three months ended June 30, 2021, we repaid debt and incurred a loss on extinguishment of debt of $0.2 million related to unamortized deferred financing costs on the date of the repayment.

Gain on sale of properties, net

During the three months ended June 30, 2021, we sold three office properties located in Atlanta, Georgia on May 27, 2021 with an aggregate sales price of approximately $219.5 million, at a net gain of approximately $22.7 million.

We sold an office property in Dulles, Virginia on June 29, 2021 at a loss of $2.1 million.

There were no property sales during the three months ended June 30, 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 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.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $8,000 during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Net income for the three months ended June 30, 2021 was $16.1 million compared to a net loss of $2.1 million for the three months ended June 30, 2020, for the reasons described above.

The following table shows financial results for the six months ended June 30, 2021 and 2020:

Six months ended June 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

Loss on extinguishment of debt

Gain on sale of properties, net

Income (loss) before taxes on income

Tax expense on income

Net income (loss)

Comparison of the six months ended June 30, 2021 to the six months ended June 30, 2020:

Total revenues decreased by $8.6 million to $115.2 million for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $8.6 million arising primarily from the sale of four properties and a tenant bankruptcy in December 2020 and other loss of rental income from leases that expired after June 30, 2020 during the six months ended June 30, 2021 compared the same period in 2020.

These decreases were partially offset by rental income earned from leases commencing after June 30, 2020.

Our leased space in our operating properties was 79.5% at June 30, 2021 and 84.5% at June 30, 2020.

Total expenses decreased by $1.0 million to $125.8 million for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020.

The decrease was primarily a result of:

● An decrease in real estate operating expenses and real estate taxes and insurance of approximately $1.3 million.

● An decrease in depreciation and amortization of approximately $1.1 million.

These decreases were partially offset by:

● An increase general and administrative expenses of approximately $0.8 million, wich was primarily from professional fees.

● An increase in interest expense of approximately $0.6 million.

The increase was primarily from interest swap breakage costs of $1.9 million related to the repayment of $155 million in term loan debt

on June 4, 2021.

These increases were partially offset by lower interest expense as a result of lower debt outstanding during the six months ended June 30, 2021 compared to the same period in 2020.

Loss on extinguishment of debt

During the six months ended June 30, 2021, we repaid debt and incurred a loss on extinguishment of debt of $0.2 million related to unamortized deferred financing costs on the date of the repayment.

Gain on sale of properties, net

During the six months ended June 30, 2021, we sold three office properties located in Atlanta, Georgia on May 27, 2021 with an aggregate sales price of approximately $219.5 million, at a net gain of approximately $22.7 million.

We sold an office property in Dulles, Virginia on June 29, 2021 at a loss of $2.1 million.

There were no property sales during the three months ended June 30, 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 $9,000 during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Net income for the six months ended June 30, 2021 was $9.7 million compared to a net loss of $3.1 million for the six months ended June 30, 2020, for the reasons described above.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

(in thousands):

Gain on sale of property

Net income (loss)

Gain on sale of properties

Depreciation and amortization

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Management believes that investors are interested in this information.

NOI is a non-GAAP financial measure that the Company defines as net income or loss (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, hedge ineffectiveness, gains or losses on the sale of assets and excludes non-property specific income and expenses.

NOI is a non-GAAP financial measure that the Company defines as net income or loss (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, hedge ineffectiveness, gains or losses on extinguishment of debt, gains or losses on the sale of assets and excludes non-property specific income and expenses.

The information presented includes footnotes and the data is shown by region with properties owned in the periods presented, which we call Same Store.

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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, 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.

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Reconciliation to Net Income (Loss)

Net income (loss)

Add (deduct):

Loss on extinguishment of debt

Gain on sale of properties, net

Management fee income

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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 three months ended March 31, 2021 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 six months ended June 30, 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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Square Feet (b)

Loudoun Tech Center

Stonecroft (c)

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Blue Lagoon Drive

One Overton Park

Addison Circle

Collins Crossing

GAAP rent includes the impact of tenant concessions and reimbursements.

This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans.

Percentage as of

Rent per Occupied

Property Name

Square Feet (b)

Eldridge Green

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One Legacy Circle

One Ravinia Drive

Two Ravinia Drive

Westchase I & II

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Total Owned Properties

(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.

(a) Based on weighted occupied square feet for the six months ended June 30 2021, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the six months ended June 30, 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 $4.1 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.

Cash, cash equivalents and restricted cash were $24.2 million and $4.2 million at June 30, 2021 and December 31, 2020, respectively.

The increase of $20.0 million is attributable to $6.1 million provided by operating activities, plus $191.7 million provided by investing activities less $177.8 million used in financing activities.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing debt financing will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

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.

We have extension options on our 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 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.

Cash provided by operating activities for the six months ended June 30, 2021 of $6.1 million is primarily attributable to net income of $9.7 million less $20.6 million of gains on sale of properties, net, plus the add-back of $42.5 million of non-cash expenses, plus a decrease in tenant rent receivables of $4.5 million.

These increases were partially offset by a decrease in accounts payable and accrued compensation of $20.1 million, an increase in payment of deferred leasing commissions of $6.9 million, an increase in tenant security deposits of $1.9 million, an increase in lease acquisition costs 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 three months ended March 31, 2021 of $16.0 million is primarily attributable to purchases of other real estate assets and office equipment investments.

Cash provided by investing activities for the six months ended June 30, 2021 of $191.7 million is primarily attributable to proceeds from the sale of four properties of $228.7 million less purchases of other real estate assets and office equipment investments of $37.0 million.

Financing Activities

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.

Cash used in financing activities for the six months ended June 30, 2021 of $177.8 million is primarily attributable to repayment of the JPM Term Loan (as defined below) of $100.0 million, repayment of a tranche of the BMO Term Loan (as defined below) of $55.0 million, net repayments on the BAML Revolver (as defined below) of $3.5 million and distributions paid to stockholders of 19.3 million.

JPM Term Loan

On August 2, 2018, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (the “JPM Credit Agreement”), which provides a single unsecured bridge loan in the aggregate principal amount of $150 million (the “JPM Term Loan”).

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 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 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 provided 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 remained fully advanced and outstanding under the JPM Term Loan.

On June 4, 2021, the Company repaid the remaining $100 million outstanding on the loan, which had been scheduled to mature on November 30, 2021, and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs.

The repayment was made with a portion of the proceeds from the May 27, 2021 sales of the three Atlanta properties.

Although the interest rate on the JPM Term Loan was 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 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.

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.

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

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.

On June 4, 2021, the Company paid approximately $1.2 million to terminate the interest rate swap, which was scheduled to mature on November 30, 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, 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 provides for a single, unsecured term loan borrowing in the initial amount of $220 million (the “BMO Term Loan”), of which $165 million remains fully advanced and outstanding.

The BMO Term Loan initially consisted of a $55 million tranche A term loan and a $165 million tranche B term loan.

On June 4, 2021, the Company repaid the tranche A term loan that was scheduled to mature on November 30, 2021, and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs.

The repayment was made with a portion of the proceeds from the May 27, 2021 sales of the three Atlanta properties.

The $165 million 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 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).

The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at June 30, 2021) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at June 30, 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 expired on August 26, 2020.

On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum, which 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.

Accordingly, based upon the Company’s credit rating, as of June 30, 2021, the effective interest rate on the BMO Term Loan was 4.04% per annum.

On June 4, 2021, the Company paid approximately $0.6 million to terminate the portion of the interest rate swap on tranche A, which was scheduled to mature on November 30, 2021.

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).

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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.

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

We were in compliance with the BMO Term Loan financial covenants as of June 30, 2021.

BAML Credit Facility

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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 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).

As of June 30, 2021, there were no 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 (1.55% over LIBOR at June 30, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.55% over the base rate at June 30, 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.

The facility fee is assessed against the total amount of the BAML Revolver, or $600 million (0.30% at June 30, 2021).

Based upon the Company’s credit rating, as of June 30, 2021, the interest rate on the BAML Revolver was 1.65% per annum.

The weighted average interest rate on all amounts outstanding on the BAML Revolver during the six months ended June 30, 2021 was approximately 1.31% per annum.

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

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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 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).

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.75% over LIBOR at June 30, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.75% over the base rate at June 30, 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 March 31, 2021, the effective interest rate on the BAML Term Loan was 2.47% per annum.

On July 22, 2016, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BAML Term Loan at 1.12% per

annum for the period beginning on September 27, 2017 and ending on September 27, 2021.

Accordingly, based upon the Company’s credit rating, as of June 30, 2021, the effective interest rate on the BAML Term Loan was 2.87% 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 March 31, 2021.

The Company was in compliance with the BAML Credit Facility financial covenants as of June 30, 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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On December 20, 2017, the Senior Notes were funded and proceeds were used to reduce the outstanding balance of the BAML Revolver.

The Senior Notes bear interest depending on the Company’s credit rating.

As of June 30, 2021, the Series A Notes bear interest at 4.49% per annum and the Series B Notes bear interest at 4.76% per annum.

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

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;

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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.

In the case of an event of default, the Purchasers may, among other remedies, accelerate

the payment of all obligations.

The Company was in compliance with the Senior Notes financial covenants as of June 30, 2021.

Stock Repurchase Program

On June 23, 2021, we announced a share repurchase program under which we are authorized to repurchase up to $50 million of our common stock.

The share repurchase program may be suspended or discontinued at any time.

During the three months ended June 30, 2021, we did not repurchase any shares of common stock under the program and therefore as of June 30, 2021, $50 million remained authorized for repurchases of our common stock under the program.

Future repurchases of common stock will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors.

Equity Securities

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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 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.

As of June 30, 2021, we had one secured 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 the outstanding amounts of this loan will be repaid from sale of the collateral.

We may be subject to various legal proceedings and claims that arise in the ordinary course of our business.

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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 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.

Additional information about our Sponsored REIT Loans outstanding as of June 30, 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 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.

For the three and six months ended June 30, 2021 and 2020, respectively, the rental income exceeded the expenses for each individual property, with the exception of Stonecroft for the three and six months ended June 30, 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 $172,000 related to this property during the three months ended March 31, 2020.

We had no rental income and operating expenses of $274,000 related to this property during the three months ended June 30, 2020.

We had no rental income and operating expenses of $446,000 related to this property during the six months ended June 30, 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