FRANKLIN STREET PROPERTIES CORP /MA/ 10-Q

Item 3.  Quantitative and Qualitative Disclosures About Market Risk ​ Market Rate Risk ​ We are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We use interest rate derivative instruments to manage exposure to interest rate changes. As of September 30, 2022 and December 31, 2021, if market rates on our outstanding borrowings under the BofA Revolver subject to a floating rate increased by 10% at maturity, or approximately 50 basis points, over the current variable rate, the increase in interest expense would decrease future earnings and cash flows by approximately $0.3 million. Based upon our credit rating, the interest rate on the BofA Revolver as of September 30, 2022 was SOFR plus an adjustment of 0.11448% plus 195 basis points, or 5.11% per annum. 38 Table of Contents There was $65.0 million drawn on the BofA Revolver as of September 30, 2022. We do not believe that the interest rate risk on the BofA Revolver is material as of September 30, 2022. ​ Although the interest rate on the BMO Term Loan are variable, the Company fixed the base LIBOR interest rate on the BMO Term Loan, by entering into interest rate swap agreements. On February 20, 2019, the Company fixed the interest rate for the period beginning August 26, 2020 and ending January 31, 2024 on the BMO Term Loan with interest rate swap agreements (the “2019 BMO Interest Rate Swap”). On June 4, 2021, the Company paid approximately $0.6 million to terminate $55 million in Notional Value on the 2019 BMO Interest Rate Swap, which was scheduled to mature on November 30, 2021. Accordingly, based upon our credit rating, as of September 30, 2022, the interest rate on the BMO Term Loan was 4.04% per annum. The fair value of these interest rate swaps are affected by changes in market interest rates. We believe that we have mitigated interest rate risk with respect to the BMO Term Loan through the 2019 BMO Interest Rate Swap until January 31, 2024. This interest rate swap was our only derivative instrument as of September 30, 2022. ​ The table below includes our derivative instrument, which is hedging variable cash flows related to interest on our BMO Term Loan as of September 30, 2022 and December 31, 2021 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Notional Strike Effective Expiration ​ Fair Value (2) at (in thousands) ​ Value ​ Rate ​ Date ​ Date ​ September 30, 2022 December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2019 BMO Interest Rate Swap (1) ​ $ 165,000 2.39 % Aug-20 Jan-24 ​ $ 4,266 ​ $ (5,239) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (1) The Notional Value decreased to $165 million on June 4, 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (2) Classified within Level 2 of the fair value hierarchy. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Our BMO Term Loan hedging transaction uses derivative instruments that involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. We require our derivatives contracts to be with counterparties that have investment grade ratings. As a result, we do not anticipate that any counterparty will fail to meet its obligations. However, there can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies. ​ The Company’s derivatives are recorded at fair value in other assets and liabilities in the consolidated balance sheets, the effective portion of the derivatives’ fair value is recorded to other comprehensive income in the consolidated statements of other comprehensive income (loss). ​ The following table presents, as of September 30, 2022, our contractual variable rate borrowings under our BofA Revolver, which matures on January 12, 2024, under our BMO Term Loan Tranche B, which matures on January 31, 2024, under our Series A Notes, which mature on December 20, 2024, and under our Series B Notes, which mature on December 20, 2027. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Payment due by period ​ ​ (in thousands) ​ Total 2022 2023 2024 2025 2026 Thereafter BofA Revolver ​ $ 65,000 ​ $ — ​ $ — ​ $ 65,000 ​ $ — ​ $ — ​ $ — ​ BMO Term Loan Tranche B ​ ​ 165,000 ​ ​ — ​ ​ — ​ ​ 165,000 ​ ​ — ​ ​ — ​ ​ — ​ Series A Notes ​ ​ 116,000 ​ ​ — ​ ​ — ​ ​ 116,000 ​ — ​ — ​ — ​ Series B Notes ​ 84,000 ​ ​ — ​ ​ — ​ ​ — ​ — ​ — ​ 84,000 ​ Total ​ $ 430,000 ​ $ — ​ $ — ​ $ 346,000 ​ $ — ​ $ — ​ $ 84,000 ​ ​ ​