Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2020. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. 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, 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. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A. “Risk Factors” below. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.
Overview
FSP Corp., or we or the Company, operates in a single reportable segment: real estate operations. The real estate operations market involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development. Our current strategy is to invest in infill and central business district office properties in the United States sunbelt and mountain west regions as well as select opportunistic markets. We believe that the United States sunbelt and mountain west regions have macro-economic drivers that have the potential to increase occupancies and rents. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.
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. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on broader economic/market conditions. 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.
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
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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 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. 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. 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 during the fourth quarter of 2021.
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 $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
COVID-19 Outbreak
Beginning in January 2020, there was a global outbreak of COVID-19, which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. It has already disrupted global travel supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain. Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, 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, our ability to refinance existing indebtedness or to secure new sources of capital on favorable terms, fluctuations in our level of dividends, increased costs of operations, our ability to complete required capital expenditures in a timely manner and on budget, decrease in values of our real estate assets, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We are unable to estimate the impact the COVID-19 pandemic will have on our future financial results at this time. See Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
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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. 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 . Future rent concession requests or nonpayment of rent could lead to increased rent delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions or lower occupancy, extended lease terms, increased tenant improvement capital expenditures, or reduced rental rates to maintain occupancies. We review each rent concession request on a case by case basis and may or may not provide rent concessions, depending on the specific circumstances involved. Cash, cash equivalents and restricted cash were $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. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties .
Economic Conditions
The economy in the United States has been adversely impacted as a result of the COVID-19 pandemic. Economic conditions directly affect the demand for office space, our primary income producing asset. The broad economic market conditions in the United States are typically affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, the pace of economic growth and/or recessionary concerns, uncertainty about government fiscal, monetary, trade and tax policies, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit, and interest rates. As of the date of this report, the impact of the COVID-19 pandemic and related fallout from containment and mitigation measures, such as work from home arrangements and the closing of various businesses, is adversely affecting current economic conditions in the United States.
Real Estate Operations
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 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 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 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 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
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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. 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 during the fourth quarter of 2021. 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 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. 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 $22.8 million. 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. 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
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.
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Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations.
Recent Accounting Standards
In March 2020, the Financial Accounting Standards Board (FASB) issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently assessing the potential impact that the adoption of ASU 2020-04 may have on its consolidated financial statements.
Results of Operations
The following table shows financial results for the three months ended September 30, 2021 and 2020:
Three months ended September 30,
(in thousands)
2021
2020
Change
Revenues:
Rental
$
50,326
$
61,834
$
(11,508)
Related party revenue:
Management fees and interest income from loans
419
400
19
Other
57
13
44
Total revenues
50,802
62,247
(11,445)
Expenses:
Real estate operating expenses
14,373
16,730
(2,357)
Real estate taxes and insurance
10,200
12,279
(2,079)
Depreciation and amortization
18,862
22,076
(3,214)
General and administrative
3,749
3,817
(68)
Interest
7,928
8,953
(1,025)
Total expenses
55,112
63,855
(8,743)
Loss on extinguishment of debt
(236)
—
(236)
Gain on sale of properties, net
8,632
—
8,632
Income (loss) before taxes and equity in income of non-consolidated REITs
4,086
(1,608)
5,694
Tax expense
51
71
(20)
Equity in income of non-consolidated REITs
421
—
421
Net income (loss)
$
4,456
$
(1,679)
$
6,135
Comparison of the three months ended September 30, 2021 to the three months ended September 30, 2020:
Revenues
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 $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. Our
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leased space in our operating properties was 80.0% at September 30, 2021 and 85.6% at September 30, 2020.
Expenses
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:
● 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 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 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 $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.
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The following table shows financial results for the nine months ended September 30, 2021 and 2020:
Nine months ended September 30,
(in thousands)
2021
2020
Change
Revenues:
Rental
$
164,671
$
184,799
$
(20,128)
Related party revenue:
Management fees and interest income from loans
1,246
1,208
38
Other
69
31
38
Total revenues
165,986
186,038
(20,052)
Expenses:
Real estate operating expenses
45,664
49,498
(3,834)
Real estate taxes and insurance
34,461
36,348
(1,887)
Depreciation and amortization
62,379
66,659
(4,280)
General and administrative
11,857
11,159
698
Interest
26,582
26,996
(414)
Total expenses
180,943
190,660
(9,717)
Loss on extinguishment of debt
(403)
—
(403)
Gain on sale of properties, net
29,258
—
29,258
Income (loss) before taxes on income and equity in income of non-consolidated REITs
13,898
(4,622)
18,520
Tax expense on income
174
203
(29)
Equity in income of non-consolidated REITs
421
—
421
Net income (loss)
$
14,145
$
(4,825)
$
18,970
Comparison of the nine months ended September 30, 2021 to the nine months ended September 30, 2020:
Revenues
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 $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.
Expenses
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:
● 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
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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 $0.7 million, which was primarily from professional fees.
Loss on extinguishment of debt
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 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. 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 $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.
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Non-GAAP Financial Measures
Funds From Operations
The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, hedge ineffectiveness, acquisition costs of newly acquired properties that are not capitalized and lease acquisition costs that are not capitalized plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on mortgage loans, properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income or loss (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT, may define this term in a different manner. We have included the NAREIT FFO definition as of May 17, 2016 in the table and note that other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income or loss and cash flows from operating, investing and financing activities in the consolidated financial statements.
The calculations of FFO are shown in the following table:
For the
For the
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands):
2021
2020
2021
2020
Net income (loss)
$
4,456
$
(1,679)
$
14,145
$
(4,825)
Gain on sale of properties
(8,632)
—
(29,258)
—
Equity in income of non-consolidated REITs
(421)
—
(421)
—
FFO from non-consolidated REITs
421
—
421
—
Depreciation and amortization
18,861
21,989
62,340
66,424
NAREIT FFO
14,685
20,310
47,227
61,599
Lease Acquisition costs
112
136
297
333
Funds From Operations
$
14,797
$
20,446
$
47,524
$
61,932
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which we refer to as NOI. Management believes that investors are interested in this information. NOI is a non-GAAP financial measure that the Company defines as net income 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. The comparative Same Store results include properties held for the periods presented and exclude properties that are redevelopment properties. We also
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exclude properties that have been placed in service, but that do not have operating activity for all periods presented, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees. NOI, as defined by the Company, may not be comparable to NOI reported by other REITs that define NOI differently. NOI should not be considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions. The calculations of NOI are shown in the following table:
Net Operating Income (NOI)*
Rentable
Square
Nine Months
Nine Months
Feet
Three Months Ended
Ended
Three Months Ended
Ended
Inc
%
(in thousands)
or RSF
31-Mar-21
30-Jun-21
30-Sep-21
30-Sep-21
31-Mar-20
30-Jun-20
30-Sep-20
30-Sep-20
(Dec)
Change
Region
East
437
$
592
$
685
$
642
$
1,919
$
896
$
1,218
$
591
$
2,705
$
(786)
(29.1)
%
MidWest
1,000
3,139
3,184
3,470
9,793
3,412
3,062
3,000
9,474
319
3.4
%
South
3,202
9,555
9,207
8,482
27,244
10,312
9,975
10,387
30,674
(3,430)
(11.2)
%
West
2,625
10,369
9,901
10,144
30,414
11,463
11,211
10,975
33,649
(3,235)
(9.6)
%
Property NOI* from Operating Properties
7,264
23,655
22,977
22,738
69,370
26,083
25,466
24,953
76,502
(7,132)
(9.3)
%
Dispositions and Redevelopment Properties (a)
519
6,106
5,023
2,625
13,754
6,791
6,730
7,244
20,765
(7,011)
(5.2)
%
Property NOI*
7,783
$
29,761
$
28,000
$
25,363
$
83,124
$
32,874
$
32,196
$
32,197
$
97,267
$
(14,143)
(14.5)
%
Same Store
$
23,655
$
22,977
$
22,738
$
69,370
$
26,083
$
25,466
$
24,953
$
76,502
$
(7,132)
(9.3)
%
Less Nonrecurring
Items in NOI* (b)
32
34
281
347
26
810
351
1,187
(840)
0.9
%
Comparative
Same Store
$
23,623
$
22,943
$
22,457
$
69,023
$
26,057
$
24,656
$
24,602
$
75,315
$
(6,292)
(8.4)
%
Nine Months
Nine Months
Three Months Ended
Ended
Three Months Ended
Ended
Reconciliation to Net Income (Loss)
31-Mar-21
30-Jun-21
30-Sep-21
30-Sep-21
31-Mar-20
30-Jun-20
30-Sep-20
30-Sep-20
Net income (loss)
$
(6,460)
$
16,149
$
4,456
$
14,145
$
(1,071)
$
(2,075)
$
(1,679)
$
(4,825)
Add (deduct):
Loss on extinguishment of debt
—
167
236
403
—
—
—
—
Gain on sale of properties, net
—
(20,626)
(8,632)
(29,258)
—
—
—
—
Management fee income
(465)
(403)
(380)
(1,248)
(478)
(446)
(484)
(1,408)
Depreciation and amortization
24,381
19,136
18,861
62,378
22,338
22,245
22,076
66,659
Amortization of above/below market leases
(32)
(6)
—
(38)
(73)
(75)
(86)
(234)
General and administrative
4,146
3,962
3,749
11,857
3,525
3,817
3,817
11,159
Interest expense
8,600
10,054
7,928
26,582
9,063
8,980
8,953
26,996
Interest income
(394)
(399)
(404)
(1,197)
(382)
(381)
(386)
(1,149)
Equity in income of non-consolidated REITs
—
—
(421)
(421)
—
—
Non-property specific items, net
(15)
(34)
(30)
(79)
(48)
131
(14)
69
Property NOI*
$
29,761
$
28,000
$
25,363
$
83,124
$
32,874
$
32,196
$
32,197
$
97,267
(a) We define redevelopment properties as properties being developed, redeveloped or where redevelopment is complete, but are in lease-up and that are not stabilized. We also include properties that have been placed in service, but that do not have operating activity for all periods presented .
(b) Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability.
*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.
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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. 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.
Weighted
Occupied
Weighted
Year Built
Weighted
Percentage as of
Average
or
Net Rentable
Occupied
September 30,
Rent per Occupied
Property Name
City
State
Renovated
Square Feet
Sq. Ft.
2021 (a)
Square Feet (b)
Forest Park
Charlotte
NC
1999/2020
64,198
31,534
49.1
%
$
25.29
Meadow Point
Chantilly
VA
1999
138,537
97,419
70.3
%
26.15
Innsbrook
Glen Allen
VA
1999
298,183
170,680
57.2
%
18.66
Stonecroft (c)
Chantilly
VA
2008
111,469
—
—
%
—
East total
612,387
299,633
48.9
%
21.79
Northwest Point
Elk Grove Village
IL
1999
177,095
177,095
100.0
%
30.27
909 Davis Street
Evanston
IL
2002
195,098
182,105
93.3
%
41.83
121 South 8th Street
Minneapolis
MN
1974
298,121
256,056
85.9
%
23.33
801 Marquette Ave
Minneapolis
MN
1923/2017
129,821
71,713
55.2
%
15.72
Plaza Seven
Minneapolis
MN
1987
330,096
282,529
85.6
%
33.27
Midwest total
1,130,231
969,498
85.8
%
30.41
Blue Lagoon Drive
Miami
FL
2002/2021
213,182
138,611
65.0
%
26.21
Park Ten
Houston
TX
1999
157,609
113,195
71.8
%
30.25
Addison Circle
Addison
TX
1999
289,325
242,194
83.7
%
32.30
Collins Crossing
Richardson
TX
1999
300,887
251,241
83.5
%
27.40
Eldridge Green
Houston
TX
1999
248,399
248,399
100.0
%
27.89
Park Ten Phase II
Houston
TX
2006
156,746
148,924
95.0
%
29.20
Liberty Plaza
Addison
TX
1985
217,191
160,396
73.9
%
21.84
Legacy Tennyson Center
Plano
TX
1999/2008
207,049
98,638
47.6
%
23.75
One Legacy Circle
Plano
TX
2008
214,110
120,672
56.4
%
38.46
Westchase I & II
Houston
TX
1983/2008
629,025
330,364
52.5
%
28.05
Pershing Park Plaza
Atlanta
GA
1989
160,145
96,824
60.5
%
33.58
999 Peachtree
Atlanta
GA
1987
621,946
524,425
84.3
%
34.60
South Total
3,415,614
2,473,883
72.4
%
29.99
380 Interlocken
Broomfield
CO
2000
240,359
155,440
64.7
%
33.00
1999 Broadway
Denver
CO
1986
680,255
461,825
67.9
%
33.69
1001 17th Street
Denver
CO
1977/2006
655,420
625,205
95.4
%
37.02
600 17th Street
Denver
CO
1982
610,730
518,937
85.0
%
32.90
Greenwood Plaza
Englewood
CO
2000
196,236
196,236
100.0
%
25.13
390 Interlocken
Broomfield
CO
2002
241,512
239,991
99.4
%
32.99
West Total
2,624,512
2,197,634
83.7
%
33.56
Total Owned Properties
7,782,744
5,940,648
76.3
%
$
30.97
(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.
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Liquidity and Capital Resources
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. 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 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. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties.
Operating Activities
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 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 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
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.
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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 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 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 (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. 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 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.
The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. We were in compliance with the BMO Term Loan financial covenants as of September 30, 2021.
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BAML Credit Facility
On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and an existing term loan (the “BAML Term Loan”).
BAML Revolver Highlights
● The BAML Revolver is for borrowings, at the Company's election, of up to $600 million. Borrowings made pursuant to the BAML Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $600 million outstanding at any time.
● Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the initial maturity date of January 12, 2022. The Company has the right to extend the maturity date of the BAML Revolver by two additional six month periods, or until January 12, 2023, upon payment of a fee and satisfaction of certain customary conditions.
● The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.
As of 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 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. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2020 was approximately 1.65% per annum.
BAML Term Loan Highlights
● The 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.
● 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.
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
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Table of Contents
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
The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BAML Credit Facility provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BAML Credit Facility). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BAML Credit Facility financial covenants as of 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; to finance investments associated with Sponsored REITs to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BAML Credit Facility.
Senior Notes
On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes. Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $200 million of senior unsecured notes consisting of (i) Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $84 million (the “Series B Notes,” and, together with the Series A Notes, the “Senior Notes”). On December 20, 2017, the Senior Notes were funded and 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 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. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BAML Credit Facility, the BMO Credit Agreement and the JPM Credit Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50; a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material
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Table of Contents
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 September 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 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.
Equity Securities
From time to time, we expect to issue debt securities, common stock, preferred stock or depository shares under a registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.
Contingencies
From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage. As of September 30, 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. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
We intend to draw on the BAML Credit Facility in the future for a variety of corporate purposes, including the acquisition of properties that we acquire directly for our portfolio and for Sponsored REIT Loans as described below.
Loans to Sponsored REITs
Sponsored REIT Loans
From time to time we may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. We anticipate that advances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or another capital event. Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately two to three years.
Our Sponsored REIT Loans subject us to credit risk. 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
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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 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 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 $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
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.