Item 1A. Risk Factors
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”), which could materially affect our business, financial condition or future results. The risks described in the 2021 Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We have updated certain risk factors included in the 2021 Form 10-K, as set forth below.
Risks Related to our Indebtedness
Increases in interest rates would increase our interest costs on variable rate debt and could adversely impact our ability to refinance existing debt or sell assets .
As of June 30, 2022, we had borrowings of $55 million drawn and outstanding under the BofA Revolver. Borrowings under the BofA Revolver, which may not exceed $237.5 million outstanding at any time, bear interest at variable rates based on our leverage ratio, from which we may incur additional indebtedness in the future. As of June 30, 2022, $110 million was drawn and outstanding under the BofA Term Loan. The BofA Term Loan includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity. On July 22, 2016, we fixed the base LIBOR rate on the BofA Term Loan at 1.12% until September 27, 2021 by entering into an interest rate swap agreement. Subsequent to expiration of the interest rate swap agreement, interest on the BofA Term Loan has been at variable rates based on our credit rating.
As of June 30, 2022, $165 million was drawn and outstanding under the BMO Term Loan, although such amount may be increased by up to an additional $100 million through the exercise of an accordion feature. The BMO Term Loan consists of a $55 million tranche A term loan, which was fully repaid on June 4, 2021, and a $165 million tranche B term loan that remains outstanding. Although interest on the BMO Term Loan is at variable rates based on our credit rating, on August 26, 2013, we fixed the base LIBOR rate on the BMO Term Loan at 2.32% per annum until August 26, 2020 by entering into an interest rate swap agreement. On February 20, 2019, we fixed the base LIBOR rate on the BMO Term Loan at 2.39% per annum for the period beginning August 26, 2020 and ending on January 31, 2024, by entering into interest rate swap agreements.
During 2022, the Federal Reserve raised the federal funds rate target several times, most recently by 75 basis points in July 2022 to a range of 2.25% to 2.50% and indicated that ongoing increases in the target range will be appropriate . We expect that there will be additional increases in the Federal Reserve benchmark rate. If interest rates continue to increase, then the interest costs on our unhedged variable rate debt will also increase, which could adversely affect our cash flow, our ability to pay principal and interest on our debt and our ability to make distributions to stockholders. In addition, rising interest rates could limit our ability to incur new debt or to refinance existing debt when it matures. From time to time, we may enter into additional interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges. In addition, increases in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions, and limiting our ability to incur new debt or refinance existing debt when it matures.
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Risks Related to our Operations and Properties
Economic conditions in the United States could have a material adverse impact on our earnings and financial condition.
The economic outlook in the United States is uncertain and facing recessionary concerns, including as a result of the ongoing effects of negative gross domestic product growth, the COVID-19 pandemic, rising inflation, increasing interest rates, supply chain disruptions and the conflict between Russia and Ukraine. Because economic conditions in the United States may affect the demand for office space, real estate values, occupancy levels and property income, current and future economic conditions in the United States, including slower growth, stock market volatility or recession fears, could have a material adverse impact on our earnings and financial condition. Economic conditions may be affected by numerous factors, including but not limited to, the pace of economic growth and/or recessionary concerns, inflation, increases in the levels of unemployment, energy prices, changes in currency exchange rates, uncertainty about government fiscal and tax policy, geopolitical events, the regulatory environment, the availability of credit and interest rates. As of the date of this report, the continuing impact of the COVID-19 pandemic and increased interest rates continue to adversely affect the demand for office space. Future economic factors also may negatively affect the demand for office space, real estate values, occupancy levels and property income.
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