Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
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● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, 2013 framework.
Based on our assessment, management concluded that, as of December 31, 2022, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included elsewhere in this annual report on Form 10-K, has issued an attestation report on our internal control over financial reporting as of December 31, 2022. Please see page F-3.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
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PART III
Certain information required by Part III of this Form 10-K will be contained in our definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) which we plan to file not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The response to this item is contained under the caption “Information about our Executive Officers” in Part I hereof and in the Proxy Statement under the captions “CORPORATE GOVERNANCE”, “PROPOSAL 1 - ELECTION OF DIRECTORS” and, if applicable, “DELINQUENT SECTION 16(a) REPORTS” and is incorporated herein by reference.
Our board of directors has adopted a code of business conduct and ethics that applies to all of our executive officers, directors and employees. The code was approved by the nominating and corporate governance committee of our board of directors and by the full board of directors. We have posted a current copy of our code under “Corporate Governance” in the “Investor Relations” section of our website at http://www.fspreit.com. To the extent permitted by applicable rules of the NYSE American, we intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the code of business conduct and ethics with respect to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website.
Item 11. Executive Compensation
The response to this item is contained in the Proxy Statement under the captions “COMPENSATION DISCUSSION AND ANALYSIS” and “DIRECTOR COMPENSATION AND STOCK OWNERSHIP GUIDELINES” and, other than the information required by Item 402(v) of Regulation S-K, is incorporated herein by reference.
The “Compensation Committee Report” contained in the Proxy Statement shall not be deemed “soliciting material” or “filed” with the SEC or otherwise subject to the liabilities of Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The response to this item is contained in the Proxy Statement under the captions “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The response to this item is contained in the Proxy Statement under the captions “PROPOSAL 1 - ELECTION OF DIRECTORS”, “CORPORATE GOVERNANCE” and “TRANSACTIONS WITH RELATED PERSONS” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The response to this item is contained in the Proxy Statement under the caption “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FEES AND SERVICES” and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. Financial Statements:
The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules:
The Financial Statement Schedules listed on the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
Schedules other than those listed are omitted as they are not applicable or the required or equivalent information has been included in the financial statements or notes thereto.
3. Exhibits:
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EXHIBIT INDEX
Exhibit No.
Description
3.1 (1)
Articles of Incorporation, as amended.
3.2 (2)
Amended and Restated By-laws.
4.1 (3)
Description of Securities Registered Under Section 12 of the Exchange Act.
10.1+ (4)
2002 Stock Incentive Plan of FSP Corp .
10.2 (5)
First Amendment to Credit Agreement, dated February 10, 2023, among FSP Corp., Bank of America, N.A. and the other parties thereto.
10.3 (6)
First Amendment to Second Amended and Restated Credit Agreement, dated February 10, 2023, among FSP Corp., Bank of Montreal and the other parties thereto.
10.4 (7)
Credit Agreement, dated January 10, 2022, among FSP Corp., Bank of America, N.A. and the other parties thereto
10.5 (8)
Joinder and Increase Agreement, dated February 10, 2022, among FSP Corp., BankUnited N.A. and Bank of America, N.A., as administrative agent.
10.6 (9)
Second Amended and Restated Credit Agreement, dated September 27, 2018, among FSP Corp., Bank of Montreal and the other parties thereto.
10.7 (10)
Second Amended and Restated Credit Agreement, dated October 29, 2014, among FSP Corp., Bank of America, N.A. and the other parties thereto.
10.8 (11)
First Amendment to Second Amended and Restated Credit Agreement, dated July 21, 2016, among FSP Corp., Bank of America, N.A. and the other parties thereto.
10.9 (12)
Second Amendment to Second Amended and Restated Credit Agreement, dated October 18, 2017, among FSP Corp., Bank of America, N.A., and the other parties thereto.
10.10 (13)
Amended and Restated Credit Agreement, dated August 2, 2018, among FSP Corp., JPMorgan Chase Bank, N.A. and the other parties thereto.
10.11 (14)
Note Purchase Agreement, dated October 24, 2017, among FSP Corp. and the other parties named therein as purchasers.
10.12+(15)
Form of Retention Agreement.
10.13+(16)
Change in Control Discretionary Plan.
21.1*
Subsidiaries of the Registrant.
23.1*
Consent of Ernst & Young LLP.
31.1*
Certification of FSP Corp.’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of FSP Corp.’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of FSP Corp.’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of FSP Corp.’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101*
The following materials from FSP Corp.’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Other Comprehensive Income; and (v) the Notes to Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
(1)
Incorporated by reference to Exhibit 3.1 to FSP Corp.’s Quarterly Report on Form 10-Q filed on July 30, 2019 (File No. 001-32470).
(2)
Incorporated by reference to Exhibit 3.1 to FSP Corp.’s Current Report on Form 8-K, filed on February 3, 2023 (File No. 001-32470).
(3)
Incorporaterd by reference to Exhibit 10.1 to FSP Corp.’s Annual Report on Form 10-K, filed on February 15, 2022 (File No. 001-32470).
(4)
Incorporaterd by reference to Exhibit 10.1 to FSP Corp.’s Annual Report on Form 10-K, filed on March 29, 2002 (File No. 001-32470).
(5)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on February 10, 2023 (File No. 001-32470).
(6)
Incorporated by reference to Exhibit 10.2 to FSP Corp.’s Current Report on Form 8-K, filed on February 10, 2023 (File No. 001-32470).
(7)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on January 12, 2022 (File No. 001-32470).
(8)
Incorporated by reference to Exhibit 10.3 to FSP Corp.’s Annual Report on Form 10-K, filed on February 15, 2022 (File No. 001-32470).
(9)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on September 27, 2018 (File No. 001-32470).
(10)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on October 29, 2014 (File No. 001-32470).
(11)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on July 27, 2016 (File No. 001-32470).
(12)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on October 24, 2017 (File No. 001-32470)
(13)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on August 2, 2018 (File No. 001-32470).
(14)
Incorporated by reference to Exhibit 10.4 to FSP Corp.’s Current Report on Form 8-K, filed on October 24, 2017 (File No. 001-32470)
(15)
Incorporated by reference to Exhibit 10.5 to FSP Corp.’s Annual Report on Form 10-K, filed on February 24, 2006 (File No. 001-32470).
(16)
Incorporated by reference to Exhibit 99.2 to FSP Corp.’s Current Report on Form 8-K, filed on February 8, 2006 (File No. 001-32470).
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+
Management contract or compensatory plan or arrangement filed as an Exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
*
Filed herewith.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf as of February 14, 2023 by the undersigned, thereunto duly authorized.
FRANKLIN STREET PROPERTIES CORP.
By:
/s/ George J. Carter
George J. Carter
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ George J. Carter
Chief Executive Officer and Director (Principal Executive Officer)
February 14, 2023
George J. Carter
/s/ John G. Demeritt
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
February 14, 2023
John G. Demeritt
/s/ John N. Burke
Director
February 14, 2023
John N. Burke
/s/ Brian N. Hansen
Director
February 14, 2023
Brian N. Hansen
/s/ Kenneth A. Hoxsie
Director
February 14, 2023
Kenneth A. Hoxsie
/s/ Dennis J. McGillicuddy
Director
February 14, 2023
Dennis J. McGillicuddy
/s/ Georgia Murray
Director
February 14, 2023
Georgia Murray
/s/ Kathryn P. O’Neil
Director
February 14, 2023
Kathryn P. O’Neil
/s/ Milton P. Wilkins Jr.
Director
February 14, 2023
Milton P. Wilkins Jr.
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Franklin Street Properties Corp.
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm (PCAOB ID 42 )
F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2022 and 2021
F-5
Consolidated Statements of Income for each of the three years in the period ended December 31, 2022
F-7
Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2022
F-8
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2022
F-9
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2022
F-10
Notes to the Consolidated Financial Statements
F-12
Financial Statement Schedules — Schedule II and III
F-34
All other schedules for which a provision is made in the applicable accounting resolutions of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Franklin Street Properties Corp.:
Opinion on Internal Control Over Financial Reporting
We have audited Franklin Street Properties Corp.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Franklin Street Properties Corp. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022 and the related notes and financial statement schedules listed in the index at Item 15(a)(2) and our report dated February 14, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A of Franklin Street Properties Corp.’s Annual Report on Form 10-K under the heading Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 14, 2023
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Franklin Street Properties Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Franklin Street Properties Corp. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022 and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 14, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-3
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Measurement of related party mortgage loan receivable
Description of the Matter
The Company’s related party mortgage loan portfolio consisted of a loan with a principal balance outstanding of $24 million as of December 31, 2022. The Company determined that an allowance for loan loss of $4.2 million was required for this loan. As discussed in Note 3 to the consolidated financial statements, management evaluates whether a loss has been incurred based on expected performance, cash flow and the value of underlying real estate for secured lending.
Auditing the Company’s estimate of the allowance for loan losses for mortgage loans involved a high degree of subjectivity in evaluating management’s assumptions used in the valuation of underlying real estate for secured lending.
How We Addressed the Matter in Our Audit
We tested the design and operating effectiveness of the Company’s controls over the allowance for loan loss process. This included controls over the valuation of real estate collateral for secured lending.
Our testing of the measurement of the related party mortgage loan receivable included, among other procedures, testing the completeness and accuracy of data used in the valuation of real estate collateral and, with the assistance of our valuation specialists, evaluating management’s assumptions used in the valuation of the underlying real estate. For example, we compared the assumptions of expected performance of the underlying real estate to market data, performed a sensitivity analysis to evaluate the assumptions that were most significant to the estimate of value and recalculated management’s estimate.
Impairment assessment of real estate assets
Description of the Matter
The Company’s real estate assets, net totaled $1.1 billion as of December 31, 2022. As described in Note 2 to the consolidated financial statements, the Company reviews its properties to determine if their carrying amounts will be recovered from future operating cash flows if certain indicators of impairment are identified.
Auditing the Company's impairment assessment involved a high degree of subjectivity as estimates underlying the determination of recoverability were based on assumptions affected by expected future market conditions and leasing activity. Assumptions included in the Company’s recoverability assessment included the rental rates and future occupancy of the Company’s real estate properties.
How We Addressed the Matter in Our Audit
We tested the design and operating effectiveness of controls over the Company’s impairment process. For example, we tested controls over management’s review of important assumptions underlying projections used in the Company’s recoverability assessment.
Our testing of the Company’s impairment assessment included, among other procedures, evaluating the significant assumptions used to estimate future undiscounted cash flows used in the recoverability assessment. For example, we compared assumptions of future market conditions to current market data and performed a sensitivity analysis to evaluate the assumptions that were most significant to the estimate of undiscounted cash flows and recalculated management’s estimate.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Boston, Massachusetts
February 14, 2023
F-4
Table of Contents
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
(in thousands)
2022
2021
Assets:
Real estate assets:
Land
$
126,645
$
146,844
Buildings and improvements
1,388,869
1,457,209
Fixtures and equipment
11,151
11,404
1,526,665
1,615,457
Less accumulated depreciation
423,417
424,487
Real estate assets, net
1,103,248
1,190,970
Acquired real estate leases, less accumulated amortization of $ 20,243 and $ 40,423 , respectively
10,186
14,934
Cash, cash equivalents and restricted cash
6,632
40,751
Tenant rent receivables
2,201
1,954
Straight-line rent receivable
52,739
49,024
Prepaid expenses and other assets
6,676
4,031
Other assets: derivative asset
4,358
—
Related party mortgage loan receivable, less allowance for credit loss of $ 4,237 and $ 0 , respectively
19,763
24,000
Office computers and furniture, net of accumulated depreciation of $ 1,115 and $ 1,198 , respectively
154
198
Deferred leasing commissions, net of accumulated amortization of $ 19,043 and $ 21,099 , respectively
35,709
38,311
Total assets
$
1,241,666
$
1,364,173
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
(in thousands, except share and par value amounts)
2022
2021
Liabilities and Stockholders’ Equity:
Liabilities:
Bank note payable
$
48,000
$
—
Term loans payable, less unamortized financing costs of $ 250 and $ 714 , respectively
164,750
274,286
Series A & Series B Senior Notes, less unamortized financing costs of $ 494 and $ 658 , respectively
199,506
199,342
Accounts payable and accrued expenses
50,366
89,493
Accrued compensation
3,644
4,704
Tenant security deposits
5,710
6,219
Lease liability
759
1,159
Other liabilities: derivative liabilities
—
5,239
Acquired unfavorable real estate leases, less accumulated amortization of $ 574 and $ 2,285 , respectively
195
528
Total liabilities
472,930
580,970
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $ .0001 par value, 20,000,000 shares authorized, none issued or outstanding
—
—
Common stock, $ .0001 par value, 180,000,000 shares authorized, 103,235,914 and 103,998,520 shares issued and outstanding , respectively
10
10
Additional paid-in capital
1,334,776
1,339,226
Accumulated other comprehensive income (loss)
4,358
( 5,239 )
Distributions in excess of accumulated earnings
( 570,408 )
( 550,794 )
Total stockholders’ equity
768,736
783,203
Total liabilities and stockholders’ equity
$
1,241,666
$
1,364,173
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Income
For the Year Ended
December 31,
(in thousands, except per share amounts)
2022
2021
2020
Revenues:
Rental
$
163,739
$
207,581
$
244,207
Related party revenue:
Management fees and interest income from loans
1,855
1,700
1,610
Other
21
77
31
Total revenues
165,615
209,358
245,848
Expenses:
Real estate operating expenses
52,820
60,881
66,940
Real estate taxes and insurance
34,620
41,061
48,390
Depreciation and amortization
63,808
78,544
88,558
General and administrative
13,885
15,898
14,997
Interest
22,808
32,273
36,026
Total expenses
187,941
228,657
254,911
Loss on extinguishment of debt
( 78 )
( 901 )
—
Impairment and loan loss reserve
( 4,237 )
—
—
Gain on sale of properties, net
27,939
113,134
41,928
Income before taxes and equity in income of non-consolidated REITs
1,298
92,934
32,865
Tax expense
204
638
250
Equity in income of non-consolidated REITs
—
421
—
Net income
$
1,094
$
92,717
$
32,615
Weighted average number of shares outstanding , basic and diluted
103,338
106,667
107,303
Net income per share , basic and diluted
$
0.01
$
0.87
$
0.30
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Comprehensive Income (Loss)
For the
Year Ended
December 31,
(in thousands)
2022
2021
2020
Net income
$
1,094
$
92,717
$
32,615
Other comprehensive income:
Unrealized gain (loss) on derivative financial instruments
9,597
12,072
( 12,629 )
Total other comprehensive income (loss)
9,597
12,072
( 12,629 )
Comprehensive income
$
10,691
$
104,789
$
19,986
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Stockholders’ Equity
Accumulated
Distributions
Additional
other
in excess of
Total
Common Stock
Paid-In
comprehensive
accumulated
Stockholders’
(in thousands)
Shares
Amount
Capital
income (loss)
earnings
Equity
Balance, December 31, 2019
107,269
11
$
1,356,794
$
( 4,682 )
$
( 565,727 )
$
786,396
Comprehensive income (loss)
—
—
—
( 12,629 )
32,615
19,986
Shares issued for:
—
Equity-based compensation
59
—
337
—
—
337
Distributions
—
—
—
—
( 38,628 )
( 38,628 )
Balance, December 31, 2020
107,328
11
1,357,131
( 17,311 )
( 571,740 )
768,091
Comprehensive income
—
—
—
12,072
92,717
104,789
Repurchased shares
( 3,396 )
( 1 )
( 18,243 )
( 18,244 )
Shares issued for:
—
Equity-based compensation
67
—
338
—
—
338
Distributions
—
—
—
—
( 71,771 )
( 71,771 )
Balance, December 31, 2021
103,999
10
1,339,226
( 5,239 )
( 550,794 )
783,203
Comprehensive income
—
—
—
9,597
1,094
10,691
Repurchased shares
( 847 )
—
( 4,843 )
( 4,843 )
Shares issued for:
—
Equity-based compensation
84
—
393
—
—
393
Distributions
—
—
—
—
( 20,708 )
( 20,708 )
Balance, December 31, 2022
103,236
$
10
$
1,334,776
$
4,358
$
( 570,408 )
$
768,736
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
For the Year Ended December 31,
(in thousands)
2022
2021
2020
Cash flows from operating activities:
Net income
$
1,094
$
92,717
$
32,615
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
65,697
81,041
91,581
Amortization of above and below market leases
( 118 )
( 34 )
( 313 )
Shares issued as compensation
394
338
337
Loss on extinguishment of debt
78
901
—
Impairment and loan loss reserve
4,237
—
—
Gain on sale of properties, net
( 27,939 )
( 113,134 )
( 41,928 )
Equity in income of non-consolidated REITs
—
( 421 )
—
Distributions from non-consolidated REITs
—
421
—
Decrease in allowance for doubtful accounts and write-off of accounts receivable
—
—
( 13 )
Changes in operating assets and liabilities:
Tenant rent receivables
( 247 )
5,702
( 3,792 )
Straight-line rents
( 5,895 )
( 3,930 )
( 1,685 )
Lease acquisition costs
( 4,494 )
( 2,353 )
( 2,123 )
Prepaid expenses and other assets
( 1,805 )
82
( 129 )
Accounts payable and accrued expenses
( 5,983 )
( 11,096 )
7,785
Accrued compensation
( 1,060 )
786
518
Tenant security deposits
( 509 )
( 2,458 )
( 669 )
Payment of deferred leasing commissions
( 8,216 )
( 12,200 )
( 13,735 )
Net cash provided by operating activities
15,234
36,362
68,449
Cash flows from investing activities:
Property improvements, fixtures and equipment
( 54,910 )
( 64,833 )
( 77,919 )
Investment in related party mortgage loan receivable
—
( 3,000 )
—
Proceeds received from sales of properties
128,949
573,307
88,958
Net cash provided by investing activities
74,039
505,474
11,039
Cash flows from financing activities:
Distributions to stockholders
( 53,988 )
( 38,491 )
( 38,628 )
Stock repurchases
( 4,843 )
( 18,244 )
—
Borrowings under bank note payable
90,000
91,500
105,000
Repayments of bank note payable
( 42,000 )
( 95,000 )
( 101,500 )
Repayment of term loans payable
( 110,000 )
( 445,000 )
( 50,000 )
Deferred financing costs
( 2,561 )
—
—
Net cash used in financing activities
( 123,392 )
( 505,235 )
( 85,128 )
Net increase (decrease) in cash, cash equivalents and restricted cash
( 34,119 )
36,601
( 5,640 )
Cash, cash equivalents and restricted cash , beginning of year
40,751
4,150
9,790
Cash, cash equivalents and restricted cash , end of period
$
6,632
$
40,751
$
4,150
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
For the Year Ended December 31,
(in thousands)
2022
2021
2020
Supplemental disclosure of cash flow information:
Cash paid for:
Interest
$
21,085
$
30,141
$
33,060
Taxes on income
$
667
$
454
$
477
Non-cash investing and financing activities:
Accrued dividend
$
—
$
33,280
$
—
Accrued costs for purchase of real estate assets
$
9,962
$
4,715
$
8,625
The accompanying notes are an integral part of these consolidated financial statements.
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Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
1. Organization
Franklin Street Properties Corp. (“FSP Corp.” or the “Company”), holds, directly and indirectly, 100 % of the interest in FSP Investments LLC, FSP Property Management LLC , FSP Holdings LLC and FSP Protective TRS Corp . FSP Property Management LLC provides asset management and property management services. The Company also has a non-controlling common stock interest in one corporation organized to operate as a real estate investment trust (“REIT”). The Company refers to this REIT and similarly structured past REITs collectively as the “Sponsored REIT” or the “Sponsored REITs”, as the context requires.
As of December 31, 2022, the Company owned and operated a portfolio of real estate consisting of 21 operating properties, one managed Sponsored REIT and held one promissory note secured by a mortgage on real estate owned by a Sponsored REIT. From time-to-time, the Company may acquire real estate or make additional secured loans. The Company may also pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, or for geographic or property specific reasons.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Estimates and Assumptions
The Company prepares its financial statements and related notes in conformity with generally accepted accounting principles in the United States of America (“GAAP”). These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the consolidated financial statements include the allowance for doubtful accounts, allowance for credit losses, purchase price allocations, impairment considerations, useful lives of fixed assets and the valuation of derivatives.
Investments in non-consolidated REITs
As of December 31, 2022, the Company has a non-controlling common stock interest in one Sponsored REIT in which the Company no longer shares in economic benefit or risk. The Company had a non-controlling common stock interest in another Sponsored REIT and a non-controlling preferred stock interest in two additional Sponsored REITs, each of which were liquidated during 2019 or 2018. The Company exercised influence over, but did not control these entities and investments were accounted for using the equity method. Under the equity method of accounting, the Company's cost basis was adjusted by its share of the Sponsored REITs' earnings or losses.
The equity investments in Sponsored REITS were reviewed for impairment each reporting period. The Company recorded impairment charges when events or circumstances indicated a decline in the fair value below the carrying value of the investment had occurred and such decline was other-than-temporary.
Variable Interest Entities (VIEs)
We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. The determination of whether an entity in which we hold a direct or indirect variable interest is a VIE is based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make
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judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.
We analyze any investments in VIEs to determine if we are the primary beneficiary. In evaluating whether we are the primary beneficiary, we evaluate our direct and indirect economic interests in the entity. Determining which reporting entity, if any, is the primary beneficiary of a VIE is primarily a qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment.
We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct a proposed sale of the property or merger of the company. In addition, we consider the rights of other investors to participate in those decisions, to replace the manager and to amend the corporate charter. We determine whether we are the primary beneficiary of a VIE at the time we become involved with a variable interest entity and reconsider that conclusion upon a reconsideration event. As of December 31, 2022, our relationship with FSP Monument Circle LLC was considered a VIE for which we are not the primary beneficiary. Our maximum exposure to losses associated with this VIE is limited to the outstanding Sponsored REIT Loan net of the allowance for credit loss, the related accrued interest receivable and an exit fee receivable, which were in aggregate approximately $ 22.1 million and $ 24.5 million at December 31, 2022 and 2021, respectively. The accrued interest and exit fee receivables are included in prepaid expenses and other assets in the consolidated balance sheet and are approximately $ 2.3 million and $ 0.5 million at December 31, 2022 and 2021, respectively. The relationships and investments related to the entity in which we have a variable interest with are summarized in Note 3, Related Party Transactions and Investments in Non-Consolidated Entities.
Real Estate and Depreciation
Real estate assets are stated at cost less accumulated depreciation.
The Company allocates the value of real estate acquired among land, buildings and identified intangible assets or liabilities. Costs related to land, building and improvements are capitalized. Typical capital items include new roofs, site improvements, various exterior building improvements and major interior renovations. Costs incurred in connection with leasing (primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period. Routine replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred. Depreciation is computed using the straight-line method over the assets’ estimated useful lives as follows:
Category
Years
Commercial buildings
39
Building improvements
15
-
39
Fixtures and equipment
3
-
7
The Company reviews its properties to determine if their carrying amounts will be recovered from future operating cash flows if certain indicators of impairment are identified at those properties. These indicators may include lower or declining tenant occupancy, weak or declining tenant profitability, cash flows or liquidity, the Company’s 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 the Company’s investment. If indicators of impairment are present, the Company evaluates the carrying value of the property by comparing it to its expected future undiscounted cash flow. If the Company determines that impairment has occurred, the affected assets are reduced to their fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows are considered on an undiscounted basis in the analysis that the Company conducts to determine whether an asset has been impaired, the Company’s strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized. The Company did not recognize any impairment losses for the years ended December 31, 2022, 2021 and 2020.
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Acquired Real Estate Leases and Amortization
Acquired real estate leases represent costs associated with acquiring an in-place lease (i.e., the market cost to execute a similar lease, including leasing commission, tenant improvements, legal, vacancy and other related costs) and the value relating to leases with rents above the market rate. Amortization is computed using the straight-line method over the term of the leases, which range from 12 months to 154 months . Amortization of these combined components was approximately $ 4.5 million, $ 8.2 million and $ 12.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Amortization related to costs associated with acquiring an in-place lease is included in depreciation and amortization on the consolidated statements of income. Amortization related to leases with rents above the market rate is offset against the rental revenue in the consolidated statements of income. The estimated annual amortization expense for the five years and thereafter following December 31, 2022 is as follows:
(in thousands)
December 31,
2023
$
2,999
2024
2,591
2025
1,938
2026
1,761
2027
415
2028 and thereafter
482
Acquired Unfavorable Real Estate Leases and Amortization
Acquired unfavorable real estate leases represent the value relating to leases with rents below the market rate. Amortization is computed using the straight-line method over the term of the leases, which range from 12 months to 151 months . Amortization expense was approximately $ 0.2 million, $ 0.5 million and $ 0.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Amortization related to leases with rents below the market rate is included with rental revenue in the consolidated statements of income. The estimated annual amortization for the five years and thereafter following December 31, 2022 is as follows:
(in thousands)
December 31,
2023
$
74
2024
56
2025
24
2026
15
2027
7
2028 and thereafter
19
Asset Held For Sale
Classification of a property as held for sale typically occurs upon the execution of a purchase and sale agreement and belief by management that the sale or disposition is probable of occurrence within one year . Upon determining that a property was held for sale, the Company discontinues depreciating the property and reflects the property in its consolidated balance sheet at the lower of its carrying amount or fair value less the cost to sell. The Company presents the property held for sale on its consolidated balance sheet as “Asset held for sale”. The Company reports the results of operations of its properties sold or held for sale in its consolidated statements of income through the date of sale.
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Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows.
December 31,
December 31,
(in thousands)
2022
2021
Cash and cash equivalents
$
3,739
$
34,308
Restricted cash
2,893
6,443
Total cash, cash equivalents and restricted cash
$
6,632
$
40,751
Restricted Cash
Restricted cash consists of tenant security deposits, which are required by law in some states or by contractual agreement to be kept in a segregated account, and escrows arising from property sales. Tenant security deposits are refunded when tenants vacate, provided that the tenant has not damaged the property.
Cash held in escrow is paid based on the terms of the closing agreement for the sale. Restricted cash also may include funds segregated for specific tenant improvements per lease agreements.
Tenant Rent Receivables
Tenant rent receivables are expected to be collected within one year . The Company provided an allowance for doubtful accounts based on collectability. The Company recognizes the effect of a change in its assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.
Related Party Mortgage Loan Receivable
Management monitors and evaluates the secured loans compared to the expected performance, cash flow and value of the underlying real estate.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, derivatives, related party mortgage loan receivable and accounts receivable. The Company maintains its cash balances principally in two banks which the Company believes to be creditworthy. The Company periodically assesses the financial condition of the banks and believes that the risk of loss is minimal. Cash balances held with various financial institutions frequently exceed the insurance limit of $ 250,000 provided by the Federal Deposit Insurance Corporation. The derivatives that the Company has are from three interest rate swap agreements that are discussed in Note 5. The related party mortgage loan receivable is held with one Sponsored REIT. The Company performs regular evaluations on the extent and impact of any credit deterioration that could affect the performance and value of the secured property, as well as the financial and operating capability of the borrower. The Company performs ongoing credit evaluations of its tenants and requires certain tenants to provide security deposits or letters of credit. Though these security deposits and letters of credit are insufficient to meet the total value of a tenant’s lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting the space. The Company has no single tenant which accounts for more than 10 % of its annualized rent.
Financial Instruments
The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued expenses, accrued compensation, and tenant security deposits approximate their
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fair values based on their short-term maturity and the bank note and term loans payable approximate their fair values as they bear interest at variable interest rates.
Straight-line Rent Receivable
Certain leases provide for fixed rent increases over the term of the lease. Rental revenue is recognized on a straight-line basis over the related lease term; however, billings by the Company are based on the lease agreements. Straight-line rent receivable, which is the cumulative revenue recognized in excess of amounts billed by the Company, was $ 52.7 million, $ 49.0 million and $ 67.8 million at December 31, 2022, 2021 and 2020, respectively. Prior to 2020, the Company provided an allowance for doubtful accounts based on collectability. The Company recognized the effect of a change in its assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense. The reserve was eliminated during 2020.
Deferred Leasing Commissions
Deferred leasing commissions represent direct and incremental external leasing costs incurred in the leasing of commercial space. These costs are capitalized and are amortized on a straight-line basis over the terms of the related lease agreements. Amortization expense was approximately $ 7.1 million, $ 10.7 million and $ 9.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The estimated annual amortization for the five years and thereafter following December 31, 2022 is as follows:
(in thousands)
December 31,
2023
$
7,254
2024
5,174
2025
4,313
2026
3,602
2027
3,206
2028 and thereafter
12,160
Common Share Repurchases
The Company recognizes the gross cost of the common shares it repurchases as a reduction in stockholders’ equity using the treasury stock method. Maryland law does not recognize a separate treasury stock account but provides that shares repurchased are classified as authorized but unissued shares. Accordingly, the Company reduces common stock for the par value and the excess of the purchase price over the par value is a reduction to additional paid-in capital.
Revenue Recognition
Rental Revenue - The Company has retained substantially all of the risks and benefits of ownership of the Company’s commercial properties and accounts for its leases as operating leases. Rental revenue includes income from leases, certain reimbursable expenses, straight-line rent adjustments and other income associated with renting the property. Rental income from leases, which includes rent concessions (including free rent and other lease inducements) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. The Company does not
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have any significant percentage rent arrangements with its commercial property tenants. Reimbursable expenses are included in rental income in the period earned. A summary of rental revenue is shown in the following table:
Year Ended
December 31,
(in thousands)
2022
2021
2020
Income from leases
$
107,990
$
148,705
$
180,899
Reimbursable expenses
49,736
54,825
61,310
Straight-line rent adjustment
5,895
4,017
1,685
Amortization of favorable and unfavorable leases
118
34
313
$
163,739
$
207,581
$
244,207
Related Party and Other Revenue - Property and asset management fees, interest income on loans and other income are recognized when the related services are performed and the earnings process is complete.
Segment Reporting
The Company is a REIT focused on real estate investments primarily in the office market and currently operates in only one segment: real estate operations.
Income Taxes
Taxes on income for the years ended December 31, 2022, 2021 and 2020 represent taxes incurred by FSP Protective TRS Corp, which is a taxable REIT subsidiary, and the State of Texas franchise tax applicable to FSP Corp., which is classified as an income tax for reporting purposes.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at December 31, 2022, 2021 and 2020. The denominator used for calculating basic and diluted net income per share was 103,338,000 , 106,667,000 and 107,303,000 for the years ended December 31, 2022 , 2021 and 2020 , respectively.
Derivative Instruments
The Company recognizes derivatives on the consolidated balance sheets at fair value. Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the consolidated balance sheets as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is recognized in other comprehensive income (“OCI”) and reclassified into the income statement. The Company reviews the effectiveness of each hedging transaction, which involves estimating future cash flows, at least quarterly. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The Company currently has no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes in interest rates and counterparty credit risk. The results of such variability could be a significant increase or decrease in the Company’s derivative assets, derivative liabilities, equity, and/or earnings.
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Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There is also an established fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial assets and liabilities recorded on the consolidated balance sheets at fair value are categorized based on the inputs to the valuation techniques as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity or information. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability including credit risk, which was not significant to the overall value.
These inputs (See Notes 3 and 5) were considered and applied to the Company’s derivative instruments and Sponsored REIT Loan. Level 2 inputs were used to value the interest rate swaps and Level 3 inputs were used to value the Sponsored REIT Loan.
Subsequent Events
In preparing these consolidated financial statements the Company evaluated events that occurred through the date of issuance of these financial statements for potential recognition or disclosure.
Recent Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company does note anticipate that the adoption of ASU 2020-04 will have a material impact on the consolidated financial statements.
3. Related Party Transactions and Investments in Non-Consolidated Entities
Investment in Sponsored REITs
The Company held a common stock interest in 1 , 2 and 2 Sponsored REITs at December 31, 2022, 2021 and 2020, respectively. The Company held a non-controlling preferred stock investment in two Sponsored REITs, FSP 303 East Wacker Drive Corp. (“East Wacker”) and FSP Grand Boulevard Corp. (“Grand Boulevard”), each of which were liquidated during the three months ended September 30, 2018.
Equity in income (loss) of investments in non-consolidated REITs were derived from the Company’s share of income or loss in the operations of those entities and includes gain or loss on liquidation. The Company exercised influence over, but did not control these entities, and investments were accounted for using the equity method.
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Equity in income of investment in non-consolidated REITs:
The following table includes equity in income of investments in non-consolidated REITs:
Year Ended
December 31,
(in thousands)
2021
Equity in income of East Wacker
$
421
Total
$
421
Equity in income of East Wacker was derived from the Company’s preferred stock investment in the entity. In December 2007, the Company purchased 965.75 preferred shares or 43.7 % of the outstanding preferred shares, of East Wacker. On September 24, 2018, the property owned by East Wacker was sold at a gain. On October 6, 2021, the Company received a liquidating distribution of $ 0.4 million, which is included in equity in income of non-consolidated REITs on the consolidated statements of income.
The following table includes distributions received from non-consolidated REITs:
Year Ended
December 31,
(in thousands)
2021
Distributions from East Wacker
$
421
$
421
Non-consolidated REITs
As of December 31, 2022, the Company has a non-controlling common stock interest in one Sponsored REIT in which the Company no longer shares in economic benefit or risk.
Management fees and interest income from loans:
Asset management fees range from 1 % to 5 % of collected rents, and the applicable contracts are cancelable with 30 day notice. Asset management fee income from non-consolidated entities amounted to approximately $ 28,000 , $ 61,000 and $ 71,000 for the years ended December 31, 2022, 2021 and 2020, respectively.
The Company reviews the need for an allowance under CECL for Sponsored REIT loans at each reporting period. The measurement of expected credit losses is based upon historical experiences, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company has elected to apply the practical expedient for financial assets secured by collateral in instances where the borrower is experiencing financial difficulty and repayment of the Sponsored REIT Loan is expected to be provided substantially through operation or sale of the collateral. The Company uses the fair value of the collateral at the reporting date and an adjustment to the allowance for expected credit losses is recorded when the amortized cost basis of the financial asset exceeds the fair value of the collateral, less costs to sell.
The Company regularly evaluates the extent and impact of any credit deterioration that could affect performance and the value of the secured property, as well as the financial and operating capability of the borrower. A property’s operating results and existing cash balances are considered and used to assess whether cash flows from operations are sufficient to cover the current and future operating and debt service requirements. The Company also evaluates the borrower’s competency in managing and operating the secured property and considers the overall economic environment, real estate sector and geographic sub-market in which the secured property is located. The Company applies normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.
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The Company anticipates 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.
The following is a summary of the Sponsored REIT Loan outstanding as of December 31, 2022:
Maximum
Amount
Interest
(dollars in thousands, except footnotes)
Maturity
Amount
Outstanding
Rate at
Sponsored REIT
Location
Date
of Loan
31-Dec-22
31-Dec-22
Mortgage loan secured by property
FSP Monument Circle LLC (1)
Indianapolis, IN
30-Jun-23
$
24,000
$
24,000
7.51
%
$
24,000
$
24,000
(1) This mortgage loan includes an origination fee of $ 164,000 and an exit fee of $ 38,000 when repaid by the borrower.
The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $ 1.8 million, $ 1.6 million and $ 1.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.
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. 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. As part of its consideration for agreeing to amend and restate the Sponsored REIT Loan, the Company obtained from the stockholders of the parent of FSP Monument Circle LLC the right to vote their shares in favor of any sale of the property owned by FSP Monument Circle LLC any time on or after January 1, 2023. The amended and restated Sponsored REIT Loan qualified as a troubled debt restructuring. There were no commitments to lend additional funds to the Sponsored REIT and the loan is collateralized by the mortgage held on the Sponsored REIT’s property and by cash accounts, as of December 31, 2022.
As of December 31, 2021 and 2020, we did not have an allowance for credit losses recorded on our consolidated balance sheet. We recorded a $ 4.2 million increase in our provision for credit losses during the year ended December 31, 2022. The change in the allowance for credit losses during the year ended December 31, 2022 is primarily due to the deterioration within the current real estate market, changes to key assumptions applied within our financial model to reflect these market changes, such as the exit capitalization and discount rates, and due to an increase in the accrued interest receivable balance. The following table presents a roll-forward of our allowance for credit losses.
For the Year Ended December 31,
(Dollars in thousands)
2022
2021
2020
Beginning allowance for credit losses
$
—
$
—
$
—
Additional increases to the allowance for credit losses
4,237
—
—
Ending allowance for credit losses
$
4,237
$
—
$
—
The following is quantitative information about significant unobservable inputs in our Level 3 measurement of the collateral of the Sponsored REIT Loan measured at fair value on a nonrecurring basis:
Fair Value (1) at
Significant
Range
Weighted
Description
December 31, 2022
Valuation Technique
Unobservable Input
Min
Max
Average (2)
(in thousands)
Sponsored REIT Loan
$
19,763
Discounted Cash Flows
Exit Cap Rate
7.50
%
7.50
%
7.50
%
Discount Rate
9.50
%
9.50
%
9.50
%
(1) Classified within Level 3 of the fair value hierarchy.
(2) Unobservable inputs were weighted based on the fair value of the related instrument.
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4. Bank Note Payable, Term Note Payable and Private Placements
JPM Term Loan
On August 2, 2018, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (the “JPM Credit Agreement”), which provides a single unsecured bridge loan in the aggregate principal amount of $ 150 million (the “JPM Term Loan”). On December 24, 2020 the Company repaid a $ 50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, and $ 100 million remained fully advanced and outstanding under the JPM Term Loan. On June 4, 2021, the Company repaid the remaining $ 100 million outstanding on the loan, which had been scheduled to mature on November 30, 2021, and incurred a loss on extinguishment of debt of $ 0.1 million related to unamortized deferred financing costs.
Although the interest rate on the JPM Term Loan was variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $ 100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44 % per annum on a $ 100 million portion of the JPM Term Loan until November 30, 2021. On June 4, 2021, the Company paid approximately $ 1.2 million to terminate the interest rate swap, which was scheduled to mature on November 30, 2021.
BMO Term Loan
On September 27, 2018, the Company entered into a Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (the “BMO Credit Agreement”). Subsequent to December 31, 2022, on February 10, 2023, the BMO Credit Agreement was amended. See Note 11 in these Consolidated Financial Statements for additional disclosure regarding the amendment. Unless otherwise indicated, all of the information in this description of the BMO Term Loan is as of December 31, 2022. 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 remained fully advanced and outstanding as of December 31, 2022. 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 three properties located in Atlanta, Georgia. 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.
As of December 31, 2022, 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, 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 is determined based on the Company’s credit rating pursuant to the following grid:
Credit
LIBOR Rate
Base Rate
Level
Rating
Margin
Margin
I
A-
/
A3
(or higher)
85.0
bps
—
bps
II
BBB+
/
Baa1
90.0
bps
—
bps
III
BBB
/
Baa2
100.0
bps
—
bps
IV
BBB-
/
Baa3
125.0
bps
25.0
bps
V
<BBB-
/
Baa3
165.0
bps
65.0
bps
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For purposes of the BMO Term Loan, 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 %. As of December 31, 2022, the Company’s credit rating from Moody’s Investors Service was Ba1.
Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into interest rate swap transactions. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32 % per annum, which matured on August 26, 2020. On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39 % per annum for the period beginning on August 26, 2020 and ending January 31, 2024. Accordingly, based upon the Company’s credit rating, as of December 31, 2022, the effective interest rate on the BMO Term Loan was 4.04 % per annum. On June 4, 2021, the Company paid approximately $ 0.6 million to terminate the portion of the interest rate swap on the tranche A term loan, which was scheduled to mature on November 30, 2021.
The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest 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. The Company was 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. Borrowings made under the BofA Revolver may be revolving loans or letters of credit, the combined sum of which may not exceed $ 237.5 million outstanding at any time. Subsequent to December 31, 2022, on February 10, 2023, the BofA Credit Agreement was amended. See Note 11 in these Consolidated Financial Statements for additional disclosure regarding the amendment. Unless otherwise indicated, all of the information in this description of the BofA Revolver is as of December 31, 2022. As of December 31, 2022, there were borrowings of $ 48.0 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.
As of December 31, 2022, borrowings under the BofA Revolver bear interest at a margin over either (i) the daily simple Secured Overnight Financing Rate (“SOFR”), plus an adjustment of 0.11448 % , or (ii) one , three or six month term SOFR, plus a corresponding adjustment of 0.11448 % , 0.26161 % or 0.42826 % , respectively. In addition, under certain circumstances, such as if SOFR is not able to be determined, the BofA Revolver will instead bear interest at a margin over a specified base rate. The margin over SOFR or, if applicable, the base rate varies depending on the Company’s
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leverage ratio ( 1.750 % over SOFR and 0.750 % over the base rate at December 31, 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 December 31, 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:
Level
Leverage Ratio
Daily SOFR Rate Loans, Term SOFR Loans and Letter of Credit Fees
Facility Fee
Base Rate Loans
I
< 35.00 %
1.550 %
0.300 %
0.550 %
II
≥ 35.00 % -
< 40.00 %
1.650 %
0.300 %
0.650 %
III
≥ 40.00 % -
< 45.00 %
1.750 %
0.350 %
0.750 %
IV
≥ 45.00 % -
< 50.00 %
1.950 %
0.350 %
0.950 %
V
≥ 50.00 % -
< 55.00 %
2.150 %
0.350 %
1.150 %
VI
≥ 55.00 %
2.350 %
0.400 %
1.350 %
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:
Level
Credit Rating
Daily SOFR Rate Loans, Term SOFR Loans and Letter of Credit Fees
Facility Fee
Base Rate Loans
I
A-/A3 (or higher)
0.725 %
0.125 %
0.000 %
II
BBB+/Baa1
0.775 %
0.150 %
0.000 %
III
BBB/Baa2
0.850 %
0.200 %
0.000 %
IV
BBB-/Baa3
1.050 %
0.250 %
0.050 %
V
<BBB-/Baa3
1.400 %
0.300 %
0.400 %
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 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), (ii) and (iv).
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, 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
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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; provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company’s good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company’s status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject. The Company was in compliance with the BofA Revolver financial covenants as of 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). In the event of a default by the Company, BofA, in its capacity as administrative agent, may, and at the request of the requisite number of lenders shall, declare all obligations under the BofA Credit Agreement immediately due and payable and enforce any and all rights of the lenders or BofA under the BofA Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable.
The Company may use the net proceeds of the BofA Revolver to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs, to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BofA Credit Agreement.
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 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.
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, 2022, the Company’s credit rating from Moody’s Investors Service was Ba1.
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.
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 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 on extinguishment of debt of $ 0.1 million related to unamortized deferred financing costs. As of December 31, 2022, there was no balance outstanding under the Former BofA Term Loan.
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● If the Company had not prepaid the Former BofA Term Loan on September 6, 2022, the Former BofA Term Loan would have matured by its own terms 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 ( 0.75 % over the base rate at the date of repayment on September 6, 2022).
The interest rate on the Former BofA Term Loan was variable through the date of prepayment on September 6, 2022. Previously the Company had fixed the base LIBOR interest rate on the 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.
Senior Notes
On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes. Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $ 200,000,000 of senior unsecured notes consisting of (i) Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $ 116 million (the “Series A Notes”) and (ii) Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $ 84 million (the “Series B Notes,” and, together with the Series A Notes, the “Senior Notes”). On December 20, 2017, the Senior Notes were funded and the proceeds were used to reduce the outstanding balance of the Former BofA Revolver.
The Senior Notes bear interest depending on the Company’s credit rating. As of December 31, 2021, the Series A Notes bear interest at 4.49 % per annum and the Series B Notes bear interest at 4.76 % per annum.
The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BofA Credit 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 ; a maximum leverage ratio and an unsecured leverage ratio of no more than 60 % ( 65 % if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. The Company was in compliance with the Senior Notes financial covenants as of December 31, 2021.
5. Financial Instruments: Derivatives and Hedging
On July 22, 2016, the Company entered into interest rate swap transactions that fixed the interest rate for the period beginning on September 27, 2017 and ended on September 27, 2021 on the BofA Term Loan (the “2017 Interest Rate Swap”). On March 7, 2019, the Company entered into interest rate swap transactions that fixed the interest rate for the period beginning on March 29, 2019 and ended on November 30, 2021 on a $ 100 million portion of the JPM Term Loan
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(the “2019 JPM Interest Rate Swap”). On February 20, 2019, the Company entered into interest rate swap transactions that fixed the interest rate for the period beginning August 26, 2020 and ending January 31, 2024 on the BMO Term Loan (the “2019 BMO Interest Rate Swap”). The variable rates that were fixed under the 2017 Interest Rate Swap, the 2019 JPM Interest Rate Swap and the 2019 BMO Interest Rate Swap (collectively referred to as the “Interest Rate Swaps”) are described in Note 4.
On June 4, 2021, the Company paid approximately $ 1.2 million to terminate the 2019 JPM Interest Rate Swap that was scheduled to mature on November 30, 2021 and approximately $ 0.6 million to terminate a portion of the 2019 BMO Interest Rate Swap that was scheduled to mature on November 30, 2021. As a result of the terminations, approximately $ 1.9 million of the balance held in accumulated other comprehensive income (loss) was reclassified into earnings. The JPM Term Loan and a portion of the BMO Term Loan related to these interest rate swaps was also repaid on June 4, 2021, which is described in Note 4.
The Interest Rate Swaps qualify as cash flow hedges and have been recognized on the consolidated balance sheets at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be recognized in earnings in the same period in which the hedged interest payments affect earnings, which may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.
The following table summarizes the notional and fair value of our derivative financial instruments at December 31, 2022. The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.
Notional
Strike
Effective
Expiration
Fair Value (1) at
(in thousands)
Value
Rate
Date
Date
December 31, 2022
December 31, 2021
2019 BMO Interest Rate Swap
$
165,000
2.39
%
Aug-20
Jan-24
$
4,358
$
( 5,239 )
(1) Classified within Level 2 of the fair value hierarchy.
The 2019 BMO Interest Rate Swap was reported as an asset with a fair value of approximately $ 4.4 million and a liability of approximately $ 5.2 million at December 31, 2022 and December 31, 2021, respectively. The balance is included in other assets: derivative asset and other liabilities: derivative liabilities in the consolidated balance sheet at December 31, 2022 and December 31, 2021, respectively.
The gain/(loss) on the Company’s Interest Rate Swaps that was recorded in OCI and the accompanying consolidated statements of income as a component of interest expense for the years ended December 31, 2022, 2021 and 2020, respectively, was as follows:
(in thousands)
Year Ended December 31,
Interest Rate Swaps in Cash Flow Hedging Relationships:
2022
2021
2020
Amounts of gain (loss) recognized in OCI
$
8,451
$
3,786
$
( 20,380 )
Amounts of previously recorded loss reclassified from OCI into Interest Expense
$
( 1,146 )
$
( 8,286 )
$
( 7,751 )
Total amount of Interest Expense presented in the consolidated statements of operations
$
22,808
$
32,273
$
36,026
Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. The Company estimates that approximately $ 4.0 million of the current balance held in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.
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The Company is hedging the exposure to variability in anticipated future interest payments on existing debt.
The BMO Term Loan, BofA Term Loan and JPM Term Loan hedging transactions used 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 either or both of the contracts. The Company requires its derivatives contracts to be with counterparties that have investment grade ratings. As a result, the Company does not anticipate that any counterparty will fail to meet its obligations. However, there can be no assurance that the Company will be able to adequately protect against the foregoing risks or that it will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk. The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the consolidated balance sheets.
The Company’s derivatives are recorded at fair value in other assets: derivative asset and other liabilities: derivative liability in the consolidated balance sheets and the effective portion of the derivatives’ fair value is recorded to other comprehensive income in the consolidated statements of other comprehensive income (loss).
6. Stockholders’ Equity
Equity-Based Compensation
On May 20, 2002, the stockholders of the Company approved the 2002 Stock Incentive Plan (the “Plan”). The Plan is an equity-based incentive compensation plan, and provides for the grants of up to a maximum of 2,000,000 shares of the Company’s common stock (“Awards”). All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted Awards. Awards under the Plan are made at the discretion of the Company’s Board of Directors, and have no vesting requirements. Upon granting an Award, the Company will recognize compensation cost equal to the fair value of the Company’s common stock, as determined by the Company’s Board of Directors, on the date of the grant.
On May 17,2022, May 20, 2021 and June 4, 2020, the Company granted shares under the Plan to non-employee directors at a compensation cost related to such grants indicated in the table below, which was recognized during the years ended December 31, 2022, 2021 and 2020, respectively, and is included in general and administrative expenses in the consolidated statements of income. Such shares were fully vested on the date of issuance.
Shares Available
Compensation
for Grant
Cost
Balance December 31, 2019
1,906,382
$
337,500
Shares granted 2020
( 58,998 )
337,500
Balance December 31, 2020
1,847,384
675,000
Shares granted 2021
( 66,564 )
337,500
Balance December 31, 2021
1,780,820
1,012,500
Shares granted 2022
( 84,133 )
393,750
Balance December 31, 2022
1,696,687
$
1,406,250
Repurchase of Common Stock
On June 23, 2021, the Board of Directors of the Company 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. The
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Company repurchased 3,396,243 shares of common stock during the third and fourth quarter of 2021 at an aggregate cost of approximately $ 18.2 million and at an average cost of approximately $ 5.37 per share, inclusive of brokerage commissions. The Company repurchased 846,739 shares of common stock during the first quarter of 2022 at an aggregate cost of approximately $ 4.8 million and at an average cost of approximately $ 5.72 per share, inclusive of brokerage commissions. The Company did not repurchase any shares of common stock during the remainder of 2022. The excess of the purchase price over the par value of the shares repurchased is applied to reduce additional paid-in capital.
A summary of the repurchase of common stock by the Company is shown in the following table:
(Cost in thousands)
Shares Repurchased
Cost
Balance December 31, 2020
1,017,498
$
18,775
Repurchase of shares
3,396,243
18,244
Balance, December 31, 2021
4,413,741
37,019
Repurchase of shares
846,739
4,843
Balance, December 31, 2022
5,260,480
$
41,862
7. Federal Income Tax Reporting
General
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10 % of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”). In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20 % ( 25 % of taxable years beginning on or before December 31, 2017) of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25 % of the value of all of the Company’s assets. FSP Investments LLC and FSP Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code. The TRSs have gross amounts of net operating losses (“NOLs”) available to those taxable corporations of $ 4.9 million and $ 4.8 million as of December 31, 2022 and 2021, respectively. The NOLs created prior to 2018 will expire between 2030 and 2047 and the NOLs generated after 2017 will not expire. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured.
Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.
The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company and one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2019 and thereafter.
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The Company is subject to a business tax known as the Revised Texas Franchise Tax. Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax. The Company recorded a provision for the Revised Texas Franchise Tax of $ 0.2 million, $ 0.2 million and $ 0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Net operating losses
Section 382 of the Code restricts a corporation’s ability to use net operating losses (“NOLs”) to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. Approximately $ 0.1 million of NOLs expired in 2021. The Company used approximately $ 11.1 million of NOLs in 2021 to offset federal net taxable capital gains resulting from the sale of properties in 2021, therefore approximately $ 11.1 million of valuation allowances were reversed in 2021. A valuation allowance is provided for the full amount of the gross NOLs available as the realization of any tax benefits remaining from such NOLs is not assured. The gross amount of NOLs available to the Company was approximately $ 1.7 million and $ 1.7 million as of December 31, 2022 and 2021, respectively with full valuation allowances.
Income Tax Expense
The income tax expense reflected in the consolidated statements of income relates primarily to state income taxes as a result of some states that limit the use of net operating losses, which are in Other Taxes, and to a lesser extent, the Revised Texas Franchise Tax. FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties.
For the Year Ended December 31,
(Dollars in thousands)
2022
2021
2020
Revised Texas Franchise Tax
$
239
$
234
$
250
Other Taxes
( 35 )
404
—
Tax expense
$
204
$
638
$
250
Taxes on income are a current tax expense. No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.
At December 31, 2022, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $ 156.7 million and at December 31, 2021, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $ 153.7 million.
Tax Components
The following summarizes the tax components of the Company’s common distributions paid per share for the years ended December 31, 2022, 2021 and 2020:
2022
2021
2020
Per Share
%
Per Share
%
Per Share
%
Ordinary income
$
—
—
%
$
—
—
%
$
0.28
77.51
%
Capital gain
0.14
70
%
0.68
100
%
0.06
16.72
%
Return of capital
0.06
30
%
—
—
%
0.02
5.77
%
Total
$
0.20
100
%
$
0.68
100
%
$
0.36
100
%
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8. Leases
Leases as a Lessee:
The Company entered into a noncancelable contract with a third party to obtain office space that commenced on September 1, 2010. The contract was amended on October 25, 2016 to extend the contract through September 30, 2024. As of December 31, 2022, the Company’s right-of-use asset was $ 0.7 million, which is included in prepaid and other assets on the consolidated balance sheet as of December 31, 2022.
The Company has an option to extend the terms of its office space lease with one 5-year extension option. As of December 31, 2022, the exercise of the extension option was not reasonably certain. Therefore, the extension option is not recognized as part of the Company’s right-of-use asset and lease liability.
A discount rate equal to the Company’s incremental borrowing rate was applied to the future monthly contractual lease payments remaining as of December 31, 2022 to compute the lease liability. The incremental borrowing rate is the rate equal to the closest borrowing under the BofA Revolver at the time of the Company’s adoption of ASU 2016-02.
Lease Costs
Year Ended
(in thousands)
December 31, 2022
December 31, 2021
December 31, 2020
Operating lease cost
$
419
$
419
$
419
$
419
$
419
$
419
Other information
Cash paid for amounts included in the measurement of lease liabilities
438
429
421
Weighted average remaining lease terms in years - operating leases
1.75
2.75
3.75
Weighted average discount rate - operating leases
3.86 %
3.86 %
3.86 %
Maturity analysis for liabilities
Total
Undiscounted
(in thousands)
Cash Flows
Discount rate at commencement
3.86 %
2023
$
447
2024
340
$
787
Present value lease liability
$
759
Difference between undiscounted cash flows and discounted cash flows
$
28
Leases as a Lessor:
The Company is a lessor of commercial real estate with operations that include the leasing of office and industrial properties. Many of the leases with customers contain options to extend leases at a fair market rate and may also include options to terminate leases. The Company considers several inputs when evaluating the amount it expects to derive from its leased assets at the end of the lease terms, such as the remaining useful life, expected market conditions, fair value of lease payments, expected fair values of underlying assets, and expected deployment of the underlying assets. The Company’s strategy to address its risk for the residual value in its commercial real estate is to re-lease the commercial space.
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The Company has elected to apply the practical expedient to not separate non-lease components from the related lease component of real estate leases. This combined component is primarily comprised of fixed lease payments, early termination fees, common area maintenance cost reimbursements, and parking lease payments. The Company applies ASC 842-Leases to the combined lease and non-lease components.
For the year ended December 31, 2022, 2021 and 2020, the Company recognized the following amounts of income relating to lease payments:
Income relating to lease payments:
Year Ended
(in thousands)
December 31, 2022
December 31, 2021
December 31, 2020
Income from leases (1)
$
157,719
$
203,530
$
242,209
$
157,719
$
203,530
$
242,209
Undiscounted Cash Flows
Year ending
(in thousands)
December 31,
2023
98,712
2024
90,567
2025
77,525
2026
66,597
2027
56,357
2028 and thereafter
220,931
$
610,689
(1) Amounts recognized from variable lease payments were $ 49,730 , $ 54,825 and $ 61,310 for the years ended December 31, 2022, 2021 and 2020, respectively.
9. Retirement Plan
In 2006, the Company established a 401(k) plan to cover eligible employees, which permitted deferral of up to $ 17,000 per year (indexed for inflation) into the 401(k) plan, subject to certain limitations imposed by the Internal Revenue Code. An employee’s elective deferrals are immediately vested upon contribution to the 401(k) plan. The Company matches employee contributions to the 401(k) plan dollar for dollar up to 3 % of each employee’s annual compensation up to $ 200,000 . In addition, we may elect to make an annual discretionary profit-sharing contribution. The Company’s total contribution under the 401(k) plan amounted to $ 0.1 million, $ 0.1 million and $ 0.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.
10. Dispositions of Property
In 2021, the Company determined that further debt reduction would provide greater financial flexibility and potentially increase shareholder value. Accordingly, the Company adopted a strategy to dispose of certain properties where it believes valuation potential has been reached.
In 2022, the Company 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. The Company sold an office property located in Evanston, Illinois on December 28, 2022 for a sales price of $ 27.8 million, at a gain of approximately $ 3.9 million. The Company used the proceeds of the dispositions principally to repay outstanding indebtedness.
In 2021, the Company 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. The Company also 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. The Company 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. The Company sold two office properties located in
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Chesterfield, Missouri on September 23, 2021 for an aggregate sales price of approximately $ 67 million, at a gain of approximately $ 10.3 million. The Company sold an office property in Atlanta, Georgia on October 22, 2021, for a sales price of approximately $ 223.9 million, at a gain of approximately $ 86.8 million. The Company sold two office properties located in Chantilly, Virginia on November 16, 2021 for an aggregate sales price of $ 40 million, at a loss of $ 2.9 million.
In 2020, the Company 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.
The Company reports the results of operations of its properties in its consolidated statements of operations, which includes rental income, rental operating expenses, real estate taxes and insurance and depreciation and amortization.
The operating results for the properties that the Company disposed of are summarized below:
For the Years Ended
December 31,
(in thousands)
2022
2021
2020
Rental revenue
$
16,994
$
59,792
$
94,484
Rental operating expenses
( 4,501 )
( 16,711 )
( 26,031 )
Real estate taxes and insurance
( 5,142 )
( 12,014 )
( 17,398 )
Depreciation and amortization
( 4,474 )
( 18,130 )
( 32,435 )
Income from dispositions
$
2,877
$
12,937
$
18,620
11. Subsequent Events
As of January 1, 2023, the Company will be consolidating FSP Monument Circle LLC. The Company obtained from the stockholders of the parent of FSP Monument Circle LLC the right to vote their shares in favor of any sale of the property owned by FSP Monument Circle LLC any time on or after January 1, 2023, which triggers consolidation accounting rules as the Company now controls the entity.
On January 4, 2023, the Company entered into a purchase and sale agreement for the potential disposition of a property located in Elk Grove Village, Illinois to a third party. The transaction is subject to customary closing conditions and is expected to close on or about February 24, 2023.
On January 13, 2023, the Board of Directors of the Company declared a cash distribution of $ 0.01 per share of common stock payable on February 16, 2023 to stockholders of record on January 27, 2023.
On February 8, 2023, the Company terminated all remaining interest rate swaps applicable to the BMO Term Loan and, on February 10, 2023, the Company received an aggregate of approximately $ 4.3 million as a result of such terminations.
On February 10, 2023, the Company entered into a First Amendment (the “BMO First Amendment”) to the BMO Term Loan. On February 10, 2023, as part of the BMO First Amendment, the Company repaid a $ 40 million portion of the BMO Term Loan, so that $ 125 million remains outstanding. On or before April 1, 2024, the Company is required to repay an additional $ 25 million of the BMO Term Loan. The BMO First Amendment, among other items, extended the maturity date of the BMO Term Loan from January 31, 2024 to October 1, 2024, changed the interest rate on the BMO Term Loan from a number of basis points over LIBOR depending on the Company’s credit rating to 300 basis points over SOFR, and made certain changes to conditions and covenants.
On February 10, 2023 the Company entered into a First Amendment (the “BofA First Amendment”) to the BofA Revolver. The BofA First Amendment, among other items, extended the maturity date of the of the BofA Revolver from January 12, 2024 to October 1, 2024, reduced availability under the BofA Revolver from up to $ 237.50 million to up to $ 150 million effective February 10, 2023, with further reductions to $ 125 million effective October 1, 2023 and to $ 100 million effective April 1, 2024, changed the interest rate on the BofA Revolver from a number of basis points over SOFR depending on the Company’s credit rating to 300 basis points over SOFR, and made certain changes to conditions
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and covenants. As of February 10, 2023, there were borrowings of $ 105 million drawn and outstanding under the BofA Revolver, including a borrowing of $ 40 million used to repay a portion of the BMO Term Loan.
On February 10, 2023, the Company disclosed in a Current Report on Form 8-K that the Board of Directors of the Company had discontinued the previous authorization, made on June 23, 2021, to repurchase 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.
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Schedule II
Franklin Street Properties Corp.
Valuation and qualifying accounts:
Additions
(Decreases)
Balance at
charged to
Balance
(in thousands)
beginning
costs and
at end
Classification
of year
expenses
Deductions
of year
Allowance for doubtful accounts
2020
$
300
340
( 135 )
505
2021
505
157
( 129 )
533
2022
533
( 38 )
( 478 )
17
Straight-line rent allowance for doubtful accounts
2020
$
50
—
( 50 )
—
2021
—
—
—
—
2022
—
—
—
—
Allowance for credit losses
2020
$
—
—
—
—
2021
—
—
—
—
2022
—
4,237
—
4,237
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SCHEDULE III
FRANKLIN STREET PROPERTIES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2022
Initial Cost
Historical Cost
Costs
Capitalized
Buildings
Total Costs,
(in thousands)
Buildings
(Disposals)
Improvements
Net of
Depreciable
Date of
Encumbrances
Improvements
Subsequent to
and
Accumulated
Accumulated
Life
Year
Acquisition
Description
(1)
Land
and Equipment
Acquisition
Land
Equipment
Total (2)
Depreciation
Depreciation
Years
Built
(3)
(in thousands)
Commercial Properties:
Forest Park, Charlotte, NC
—
$
1,559
$
5,672
$
4,507
$
1,559
$
10,179
$
11,738
3,079
$
8,659
5
-
39
1999
1999
Northwest Point, Elk Grove Village, IL
—
2,914
26,295
14,275
2,914
40,570
43,484
21,776
21,708
5
-
39
1999
2001
Park Ten, Houston, TX
—
1,061
21,303
7,090
565
28,889
29,454
15,189
14,265
5
-
39
1999
2002
Addison, Addison, TX
—
4,325
48,040
13,447
4,325
61,487
65,812
27,669
38,143
5
-
39
1999
2002
Collins, Richardson, TX
—
4,000
42,598
9,419
4,000
52,017
56,017
26,137
29,880
5
-
39
1999
2003
Greenwood, Englewood, CO
—
3,100
30,201
13,933
3,100
44,134
47,234
21,700
25,534
5
-
39
2000
2005
Innsbrook, Glenn Allen, VA
—
5,000
40,216
9,002
5,000
49,218
54,218
21,900
32,318
5
-
39
1999
2003
Blue Lagoon, Miami, FL
—
6,306
46,124
38,152
6,306
84,276
90,582
19,649
70,933
5
-
39
2002
2003
Eldridge Green, Houston, TX
—
3,900
43,791
9,063
3,900
52,854
56,754
22,346
34,408
5
-
39
1999
2004
Liberty Plaza, Addison, TX
—
4,374
21,146
11,334
4,373
32,481
36,854
14,106
22,748
5
-
39
1985
2006
Park Ten II, Houston, TX
—
1,300
31,712
7,258
1,300
38,970
40,270
15,165
25,105
5
-
39
2006
2006
121 South Eight Street, Minneapolis, MN
—
4,444
15,214
30,549
4,444
45,763
50,207
15,084
35,123
5
-
39
1974
2010
801 Marquette Ave South, Minneapolis, MN
—
4,184
—
28,093
4,184
28,093
32,277
6,174
26,103
5
-
39
1923
2010
Legacy Tennyson Center, Plano, TX
—
3,067
22,064
4,656
3,067
26,720
29,787
8,698
21,089
5
-
39
2008
2011
One Legacy Circle, Plano, TX
—
2,590
36,608
5,754
2,590
42,362
44,952
13,136
31,816
5
-
39
2008
2011
Westchase I & II, Houston, TX
—
8,491
121,508
23,348
8,491
144,856
153,347
38,361
114,986
5
-
39
2008
2012
1999 Broadway, Denver CO
—
16,334
137,726
40,531
16,334
178,257
194,591
46,371
148,220
5
-
39
1986
2013
1001 17th Street, Denver, CO
—
17,413
165,058
34,429
17,413
199,487
216,900
47,256
169,644
5
-
39
2006
2013
Plaza Seven, Minneapolis, MN
—
6,604
54,240
13,795
6,604
68,035
74,639
13,772
60,867
5
-
39
1987
2016
Pershing Plaza, Atlanta, GA
—
5,300
34,158
20,336
5,300
54,494
59,794
6,424
53,370
5
-
39
1989
2016
600 17th Street, Denver, CO
—
20,876
99,941
16,937
20,876
116,878
137,754
19,425
118,329
5
-
39
1982
2016
Balance — Real Estate
—
$
127,142
$
1,043,615
$
355,908
$
126,645
$
1,400,020
$
1,526,665
$
423,417
$
1,103,248
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $ 1,686,597 .
(3) Original date of acquisition by Sponsored Entity.
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The following table summarizes the changes in the Company’s real estate investments and accumulated depreciation:
December 31,
(in thousands)
2022
2021
2020
Real estate investments, at cost:
Balance, beginning of year
$
1,615,457
$
2,140,733
$
2,127,907
Improvements
60,132
60,910
75,472
Dispositions
( 148,924 )
( 586,186 )
( 62,646 )
Balance, end of year - Real Estate
$
1,526,665
$
1,615,457
$
2,140,733
Accumulated depreciation:
Balance, beginning of year
$
424,487
$
538,717
$
490,697
Depreciation
52,208
60,080
67,001
Dispositions
( 53,278 )
( 174,310 )
( 18,981 )
Balance, end of year - Accumulated Depreciation
$
423,417
$
424,487
$
538,717
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