What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-03 · 147 added, 122 removed, 297 unchanged (48% 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, 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.

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, expectations for future property dispositions, uncertainty relating to the completion and timing of the disposition of the properties under agreement, expectations for potential repurchases of our common stock and the potential payment of special dividends, 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, 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, increases in the level of general and administrative costs as a percentage of revenus as revenues decrease as a result of property dispositions, 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 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.

As of September 30, 2021, approximately 6.6 million square feet, or approximately 84.6% of our total owned portfolio, was located in Atlanta, Dallas, Denver, Houston and Minneapolis.

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

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We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.

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

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

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

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

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

We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets and intend to continue our strategy of seeking to increase shareholder value through the sale of select properties where we believe that our short to intermediate term valuation objectives have been met.

Pursuant to this strategy, we anticipate that dispositions in 2021 will result in estimated gross proceeds in the range of approximately $563 million to $600 million.

As of October 25, 2021, we had disposed of real estate assets for aggregate gross proceeds of approximately $563 million and repaid approximately $508 million of debt.

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

Proceeds from dispositions are intended to be

used for the repayment of debt, repurchases of our common stock, any special dividends required to meet REIT requirements, and other general corporate purposes.

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.

On June 29, 2021, we sold Loudoun Technology Center in Sterling, Virginia for gross proceeds of approximately $17.25 million.

On August 31, 2021, we sold River Crossing in Indianapolis, Indiana for gross proceeds of $35 million.

On September 23, 2021, we sold Timberlake and Timberlake East, in Chesterfield, Missouri for aggregate gross proceeds of $67 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.

During the three months ended September 30, 2021, we repaid $90 million of term loan indebtedness.

On October 5, 2021, we entered into a Purchase and Sale Agreement with a third-party buyer for the disposition of two properties located in Chantilly, Virginia for a purchase price of approximately $40 million.

On October 22, 2021, we sold 999 Peachtree in Atlanta Georgia for gross proceeds of approximately $223.9 million.

On October 25, 2021, the Company repaid $15.0 million of the BAML Revolver and $200.0 million of the BAML Term Loan using proceeds from the sale of the property.

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.

We anticipate that as a result of this downgrade we will incur an additional approximately $0.8 million in additional interest costs over the balance of 2021 and $3.2 million in additional interest costs over a full twelve month period based on our borrowings as of September 30, 2021.

Trends and Uncertainties

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We have been following and directing our vendors to follow the guidelines from the Centers for Disease Control and other applicable authorities to minimize the spread of COVID-19 among our employees, tenants, vendors and visitors, as well as at our properties.

We have implemented working from home policies for our employees.

During the 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.

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

During the nine months ended September 30, 2021, all of our properties remained open for business.

Some of our tenants have requested rent concessions, and more tenants may request rent concessions or may not pay rent in the future .

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 $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.

Cash, cash equivalents and restricted cash were $9.7 million as of September 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 September 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 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.

As of September 30, 2021, our real estate portfolio was comprised of 26 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 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.

Our 26 operating properties were approximately 80.0% leased as of September 30, 2021, a decrease from 85.0% leased as of December 31, 2020.

The 5.0% decrease in leased space was a result of the impact from the disposition of four properties in the second quarter of 2021, the disposition of three properties in the third quarter of 2021 and of lease expirations and terminations, which exceeded leasing completed during the nine months ended September 30, 2021.

As of September 30, 2021, we had approximately 1,536,000 square feet of vacancy in our operating properties compared to approximately 1,397,000 square feet of vacancy at December 31, 2020.

During the nine months ended September 30, 2021, we leased approximately 892,000 square feet of office space, of which approximately 622,000 square feet were with existing tenants, at a weighted average term of 7.8 years.

On average, tenant improvements for such leases were $25.08 per square foot, lease commissions were $11.61 per square foot and rent concessions were approximately eight months of free rent.

Average GAAP base rents under such leases were $30.10 per square foot, or 2.0% 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.

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

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

As of June 30, 2021, our sole redevelopment property was an approximately 111,000 square foot property known as Stonecroft in Chantilly, Virginia.

As of September 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 redevelopment costs (excluding lease-up costs) of $5.1 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.

As of September 30, 2021, we had incurred approximately $3.6 million in redevelopment costs.

We anticipate completing the redevelopment during the fourth quarter of 2021.

On October 5, 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.

We expect to incur the remaining redevelopment costs of approximately $1.6 million prior to the anticipated closing of the sale of the property in the fourth quarter of 2021.

If the expected 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 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.

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

As of September 30, 2021, leases for approximately 0.9% and 7.9% of the square footage in our owned portfolio are scheduled to expire during 2021 and 2022, respectively.

As the fourth 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 fourth 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.

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

We sold an office property located in Indianapolis, Indiana on August 31, 2021 with a sales price of approximately $35 million, at a loss of approximately $1.7 million.

We sold two office properties located in Chesterfield, Missouri on September 23, 2021 with an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 million.

On October 22, 2021, the Company sold 999 Peachtree in Atlanta Georgia for a sales price of approximately $223.9 million, at a gain of approximately $86.8 million.

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

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Recent Accounting Standards

In March 2020, the FASB issued ASU No.

In March 2020, the Financial Accounting Standards Board (FASB) issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

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Results of Operations

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

Three months ended June 30,

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

Three months ended September 30,

(in thousands)

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Gain on sale of properties, net

Income (loss) before taxes

Income (loss) before taxes and equity in income of non-consolidated REITs

Equity in income of non-consolidated REITs

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.

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

Total revenues decreased by $11.5 million to $50.8 million for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020.

The decrease was primarily a result of:

● 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.

● A decrease in rental revenue of approximately $11.5 million arising primarily from the sale of eight properties in the last twelve months and a tenant bankruptcy in December 2020 and other losses of rental income from leases that expired after September 30, 2020 and during the three months ended September 30, 2021, compared to the three months ended September 30, 2020.

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

leased space in our operating properties was 80.0% at September 30, 2021 and 85.6% at September 30, 2020.

Total expenses decreased by $8.7 million to $55.1 million for the three months ended September 30, 2021, as compared to the three months ended September 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.

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $4.4 million primarlity attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $3.2 million primarlity attributable to the property dispositions noted above.

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

● A decrease to interest expense of approximately $1.0 million.

The decrease was primarily from lower interest expense as a result of a lower principal amount of debt outstanding, which was partially offset by higher interest rates during the three months ended September 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.

During the three months ended September 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.

During the three months ended September 30, 2021, we sold an office property located in Indianapolis, Indiana on August 31, 2021, with a sales price of approximately $35 million at a loss of approximately $1.7 million.

We sold two office properties located in Chesterfield, Missouri on September 23, 2021 with an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 million.

There were no property sales during the three months ended September 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 $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,

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $20,000 during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Net income (loss)

Net income for the three months ended September 30, 2021 was $4.5 million compared to a net loss of $1.7 million for the three months ended September 30, 2020, for the reasons described above.

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

Nine months ended September 30,

(in thousands)

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Gain on sale of properties, net

Income (loss) before taxes on income

Income (loss) before taxes on income and equity in income of non-consolidated REITs

Tax expense on income

Equity in income of non-consolidated REITs

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.

Comparison of the nine months ended September 30, 2021 to the nine months ended September 30, 2020:

Total revenues decreased by $20.1 million to $166.0 million for the nine months ended September 30, 2021, as compared to the nine months ended September 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.

● A decrease in rental revenue of approximately $20.1 million arising primarily from the sale of eight properties in the last twelve months and a tenant bankruptcy in December 2020 and other loss of rental income from leases that expired after September 30, 2020 during the nine months ended September 30, 2021 compared the same period in 2020.

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

Our leased space in our operating properties was 80.0% at September 30, 2021 and 85.6% at September 30, 2020.

Total expenses decreased by $9.7 million to $180.9 million for the nine months ended September 30, 2021, as compared to the nine months ended September 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.

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $5.7 million primarlity attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $4.3 million primarlity attributable to the property dispositions noted above.

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

The decrease was primarily from lower interest expense as a result of a lower principal amount of debt outstanding, which was partially offset

by higher interest rates during the nine months ended September 30, 2021 compared to the same period in 2020.

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.

● An increase general and administrative expenses of approximately $0.7 million, which was primarily from professional fees.

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.

During the nine months ended September 30, 2021, we repaid debt and incurred a loss on extinguishment of debt of $0.4 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.

During the nine months ended September 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 $22.8 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.

We sold an office property located in Indianapolis, Indiana on August 31, 2021, with a sales price of approximately $35 million at a loss of approximately $1.7 million.

We sold two office properties located in Chesterfield, Missouri on September 23, 2021 with an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 million.

There were no property sales during the nine months ended September 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.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $29,000 during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Net income (loss)

Net income for the nine months ended September 30, 2021 was $14.1 million compared to a net loss of $4.8 million for the nine months ended September 30, 2020, for the reasons described above.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands):

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Gain on sale of properties

Equity in income of non-consolidated REITs

FFO from non-consolidated REITs

Depreciation and amortization

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The comparative Same Store results include properties held for the periods presented and exclude properties that are redevelopment properties.

We also exclude properties that have been placed in service, but that do not have operating activity for all periods presented, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees.

NOI, as defined

by the Company, may not be comparable to NOI reported by other REITs that define NOI differently.

exclude properties that have been placed in service, but that do not have operating activity for all periods presented, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees.

NOI, as defined by the Company, may not be comparable to NOI reported by other REITs that define NOI differently.

NOI should not be considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions.

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Interest income

Equity in income of non-consolidated REITs

Non-property specific items, net

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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 six months ended June 30, 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 nine months ended September 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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Percentage as of

September 30,

Rent per Occupied

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909 Davis Street

River Crossing

Timberlake East

121 South 8th Street

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Total Owned Properties

(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.

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

(b) Represents annualized GAAP rental revenue for the nine months ended September 30, 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 $24.2 million and $4.2 million at June 30, 2021 and December 31, 2020, respectively.

Cash, cash equivalents and restricted cash were $9.7 million and $4.2 million at September 30, 2021 and December 31, 2020, respectively.

The increase of $5.6 million is attributable to $26.9 million provided by operating activities, plus $264.3 million provided by investing activities less $285.7 million used in financing activities.

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Operating Activities

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.

Cash provided by operating activities for the nine months ended September 30, 2021 of $26.9 million is primarily attributable to net income of $14.1 million less $29.3 million of gains on sale of properties, net, plus the add-back of $61.6 million of non-cash expenses, plus a decrease in tenant rent receivables of $5.0 million and proceeds received from a liquidating distribution from a non-consoldiated REIT of $0.4 million.

These increases were partially offset by an increase in payment of deferred leasing commissions of $10.9 million, a decrease in accounts payable and accrued compensation of $8.8 million, an increase in tenant security deposits of $2.5 million, an increase in lease acquisition costs of $1.7 million and an increase in prepaid expenses and other assets of $1.0 million.

Investing Activities

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.

Cash provided by investing activities for the nine months ended September 30, 2021 of $264.3 million is primarily attributable to proceeds from the sale of seven properties of $319.3 million less purchases of other real estate assets and office equipment investments of $55.0 million.

Financing Activities

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.

Cash used in financing activities for the nine months ended September 30, 2021 of $285.7 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, repayment of a portion of the BAML Term Loan (as defined below) of $90 million, net repayments on the BAML Revolver (as defined below) of $3.5 million, stock repurchases of $8.2 million and distributions paid to stockholders of $29.0 million.

JPM Term Loan

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The BMO Credit Agreement also includes an accordion feature that allows up to $100 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions.

The BMO Term Loan 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).

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 September 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 September 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.

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On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39% per annum for the period beginning on August 26, 2020 and ending January 31, 2024.

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

Accordingly, based upon the Company’s credit rating, as of September 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.

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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 June 30, 2021.

We were in compliance with the BMO Term Loan financial covenants as of September 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 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).

As of September 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 September 30, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.55% over the base rate at September 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 (0.30% 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.

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

Based upon the Company’s credit rating, as of September 30, 2021, the interest rate on the BAML Revolver would have been 1.63% per annum had any borrowings been outstanding.

The weighted average interest rate on all amounts outstanding on the BAML Revolver during the nine months ended September 30, 2021 was approximately 1.32% per annum.

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

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BAML Term Loan Highlights

● The BAML Term Loan is for $400 million.

● The original principal amount of the BAML Term Loan was $400 million.

On September 30, 2021, the Company repaid a $90 million portion of the BAML Term Loan.

As of September 30, 2021, $310 million remained outstanding under the BAML Term Loan.

● The BAML Term Loan matures on January 12, 2023.

● 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 (1.75% 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 June 30, 2021, the effective interest rate on the BAML Term Loan was 2.87% per annum.

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 September 30, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.75% over the base rate at September 30, 2021).

The interest rate on the BAML Credit Facility was variable at September 30, 2021.

Previously the Company had 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 ended on September 27, 2021.

Based upon the Company’s credit rating, as of September 30, 2021, the interest rate on the BAML Term Loan was 1.83% per annum.

The weighted average variable interest rate on all amounts outstanding under the BAML Term Loan after the expiration of the interest rate swaps, from September 28 through September 30, 2021 was approximately 1.84% 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 June 30, 2021.

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

As of September 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.

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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.

indebtedness or certain other private placements of debt of the Company and its subsidiaries.

The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events.

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

the payment of all obligations.

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

Stock Repurchase Program

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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.

During the three months ended September 30, 2021, we repurchased 1,762,038 shares of common stock at an average price per share of $4.68.

As of September 30, 2021, $41.8 million remained authorized for repurchase 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.

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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 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.

As of September 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.

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However, we believe that our position as asset manager of each of the Sponsored REITs helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REITs.

Before making a Sponsored REIT Loan, we consider a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the applicable Sponsored REIT and local and national market conditions.

and national market conditions.

These factors are subject to change and we do not apply a formula or assign relative weights to the factors.

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

Additional information about our Sponsored REIT Loans outstanding as of June 30, 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 September 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” and Note 10 “Subsequent Events”, in the Notes to Consolidated Financial Statements included in this report.

Other Consideration s

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

For the three and six months ended June 30, 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.

For the three and nine months ended September 30, 2021 and 2020, respectively, the rental income exceeded the expenses for each individual property, with the exception of 801 Marquette for the three and nine months ended September 30, 2021, Pershing Park for the three months ended September 30, 2021 and Stonecroft for the three and nine months ended September 30, 2020.

801 Marquette has approximately 130,000 square feet of rentable space, which is 91.8% leased as of September 30, 2021.

During the three months ended September 30, 2021, we determined that a lease was not collectible and wrote off related rents and receivables against rental income.

The tenant continues to occupy the space and is on a cash basis for revenue recognition.

The property had $22,000 in rental income and $334,000 of operating expenses for the three months ended September 30, 2021 and had $852,000 of rental income and $1,026,000 or operating expenses for the nine months ended September 30, 2021.

Pershing Park has approximately 160,000 square feet of rentable space, which was 12.4% leased at June 30, 2021 due to a large tenant departure on May 31, 2021.

During the three months ended September 30, 2021, we signed a lease with a new tenant for approximately 100,000 square feet that has not commenced.

The property had $178,000 of rental income and $510,000 of operating expenses for the three months ended September 30, 2021.

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

We had no rental income and operating expenses of $274,000 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.

We had no rental income and operating expenses of $69,000 related to this property during the three months ended September 30, 2020.

We had no rental income and operating expenses of $514,000 related to this property during the nine months ended September 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