Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2021. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, adverse changes in general economic or local market conditions, including the impact of increasing inflation, energy prices and interest rates, as well as a result of the COVID-19 pandemic, including the impact of work-from-home policies, and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the markets in which we own properties, including energy-influenced markets such as Dallas, Denver and Houston, expectations for future property dispositions, uncertainty relating to the completion and timing of the disposition of the properties under agreement, expectations for potential repurchases of our common stock and the potential payment of special dividends, changes in interest rates as a result of economic market conditions, 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 Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and Part II, Item 1A. “Risk Factors” below. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.
Overview
FSP Corp., or we or the Company, operates in a single reportable segment: real estate operations. The real estate operations market involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development. Our current strategy is to invest in infill and central business district office properties in the United States sunbelt and mountain west regions as well as select opportunistic markets. We believe that the United States sunbelt and mountain west regions have macro-economic drivers that have the potential to increase occupancies and rents. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.
As of September 30, 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. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on broader economic/market conditions. We may look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.
We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets and we will seek to increase shareholder value (1) through the potential sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) by striving to increase occupancy in our continuing portfolio of real estate. Pursuant to this strategy, we anticipate that dispositions in 2022 will result in estimated gross proceeds in the range of approximately $102.5 million to $200 million. However, this estimated range is subject to change for a variety of reasons, including economic conditions, office market conditions and geopolitical events. As we
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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 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. 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 and December 31, 2021, we repaid $90 million and $215 million, respectively, of term loan indebtedness.
In July 2022, we adopted a variable quarterly dividend policy, which replaced our previous regular quarterly dividend policy. Under the new variable quarterly dividend policy, the Board of Directors will determine quarterly dividends based upon a variety of factors, including the Company’s estimates of its annual taxable income and the amount that the Company is required to distribute annually in the aggregate to enable the Company to continue to qualify as a real estate investment trust for federal income tax purposes.
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 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
COVID-19 Pandemic
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 disrupted global travel supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain. Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, including the spread of more contagious variants of the virus, as well as the availability, administration rates and effectiveness of vaccines, therapeutics and any responses taken on a national and local level by government authorities and businesses. 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. 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. 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,
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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. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
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 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. Future rent concession requests or nonpayment of rent could lead to increased rent delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions or lower occupancy, extended lease terms, increased tenant improvement capital expenditures, or reduced rental rates to maintain occupancies. We review each rent concession request on a case by case basis and may or may not provide rent concessions, depending on the specific circumstances involved. Cash, cash equivalents and restricted cash were $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. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to pay dividends to stockholders and the level of such dividends, 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 global economy is experiencing significant disruptions as a result of various factors, including geopolitical events such as the ongoing conflict between Russia and Ukraine, the COVID-19 pandemic and continuing supply chain difficulties. In addition, negative gross domestic product growth, increasing inflation, energy prices and interest rates and declining consumer confidence and spending are contributing to recessionary concerns for the economy of the United States. Economic conditions directly affect the demand for office space, our primary income producing asset. 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 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. As of the date of this report, the impact of current economic conditions and geopolitical events and the ongoing effects of the COVID-19 pandemic are adversely affecting the demand for office space in the United States.
Real Estate Operations
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
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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 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. Also, we believe the potential exists for any of our tenants to default on its lease or to seek the protection of bankruptcy. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.
Dispositions of Properties
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.
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.
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 we will seek to increase shareholder value (1) through the potential sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) by striving to increase occupancy in our continuing portfolio of real estate. Pursuant to this strategy, we anticipate that dispositions in 2022 will result in estimated gross proceeds in the range of approximately $102.5 million to $200 million. However, this estimated range is subject to change for a variety of reasons, including economic conditions, office market conditions and geopolitical events. 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 and other general corporate purposes.
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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. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.
Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations.
Recent Accounting Standards
In March 2020, the Financial Accounting Standards Board (FASB) issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently assessing the potential impact that the adoption of ASU 2020-04 may have on its consolidated financial statements.
Results of Operations
The following table shows financial results for the three months ended September 30, 2022 and 2021:
Three months ended September 30,
(in thousands)
2022
2021
Change
Revenues:
Rental
$
40,366
$
50,326
$
(9,960)
Related party revenue:
Management fees and interest income from loans
466
419
47
Other
4
57
(53)
Total revenues
40,836
50,802
(9,966)
Expenses:
Real estate operating expenses
13,369
14,373
(1,004)
Real estate taxes and insurance
8,951
10,200
(1,249)
Depreciation and amortization
15,148
18,862
(3,714)
General and administrative
3,232
3,749
(517)
Interest
6,110
7,928
(1,818)
Total expenses
46,810
55,112
(8,302)
Loss on extinguishment of debt
(78)
(236)
158
Impairment and loan loss reserve
(717)
—
(717)
Gain on sale of properties, net
24,077
8,632
15,445
Income (loss) before taxes and equity in income of non-consolidated REITs
17,308
4,086
13,222
Tax expense
62
51
11
Equity in income of non-consolidated REITs
—
421
(421)
Net income (loss)
$
17,246
$
4,456
$
12,790
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Comparison of the three months ended September 30, 2022 to the three months ended September 30, 2021:
Revenues
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 $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.
Expenses
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:
● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.3 million primarily attributable to the property dispositions noted above.
● 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 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 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 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 $62,000 during the three months ended September 30, 2022 compared to $51,000 during the three months ended September 30, 2021.
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Net income
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.
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The following table shows financial results for the nine months ended September 30, 2022 and 2021:
Nine months ended September 30,
(in thousands)
2022
2021
Change
Revenues:
Rental
$
122,994
$
164,671
$
(41,677)
Related party revenue:
Management fees and interest income from loans
1,393
1,246
147
Other
17
69
(52)
Total revenues
124,404
165,986
(41,582)
Expenses:
Real estate operating expenses
38,547
45,664
(7,117)
Real estate taxes and insurance
26,713
34,461
(7,748)
Depreciation and amortization
49,004
62,379
(13,375)
General and administrative
10,997
11,857
(860)
Interest
17,140
26,582
(9,442)
Total expenses
142,401
180,943
(38,542)
Loss on extinguishment of debt
(78)
(403)
325
Impairment and loan loss reserve
(1,857)
—
(1,857)
Gain on sale of properties, net
24,077
29,258
(5,181)
Income (loss) before taxes and equity in income of non-consolidated REITs
4,145
13,898
(9,753)
Tax expense
167
174
(7)
Equity in income of non-consolidated REITs
—
421
(421)
Net income (loss)
$
3,978
$
14,145
$
(10,167)
Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021:
Revenues
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 $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.
Expenses
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:
● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $14.9 million primarily attributable to the property dispositions noted above.
● 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 $0.9 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 nine months ended September 30, 2022 compared to the nine
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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 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 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 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 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.
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Non-GAAP Financial Measures
Funds From Operations
The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, hedge ineffectiveness, acquisition costs of newly acquired properties that are not capitalized and lease acquisition costs that are not capitalized plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on mortgage loans, properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income or loss (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT, may define this term in a different manner. We have included the NAREIT FFO definition as of May 17, 2016 in the table and note that other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income or loss and cash flows from operating, investing and financing activities in the consolidated financial statements.
The calculations of FFO are shown in the following table:
For the
For the
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands):
2022
2021
2022
2021
Net income
$
17,246
$
4,456
$
3,978
$
14,145
Impairment and loan loss reserve
717
—
1,857
—
Gain on sale of properties
(24,077)
(8,632)
(24,077)
(29,258)
Equity in income of non-consolidated REITs
—
(421)
—
(421)
FFO from non-consolidated REITs
—
421
—
421
Depreciation and amortization
15,114
18,861
48,916
62,340
NAREIT FFO
9,000
14,685
30,674
47,227
Lease Acquisition costs
41
112
206
297
Funds From Operations
$
9,041
$
14,797
$
30,880
$
47,524
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which we refer to as NOI. Management believes that investors are interested in this information. NOI is a non-GAAP financial measure that the Company defines as net income or loss (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, hedge ineffectiveness, gains or losses on extinguishment of debt, gains or losses on the sale of assets and excludes non-property specific income and expenses. The information presented includes footnotes and the data is shown by region with properties owned in the periods presented, which we call Same Store. The comparative Same Store
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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. NOI should not be considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions. The calculations of NOI are shown in the following table:
Net Operating Income (NOI)*
Rentable
Square
Nine Months Ended
Nine Months
Feet
Three Months Ended
Ended
Three Months Ended
Ended
Inc
%
(in thousands)
or RSF
31-Mar-22
30-Jun-22
30-Sep-22
30-Sep-22
31-Mar-21
30-Jun-21
30-Sep-21
30-Sep-21
(Dec)
Change
Region
East
362
$
497
$
475
$
391
$
1,363
$
504
$
523
$
612
$
1,639
$
(276)
(16.8)
%
MidWest
1,130
3,897
4,850
3,905
12,652
3,217
3,243
3,158
9,618
3,034
31.5
%
South
2,796
5,817
5,611
5,902
17,330
7,095
7,070
6,162
20,327
(2,997)
(14.7)
%
West
2,146
8,070
6,609
6,401
21,080
8,721
8,392
8,643
25,756
(4,676)
(18.2)
%
Property NOI* from Operating Properties
6,434
18,281
17,545
16,599
52,425
19,537
19,228
18,575
57,340
(4,915)
(8.6)
%
Dispositions and Redevelopment Properties (a)
-
1,300
1,574
1,068
3,942
10,223
8,772
6,788
25,783
(21,841)
(23.6)
%
Property NOI*
6,434
$
19,581
$
19,119
$
17,667
$
56,367
$
29,760
$
28,000
$
25,363
$
83,123
$
(26,756)
(32.2)
%
Same Store
$
18,281
$
17,545
$
16,599
$
52,425
$
19,537
$
19,228
$
18,575
$
57,340
$
(4,915)
(8.6)
%
Less Nonrecurring
Items in NOI* (b)
273
1,258
494
2,025
32
34
281
347
1,678
(3.0)
%
Comparative
Same Store
$
18,008
$
16,287
$
16,105
$
50,400
$
19,505
$
19,194
$
18,294
$
56,993
$
(6,593)
(11.6)
%
Nine Months Ended
Nine Months
Three Months Ended
Ended
Three Months Ended
Ended
Reconciliation to Net Income (Loss)
31-Mar-22
30-Jun-22
30-Sep-22
30-Sep-22
31-Mar-21
30-Jun-21
30-Sep-21
30-Sep-21
Net income (loss)
$
(4,158)
$
(9,110)
$
17,246
$
3,978
$
(6,460)
$
16,149
$
4,456
$
14,145
Add (deduct):
Loss on extinguishment of debt
—
78
78
—
167
236
403
Impairment and loan loss reserve
—
1,140
717
1,857
—
—
—
—
Gain on sale of properties, net
—
—
(24,077)
(24,077)
—
(20,626)
(8,632)
(29,258)
Management fee income
(291)
(267)
(274)
(832)
(465)
(403)
(380)
(1,248)
Depreciation and amortization
15,670
18,185
15,148
49,003
24,381
19,136
18,862
62,379
Amortization of above/below market leases
(9)
(45)
(34)
(88)
(32)
(6)
—
(38)
General and administrative
3,784
3,981
3,233
10,998
4,146
3,962
3,749
11,857
Interest expense
5,366
5,664
6,109
17,139
8,600
10,054
7,928
26,582
Interest income
(451)
(455)
(461)
(1,367)
(394)
(399)
(404)
(1,197)
Equity in income of non-consolidated REITs
—
—
—
(421)
(421)
Non-property specific items, net
(330)
26
(18)
(322)
(16)
(34)
(31)
(81)
Property NOI*
$
19,581
$
19,119
$
17,667
$
56,367
$
29,760
$
28,000
$
25,363
$
83,123
(a) We define redevelopment properties as properties being developed, redeveloped or where redevelopment is complete, but are in lease-up and that are not stabilized. We also include properties that have been placed in service, but that do not have operating activity for all periods presented .
(b) Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability.
*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.
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The information presented below provides the weighted average GAAP rent per square foot for the nine months ended September 30, 2022 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans.
Weighted
Occupied
Weighted
Year Built
Weighted
Percentage as of
Average
or
Net Rentable
Occupied
September 30,
Rent per Occupied
Property Name
City
State
Renovated
Square Feet
Sq. Ft.
2022 (a)
Square Feet (b)
Forest Park
Charlotte
NC
1999/2020
64,198
50,331
78.4
%
$
23.38
Innsbrook
Glen Allen
VA
1999
298,183
145,543
48.8
%
18.94
East total
362,381
195,874
54.1
%
20.08
Northwest Point
Elk Grove Village
IL
1999
177,095
177,095
100.0
%
31.64
909 Davis Street
Evanston
IL
2002
195,098
179,939
92.2
%
41.91
121 South 8th Street
Minneapolis
MN
1974
298,121
267,027
89.6
%
24.85
801 Marquette Ave
Minneapolis
MN
1923/2017
129,691
115,736
89.2
%
22.38
Plaza Seven
Minneapolis
MN
1987
330,096
270,085
81.8
%
33.56
Midwest total
1,130,101
1,009,882
89.4
%
31.13
Blue Lagoon Drive
Miami
FL
2002/2021
213,182
156,795
73.6
%
28.68
Park Ten
Houston
TX
1999
157,609
113,431
72.0
%
29.02
Addison Circle
Addison
TX
1999
289,333
202,822
70.1
%
33.73
Collins Crossing
Richardson
TX
1999
300,887
259,034
86.1
%
26.58
Eldridge Green
Houston
TX
1999
248,399
248,399
100.0
%
26.89
Park Ten Phase II
Houston
TX
2006
156,746
148,924
95.0
%
28.61
Liberty Plaza
Addison
TX
1985
217,600
152,908
70.3
%
23.79
Legacy Tennyson Center
Plano
TX
1999/2008
208,966
85,175
40.8
%
30.81
One Legacy Circle
Plano
TX
2008
214,110
125,383
58.6
%
36.94
Westchase I & II
Houston
TX
1983/2008
629,025
347,914
55.3
%
27.26
Pershing Park Plaza
Atlanta
GA
1989
160,145
31,052
19.4
%
24.92
South Total
2,796,002
1,871,837
66.9
%
28.64
1999 Broadway
Denver
CO
1986
680,255
452,301
66.5
%
33.64
1001 17th Street
Denver
CO
1977/2006
657,816
516,846
78.6
%
34.62
600 17th Street
Denver
CO
1982
611,163
473,346
77.5
%
34.01
Greenwood Plaza
Englewood
CO
2000
196,236
159,442
81.3
%
26.95
West Total
2,145,470
1,601,935
74.7
%
33.40
Total Owned Properties
6,433,954
4,679,528
72.7
%
$
30.45
(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.
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Liquidity and Capital Resources
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. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to pay dividends to stockholders and the level of such dividends, however, depends in significant part upon the level of rental income from our real properties and our interest costs.
Operating Activities
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 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 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
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 II, 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. We believe these sources of funds will provide sufficient funds to adequately meet our obligations beyond the next twelve months.
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JPM Term Loan
On August 2, 2018, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (the “JPM Credit Agreement”), which provided a single unsecured bridge loan in the aggregate principal amount of $150 million (the “JPM Term Loan”). On December 24, 2020, the Company repaid a $50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, and $100 million remained fully advanced and outstanding under the JPM Term Loan. On June 4, 2021, the Company repaid the remaining $100 million outstanding on the loan, which had been scheduled to mature on November 30, 2021, and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs.
Although the interest rate on the JPM Term Loan was variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44% per annum on a $100 million portion of the JPM Term Loan until November 30, 2021. On June 4, 2021, the Company paid approximately $1.2 million to terminate the interest rate swap, which was scheduled to mature on November 30, 2021.
BMO Term Loan
On September 27, 2018, the Company entered into a Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal (“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. 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 $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 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 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 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
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ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or the administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BMO Term Loan financial covenants as of September 30, 2022.
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 million (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 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. 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 (1.95% 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 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. 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 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 Company was in compliance with the BofA Revolver financial covenants as of September 30, 2022.
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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 Revolver on January 10, 2022, the Company delivered a notice to BofA terminating the aggregate lender commitments under the Former BofA Revolver in their entirety. There were no amounts drawn on the Former BofA Revolver as of December 31, 2021 and January 10, 2022.
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. 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. 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.
Senior Notes
On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes.
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Table of Contents
Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $200 million of senior unsecured notes consisting of (i) Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $84 million (the “Series B Notes” and, together with the Series A Notes, the “Senior Notes”). On December 20, 2017, the Senior Notes were funded and the 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 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. 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 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; a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. The Company was in compliance with the Senior Notes financial covenants as of September 30, 2022.
Stock Repurchase Program
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
From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage. As of September 30, 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.
We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
We intend to draw on the 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.
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Loans to Sponsored REIT
Sponsored REIT Loans
From time to time we may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. We anticipate the sole Sponsored REIT Loan outstanding will be repaid through operation or sale of the property. A Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately one year.
Our Sponsored REIT Loans subject us to credit risk. However, we believe that our position as asset manager of a Sponsored REIT helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REIT. Before making a Sponsored REIT Loan, we consider a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the applicable Sponsored REIT and local and national market conditions. These factors are subject to change and we do not apply a formula or assign relative weights to the factors. Instead, we make a subjective determination after considering such factors collectively.
Additional information about our Sponsored REIT 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 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. During the three months ended September 30, 2021, we signed a lease with a new tenant. During the three months ended March 31, 2022, we signed an expansion of space with that same tenant. The new lease inclusive of the expansion space is for approximately 101,000 square feet and has not yet commenced. 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
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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