What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-14 compared with 2022-02-15 · 218 added, 211 removed, 356 unchanged (55% of the section changed)

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Accordingly, readers are cautioned not to place undue reliance on forward-looking statements.

Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, adverse changes in general economic or local market conditions, including as a result of the COVID-19 pandemic and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the markets in which we own properties, including energy-influenced markets such as Dallas, Denver and Houston, expectations for future property dispositions, expectations for potential repurchases of our common stock and the potential payment of special dividends, changes in interest rates as a result of economic market conditions, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, delays in construction schedules, unanticipated increases in construction costs, unanticipated repairs, increases in the level of general and administrative costs as a percentage of revenues as revenues decrease as a result of property dispositions, additional staffing, insurance increases and real estate tax valuation reassessments.

See “Risk Factors” in Item 1A.

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 recessionary concerns, inflation, energy prices and interest rates, as well as those resulting from 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 the potential payment of special dividends, changes in interest rates as a result of economic market conditions, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, delays in construction schedules, unanticipated increases in construction costs, unanticipated repairs, increases in the level of general and administrative costs as a percentage of revenues as revenues decrease as a result of property dispositions, additional staffing, insurance increases and real estate tax valuation reassessments.

See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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

As of December 31, 2022, approximately 5.3 million square feet, or approximately 85.4% 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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We have no influence on broader economic/market conditions.

We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.

We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets and intend to continue the strategy we initially adopted in 2021 of seeking to increase shareholder value through the sale of select properties where we believe that short to intermediate term valuation potential has been reached.

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

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

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

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

Specifically, on May 27, 2021, we sold One Ravinia, Two Ravinia and One Overton Park in Atlanta Georgia for aggregate gross proceeds of approximately $219.5 million, on June 29, 2021, we sold Loudoun Technology Center in Sterling, Virginia for gross proceeds of approximately $17.25 million, on August 31, 2021, we sold River Crossing in Indianapolis, Indiana for gross proceeds of $35 million, on September 23, 2021, we sold Timberlake and Timberlake East, in Chesterfield, Missouri for aggregate gross proceeds of $67 million, on October 22, 2021, we sold 999 Peachtree in Atlanta Georgia for gross proceeds of approximately $223.9 million and on November 16, 2021, we sold two office properties in Chantilly, Virginia for aggregate gross proceeds of approximately $40 million.

During the three months ended June 30, 2021, we repaid approximately $155 million of term loan indebtedness and the approximately $47.5 million that had been drawn under our revolving line of credit.

During the three months ended September 30, 2021, we repaid $90 million of term loan indebtedness.

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

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 by (1) pursuing the sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) striving to lease vacant space.

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

Proceeds from dispositions are intended to be used primarily for the repayment of debt.

For the year ended December 31, 2022, our disposition strategy resulted in gross sale proceeds of $130.3 million and we repaid $128.9 million of debt.

Specifically, on August 31, 2022, we sold two office properties located in Broomfield, Colorado for aggregate gross proceeds 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 “Former BofA Term Loan”).

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

In addition, on December 28, 2022, we sold one office property located in Evanston, Illinois for gross proceeds of $27.8 million, at a gain of $3.9 million.

On December 29, 2022 and December 30, 2022, we repaid $7 million and $20 million, respectively, that had been drawn under our revolving line of credit with Bank of America, N.A.

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

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

As of December 31, 2022, the interest rate applicable to borrowings under the BMO Term Loan, the BofA Revolver and the Senior Notes (each as defined in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources) was based in part on the rating of our debt.

On February 10, 2023, we entered into amendments to the BMO Term Loan and the BofA Revolver that, among other things, caused the interest rate applicable to those borrowings to no longer be based in part on the rating of our debt.

The interest rate applicable to borrowings under the Senior Notes continues to be based in part on the rating of our debt.

We anticipate that as a result of this downgrade we will incur approximately $1.0 million in additional interest costs from the Senior Notes over a full twelve-month period based on our borrowings as of February 10, 2023.

Trends and Uncertainties

COVID-19 Outbreak

Beginning in January 2020, there was a global outbreak of COVID-19, which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets.

It has already disrupted global travel supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain.

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

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

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

COVID-19 Pandemic

The COVID-19 pandemic 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.

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.

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

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

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, 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 “Risk Factors” in Item 1A.

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Cash, cash equivalents and restricted cash were $6.6 million as of December 31, 2022.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BofA Revolver ($202.5 million available as of February 14, 2022), will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BofA Revolver ($45 million available as of February 10, 2023) 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 maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties and the amount, timing and terms of any property dispositions.

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

Various sectors of the economy in the United States have been adversely impacted as a result of the COVID-19 pandemic.

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, 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.

As of the date of this report, the impact of the COVID-19 pandemic and related fallout from containment and mitigation measures, such as work from home arrangements and the closing of various businesses, is adversely affecting the demand for office space in the United States.

In addition, the broad economic market conditions in the United States are typically affected by numerous other factors, including but not limited to, inflation and employment levels, energy prices, uncertainty about government fiscal, monetary, trade and tax policies, changes in currency exchange rates, the regulatory environment and the availability of credit.

During 2022 and as of February 10, 2023, the Federal Reserve raised the federal funds rate target several times, most recently by 25 basis points on February 1, 2023, to a range of 4.50% to 4.75%.

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 December 31, 2022, approximately 12% 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 December 31, 2022, our real estate portfolio was comprised of 21 operating properties, which we also refer to as our owned properties.

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

Our 21 operating properties were approximately 75.6% leased as of December 31, 2022, a decrease from 78.4% leased as of December 31, 2021.

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

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

The 2.8% decrease in leased space was primarily a result of lease maturities that occurred during the year ended December 31, 2022.

As of December 31, 2022, we had approximately 1,524,000 square feet of vacancy in our owned properties compared to approximately 1,496,000 square feet of vacancy at December 31, 2021.

During the year ended December 31, 2022, we leased approximately 435,000 square feet of office space, of which approximately 160,000 square feet were with existing tenants, at a weighted average term of 6.4 years.

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

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

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

On average, tenant improvements for such leases were $31.86 per square foot, lease commissions were $11.80 per square foot and rent concessions were approximately six months of free rent.

Average GAAP base rents

under such leases were $33.27 per square foot, or 10.6% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2021.

During 2022, we had no redevelopment properties.

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

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Our property known as Blue Lagoon in Miami, Florida, was substantially completed during the first quarter of 2021, and had previously been classified as a redevelopment property.

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

As of December 31, 2022, the property had leases signed for 98.5% of the rentable square feet of the property, including one tenant occupying approximately 73.6% of the rentable square feet of the property.

As of December 31, 2022, leases for approximately 6.4% and 13.8% of the square footage in our owned portfolio are scheduled to expire during 2023 and 2024, respectively.

As the first quarter of 2023 begins, we believe that our operating properties are stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants.

While leasing activity at our properties has continued, we believe that the COVID-19 outbreak and related containment and mitigation measures may limit or delay new tenant leasing during at least the first quarter of 2022 and potentially in future periods.

While leasing activity at our properties has continued, we believe that the impact of geopolitical events, current economic conditions and the ongoing effects of the COVID-19 pandemic may limit or delay new tenant leasing during at least the first quarter of 2023 and potentially in future periods.

While we cannot generally predict when an existing vacancy in our owned portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates.

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Real Estate Acquisition and Investment Activity

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

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

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

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

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

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

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

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

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

Property Dispositions and Assets Held for Sale

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.

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 gain of approximately $24.1 million.

We also sold an office property in Evanston, Illinois on December 28, 2022 for a sales price of approximately $27.8 million, at a gain of $3.9 million.

There were no properties held for sale as of December 31, 2022.

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 in Dulles, Virginia on June 29, 2021 for a sales price of approximately $17.3 million, at a loss of $2.1 million.

We sold an office property located in Indianapolis, Indiana on August 31, 2021 for a sales price of approximately $35 million, at a loss of approximately $1.7 million.

We sold two office properties located in Chesterfield, Missouri on September 23, 2021 for

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

We sold two office properties located in Chesterfield, Missouri on September 23, 2021 for an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 million.

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

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

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

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

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.

Our current strategy is to continue to invest in the sunbelt and mountain west regions of the United States.

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

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

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

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

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

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

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 by (1) pursuing the sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) striving to lease vacant space.

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

Proceeds from dispositions are intended to be used primarily for the repayment of debt.

Critical Accounting Estimates

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We periodically evaluate our real estate properties for impairment indicators.

These indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that permanently reduce the value of our investments.

These indicators may include lower or declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that permanently reduce the value of our investments.

If indicators of impairment are present, we evaluate the carrying value of the property by comparing it to its expected future undiscounted cash flows.

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Incorrect assumptions or estimates may result in misclassification of our leases.

Ownership of Stock in a Sponsored REIT and Related Interests

We held preferred stock interests in two Sponsored REITs, both of which were liquidated during 2018.

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

These preferred stock interests were accounted for using the equity method.

Under the equity method of accounting our cost basis was adjusted by our share of the Sponsored REITs’ operations and distributions received.

We also agreed to vote our preferred shares (i) with respect to any merger in the same manner that a majority of the other stockholders of the Sponsored REIT vote for or against the merger and (ii) with respect to any other matter presented to a vote by the stockholders of these Sponsored REITs in the same proportion as shares voted by other stockholders of that Sponsored REIT.

The equity investments in Sponsored REITS were reviewed for impairment each reporting period.

The Company recorded impairment charges when events or circumstances indicate a decline in the fair value below the carrying value of the investment has occurred and such decline is other than temporary.

Results of Operations

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Loss on extinguishment of debt

Impairment and loan loss reserve

Gain on sale of properties, net

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

Tax expense on income

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 year ended December 31, 2022 to the year ended December 31, 2021

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The decrease was primarily a result of:

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

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

● A decrease in rental revenue of approximately $43.8 million primarily due to the sale of thirteen properties during 2021 and 2022 and the loss of rental income from lease expirations during the periods presented.

These decreases were partially offset by rental income earned from leases that commenced during the periods presented.

Our leased space in our operating properties was 75.6% at December 31, 2022 and 78.4% at December 31, 2021.

This decrease was partially offset by:

● An increase in interest income of approximately $0.2 million from a higher principal balance on the Sponsored REIT Loan during 2022 compared to 2021.

Total expenses decreased by $40.7 million to $187.9 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

The decrease was primarily a result of:

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

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

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $14.5 million primarily attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $14.7 million primarily attributable to the property dispositions noted above.

● A decrease in general and administrative expenses of approximately $2.0 million, which was primarily due to lower personnel costs of $1.3 million and professional fees and expenses of $0.7 million.

● A decrease in interest expense of approximately $9.5 million.

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

These decreases were partially offset by:

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

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 year ended December 31, 2022 compared to the year ended December 31, 2021.

In addition, the decrease was higher in 2022 as a result of interest swap breakage costs in 2021 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 year ended December 31, 2021, we repaid debt and incurred a loss on extinguishment of debt of $0.9 million related to unamortized deferred financing costs on the dates of the repayments.

During the year ended December 31, 2022 and 2021, we repaid debt and incurred a loss on extinguishment of debt of $0.1 million and $0.9 million, respectively, related to unamortized deferred financing costs on the dates of the repayments.

Impairment and loan reserve

During the year ended December 31, 2022, we recorded an impairment on a mortgage receivable of $4.2 million.

Gain on sale of properties, net

During the year ended December 31, 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.

We also sold an office property in Evanston, Illinois on December 28, 2022 for a sales price of approximately $27.8 million, at a gain of $3.9 million.

During the year ended December 31, 2021, we sold three office properties located in Atlanta, Georgia on May 27, 2021 for an aggregate sales price of approximately $219.5 million, at a net gain of approximately $22.8 million.

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

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

Tax expense on income

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

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $239,000 during the year ended December 31, 2022 compared to $234,000 during the year ended December 31, 2021.

We received state tax refunds of $35,000 during the year ended December 31, 2022.

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

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

Net income (loss)

Net income for the year ended December 31, 2022 was $1.1 million compared to net income of $92.7 million for the year ended December 31, 2021, for the reasons described above.

The following table shows financial results for the years ended December 31, 2021 and 2020.

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Total expenses

Gain on sale of property

Income before taxes on income

Taxes on income

Loss on extinguishment of debt

Gain on sale of properties, net

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

Equity in income of non-consolidated REITs

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

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The decrease was primarily a result of:

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

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

● A decrease in rental revenue of approximately $36.6 million arising primarily from the sale of ten properties during 2021 and a tenant bankruptcy in December 2020 and other losses of rental income from leases that expired after December 31, 2020.

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

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

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

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

The decrease was primarily a result of:

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

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

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $13.4 million, primarily as a result of the sale of ten properties during 2021.

● A decrease to depreciation and amortization of approximately $10.0 million, primarily as a result of the sale of ten properties during 2021.

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

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

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

These decreases were partially offset by:

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

Gain on sale of property

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

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

Loss on extinguishment of debt

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

Gain on sale of properties, net

We sold an office property in Dulles, Virginia on June 29, 2021 for a sales price of approximately $17.3 million, at a loss of $2.1 million.

We sold an office property located in Indianapolis, Indiana on August 31, 2021, for a sales price of approximately $35 million, at a loss of approximately $1.7 million.

We sold two office properties located in Chesterfield, Missouri on September 23, 2021 for an aggregate sales price of approximately $67 million, at a gain of approximately $10.3 million.

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

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

Tax expense on income

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $144,000 and federal and other income taxes, which increased by $125,000, during the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily as a result of a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017 during the year ended December 31, 2019.

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

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

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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 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.

We exclude FFO from any Sponsored REIT that is consolidated from the calculation of FFO.

FFO should not be considered as an alternative to net income (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.

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(in thousands):

Impairment and loan loss reserve

Gain on sale of properties

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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 the sale of assets and excludes non-property specific income and expenses.

We exclude the NOI from any Sponsored REIT that is consolidated from the calculation of NOI.

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.

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.

NOI should not be

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

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

The calculations of NOI are shown in the following table:

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Loss on extinguishment of debt

Impairment and loan loss reserve

Gain on sale of property

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Interest income

Equity in losses of non-consolidated REITs

Equity in income of non-consolidated REITs

Non-property specific items, net

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Cash and cash equivalents were $6.6 million and $40.8 million at December 31, 2022 and December 31, 2021, respectively.

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

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

The decrease of $34.2 million is attributable to $15.2 million provided by operating activities, plus $74.0 million provided by investing activities less $123.4 million used in financing activities.

Management believes that existing cash, cash anticipated to be generated internally by operations, including property dispositions, and our existing availability under the BofA Revolver ($45 million available as of February 10, 2023), will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

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

We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses.

Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real properties and our interest costs.

Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real properties, property dispositions and our interest costs.

Operating Activities

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

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

Cash provided by our operating activities of $15.2 million is primarily attributable to net income of $1.1 million excluding gains on sale of properties of $27.9 million and the impairment of a mortgage loan receivable of $4.2 million plus the add-back of $60.1 million of non-cash expenses, less $8.2 million increase in payments of deferred leasing commissions, a $7.0 million increase in accounts payable and accrued expenses, a $4.5 million increase in lease acquisition costs, a $1.8 million increase in prepaid expenses and other assets, a $0.5 million increase in tenant security deposits and a $0.3 million increase in tenant rent receivables.

Investing Activities

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

Cash provided by investing activities for the year ended December 31, 2022 of $74.0 million is primarily attributable to proceeds from the sale of three properties of $128.9 million and was partially offset by capital expenditures and office equipment investments of approximately $54.9 million.

Financing Activities

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

Cash used in financing activities for the year ended December 31, 2022 of $123.4 million is primarily attributable to repayment of the Former BofA Term Loan in the amount of $110.0 million, distributions paid to stockholders in the amount of $54.0 million, stock repurchases in the amount of $4.8 million, and payment of deferred financing costs of $2.6 million, which was partially offset by net borrowings under the BofA Revolver of $48.0 million.

Liquidity beyond the next 12 months

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

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

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

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

In the past, we considered borrowing on our unsecured line of credit facility, adding or refinancing existing term debt or raising capital through public offerings or At The Market (ATM) programs of our common stock.

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

Operations, Contractual Obligations.

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

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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”).

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.

On February 10, 2023, the Company entered into a First Amendment to Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (the “BMO First Amendment”).

The BMO First Amendment amended the Second Amended and Restated Credit Agreement dated September 27, 2018 (as amended by the BMO First Amendment, the “BMO Credit Agreement”) among the Company and the lending institutions party thereto to, among other things, extend the maturity date from January 31, 2024 to October 1, 2024 and change the interest rate from a number of basis points over LIBOR depending on the Company’s credit rating to 300 basis points over SOFR (Secured Overnight Financing Rate).

The BMO Credit Agreement initially provided for an unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”), of which $125 million remains outstanding.

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

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

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

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

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

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 December 31, 2021) 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 December 31, 2021).

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

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

On February 10, 2023, as part of the BMO First Amendment, the Company repaid a $40 million portion of the $165 million tranche B term loan, so that $125 million remains outstanding.

On or before April 1, 2024, we are required to repay an additional $25 million of the BMO Term Loan.

The tranche B term loan matures on October 1, 2024.

Effective February 10, 2023 upon entering into the BMO First Amendment, the BMO Term Loan bears interest at either (i) 300 basis points over one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively, or (ii) 200 basis points over the base rate.

Prior to February 10, 2023, the BMO Term Loan bore interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at December 31, 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 December 31, 2022).

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

Effective February 10, 2023 upon entering into the BMO First Amendment, base rate means, for any day, a fluctuating rate per annum equal to the highest of:

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

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

Prior to February 10, 2023, base rate meant, for any day, a fluctuating rate per annum equal to the highest of:

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

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On June 4, 2021, the Company paid approximately $0.6 million to terminate the portion of the interest rate swap on tranche A, which was scheduled to mature on November 30, 2021.

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

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.

On February 8, 2023, we terminated all remaining interest rate swaps applicable to the BMO Term Loan and, on February 10, 2023, we received an aggregate of approximately $4.3 million as a result of such terminations.

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 and repurchases and redemptions of the Company’s common stock;

going concern qualifications to our financial statements;

and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates.

In addition, the BMO Credit Agreement also restricts the Company’s ability to make quarterly dividend distributions that exceed $0.01 per share of the Company’s common stock;

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 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 maximum secured recourse 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).

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 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.

For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders

will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable.

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

On February 10, 2023, the Company entered into a First Amendment to 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 (the “BofA First Amendment”), for a revolving line of credit for borrowings, at the Company’s election, of up to $150 million (the “BofA Revolver”).

The BofA First Amendment amended the Credit Agreement dated January 10, 2022 (as amended by the BofA First Amendment, the “BofA Credit Agreement”) among the Company and the lending institutions party thereto to, among other things, extend the maturity date from January 12, 2024 to October 1, 2024, reduce availability for borrowings, at the Company’s election, from up to $237.5 million to up to $150 million, and to change the interest rate from a number of basis points over SOFR depending on the Company’s credit rating to 300 basis points over SOFR.

Borrowings made under the BofA Revolver may be revolving loans or letters of credit, the combined sum of which may not exceed $150 million outstanding at any time.

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

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

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

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

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

Effective October 1, 2023, availability under the BofA Revolver will be reduced to $125 million and, effective April 1, 2024, availability under the BofA Revolver will be further reduced to $100 million.

As of December 31, 2022, there were borrowings of $48.0 million drawn and outstanding under the BofA Revolver.

As of February 10, 2023, there were borrowings of $105 million drawn and outstanding under the BofA Revolver, which borrowings include $40.0 million that the Company borrowed on February 10, 2023 to repay a portion of the BMO Term Loan .

Borrowings made pursuant to the BofA Revolver may be borrowed, repaid and reborrowed from time to time until the maturity date on October 1, 2024.

Effective February 10, 2023 upon entering into the BofA First Amendment, the BofA Revolver bears interest at 300 basis points over either (i) the daily simple 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 was not able to be determined, the BofA Revolver will instead bear interest at 200 basis points over the base rate.

Prior to February 10, 2023, borrowings under the BofA Revolver bore interest at a margin over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively.

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

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

The Company is also obligated to pay an

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

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

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

Prior to February 10, 2023, the margin over SOFR or, if applicable, the base rate varied depending on the Company’s leverage ratio (1.750% over SOFR and 0.750% over the base rate at December 31, 2022).

Effective February 10, 2023 upon entering into the BofA First Amendment, the Company is also obligated to pay an annual facility fee on the unused portion of the BofA Revolver at the rate of 0.350% per annum and, if applicable, letter of credit fees.

Prior to February 10, 2023, the Company was also obligated to pay an annual facility fee and, if applicable, letter of credit fees in amounts that were also based on the Company’s leverage ratio.

The previous facility fee was assessed against the aggregate amount of lender commitments regardless of usage (0.350% at December 31, 2022).

Prior to February 10, 2023, the actual amount of the facility fee, any letter of credit fees, and the margin over SOFR or the base rate was determined based on the per annum percentages in the following grids:

Leverage Ratio

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Base Rate Loans

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

Prior to February 10, 2023, in the event that the Company was assigned an investment grade credit rating, the Company had a one-time right to elect to convert to a different, credit-based pricing grid with the following per annum percentages:

Credit Rating

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

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

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

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

Based upon the Company’s credit rating, as of December 31, 2022, the interest rate on the BofA Revolver was 6.22% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through December 31, 2022 was approximately 2.52% 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, use of proceeds, the amount of cash and cash equivalents that the Company can have on its balance sheet after giving effect to an advance under the BofA Revolver, and repurchases and redemptions of the Company’s common stock, going concern qualifications to our financial statements, and 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 maximum secured recourse 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 quarterly dividend distributions that exceed $0.01 per share of the Company’s common stock;

The Company was in compliance with the BofA Revolver financial covenants as of December 31, 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).

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

The Company may use the net proceeds of the BofA Revolver to finance the acquisition of real properties and for other permitted investments;

to finance investments associated with Sponsored REITs, to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BofA Credit Agreement.

BofA Credit Facility

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

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

The Company may use the net proceeds of the BofA Revolver for permitted investments and for working capital and other general business purposes, including for building improvements, tenant improvements and leasing commissions, in each case to the extent permitted under the BofA Credit Agreement.

Former 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 “Former BofA Credit Facility”) that continued an existing unsecured revolving line of credit (the “Former BofA Revolver”) and an existing term loan (the “Former BofA Term Loan”).

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

There were no amounts drawn on the Former BofA Revolver as of December 31, 2021 and January 10, 2022 .

Former BofA Revolver Highlights

● The Former BofA Revolver was terminated at the Company’s election effective January 10, 2022.

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

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

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

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

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

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

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

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

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

Credit Rating

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

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

month LIBOR based rate for such day plus 1.00%.

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

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

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

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

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

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

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

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

BofA Term Loan Highlights

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

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

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

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

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

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

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

Credit Rating

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

Former BofA Term Loan Highlights

● The Former BofA Term Loan was repaid in its entirety on September 6, 2022.

● The original principal amount of the Former 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 Former 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 Former BofA Term Loan in full and incurred a loss of extinguishment of debt of $0.1 million related to unamortized deferred financing costs.

● If the Company had not prepaid the Former BofA Term Loan in full on September 6, 2022, the Former BofA Term Loan would have matured on January 12, 2023.

The Former 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 (0.750% over the base rate at the date of repayment on September 6, 2022).

The margin over LIBOR rate or base rate was determined based on the Company’s credit rating pursuant to a pricing grid.

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

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

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

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

Previously the Company had fixed the base LIBOR interest rate on the BofA Term Loan by entering into interest rate swap transactions.

On July 22, 2016, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BofA Term Loan at 1.12% per annum for the period beginning on September 27, 2017 and ended on September 27, 2021.

Based upon the Company’s credit rating, as of December 31, 2021, the interest rate on the BofA Term Loan was 1.84% per annum.

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

BofA Credit Facility General Information

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

The BofA Credit Facility also contains financial

covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage.

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

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

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

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

At the date of repayment on September 6, 2022, the Company’s credit rating from Moody’s Investors Service was Ba1.

The interest rate on the Former BofA Credit Facility was variable through the date of repayment on September 6, 2022.

Previously the Company had fixed the base LIBOR interest rate on the Former 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 Former 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 Former BofA Term Loan through the date of repayment on September 6, 2022 was approximately 2.65% per annum.

Based upon the Company’s credit rating, as of December 31, 2021, the interest rate on the Former BofA Term Loan was 1.84% per annum.

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

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 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.

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

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

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Stock Repurchases

On June 23, 2021, FSP Corp.

announced that the Board of Directors of FSP Corp.

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

On June 23, 2021, we announced that our Board of Directors 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.

On February 10, 2023, we disclosed in a Current Report on Form 8-K that our Board of Directors had discontinued the repurchase authorization.

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 December 31, 2021, 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 that advances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or another other capital event.

As of December 31, 2022, the Sponsored REIT Loan had $24 million principal amount outstanding.

The Sponsored REIT Loan is secured by a mortgage on the underlying property and has a current term of less than one year.

We anticipate that the Sponsored REIT Loan will be repaid through cash flow from property operations or sale of the underlying property, although the actual amount and timing of any repayment is uncertain and will likely depend on prevailing market conditions at the time of any such sale.

We may be subject to various legal proceedings and claims that arise in the ordinary course of our business.

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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.

Loans to Sponsored REITs

What changed 10-K

Item 7. Management’s Discussion and Analysis