What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-01 compared with 2022-08-02 · 129 added, 133 removed, 319 unchanged (45% of the section changed)

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We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.

As of June 30, 2022, approximately 5.8 million square feet, or approximately 84.0% of our total owned portfolio, was located in Dallas, Denver, Houston and Minneapolis.

As of September 30, 2022, approximately 5.3 million square feet, or approximately 83% of our total owned portfolio, was located in Dallas, Denver, Houston and Minneapolis.

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

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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, payment of dividends pursuant to our variable quarterly dividend policy and 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.

Proceeds from dispositions are intended to be used for the repayment of debt, repurchases of our common stock, payment of dividends and other general corporate purposes.

We sold two office properties located in Broomfield, Colorado on August 31, 2022, for an aggregate sales price of $102.5 million, at a gain of approximately $24.1 million.

On September 6, 2022, we prepaid our $110 million term loan with Bank of America, N.A.

as administrative agent and the other lending institutions party thereto ( the “BofA Term Loan”).

If we had not prepaid the BofA Term Loan in full, it would have matured by its own terms on January 12, 2023.

For the year ended December 31, 2021, our disposition strategy resulted in gross sale proceeds of approximately $603 million, and we used a portion of the proceeds of such dispositions to repay 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.

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During the three months ended September 30, 2021 and December 31, 2021, we repaid $90 million and $215 million, respectively, of term loan indebtedness.

During the six months ended June 30, 2022, we did not have any property dispositions and, as a result, did not repay any indebtedness.

In July 2022, we adopted a variable quarterly dividend policy, which replaced our previous regular quarterly dividend policy.

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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 approximately $2.2 million in additional interest costs during the next twelve months based on our borrowings and interest rates as defined in our loan agreements as of June 30, 2022.

We anticipate that as a result of this downgrade we will incur approximately $1.8 million in additional interest costs during the next twelve months based on our borrowings and interest rates as defined in our loan agreements as of September 30, 2022.

Trends and Uncertainties

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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.

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.

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 still do not fully occupy the space that they lease.

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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.

The COVID-19 pandemic continues to present 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 impact of work-from-home policies, 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 full

extent of the impact that the COVID-19 pandemic will have on our future financial results at this time.

The COVID-19 pandemic continues to present 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 impact of work-from-home policies, 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, negative impacts on 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,

making more difficult our ability to complete required capital expenditures in a timely manner and on budget, decreases 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 full extent of the impact that the COVID-19 pandemic will have on our future financial results at this time.

See Part I, Item 1A.

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

During the year ended December 31, 2021 and the six months ended June 30, 2022, all of our properties remained open for business.

During the year ended December 31, 2021 and the nine months ended September 30, 2022, 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.

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We review each rent concession request on a case by case basis and may or may not provide rent concessions, depending on the specific circumstances involved.

Cash, cash equivalents and restricted cash were $4.7 million as of June 30, 2022.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BofA Revolver ($182.5 million available as of July 28, 2022) and proceeds from dispositions of properties, will be sufficient to meet working capital requirements, term loan repayment and anticipated capital expenditures for at least the next 12 months.

Cash, cash equivalents and restricted cash were $8.7 million as of September 30, 2022.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BofA Revolver ($172.5 million available as of October 28, 2022) and proceeds from dispositions of properties, will be sufficient to meet working capital requirements, term loan repayment and anticipated capital expenditures for at least the next 12 months.

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

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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.

During the six months ended June 30, 2022, the Federal Reserve raised the federal funds rate target several times, most recently by 75 basis points in June 2022 to a range of 1.50% to 1.75%.

Subsequent to the end of the quarter, in July 2022, the Federal Reserve raised the Federal Funds rate by 75 basis points to a range of 2.25% to 2.50% and indicated that ongoing increases in the target range will be appropriate, which could also increase interest rates.

In addition, in April 2022, the Federal Reserve confirmed its plan to reduce its balance sheet at a rapid pace beginning in May 2022 and in July 2022 indicated it would continue to reduce its holdings of Treasury Securities and agency debt and agency mortgage-backed securities.

During the nine months ended September 30, 2022, the Federal Reserve raised the federal funds rate target several times, most recently by 75 basis points in September 2022 to a range of 3.00% to 3.25%.

The Federal Reserve has indicated that ongoing increases in the target range will be appropriate, which could also increase interest rates.

In addition, in April 2022, the Federal Reserve confirmed its plan to reduce its balance sheet at a rapid pace beginning in May 2022 and in September 2022 indicated it would continue to reduce its holdings of Treasury Securities and agency debt and agency mortgage-backed securities.

If interest rates continue to increase, then the interest costs on our unhedged variable rate debt would be adversely affected, which could in turn adversely affect our cash flow, our ability to pay principal and interest on our debt and our ability to make distributions to stockholders.

As of September 30, 2022, approximately 15% of our total debt constituted unhedged variable rate debt.

Increasing interest rates could also decrease the amount third parties are willing to pay for our assets and limit our ability to incur new debt or refinance existing debt when it matures.

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Real Estate Operations

As of June 30, 2022, our real estate portfolio was comprised of 24 operating properties, which we also refer to as our owned properties.

Our 24 operating properties were approximately 76.3% leased as of June 30, 2022, a decrease from 78.4% leased as of December 31, 2021.

The 2.1% decrease in leased space was primarily a result of lease maturities that occurred during the six months ended June 30, 2022.

As of June 30, 2022, we had approximately 1,638,000 square feet of vacancy in our owned properties compared to approximately 1,496,000 square feet of vacancy at December 31, 2021.

During the six months ended June 30, 2022, we leased approximately 276,000 square feet of office space, of which approximately 105,000 square feet were with existing tenants, at a weighted average term of 6.9 years.

On average, tenant improvements for such leases were $40.48 per square foot, lease commissions were $13.72 per square foot and rent concessions were approximately six

months of free rent.

As of September 30, 2022, our real estate portfolio was comprised of 22 operating properties, which we also refer to as our owned properties.

Our 22 operating properties were approximately 75.9% leased as of September 30, 2022, a decrease from 78.4% leased as of December 31, 2021.

The 2.5% decrease in leased space was primarily a result of lease maturities that occurred during the nine months ended September 30, 2022.

As of September 30, 2022, we had approximately 1,549,000

square feet of vacancy in our owned properties compared to approximately 1,496,000 square feet of vacancy at December 31, 2021.

During the nine months ended September 30, 2022, we leased approximately 342,000 square feet of office space, of which approximately 125,000 square feet were with existing tenants, at a weighted average term of 7.0 years.

On average, tenant improvements for such leases were $35.60 per square foot, lease commissions were $12.83 per square foot and rent concessions were approximately six months of free rent.

Average GAAP base rents under such leases were $33.40 per square foot, or 9.6% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2021.

As of June 30, 2022, leases for approximately 1.8% and 5.5% of the square footage in our owned portfolio are scheduled to expire during 2022 and 2023, respectively.

As the third 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 impact of geopolitical events and current economic conditions and the ongoing effects of the COVID-19 pandemic may limit or delay new tenant leasing during at least the third quarter of 2022 and potentially in future periods.

As of September 30, 2022, leases for approximately 0.8% and 6.9% of the square footage in our owned portfolio are scheduled to expire during 2022 and 2023, respectively.

As the fourth 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 impact of geopolitical events and current economic conditions and the ongoing effects of the COVID-19 pandemic may limit or delay new tenant leasing during at least the fourth 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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Dispositions of Properties

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 June 30, 2022.

During 2022, we sold two office properties located in Broomfield, Colorado on August 31, 2022 for an aggregate sales price of $102.5 million, at a net gain of approximately $24.1 million.

During 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 located in Dulles, Virginia on June 29, 2021 for a sales price of approximately $17.3 million, at a net 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 net 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 net 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 net 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 net loss of approximately $2.9 million.

There were no properties held for sale as of September 30, 2022.

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

On July 6, 2022, the Company entered into a reinstatement of, and amendment to, a Purchase and Sale Agreement with a third-party buyer for the disposition of two properties located in Broomfield, Colorado.

Assuming satisfaction of certain customary conditions to close, the closing of the sale of the properties is expected to take place during the third quarter of 2022.

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

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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, dividends pursuant to our variable quarterly dividend policy and any special dividends required to meet REIT requirements, and other general corporate purposes.

Proceeds from dispositions are intended to be used for the repayment of debt, repurchases of our common stock, dividends and other general corporate purposes.

Critical Accounting Estimates

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Results of Operations

The following table shows financial results for the three months ended June 30, 2022 and 2021:

Three months ended June 30,

The following table shows financial results for the three months ended September 30, 2022 and 2021:

Three months ended September 30,

(in thousands)

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Gain on sale of properties, net

Income (loss) before taxes

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

Equity in income of non-consolidated REITs

Net income (loss)

Comparison of the three months ended June 30, 2022 to the three months ended June 30, 2021:

Total revenues decreased by $14.8 million to $41.3 million for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.

Comparison of the three months ended September 30, 2022 to the three months ended September 30, 2021:

Total revenues decreased by $10.0 million to $40.8 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $14.9 million arising primarily from the sale of ten properties in the last fourteen months and other losses of rental income from leases that expired after June 30, 2021 and during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

These decreases were partially offset by rental income earned from leases commencing after June 30, 2021.

Our leased space in our operating properties was 76.3% at June 30, 2022 and 79.5% at June 30, 2021.

Total expenses decreased by $11.2 million to $49.2 million for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.

● A decrease in rental revenue of approximately $10.0 million arising primarily from the sale of five properties since September 30, 2021 and other losses of rental income from leases that expired after September 30, 2021 and during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

These decreases were partially offset by rental income earned from leases commencing after September 30, 2021.

Our leased space in our operating properties was 75.9% at September 30, 2022 and 80.0% at September 30, 2021.

Total expenses decreased by $8.3 million to $46.8 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

The decrease was primarily a result of:

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● A decrease in depreciation and amortization of approximately $3.7 million primarily attributable to the property dispositions noted above.

● A decrease in general and administrative expenses of $0.5 million, which was primarily related to lower personnel costs.

● A decrease in interest expense of approximately $1.8 million.

The decrease was primarily from lower interest expense as a result of a lower principal amount of debt outstanding, which was partially offset by higher interest rates during the three months ended June 30, 2022 compared to the same period in 2021.

The decrease was primarily due to lower interest expense as a result of a lower principal amount of debt outstanding, which was partially offset by higher interest rates during the three months ended September 30, 2022 compared to the same period in 2021.

Loss on extinguishment of debt

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

During the three months ended September 30, 2022, we repaid debt and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs on the date of the repayment.

Impairment and loan reserve and Gain on sale of properties, net

During the three months ended June 30, 2022, we recorded an impairment on a mortgage receivable of $1.1 million.

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

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

There were no property sales during the three months ended June 30, 2022.

During the three months ended September 30, 2022, we recorded an impairment on a mortgage receivable of $0.7 million.

During the three months ended September 30, 2022, we sold two office properties located in Broomfield, Colorado on August 31, 2022 with an aggregate sales price of $102.5 million, at a gain of $24.1 million.

During the three months ended September 30, 2021, 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 with an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 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 was flat during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Net income (loss)

Net loss for the three months ended June 30, 2022 was $9.1 million compared to a net income of $16.1 million for the three months ended June 30, 2021, for the reasons described above.

The following table shows financial results for the six months ended June 30, 2022 and 2021:

Six months ended June 30,

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $62,000 during the three months ended September 30, 2022 compared to $51,000 during the three months ended September 30, 2021.

Net income for the three months ended September 30, 2022 was $17.2 million compared to a net income of $4.5 million for the three months ended September 30, 2021, for the reasons described above.

The following table shows financial results for the nine months ended September 30, 2022 and 2021:

Nine months ended September 30,

(in thousands)

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Gain on sale of properties, net

Income (loss) before taxes

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

Equity in income of non-consolidated REITs

Net income (loss)

Comparison of the six months ended June 30, 2022 to the six months ended June 30, 2021:

Total revenues decreased by $31.6 million to $83.6 million for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021.

Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021:

Total revenues decreased by $41.6 million to $124.4 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $31.7 million arising primarily from the sale of ten properties and other loss of rental income from leases that expired after June 30, 2021 during the six months ended June 30, 2022 compared the same period in 2021.

These decreases were partially offset by rental income earned from leases commencing after June 30, 2021.

Our leased space in our operating properties was 76.3% at June 30, 2022 and 79.5% at June 30, 2021.

Total expenses decreased by $30.2 million to $95.6 million for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021.

● A decrease in rental revenue of approximately $41.7 million arising primarily due to the sale of twelve properties during 2021 and 2022 and other loss of rental income from leases that expired after September 30, 2021 and during the nine months ended September 30, 2022 compared the same period in 2021.

These decreases were partially offset by rental income earned from leases commencing after September 30, 2021.

Our leased space in our operating properties was 75.9% at September 30, 2022 and 80.0% at September 30, 2021.

Total expenses decreased by $38.5 million to $142.4 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.

The decrease was primarily a result of:

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● A decrease in depreciation and amortization of approximately $13.4 million primarily attributable to the property dispositions noted above.

● A decrease general and administrative expenses of approximately $0.3 million, which was primarily from professional fees and expenses.

● A decrease general and administrative expenses of approximately $0.9 million, which was primarily due to lower personnel costs and professional fees and expenses.

● A decrease in interest expense of approximately $9.4 million.

The decrease was primarily from lower interest expense as a result of a lower principal amount of debt outstanding, which was partially offset by higher interest rates during the six months ended June 30, 2022 compared to the six months ended

June 30, 2021.

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

The decrease was primarily from lower interest expense as a result of a lower principal amount of debt outstanding, which was partially offset by higher interest rates during the nine months ended September 30, 2022 compared to the nine

months ended September 30, 2021.

In addition, the decrease was higher from interest swap breakage costs of $1.9 million related to the repayment of $155 million in term loan debt on June 4, 2021.

Loss on extinguishment of debt

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

During the nine months ended September 30, 2022 and 2021, we repaid debt and incurred a loss on extinguishment of debt of $0.1 million and $0.4 million related to unamortized deferred financing costs on the dates of the repayments.

Impairment and loan reserve and Gain on sale of properties, net

During the three months ended June 30, 2022, we recorded an impairment on a mortgage receivable of $1.1 million.

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

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

There were no property sales during the six months ended June 30, 2022.

During the nine months ended September 30, 2022, we recorded an impairment on a mortgage receivable of $1.9 million.

During the nine months ended September 30, 2022, we sold two office properties located in Broomfield, Colorado on August 31, 2022 for an aggregate sales price of $102.5 million, at a gain of $24.1 million.

During the nine months ended September 30, 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 located in Dulles, Virginia on June 29, 2021 at a loss of $2.1 million.

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

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 $18,000 during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $167,000 during the nine months ended September 30, 2022 compared to $174,000 during the nine months ended September 30, 2021.

Net income (loss)

Net loss for the six months ended June 30, 2022 was $13.3 million compared to net income $9.7 million for the six months ended June 30, 2021, for the reasons described above.

Net loss for the nine months ended September 30, 2022 was $4.0 million compared to net income $14.1 million for the nine months ended September 30, 2021, for the reasons described above.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands):

Net income (loss)

Impairment and loan loss reserve

Gain on sale of properties

Equity in income of non-consolidated REITs

FFO from non-consolidated REITs

Depreciation and amortization

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

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

We also 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.

The comparative Same Store

results include properties held for the periods presented and exclude properties that are redevelopment properties.

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

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

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Net Operating Income (NOI)*

Six Months Ended

Nine Months Ended

Three Months Ended

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Items in NOI* (b)

Six Months Ended

Nine Months Ended

Three Months Ended

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*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.

The information presented below provides the weighted average GAAP rent per square foot for the six months ended June 30, 2022 for our properties and weighted occupancy square feet and percentages.

The information presented below provides the weighted average GAAP rent per square foot for the nine months ended September 30, 2022 for our properties and weighted occupancy square feet and percentages.

GAAP rent includes the impact of tenant concessions and reimbursements.

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Percentage as of

September 30,

Rent per Occupied

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Pershing Park Plaza

380 Interlocken

1999 Broadway

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Greenwood Plaza

390 Interlocken

Total Owned Properties

(a) Based on weighted occupied square feet for the six months ended June 30, 2022, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the six months ended June 30, 2022, per weighted occupied square foot.

(a) Based on weighted occupied square feet for the nine months ended September 30, 2022, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the nine months ended September 30, 2022, per weighted occupied square foot.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash were $4.7 million and $40.7 million at June 30, 2022 and December 31, 2021, respectively.

The decrease of $36.0 million is attributable to $10.2 million used in operating activities, $21.5 million used in investing activities and $4.3 million used in financing activities.

Cash, cash equivalents and restricted cash were $8.7 million and $40.7 million at September 30, 2022 and December 31, 2021, respectively.

The decrease of $32.0 million is attributable to $9.3 million provided by operating activities, $64.0 million provided by investing activities and $105.3 million used in financing activities.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BofA Revolver ($162.5 million available as of October 28, 2022) and proceeds from dispositions of properties, will be sufficient to meet working capital requirements, term loan repayment and anticipated capital expenditures for at least the next 12 months.

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

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Operating Activities

Cash used in operating activities for the six months ended June 30, 2022 of $10.2 million is primarily attributable to a net loss of $13.3 million plus the impairment loss on a mortgage receivable of $1.1 million and the add-back of $32.3 million of non-cash expenses, less a decrease in accounts payable and accrued compensation of $20.7 million, an increase in payment of deferred leasing commissions of $5.0 million, an increase in lease acquisition costs of $2.4 million, an increase in prepaid expenses of $1.1 million, an increase in tenant rent receivables of $0.7 million and an increase in tenant security deposits of $0.4 million.

Cash provided by operating activities for the nine months ended September 30, 2022 of $9.3 million is primarily attributable to a net income of $4.0 million less the gain on sale of properties of $24.1 million, plus the impairment loss on a mortgage receivable of $1.9 million, and the add-back of $46.8 million of non-cash expenses, plus a decrease in tenant rent receivables of $0.6 million, less a decrease in accounts payable and accrued compensation of $7.9 million, an increase in payment of deferred leasing commissions of $7.1 million, an increase in lease acquisition costs of $2.7 million, an increase in prepaid expenses of $1.7 million and an increase in tenant security deposits of $0.5 million.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2022 of $21.5 million is primarily attributable to purchases of other real estate assets and office equipment investments of $21.5 million.

Cash provided by investing activities for the nine months ended September 30, 2022 of $64.0 million is primarily attributable to proceeds from asset sales of $102.0 million, which was partially offset by purchases of other real estate assets and office equipment investments of $38.0 million.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2022 of $4.3 million is primarily attributable to payment of distributions to stockholders of $51.9 million, stock repurchases of $4.8 million and payment of deferred financing costs of $2.6 million, which was partially offset by net borrowings on the BofA Revolver (as defined below) of $55.0 million.

Cash used in financing activities for the nine months ended September 30, 2022 of $105.3 million is primarily attributable to repayment of the BofA Term Loan of $110 million, payment of distributions to stockholders of $52.9 million, stock repurchases of $4.8 million and payment of deferred financing costs of $2.6 million, which was partially offset by net borrowings on the BofA Revolver (as defined below) of $65.0 million.

Liquidity beyond the next 12 months

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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.

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BMO Term Loan

On September 27, 2018, the Company entered into a Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (the “BMO Credit Agreement”).

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 (“BMO”), 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.

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

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

The $165 million tranche B term loan matures on January 31, 2024.

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

The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at June 30, 2022) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at June 30, 2022).

The BMO Term Loan was previously evidenced by an Amended and Restated Credit Agreement, dated October 29, 2014, among the Company, BMO, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated July 21, 2016, and a Second Amendment, dated October 18, 2017.

The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at September 30, 2022) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at September 30, 2022).

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

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

On August 26, 2013, the Company entered into an ISDA Master Agreement with BMO 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 June 30, 2022, the effective interest rate on the BMO Term Loan was 4.04% per annum.

Accordingly, based upon the Company’s credit rating, as of September 30, 2022, 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 the tranche A term loan, which was scheduled to mature on November 30, 2021.

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

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

The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage

ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage.

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

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

The Company was in compliance with the BMO Term Loan financial covenants as of June 30, 2022.

The Company was in compliance with the BMO Term Loan financial covenants as of September 30, 2022.

BofA Revolver

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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 June 30, 2022, there were borrowings of $55.0 million drawn and outstanding under the BofA Revolver.

As of September 30, 2022, there were borrowings of $65.0 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.

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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 (1.95% over SOFR and 0.95% over the base rate at June 30, 2022).

The margin over SOFR or, if applicable, the base rate varies depending on the Company’s leverage ratio (1.95% over SOFR and 0.95% over the base rate at September 30, 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 (0.35% at June 30, 2022).

Based upon the Company’s credit rating, as of June 30, 2022, the interest rate on the BofA Revolver was 3.75% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through June 30, 2022 was approximately 2.43% per annum.

The facility fee is assessed against the aggregate amount of lender commitments regardless of usage (0.35% at September 30, 2022).

Based upon the Company’s credit rating, as of September 30, 2022, the interest rate on the BofA Revolver was 5.11% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through September 30, 2022 was approximately 1.84% per annum.

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.

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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 Company was in compliance with the BofA Revolver financial covenants as of June 30, 2022.

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).

The Company was in compliance with the BofA Revolver financial covenants as of September 30, 2022.

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.

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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 June 30, 2022, $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 applicable to 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 June 30, 2022) or (ii) a margin over the base rate depending on the Company’s credit rating (0.75% over the base rate at June 30, 2022).

The interest rate on the BofA Term Loan was variable at June 30, 2022.

On September 6, 2022, the Company prepaid the remaining $110 million balance of the BofA Term Loan in full and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs.

As of September 30, 2022, there was no balance outstanding under the BofA Term Loan.

● If the Company had not prepaid the BofA Term Loan on September 6, 2022, the BofA Term Loan would have matured by its own terms on January 12, 2023.

The BofA Term Loan bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.75% over LIBOR at the date of repayment on September 6, 2022) or (ii) a margin over the base rate depending on the Company’s credit rating (0.75% over the base rate at the date of repayment on September 6, 2022).

The interest rate on the BofA Term Loan was variable through the date of prepayment on September 6, 2022.

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 June 30, 2022, the interest rate on the BofA Term Loan was 3.54% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Term Loan through June 30, 2022, was approximately 2.22% 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.

The Company was in compliance with the BofA Credit Facility financial covenants as of June 30, 2022.

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;

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 Facility.

The weighted average variable interest rate on all amounts outstanding under the BofA Term Loan through the date of repayment on September 6, 2022, was approximately 2.65% per annum.

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.

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

As of June 30, 2022, the Series A Notes bear interest at 4.49% per annum and the Series B Notes bear interest at 4.76% per annum.

As of September 30, 2022, the Series A Notes bear interest at 4.49% per annum and the Series B Notes bear interest at 4.76% per annum.

The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio.

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In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations.

The Company was in compliance with the Senior Notes financial covenants as of June 30, 2022.

The Company was in compliance with the Senior Notes financial covenants as of September 30, 2022.

Stock Repurchase Program

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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.

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.

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From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage.

As of June 30, 2022, we had one loan outstanding for $24 million principal amount with one Sponsored REIT under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes.

As of September 30, 2022, we had one loan outstanding for $24 million principal amount with one Sponsored REIT under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes.

We anticipate the sole Sponsored REIT Loan outstanding will be repaid through operation or sale of the property.

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

Additional information about our Sponsored REIT Loan outstanding as of June 30, 2022, including a summary table of our Sponsored REIT Loan, is incorporated herein by reference to Part 1, Item 1, Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans” in the Notes to Consolidated Financial Statements included in this report.

Additional information about our Sponsored REIT Loan outstanding as of September 30, 2022, including a summary table of our Sponsored REIT Loan, is incorporated herein by reference to Part 1, Item 1, Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans” in the Notes to Consolidated Financial Statements included in this report.

Other Consideration s

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

For the three and six months ended June 30, 2022 and 2021, respectively, the rental income exceeded the expenses for each individual property, with the exception of Pershing Park for the three and six months ended June 30, 2022.

For the three and nine months ended September 30, 2022 and 2021, respectively, the rental income exceeded the expenses for each individual property, with the exception of Pershing Park for the three and nine months ended September 30, 2022.

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.

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The new lease inclusive of the expansion space is for approximately 101,000 square feet and has not yet commenced.

Pershing Park had $167,000 of rental income and $461,000 of operating expenses for the three months ended June 30, 2022.

The property had $354,000 of rental income and $1,017,000 of operating expenses for the six months ended June 30, 2022, and was 78.1% leased as of June 30, 2022.

Pershing Park had $310,000 of rental income and $575,000 of operating expenses for the three months ended September 30, 2022.

The property had $664,000 of rental income and $1,593,000 of operating expenses for the nine months ended September 30, 2022, and was 79.2% leased as of September 30, 2022.

Off-Balance Sheet Arrangements and Contractual Obligations

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis