What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 122 added, 72 removed, 320 unchanged (38% of the section changed)

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

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

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

See Part I, Item 1A.

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

As of March 31, 2023, approximately 5.3 million square feet, or approximately 84.8% of our total owned and consolidated portfolio, was located in Dallas, Denver, Houston and Minneapolis.

As of June 30, 2023, approximately 5.3 million square feet, or approximately 84.9% of our total owned and consolidated portfolio, was located in Dallas, Denver, Houston and Minneapolis.

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

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Under the new variable quarterly dividend policy, the Board of Directors will determine quarterly dividends based upon a variety of factors, including the Company’s estimates of its annual taxable income and the amount that the Company is required to distribute annually in the aggregate to enable the Company to continue to qualify as a real estate investment trust for federal income tax purposes.

On April 12, 2023, the credit rating for our senior unsecured debt was downgraded by Moody’s Investor Service to Ba3 from Ba1.

On April 12, 2023, the credit rating for our senior unsecured debt was downgraded by Moody’s Investor Service to Ba3 from Ba1 and on June 14, 2023, was downgraded to B3 from Ba3.

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

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

We anticipate that as a result of our below investment grade credit rating, we will continue to incur approximately $1.0 million in additional interest costs from the Senior Notes over a full twelve-month period based on our borrowings as of April 27, 2023.

We anticipate that as a result of our below investment grade credit ratings, we will continue to incur approximately $1.0 million in additional interest costs from the Senior Notes over a full twelve-month period based on our borrowings as of July 27, 2023.

Trends and Uncertainties

Long-Term Impact of COVID-19 Pandemic

Considerable uncertainty still surrounds the long-term impact of the COVID-19 pandemic and its potential effects on the population, including the spread of more contagious variants of the virus.

Considerable uncertainty still surrounds the long-term impact of the COVID-19 pandemic and its potential effects on the population, including the spread of more contagious variants of the virus, and on the commercial real estate market and our business.

Many of our tenants still do not fully occupy the space that they lease.

The pandemic has had an adverse impact on economic and market conditions in various sectors of the economy.

However, the evolving nature of the pandemic makes it difficult to ascertain the long-term impact it will have on commercial real estate markets and our business.

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

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

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

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Economic Conditions

The global economy continues to experience significant disruptions as a result of various factors, including geopolitical events such as the ongoing conflict between Russia and Ukraine and increasing tensions with China, the long-term impact of the COVID-19 pandemic and continuing supply chain difficulties.

Although recent indicators suggest that economic activity has expanded at a modest pace, the global economy continues to experience significant disruptions as a result of various factors, including geopolitical events such as the ongoing conflict between Russia and Ukraine and increasing tensions with China, the long-term impact of the COVID-19 pandemic and continuing supply chain difficulties.

In addition, various economic factors, including but not limited to, inflation and interest rates, are contributing to recessionary concerns for the economy of the United States.

Economic conditions directly affect the demand for office space, our primary income producing asset.

In addition, the broad

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

During 2022 and 2023 and as of April 27, 2023, the Federal Reserve raised the federal funds rate target several times, most recently by 25 basis points on March 22, 2023, to a range of 4.75% to 5.00%.

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

In addition, the broad economic market conditions in the

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

During 2022 and 2023 and as of July 27, 2023, the Federal Reserve raised the federal funds rate target several times, most recently by 25 basis points on July 26, 2023, to a range of 5.25% to 5.50%.

Any future increases in the target range could also increase interest rates.

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

As of March 31, 2023, approximately 50.0% of our total debt constituted unhedged variable rate debt.

As of June 30, 2023, approximately 50.0% of our total debt constituted unhedged variable rate debt.

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

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Real Estate Operations

As of March 31, 2023, our real estate portfolio was comprised of 20 owned properties, which we refer to as our owned properties, and a non-controlling common stock interest in the corporation that is the sole member of FSP Monument Circle LLC, which corporation was organized to operate as a real estate investment trust, or Sponsored REIT.

As of June 30, 2023, our real estate portfolio was comprised of 20 owned properties, which we refer to as our owned properties, and a non-controlling common stock interest in the corporation that is the sole member of FSP Monument Circle LLC, which corporation was organized to operate as a real estate investment trust, which we refer to as the Sponsored REIT.

The Sponsored REIT, which we also refer to as Monument Circle, was consolidated effective January 1, 2023.

We refer to these 21 properties as our owned and consolidated properties.

Our owned properties were approximately 73.9% leased as of March 31, 2023, a decrease from 75.6% leased as of December 31, 2022.

The 1.7% decrease in leased space was primarily a result of lease maturities that occurred during the three months ended March 31, 2023 and the impact on leased percentage from the dispostion of one property on March 10, 2023.

As of March 31, 2023, we had approximately 1,581,000 square feet of vacancy in our owned properties compared to approximately 1,524,000 square feet of vacancy at December 31, 2022.

During the three months ended March 31, 2023, we leased approximately 129,000 square feet of office space in our owned properties, of which approximately 81,000 square feet were with existing tenants, at a weighted average term of 6.1 years.

Our owned properties were approximately 75.7% leased as of June 30, 2023, an increase from 75.6% leased as of December 31, 2022.

The 0.1% increase in leased space was primarily a result of new leasing, net of lease maturities that occurred during the six months ended June 30, 2023 and the impact on leased percentage from the disposition of one property on March 10, 2023.

As of June 30, 2023, we had approximately 1,469,000 square feet of vacancy in our owned properties compared to approximately 1,524,000 square feet of vacancy at December 31, 2022.

During the six months ended June 30, 2023, we leased approximately 445,000 square feet of office space in our owned properties, of which approximately 269,000 square feet were with existing tenants, at a weighted average term of 6.6 years.

On average, tenant improvements for such leases were $20.90 per square foot, lease commissions were $10.27 per square foot and rent concessions were approximately five months of free rent.

Average GAAP base rents under such leases were $29.14 per square foot, or 7.2% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2022.

Our owned and consolidated properties were approximately 71.5% leased as of March 31, 2023 compared to our owned properties at 73.9% leased as of March 31, 2023.

Our owned and consolidated properties were approximately 73.3% leased as of June 30, 2023, compared to our owned properties at 75.7% leased as of June 30, 2023.

The lower leased percentage is a result of the consolidation of Monument Circle effective January 1, 2023.

As of March 31, 2023, Monument Circle was approximately 4.1% leased.

As of March 31, 2023, leases for approximately 4.1% and 11.3% of the square footage in our owned and consolidated properties are scheduled to expire during 2023 and 2024, respectively.

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

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

As of June 30, 2023, Monument Circle was approximately 4.1% leased.

As of June 30, 2023, leases for approximately 2.8% and 9.9% of the square footage in our owned and consolidated properties are scheduled to expire during 2023 and 2024, respectively.

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

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

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

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On October 29, 2021, we agreed to amend and restate our existing loan to Monument Circle that is secured by a mortgage on real estate owned by Monument Circle, which we refer to as the Sponsored REIT Loan.

The amended and restated Sponsored REIT Loan extended the maturity date from December 6, 2022 to June 30, 2023 (subject to further extension to September 30, 2023), increased the aggregate principal amount of the loan from $21 million to $24 million, and included certain other modifications.

The amended and restated Sponsored REIT Loan extended the maturity date from December 6, 2022 to June 30, 2023, increased the aggregate principal amount of the loan from $21 million to $24 million, and included certain other modifications.

In consideration of our agreement to amend and restate the Sponsored REIT Loan, we obtained from the stockholders of Monument Circle the right to vote their shares in favor of any sale of the property owned by Monument Circle any time on or after January 1, 2023.

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A gain on consolidation of approximately $0.4 million was recognized in the three months ended March 31, 2023.

On June 26, 2023, the Sponsored REIT Loan maturity was extended to September 30, 2023.

Additional information about the consolidation of Monument Circle is incorporated herein by reference to Note 1, “Organization, Properties, Basis of Presentation, Financial Instruments, and Recent Accounting Standards – Variable Interest Entities (VIEs)” and Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.

Dispositions of Properties

Dispositions of Properties and Asset Held for Sale

During 2023, we sold an office property located in Elk Grove, Illinois on March 10, 2023 for a sales price of $29.1 million, at a gain of approximately $8.4 million.

During the three months ended June 30, 2023, we entered into an agreement to sell a property in Charlotte, North Carolina at an expected loss of $0.8 million, which was recorded as an impairment and we classified the property as an asset held for sale as of June 30, 2023 and expect to close on the sale of the property for $9.2 million in gross proceeds during the third quarter of 2023.

In addition, subsequent to June 30, 2023, we executed purchase and sale agreements with three different unrelated purchasers for the potential sale of three properties that would result in aggregate gross proceeds of approximately $156 million.

These transactions remain subject to customary closing conditions, including successful completion by the purchasers of due diligence inspection periods.

If successful, these transactions are expected to close during the fourth quarter of 2023 and the proceeds are intended to be used primarily for the repayment of debt.

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

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

There were no properties held for sale as of March 31, 2023.

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

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On an on-going basis, we evaluate our estimates.

In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information.

In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to

reflect more current information.

The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.

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Results of Operations

The following table shows financial results for the three months ended March 31, 2023 and 2022:

Three months ended March 31,

The following table shows financial results for the three months ended June 30, 2023 and 2022:

Three months ended June 30,

(in thousands)

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Total expenses

Impairment and loan loss reserve

Gain on sale of properties and impairment of asset held for sale, net

Loss before taxes

Comparison of the three months ended June 30, 2023 to the three months ended June 30, 2022:

Total revenues decreased by $5.0 million to $36.3 million for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $4.6 million arising primarily from the sale of three properties during 2022 and one property in 2023 and other losses of rental income from lease

expirations during the periods presented.

These decreases were partially offset by rental income earned from leases commencing after June 30, 2022.

Our leased space in our owned and consolidated properties was 73.3% at June 30, 2023 and 76.3% at June 30, 2022.

● A decrease in interest income from loans of approximately $0.5 million, due to the consolidation of Monument Circle in our financial results as of January 1, 2023.

Total expenses decreased by $5.4 million to $43.8 million for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.1 million primarily attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $3.5 million primarily attributable to the property dispositions noted above.

● A decrease in general and administrative expenses of $0.2 million primarily attributable to lower personnel costs and professional fees.

These decreases were partially offset by:

● An increase in interest expense of approximately $0.4 million.

The increase was primarily due to higher interest expense as a result of higher interest rates under the loan amendments we entered into on February 10, 2023 described above and was partially offset by a lower principal amount of debt outstanding compared to the same period in 2022.

Provision for loss on asset held for sale

Tax expense on income

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $75,000 during the three months ended June 30, 2023 compared to $56,000 during the three months ended June 30, 2022.

Net loss for the three months ended June 30, 2023 was $8.4 million compared to $9.1 million for the three months ended June 30, 2022, for the reasons described above.

The following table shows financial results for the six months ended June 30, 2023 and 2022:

Six months ended June 30,

(in thousands)

Related party revenue:

Management fees and interest income from loans

Total revenues

Real estate operating expenses

Real estate taxes and insurance

Depreciation and amortization

General and administrative

Total expenses

Loss on extinguishment of debt

Gain on consolidation of Sponsored REIT

Gain on sale of properties, net

Income (loss) before taxes

Impairment and loan loss reserve

Gain on sale of properties and impairment of asset held for sale, net

Loss before taxes

Net income (loss)

Comparison of the three months ended March 31, 2023 to the three months ended March 31, 2022:

Total revenues decreased by $4.5 million to $37.8 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

Comparison of the six months ended June 30, 2023 to the six months ended June 30, 2022:

Total revenues decreased by $9.5 million to $74.0 million for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $8.6 million arising primarily from the sale of three properties during 2022 and one property in 2023 and other losses of rental income from lease expirations during the periods presented.

These decreases were partially offset by rental income earned from leases commencing after March 31, 2022.

Our leased space in our owned and consolidated properties was 71.5% at March 31, 2023 and 77.3% at March 31, 2022.

● A decrease in interest income from loans of approximately $0.5 million due to the consolidation of Monument Circle as of January 1, 2023.

Total expenses decreased by $2.4 million to $44.0 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

These decreases were partially offset by rental income earned from leases commencing after June 30, 2022.

Our leased space in our owned and consolidated properties was 73.3% at June 30, 2023 and 76.3% at June 30, 2022.

● A decrease in interest income from loans of approximately $0.9 million due to the consolidation of Monument Circle in our financial results as of January 1, 2023.

Total expenses decreased by $7.8 million to $87.8 million for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

The decrease was primarily a result of:

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● A decrease in depreciation and amortization of approximately $4.5 million primarily attributable to the property dispositions noted above.

● A decrease in general and administrative expenses of $0.2 million primarily attributable to lower personnel costs and professional fees.

These decreases were partially offset by:

● An increase in interest expense of approximately $0.9 million.

The increase was primarily due to higher interest expense as a result of higher interest rates from loan extensions signed on February 10, 2023 and was partially offset by a lower principal amount of debt outstanding compared to the same period in 2022.

Loss on extinguishment of debt

During the three months ended March 31, 2023, we repaid debt and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs on the date of the repayment.

During the six months ended June 30, 2023, we repaid debt and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs on the date of the repayment.

Gain on consolidation of Sponsored REIT

During the three months ended March 31, 2023, we recorded a gain on consolidation of Sponsored REIT as a result of reducing the Monument Circle loan loss reserve, which resulted in a $0.4 million gain.

Gain on sale of properties, net

During the six months ended June 30, 2023, we recorded a gain on consolidation of Sponsored REIT as a result of reducing the Monument Circle loan loss reserve, which resulted in a $0.4 million gain.

Gain on sale of properties and provision for loss on asset held for sale

During the three months ended March 31, 2023, we sold an office property located in Elk Grove, Illinois on March 10, 2023 for a sales price of $29.1 million, at a gain of approximately $8.4 million.

Tax expense on income

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $67,000 during the three months ended March 31, 2023 compared to $49,000 during the three months ended March 31, 2022.

Net income (loss)

Net income for the three months ended March 31, 2023 was $2.4 million compared to a net loss of $4.2 million for the three months ended March 31, 2022, for the reasons described above.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $142,000 during the six months ended June 30, 2023 compared to $105,000 during the six months ended June 30, 2022.

Net loss for six months ended June 30, 2023 was $6.0 million compared to $13.3 million for the six months ended June 30, 2022, for the reasons described above.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

(in thousands):

Net income (loss)

Gain on consolidation of Sponsored REIT

Gain on sale of properties

Impairment and loan loss reserve

Gain on sale of properties and impairment of asset held for sale, net

Depreciation and amortization

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

The comparative Same Store results include properties held for the periods presented and exclude acquired properties or properties that have been placed in service, but that do not have operating activity for all periods presented, dispositions and significant nonrecurring income such as bankruptcy

settlements and lease termination fees.

The comparative Same Store results include properties held for the periods presented and exclude acquired properties or properties that have been placed in service, but that do not

have operating activity for all periods presented, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees.

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

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Three Months Ended

Six Months Ended

Three Months Ended

Six Months Ended

(in thousands)

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Items in NOI* (b)

Six Months Ended

Three Months Ended

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Gain on consolidation of Sponsored REIT

Gain on sale of properties, net

Impairment and loan loss reserve

Gain on sale of properties and impairment of asset held for sale, net

Management fee income

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

The information presented below provides the weighted average GAAP rent per square foot for the three months ended March 31, 2023 for our owned and consolidated properties and weighted occupancy square feet and percentages.

The information presented below provides the weighted average GAAP rent per square foot for the six months ended June 30, 2023 for our owned and consolidated properties and weighted occupancy square feet and percentages.

GAAP rent includes the impact of tenant concessions and reimbursements.

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Square Feet (b)

Forest Park (c)

120 Monument Circle

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Total Owned & Consolidated Properties

(a) Based on weighted occupied square feet for the three months ended March 31, 2023, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the three months ended March 31, 2023, per weighted occupied square foot.

(a) Based on weighted occupied square feet for the six months ended June 30, 2023, including month-to-month tenants, divided by the applicable property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the six months ended June 30, 2023, per weighted occupied square foot.

Liquidity and Capital Resources

Cash and cash equivalents were $13.1 million and $6.6 million at March 31, 2023 and December 31, 2022, respectively.

The increase of $6.5 million is attributable to $1.1 million used in operating activities, plus $19.7 million provided by investing activities less $12.1 million used in financing activities.

Management believes that existing cash, cash anticipated to be generated internally by operations, including property dispositions, and our existing availability under the BofA Revolver ($75 million available as of April 27, 2023), will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

Cash and cash equivalents were $6.7 million and $6.6 million at June 30, 2023 and December 31, 2022, respectively.

The increase of $0.1 million is attributable to $0.5 million provided by operating activities, plus $12.8 million provided by investing activities less $13.2 million used in financing activities.

Management believes that existing cash, cash anticipated to be generated internally by operations, including property dispositions, and our existing availability under the BofA Revolver ($70 million available as of July 27, 2023), will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

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

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Operating Activities

Cash used in operating activities for the three months ended March 31, 2023 of $1.1 million is primarily attributable to net income of $2.4 million less the gain on sale of a property of $8.4 million, less the gain on consolidation of Sponsored REIT of $0.4 million, plus the add-back of $14.4 million of non-cash expenses, less an increase in tenant rent receivables of $1.1 million, less a decrease in accounts payable and accrued compensation of $5.8 million, an increase in payment of deferred leasing commissions of $0.9 million, an increase in lease acquisition costs of $0.8 million and an increase in prepaid expenses of $0.5 million.

Cash provided by operating activities for the six months ended June 30, 2023 of $0.5 million is primarily attributable to a net loss of $6.0 million, plus the impairment of a property held for sale of $0.8 million, less the gain on sale of a property of $8.4 million, less the gain on consolidation of Sponsored REIT of $0.4 million, plus the add-back of $29.6 million of non-cash expenses, less a decrease in accounts payable and accrued compensation of $10.1 million, an increase in payment of deferred leasing commissions of $4.1 million, an increase in lease acquisition costs of $0.8 million and an increase in prepaid expenses of $0.3 million plus a decrease in tenant rent receivables of $0.2 million.

Investing Activities

Cash provided by investing activities for the three months ended March 31, 2023 of $19.7 million is primarily attributable to proceeds from an asset sale of $28.1 million and an increase of investment in a mortgage receivable of $3.0 million from cash recorded in consolidation of Monument Circle, which was partially offset by purchases of other real estate assets and office equipment investments of $11.4 million.

Cash provided by investing activities for the six months ended June 30, 2023 of $12.8 million is primarily attributable to proceeds from an asset sale of $28.1 million and an increase of investment in a mortgage receivable of $3.1 million from cash recorded in consolidation of Monument Circle, which was partially offset by purchases of other real estate assets and office equipment investments of $18.4 million.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2023 of $12.1 million is primarily attributable to the repayment of a portion of the BMO Term Loan of $40.0 million, repayment of a portion of the BofA Revolver of $30.0 million, payment of distributions to stockholders of $1.0 million, and payment of deferred financing costs of $2.3 million, which was partially offset by net borrowings on the BofA Revolver of $57.0 million and the proceeds from the termination of interest rate swap of $4.2 million.

Cash used in financing activities for the six months ended June 30, 2023 of $13.2 million is primarily attributable to the repayment of a portion of the BMO Term Loan of $40.0 million, repayment of a portion of the BofA Revolver of $35.0 million, payment of distributions to stockholders of $2.1 million, and payment of deferred financing costs of $2.3 million, which was partially offset by net borrowings on the BofA Revolver of $62.0 million and the proceeds from the termination of interest rate swap of $4.2 million.

Liquidity beyond the next 12 months

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Prior to February 10, 2023, the BMO Term Loan bore interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at December 31, 2022) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at December 31, 2022).

As of March 31, 2023, the interest rate on the BMO Term Loan was 7.92% per annum.

The weighted average variable interest rate on all amounts outstanding under the BMO Term Loan from February 8, 2023, which is when the Company terminated its outstanding interest rate swaps applicable to the BMO Term Loan as described below, through March 31, 2023 was approximately 7.16% per annum.

As of June 30, 2023, the interest rate on the BMO Term Loan was 8.26% per annum.

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

12 unchanged sentences

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

We were in compliance with the BMO Term Loan financial covenants as of March 31, 2023.

We were in compliance with the BMO Term Loan financial covenants as of June 30, 2023.

BofA Revolver

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

As of March 31, 2023 and April 27, 2023, there were borrowings of $75 million and $75 million drawn and outstanding under the BofA Revolver, respectively, which borrowings include $40 million that the Company borrowed on February 10, 2023 to repay a portion of the BMO Term Loan.

As of June 30, 2023 and July 27, 2023, there were borrowings of $75 million and $80 million drawn and outstanding under the BofA Revolver, respectively, which borrowings include $40 million that the Company borrowed on February 10, 2023 to repay a portion of the BMO Term Loan.

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

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

As of March 31, 2023, the interest rate on the BofA Revolver was 7.92% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through March 31, 2023 was approximately 6.91% per annum.

As of June 30, 2023, the interest rate on the BofA Revolver was 8.26% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through June 30, 2023 was approximately 7.66% per annum.

The BofA Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, use of proceeds, the amount of cash and cash equivalents that the Company can have on its balance sheet after giving effect to an advance under the BofA Revolver, repurchases and redemptions of the Company’s common stock, going concern qualifications to our financial statements, and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates.

2 unchanged sentences

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 March 31, 2023.

The Company was in compliance with the BofA Revolver financial covenants as of June 30, 2023.

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).

33 unchanged sentences

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

As of March 31, 2023, the Series A Notes bear interest at 4.49% per annum and the Series B Notes bear interest at 4.76% per annum.

As of June 30, 2023, 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.

7 unchanged sentences

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

We were in compliance with the Senior Notes financial covenants as of March 31, 2023.

We were in compliance with the Senior Notes financial covenants as of June 30, 2023.

Equity Offering

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

Additional information about the Sponsored REIT Loan outstanding as of March 31, 2023, is incorporated herein by reference to Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.

Additional information about the Sponsored REIT Loan outstanding as of June 30, 2023, is incorporated herein by reference to Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.

Other Consideration s

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

For the three months ended March 31, 2023 and 2022, respectively, the rental income exceeded the expenses for each individual property, with the exception of Monument Circle for the three months ended March 31, 2023 and Pershing Park for the three months ended March 31, 2022.

For the three and six months ended June 30, 2023 and 2022, respectively, the rental income exceeded the expenses for each individual property, with the exception of Monument Circle for the three and six months ended June 30, 2023 and Pershing Park for the three and six months ended June 30, 2022.

Monument Circle has approximately 214,000 square feet of rentable space comprised of both office and street level retail space.

1 unchanged sentence

The retail component comprises the remaining approximately 5% of the property’s rentable space.

Monument Circle had approximately $70,000 of rental income and $216,000 of operating expenses for the three months ended March 31, 2023, and was 4.1% leased to two retail tenants as of March 31, 2023.

Monument Circle had approximately $68,000 of rental income and $310,000 of operating expenses for the three months ended June 30, 2023.

Monument Circle had approximately $138,000 of rental income and $526,000 of operating expenses for the six months ended June 30, 2023, and was 4.1% leased to two retail tenants as of June 30, 2023.

Pershing Park has approximately 160,000 square feet of rentable space, which was 12.4% leased at June 30, 2021 due to a large tenant departure on May 31, 2021.

2 unchanged sentences

The new lease inclusive of the expansion space is for approximately 101,000 square feet and has commenced.

Pershing Park had approximately $187,000 of rental income and $557,000 of operating expenses for the three months ended March 31, 2022, and was 78.1% leased as of March 31, 2022.

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

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

Off-Balance Sheet Arrangements and Contractual Obligations

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis