Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2022. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. 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, 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. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and Part II, Item 1A. “Risk Factors” below. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.
Overview
FSP Corp., or we or the Company, operates in a single reportable segment: real estate operations. The real estate operations market involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development. Our current strategy is to invest in infill and central business district office properties in the United States sunbelt and mountain west regions as well as select opportunistic markets. We believe that the United States sunbelt and mountain west regions have macro-economic drivers that have the potential to increase occupancies and rents. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.
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. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on broader economic market conditions. We may look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.
We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets and we will seek to increase shareholder value by (1) pursuing the sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) striving to lease vacant space. As we continue to execute this strategy, our revenue, Funds From Operations, and capital expenditures may decrease in the short term. Proceeds from dispositions are intended to be used primarily for the repayment of debt.
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For the year ended December 31, 2022, our disposition strategy resulted in gross sale proceeds of $130.3 million and we repaid $128.9 million of debt. Specifically, on August 31, 2022, we sold two office properties located in Broomfield, Colorado for aggregate gross proceeds of $102.5 million, at a gain of approximately $24.1 million. On September 6, 2022, we prepaid our $110 million term loan with Bank of America, N.A. as administrative agent and the other lending institutions party thereto (the “Former BofA Term Loan”). In addition, on December 28, 2022, we sold one office property located in Evanston, Illinois for gross proceeds of $27.8 million, at a gain of $3.9 million. On December 29, 2022 and December 30, 2022, we repaid $7 million and $20 million, respectively, that had been drawn under our revolving line of credit with Bank of America, N.A. as administrative agent and the other lending institutions party thereto (the “BofA Revolver”).
In 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 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. 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 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 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 October 26, 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, 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 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. See “Risk Factors” in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
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, Israel’s declaration of war on Hamas, a U.S. 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
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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 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 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. As of the date of this report, the impact of current economic conditions and geopolitical events and the long-term impact of the COVID-19 pandemic are adversely affecting the demand for office space in the United States.
Real Estate Operations
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 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 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. Also, we believe the potential exists for any of our tenants to default on its lease or to seek the protection of bankruptcy. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.
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Consolidation of Sponsored REIT
As of January 1, 2023, we consolidated Monument Circle into our financial statements. 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, 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. As a result of our obtaining this right to vote shares, GAAP variable interest entity (VIE) rules required us to consolidate Monument Circle as of January 1, 2023. 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 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 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. 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, 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. Our current strategy is to continue to invest in the sunbelt and mountain west regions of the United States. Accordingly, the properties sold remained classified within continuing operations for all periods presented.
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We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets, and we will seek to increase shareholder value by (1) pursuing the sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) striving to lease vacant space. As we continue to execute this strategy, our revenue, Funds From Operations, and capital expenditures may decrease in the short term. Proceeds from dispositions are intended to be used primarily for the repayment of debt.
Critical Accounting Estimates
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. 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. 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.
Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations.
Recent Accounting Standards
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): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. We do not anticipate that the adoption of ASU 2020-04 will have a material impact on our consolidated financial statements.
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Results of Operations
The following table shows financial results for the three months ended September 30, 2023 and 2022:
Three months ended September 30,
(in thousands)
2023
2022
Change
Revenues:
Rental
$
36,903
$
40,366
$
(3,463)
Related party revenue:
Management fees and interest income from loans
—
466
(466)
Other
—
4
(4)
Total revenues
36,903
40,836
(3,933)
Expenses:
Real estate operating expenses
12,797
13,369
(572)
Real estate taxes and insurance
7,115
8,951
(1,836)
Depreciation and amortization
13,408
15,148
(1,740)
General and administrative
3,265
3,232
33
Interest
6,209
6,110
99
Total expenses
42,794
46,810
(4,016)
Loss on extinguishment of debt
(39)
(78)
39
Impairment and loan loss reserve
—
(717)
717
Gain (loss) on sale of properties and impairment of assets held for sale, net
(39,671)
24,077
(63,748)
Income (loss) before taxes
(45,601)
17,308
(62,909)
Tax expense
70
62
8
Net income (loss)
$
(45,671)
$
17,246
$
(62,917)
Comparison of the three months ended September 30, 2023 to the three months ended September 30, 2022:
Revenues
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 $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.
Expenses
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:
● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.4 million primarily attributable to the property dispositions noted above.
● A decrease in depreciation and amortization of approximately $1.7 million primarily attributable to the property dispositions noted above.
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These decreases were partially offset by:
● An increase in interest expense of approximately $0.1 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.
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 $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.
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The following table shows financial results for the nine months ended September 30, 2023 and 2022:
Nine months ended September 30,
(in thousands)
2023
2022
Change
Revenues:
Rental
$
110,927
$
122,994
$
(12,067)
Related party revenue:
Management fees and interest income from loans
—
1,393
(1,393)
Other
9
17
(8)
Total revenues
110,936
124,404
(13,468)
Expenses:
Real estate operating expenses
37,627
38,547
(920)
Real estate taxes and insurance
21,257
26,713
(5,456)
Depreciation and amortization
42,780
49,004
(6,224)
General and administrative
10,849
10,997
(148)
Interest
18,099
17,140
959
Total expenses
130,612
142,401
(11,789)
Loss on extinguishment of debt
(106)
(78)
(28)
Gain on consolidation of Sponsored REIT
394
—
394
Impairment and loan loss reserve
—
(1,857)
1,857
Gain (loss) on sale of properties and impairment of assets held for sale, net
(32,085)
24,077
(56,162)
Income (loss) before taxes
(51,473)
4,145
(55,618)
Tax expense
212
167
45
Net income (loss)
$
(51,685)
$
3,978
$
(55,663)
Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022:
Revenues
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 $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.
Expenses
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:
● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $6.4 million primarily attributable to the property dispositions noted above.
● 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 $0.1 million primarily attributable to lower personnel costs.
These decreases were partially offset by:
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● 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 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.
Loss on extinguishment of debt
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 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. 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.
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 $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.
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Non-GAAP Financial Measures
Funds From Operations
The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, hedge ineffectiveness, acquisition costs of newly acquired properties that are not capitalized and lease acquisition costs that are not capitalized plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income or loss (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT, may define this term in a different manner. We have included the NAREIT FFO definition as of May 17, 2016 in the table and note that other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income or loss and cash flows from operating, investing and financing activities in the consolidated financial statements.
The calculations of FFO are shown in the following table:
For the
For the
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands):
2023
2022
2023
2022
Net income (loss)
$
(45,671)
$
17,246
$
(51,685)
$
3,978
Gain on consolidation of Sponsored REIT
—
—
(394)
—
Impairment and loan loss reserve
—
717
—
1,857
(Gain) loss on sale of properties and impairment of assets held for sale, net
39,671
(24,077)
32,085
(24,077)
Depreciation and amortization
13,400
15,114
42,742
48,916
NAREIT FFO
7,400
9,000
22,748
30,674
Lease Acquisition costs
109
41
278
206
Funds From Operations
$
7,509
$
9,041
$
23,026
$
30,880
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which we refer to as NOI. Management believes that investors are interested in this information. 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
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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. NOI should not be considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions. The calculations of NOI are shown in the following table:
Net Operating Income (NOI)*
Rentable
Square
Feet
Three Months Ended
Nine Months Ended
Three Months Ended
Nine Months Ended
Inc
%
(in thousands)
or RSF
31-Mar-23
30-Jun-23
30-Sep-23
30-Sep-23
31-Mar-22
30-Jun-22
30-Sep-22
30-Sep-22
(Dec)
Change
Region
East
298
$
276
$
343
$
239
$
858
$
274
$
278
$
221
$
773
$
85
11.0
%
MidWest
758
2,239
1,718
1,396
5,353
2,478
3,038
2,486
8,002
(2,649)
(33.1)
%
South
2,797
7,933
8,128
8,532
24,593
5,817
5,611
5,902
17,330
7,263
41.9
%
West
2,140
6,422
6,412
6,505
19,339
8,070
6,609
6,401
21,080
(1,741)
(8.3)
%
Property NOI* from Owned Properties
5,993
16,870
16,601
16,672
50,143
16,639
15,536
15,010
47,185
2,958
6.3
%
Disposition and Acquisition Properties (a)
213
870
(30)
(68)
772
2,942
3,582
2,658
9,182
(8,410)
(16.0)
%
Property NOI*
6,206
$
17,740
$
16,571
$
16,604
$
50,915
$
19,581
$
19,118
$
17,668
$
56,367
$
(5,452)
(9.7)
%
Same Store
$
16,870
$
16,601
$
16,672
$
50,143
$
16,639
$
15,536
$
15,010
$
47,185
$
2,958
6.3
%
Less Nonrecurring
Items in NOI* (b)
1,292
301
485
2,078
273
1,258
494
2,025
53
0.1
%
Comparative
Same Store
$
15,578
$
16,300
$
16,187
$
48,065
$
16,366
$
14,278
$
14,516
$
45,160
$
2,905
6.4
%
Nine Months Ended
Nine Months Ended
Three Months Ended
Ended
Three Months Ended
Ended
Reconciliation to Net Income (Loss)
31-Mar-23
30-Jun-23
30-Sep-23
30-Sep-23
31-Mar-22
30-Jun-22
30-Sep-22
30-Sep-22
Net income (loss)
$
2,406
$
(8,420)
$
(45,671)
$
(51,685)
$
(4,158)
$
(9,110)
$
17,246
$
3,978
Add (deduct):
Loss on extinguishment of debt
67
—
39
106
—
—
78
78
Gain on consolidation of Sponsored REIT
(394)
—
—
(394)
—
—
—
—
Impairment and loan loss reserve
—
—
—
—
—
1,140
717
1,857
Gain on sale of properties and impairment of assets held for sale, net
(8,392)
806
39,671
32,085
—
—
(24,077)
(24,077)
Management fee income
(374)
(427)
(460)
(1,261)
(291)
(267)
(274)
(832)
Depreciation and amortization
14,727
14,645
13,409
42,781
15,670
18,185
15,148
49,003
Amortization of above/below market leases
(18)
(12)
(9)
(39)
(9)
(45)
(34)
(88)
General and administrative
3,817
3,768
3,265
10,850
3,784
3,981
3,233
10,998
Interest expense
5,806
6,084
6,209
18,099
5,366
5,664
6,110
17,140
Interest income
—
—
—
—
(451)
(455)
(461)
(1,367)
Non-property specific items, net
95
127
151
373
(330)
25
(18)
(323)
Property NOI*
$
17,740
$
16,571
$
16,604
$
50,915
$
19,581
$
19,118
$
17,668
$
56,367
(a) We define Disposition and Acquisition Properties as properties that were sold or acquired or consolidated and do not have operating activity for all periods presented.
(b) Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability.
*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.
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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.
Weighted
Occupied
Weighted
Year Built
Weighted
Percentage as of
Average
or
Net Rentable
Occupied
September 30,
Rent per Occupied
Property Name
City
State
Renovated
Square Feet
Sq. Ft.
2023 (a)
Square Feet (b)
Innsbrook
Glen Allen
VA
1999
298,183
142,382
47.8
%
18.69
East Total
298,183
142,382
47.8
%
18.69
120 Monument Circle
Indianapolis
IN
1992
213,760
8,722
4.1
%
31.71
121 South 8th Street
Minneapolis
MN
1974
298,121
244,757
82.1
%
25.06
801 Marquette Ave
Minneapolis
MN
1923/2017
129,691
119,108
91.8
%
24.13
Plaza Seven
Minneapolis
MN
1987
330,096
216,279
65.5
%
29.58
Midwest Total
971,668
588,866
60.6
%
26.63
Blue Lagoon Drive (c)
Miami
FL
2002/2021
213,182
174,511
81.9
%
44.71
Park Ten
Houston
TX
1999
157,609
122,872
78.0
%
28.58
Addison Circle
Addison
TX
1999
289,333
240,175
83.0
%
35.18
Collins Crossing
Richardson
TX
1999
300,887
285,451
94.9
%
26.93
Eldridge Green
Houston
TX
1999
248,399
248,399
100.0
%
27.05
Park Ten Phase II
Houston
TX
2006
156,746
148,924
95.0
%
29.24
Liberty Plaza
Addison
TX
1985
217,841
157,238
72.2
%
24.48
Legacy Tennyson Center
Plano
TX
1999/2008
209,461
102,552
49.0
%
30.25
One Legacy Circle (c)
Plano
TX
2008
214,110
142,983
66.8
%
38.31
Westchase I & II
Houston
TX
1983/2008
629,025
368,231
58.5
%
26.98
Pershing Park Plaza (c)
Atlanta
GA
1989
160,145
127,796
79.8
%
38.56
South Total
2,796,738
2,119,132
75.8
%
31.06
1999 Broadway
Denver
CO
1986
682,639
423,509
62.0
%
33.66
1001 17th Street
Denver
CO
1977/2006
648,861
454,657
70.1
%
38.84
600 17th Street
Denver
CO
1982
612,135
481,812
78.7
%
34.66
Greenwood Plaza
Englewood
CO
2000
196,236
130,006
66.3
%
29.04
West Total
2,139,871
1,489,984
69.6
%
35.16
Total Owned & Consolidated Properties
6,206,460
4,340,364
69.9
%
$
31.46
(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.
(c) Property is classified as an asset held for sale as of September 30, 2023.
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Liquidity and Capital Resources
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. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations and property dispositions. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real properties, property dispositions and our interest costs.
Operating Activities
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
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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 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 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
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. Increases in operating expenses are predominantly borne by our tenants. To the extent that increases cannot be passed on to our tenants through rent reimbursements, such expenses would reduce the amount of available cash flow, which can adversely affect the market value of the applicable property.
We have used a variety of sources to fund our cash needs in addition to our free cash flow generated from our investments in real estate. In the past, we considered borrowing on our unsecured line of credit facility, adding or refinancing existing term debt or raising capital through public offerings or At The Market (ATM) programs of our common stock.
BMO Term Loan
On February 10, 2023, the Company entered into a First Amendment to the Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (the “BMO First Amendment”). The BMO First Amendment amended the Second Amended and Restated Credit Agreement dated September 27, 2018, among the Company and the lending institutions party thereto (as amended by the BMO First Amendment, the “BMO Credit Agreement”) to, among other things, extend the maturity date from January 31, 2024 to October 1, 2024 and change the interest rate from a number of basis points over LIBOR depending on the Company’s credit rating to 300 basis points over SOFR (Secured Overnight Financing Rate). The BMO Credit Agreement initially provided for an unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”). 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. The remaining balance of the BMO Term Loan matures on October 1, 2024.
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Table of Contents
Effective February 10, 2023 upon entering into the BMO First Amendment, the BMO Term Loan bears interest at either (i) 300 basis points over one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively, or (ii) 200 basis points over the base rate. Prior to February 10, 2023, the BMO Term Loan bore interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at December 31, 2022) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at December 31, 2022).
As of September 30, 2023, the interest rate on the BMO Term Loan was 8.43% 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 September 30, 2023 was approximately 7.98% 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. On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39% per annum for the period beginning on August 26, 2020 and ending January 31, 2024. Accordingly, based upon the Company’s credit rating, as of both December 31, 2022 and February 8, 2023, the effective interest rate on the BMO Term Loan was 4.04% per annum. On February 8, 2023, we terminated all outstanding interest rate swaps applicable to the BMO Term Loan and, on February 10, 2023, we received an aggregate of approximately $4.3 million as a result of such terminations, of which approximately $0.1 million related to interest receivable.
The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments and repurchases and redemptions of the Company’s common stock; going concern qualifications to our financial statements; and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. In addition, the BMO Credit Agreement also restricts the Company’s ability to make quarterly dividend distributions that exceed $0.01 per share of the Company’s common stock; provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company’s good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company’s status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject. The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage.
The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. 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
37
Table of Contents
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 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.
Effective February 10, 2023 upon entering into the BofA First Amendment, the BofA Revolver bears interest at 300 basis points over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively. In addition, under certain circumstances, such as if SOFR was not able to be determined, the BofA Revolver will instead bear interest at 200 basis points over the base rate. Prior to February 10, 2023, borrowings under the BofA Revolver bore interest at a margin over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively. Prior to February 10, 2023, the margin over SOFR or, if applicable, the base rate, varied depending on the Company’s leverage ratio (1.750% over SOFR and 0.750% over the base rate at December 31, 2022). Effective February 10, 2023 upon entering into the BofA First Amendment, the Company is also obligated to pay an annual facility fee on the unused portion of the BofA Revolver at the rate of 0.350% per annum and, if applicable, letter of credit fees. Prior to February 10, 2023, the Company was also obligated to pay an annual facility fee and, if applicable, letter of credit fees in amounts that were also based on the Company’s leverage ratio. The previous facility fee was assessed against the aggregate amount of lender commitments regardless of usage (0.350% at December 31, 2022).
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. 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 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). In the event of a default by the Company, BofA, in its capacity as administrative agent, may, and at the request of the requisite number of lenders shall, declare all obligations under the BofA Credit Agreement immediately due and payable and enforce any and all rights of the lenders or BofA under the BofA Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable.
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The Company may use the net proceeds of the BofA Revolver for permitted investments and for working capital and other general business purposes, including for building improvements, tenant improvements and leasing commissions, in each case to the extent permitted under the BofA Credit Agreement.
Former BofA Credit Facility
On July 21, 2016, the Company entered into a First Amendment (the “BofA First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BofA Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and BofA, as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BofA First Amendment and the BofA Second Amendment, the “Amended Former BofA Credit Facility”) that continued an existing unsecured revolving line of credit (the “Former BofA Revolver”) and an existing term loan (the “Former BofA Term Loan”). Effective simultaneously with the closing of the Amended Former BofA Credit Facility on January 10, 2022, the Company delivered a notice to BofA terminating the aggregate lender commitments under the Former BofA Revolver in their entirety. There were no amounts drawn on the Former BofA Revolver as of December 31, 2021 and January 10, 2022.
Former BofA Revolver Highlights
● The Former BofA Revolver was terminated at the Company’s election effective January 10, 2022.
● As of December 31, 2021 and January 10, 2022, there were no borrowings under the Former BofA Revolver .
The Former BofA Revolver bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.550% over LIBOR at December 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.550% over the base rate at December 31, 2021). The Former BofA Credit Facility also obligated the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating. The facility fee was assessed against the total amount of the Former BofA Revolver, or $600 million (0.30% at December 31, 2021). The amount of any applicable facility fee, and the margin over LIBOR rate or base rate was determined based on the Company’s credit rating pursuant to a pricing grid.
For purposes of the Former BofA Credit Facility, base rate meant, for any day, a fluctuating rate per annum equal to the highest of: (i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one month LIBOR based rate for such day plus 1.00%. As of December 31, 2021, the Company’s credit rating from Moody’s Investors Service was Ba1.
During 2022 and as of December 31, 2022, there were no borrowings under the Former BofA Revolver.
Former BofA Term Loan Highlights
● The Former BofA Term Loan was repaid in its entirety on September 6, 2022.
● The original principal amount of the Former BofA Term Loan was $400 million. On September 30, 2021, the Company repaid a $90 million portion and on October 25, 2021, the Company repaid a $200 million portion of the Former BofA Term Loan and incurred a loss on extinguishment of debt of $0.7 million related to unamortized deferred financing costs. On September 6, 2022, the Company prepaid the remaining $110 million balance of the Former BofA Term Loan in full and incurred a loss of extinguishment of debt of $0.1 million related to unamortized deferred financing costs.
The Former BofA Term Loan bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.75% over LIBOR at the date of repayment on September 6, 2022) or (ii) a margin over the base rate depending on the Company’s credit rating (0.750% over the base rate at the date of repayment on September 6, 2022). The margin over LIBOR rate or base rate was determined based on the Company’s credit rating pursuant to a pricing grid.
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The interest rate on the Former BofA Term Loan was variable through the date of repayment on September 6, 2022. Previously the Company had fixed the base LIBOR interest rate on the Former BofA Term Loan by entering into interest rate swap transactions. On July 22, 2016, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the Former BofA Term Loan at 1.12% per annum for the period beginning on September 27, 2017 and ended on September 27, 2021. The weighted average variable interest rate on all amounts outstanding under the Former BofA Term Loan through the date of repayment on September 6, 2022 was approximately 2.65% per annum.
Senior Notes
On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes. Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $200 million of senior unsecured notes consisting of (i) Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $84 million (the “Series B Notes”, and, together with the Series A Notes, the “Senior Notes”). On December 20, 2017, the Senior Notes were funded and proceeds were used to reduce the outstanding balance of the Former BofA Revolver.
The Senior Notes bear interest depending on the Company’s credit rating. As of 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. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BofA Credit Agreement and the BMO Credit Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50; a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. We were in compliance with the Senior Notes financial covenants as of September 30, 2023.
Equity Offering
From time to time, we may issue debt securities, common stock, preferred stock or depository shares under a registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.
Stock Repurchase Program
On June 23, 2021, we announced that our Board of Directors had authorized the repurchase of up to $50 million of the Company’s common stock from time to time in the open market, privately negotiated transactions or other manners as permitted by federal securities laws. The repurchase authorization may be suspended or discontinued at any time. On February 10, 2023, we disclosed in a Current Report on Form 8-K that our Board of Directors had discontinued the repurchase authorization.
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Contingencies
We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
To the extent permitted by the BofA Credit Agreement, we intend to draw on the BofA Revolver in the future for a variety of corporate purposes, including for the Sponsored REIT Loan as described below.
Sponsored REIT Loan
The Sponsored REIT Loan is secured by a mortgage on the underlying property and has a current term of less than one year. We anticipate that the Sponsored REIT Loan will be repaid through cash flow from property operations or sale of the underlying property, although the actual amount and timing of any repayment is uncertain and will likely depend on prevailing market conditions at the time of any such sale.
The Sponsored REIT Loan subjects us to credit risk. However, we believe that our position as asset manager of the Sponsored REIT helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REIT. Before making the Sponsored REIT Loan, we considered a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the Sponsored REIT and local and national market conditions. These factors are subject to change and we do not apply a formula or assign relative weights to the factors. Instead, we make a subjective determination after considering such factors collectively.
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 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. The office component comprises approximately 95% of the rentable space and was net leased to a single corporate tenant, through December 31, 2018. The retail component comprises the remaining approximately 5% of the property’s rentable space. 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. During the three months ended September 30, 2021, we signed a lease with a new tenant. During the three months ended March 31, 2022, we signed an expansion of space with that same tenant. The new lease inclusive of the expansion space is for approximately 101,000 square feet and has commenced. 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.
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Off-Balance Sheet Arrangements and Contractual Obligations
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.