What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-01 · 158 added, 113 removed, 329 unchanged (45% 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 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.

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, our inability to extend and/or refinance our debt or effect asset sales sufficient to repay such debt prior to the maturity dates thereof, 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 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.

As of September 30, 2023, approximately 5.3 million square feet, or approximately 85.7% 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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as administrative agent and the other lending institutions party thereto (the “Former BofA Term Loan”).

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

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

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In 2023, we sold one 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.

On March 13, 2023, we repaid $25 million that had been drawn under the BofA Revolver.

On March 13, 2023, we used proceeds of this sale to repay $25 million that had been drawn under the BofA Revolver.

On August 9, 2023, we sold an office property located in Charlotte, North Carolina for a sales price of $9.2 million, at a loss of $0.8 million.

On August 10, 2023, we used the net proceeds from this sale and cash on hand to repay $10 million of the BMO Term Loan.

In July 2022, we adopted a variable quarterly dividend policy, which replaced our previous regular quarterly dividend policy.

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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 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

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Economic Conditions

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.

designated Foreign Terrorist Organization, current armed conflict in Israel and the Gaza Strip, 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 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%.

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 October 26, 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 June 30, 2023, approximately 50.0% of our total debt constituted unhedged variable rate debt.

As of September 30, 2023, approximately 49.4% 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 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.

As of September 30, 2023, our real estate portfolio was comprised of 19 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 20 properties as our owned and consolidated properties.

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.

Our owned properties were approximately 74.8% leased as of September 30, 2023, a decrease from 75.6% leased as of December 31, 2022.

The 0.8% decrease in leased space was primarily a result of lease maturities that occurred during the nine months ended September 30, 2023 and the impact on leased percentage from the disposition of one property on March 10, 2023 and one property on August 9, 2023.

These decreases were partially offset by new leasing during the nine months ending September 30, 2023.

As of September 30, 2023, we had approximately 1,510,000 square feet of vacancy in our owned properties compared to approximately 1,524,000 square feet of vacancy at December 31, 2022.

During the nine months ended September 30, 2023, we leased approximately 571,000 square feet of office space in our owned properties, of which approximately 365,000 square feet were with existing tenants, at a weighted average term of 6.3 years.

On average, tenant improvements for such leases were $20.13 per square foot, lease commissions were $9.92 per square foot and rent concessions were approximately five months of free rent.

Average GAAP base rents under such leases were $29.35 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 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 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.

Our owned and consolidated properties were approximately 72.4% leased as of September 30, 2023, compared to our owned properties at 74.8% leased as of September 30, 2023.

The difference is a result of the consolidation of Monument Circle effective January 1, 2023.

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

As of September 30, 2023, leases for approximately 1.4% and 9.0% of the square footage in our owned and consolidated properties are scheduled to expire during 2023 and 2024, respectively.

As the fourth 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 fourth 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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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.

On June 26, 2023, the Sponsored REIT Loan maturity was initially extended to September 30, 2023 and on September 26, 2023 was further extended to September 30, 2024.

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 and Asset Held for Sale

Dispositions of Properties and Assets 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.

The property sold on August 9, 2023 for a sales price of $9.2 million, at a loss of $0.8 million, which had been our expected loss.

During the three months ended September 30, 2023, we recorded a gain on sale of $53,000 as a result of conveying approximately 7,826 square feet of land at our Addison, Texas property to the Town of Addison as part of a road revitalization project.

In addition, during the three months ended September 30, 2023, we executed purchase and sale agreements with four different unrelated purchasers for the potential sale of four properties that would result in aggregate gross proceeds of approximately $201 million.

Three of these potential dispositions were classified as assets held for sale as of September 30, 2023.

On October 26, 2023, we completed the sale of one such asset held for sale as of September 30, 2023, an office building located in Plano, Texas for a sales price of $48.0 million at a gain of approximately $10.6 million.

The two remaining assets held for sale as of September 30, 2023 are expected to sell for an aggregate sales price of $108 million at an aggregate loss of approximately $39.7 million, which was recorded as an impairment as of September 30, 2023.

The three remaining potential dispositions remain subject to customary closing conditions, including successful completion by one of the purchasers of a due diligence inspection period and are expected to close during the fourth quarter of 2023.

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.

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

We used, or intend to use, the proceeds of the dispositions primarily for the repayment of debt.

The dispositions of these properties did not represent a strategic shift that has a major effect on our operations and financial results.

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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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Recent Accounting Standards

In March 2020, the Financial Accounting Standards Board (FASB) issued ASU No.

In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2023-06, Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”).

ASU 2023-06 adds interim and annual disclosure requirements to GAAP at the request of the Securities and Exchange Commission.

The guidance in ASU 2023-06 is required to be applied prospectively and the GAAP requirements will be effective when the removal of the related SEC disclosure requirements is effective.

If the SEC does not act to remove its related disclosure requirements by June 30, 2027, any related FASB amendments will be removed from the Accounting Standards Codification and will not be effective.

The Company does not anticipate the adoption of ASU 2023-06 will have a material impact on the consolidated financial statements.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

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Results of Operations

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

Three months ended June 30,

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

Three months ended September 30,

(in thousands)

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Total expenses

Loss on extinguishment of debt

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.

Gain (loss) on sale of properties and impairment of assets held for sale, net

Income (loss) before taxes

Net income (loss)

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

Total revenues decreased by $3.9 million to $36.9 million for the three months ended September 30, 2023, as compared to the three months ended September 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 rental revenue of approximately $3.4 million arising primarily from the sale of three properties during 2022 and two properties 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 September 30, 2022.

Our leased space in our owned and consolidated properties was 72.4% at September 30, 2023 and 75.9% at September 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.

Total expenses decreased by $4.0 million to $42.8 million for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

The decrease was primarily a result of:

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● A decrease in depreciation and amortization of approximately $1.7 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:

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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

Loss on extinguishment of debt

During the three months ended September 30, 2023 and September 30, 2022, we repaid debt and incurred a loss on extinguishment of debt of $39,000 and $78,000, respectively, related to unamortized deferred financing costs on the dates of the repayments.

Impairment and loan loss reserve

During the three months ended September 30, 2022, we recorded an impairment on a mortgage receivable of $0.7 million.

Gain and loss on sale of properties and impairment

During the three months ended September 30, 2023, we sold an office property located in Charlotte, North Carolina for a sales price of $9.2 million at a loss of approximately $0.8 million.

During the three months ended September 30, 2023, we also recorded a gain on sale of $53,000 as a result of conveying approximately 7,826 square feet of land at our Addison, Texas property to the Town of Addison as part of a road revitalization project and increased the loss on sale of Forest Park by $38,000 as a result of final sales adjustments.

During the three months ended September 30, 2023, we entered into an agreement to sell a property in Miami, Florida for a gross sales price of approximately $68.0 million at an expected loss of $19.2 million and an agreement to sell a property in Atlanta, Georgia for a gross sales price of approximately $40.0 million at an expected loss of $20.5 million.

We recorded corresponding impairments on these assets held for sale at September 30, 2023.

During the three months ended September 30, 2022, we sold two office properties located in Broomfield, Colorado on August 31, 2022 with an aggregate sales price of $102.5 million, at a gain of $24.1 million.

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,

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $70,000 during the three months ended September 30, 2023 compared to $62,000 during the three months ended September 30, 2022.

Net income and loss

Net loss for the three months ended September 30, 2023 was $45.7 million compared to net income of $17.2 million for the three months ended September 30, 2022, for the reasons described above.

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

Nine months ended September 30,

(in thousands)

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Impairment and loan loss reserve

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

Loss before taxes

Gain (loss) on sale of properties and impairment of assets held for sale, net

Income (loss) before taxes

Net income (loss)

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.

Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022:

Total revenues decreased by $13.5 million to $110.9 million for the nine months ended September 30, 2023, as compared to the nine months ended September 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 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 rental revenue of approximately $12.1 million arising primarily from the sale of three properties during 2022 and two properties 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 September 30, 2022.

Our leased space in our owned and consolidated properties was 72.4% at September 30, 2023 and 75.9% at September 30, 2022.

● A decrease in interest income from loans of approximately $1.4 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.

Total expenses decreased by $11.8 million to $130.6 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

The decrease was primarily a result of:

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● A decrease in depreciation and amortization of approximately $6.2 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.

● A decrease in general and administrative expenses of $0.1 million primarily attributable to lower personnel costs.

These decreases were partially offset by:

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Loss on extinguishment of debt

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.

During the nine months ended September 30, 2023 and September 30, 2022, we repaid debt and incurred a loss on extinguishment of debt of approximately $0.1 million and $0.1 million, respectively, related to unamortized deferred financing costs on the dates of the repayments.

Gain on consolidation of Sponsored REIT

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 nine months ended September 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.

Impairment and loan reserve

During the nine months ended September 30, 2022, we recorded an impairment on a mortgage receivable of $1.9 million.

Gain and loss on sale of properties and impairment

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.

During the three months ended September 30, 2023, we sold an office property located in Charlotte, North Carolina for a sales price of $9.2 million at a loss of approximately $0.8 million.

We recorded corresponding impairments on these assets held for sale at September 30, 2023.

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 $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.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $212,000 during the nine months ended September 30, 2023 compared to $167,000 during the nine months ended September 30, 2022.

Net income and loss

Net loss for nine months ended September 30, 2023, was $51.7 million compared to net income of $4.0 million for the nine months ended September 30, 2022, for the reasons described above.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands):

Net income (loss)

Gain on consolidation of Sponsored REIT

Impairment and loan loss reserve

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

(Gain) loss on sale of properties and impairment of assets held for sale, net

Depreciation and amortization

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NOI is a non-GAAP financial measure that the Company defines as net income or loss (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, hedge ineffectiveness, gains or losses on the sale of assets and excludes non-property specific income and expenses.

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 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.

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

Nine Months Ended

Three Months Ended

Six Months Ended

Nine Months Ended

(in thousands)

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Items in NOI* (b)

Six Months Ended

Nine Months Ended

Three Months Ended

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Impairment and loan loss reserve

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

Gain on sale of properties and impairment of assets 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 six months ended June 30, 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 nine months ended September 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.

Percentage as of

September 30,

Rent per Occupied

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Square Feet (b)

Forest Park (c)

120 Monument Circle

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Midwest Total

Blue Lagoon Drive

Blue Lagoon Drive (c)

Addison Circle

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Legacy Tennyson Center

One Legacy Circle

One Legacy Circle (c)

Westchase I & II

Pershing Park Plaza

Pershing Park Plaza (c)

1999 Broadway

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Total Owned & Consolidated Properties

(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.

(a) Based on weighted occupied square feet for the nine months ended September 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 nine months ended September 30, 2023, per weighted occupied square foot.

Liquidity and Capital Resources

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

As of September 30, 2023 and November 7, 2023, we had aggregate outstanding indebtedness under two unsecured loans, the BofA Revolver and the BMO Term Loan, totaling approximately $195 million and $205 million, respectively, maturing within 12 months of the date of issuance of the financial statements in this report, and expect to have sufficient financial resources available to satisfy the obligations when due.

Subsequent to September 30, 2023, on October 26, 2023, we closed on the disposition of one property resulting in net proceeds of approximately $46.7 million.

As of November 7, 2023, we are holding such net proceeds in cash and cash equivalents.

As of September 30, 2023, we had entered into agreements to effect the sale of two properties held for sale that are scheduled to close during the fourth quarter of 2023, which two dispositions would result in aggregate net proceeds of approximately $96.5 million.

As of November 7, 2023, we had cash and cash equivalents of approximately $73.5 million, which when combined with the aggregate net proceeds of approximately $96.5 million from the above-described two dispositions scheduled to close during the fourth quarter of 2023, will be sufficient to repay approximately $170.0 million of the approximately $205.0 million of indebtedness maturing on October 1, 2024.

We are also actively working on the potential disposition of additional properties that are not classified as assets held for sale as of September 30, 2023.

As of September 30, 2023, we had entered into an agreement to effect the sale of a property that is scheduled to close during the fourth quarter of 2023, which would result in net proceeds of approximately $43.6 million.

We intend to use net proceeds from dispositions primarily for the repayment of debt.

Management is also actively engaged in discussions with our lenders to extend and/or refinance the BofA Revolver and the BMO Term Loan prior to maturity.

We believe that we will be able to extend and/or refinance the BofA Revolver and the BMO Term Loan prior to their scheduled October 1, 2024 maturity dates.

However, there can be no assurance that we will be able to obtain extensions and/or refinancings in a timely manner, or on acceptable terms, if at all, or generate the cash necessary to pay off the BofA Revolver and the BMO Term Loan through asset sales prior to their October 1, 2024 maturity dates.

The failure to obtain extensions and/or refinancings, or otherwise to repay the BofA Revolver and the BMO Term Loan, when due, could lead to events of default, which would have a material adverse effect on our financial condition.

We have concluded that management’s plans to dispose of assets and extend and/or refinance the BofA Revolver and the BMO Term Loan are probable of being achieved and alleviate substantial doubt about our ability to continue as a going concern.

The accompanying financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from an adverse outcome of this uncertainty.

As of September 30, 2023, we also have the Series A Notes (as defined in Note 3) in the aggregate principal amount of $116 million outstanding that are scheduled to mature on December 20, 2024, which is beyond 12 months of the date of issuance of the financial statements in this Quarterly Report on Form 10-Q and therefore have been excluded from management’s associated going concern assessment and analysis.

Cash and cash equivalents were $13.0 million and $6.6 million at September 30, 2023 and December 31, 2022, respectively.

The increase of $6.4 million is attributable to $11.5 million provided by operating activities, plus $14.1 million provided by investing activities less $19.2 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 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.

Cash provided by operating activities for the nine months ended September 30, 2023 of $11.5 million is primarily attributable to a net loss of $51.7 million, plus the net loss on sale of a property and impairments on two assets held for sale of $32.1 million, less the gain on consolidation of Sponsored REIT of $0.4 million, plus the add-back of $42.7 million of non-cash expenses, less an increase in payment of deferred leasing commissions of $5.9 million, a decrease in accounts

payable and accrued compensation of $3.0 million, an increase in prepaid expenses of $0.6 million, an increase in lease acquisition costs of $0.9 million, an increase in tenant rent receivables of $0.7 million and an increase in tenant security deposits of $0.1 million.

Investing Activities

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.

Cash provided by investing activities for the nine months ended September 30, 2023 of $14.1 million is primarily attributable to proceeds from an asset sale of $37.1 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 $26.0 million.

Financing Activities

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.

Cash used in financing activities for the nine months ended September 30, 2023 of $19.2 million is primarily attributable to the repayment of a portion of the BMO Term Loan of $50.0 million, repayment of a portion of the BofA Revolver of $35.0 million, payment of distributions to stockholders of $3.1 million, and payment of deferred financing costs of $2.3 million, which was partially offset by net borrowings on the BofA Revolver of $67.0 million and the proceeds from the termination of interest rate swap of $4.2 million.

Liquidity beyond the next 12 months

Our ability to generate cash adequate to meet our needs is dependent primarily on income from real estate investments, the sale of real estate investments, leveraging of real estate investments, availability of bank borrowings, proceeds from public offerings of stock, private placement of debt and access to the capital markets.

In addition to the BofA Revolver and the BMO Term Loan maturities described above, our Series A Notes, of which an aggregate principal amount of $116 million is outstanding as of September 30, 2023, have a maturity date of December 20, 2024.

Our ability to generate cash adequate to satisfy our debt obligations as they mature and meet our operating needs is dependent primarily on income from real estate investments, the sale of real estate investments, leveraging of real estate investments, availability of bank borrowings, proceeds from public offerings of stock, private placement of debt and access to the capital markets.

The acquisition of new properties, the payment of expenses related to real estate operations, capital improvement expenses, debt service payments, general and administrative expenses, and distribution requirements place demands on our liquidity.

See Part II, Item 1A, Risk Factors for additional risks relating to our liquidity.

We intend to operate our properties from the cash flows generated by our properties.

However, our expenses are affected by various factors, including inflation.

See Part II, Item 1A, Risk Factors for additional factors.

Increases in operating expenses are predominantly borne by our tenants.

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

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

BMO Term Loan

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

In connection with the BMO First Amendment, the Company repaid a $40 million portion of the BMO Term Loan, so that $125 million remains outstanding as of March 31, 2023.

In connection with the BMO First Amendment, the Company repaid a $40 million portion of the remaining principal balance of the BMO Term Loan, so that $125 million remained outstanding.

On August 10, 2023, we repaid an additional $10 million of this loan, so that $115 million principal amount remains outstanding under the BMO Term Loan as of September 30, 2023.

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

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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 June 30, 2023, the interest rate on the BMO Term Loan was 8.26% 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 June 30, 2023 was approximately 7.75% per annum.

As of September 30, 2023, the interest rate on the BMO Term Loan was 8.43% 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.

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

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

the BMO Credit Agreement).

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

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

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

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

BofA Revolver

On February 10, 2023, the Company entered into a First Amendment to Credit Agreement with Bank of America, N.A., as administrative agent, a letter of credit issuer and a lender (“BofA”), and the other lending institutions party thereto (the “BofA First Amendment”), for a revolving line of credit for borrowings, at the Company’s election, of up to $150 million (the “BofA Revolver”).

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

for borrowings, at the Company’s election, from up to $237.5 million to up to $150 million, and to change the interest rate from a number of basis points over SOFR depending on the Company’s credit rating to 300 basis points over SOFR.

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

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 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.

As of September 30, 2023 and November 7, 2023, there were borrowings of $80 million and $90 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 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.

As of September 30, 2023, the interest rate on the BofA Revolver was 8.43% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through September 30, 2023, was approximately 7.80% 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.

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

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

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

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 June 30, 2023.

The Company was in compliance with the BofA Revolver financial covenants as of September 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).

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On September 6, 2022, the Company prepaid the remaining $110 million balance of the Former BofA Term Loan in full and incurred a loss of extinguishment of debt of $0.1 million related to unamortized deferred financing costs.

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

The Former BofA Term Loan bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.75% over LIBOR at the date of repayment on September 6, 2022) or (ii) a margin over the base rate depending on the Company’s credit rating (0.750% over the base rate at the date of repayment on September 6, 2022).

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

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.

As of September 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.

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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.

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.

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

We were in compliance with the Senior Notes financial covenants as of September 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 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.

Additional information about the Sponsored REIT Loan outstanding as of September 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 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.

For the three and nine months ended September 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 nine months ended September 30, 2023 and Pershing Park for the three and nine months ended September 30, 2022.

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

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

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.

Monument Circle had approximately $70,000 of rental income and $304,000 of operating expenses for the three months ended September 30, 2023.

Monument Circle had approximately $207,000 of rental income and $830,000 of operating expenses for the nine months ended September 30, 2023, and was 4.1% leased to two retail tenants as of September 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.

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

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.

Pershing Park had $310,000 of rental income and $575,000 of operating expenses for the three months ended September 30, 2022.

The property had $664,000 of rental income and $1,593,000 of operating expenses for the nine months ended September 30, 2022, and was 79.2% leased as of September 30, 2022.

Off-Balance Sheet Arrangements and Contractual Obligations

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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