Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2023, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, 2013 framework.
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Based on our assessment, management concluded that, as of December 31, 2023, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included elsewhere in this annual report on Form 10-K, has issued an attestation report on our internal control over financial reporting as of December 31, 2023. Please see page F-3.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Director and Officer Trading Arrangements
None of our directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the fourth quarter of 2023.
Disclosure Pursuant to Item 1.01 of Form 8-K - Entry into a Material Definitive Agreement
On February 21, 2024, we entered into amendments to each of our existing term loan with Bank of Montreal, as administrative agent, and the other lending institutions party thereto, our existing revolving line of credit with Bank of America, N.A., as administrative agent, and the other lending institutions party thereto and our Series A Notes due December 20, 2024 and Series B Notes due December 20, 2027. As a result of these amendments, we changed the maturity dates of each to April 1, 2026 and repaid an aggregate of $102 million of such debt, as further described below. In addition, the amendment to the revolving line of credit converted the revolving loan to a term loan, as also described further below.
BMO Term Loan
On February 21, 2024, we entered into a Second Amendment to Second Amended and Restated Credit Agreement (the “BMO Second Amendment”) with Bank of Montreal, as administrative agent, and the other lending institutions party thereto to amend our existing term loan (as amended by the BMO Second Amendment, the “BMO Term Loan”). The BMO Second Amendment amended the Second Amended and Restated Credit Agreement dated September 27, 2018 among us and the lending institutions party thereto (the “Original BMO Credit Agreement”), as amended by the First Amendment to Second Amended and Restated Credit Agreement dated February 10, 2023 (the “BMO First Amendment”) to, among other things: (1) extend the maturity date from October 1, 2024 to April 1, 2026; (2) change the interest rate from either 300 basis points over SOFR (Secured Overnight Financing Rate) or 200 basis points over the base rate to either 300 basis points over SOFR with a floor on SOFR of 500 basis points or 200 basis points over the base rate with a floor on the base rate of 600 basis points; (3) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan (defined below) and the Senior Notes (defined below) exceeds $200 million, the spread over SOFR or the base rate, as applicable, will permanently increase by 100 basis points, from 300 basis points to 400 basis points in the case of SOFR, and from 200 basis points to 300 basis points in the case of the base rate; (4) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan (as defined below) and the Senior Notes (as defined below) with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556% to the BMO Term Loan; (b) 20.00000% to the BofA Term Loan; (c) 44.44444% to the Senior Notes; and (d) the remaining 10% to be retained by us; (5) require that, within 90 days of the February 21, 2024 effective date of the BMO Second Amendment, certain of our subsidiaries guarantee the BMO Term Loan; (6) require that, within 90 days of the February 21, 2024 effective date of the BMO Second Amendment, we pledge our equity interests in certain of our subsidiaries as collateral for the BMO Term Loan; (7) reduce our minimum fixed charge coverage ratio from 1.50x to 1.25x; and (8) reduce our minimum unsecured interest coverage ratio from 1.75x to 1.25x. We refer to the Original BMO Credit Agreement, as amended by the BMO First Amendment and the BMO Second Amendment, as the BMO Credit Agreement.
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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 initially consisted of a $55 million tranche A term loan, which we repaid on June 4, 2021, and a $165 million tranche B term loan. As of December 31, 2023, $115 million was outstanding under the tranche B term loan. On February 21, 2024, as part of the BMO Second Amendment, we repaid an approximately $29.0 million portion of the tranche B term loan so that approximately $86.0 million remains outstanding.
Pursuant to the BMO Second 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, with a floor on SOFR of 5.00% or (ii) 200 basis points over the base rate with a floor on the base rate of 6.00%. In addition, effective February 21, 2024 upon entering into the BMO Second Amendment, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the spread over SOFR or the base rate, as applicable, will permanently increase by 100 basis points from 300 basis points to 400 basis points in the case of SOFR, and from 200 basis points to 300 basis points in the case of the base rate. Base rate means, for any day, a fluctuating rate per annum equal to the highest of: (i) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime commercial rate”, (ii) the Federal Funds Rate plus ½ of 1% (0.50%), (iii) term SOFR for one month plus 1.00% and (iv) 6.00%. If the base rate is being used because SOFR is not able to be determined, the base rate shall be the greater of clauses (i) and, (ii) and (iv).
Certain of the lenders party to the BMO Second Amendment, and their respective affiliates, have performed, and may in the future perform for us and our subsidiaries, various commercial banking, investment banking, underwriting and other financial advisory services, for which they have received, and will receive, customary fees and expenses.
The BMO Second Amendment is attached to this Annual Report on Form 10-K as Exhibit 10.3. The foregoing summary of the BMO Second Amendment is qualified in its entirety by the complete text of the BMO Second Amendment.
BofA Term Loan
On February 21, 2024, we amended our revolving line of credit (the “BofA Revolver”) (now known as the “BofA Term Loan”) by entering into a Second Amendment to Credit Agreement with Bank of America, N.A., as administrative agent, and the other lending institutions party thereto (the “BofA Second Amendment”). The BofA Second Amendment amended the Credit Agreement dated January 10, 2022 (the “Original BofA Credit Agreement”), as amended by the First Amendment to Credit Agreement dated February 10, 2023 (the “BofA First Amendment”), to, among other things: (1) extend the maturity date from October 1, 2024 to April 1, 2026; (2) convert borrowings from being either revolving loans or letters of credit to a term loan; (3) change the interest rate from 300 basis points over SOFR (Secured Overnight Financing Rate) to 300 basis points over SOFR with a floor on SOFR of 500 basis points; (4) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the spread over SOFR will permanently increase by 100 basis points from 300 basis points to 400 basis points; (5) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556% to the BMO Term Loan; (b) 20.00000% to the BofA Term Loan; (c) 44.44444% to the Senior Notes; and (d) the remaining 10% to be retained by us; (6) require that, within 90 days of the February 21, 2024 effective date of the BofA Second Amendment, certain of our subsidiaries guarantee the BofA Term Loan; (7) require that, within 90 days of the February 21, 2024 effective date of the BofA Second Amendment, we pledge our equity interests in certain of our subsidiaries as collateral for the BofA Term Loan; (8) reduce our minimum fixed charge coverage ratio from 1.50x to 1.25x; and (9) reduce our minimum unsecured interest coverage ratio from 1.75x to 1.25x. We refer to the Original BofA Credit Agreement, as amended by the BofA First Amendment and the BofA Second Amendment, as the BofA Credit Agreement.
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As of December 31, 2023, there were borrowings of $90 million drawn and outstanding under the BofA Revolver. On February 21, 2024, as part of the BofA Second Amendment, we repaid an approximately $22.7 million portion of the BofA Revolver so that approximately $67.3 million remains outstanding under the BofA Term Loan.
Effective February 21, 2024 upon entering into the BofA Second Amendment, interest on the BofA Term Loan was amended to mean 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, with a floor on SOFR of 5.00%. In addition, effective February 21, 2024 upon entering into the BofA Second Amendment, under certain circumstances, such as if SOFR is not able to be determined, the BofA Term Loan bears interest at 200 basis points over the base rate with a floor on the base rate of 600 basis points. In addition, effective February 21, 2024 upon entering into the BofA Second Amendment, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the spread over SOFR will permanently increase by 100 basis points from 300 basis points to 400 basis points in the case of SOFR, and from 200 basis points to 300 basis points in the case of the base rate. Base rate means, for any day, a fluctuating rate per annum equal to the highest of: (i) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate”, (ii) the Federal Funds Rate plus 1/2 of 1% (0.50%), (iii) term SOFR for one month plus 1.00% and (iv) 6.00%. If the base rate is being used because SOFR is not able to be determined, the base rate shall be the greater of clauses (i), (ii) and (iv). Effective February 21, 2024 upon entering into the BofA Second Amendment, we are no longer obligated to pay an annual facility commitment fee on the unused portion of the BofA Revolver at the rate of 0.35% per annum and, if applicable, letter of credit fees.
Certain of the lenders party to the BofA Second Amendment, and their respective affiliates, have performed, and may in the future perform for us and our subsidiaries, various commercial banking, investment banking, underwriting and other financial advisory services, for which they have received, and will receive, customary fees and expenses.
The BofA Second Amendment is attached to this Annual Report on Form 10-K as Exhibit 10.2. The foregoing summary of the BofA Second Amendment is qualified in its entirety by the complete text of the BofA Second Amendment.
Senior Notes
On February 21, 2024, we entered into a First Amendment to Note Purchase Agreement (the “NPA First Amendment”) with the purchasers party thereto. The NPA First Amendment amended the Note Purchase Agreement dated October 24, 2017 (the “Original Note Purchase Agreement”), to, among other things: (1) extend the maturity date of the Series A Notes (the “Series A Notes”) from December 20, 2024 to April 1, 2026; (2) shorten the maturity date of the Series B Notes (the “Series B Notes”) from December 20, 2027 to April 1, 2026; (3) increase the interest rate applicable to the Series A Notes from 4.49% per annum to 8.00% per annum; (4) increase the interest rate applicable to the Series B Notes from 4.76% per annum to 8.00% per annum; (5) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the per annum interest rates applicable to the Series A Note and the Series B Notes will permanently increase by 1.00% from 8.00% per annum to 9.00% per annum; (6) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556% to the BMO Term Loan; (b) 20.00000% to the BofA Term Loan; (c) 44.44444% to the Senior Notes; and (d) the remaining 10% to be retained by us; (7) require that, within 90 days of the February 21, 2024 effective date of the NPA First Amendment, certain of our subsidiaries guarantee the Senior Notes; (8) require that, within 90 days of the February 21, 2024 effective date of the NPA First Amendment, we pledge our equity interests in certain of our subsidiaries as collateral for the Senior Notes; and (9) conform all financial covenants and negative covenants in the Note Purchase Agreement with the BofA Credit Agreement and the BMO Credit Agreement. We refer to the Original Note Purchase Agreement, as amended by the NPA First Amendment, as the Note Purchase Agreement.
On February 21, 2024, as part of the NPA First Amendment, we repaid an approximately $29.2 million portion of the Series A Notes so that approximately $86.8 million of the Series A Notes remains outstanding. In addition, on
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February 21, 2024, as part of the NPA First Amendment, we repaid an approximately $21.2 million portion of the Series B Notes so that approximately $62.8 million of the Series B Notes remains outstanding.
The NPA First Amendment is attached to this Annual Report on Form 10-K as Exhibit 10.4. The foregoing summary of the NPA First Amendment is qualified in its entirety by the complete text of the NPA First Amendment.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Certain information required by Part III of this Form 10-K will be contained in our definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) which we plan to file not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The response to this item is contained under the caption “Information about our Executive Officers” in Part I hereof and in the Proxy Statement under the captions “CORPORATE GOVERNANCE”, “PROPOSAL 1 - ELECTION OF DIRECTORS” and, if applicable, “DELINQUENT SECTION 16(a) REPORTS” and is incorporated herein by reference.
Our board of directors has adopted a code of business conduct and ethics that applies to all of our executive officers, directors and employees. The code was approved by the nominating and corporate governance committee of our board of directors and by the full board of directors. We have posted a current copy of our code under “Corporate Governance” in the “Investor Relations” section of our website at http://www.fspreit.com. To the extent permitted by applicable rules of the NYSE American, we intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the code of business conduct and ethics with respect to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website.
Item 11. Executive Compensation
The response to this item is contained in the Proxy Statement under the captions “COMPENSATION DISCUSSION AND ANALYSIS” and “DIRECTOR COMPENSATION AND STOCK OWNERSHIP GUIDELINES” and, other than the information required by Item 402(v) of Regulation S-K, is incorporated herein by reference.
The “Compensation Committee Report” contained in the Proxy Statement shall not be deemed “soliciting material” or “filed” with the SEC or otherwise subject to the liabilities of Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The response to this item is contained in the Proxy Statement under the captions “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS” and is incorporated herein by reference.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
The response to this item is contained in the Proxy Statement under the captions “PROPOSAL 1 - ELECTION OF DIRECTORS”, “CORPORATE GOVERNANCE” and “TRANSACTIONS WITH RELATED PERSONS” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The response to this item is contained in the Proxy Statement under the caption “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FEES AND SERVICES” and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. Financial Statements:
The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules:
The Financial Statement Schedules listed on the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
Schedules other than those listed are omitted as they are not applicable or the required or equivalent information has been included in the financial statements or notes thereto.
3. Exhibits:
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EXHIBIT INDEX
Exhibit No.
Description
3.1 (1)
Articles of Incorporation, as amended.
3.2 (2)
Amended and Restated By-laws.
4.1 (3)
Description of Securities Registered Under Section 12 of the Exchange Act.
10.1+ (4)
2002 Stock Incentive Plan of FSP Corp .
10.2*
Second Amendment to Credit Agreement, dated February 21, 2024, among FSP Corp., Bank of America, N.A. and the other parties thereto
10.3*
Second Amendment to Second Amended and Restated Credit Agreement, dated February 21, 2024, among FSP Corp., Bank of Montreal and the other parties thereto.
10.4*
First Amendment to Note Purchase Agreement, dated February 21, 2024, among FSP Corp. and the other parties named therein as purchasers.
10.5 (5)
First Amendment to Credit Agreement, dated February 10, 2023, among FSP Corp., Bank of America, N.A. and the other parties thereto.
10.6 (6)
First Amendment to Second Amended and Restated Credit Agreement, dated February 10, 2023, among FSP Corp., Bank of Montreal and the other parties thereto.
10.7 (7)
Credit Agreement, dated January 10, 2022, among FSP Corp., Bank of America, N.A. and the other parties thereto.
10.8 (8)
Joinder and Increase Agreement, dated February 10, 2022, among FSP Corp., BankUnited N.A. and Bank of America, N.A., as administrative agent.
10.9 (9)
Second Amended and Restated Credit Agreement, dated September 27, 2018, among FSP Corp., Bank of Montreal and the other parties thereto.
10.10 (10)
Note Purchase Agreement, dated October 24, 2017, among FSP Corp. and the other parties named therein as purchasers.
10.11 +(11)
Form of Retention Agreement.
10.12 +(12)
Change in Control Discretionary Plan.
21.1*
Subsidiaries of the Registrant.
23.1*
Consent of Ernst & Young LLP.
31.1*
Certification of FSP Corp.’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of FSP Corp.’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of FSP Corp.’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of FSP Corp.’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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97+*
Compensation Recovery Policy.
101*
The following materials from FSP Corp.’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Other Comprehensive Income; and (v) the Notes to Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
(1)
Incorporated by reference to Exhibit 3.1 to FSP Corp.’s Quarterly Report on Form 10-Q filed on July 30, 2019 (File No. 001-32470).
(2)
Incorporated by reference to Exhibit 3.1 to FSP Corp.’s Current Report on Form 8-K, filed on February 3, 2023 (File No. 001-32470).
(3)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Annual Report on Form 10-K, filed on February 15, 2022 (File No. 001-32470).
(4)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Annual Report on Form 10-K, filed on March 29, 2002 (File No. 001-32470).
(5)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on February 10, 2023 (File No. 001-32470).
(6)
Incorporated by reference to Exhibit 10.2 to FSP Corp.’s Current Report on Form 8-K, filed on February 10, 2023 (File No. 001-32470).
(7)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on January 12, 2022 (File No. 001-32470).
(8)
Incorporated by reference to Exhibit 10.3 to FSP Corp.’s Annual Report on Form 10-K, filed on February 15, 2022 (File No. 001-32470).
(9)
Incorporated by reference to Exhibit 10.1 to FSP Corp.’s Current Report on Form 8-K, filed on September 27, 2018 (File No. 001-32470).
(10)
Incorporated by reference to Exhibit 10.4 to FSP Corp.’s Current Report on Form 8-K, filed on October 24, 2017 (File No. 001-32470)
(11)
Incorporated by reference to Exhibit 10.5 to FSP Corp.’s Annual Report on Form 10-K, filed on February 24, 2006 (File No. 001-32470).
(12)
Incorporated by reference to Exhibit 99.2 to FSP Corp.’s Current Report on Form 8-K, filed on February 8, 2006 (File No. 001-32470).
+
Management contract or compensatory plan or arrangement filed as an Exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
*
Filed herewith.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf as of February 26, 2024 by the undersigned, thereunto duly authorized.
FRANKLIN STREET PROPERTIES CORP.
By:
/s/ George J. Carter
George J. Carter
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ George J. Carter
Chief Executive Officer and Director (Principal Executive Officer)
February 26, 2024
George J. Carter
/s/ John G. Demeritt
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
February 26, 2024
John G. Demeritt
/s/ John N. Burke
Director
February 26, 2024
John N. Burke
/s/ Brian N. Hansen
Director
February 26, 2024
Brian N. Hansen
/s/ Kenneth A. Hoxsie
Director
February 26, 2024
Kenneth A. Hoxsie
/s/ Dennis J. McGillicuddy
Director
February 26, 2024
Dennis J. McGillicuddy
/s/ Georgia Murray
Director
February 26, 2024
Georgia Murray
/s/ Kathryn P. O’Neil
Director
February 26, 2024
Kathryn P. O’Neil
/s/ Milton P. Wilkins Jr.
Director
February 26, 2024
Milton P. Wilkins Jr.
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Franklin Street Properties Corp.
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm (PCAOB ID 42 )
F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2023 and 2022
F-6
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2023
F-8
Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2023
F-9
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2023
F-10
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2023
F-11
Notes to the Consolidated Financial Statements
F-13
Financial Statement Schedules — Schedule II and III
F-36
All other schedules for which a provision is made in the applicable accounting resolutions of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Franklin Street Properties Corp.:
Opinion on Internal Control Over Financial Reporting
We have audited Franklin Street Properties Corp.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Franklin Street Properties Corp. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedules listed in the index at Item 15(a)(2) and our report dated February 26, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F-2
Table of Contents
/s/ Ernst & Young LLP
Boston, Massachusetts
February 26, 2024
F-3
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Franklin Street Properties Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Franklin Street Properties Corp. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023 and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-4
Table of Contents
Impairment assessment of real estate assets
Description of the Matter
The Company’s real estate assets, net totaled $891 million as of December 31, 2023. As described in Note 2 to the consolidated financial statements, the Company reviews its properties to determine if their carrying amounts will be recovered from future operating cash flows when indicators of impairment are identified.
Auditing the Company's impairment assessment involved a high degree of subjectivity as estimates underlying the determination of recoverability involve management making significant judgments to derive assumptions affected by expected future market conditions and leasing activity. Assumptions included in the Company’s recoverability assessment included the rental rates and future occupancy of the Company’s real estate properties.
How We Addressed the Matter in Our Audit
We tested the design and operating effectiveness of controls over the Company’s impairment process. For example, we tested controls over management’s review of significant assumptions underlying projections used in the Company’s recoverability assessment.
Our testing of the Company’s impairment assessment included, among other procedures, evaluating the significant assumptions used to estimate the future undiscounted cash flows used in the recoverability assessment. For example, we compared future market conditions to current market data, performed a sensitivity analysis to evaluate the impact of certain assumptions on the estimate of undiscounted cash flows and recalculated management’s estimate. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the certain assumptions for certain real estate assets.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Boston, Massachusetts
February 26, 2024
F-5
Table of Contents
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
(in thousands)
2023
2022
Assets:
Real estate assets:
Land (amounts related to variable interest entities ("VIEs") of $ 6,416 and $ 0 at December 31, 2023 and December 31, 2022, respectively)
$
110,298
$
126,645
Buildings and improvements (amounts related to VIEs of $ 13,279 and $ 0 at December 31, 2023 and December 31, 2022, respectively)
1,133,971
1,388,869
Fixtures and equipment
12,904
11,151
1,257,173
1,526,665
Less accumulated depreciation (amounts related to VIEs of $ 341 and $ 0 at December 31, 2023 and December 31, 2022, respectively)
366,349
423,417
Real estate assets, net (amounts related to VIEs of $ 19,354 and $ 0 at December 31, 2023 and December 31, 2022, respectively)
890,824
1,103,248
Acquired real estate leases, less accumulated amortization of $ 20,413 and $ 20,243 , respectively (amounts related to VIEs of $ 305 and $ 0 , less accumulated amortization of $ 222 and $ 0 at December 31, 2023 and December 31, 2022, respectively)
6,694
10,186
Asset held for sale
73,318
—
Cash, cash equivalents and restricted cash (amounts related to VIEs of $ 2,167 and $ 0 at December 31, 2023 and December 31, 2022, respectively)
127,880
6,632
Tenant rent receivables
2,191
2,201
Straight-line rent receivable
40,397
52,739
Prepaid expenses and other assets
4,239
6,676
Other assets: derivative asset
—
4,358
Related party mortgage loan receivable, less allowance for credit loss of $ 0 and $ 4,237 , respectively
—
19,763
Office computers and furniture, net of accumulated depreciation of $ 1,020 and $ 1,115 , respectively
123
154
Deferred leasing commissions, net of accumulated amortization of $ 16,008 and $ 19,043 , respectively
23,664
35,709
Total assets
$
1,169,330
$
1,241,666
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
(in thousands, except share and par value amounts)
2023
2022
Liabilities and Stockholders’ Equity:
Liabilities:
Bank note payable
$
90,000
$
48,000
Term loans payable, less unamortized financing costs of $ 293 and $ 250 , respectively
114,707
164,750
Series A & Series B Senior Notes, less unamortized financing costs of $ 329 and $ 494 , respectively
199,670
199,506
Accounts payable and accrued expenses (amounts related to VIEs of $ 590 and $ 0 at December 31, 2023 and December 31, 2022, respectively)
41,879
50,366
Accrued compensation
3,644
3,644
Tenant security deposits
6,204
5,710
Lease liability
334
759
Acquired unfavorable real estate leases, less accumulated amortization of $ 396 and $ 574 , respectively
87
195
Total liabilities
456,525
472,930
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $ .0001 par value, 20,000,000 shares authorized, none issued or outstanding
—
—
Common stock, $ .0001 par value, 180,000,000 shares authorized, 103,430,353 and 103,235,914 shares issued and outstanding , respectively
10
10
Additional paid-in capital
1,335,091
1,334,776
Accumulated other comprehensive income
355
4,358
Distributions in excess of accumulated earnings
( 622,651 )
( 570,408 )
Total stockholders’ equity
712,805
768,736
Total liabilities and stockholders’ equity
$
1,169,330
$
1,241,666
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Operations
For the Year Ended
December 31,
(in thousands, except per share amounts)
2023
2022
2021
Revenues:
Rental
$
145,446
$
163,739
$
207,581
Related party revenue:
Management fees and interest income from loans
—
1,855
1,700
Other
261
21
77
Total revenues
145,707
165,615
209,358
Expenses:
Real estate operating expenses
50,732
52,820
60,881
Real estate taxes and insurance
27,200
34,620
41,061
Depreciation and amortization
54,738
63,808
78,544
General and administrative
14,021
13,885
15,898
Interest
24,318
22,808
32,273
Total expenses
171,009
187,941
228,657
Loss on extinguishment of debt
( 106 )
( 78 )
( 901 )
Gain on consolidation of Sponsored REIT
394
—
—
Impairment and loan loss reserve
—
( 4,237 )
—
Gain (loss) on sale of properties and impairment of assets held for sale, net
( 23,384 )
27,939
113,134
Interest income
567
—
—
Income (loss) before taxes
( 47,831 )
1,298
92,934
Tax expense
279
204
638
Equity in income of non-consolidated REITs
—
—
421
Net income (loss)
$
( 48,110 )
$
1,094
$
92,717
Weighted average number of shares outstanding, basic and diluted
103,357
103,338
106,667
Net income (loss) per share, basic and diluted
$
( 0.47 )
$
0.01
$
0.87
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Comprehensive Income (Loss)
For the
Year Ended
December 31,
(in thousands)
2023
2022
2021
Net income (loss)
$
( 48,110 )
$
1,094
$
92,717
Other comprehensive income (loss):
Unrealized gain on derivative financial instruments
177
9,597
12,072
Reclassification from accumulated other comprehensive income into interest expense
( 4,180 )
—
—
Total other comprehensive income (loss)
( 4,003 )
9,597
12,072
Comprehensive income (loss)
$
( 52,113 )
$
10,691
$
104,789
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Stockholders’ Equity
Accumulated
Distributions
Additional
other
in excess of
Total
Common Stock
Paid-In
comprehensive
accumulated
Stockholders’
(in thousands)
Shares
Amount
Capital
income (loss)
earnings
Equity
Balance, December 31, 2020
107,328
11
$
1,357,131
$
( 17,311 )
$
( 571,740 )
$
768,091
Comprehensive income
—
—
—
12,072
92,717
104,789
Repurchased shares
( 3,396 )
( 1 )
( 18,243 )
( 18,244 )
Shares issued for:
—
Equity-based compensation
67
—
338
—
—
338
Distributions
—
—
—
—
( 71,771 )
( 71,771 )
Balance, December 31, 2021
103,999
10
1,339,226
( 5,239 )
( 550,794 )
783,203
Comprehensive income
—
—
—
9,597
1,094
10,691
Repurchased shares
( 847 )
—
( 4,843 )
( 4,843 )
Shares issued for:
Equity-based compensation
84
—
393
—
—
393
Distributions
—
—
—
—
( 20,708 )
( 20,708 )
Balance, December 31, 2022
103,236
10
1,334,776
4,358
( 570,408 )
768,736
Comprehensive loss
—
—
—
( 4,003 )
( 48,110 )
( 52,113 )
Repurchased shares
—
—
—
—
Shares issued for:
—
Equity-based compensation
194
—
315
—
—
315
Distributions
—
—
—
—
( 4,133 )
( 4,133 )
Balance, December 31, 2023
103,430
$
10
$
1,335,091
$
355
$
( 622,651 )
$
712,805
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
For the Year Ended December 31,
(in thousands)
2023
2022
2021
Cash flows from operating activities:
Net income (loss)
$
( 48,110 )
$
1,094
$
92,717
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense
57,240
65,697
81,041
Amortization of above and below market leases
( 44 )
( 118 )
( 34 )
Shares issued as compensation
315
394
338
Amortization of other comprehensive income into interest expense
( 3,851 )
—
—
Loss on extinguishment of debt
106
78
901
Gain on consolidation of Sponsored REIT
( 394 )
—
—
Impairment and loan loss reserve
—
4,237
—
(Gain) loss on sale of properties and impairment of assets held for sale, net
23,384
( 27,939 )
( 113,134 )
Equity in income of non-consolidated REITs
—
—
( 421 )
Distributions from non-consolidated REITs
—
—
421
Changes in operating assets and liabilities:
Tenant rent receivables
10
( 247 )
5,702
Straight-line rents
625
( 5,895 )
( 3,930 )
Lease acquisition costs
( 2,007 )
( 4,494 )
( 2,353 )
Prepaid expenses and other assets
382
( 1,805 )
82
Accounts payable and accrued expenses
( 2,709 )
( 5,983 )
( 11,096 )
Accrued compensation
—
( 1,060 )
786
Tenant security deposits
494
( 509 )
( 2,458 )
Payment of deferred leasing commissions
( 7,575 )
( 8,216 )
( 12,200 )
Net cash provided by operating activities
17,866
15,234
36,362
Cash flows from investing activities:
Property improvements, fixtures and equipment
( 31,637 )
( 54,910 )
( 64,833 )
Consolidation of Sponsored REIT
3,048
—
( 3,000 )
Proceeds received from sales of properties
142,225
128,949
573,307
Net cash provided by investing activities
113,636
74,039
505,474
Cash flows from financing activities:
Distributions to stockholders
( 4,133 )
( 53,988 )
( 38,491 )
Proceeds received from termination of interest rate swap
4,206
—
—
Stock repurchases
—
( 4,843 )
( 18,244 )
Borrowings under bank note payable
77,000
90,000
91,500
Repayments of bank note payable
( 35,000 )
( 42,000 )
( 95,000 )
Repayment of term loan payable
( 50,000 )
( 110,000 )
( 445,000 )
Deferred financing costs
( 2,327 )
( 2,561 )
—
Net cash used in financing activities
( 10,254 )
( 123,392 )
( 505,235 )
Net increase (decrease) in cash, cash equivalents and restricted cash
121,248
( 34,119 )
36,601
Cash, cash equivalents and restricted cash , beginning of year
6,632
40,751
4,150
Cash, cash equivalents and restricted cash , end of period
$
127,880
$
6,632
$
40,751
The accompanying notes are an integral part of these consolidated financial statements.
F-11
Table of Contents
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
For the Year Ended December 31,
(in thousands)
2023
2022
2021
Supplemental disclosure of cash flow information:
Cash paid for:
Interest
$
25,740
$
21,085
$
30,141
Taxes on income
$
339
$
667
$
454
Non-cash investing and financing activities:
Accrued dividend
$
—
$
—
$
33,280
Accrued costs for purchase of real estate assets
$
7,566
$
9,962
$
4,715
Investment in related party mortgage loan receivable converted to real estate assets and acquired real estate leases in conjunction with variable interest entity consolidation
$
20,000
$
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-12
Table of Contents
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
1. Organization
Franklin Street Properties Corp. (“FSP Corp.” or the “Company”) holds, directly and indirectly, 100 % of the interest in FSP Investments LLC, FSP Property Management LLC , FSP Holdings LLC and FSP Protective TRS Corp . FSP Property Management LLC provides asset management and property management services. The Company also has a non-controlling common stock interest in the corporation that is the sole member of FSP Monument Circle LLC, which corporation was organized to operate as a real estate investment trust (“Monument Circle” or the “Sponsored REIT”).
As of December 31, 2023, the Company owned and operated a portfolio of real estate consisting of 17 operating properties, and the Sponsored REIT, which was consolidated effective January 1, 2023. The Company may pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, for geographic, property specific reasons or for other general corporate purposes.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Estimates and Assumptions
The Company prepares its financial statements and related notes in conformity with generally accepted accounting principles in the United States of America (“GAAP”). These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the consolidated financial statements include the allowance for credit losses, purchase price allocations, impairment considerations and the valuation of derivatives.
Variable Interest Entities (VIEs)
The Company determines whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. The determination of whether an entity in which the Company holds a, direct or indirect, variable interest is a VIE is based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. The Company makes judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.
The Company analyzes any investments in VIEs to determine if the Company is the primary beneficiary. In evaluating whether the Company is the primary beneficiary, the Company evaluates its direct and indirect economic interests in the entity. Determining which reporting entity, if any, is the primary beneficiary of a VIE is primarily a qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment.
The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct a proposed sale of the property or merger of the company. In addition, the Company considers the rights of other investors to participate in those decisions, to replace the manager and to amend the corporate charter. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and considers that conclusion upon a reconsideration event.
F-13
Table of Contents
As of January 1, 2023, the Company’s relationship with the Sponsored REIT was considered a VIE and the Company became the primary beneficiary. Upon this reconsideration event, the entity is included within the Company’s consolidated financial statements and all intercompany accounts and transactions have been eliminated in consolidation. A gain on consolidation of approximately $ 0.4 million was recognized in the three months ended March 31, 2023. Cash and cash equivalents of $ 3 million held by Monument Circle was included in the Company’s cash and cash equivalents upon consolidation and is reflected as “Consolidation of Sponsored REIT” in the consolidated statement of cash flows. The cash and cash equivalents held by Monument Circle are unable to be utilized for the Company’s operational purposes. The creditors of Monument Circle’s trade payables do not have any recourse against the Company.
The consolidation value of Monument Circle was allocated to real estate investments and leases, including lease origination costs. Lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar lease, including leasing commission, legal, vacancy, and other related costs). The value assigned to building approximates the replacement cost; the value assigned to land approximates its appraised value; and the value assigned to leases approximate their fair value. Other assets and liabilities are recorded at their historical costs, which approximates fair value.
The Company assessed the fair value of the acquired real estate leases based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs are Level 3 in the fair value hierarchy.
The following table summarizes the estimated fair value of the assets acquired at the date of consolidation, January 1, 2023:
(in thousands)
Real estate assets
$
19,695
Value of acquired real estate leases
305
Total
$
20,000
The following is quantitative information about significant unobservable inputs in the Company’s Level 3 measurement of the assets acquired in the consolidation of Monument Circle and were measured at fair value on a nonrecurring basis at January 1, 2023:
Fair Value (1) at
Significant
Range
Weighted
Description
January 1, 2023
Valuation Technique
Unobservable Input
Min
Max
Average (2)
(in thousands)
Monument Circle Consolidation
$
20,000
Discounted Cash Flows
Exit Cap Rate
7.50
%
7.50
%
7.50
%
Discount Rate
9.50
%
9.50
%
9.50
%
(1) Classified within Level 3 of the fair value hierarchy.
(2) Unobservable inputs were weighted based on the fair value of the related instrument.
Prior to January 1, 2023, the Company’s relationship with the Sponsored REIT was considered a VIE in which the Company was not the primary beneficiary. The Company’s maximum exposure to losses associated with this VIE was limited to the principal amount outstanding under the loan from the Company to the Sponsored REIT secured by a mortgage on real estate owned by the Sponsored REIT (the “Sponsored REIT Loan”) net of the allowance for credit loss, the related accrued interest receivable and an exit fee receivable, which were in aggregate approximately $ 22.1 million at December 31, 2022. The accrued interest and exit fee receivables are included in prepaid expenses and other assets in the consolidated balance sheet and were approximately $ 2.3 million at December 31, 2022. The relationships and investments related to the Sponsored REIT are summarized in Note 3 .
Real Estate and Depreciation
Real estate assets are stated at cost less accumulated depreciation.
F-14
Table of Contents
The Company allocates the value of real estate acquired among land, buildings and identified intangible assets or liabilities. Costs related to land, building and improvements are capitalized. Typical capital items include new roofs, site improvements, various exterior building improvements and major interior renovations. Costs incurred in connection with leasing (primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period. Routine replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred. Depreciation is computed using the straight-line method over the assets’ estimated useful lives as follows:
Category
Years
Commercial buildings
39
Building improvements
15
-
39
Fixtures and equipment
3
-
7
The Company reviews its properties to determine if their carrying amounts will be recovered from future operating cash flows if certain indicators of impairment are identified at those properties. These indicators may include lower or declining tenant occupancy, weak or declining tenant profitability, cash flows or liquidity, the Company’s decision to dispose of an asset before the end of its estimated useful life or legislative, economic, or market changes that permanently reduce the value of the Company’s investment. If indicators of impairment are present, the Company evaluates the carrying value of the property by comparing it to its expected future undiscounted cash flow. A property’s value is impaired only if management’s estimate of future undiscounted cash flows to be generated by the property over its estimated holding period is less than the carrying value of the property. If there are different potential outcomes for a property, the Company will take a probability weighted approach to estimating future cash flows. If the Company determines that impairment has occurred, the affected assets are reduced to their fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates, capital requirements, estimated holding periods and outcome probabilities that could differ materially from actual results in future periods. Since cash flows are considered on an undiscounted basis in the analysis that the Company conducts to determine whether an asset has been impaired, the Company’s strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized. The Company did not recognize any impairment losses on any assets classified as held and used for the years ended December 31, 2023, 2022 and 2021.
Acquired Real Estate Leases and Amortization
Acquired real estate leases represent costs associated with acquiring an in-place lease (i.e., the market cost to execute a similar lease, including leasing commission, tenant improvements, legal, vacancy and other related costs) and the value relating to leases with rents above the market rate. Amortization is computed using the straight-line method over the term of the leases, which range from 12 months to 154 months . Amortization of these combined components was approximately $ 3.2 million, $ 4.5 million and $ 8.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Amortization related to costs associated with acquiring an in-place lease is included in depreciation and amortization on the consolidated statements of income. Amortization related to leases with rents above the market rate is offset against
the rental revenue in the consolidated statements of income. The estimated annual amortization expense for the five years and thereafter following December 31, 2023 is as follows:
(in thousands)
December 31,
2024
$
2,489
2025
1,718
2026
1,644
2027
389
2028
300
2029 and thereafter
154
F-15
Table of Contents
Acquired Unfavorable Real Estate Leases and Amortization
Acquired unfavorable real estate leases represent the value relating to leases with rents below the market rate. Amortization is computed using the straight-line method over the term of the leases, which range from 12 months to 151 months . Amortization expense was approximately $ 0.1 million, $ 0.2 million and $ 0.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Amortization related to leases with rents below the market rate is included with rental revenue in the consolidated statements of income. The estimated annual amortization for the five years and thereafter following December 31, 2023 is as follows:
(in thousands)
December 31,
2024
$
42
2025
10
2026
8
2027
8
2028
6
2029 and thereafter
13
Asset Held For Sale
Classification of a property as held for sale typically occurs upon the execution of a purchase and sale agreement and belief by management that the sale or disposition is probable of occurrence within one year . Upon determining that a property was held for sale, the Company discontinues depreciating the property and reflects the property in its consolidated balance sheet at the lower of its carrying amount or fair value less the cost to sell. The Company presents the property held for sale on its consolidated balance sheet as “Asset held for sale”. The Company reports the results of operations of its properties sold or held for sale (that do not represent a strategic shift that has, or will have, a major effect on financial results) in its consolidated statements of income through the date of sale.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows.
December 31,
December 31,
(in thousands)
2023
2022
Cash and cash equivalents (1)
$
125,530
$
3,739
Restricted cash
2,350
2,893
Total cash, cash equivalents and restricted cash
$
127,880
$
6,632
(1) Includes $ 2,167 at December 31, 2023, pertaining to Monument Circle, which the Company is unable to utilize for its own operational purposes.
Restricted Cash
Restricted cash consists of tenant security deposits, which are required by law in some states or by contractual agreement to be kept in a segregated account, and escrows arising from property sales. Tenant security deposits are refunded when tenants vacate, provided that the tenant has not damaged the property.
Cash held in escrow is paid based on the terms of the closing agreement for the sale. Restricted cash also may include funds segregated for specific tenant improvements per lease agreements.
F-16
Table of Contents
Tenant Rent Receivables
Tenant rent receivables are expected to be collected within one year . The Company recognizes the effect of a change in its assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income.
Related Party Mortgage Loan Receivable
Management monitors and evaluates the secured loans compared to the expected performance, cash flow and value of the underlying real estate.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, derivatives, related party mortgage loan receivable and accounts receivable. The Company maintains its cash balances principally in two banks which the Company believes to be creditworthy. The Company periodically assesses the financial condition of the banks and believes that the risk of loss is minimal. Cash balances held with various financial institutions frequently exceed the insurance limit of $ 250,000 provided by the Federal Deposit Insurance Corporation. The derivatives that the Company has are from three interest rate swap agreements that are discussed in Note 5. The related party mortgage loan receivable is held with one Sponsored REIT. The Company performs regular evaluations on the extent and impact of any credit deterioration that could affect the performance and value of the secured property, as well as the financial and operating capability of the borrower. The Company performs ongoing credit evaluations of its tenants and requires certain tenants to provide security deposits or letters of credit. Though these security deposits and letters of credit are insufficient to meet the total value of a tenant’s lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting the space. The Company has no single tenant which accounts for more than 10 % of its annualized rent.
Financial Instruments
The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued expenses, accrued compensation, and tenant security deposits approximate their fair values based on their short-term maturity and the bank note and term loans payable approximate their fair values as they bear interest at variable interest rates.
Straight-line Rent Receivable
Certain leases provide for fixed rent increases over the term of the lease. Rental revenue is recognized on a straight-line basis over the related lease term; however, billings by the Company are based on the lease agreements. Straight-line rent receivable, which is the cumulative revenue recognized in excess of amounts billed by the Company, was $ 40.4 million, $ 52.7 million and $ 49.0 million at December 31, 2023, 2022 and 2021, respectively.
Deferred Leasing Commissions
Deferred leasing commissions represent direct and incremental external leasing costs incurred in the leasing of commercial space. These costs are capitalized and are amortized on a straight-line basis over the terms of the related lease agreements. Amortization expense was approximately $ 5.9 million, $ 7.1 million and $ 10.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.
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The estimated annual amortization for the five years and thereafter following December 31, 2023 is as follows:
(in thousands)
December 31,
2024
$
4,466
2025
3,914
2026
3,285
2027
2,883
2028
2,426
2029 and thereafter
6,690
Common Share Repurchases
The Company recognizes the gross cost of the common shares it repurchases as a reduction in stockholders’ equity using the treasury stock method. Maryland law does not recognize a separate treasury stock account but provides that shares repurchased are classified as authorized but unissued shares. Accordingly, the Company reduces common stock for the par value and the excess of the purchase price over the par value is a reduction to additional paid-in capital.
Revenue Recognition
Rental Revenue - The Company has retained substantially all of the risks and benefits of ownership of the Company’s commercial properties and accounts for its leases as operating leases. Rental revenue includes income from leases, certain reimbursable expenses, straight-line rent adjustments and other income associated with renting the property. Rental income from leases, which includes rent concessions (including free rent and other lease inducements) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. The Company does not have any significant percentage rent arrangements with its commercial property tenants. Reimbursable expenses are included in rental income in the period earned. A summary of rental revenue is shown in the following table:
Year Ended
December 31,
(in thousands)
2023
2022
2021
Income from leases
$
103,716
$
107,990
$
148,705
Reimbursable expenses
42,311
49,736
54,825
Straight-line rent adjustment
( 626 )
5,895
4,017
Amortization of favorable and unfavorable leases
45
118
34
$
145,446
$
163,739
$
207,581
Related Party and Other Revenue - Property and asset management fees, interest income on loans and other income are recognized when the related services are performed and the earnings process is complete.
Segment Reporting
The Company is a REIT focused on real estate investments primarily in the office market and currently operates in only one segment: real estate operations.
Income Taxes
Taxes on income for the years ended December 31, 2023, 2022 and 2021 represent taxes incurred by FSP Protective TRS Corp, which is a taxable REIT subsidiary, and the State of Texas franchise tax applicable to FSP Corp., which is classified as an income tax for reporting purposes.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at
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December 31, 2023, 2022 and 2021. The denominator used for calculating basic and diluted net income per share was 103,357,000 , 103,338,000 and 106,667,000 for the years ended December 31, 2023 , 2022 and 2021 , respectively.
Derivative Instruments
The Company recognizes derivatives on the consolidated balance sheets at fair value. Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the consolidated balance sheets as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is recognized in other comprehensive income (“OCI”) and reclassified into the income statement. The Company reviews the effectiveness of each hedging transaction, which involves estimating future cash flows, at least quarterly. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The Company currently has no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes in interest rates and counterparty credit risk. The results of such variability could be a significant increase or decrease in the Company’s derivative assets, derivative liabilities, equity, and/or earnings.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There is also an established fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial assets and liabilities recorded on the consolidated balance sheets at fair value are categorized based on the inputs to the valuation techniques as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity or information. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability including credit risk, which was not significant to the overall value.
These inputs (See Notes 2, 3, 5 and 10) were considered and applied to the Company’s derivative instruments, Sponsored REIT Loan, Sponsored REIT purchase price allocation, and assets held for sale. Level 2 inputs were used to value the interest rate swaps and Level 3 inputs were used to value the Sponsored REIT Loan, assets acquired in the consolidation of the Sponsored REIT and the valuation of certain assets held for sale.
Subsequent Events
In preparing these consolidated financial statements the Company evaluated events that occurred through the date of issuance of these financial statements for potential recognition or disclosure.
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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 requirement 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 that the adoption of ASU 2023-06 will have a material impact on the consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires public entities to disclose significant segment expense and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. The guidance in ASU 2023-07 is applied retrospectively to all periods presented in the financial statements and is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not anticipate that the adoption of ASU 2023-07 will have a material impact on the consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 enhances the transparency and decision usefulness of income tax disclosures and disclosures about income taxes paid. The guidance in ASU 2023-09 should be applied prospectively but may be applied retrospectively for each period presented. ASU 2023-09 is effective for public entities for fiscal years beginning after December 15, 2024. The Company does not anticipate that the adoption of ASU 2023-09 will have a material impact on the consolidated financial statements .
3. Related Party Transactions and Investments in Non-Consolidated Entities
Investment in Sponsored REITs
The Company held a common stock interest in 1 , 1 and 2 sponsored REITs at December 31, 2023, 2022 and 2021, respectively. The Company held a non-controlling preferred stock investment in two sponsored REITs, FSP 303 East Wacker Drive Corp. (“East Wacker”) and FSP Grand Boulevard Corp. (“Grand Boulevard”), each of which were liquidated during the three months ended September 30, 2018.
Equity in income (loss) of investments in non-consolidated REITs were derived from the Company’s share of income or loss in the operations of those entities and includes gain or loss on liquidation. The Company exercised influence over, but did not control these entities, and investments were accounted for using the equity method.
Equity in income of investment in non-consolidated REITs:
The following table includes equity in income of investments in non-consolidated REITs:
Year Ended
December 31,
(in thousands)
2021
Equity in income of East Wacker
$
421
Total
$
421
Equity in income of East Wacker was derived from the Company’s preferred stock investment in the entity. In December 2007, the Company purchased 965.75 preferred shares or 43.7 % of the outstanding preferred shares, of East Wacker. On September 24, 2018, the property owned by East Wacker was sold at a gain. On October 6, 2021, the Company received a liquidating distribution of $ 0.4 million, which is included in equity in income of non-consolidated
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REITs on the consolidated statements of income. The following table includes distributions received from non-consolidated REITs:
Year Ended
December 31,
(in thousands)
2021
Distributions from East Wacker
$
421
$
421
Non-consolidated REITs
At December 31, 2022, the Company held a non-controlling common stock interest in one Sponsored REIT.
Management fees and interest income from loans:
Asset management fees range from 1 % to 5 % of collected rents, and the applicable contracts are cancelable with 30 day notice. Asset management fee income from non-consolidated entities amounted to approximately $ 0 , $ 28,000 and $ 61,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
Prior to the consolidation of Monument Circle on January 1, 2023, the Company held the Sponsored REIT Loan, which was reported in the balance sheet as a related party mortgage loan receivable. The Company reviewed the need for an allowance under the current expected credit loss model for the Sponsored REIT Loan at each reporting period. The measurement of expected credit losses was based upon historical experiences, current conditions, and reasonable and supportable forecasts that affected the collectability of the reported amount. The Company had elected to apply the practical expedient for financial assets secured by collateral in instances where the borrower was experiencing financial difficulty and repayment of the Sponsored REIT Loan was expected to be provided substantially through operation or sale of the collateral. The Company used the fair value of the collateral at the reporting date and an adjustment to the allowance for expected credit losses was recorded when the amortized cost basis of the financial asset exceeded the fair value of the collateral, less costs to sell.
The Company regularly evaluated the extent and impact of any credit deterioration that could affect performance and the value of the secured property, as well as the financial and operating capability of the borrower. A property’s operating results and existing cash balances were considered and used to assess whether cash flows from operations were sufficient to cover the current and future operating and debt service requirements. The Company also evaluated the borrower’s competency in managing and operating the secured property and considered the overall economic environment, real estate sector and geographic sub-market in which the secured property was located. The Company applied normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.
The Company recognized interest income and fees from the Sponsored REIT Loan of approximately $ 0.0 million, $ 1.8 million and $ 1.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.
On October 29, 2021, the Company agreed to amend and restate the Sponsored REIT Loan to extend the maturity date from December 6, 2022 to June 30, 2023 and to advance an additional $ 3.0 million tranche of indebtedness to FSP Monument Circle LLC with the same June 30, 2023 maturity date, effectively increasing the aggregate principal amount of the Sponsored REIT Loan from $ 21 million to $ 24 million. In addition, the Company agreed to defer all principal and interest payments due under the Sponsored REIT Loan until the maturity date. As part of its consideration for agreeing to amend and restate the Sponsored REIT Loan, the Company obtained from the stockholders of the parent of 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. The amended and restated Sponsored REIT Loan qualified as a troubled debt restructuring. There were no commitments to lend additional funds to the Sponsored REIT. On June 26, 2023, the Sponsored REIT Loan maturity was extended to September 30, 2023. On September 26, 2023, the Sponsored REIT Loan maturity was extended to September 30, 2024.
As of December 31, 2021 and 2020, the Company did not have an allowance for credit losses recorded on the consolidated balance sheet. The Company recorded a $ 4.2 million increase in its provision for credit losses during the
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year ended December 31, 2022. The change in the allowance for credit losses during the year ended December 31, 2022 is primarily due to the deterioration within the current real estate market, changes to key assumptions applied within the Company’s financial model to reflect these market changes, such as the exit capitalization and discount rates, and due to an increase in the accrued interest receivable balance. The Company recorded a $ 4.2 million decrease in its provision for credit losses during the year ended December 31, 2023. The change in the allowance for credit losses during the year ended December 31, 2023 is due to the consolidation of Monument Circle. The following table presents a roll-forward of the Company’s allowance for credit losses.
For the Year Ended December 31,
(In thousands)
2023
2022
2021
Beginning allowance for credit losses
$
( 4,237 )
$
—
$
—
Additional increases to the allowance for credit losses
—
( 4,237 )
—
Reductions to the allowance for credit losses
4,237
—
Ending allowance for credit losses
$
—
$
( 4,237 )
$
—
The following is quantitative information about significant unobservable inputs in our Level 3 measurement of the collateral of the Sponsored REIT Loan measured at fair value on a nonrecurring basis at December 31, 2022:
Fair Value (1) at
Significant
Range
Weighted
Description
December 31, 2022
Valuation Technique
Unobservable Input
Min
Max
Average (2)
(in thousands)
Sponsored REIT Loan
$
19,763
Discounted Cash Flows
Exit Cap Rate
7.50
%
7.50
%
7.50
%
Discount Rate
9.50
%
9.50
%
9.50
%
(1) Classified within Level 3 of the fair value hierarchy.
(2) Unobservable inputs were weighted based on the fair value of the related instrument.
4. Bank Note Payable, Term Note Payable and Private Placements
JPM Term Loan
On August 2, 2018, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (the “JPM Credit Agreement”), which provides a single unsecured bridge loan in the aggregate principal amount of $ 150 million (the “JPM Term Loan”). On December 24, 2020 the Company repaid a $ 50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, and $ 100 million remained fully advanced and outstanding under the JPM Term Loan. On June 4, 2021, the Company repaid the remaining $ 100 million outstanding on the loan, which had been scheduled to mature on November 30, 2021, and incurred a loss on extinguishment of debt of $ 0.1 million related to unamortized deferred financing costs.
Although the interest rate on the JPM Term Loan was variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $ 100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44 % per annum on a $ 100 million portion of the JPM Term Loan until November 30, 2021. On June 4, 2021, the Company paid approximately $ 1.2 million to terminate the interest rate swap, which was scheduled to mature on November 30, 2021.
BMO Term Loan
On 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
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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”). Subsequent to December 31, 2023, on February 21, 2024, the BMO Credit Agreement was further amended. See Note 11 in these Consolidated Financial Statements for additional disclosure regarding the amendment. Unless otherwise indicated, all of the information in this description of the BMO Term Loan is as of December 31, 2023 and does not reflect the terms of the amendment that we entered into on February 21, 2024. In connection with the BMO First Amendment, the Company repaid a $ 40 million portion of the remaining balance of the BMO Term Loan, so that $ 125 million principal amount remained outstanding. On August 10, 2023, the Company repaid an additional $ 10 million of this loan, so that $ 115 million principal amount remained outstanding under the BMO Term Loan as of December 31, 2023. On or before April 1, 2024, the Company is required to repay an additional $ 15 million of the BMO Term Loan. The remaining balance of the BMO Term Loan matures on October 1, 2024.
Effective February 10, 2023 upon entering into the BMO First Amendment, the BMO Term Loan bears interest at either (i) 300 basis points over one , three or six month term SOFR, plus a corresponding adjustment of 0.11448 %, 0.26161 % or 0.42826 %, respectively, or (ii) 200 basis points over the base rate. Prior to February 10, 2023, the BMO Term Loan bore interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating ( 165 basis points over LIBOR at December 31, 2022) or (ii) a number of basis points over the base rate depending on the Company’s credit rating ( 65 basis points over the base rate at December 31, 2022).
As of December 31, 2023, the interest rate on the BMO Term Loan was 8.47 % 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 December 31, 2023 was approximately 8.11 % 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, the Company terminated all outstanding interest rate swaps applicable to the BMO Term Loan and, on February 10, 2023, the Company received an aggregate of approximately $ 4.3 million as a result of such terminations, 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 the Company’s 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
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documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BMO Term Loan financial covenants as of December 31, 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. Subsequent to December 31, 2023, on February 21, 2024, the BofA Credit Agreement was further amended. See Note 11 in these Consolidated Financial Statements for additional disclosure regarding the amendment. Unless otherwise indicated, all of the information in this description of the BofA Revolver is as of December 31, 2023 and does not reflect the terms of the amendment that we entered into on February 21, 2024. 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 was reduced to $ 125 million and, effective April 1, 2024, availability under the BofA Revolver will be further reduced to $ 100 million. As of December 31, 2023 there were borrowings of $ 90 million drawn and outstanding under the BofA Revolver, 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 December 31, 2023, the interest rate on the BofA Revolver was 8.47 % per annum. The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through December 31, 2023 was approximately 8.05 % 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 the Company’s 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
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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 December 31, 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.
The Company may use the net proceeds of the BofA Revolver for permitted investments, working capital and other general business purposes, including for building improvements, tenant improvements and leasing commissions, in each case to the extent permitted under the BofA Credit Agreement.
Former BofA Credit Facility
On July 21, 2016, the Company entered into a First Amendment (the “BofA First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BofA Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and BofA, as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BofA First Amendment and the BofA Second Amendment, the “Former BofA Credit Facility”) that continued an existing unsecured revolving line of credit (the “Former BofA Revolver”) and an existing term loan (the “Former BofA Term Loan”). Effective simultaneously with the closing of the 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.
For purposes of the Former BofA Credit Facility, base rate meant, for any day, a fluctuating rate per annum equal to the highest of: (i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50 %, and (iii) the one month LIBOR based rate for such day plus 1.00 %. As of December 31, 2022, the Company’s credit rating from Moody’s Investors Service was Ba1.
As of December 31, 2021, and during 2022, there were no borrowings under the Former BofA Revolver. The weighted average interest rate on all amounts outstanding on the Former BofA Revolver during the year ended December 31, 2021 was approximately 1.33 % per annum.
Former BofA Term Loan Highlights
● The Former BofA Term Loan was repaid in its entirety on September 6, 2022.
● The original principal amount of the 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 on extinguishment of debt of $ 0.1 million related to unamortized deferred financing costs. As of December 31, 2022, there was no balance outstanding under the Former BofA Term Loan.
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The Former BofA Term Loan bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating ( 1.75 % over LIBOR at the date of repayment on September 6, 2022) or (ii) a margin over the base rate depending on the Company’s credit rating ( 0.75 % over the base rate at the date of repayment on September 6, 2022).
The interest rate on the Former BofA Term Loan was variable through the date of repayment on September 6, 2022. Previously the Company had fixed the base LIBOR interest rate on the Former BofA Term Loan by entering into interest rate swap transactions. On July 22, 2016, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the Former BofA Term Loan at 1.12 % per annum for the period beginning on September 27, 2017 and ended on September 27, 2021. The weighted average variable interest rate on all amounts outstanding under the Former BofA Term Loan through the date of repayment on September 6, 2022, was approximately 2.65 % per annum. Based upon the Company’s credit rating, as of December 31, 2021, the interest rate on the Former BofA Term Loan was 1.84 % per annum. The weighted average variable interest rate on all amounts outstanding under the Former BofA Term Loan after the expiration of the interest rate swaps, on September 27, 2021, during the period from September 28 through December 31, 2021, was approximately 1.85 % per annum.
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 the proceeds were used to reduce the outstanding balance of the Former BofA Revolver. Subsequent to December 31, 2023, on February 21, 2024, the Note Purchase Agreement was further amended. See Note 11 in these Consolidated Financial Statements for additional disclosure regarding the amendment. Unless otherwise indicated, all of the information in this description of the Senior Notes is as of December 31, 2023 and does not reflect the terms of the amendment that we entered into on February 21, 2024.
The Senior Notes bear interest depending on the Company’s credit rating. As of December 31, 2023, the Series A Notes bore interest at 4.49 % per annum and the Series B Notes bear interest at 4.76 % per annum.
The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BofA Credit Agreement and the BMO Credit Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50 ; a maximum leverage ratio and an unsecured leverage ratio of no more than 60 % ( 65 % if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. The Company was in compliance with the Senior Notes financial covenants as of December 31, 2023.
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5. Financial Instruments: Derivatives and Hedging
On July 22, 2016, the Company entered into interest rate swap transactions that fixed the interest rate for the period beginning on September 27, 2017 and ended on September 27, 2021 on the Former BofA Term Loan (the “2017 Interest Rate Swap”). On March 7, 2019, the Company entered into interest rate swap transactions that fixed the interest rate for the period beginning on March 29, 2019 and ended on November 30, 2021 on a $ 100 million portion of the JPM Term Loan (the “2019 JPM Interest Rate Swap”). On February 20, 2019, the Company entered into interest rate swap transactions that fixed the interest rate for the period beginning August 26, 2020 and ending January 31, 2024 on the BMO Term Loan (the “2019 BMO Interest Rate Swap”). The variable rates that were fixed under the 2019 BMO Interest Rate Swap is described in Note 4. On February 8, 2023, the Company terminated the 2019 BMO Interest Rate Swap applicable to the BMO Term Loan and, on February 10, 2023, the Company received an aggregate of approximately $ 4.3 million as a result of such terminations, of which approximately $ 0.1 million related to interest receivable. The variable rates that were fixed under the 2017 Interest Rate Swap, the 2019 JPM Interest Rate Swap and the 2019 BMO Interest Rate Swap (collectively referred to as the “Interest Rate Swaps”) are described in Note 4. As of December 31, 2023, there were no derivative instruments.
On June 4, 2021, the Company paid approximately $ 1.2 million to terminate the 2019 JPM Interest Rate Swap that was scheduled to mature on November 30, 2021 and approximately $ 0.6 million to terminate a portion of the 2019 BMO Interest Rate Swap that was scheduled to mature on November 30, 2021. As a result of the terminations, approximately $ 1.9 million of the balance held in accumulated other comprehensive income (loss) was reclassified into earnings. The JPM Term Loan and a portion of the BMO Term Loan related to these interest rate swaps was also repaid on June 4, 2021, which is described in Note 4.
The Interest Rate Swaps qualified as cash flow hedges and have been recognized on the consolidated balance sheets at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be recognized in earnings in the same period in which the hedged interest payments affect earnings, which may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.
The following table summarizes the notional and fair value of the Company’s derivative financial instrument at December 31, 2022. The notional value is an indication of the extent of the Company’s involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks.
Notional
Strike
Effective
Expiration
Fair Value (1) at
(in thousands)
Value
Rate
Date
Date
December 31, 2023
December 31, 2022
2019 BMO Interest Rate Swap
$
165,000
2.39
%
Aug-20
Jan-24
$
—
$
4,358
(1) Classified within Level 2 of the fair value hierarchy.
The 2019 BMO Interest Rate Swap was reported as an asset with a fair value of approximately $ 4.4 million at December 31, 2022. The balance is included in other assets: derivative asset in the consolidated balance sheet at December 31, 2022.
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The gain/(loss) on the Company’s Interest Rate Swaps that was recorded in OCI and the accompanying consolidated statements of income as a component of interest expense for the years ended December 31, 2023, 2022 and 2021, respectively, was as follows:
(in thousands)
Year Ended December 31,
Interest Rate Swaps in Cash Flow Hedging Relationships:
2023
2022
2021
Amounts of gain recognized in OCI
$
177
$
8,451
$
3,786
Amounts of previously recorded gain (loss) reclassified from OCI into Interest Expense
$
4,180
$
( 1,146 )
$
( 8,286 )
Total amount of Interest Expense presented in the consolidated statements of operations
$
24,318
$
22,808
$
32,273
Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. The Company estimates that approximately $ 0.4 million of the current balance held in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.
The Company hedged the exposure to variability in anticipated future interest payments on existing debt.
The BMO Term Loan, Former BofA Term Loan and JPM Term Loan hedging transactions used derivative instruments that involved certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates would cause a significant loss of basis in either or both of the contracts. The Company required its derivatives contracts to be with counterparties that have investment grade ratings. As a result, the Company did not anticipate that any counterparty would fail to meet its obligations. However, there was no assurance that the Company would be able to adequately protect against the foregoing risks or that it would ultimately realize an economic benefit that exceeded the related amounts incurred in connection with engaging in such hedging strategies.
The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk. The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the consolidated balance sheets.
The Company’s derivatives are recorded at fair value in other assets: derivative asset and other liabilities: derivative liability in the consolidated balance sheets and the effective portion of the derivatives’ fair value is recorded to other comprehensive income in the consolidated statements of other comprehensive income (loss).
6. Stockholders’ Equity
Equity-Based Compensation
On May 20, 2002, the stockholders of the Company approved the 2002 Stock Incentive Plan (the “Plan”). The Plan is an equity-based incentive compensation plan, and provides for the grants of up to a maximum of 2,000,000 shares of the Company’s common stock (“Awards”). All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted Awards. Awards under the Plan are made at the discretion of the Company’s Board of Directors, and have no vesting requirements. Upon granting an Award, the Company will recognize compensation cost equal to the fair value of the Company’s common stock, as determined by the Company’s Board of Directors, on the date of the grant.
On May 18, 2023, May 17,2022 and May 20, 2021, the Company granted shares under the Plan to non-employee directors at a compensation cost related to such grants indicated in the table below, which was recognized during the
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years ended December 31, 2023, 2022 and 2021, respectively, and is included in general and administrative expenses in the consolidated statements of income. Such shares were fully vested on the date of issuance.
Shares Available
Compensation
for Grant
Cost
Balance December 31, 2020
1,847,384
$
675,000
Shares granted 2021
( 66,564 )
337,500
Balance December 31, 2021
1,780,820
1,012,500
Shares granted 2022
( 84,133 )
393,750
Balance December 31, 2022
1,696,687
$
1,406,250
Shares granted 2023
( 194,439 )
314,991
Balance December 31, 2023
1,502,248
$
1,721,241
Repurchase of Common Stock
On June 23, 2021, the Board of Directors of the Company authorized the repurchase of up to $ 50 million of the Company’s common stock from time to time in the open market, privately negotiated transactions or other manners as permitted by federal securities laws. The repurchase authorization may be suspended or discontinued at any time. The Company repurchased 3,396,243 shares of common stock during the third and fourth quarter of 2021 at an aggregate cost of approximately $ 18.2 million and at an average cost of approximately $ 5.37 per share, inclusive of brokerage commissions. The Company repurchased 846,739 shares of common stock during the first quarter of 2022 at an aggregate cost of approximately $ 4.8 million and at an average cost of approximately $ 5.72 per share, inclusive of brokerage commissions. The Company did not repurchase any shares of common stock during the remainder of 2022 or in 2023. On February 10, 2023, the Company announced it had discontinued the previous repurchase authorization made on June 23, 2021. The excess of the purchase price over the par value of the shares repurchased is applied to reduce additional paid-in capital.
A summary of the repurchase of common stock by the Company is shown in the following table:
(Cost in thousands)
Shares Repurchased
Cost
Balance December 31, 2020
1,017,498
$
18,775
Repurchase of shares
3,396,243
18,244
Balance, December 31, 2021
4,413,741
$
37,019
Repurchase of shares
846,739
4,843
Balance, December 31, 2022
5,260,480
$
41,862
7. Federal Income Tax Reporting
General
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10 % of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”). In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20 % ( 25 % of taxable years beginning on or before December 31, 2017) of the value of all of the Company’s assets and, when considered together with other non-
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real estate assets, cannot exceed 25 % of the value of all of the Company’s assets. FSP Investments LLC and FSP Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code. The TRSs have gross amounts of net operating losses (“NOLs”) available to those taxable corporations of $ 4.9 million and $ 4.9 million as of December 31, 2023 and 2022, respectively. The NOLs created prior to 2018 will expire between 2030 and 2047 and the NOLs generated after 2017 will not expire. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured.
Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.
The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company and one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2020 and thereafter.
The Company is subject to a business tax known as the Revised Texas Franchise Tax. Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax. The Company recorded a provision for the Revised Texas Franchise Tax of $ 0.3 million, $ 0.2 million and $ 0.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Net operating losses
Section 382 of the Code restricts a corporation’s ability to use net operating losses (“NOLs”) to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Company’s prior sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. Approximately $ 0.7 million of NOLs expired in 2023 and approximately $ 0.1 million of NOLs expired in 2021. The Company used approximately $ 11.1 million of NOLs in 2021 to offset federal net taxable capital gains resulting from the sale of properties in 2021, therefore approximately $ 11.1 million of valuation allowances were reversed in 2021. A valuation allowance is provided for the full amount of the gross NOLs available as the realization of any tax benefits remaining from such NOLs is not assured. The gross amount of NOLs available to the Company was approximately $ 29.7 million and $ 1.7 million as of December 31, 2023 and 2022, respectively, with full valuation allowances.
Income Tax Expense
The income tax expense reflected in the consolidated statements of income relates primarily to state income taxes as a result of some states that limit the use of net operating losses, which are in Other Taxes, and to a lesser extent, the Revised Texas Franchise Tax. FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties.
For the Year Ended December 31,
(Dollars in thousands)
2023
2022
2021
Revised Texas Franchise Tax
$
279
$
239
$
234
Other Taxes
—
( 35 )
404
Tax expense
$
279
$
204
$
638
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Taxes on income are a current tax expense. No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.
At December 31, 2023, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $ 144.4 million and at December 31, 2022, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $ 156.7 million.
Tax Components
The following summarizes the tax components of the Company’s common distributions paid per share for the years ended December 31, 2023, 2022 and 2021:
2023
2022
2021
Per Share
%
Per Share
%
Per Share
%
Ordinary income
$
—
—
%
$
—
—
%
$
—
—
%
Capital gain
—
—
%
0.14
70
%
0.68
100
%
Return of capital
0.04
100
%
0.06
30
%
—
—
%
Total
$
0.04
100
%
$
0.20
100
%
$
0.68
100
%
8. Leases
Leases as a Lessee:
The Company entered into a noncancelable contract with a third party to obtain office space that commenced on September 1, 2010. The contract was amended on October 25, 2016 to extend the contract through September 30, 2024. As of December 31, 2023, the Company’s right-of-use asset was $ 0.3 million, which is included in prepaid and other assets on the consolidated balance sheet as of December 31, 2023. A discount rate equal to the Company’s incremental borrowing rate was applied to the future monthly contractual lease payments remaining as of December 31, 2023 to compute the lease liability. The incremental borrowing rate is the rate equal to the closest borrowing under the BofA Revolver at the time of the Company’s adoption of ASU 2016-02.
Lease Costs
For the Year Ended December 31,
(in thousands)
2023
2022
2021
Operating lease cost
$
419
$
419
$
419
$
419
$
419
$
419
Other information
Cash paid for amounts included in the measurement of lease liabilities
$
447
$
438
$
429
Weighted average remaining lease terms in years - operating leases
0.75
1.75
2.75
Weighted average discount rate - operating leases
3.86 %
3.86 %
3.86 %
Maturity analysis for liabilities
Total
Undiscounted
(in thousands)
Cash Flows
Discount rate at commencement
3.86 %
2024
$
340
$
340
Present value lease liability
$
334
Difference between undiscounted cash flows and discounted cash flows
$
6
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Leases as a Lessor:
The Company is a lessor of commercial real estate with operations that include the leasing of office and industrial properties. Many of the leases with customers contain options to extend leases at a fair market rate and may also include options to terminate leases. The Company considers several inputs when evaluating the amount it expects to derive from its leased assets at the end of the lease terms, such as the remaining useful life, expected market conditions, fair value of lease payments, expected fair values of underlying assets, and expected deployment of the underlying assets. The Company’s strategy to address its risk for the residual value in its commercial real estate is to re-lease the commercial space.
The Company has elected to apply the practical expedient to not separate non-lease components from the related lease component of real estate leases. This combined component is primarily comprised of fixed lease payments, early termination fees, common area maintenance cost reimbursements, and parking lease payments. The Company applies ASC 842, Leases, to the combined lease and non-lease components.
For the years ended December 31, 2023, 2022 and 2021, the Company recognized the following amounts of income relating to lease payments:
Income relating to lease payments:
For the Year Ended December 31,
(in thousands)
2023
2022
2021
Income from leases (1)
$
146,027
$
157,719
$
203,530
$
146,027
$
157,719
$
203,530
Undiscounted Cash Flows
Year ending
(in thousands)
December 31,
2024
86,936
2025
78,662
2026
70,489
2027
60,660
2028
54,527
2029 and thereafter
162,594
$
513,868
(1) Includes amounts recognized from variable lease payments of $ 42,311 , $ 49,730 and $ 54,825 for the years ended December 31, 2023, 2022 and 2021, respectively.
9. Retirement Plan
In 2006, the Company established a 401(k) plan to cover eligible employees, which permitted deferral of up to $ 17,000 per year (indexed for inflation) into the 401(k) plan, subject to certain limitations imposed by the Internal Revenue Code. An employee’s elective deferrals are immediately vested upon contribution to the 401(k) plan. The Company matches employee contributions to the 401(k) plan dollar for dollar up to 3 % of each employee’s annual compensation up to $ 200,000 . In addition, we may elect to make an annual discretionary profit-sharing contribution. The Company’s total contribution under the 401(k) plan amounted to $ 0.1 million, $ 0.1 million and $ 0.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.
10. Dispositions of Property
In 2021, the Company determined that further debt reduction would provide greater financial flexibility and potentially increase shareholder value. Accordingly, the Company adopted a strategy to dispose of certain properties where it believes valuation potential has been reached.
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In 2023, the Company 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. The Company used the proceeds of the disposition principally to repay a portion of outstanding indebtedness. The Company sold one office property located in Charlotte, North Carolina on August 9, 2023 for a sales price of $ 9.2 million, at a loss of $ 0.8 million. During the three months ended September 30, 2023, the Company recorded a gain on sale of $ 53,000 as a result of conveying approximately 7,826 square feet of land at the Company’s Addison, Texas property to the Town of Addison as part of a road revitalization project.
During the three months ended September 30, 2023, the Company reclassified $ 96.4 million of its office properties in Miami, Florida and Atlanta, Georgia as assets held for sale as of September 30, 2023. The Company recorded these properties at the fair value less cost to sell, which was less than the carrying value and resulted in an impairment of $ 39.7 million in the three months ended September 30, 2023. The reclassification was a non-cash investing activity on the statement of cash flows. The Company estimated the fair value of these properties, less estimated costs to sell, using the offers to purchase the properties made by third parties (Level 3 inputs, as there is no active market).
During the three months ended September 30, 2023, the Company entered into an agreement to sell a property in Plano, Texas for a gross sales price of approximately $ 48.0 million at an expected gain of $ 10.6 million. The Company reclassified $ 36.2 million of this office property as an asset held for sale as of September 30, 2023. The reclassification was a non-cash investing activity on the statement of cash flows. On October 26, 2023, the Company completed the sale of the property located in Plano, Texas for a sales price of $ 48.0 million at a gain of approximately $ 10.6 million. On December 6, 2023, the Company sold another of the assets held for sale, an office property located in Miami, Florida for a sales price of $ 68.0 million at a loss of approximately $ 18.9 million.
The asset held for sale located in Atlanta, Georgia, was expected to sell for a sales price of $ 40.0 million at a loss of approximately $ 20.5 million, which was recorded as an impairment as of September 30, 2023, however on November 15, 2023, the Company received notice from the buyer indicating that the buyer was terminating the transaction and directing the deposit and interest be disbursed to the Company. At December 31, 2023, the office property remained classified on the consolidated balance sheet as an asset held for sale in the amount of $ 39.0 million and was comprised of $ 52.2 million of real estate assets, net of accumulated depreciation, $ 4.4 million of straight-line rents receivable, and $ 2.9 million of deferred leasing commissions, net of accumulated amortization. The Company expects the property will be sold within the next twelve months.
During the three months ended September 30, 2023, the Company entered into a purchase and sale agreement, which was subsequently amended, to sell a property located in Richardson, Texas for a sales price of $ 35.0 million. During the three months ended December 31, 2023, the Company recorded this property at the fair value less cost to sell, which was less than the carrying value and resulted in an impairment of $ 2.1 million. The Company reclassified $ 34.4 million of this office property as an asset held for sale, which comprised of $ 31.1 million in real estate assets, net of accumulated depreciation, $ 3.4 million in straight-line rents receivable, and $ 2.0 million in deferred leasing commissions, net of accumulated amortization.
In 2022, the Company sold two office properties located in Broomfield, Colorado on August 31, 2022 for an aggregate sales price of $ 102.5 million, at a gain of approximately $ 24.1 million. The Company sold an office property located in Evanston, Illinois on December 28, 2022 for a sales price of $ 27.8 million, at a gain of approximately $ 3.9 million. The Company used the proceeds of the dispositions principally to repay outstanding indebtedness.
In 2021, the Company sold three office properties located in Atlanta, Georgia on May 27, 2021 for an aggregate sales price of approximately $ 219.5 million, at a net gain of approximately $ 22.8 million. The Company also sold an office property in Dulles, Virginia on June 29, 2021 for a sales price of approximately $ 17.3 million, at a loss of $ 2.1 million. The Company sold an office property located in Indianapolis, Indiana on August 31, 2021 for a sales price of approximately $ 35 million, at a loss of approximately $ 1.7 million. The Company sold two office properties located in Chesterfield, Missouri on September 23, 2021 for an aggregate sales price of approximately $ 67 million, at a gain of approximately $ 10.3 million. The Company sold an office property in Atlanta, Georgia on October 22, 2021, for a sales price of approximately $ 223.9 million, at a gain of approximately $ 86.8 million. The Company sold two office properties located in Chantilly, Virginia on November 16, 2021 for an aggregate sales price of $ 40 million, at a loss of $ 2.9 million.
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The Company concluded the dispositions did not represent a strategic shift and reports the results of operations of its properties in its consolidated statements of operations, which includes rental income, rental operating expenses, real estate taxes and insurance and depreciation and amortization.
The operating results for the properties that the Company disposed of or classified as assets held for sale are summarized below:
Year ended December 31,
(in thousands)
2023
2022
2021
Rental revenue
$
27,157
$
43,025
$
84,179
Rental operating expenses
( 8,449 )
( 13,256 )
( 23,547 )
Real estate taxes and insurance
( 4,103 )
( 10,228 )
( 17,150 )
Depreciation and amortization
( 7,206 )
( 14,656 )
( 27,025 )
Income from dispositions and assets held for sale
$
7,399
$
4,885
$
16,457
11. Subsequent Events
On January 12, 2024, the Board of Directors of the Company declared a cash distribution of $ 0.01 per share of common stock payable on February 15, 2024 to stockholders of record on January 26, 2024.
On January 26, 2024, the Company sold a property located in Richardson, Texas for $ 35 million at a loss of approximately $ 2.1 million, which was recorded as an impairment as of December 31, 2023.
On February 21, 2024, the Company amended the BofA Revolver (now known as the “BofA Term Loan”) by entering into a Second Amendment to Credit Agreement with the lending institutions party thereto (the “BofA Second Amendment”). The BofA Second Amendment amended the Credit Agreement dated January 10, 2022 (the “Original BofA Credit Agreement”), as amended by the First Amendment to Credit Agreement dated February 10, 2023 (the “BofA First Amendment”), to, among other things: (1) extend the maturity date from October 1, 2024 to April 1, 2026; (2) convert borrowings from being either revolving loans or letters of credit to a term loan; (3) change the interest rate from 300 basis points over SOFR (Secured Overnight Financing Rate) to 300 basis points over SOFR with a floor on SOFR of 500 basis points; (4) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $ 200 million, the spread over SOFR will permanently increase by 100 basis points from 300 basis points to 400 basis points; (5) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556 % to the BMO Term Loan; (b) 20.00000 % to the BofA Term Loan; (c) 44.44444 % to the Senior Notes; and (d) the remaining 10 % to be retained by the Company; (6) require that, within 90 days of the February 21, 2024 effective date of the BofA Second Amendment, certain of the Company’s subsidiaries guarantee the BofA Term Loan; (7) require that, within 90 days of the February 21, 2024 effective date of the BofA Second Amendment, the Company pledge its equity interests in certain of the Company’s subsidiaries as collateral for the BofA Term Loan; (8) reduce the Company’s minimum fixed charge coverage ratio from 1.50 x to 1.25 x; and (9) reduce the Company’s minimum unsecured interest coverage ratio from 1.75 x to 1.25 x. On February 21, 2024, as part of the BofA Second Amendment, the Company repaid an approximately $ 22.7 million portion of the BofA Revolver so that approximately $ 67.3 million remains outstanding under the BofA Term Loan.
On February 21, 2024, the Company amended the BMO Term Loan by entering into a Second Amendment to Second Amended and Restated Credit Agreement with Bank of Montreal and the other lending institutions party thereto (the “BMO Second Amendment”). The BMO Second Amendment amended the Second Amended and Restated Credit Agreement dated September 27, 2018 (the “Original BMO Credit Agreement”), as amended by the First Amendment to Second Amended and Restated Credit Agreement dated February 10, 2023 (the “BMO First Amendment”), to, among other things: (1) extend the maturity date from October 1, 2024 to April 1, 2026; (2) change the interest rate from either 300 basis points over SOFR or 200 basis points over the base rate to either 300 basis points over SOFR with a floor on SOFR of 500 basis points or 200 basis points over the base rate with a floor on the base rate of 600 basis points; (3)
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provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $ 200 million, the spread over SOFR or the base rate, as applicable, will permanently increase by 100 basis points from 300 basis points to 400 basis points in the case of SOFR, and from 200 basis points to 300 basis points in the case of the base rate; (4) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556 % to the BMO Term Loan; (b) 20.00000 % to the BofA Term Loan; (c) 44.44444 % to the Senior Notes; and (d) the remaining 10 % to be retained by the Company; (5) require that, within 90 days of the February 21, 2024 effective date of the BMO Second Amendment, certain of the Company’s subsidiaries guarantee the BMO Term Loan; (6) require that, within 90 days of the February 21, 2024 effective date of the BMO Second Amendment, the Company pledge its equity interests in certain of the Company’s subsidiaries as collateral for the BMO Term Loan; (7) reduce the Company’s minimum fixed charge coverage ratio from 1.50 x to 1.25 x; and (8) reduce the Company’s minimum unsecured interest coverage ratio from 1.75 x to 1.25 x. On February 21, 2024, as part of the BMO Second Amendment, the Company repaid an approximately $ 29.0 million portion of the BMO Term Loan so that approximately $ 86.0 million remains outstanding.
On February 21, 2024, the Company amended the Senior Notes by entering into a First Amendment to Note Purchase Agreement (the “NPA First Amendment”) with the purchasers party thereto. The NPA First Amendment amended the Note Purchase Agreement dated October 24, 2017 (the “Original Note Purchase Agreement”) to, among other things: (1) extend the maturity date of the Series A Notes from December 20, 2024 to April 1, 2026; (2) shorten the maturity date of the Series B Notes from December 20, 2027 to April 1, 2026; (3) increase the interest rate applicable to the Series A Notes from 4.49 % per annum to 8.00 % per annum; (4) increase the interest rate applicable to the Series B Notes from 4.76 % per annum to 8.00 % per annum; (5) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $ 200 million, the per annum interest rates applicable to the Series A Note and the Series B Notes will permanently increase by 1.00 % from 8.00 % per annum to 9.00 % per annum; (6) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556 % to the BMO Term Loan; (b) 20.00000 % to the BofA Term Loan; (c) 44.44444 % to the Senior Notes; and (d) the remaining 10 % to be retained by the Company; (7) require that, within 90 days of the February 21, 2024 effective date of the NPA First Amendment, certain of the Company’s subsidiaries guarantee the Senior Notes; (8) require that, within 90 days of the February 21, 2024 effective date of the NPA First Amendment, the Company pledge its equity interests in certain of the Company’s subsidiaries as collateral for the Senior Notes; and (9) conform all financial covenants and negative covenants in the Note Purchase Agreement with the BofA Credit Agreement and the BMO Credit Agreement. On February 21, 2024, as part of the NPA First Amendment, the Company repaid an approximately $ 29.2 million portion of the Series A Notes so that approximately $ 86.8 million of the Series A Notes remains outstanding. In addition, on February 21, 2024, as part of the NPA First Amendment, the Company repaid an approximately $ 21.2 million portion of the Series B Notes so that approximately $ 62.8 million of the Series B Notes remains outstanding.
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Schedule II
Franklin Street Properties Corp.
Valuation and qualifying accounts:
Additions
(Decreases)
Balance at
charged to
Balance
(in thousands)
beginning
costs and
at end
Classification
of year
expenses
Deductions
of year
Allowance for doubtful accounts
2021
$
505
157
( 129 )
533
2022
533
( 38 )
( 478 )
17
2023
17
( 9 )
—
8
Allowance for credit losses
2021
$
—
—
—
—
2022
—
4,237
—
4,237
2023
4,237
( 4,237 )
—
—
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SCHEDULE III
FRANKLIN STREET PROPERTIES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2023
Initial Cost
Historical Cost
Costs
Capitalized
Buildings
Total Costs,
(in thousands)
Buildings
(Disposals)
Improvements
Net of
Depreciable
Date of
Encumbrances
Improvements
Subsequent to
and
Accumulated
Accumulated
Life
Year
Acquisition
Description
(1)
Land
and Equipment
Acquisition
Land
Equipment
Total (2)
Depreciation
Depreciation
Years
Built
(3)
(in thousands)
Commercial Properties:
Park Ten, Houston, TX
—
1,061
21,303
8,100
565
29,899
30,464
15,649
14,815
5
-
39
1999
2002
Addison, Addison, TX
—
4,325
48,040
13,860
4,325
61,900
66,225
30,173
36,052
5
-
39
1999
2002
Greenwood, Englewood, CO
—
3,100
30,201
11,584
3,100
41,785
44,885
20,108
24,777
5
-
39
2000
2005
Innsbrook, Glenn Allen, VA
—
5,000
40,216
14,199
5,000
54,415
59,415
21,809
37,606
5
-
39
1999
2003
Eldridge Green, Houston, TX
—
3,900
43,791
12,400
3,900
56,191
60,091
23,906
36,185
5
-
39
1999
2004
Liberty Plaza, Addison, TX
—
4,374
21,146
11,991
4,279
33,232
37,511
15,314
22,197
5
-
39
1985
2006
Park Ten II, Houston, TX
—
1,300
31,712
7,258
1,300
38,970
40,270
16,870
23,400
5
-
39
2006
2006
121 South Eight Street, Minneapolis, MN
—
4,444
15,214
30,378
4,444
45,592
50,036
16,769
33,267
5
-
39
1974
2010
801 Marquette Ave South, Minneapolis, MN
—
4,184
—
28,280
4,184
28,280
32,464
7,216
25,248
5
-
39
1923
2010
Legacy Tennyson Center, Plano, TX
—
3,067
22,064
6,166
3,067
28,230
31,297
9,713
21,584
5
-
39
2008
2011
Westchase I & II, Houston, TX
—
8,491
121,508
24,026
8,491
145,534
154,025
42,809
111,216
5
-
39
2008
2012
1999 Broadway, Denver CO
—
16,334
137,726
43,291
16,334
181,017
197,351
52,482
144,869
5
-
39
1986
2013
1001 17th Street, Denver, CO
—
17,413
165,058
37,227
17,413
202,285
219,698
53,627
166,071
5
-
39
2006
2013
Plaza Seven, Minneapolis, MN
—
6,604
54,240
14,025
6,604
68,265
74,869
16,243
58,626
5
-
39
1987
2016
600 17th Street, Denver, CO
—
20,876
99,941
18,060
20,876
118,001
138,877
23,320
115,557
5
-
39
1982
2016
Monument Circle, Indianapolis, IN
6,416
13,279
—
6,416
13,279
19,695
341
19,354
5
-
39
1992
2023
Balance — Real Estate
—
$
110,889
$
865,439
$
280,845
$
110,298
$
1,146,875
$
1,257,173
$
366,349
$
890,824
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $ 1,401,985 .
(3) Original date of acquisition by Sponsored Entity.
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The following table summarizes the changes in the Company’s real estate investments and accumulated depreciation:
December 31,
(in thousands)
2023
2022
2021
Real estate investments, at cost:
Balance, beginning of year
$
1,526,665
$
1,615,457
$
2,140,733
Acquisitions
19,695
—
—
Improvements
29,194
60,132
60,910
Assets held for sale
( 118,644 )
—
—
Dispositions
( 199,737 )
( 148,924 )
( 586,186 )
Balance, end of year - Real Estate
$
1,257,173
$
1,526,665
$
1,615,457
Accumulated depreciation:
Balance, beginning of year
$
423,417
$
424,487
$
538,717
Depreciation
45,558
52,208
60,080
Assets held for sale
( 35,399 )
—
—
Dispositions
( 67,227 )
( 53,278 )
( 174,310 )
Balance, end of year - Accumulated Depreciation
$
366,349
$
423,417
$
424,487
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