What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-15 compared with 2021-02-16 · 251 added, 208 removed, 316 unchanged (59% 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, any inability to dispose of properties on acceptable terms and any delays in the timing of any such anticipated dispositions, 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, 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, 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 revenues as revenues decrease as a result of property dispositions, additional staffing, insurance increases and real estate tax valuation reassessments.

See “Risk Factors” in Item 1A.

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As of December 31, 2021, approximately 6.0 million square feet, or approximately 86.3% of our total owned portfolio, was located in Atlanta, Dallas, Denver, Houston and Minneapolis.

From time-to-time we may dispose of our smaller, suburban office assets and replace them with larger urban infill and central business district office assets.

As we execute this strategy, short term operating results could be adversely impacted.

However, we believe that the transformed portfolio has the potential to provide higher profit and asset value growth over a longer period of time.

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.

Proceeds from these potential dispositions would be used primarily for the repayment of debt.

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 the strategy we initially adopted in 2021 of seeking to increase shareholder value through the sale of select properties where we believe that short to intermediate term valuation potential has been reached.

Pursuant to this strategy, we anticipate that dispositions in 2022 will result in estimated gross proceeds in the range of approximately $250 million to $350 million.

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.

For the year ended December 31, 2021, our disposition strategy resulted in gross sale proceeds of approximately $603 million, and we repaid approximately $508 million of debt.

Specifically, 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, on October 22, 2021, we sold 999 Peachtree in Atlanta Georgia for gross proceeds of approximately $223.9 million and on November 16, 2021, we sold two office properties in Chantilly, Virginia for aggregate gross proceeds of approximately $40 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.

During the three months ended December 31, 2021, we repaid approximately $215 million of indebtedness.

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 $2.4 million in additional interest costs over a full twelve month period based on our borrowings as of December 31, 2021.

Trends and Uncertainties

COVID-19 Pandemic

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, as well as the availability and effectiveness of vaccines, therapeutics and any responses taken on a national and local level by government authorities and businesses.

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

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

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

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

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

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

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

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

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

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

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

We are unable to estimate the impact the COVID-19 pandemic will have on our future financial results at this time.

See “Risk Factors” in Item 1A.

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

We have implemented working from home policies for our employees.

During the three months ended December 31, 2020 and as of February 5, 2021, all of our properties remained open for business.

Although some of our tenants have requested rent concessions, and more tenants may request rent concessions or may not pay rent in the future, as of December 31, 2020, we had collected approximately 98% of rental receipts due in December 2020.

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

During the year ended December 31, 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.

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Cash, cash equivalents and restricted cash were $40.8 million as of December 31, 2021.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BAML Revolver ($596.5 million as of December 31, 2020) will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BofA Revolver ($202.5 million available as of February 14, 2022), 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.

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 and the amount, timing and terms of any property dispositions.

Economic Conditions

The economy in the United States has been adversely impacted as a result of the COVID-19 pandemic.

Various sectors of the economy in the United States have 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.

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.

In addition, 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.

Real Estate Operations

As of December 31, 2020, our real estate portfolio was comprised of 32 operating properties, which we refer to as our operating properties, and 2 redevelopment properties, which we refer to as our redevelopment properties, that are in the process of being redeveloped, or are completed but not yet stabilized.

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

As of December 31, 2021, our real estate portfolio was comprised of 24 operating properties, which we also refer to as our owned properties.

Previously we had redevelopment properties, which we referred to as our redevelopment properties, that were in the process of being redeveloped, or were completed but not yet stabilized.

Our 24 operating properties were approximately 78.4% leased as of December 31, 2021, a decrease from 85.0% leased as of December 31, 2020.

The 2.6% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded leasing completed during the year ended December 31, 2020.

The 6.6% decrease in leased space was a result of the impact from the disposition of ten properties in 2021and lease expirations and terminations, which exceeded leasing completed during the year ended December 31, 2021.

As of December 31, 2021, we had approximately 1,496,000 square feet of vacancy in our operating properties compared to approximately 1,397,000 square feet of vacancy at December 31, 2020.

During the year ended December 31, 2021, we leased approximately 1,035,000 square feet of office space, of which approximately 665,000 square feet were with existing tenants, at a weighted average term of 7.7 years.

On average, tenant improvements for such leases were $34.07 per square foot, lease commissions were $11.36 per square foot and rent concessions were approximately five months of free rent.

On average, tenant improvements for such leases were $25.89 per square foot, lease commissions were $11.45 per square foot and rent concessions were approximately seven months of free rent.

Average GAAP base rents under such leases were $30.86 per square foot, or 2.5% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2020.

As of December 31, 2020, our two redevelopment properties included an approximately 111,000 square foot property known as Stonecroft in Chantilly, Virginia and an approximately 213,000 square foot property known as Blue Lagoon in Miami, Florida.

Given the length of the redevelopment and lease-up process, these properties are not classified as an operating property until, in some cases, years after we commence the project.

Our property known as 801 Marquette in Minneapolis, Minnesota, which was substantially completed at the end of the second quarter of 2017, had been previously classified as a redevelopment property.

As of June 30, 2020, the property had leases signed and tenants occupying approximately 37% of the rentable square feet of the property.

On September 14, 2020, we entered into a lease agreement with a new tenant with an initial term of 16 years for approximately 71,000 square feet, or 54.8% of the property’s rentable square feet.

As a result, 801 Marquette was approximately 91.8% leased, which we consider stabilized, and has been reclassified as an operating property.

Our property known as Forest Park in Charlotte, North Carolina, which was substantially completed at the end of the second quarter of 2020, had previously been classified as a redevelopment property.

On July 20, 2020, a tenant lease commenced and occupies approximately 22,000 square feet, or approximately 34.5% of the total rentable square feet, with an initial term of 11 years.

On September 24, 2020, we entered into a lease agreement with a new tenant for approximately 28,200 square feet, or 43.9% of the rentable square feet at the property, with an initial term of 7 years.

As a result, as of December 31, 2020, Forest Park was approximately 78.4% leased, which we consider stabilized, and has been reclassified as an operating property.

The redevelopment of Stonecroft commenced in August 2020.

We expect to incur total redevelopment and lease-up costs of $18.5 million, which includes significant interior work to make the space suitable for multiple tenants, or to accommodate a tenant with accredited security requirements.

As of December 31, 2020, we had incurred approximately $1.8 million in redevelopment costs.

We anticipate completing the redevelopment by July 31, 2021.

The redevelopment of Blue Lagoon commenced in December 2018 following the maturity of a lease with a major tenant that had occupied 100% of the property.

On September 13, 2019, we entered into a lease agreement with a new tenant with an initial term of 16 years for approximately 156,000 square feet, or 73.1% of the property’s rentable

We expect to incur total restoration, redevelopment and lease-up costs of $39.9 million, which include work on the roof of the building, costs to make the space suitable for multiple tenants and to increase parking at the property.

As of December 31, 2020, we had incurred approximately $20.4 million in total redevelopment costs.

We anticipate completing the redevelopment by February 28, 2021.

As of December 31, 2021, we had no redevelopment properties.

On November 16, 2021, we sold a property known as Stonecroft in Chantilly, Virginia and another property located in Chantilly, Virginia for aggregate gross sales proceeds of approximately $40 million.

Stonecroft had been our sole redevelopment property prior to its sale.

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 December 31, 2021, the property had leases signed and a tenant occupying approximately 73.6% of the rentable square feet of the property.

As of December 31, 2021, leases for approximately 7.3% and 4.5% of the square footage in our owned portfolio are scheduled to expire during 2022 and 2023, respectively.

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

While leasing activity at our properties has continued, we believe that the COVID-19 pandemic and related containment and mitigation measures may limit or delay new tenant leasing during at least the first quarter of 2021 and potentially in future periods.

As the first quarter of 2022 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 outbreak and related containment and mitigation measures may limit or delay new tenant leasing during at least the first quarter of 2022 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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Real Estate Acquisition and Investment Activity

● we have continued to actively explore additional potential real estate investment opportunities.

● on October 29, 2021, the Company agreed to amend and restate its existing Sponsored REIT Loan to FSP Monument Circle LLC to extend the maturity date from December 6, 2022 to June 30, 2023 and to advance an additional $3.0 million tranche of indebtedness to FSP Monument Circle LLC with the same June 30, 2023 maturity date, effectively increasing the aggregate principal amount of the Sponsored REIT Loan from $21 million to $24 million.

In addition, the Company agreed to defer all principal and interest payments due under the Sponsored REIT Loan until the maturity date on June 30, 2023.

As part of its consideration for agreeing to amend and restate the Sponsored REIT Loan, the Company obtained from the stockholders of the parent of FSP Monument Circle LLC the right to vote their shares in favor of any sale of the property owned by FSP Monument Circle LLC any time on or after January 1, 2023.

● we continued to actively explore additional potential real estate investment opportunities.

● during the year ended December 31, 2019, we received approximately $1.1 million as full repayment of a Sponsored REIT Loan with FSP Satellite Place Corp.

(“Satellite Place”) and we received approximately $51 million as full repayment of a Sponsored REIT Loan with FSP Energy Tower I Corp.;

● on February 2, 2019, we received a cash distribution of approximately $0.2 million from the liquidating trust of Grand Boulevard (defined below) and anticipate receiving additional liquidating distributions of approximately $0.1 million in the aggregate as the trust is liquidated;

● on February 2, 2019, we received a cash distribution of approximately $0.2 million from the liquidating trust of Grand Boulevard (defined below) and on July 29, 2021, we received a final liquidating distribution of approximately $0.1 million;

● on April 3, 2019 we received a cash distribution of approximately $1.0 million from the liquidating trust of East Wacker (defined below);

● we received approximately $1.1 million in cash from Satellite Place, as partial prepayment of a Sponsored REIT Loan;

● on July 19, 2018, an office property owned by a Sponsored REIT, FSP Grand Boulevard Corp.

(Grand Boulevard) was sold to a third party.

We held an equity investment in Grand Boulevard and received a liquidating distribution of its investment of $6.2 million on July 20, 2018.

The Company received an initial cash distribution of $5.9 million from the liquidating trust of Grand Boulevard on August 17, 2018;

● on September 24, 2018, an office property owned by a Sponsored REIT, FSP 303 East Wacker Drive Corp.

(East Wacker) was sold to a third party.

We held an equity investment in East Wacker and received a liquidating distribution of its investment of $70.0 million on September 25, 2018.

We received an initial cash distribution of $69.0 million from the liquidating trust of East Wacker on September 27, 2018.

Property Dispositions and Assets Held for Sale

The Company sold an office property located in Durham, North Carolina on December 23, 2020 with a sales price of approximately $89.7 million, at a gain of approximately $41.9 million.

We sold three office properties located in Atlanta, Georgia on May 27, 2021 for 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 for a sales price of approximately $17.3 million, at a loss of $2.1 million.

We sold an office property located in Indianapolis, Indiana on August 31, 2021 for 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 for

an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 million.

On October 22, 2021, we sold an office property in Atlanta Georgia for a sales price of approximately $223.9 million, at a gain of approximately $86.8 million.

On November 16, 2021, we sold two office properties in Chantilly, Virginia for an aggregate sales price of approximately $40 million, at a loss of approximately $2.9 million.

There were no properties held for sale as of December 31, 2021.

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.

Our current strategy is to continue to invest in the sunbelt region of the United States.

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

In 2020, we sold an office property located in Durham, North Carolina, for a sales price of approximately $89.7 million, at a gain of approximately $41.9 million.

The disposal of this property did not represent a strategic shift that has a major effect on the Company’s operations and financial results.

Accordingly, the property remained classified within continuing operations for all periods presented and there were no assets held for sale at December 31, 2020 or December 31, 2019.

As an important part of our total return strategy, we intend to be active in property dispositions when we believe that we have maximized value and that market conditions warrant such activity and, as a consequence, we continuously review and evaluate our portfolio of properties for potentially advantageous dispositions.

Critical Accounting Policies

Pursuant to this strategy, we anticipate that dispositions in 2022 will result in estimated gross proceeds in the range of approximately $250 million to $350 million.

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

Critical Accounting Estimates

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.

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● allowance for doubtful accounts;

● allowance for loan losses on mortgage loans;

● assessment of the carrying values and impairments of long lived assets;

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We provided an allowance for doubtful accounts based on collectability.

Lessors recognize the effect of a change in their assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.

We recognize the effect of a change in our assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.

We periodically evaluate our real estate properties for impairment indicators.

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We compute depreciation expense using the straight-line method over estimated useful lives of up to 39 years for buildings and improvements, and up to 15 years for personal property.

Costs incurred in connection with leasing (primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period.

Costs incurred in connection with leasing

(primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period.

The allocated cost of land is not depreciated.

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Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

Cash flow hedges are accounted for by recording the fair value of the

derivative instrument on the balance sheet as either an asset or liability.

Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability.

To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity.

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Total expenses

Gain on sale of property

Income before taxes on income

Loss on extinguishment of debt

Gain on sale of properties, net

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

Tax expense on income

Equity in income of non-consolidated REITs

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

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The decrease was primarily a result of:

● A decrease in rental revenue of approximately $21.3 million arising primarily from the loss of rental income from leases that expired after December 31, 2019 and during the year ended December 31, 2020, compared to the year ended December 31, 2019.

In December 2020, a tenant filed for bankruptcy and was put on a cash basis resulting in a $3.1 million charge against revenue to write-off receivables from the lease.

● A decrease in rental revenue of approximately $36.6 million arising primarily from the sale of ten properties in the last twelve months and a tenant bankruptcy in December 2020 and other losses of rental income from leases that expired after December 31, 2020.

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

Our leased space in our operating properties was 78.4% at December 31, 2021 and 85.0% at December 31, 2020.

● A decrease of approximately $1.8 million in interest income from Sponsored REIT Loans primarily as a result of repayment of approximately $51 million of these loans in June 2019.

Total expenses decreased by $26.3 million to $228.7 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020.

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $4.8 million.

● A decrease to depreciation and amortization of approximately $2.4 million.

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $13.4 million, primarily as a result of the sale of ten properties in the last twelve months.

● A decrease to depreciation and amortization of approximately $10.0 million, primarily as a result of the sale of ten properties in the last twelve months.

● A decrease in interest expense of approximately $3.8 million.

The decrease was primarily from lower interest rates during the year ended December 31, 2020 compared to the year ended December 31, 2019.

The decrease was primarily from debt repayments made during 2021 and lower interest rates during the year ended December 31, 2021 compared to the year ended December 31, 2020.

These decreases were partially offset by:

● An increase in general and administrative expenses of $0.9 million, which was primarily attributable to an increase in public company related expenses.

Gain on sale of property

The Company sold an office property located in Durham, North Carolina on December 23, 2020 with a sales price of approximately $89.7 million, at a gain of approximately $41.9 million.

The Company did not sell any properties during the year ended December 31, 2019.

Loss on extinguishment of debt

During the year ended December 31, 2021, we repaid debt and incurred a loss on extinguishment of debt of $0.9 million related to unamortized deferred financing costs on the dates of the repayments.

Gain on sale of properties, net

During the year ended December 31, 2021, we sold three office properties located in Atlanta, Georgia on May 27, 2021 for 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 for a sales price of approximately $17.3 million, at a loss of $2.1 million.

We sold an office property located in Indianapolis, Indiana on August 31, 2021, for 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 for an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 million.

We sold an office property located in Atlanta, Georgia on October 22, 2021, for a sales price of approximately $223.9 million, at a gain of approximately $86.8 million.

We sold two office properties located in Chantilly, Virginia on November 16, 2021, for an aggregate sales price of approximately $40 million, at a loss of approximately $2.9 million.

During the year ended December 31, 2020, we sold an office property located in Durham, North Carolina on December 23, 2020 for a sales price of approximately $89.7 million, at a gain of approximately $41.9 million.

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 $144,000 and federal and other income taxes, which increased by $125,000, during the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily as a result of a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017 during the year ended December 31, 2019.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $16,000 during the year ended December 31, 2021, as compared to the year ended December 31, 2020.

We incurred $404,000 in state income taxes as a result of using some net operating loss carryforwards, which are not fully useable for some state income tax purposes during the year ended December 31, 2021.

Net income for the year ended December 31, 2021 was $92.7 million compared to a net income of $32.6 million for the year ended December 31, 2020, for the reasons described above .

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Total expenses

Income before taxes on income and equity in

income of non-consolidated REITs

Gain on sale of property

Income before taxes on income

Taxes on income

Equity in income of non-consolidated REITs

Comparison of the year ended December 31, 2020 to the year ended December 31, 2019

Total revenues increased by $0.2 million to $269.1 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018.

The increase was primarily a result of:

● An increase in rental revenue of approximately $1.7 million arising primarily from increased termination fees for the year ended December 31, 2019, as compared to the year ended December 31, 2018, and rental income earned from leases commencing in 2019 and 2018, which was offset by the loss of rental income from leases that expired in 2019 and 2018.

Total revenues decreased by $23.2 million to $245.8 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The decrease was primarily a result of:

In December 2020, a tenant filed for bankruptcy and was put on a cash basis resulting in a $3.1 million charge against revenue to write-off receivables from the lease.

These decreases were partially offset by rental income earned from leases commencing after December 31, 2019.

Our leased space in our operating properties was 85.0% at December 31, 2020 and 87.6% at December 31, 2019.

The increase was partially offset by:

● A decrease in interest income from Sponsored REIT loans of approximately $1.5 million primarily as a result of repayment of an outstanding loan by a Sponsored REIT of approximately $51 million in June 2019.

Total expenses increased by $0.1 million to $262.3 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018.

The increase was primarily a result of:

● An increase in real estate operating expenses and real estate taxes and insurance of approximately $3.6 million.

● An increase in general and administrative expenses of $1.4 million, which was primarily attributable to personnel related expenses and lease acquisition costs.

These increases were partially offset by:

● A decrease in depreciation and amortization of approximately $3.3 million.

● A decrease of approximately $1.8 million in interest income from Sponsored REIT Loans primarily as a result of repayment of approximately $51 million of these loans in June 2019 .

Total expenses decreased by $7.4 million to $255.0 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019.

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $4.8 million.

● A decrease to depreciation and amortization of approximately $2.4 million.

● A decrease in interest expense of approximately $0.7 million.

The decrease was primarily attributable to lower debt outstanding, which was partially offset by higher interest rates during the year ended December 31, 2019 compared to the year ended December 31, 2018.

The decrease was primarily from lower interest rates during the year ended December 31, 2020 compared to the year ended December 31, 2019.

These decreases were partially offset by:

● An increase in general and administrative expenses of $0.5 million, which was primarily attributable to an increase in public company related expenses.

Gain on sale of property

We sold an office property located in Durham, North Carolina on December 23, 2020 for a sales price of approximately $89.7 million, at a gain of approximately $41.9 million.

We did not sell any properties during the year ended December 31, 2019.

Tax expense on income

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which increased $75,000, and federal and other income taxes, which decreased by $166,000, during the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily as a result of a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017.

Equity in income of non-consolidated REITs

Equity in income from non-consolidated REITs was $6.8 million for the year ended December 31, 2018.

All of our investments in non-consolidated REITs were liquidated during 2018.

The equity in income during the year ended December 31, 2018 consisted of equity in income from our preferred stock investment in East Wacker of $7.2 million, which sold its property on September 24, 2018, and was partially offset by equity in loss from our preferred stock investment in Grand Boulevard of $0.1 million, which sold its property on July 19, 2018.

In addition, for the three months ended June 30, 2018, we recognized an impairment charge of $0.3 million, which represented the other-than-temporary decline in the fair value below the carrying value of the Company’s investments in non-consolidated REITs.

Net income for the year ended December 31, 2019 was $6.5 million compared to net income of $13.1 million for the year ended December 31, 2018, for the reasons described above.

Net income for the year ended December 31, 2020 was $32.6 million compared to a net income of $6.5 million for the year ended December 31, 2019, for the reasons described above .

Non-GAAP Financial Measures

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(in thousands):

Gain on sale of property

Gain on sale of properties

Equity in income of non-consolidated REITs

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

NOI, as defined by the

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

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

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

NOI should not be

considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions.

The calculations of NOI are shown in the following table:

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Add (deduct):

Loss on extinguishment of debt

Gain on sale of property

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Cash and cash equivalents were $40.8 million and $4.2 million at December 31, 2020 and December 31, 2019, respectively.

The decrease of $5.6 million is attributable to $68.5 million provided by operating activities, plus $11.0 million provided by investing activities and less $85.1 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, anticipated capital expenditures and anticipated payments of maturing debt for at least the next 12 months.

We have extension options on our JPM Term Loan and BAML Revolver (discussed below), which management expects to exercise, or we may seek to replace this indebtedness with new loans or extend the current loans.

The increase of $36.6 million is attributable to $36.3 million provided by operating activities, plus $505.5 million provided by investing activities and less $505.2 million used in financing activities.

Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations.

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Operating Activities

Cash provided by our operating activities of $68.5 million is primarily attributable to net income of $32.6 million excluding the gain on sale of a property of $41.9 million plus the add-back of $89.9 million of non-cash expenses and a $8.3 million increase in accounts payable and accrued expenses.

These increases were partially offset by a $13.7 million increase in payments of deferred leasing commissions, a $3.8 million increase in tenant rent receivables, a $2.1 million increase in lease acquisition costs, a $0.7 million decrease in tenant security deposits and a $0.1 million increase in prepaid and other assets.

Cash provided by our operating activities of $36.3 million is primarily attributable to net income of $92.7 million excluding the gain on sale of a property of $113.1 million plus the add-back of $77.9 million of non-cash expenses, plus a decrease in tenant rent receivables of $5.7 million, proceeds received from a liquidating distribution from a non-consoldiated REIT of $0.4 million and a decrease in prepaid expenses and other assets of $0.1 million.

These increases were partially offset by a $12.2 million increase in payments of deferred leasing commissions, a $10.3 million increase in accounts payable and accrued expenses, an increase in tenant security deposits of $2.5 million and an increase in lease acquisition costs of $2.4 million.

Investing Activities

Cash provided by investing activities for the year ended December 31, 2020 of $11.0 million is primarily attributable to cash proceeds from the sale of an office property located in Durham, North Carolina of approximately $88.9 million and partially offset by capital expenditures and office equipment investments of approximately $77.9 million.

Cash provided by investing activities for the year ended December 31, 2021 of $505.5 million is primarily attributable to proceeds from the sale of ten properties of $573.3 million and partially offset by capital expenditures and office equipment investments of approximately $64.8 million and an increase in mortgage lending to a non-consolidated REIT of $3.0 million.

Financing Activities

Cash used in financing activities for the year ended December 31, 2020 of $85.1 million is primarily attributable to net repayments on the JPM Term Loan (as defined below) of $50.0 million and distributions paid to stockholders of $38.6 million and was partially offset by net borrowings on the BAML Revolver (as defined below) of $3.5 million.

Cash used in financing activities for the year ended December 31, 2021 of $505.2 million is primarily attributable to repayment of the JPM Term Loan in the amount of $100.0 million, repayment of a tranche of the BMO Term Loan in the amount of $55.0 million, repayment of a portion of the BofA Term Loan in the amount of $290 million, net repayments on the Former BofA Revolver in the amount of $3.5 million, stock repurchases in the amount of $18.2 million and distributions paid to stockholders in the amount of $38.5 million.

Liquidity beyond the next 12 months

Our ability to generate cash adequate to meet our needs is dependent primarily on income from real estate investments, the sale of real estate investments, leveraging of real estate investments, availability of bank borrowings, proceeds from public offerings of stock, private placement of debt and access to the capital markets.

The acquisition of new properties, the payment of expenses related to real estate operations, capital improvement expenses, debt service payments, general and administrative expenses, and distribution requirements place demands on our liquidity.

We intend to operate our properties from the cash flows generated by our properties.

However, our expenses are affected by various factors, including inflation.

See Part I, Item 1A, Risk Factors for additional factors.

Increases in operating expenses are predominantly borne by our tenants.

To the extent that increases cannot be passed on to our tenants through rent reimbursements, such expenses would reduce the amount of available cash flow, which can adversely affect the market value of the applicable property.

We have used a variety of sources to fund our cash needs in addition to our free cash flow generated from our investments in real estate.

In the past, we considered borrowing on our unsecured line of credit facility, adding or

refinancing existing term debt or raising capital through public offerings or At The Market (ATM) programs of our common stock.

See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Contractual Obligations.

We believe these sources of funds will provide sufficient funds to adequately meet our obligations beyond the next twelve months.

JPM Term Loan

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

On December 24, 2020, the Company repaid a $50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, so that $100 million remains fully advanced and outstanding under the JPM Term Loan.

The JPM Term Loan matures on November 30, 2021, which maturity date may be extended by two additional six-month periods, or until November 30, 2022 (subject to specified exceptions).

The JPM Term Loan was previously evidenced by a Credit Agreement, dated November 30, 2016, among the Company, JPMorgan, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated October 18, 2017.

The JPM Term Loan bears interest at either (i) a number of basis points over a LIBOR-based rate depending on the Company’s credit rating (125.0 basis points over a LIBOR-based rate at December 31, 2020) or (ii) a number of basis

points over the base rate depending on the Company’s credit rating (25.0 basis points over the base rate at December 31, 2020).

The margin over the LIBOR-based rate or base rate is determined based on the Company’s credit rating pursuant to the following grid:

A3 (or higher)

For purposes of the JPM Term Loan, base rate means, for any day, a fluctuating rate per annum equal to the greatest of:

(i) JPMorgan Chase Bank, N.A.’s prime rate in effect on such day, (ii) the greater of the Federal Funds Rate or the overnight bank funding rate in effect on such day, plus 0.50% (but no less than zero), and (iii) the one month Adjusted LIBOR based rate for a such day plus 1.00%.

For purposes of the JPM Term Loan, the LIBOR-based rate means, for any interest period, the LIBOR rate for a period equal in length to the applicable interest period multiplied by the statutory reserve rate.

As of December 31, 2020, the Company’s credit rating from Moody’s Investors Service was Baa3.

Although the interest rate on the JPM Term Loan is variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions.

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

On December 24, 2020, the Company repaid a $50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, and $100 million remained fully advanced and outstanding under the JPM Term Loan.

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

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

Although the interest rate on the JPM Term Loan was variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions.

On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement.

Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44% per annum on the $100 million remaining portion of the JPM Term Loan until November 30, 2021.

Accordingly, based upon the Company’s credit rating, as of December 31, 2020, the effective interest rate on the JPM Term Loan was 3.69% per annum.

Based upon the Company’s credit rating, as of December 31, 2020, the weighted average interest rate on the unhedged $50 million portion of the JPM Term Loan during the year ended December 31, 2020 was approximately 1.90% per annum.

The $50 million portion of the JPM Term Loan was repaid on December 24, 2020.

The weighted average interest rate on the JPM Term Loan during the year ended December 31, 2019 was approximately 3.54% per annum.

The JPM Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates.

The JPM Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage.

The JPM Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the JPM Credit Agreement).

In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the JPM Credit Agreement immediately due and payable, and enforce any and all rights of the lenders or administrative agent under the JPM Credit Agreement and related documents.

For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable.

We were in compliance with the JPM Term Loan financial covenants as of December 31, 2020.

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 among the Company, the lending institutions party thereto and Bank of Montreal, as administrative agent (the “BMO Credit

The BMO Credit Agreement provides for a single, unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”) that remains fully advanced and outstanding.

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

The tranche A term loan matures on November 30, 2021 and the tranche B term loan matures on January 31, 2024.

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.

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(i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one month LIBOR based rate for such day plus 1.00%.

As of December 31, 2020, the Company’s credit rating from Moody’s Investors Service was Baa3.

As of December 31, 2021, the Company’s credit rating from Moody’s Investors Service was Ba1.

Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into interest rate swap transactions.

On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum, which expired on August 26, 2020.

On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum, which matured on August 26, 2020.

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

Accordingly, based upon the Company’s credit rating, as of December 31, 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.

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

BAML Credit Facility

On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and 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 maturity date of January12, 2022.

The Company has the right to extend the maturity date of the BAML Revolver by two additional 6 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 December 31, 2020, there was $3,500,000 outstanding under the BAML Revolver.

The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.20% over LIBOR at December 31, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at December 31, 2020).

The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating.

The facility fee is assessed against the total amount of the BAML Revolver, or $600 million (0.25% at December 31, 2020).

The amount of any applicable facility fee, and the margin over LIBOR rate or base rate is determined based on the Company’s credit rating pursuant to the following grid.

BofA Revolver

On January 10, 2022, the Company entered into a Credit Agreement (the “BofA Credit Agreement”) with Bank of America, N.A., as administrative agent, a letter of credit issuer and a lender (“BofA”), and the other lending institutions party thereto, for a new revolving line of credit for borrowings, at the Company’s election, of up to $217.5 (the “BofA Revolver”).

On February 10, 2022, the Company increased its BofA Revolver availability by $20.0 million to $237.5 million as part of the accordion feature that is available to increase borrowing capacity.

Borrowings made under the BofA Revolver may be revolving loans or letters of credit, the combined sum of which may not exceed $237.5 million outstanding at any time.

As of February 14, 2022, there were borrowings of $35.0 million drawn and outstanding under the BofA Revolver.

Borrowings made pursuant to the BofA Revolver may be borrowed, repaid and reborrowed from time to time until the maturity date on January 12, 2024.

The Company has the right to request an extension of the maturity date, subject to acceptance by the lenders and satisfaction of certain other customary conditions.

The BofA Revolver includes an accordion feature that allows the Company to request an increase in borrowing capacity to an amount not exceeding $750 million in the aggregate, subject to receipt of lender commitments and satisfaction of certain customary conditions.

Borrowings under the BofA Revolver bear interest at a margin over either (i) the daily simple Secured Overnight Financing Rate (“SOFR”), plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively.

In addition, under certain circumstances, such as if SOFR is not able to be determined, the BofA Revolver will instead bear interest at a margin over a specified base rate.

The margin over SOFR or, if applicable, the base rate varies depending on the Company’s leverage ratio (1.950% over SOFR and 0.950% over the base rate at February 4, 2022).

The Company is also obligated to pay an

annual facility fee and, if applicable, letter of credit fees in amounts that are also based on the Company’s leverage ratio.

The facility fee is assessed against the aggregate amount of lender commitments regardless of usage (0.350% at February 4, 2022).

The actual amount of the facility fee, any letter of credit fees, and the margin over SOFR or the base rate is determined based on the per annum percentages in the following grids:

Leverage Ratio

Daily SOFR Rate Loans, Term SOFR Loans and Letter of Credit Fees

Base Rate Loans

In the event that the Company is assigned an investment grade credit rating, the Company has a one-time right to elect to convert to a different, credit-based pricing grid with the following per annum percentages:

Credit Rating

For purposes of the BAML Credit Facility, base rate means, for any day, a fluctuating rate per annum equal to the highest of:

(i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one month LIBOR based rate for such day plus 1.00%.

As of December 31, 2020, the Company’s credit rating from Moody’s Investors Service was Baa3.

Based upon the Company’s credit rating, as of December 31, 2020, the interest rate on the BAML Revolver was 1.34% per annum.

As of December 31, 2020 there were borrowings of $3.5 million 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.

The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2019, was approximately 3.67% per annum.

BAML Term Loan Highlights

● The BAML Term Loan is for $400 million.

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

● The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.

● On September 27, 2012, the Company drew down the entire $400 million under the BAML Term Loan and such amount remains fully advanced and outstanding under the BAML Term Loan.

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.35% over LIBOR at December 31, 2020) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at December 31, 2020).

Daily SOFR Rate Loans, Term SOFR Loans and Letter of Credit Fees

Base Rate Loans

A-/A3 (or higher)

Base rate means, for any day, a fluctuating rate per annum equal to the highest of:

(i) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate”, (ii) the Federal Funds Rate plus 1/2 of 1% (0.50%), (iii) term SOFR for one month plus 1.00% and (iv) 1.00%.

If the base rate is being used because SOFR is not able to be determined, base rate is the greater of clauses (i), (ii) and (iv).

The BofA 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 BofA 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 a minimum unsecured interest coverage ratio.

The BofA Credit Agreement also restricts the Company’s ability to make dividend distributions that exceed of 95% of the Company’s good faith estimate of projected funds from operations for the applicable fiscal year;

provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company’s good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company’s status as a real estate investment trust, to meet the distribution requirements of

Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject.

The BofA Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with the provisions of the BofA Credit Agreement, certain cross defaults and a change in control of the Company (as defined in the BofA Credit Agreement).

In the event of a default by the Company, BofA, in its capacity as administrative agent, may, and at the request of the requisite number of lenders shall, declare all obligations under the BofA Credit Agreement immediately due and payable and enforce any and all rights of the lenders or BofA under the BofA Credit Agreement and related documents.

For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable.

The Company may use the net proceeds of the BofA Revolver 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 BofA Credit Agreement.

BofA Credit Facility

On July 21, 2016, the Company entered into a First Amendment (the “BofA First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BofA Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and BofA, as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BofA First Amendment and the BofA Second Amendment, the “BofA Credit Facility”) that continued an existing unsecured revolving line of credit (the “Former BofA Revolver”) and an existing term loan (the “BofA Term Loan”).

Effective simultaneously with the closing of the BofA Credit Agreement on January 10, 2022, the Company delivered a notice to BofA terminating the aggregate lender commitments under the Former BofA Revolver in their entirety.

Former BofA Revolver Highlights

● As of December 31, 2021 and January 10, 2022, there were no borrowings under the Former BofA Revolver.

● The Former BofA Revolver was for borrowings, at the Company's election, of up to $600 million.

Borrowings made pursuant to the Former BofA Revolver could be revolving loans, swing line loans or letters of credit, the combined sum of which could not exceed $600 million outstanding at any time.

As of December 31, 2021, there were no borrowings outstanding under the Former BofA Revolver.

The Former BofA Revolver bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.550% over LIBOR at December 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.550% over the base rate at December 31, 2021).

The BofA Credit Facility also obligated the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating.

The facility fee was assessed against the total amount of the Former BofA Revolver, or $600 million (0.30% at December 31, 2021).

The amount of any applicable facility fee, and the margin over LIBOR rate or base rate was determined based on the Company’s credit rating pursuant to the following grid.

Credit Rating

For purposes of the BofA Credit Facility, base rate means, for any day, a fluctuating rate per annum equal to the highest of:

(i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one

month LIBOR based rate for such day plus 1.00%.

As of December 31, 2021, the Company’s credit rating from Moody’s Investors Service was Ba1.

The weighted average interest rate on all amounts outstanding on the Former BofA Revolver during the year ended December 31, 2021, was approximately 1.33% per annum.

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

The weighted average interest rate on all amounts outstanding on the Former BofA Revolver during the year ended December 31, 2020, was approximately 1.65% per annum.

BofA Term Loan Highlights

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

On September 30, 2021, the Company repaid a $90 million portion and on October 25, 2021, the Company repaid a $200 million portion of the BofA Term Loan and incurred a loss on extinguishment of debt of $0.7 million related to unamortized deferred financing costs.

As of December 31, 2021, $110 million remained outstanding under the BofA Term Loan.

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

● The BofA Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity to the Former BofA Revolver and/or the BofA Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.

The BofA Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.75% over LIBOR at December 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.750% over the base rate at December 31, 2021).

The margin over LIBOR rate or base rate is determined based on the Company’s credit rating pursuant to the following grid:

Credit Rating

For purposes of the BAML Credit Facility, base rate means, for any day, a fluctuating rate per annum equal to the highest of:

For purposes of the BofA Credit Facility, base rate means, for any day, a fluctuating rate per annum equal to the highest of:

(i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one month LIBOR based rate for such day plus 1.00%.

As of December 31, 2020, the Company’s credit rating from Moody’s Investors Service was Baa3.

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 December 31, 2020, the effective interest rate on the BAML Term Loan was 2.47% per annum.

BAML Credit Facility General Information

The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates.

The BAML Credit Facility also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage.

The BAML Credit Facility provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BAML Credit Facility).

In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents.

As of December 31, 2021, the Company’s credit rating from Moody’s Investors Service was Ba1.

The interest rate on the BofA Credit Facility was variable at December 31, 2021.

Previously the Company had fixed the base LIBOR interest rate on the BofA 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 BofA 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 December 31, 2021, the interest rate on the BofA Term Loan was 1.84% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Term Loan after the expiration of the interest rate swaps, on September 27, 2021, during the period from September 28 through December 31, 2021, was approximately 1.85% per annum.

BofA Credit Facility General Information

The BofA 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 BofA 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 BofA 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 BofA 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 BofA Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BofA Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BofA 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.

We were in compliance with the BAML Credit Facility financial covenants as of December 31, 2020.

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;

We were in compliance with the BofA Credit Facility financial covenants as of December 31, 2021.

The Company may use the proceeds of the loans under the BofA Credit Facility to finance the acquisition of real properties and for other permitted investments;

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 $200,000,000 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.

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

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

As of December 31, 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.

Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BofA Credit Facility, the BMO Credit Agreement and the JPM Credit Agreement.

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

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Equity Offering

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.

From time to time, we may 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.

Stock Repurchases

On June 23, 2021, FSP Corp.

announced that the Board of Directors of FSP Corp.

had authorized the repurchase of up to $50 million of the Company’s common stock from time to time in the open market, privately negotiated transactions or other manners as permitted by federal securities laws.

The repurchase authorization may be suspended or discontinued at any time.

Contingencies

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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.

We intend to draw on the BofA Revolver 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

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

For the year ended December 31, 2020 and 2019, respectively, the rental income exceeded the expenses for each individual property, with the exception of Stonecroft for the year ended December 31, 2020 and 801 Marquette for the year ended December 31, 2019.

For the year ended December 31, 2021 and 2020, respectively, the rental income exceeded the expenses

for each individual property, with the exception of Pershing Park for the three months ended December 31, 2021 and Stonecroft for the year ended December 31, 2020.

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 $125,000 of rental income and $489,000 of operating expenses for the three months ended December 31, 2021.

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

We had no rental income and no operating expenses during the three months ended December 31, 2020 and we had no rental income and operating expenses of $514,000 for the year ended December 31, 2020.

801 Marquette had approximately 170,000 square feet of rentable space and became vacant in January 2016.

On June 30, 2016, we commenced a redevelopment plan for the property and substantially completed the redevelopment in the second quarter of 2017.

Redevelopment of 801 Marquette resulted in approximately 129,800 of net rentable square feet for the property.

As of December 31, 2020, we have signed leases with three tenants for 119,000 square feet, or 91.8% of the rentable square feet of the property, for which two tenants leases have commenced and occupy 48,000 square feet, or 37% of rentable square feet at the property.

As a result, rental income exceeded operating expenses during the year ended December 31, 2020.

We had rental income of $278,000 and operating expenses of $319,000 during the three months ended December 31, 2019.

We had rental income of $750,000 and operating expenses of $1,158,000 during the year ended December 31, 2019.

We sold this property on November 16, 2021, at a loss of approximately $4.8 million.

Rental Income Commitments

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(in thousands)

BAML Revolver (1) (2)

JPM Term Loan (3) (4)

BAML Term Loan (3) (5)

BMO Term Loan Tranche A (3) (6)

Former BofA Revolver (1) (2)

BofA Term Loan (3) (4)

BMO Term Loan Tranche B (3) (5)

5 unchanged sentences

(3) Amounts include principal and interest payments.

(4) Interest payments were estimated based on an interest rate swap with an effective interest rate of 3.69% per annum on $100 million as of December 31, 2020.

(5) The BAML Term Loan has an interest rate swap with an effective interest rate of 2.47% per annum as of December 31, 2020, which was used for estimating interest.

The swap expires on September 27, 2021.

Interest payments between September 27, 2021 and maturity were estimated based on the variable rate in effect as of December 31, 2020, which was at an annual rate of 1.44%.

(4) The BofA Term Loan interest was estimated based on the variable rate in effect as of December 31, 2021, which was at an annual rate of 1.85%.

(5) The BMO Term Loan has an interest rate swap with an effective interest rate of 4.04% per annum as of December 31, 2021, which was used for estimating interest.

The operating lease in the table above consists of our lease of corporate office space, which commenced September 1, 2010, and was amended on October 25, 2016.

The amended lease expires on September 30, 2024 and has one five year renewal option.

The amended lease expires on September 30, 2024 and has

one five year renewal option.

The lease includes a base annual rent and additional rent for our share of taxes and operating costs.

1 unchanged sentence

As of December 31, 2021, we had one Sponsored REIT Loan with $24 million principal amount outstanding.

Additional information about our Sponsored REIT Loan outstanding as of December 31, 2020, including a summary table of our Sponsored REIT Loan, is incorporated herein by reference to Note 3, “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 Loan outstanding as of December 31, 2021, including a summary table of our Sponsored REIT Loan, is incorporated herein by reference to Note 3, “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.

Off-Balance Sheet Arrangements

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and one we acquired on May 15, 2008 by cash merger and another we acquired on April 30, 2006 by merger.

As a result of our common stock interest and during the period we owned our preferred stock interests in the remaining two Sponsored REITs, we exercised influence over, but do not control these entities.

As a result of our common stock interest and during the period we owned our preferred stock interests in the remaining two Sponsored REITs, we exercised influence over, but did not control these entities.

These preferred share investments were accounted for using the equity method.

1 unchanged sentence

We also agreed to vote our preferred shares in any matter presented to a vote by the stockholders of these Sponsored REITs in the same proportion as shares voted by other stockholders of the Sponsored REITs.

At December 31, 2020, 2019 and 2018, we held a common stock interest in 2, 2 and 3 Sponsored REITs, respectively, all of which were fully syndicated and in which we no longer share economic benefit or risk.

At December 31, 2021, 2020 and 2019, we held a common stock interest in 2 Sponsored REITs, all of which were fully syndicated and in which we do not share economic benefit or risk.

From time to time, we may provide Sponsored REIT Loans to our Sponsored REITs.

As of December 31, 2021, we had one Sponsored REIT Loan with $24 million principal amount outstanding.

Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.

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-K

Item 7. Management’s Discussion and Analysis