What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-30 compared with 2023-11-07 · 213 added, 281 removed, 206 unchanged (71% of the section changed)

6 unchanged sentences

See Part I, Item 1A.

“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and Part II, Item 1A.

“Risk Factors” below.

“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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

As of September 30, 2023, approximately 5.3 million square feet, or approximately 85.7% of our total owned and consolidated portfolio, was located in Dallas, Denver, Houston and Minneapolis.

As of March 31, 2024, approximately 4.8 million square feet, or approximately 87.7% of our total owned and consolidated portfolio, was located in Dallas, Denver, Houston and Minneapolis.

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

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Proceeds from dispositions are intended to be used primarily for the repayment of debt.

For the year ended December 31, 2022, our disposition strategy resulted in gross sale proceeds of $130.3 million and we repaid $128.9 million of debt.

Specifically, on August 31, 2022, we sold two office properties located in Broomfield, Colorado for aggregate gross proceeds of $102.5 million, at a gain of approximately $24.1 million.

On September 6, 2022, we prepaid our $110 million term loan with Bank of America, N.A.

as administrative agent and the other lending institutions party thereto (the “Former BofA Term Loan”).

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

On December 29, 2022 and December 30, 2022, we repaid $7 million and $20 million, respectively, that had been drawn under our revolving line of credit with Bank of America, N.A.

as administrative agent and the other lending institutions party thereto (the “BofA Revolver”).

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

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

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

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

For the three months ended March 31, 2024 and the year ended December 31, 2023, our disposition strategy resulted in aggregate gross sale proceeds of $35.0 million and $154.5 million, respectively.

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

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

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

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

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

We anticipate that as a result of our below investment grade credit ratings, we will continue to incur approximately $1.0 million in additional interest costs from the Senior Notes over a full twelve-month period based on our borrowings as of October 26, 2023.

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

As more fully described in Note 3 “Bank Note Payable, Term Loans Payable and Senior Notes” in the Notes to Consolidated Financial Statements included in this report and in “Liquidity and Capital Resources” below, on February 21, 2024, we entered into amendments to each of the BofA Term Loan, BMO Term Loan, Series A Notes and Series B Notes (each as defined in Note 3 in the Notes to Consolidated Financial Statements included in this report) to extend the maturity dates of each facility and modify the interest rate payable under each facility and in connection with such amendments, repaid an aggregate of $102 million principal amount of debt.

The credit rating for our senior unsecured debt was downgraded by Moody’s Investor Service from Ba1 to Ba3 on April 12, 2023, and from Ba3 to B3 on June 14, 2023, which continues to be the rating as of March 31, 2024.

As of February 21, 2024, the interest rate applicable to borrowings under the Senior Notes are no longer based on the rating of our debt.

Trends and Uncertainties

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

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

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

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

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

See “Risk Factors” in Item 1A.

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Economic Conditions

Although recent indicators suggest that economic activity has expanded at a modest pace, the global economy continues to experience significant disruptions as a result of various factors, including geopolitical events such as the ongoing conflict between Russia and Ukraine, Israel’s declaration of war on Hamas, a U.S.

designated Foreign Terrorist Organization, current armed conflict in Israel and the Gaza Strip, increasing tensions with China, the long-term impact of the COVID-19 pandemic

and continuing supply chain difficulties.

Although recent indicators suggest that economic activity has expanded at a modest pace, the global economy continues to experience significant disruptions as a result of various factors, including geopolitical events such as the ongoing wars between Russia and Ukraine and between Israel and Hamas, a U.S.

designated Foreign Terrorist Organization, in the Gaza Strip and ongoing conflicts in various other parts of the Middle East, increasing tensions with China and Iran, the long-term impact of the COVID-19 pandemic and continuing supply chain difficulties.

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

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

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

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

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

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

As of September 30, 2023, approximately 49.4% of our total debt constituted unhedged variable rate debt.

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

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

ability to make distributions to stockholders.

As of March 31, 2024, approximately 50.6% of our total debt constituted unhedged variable rate debt.

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

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Real Estate Operations

As of September 30, 2023, our real estate portfolio was comprised of 19 owned properties, which we refer to as our owned properties, and a non-controlling common stock interest in the corporation that is the sole member of FSP Monument Circle LLC, which corporation was organized to operate as a real estate investment trust, which we refer to as the Sponsored REIT.

As of March 31, 2024, our real estate portfolio was comprised of 16 owned properties, which we refer to as our owned properties, and a non-controlling common stock interest in the corporation that is the sole member of FSP Monument Circle LLC, which corporation was organized to operate as a real estate investment trust, which we refer to as the Sponsored REIT.

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

We refer to these 17 properties as our owned and consolidated properties.

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

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

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

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

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

Our owned properties were approximately 73.3% leased as of March 31, 2024, a decrease from 74.0% leased as of December 31, 2023.

The 0.7% decrease in leased space was primarily a result of lease maturities that occurred during the three months ended March 31, 2024, and the impact on leased percentage from the disposition of one property on January 26, 2024.

These decreases were partially offset by new leasing during the three months ended March 31, 2024.

As of March 31, 2024, we had approximately 1,405,000 square feet of vacancy in our owned properties compared to approximately 1,445,000 square feet of vacancy at December 31, 2023.

During the three months ended March 31, 2024, we leased approximately 197,000 square feet of office space in our owned properties, of which approximately 136,000 square feet were with existing tenants, at a weighted average term of 6.8 years.

On average, tenant improvements for such leases were $29.23 per square foot, lease commissions were $9.00 per square foot and rent concessions were approximately five months of free rent.

Average GAAP base rents under such leases were $26.96 per square foot, or 13.8% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2023.

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

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

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

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

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

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

Our owned and consolidated properties were approximately 70.6% and 71.5% leased, as of March 31, 2024 and March 31, 2023, respectively.

As of March 31, 2024, leases for approximately 5.6% and 8.0% of the square footage in our owned and consolidated properties are scheduled to expire during 2024 and 2025, respectively.

As the second quarter of 2024 begins, we believe that our operating properties are stabilized, with a balanced lease expiration schedule, and existing vacancy is being actively marketed to numerous potential tenants.

While leasing activity at our properties has continued, we believe that the impact of geopolitical events, current economic conditions and the long-term impact of the COVID-19 pandemic may limit or delay new tenant leasing during at least the second quarter of 2024 and potentially in future periods.

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

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

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

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

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

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

In addition, during the three months ended September 30, 2023, we executed purchase and sale agreements with four different unrelated purchasers for the potential sale of four properties.

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

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

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

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

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

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

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

On December 6, 2023, we 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 one remaining asset held for sale 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, we received notice from the buyer indicating that the buyer was terminating the transaction and directing the deposit and interest be disbursed to us.

During the three months ended December 31, 2023, we executed a purchase and sale agreement to sell a property located in Richardson, Texas for $35 million at an expected loss of approximately $2.1 million, which was recorded as an impairment as of December 31, 2023.

On January 26, 2024, we sold the office property located in Richardson, Texas for a sales price of $35 million.

The property was classified as held for sale as of December 31, 2023 and an impairment of $2.1 million was recorded during the year ended December 31, 2023.

An additional $5,000 of costs related to the sale were recorded during the three months ended March 31, 2024.

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

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

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

The accounting policies that we believe are most critical to the understanding of our

financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.

Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates.

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

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

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

In March 2020, the FASB issued ASU No.

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

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”).

The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts.

The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.

We do not anticipate that the adoption of ASU 2020-04 will have a material impact on our consolidated financial statements.

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

The Company does not anticipate 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.

Results of Operations

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

Three months ended September 30,

(in thousands)

Related party revenue:

Management fees and interest income from loans

Total revenues

Real estate operating expenses

Real estate taxes and insurance

Depreciation and amortization

General and administrative

Total expenses

Loss on extinguishment of debt

Impairment and loan loss reserve

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

Income (loss) before taxes

Net income (loss)

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

Total revenues decreased by $3.9 million to $36.9 million for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $3.4 million arising primarily from the sale of three properties during 2022 and two properties in 2023 and other losses of rental income from lease expirations during the periods presented.

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

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

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

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

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.4 million primarily attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $1.7 million primarily attributable to the property dispositions noted above.

These decreases were partially offset by:

● An increase in interest expense of approximately $0.1 million.

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

Loss on extinguishment of debt

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

Impairment and loan loss reserve

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

Gain and loss on sale of properties and impairment

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

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

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

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

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

Tax expense on income

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

Net income and loss

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

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

Nine months ended September 30,

The following table shows financial results for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

(in thousands)

Related party revenue:

Management fees and interest income from loans

Total revenues

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Gain on consolidation of Sponsored REIT

Impairment and loan loss reserve

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

Gain (loss) on sale of property

Interest income

Income (loss) before taxes

Net income (loss)

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

Total revenues decreased by $13.5 million to $110.9 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Comparison of the three months ended March 31, 2024 to the three months ended March 31, 2023:

Total revenues decreased by $6.5 million to $31.2 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $12.1 million arising primarily from the sale of three properties during 2022 and two properties in 2023 and other losses of rental income from lease expirations during the periods presented.

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

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

● A decrease in interest income from loans of approximately $1.4 million due to the consolidation of Monument Circle in our financial results as of January 1, 2023.

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

● A decrease in rental revenue of approximately $6.5 million arising primarily from the sale of four properties in 2023, and one property in 2024 and other losses of rental income from lease expirations during the periods presented.

These decreases were partially offset by rental income earned from leases commencing after March 31, 2023.

Our leased space in our owned and consolidated properties was 70.6% as of March 31, 2024 and 71.5% as of March 31, 2023.

Total expenses decreased by $4.4 million to $39.6 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $6.4 million primarily attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $6.2 million primarily attributable to the property dispositions noted above.

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

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.7 million is primarily attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $3.1 million is primarily attributable to the property dispositions noted above.

These decreases were partially offset by:

● An increase in general and administrative expenses of $0.3 million, which was primarily attributable to higher professional fees related to debt transactions made during the three months ended March 31, 2024 compared to the same period in 2023.

● An increase in interest expense of approximately $1.0 million.

The increase was primarily due to higher interest expense as a result of higher interest rates under the loan amendments we entered into on February 10, 2023, and February 21, 2024, described above and was partially offset by a lower principal amount of debt outstanding compared to the same period in 2023.

Loss on extinguishment of debt

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

During the three months ended March 31, 2024 and March 31, 2023, we repaid debt and incurred a loss on extinguishment of debt of $0.1 million and $0.1 million, respectively, related to unamortized deferred financing costs on the dates of the repayments.

Gain on consolidation of Sponsored REIT

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

Impairment and loan reserve

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

Gain and loss on sale of properties and impairment

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

Gain on sale of properties

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

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

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

During the three months ended March 31, 2024, we sold an office property located in Richardson, Texas on January 26, 2024, for a sales price of $35.0 million at a loss of approximately $2.1 million, The property was classified as held for sale as of December 31, 2023 and an impairment of $2.1 million was recorded during the year ended December 31, 2023.

An additional $5,000 of costs related to the sale were recorded during the three months ended March 31, 2024.

Interest income

During the three months ended March 31, 2024, we invested disposition proceeds in an interest-bearing account and earned $1.0 million in interest income.

On February 21, 2024, we used $102.0 million of disposition proceeds to repay debt.

Tax expense on income

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

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $58,000 during the three months ended March 31, 2024, compared to $67,000 during the three months ended March 31, 2023.

Net income and loss

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

Net loss for the three months ended March 31, 2024 was $7.6 million, compared to net income of $2.4 million for the three months ended March 31, 2023, for the reasons described above.

Non-GAAP Financial Measures

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The calculations of FFO are shown in the following table:

Three Months Ended

Nine Months Ended

September 30,

For the three months ended March 31,

(in thousands):

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Gain on consolidation of Sponsored REIT

Impairment and loan loss reserve

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

(Gain) loss on sale of property

Depreciation and amortization

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

The information presented includes footnotes and the data is shown by region with properties owned

and consolidated in the periods presented, which we call Same Store.

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

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

settlements and lease termination fees.

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

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Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

(in thousands)

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Items in NOI* (b)

Nine Months Ended

Three Months Ended

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Gain on consolidation of Sponsored REIT

Impairment and loan loss reserve

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

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

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

The information presented below provides the weighted average GAAP rent per square foot for the three months ended March 31, 2024 for our owned and consolidated properties and weighted occupancy square feet and percentages.

GAAP rent includes the impact of tenant concessions and reimbursements.

Percentage as of

September 30,

Rent per Occupied

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Midwest Total

Blue Lagoon Drive (c)

Addison Circle

Collins Crossing

Eldridge Green

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Legacy Tennyson Center

One Legacy Circle (c)

Westchase I & II

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Total Owned & Consolidated Properties

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

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

(a) Based on weighted occupied square feet for the three months ended March 31, 2024, including month-to-month tenants, divided by the applicable property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the three months ended March 31, 2024, per weighted occupied square foot.

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cash and cash equivalents were $37.8 million and $127.9 million at March 31, 2024 and December 31, 2023, respectively.

The decrease of $90.1 million is attributable to $7.1 million used in operating activities, plus $25.5 million provided by investing activities less $108.5 million used in financing activities.

Management believes that existing cash and cash anticipated to be generated internally by operations, including property dispositions, will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

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

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Operating Activities

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

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

Cash used in operating activities for the three months ended March 31, 2024 of $7.1 million is primarily attributable to a net loss of $7.6 million, plus the add-back of $12.3 million of non-cash expenses, less a decrease in accounts payable and accrued compensation of $9.1 million, an increase in payment of deferred leasing commissions of $2.2 million, an increase in prepaid expenses of $0.4 million, and an increase in lease acquisition costs of $0.1 million.

Investing Activities

Cash provided by investing activities for the nine months ended September 30, 2023 of $14.1 million is primarily attributable to proceeds from an asset sale of $37.1 million and an increase of investment in a mortgage receivable of $3.0 million from cash recorded in consolidation of Monument Circle, which was partially offset by purchases of other real estate assets and office equipment investments of $26.0 million.

Cash provided by investing activities for the three months ended March 31, 2024 of $25.5 million is primarily attributable to proceeds from an asset sale of $34.3 million, which was partially offset by purchases of other real estate assets and office equipment investments of $8.8 million.

Financing Activities

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

Cash used in financing activities for the three months ended March 31, 2024 of $108.5 million is primarily attributable to the repayment of a portion of the BMO Term Loan of $28.9 million, repayment of a portion of the BofA Term Loan of $22.7 million, repayment of a portion of the Senior Notes of $50.4 million, payment of distributions to stockholders of $1.0 million, and payment of deferred financing costs of $5.5 million.

Liquidity beyond the next 12 months

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

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

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

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

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

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

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

See Part II, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional factors.

Increases in operating expenses are predominantly borne by our tenants.

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We have used a variety of sources to fund our cash needs in addition to our free cash flow generated from our investments in real estate.

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

We have considered adding or refinancing existing term debt or raising capital through public offerings or At The Market (ATM) programs of our common stock.

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

BMO Term Loan

On February 10, 2023, the Company entered into a First Amendment to the Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (the “BMO First Amendment”).

The BMO First Amendment amended the Second Amended and Restated Credit Agreement dated September 27, 2018, among the Company and the lending institutions party thereto (as amended by the BMO First Amendment, the “BMO Credit Agreement”) to, among other things, extend the maturity date from January 31, 2024 to October 1, 2024 and change the interest rate from a number of basis points over LIBOR depending on the Company’s credit rating to 300 basis points over SOFR (Secured Overnight Financing Rate).

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

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

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

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

The remaining balance of the BMO Term Loan matures on October 1, 2024.

Effective February 10, 2023 upon entering into the BMO First Amendment, the BMO Term Loan bears interest at either (i) 300 basis points over one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively, or (ii) 200 basis points over the base rate.

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

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

The weighted average variable interest rate on all amounts outstanding under the BMO Term Loan from February 8, 2023, which is when the Company terminated its outstanding interest rate swaps applicable to the BMO Term Loan as described below, through September 30, 2023 was approximately 7.98% per annum.

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

On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39% per annum for the period beginning on August 26, 2020 and ending January 31, 2024.

Accordingly, based upon the Company’s credit rating, as of both December 31, 2022 and February 8, 2023, the effective interest rate on the BMO Term Loan was 4.04% per annum.

On February 8, 2023, we terminated all outstanding interest rate swaps applicable to the BMO Term Loan and, on February 10, 2023, we received an aggregate of approximately $4.3 million as a result of such terminations, of which approximately $0.1 million related to interest receivable.

going concern qualifications to our financial statements;

and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates.

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

provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company’s good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company’s status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject.

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

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

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

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

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

BofA Revolver

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

The BofA First Amendment amended the Credit Agreement, dated January 10, 2022, among the Company and the lending institutions party thereto (as amended by the BofA First Amendment, the “BofA Credit Agreement”) to among other things, extend the maturity date from January 12, 2024 to October 1, 2024, reduce availability

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

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

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

As of September 30, 2023 and November 7, 2023, there were borrowings of $80 million and $90 million drawn and outstanding under the BofA Revolver, respectively, which borrowings include $40 million that the Company borrowed on February 10, 2023 to repay a portion of the BMO Term Loan.

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

Effective February 10, 2023 upon entering into the BofA First Amendment, the BofA Revolver bears interest at 300 basis points over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively.

In addition, under certain circumstances, such as if SOFR was not able to be determined, the BofA Revolver will instead bear interest at 200 basis points over the base rate.

Prior to February 10, 2023, borrowings under the BofA Revolver bore interest at a margin over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively.

Prior to February 10, 2023, the margin over SOFR or, if applicable, the base rate, varied depending on the Company’s leverage ratio (1.750% over SOFR and 0.750% over the base rate at December 31, 2022).

Effective February 10, 2023 upon entering into the BofA First Amendment, the Company is also obligated to pay an annual facility fee on the unused portion of the BofA Revolver at the rate of 0.350% per annum and, if applicable, letter of credit fees.

Prior to February 10, 2023, the Company was also obligated to pay an annual facility fee and, if applicable, letter of credit fees in amounts that were also based on the Company’s leverage ratio.

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

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

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

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

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

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

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

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

In the event of a default by the Company, BofA, in its capacity as administrative agent, may, and at the request of the requisite number of lenders shall, declare all obligations under the BofA Credit Agreement immediately due and payable and enforce any and all rights of the lenders or BofA under the BofA Credit Agreement and related documents.

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

The Company may use the net proceeds of the BofA Revolver for permitted investments and for working capital and other general business purposes, including for building improvements, tenant improvements and leasing commissions, in each case to the extent permitted under the BofA Credit Agreement.

Former BofA Credit Facility

On July 21, 2016, the Company entered into a First Amendment (the “BofA First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BofA Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and BofA, as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BofA First Amendment and the BofA Second Amendment, the “Amended Former BofA Credit Facility”) that continued an existing unsecured revolving line of credit (the “Former BofA Revolver”) and an existing term loan (the “Former BofA Term Loan”).

Effective simultaneously with the closing of the Amended Former BofA Credit Facility on January 10, 2022, the Company delivered a notice to BofA terminating the aggregate lender commitments under the Former BofA Revolver in their entirety.

There were no amounts drawn on the Former BofA Revolver as of December 31, 2021 and January 10, 2022.

Former BofA Revolver Highlights

● The Former BofA Revolver was terminated at the Company’s election effective January 10, 2022.

● As of December 31, 2021 and January 10, 2022, there were no borrowings under the Former BofA Revolver .

The Former BofA Revolver bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.550% over LIBOR at December 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.550% over the base rate at December 31, 2021).

The Former BofA Credit Facility also obligated the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating.

The facility fee was assessed against the total amount of the Former BofA Revolver, or $600 million (0.30% at December 31, 2021).

The amount of any applicable facility fee, and the margin over LIBOR rate or base rate was determined based on the Company’s credit rating pursuant to a pricing grid.

For purposes of the Former BofA Credit Facility, base rate meant, for any day, a fluctuating rate per annum equal to the highest of:

(i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one month LIBOR based rate for such day plus 1.00%.

As of December 31, 2021, the Company’s credit rating from Moody’s Investors Service was Ba1.

During 2022 and as of December 31, 2022, there were no borrowings under the Former BofA Revolver.

Former BofA Term Loan Highlights

● The Former BofA Term Loan was repaid in its entirety on September 6, 2022.

● The original principal amount of the Former BofA Term Loan was $400 million.

On September 30, 2021, the Company repaid a $90 million portion and on October 25, 2021, the Company repaid a $200 million portion of the Former BofA Term Loan and incurred a loss on extinguishment of debt of $0.7 million related to unamortized deferred financing costs.

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

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

The margin over LIBOR rate or base rate was determined based on the Company’s credit rating pursuant to a pricing grid.

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.

On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes.

Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $200 million of senior unsecured notes consisting of (i) Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $84 million (the “Series B Notes”, and, together with the Series A Notes, the “Senior Notes”).

On December 20, 2017, the Senior Notes were funded and proceeds were used to reduce the outstanding balance of the Former BofA Revolver.

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

As of September 30, 2023, the Series A Notes bear interest at 4.49% per annum and the Series B Notes bear interest at 4.76% per annum.

The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio.

The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness.

Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BofA Credit Agreement and the BMO Credit Agreement.

The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50;

a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time).

In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries.

The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events.

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

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

We have a term loan borrowing in the aggregate principal amount of approximately $86.0 million as of March 31, 2024, which we refer to as the BMO Term Loan, with Bank of Montreal, as administrative agent, and the other lending

institutions party thereto, that matures on April 1, 2026.

On February 21, 2024, we 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, which we refer to as the BMO Second Amendment.

The BMO Second Amendment amended the Second Amended and Restated Credit Agreement dated September 27, 2018, which we refer to as the Original BMO Credit Agreement, as amended by the First Amendment to Second Amended and Restated Credit Agreement dated February 10, 2023, which we refer to as 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 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;

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.

The BMO Credit Agreement initially provided for an unsecured term loan borrowing in the amount of $220 million, of which approximately $86.0 million aggregate principal amount remained outstanding as of March 31, 2024.

The BMO Term Loan initially consisted of a $55 million tranche A term loan and a $165 million tranche B term loan.

On June 4, 2021, we repaid the tranche A term loan that was scheduled to mature on November 30, 2021, and incurred a loss on extinguishment of debt of $0.1 million related to unamortized deferred financing costs.

On February 10, 2023, we repaid a $40 million portion of the tranche B term loan, so that $125 million remained outstanding.

On August 10, 2023, we repaid an additional $10 million portion of the tranche B term loan, so that $115 million remained outstanding as of August 10, 2023 and as of December 31, 2023.

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 aggregate principal amount remained outstanding as of March 31, 2024.

The tranche B term loan matures on April 1, 2026.

Effective February 21, 2024 upon entering into 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.

As of March 31, 2024, the interest rate on the BMO Term Loan was 8.44% per annum.

The weighted average variable interest rate on all amounts outstanding under the BMO Term Loan was 8.45% for the three months ended March 31, 2024.

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 currently variable under the BMO Credit Agreement, we previously 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, we 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.

On February 8, 2023, we terminated all remaining interest rate swaps applicable to the BMO Term Loan and, on February 10, 2023, we received an aggregate of approximately $4.3 million as a result of such terminations.

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, use of net cash proceeds from the disposition of property, assets and equity issuances, mandatory prepayments, the requirement to have certain subsidiaries provide guarantees, the requirement to pledge our equity interests in certain subsidiaries as collateral, changes in business, certain restricted payments, repurchases and redemptions of our common stock, going concern qualifications to our financial statements, and transactions with affiliates.

In addition, the BMO Credit Agreement also restricts our ability to make quarterly dividend distributions that exceed $0.01 per share of our common stock;

provided, however, that notwithstanding such restriction, we are permitted to make dividend distributions based on our good faith estimate of projected or estimated taxable income or otherwise as necessary to retain our 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 we would otherwise be subject.

The BMO Credit Agreement also contains financial covenants that require us 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.

We were in compliance with the BMO Term Loan financial covenants as of March 31, 2024.

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

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

BofA Term Loan

As of March 31, 2024, we have a term loan borrowing in the amount of approximately $67.3 million, which we refer to as the BofA Term Loan, with Bank of America, N.A.

as administrative agent, and other lending institutions party thereto that matures on April 1, 2026.

Prior to February 21, 2024, we referred to the BofA Term Loan as the BofA Revolver.

On February 21, 2024, we amended the BofA Term Loan by entering into a Second Amendment to Credit Agreement with the lending institutions party thereto, which we refer to as the BofA Second Amendment.

The BofA Second Amendment amended the Credit Agreement dated January 10, 2022, which we refer to as the Original BofA Credit Agreement, as amended by the First Amendment to Credit Agreement dated February 10, 2023, which we refer to as 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 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;

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.

Prior to entering into the BofA Second Amendment on February 21, 2024, borrowings made under the BofA Revolver could be revolving loans or letters of credit, the combined sum of which could not exceed $150 million outstanding at any time.

On February 10, 2023, we borrowed $40.0 million under the BofA Revolver to repay a portion of the BMO

Effective October 1, 2023, availability under the BofA Revolver was reduced to $125 million.

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 aggregate principal amount remained outstanding under the BofA Term Loan as of March 31, 2024.

Effective February 21, 2024 upon entering into the BofA Second Amendment, the BofA Term Loan 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, 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.

As of March 31, 2024, the interest rate on the BofA Term Loan was 8.44% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Term Loan was 8.43% for the three months ended March 31, 2024.

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, use of net cash proceeds from the disposition of property, assets and equity issuances, mandatory prepayments, the requirement to have certain subsidiaries provide guarantees, the requirement to pledge our equity interests in certain subsidiaries as collateral, changes in business, certain restricted payments, repurchases and redemptions of our common stock, going concern qualifications to our financial statements, and transactions with affiliates.

In addition, the BofA Credit Agreement also restricts our ability to make quarterly dividend distributions that exceed $0.01 per share of our common stock;

The BofA Credit Agreement also contains financial covenants that require us 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.

We were in compliance with the BofA Term Loan financial covenants as of March 31, 2024.

In the event of a default by us, the 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 of our outstanding obligations will become immediately due and payable.

We have senior notes in the aggregate principal amount of approximately $149.6 million as of March 31, 2024, which we refer to as the Senior Notes, that mature on April 1, 2026.

The Senior Notes consist of (i) Series A Senior Notes due April 1, 2026 in an aggregate principal amount of approximately $86.8 million, which we refer to as the Series A Notes, and (ii) Series B Senior Notes due April 1, 2026 in the aggregate principal amount of approximately $62.8 million, which we refer to as the Series B Notes.

On February 21, 2024, we amended the terms of the Senior Notes by entering into a First Amendment to Note Purchase Agreement, which we refer to as the NPA First Amendment, with the purchasers party thereto.

The NPA First Amendment amended the Note Purchase Agreement dated October 24, 2017, which we refer to as 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;

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 aggregate principal amount of the Series A Notes remained outstanding as of March 31, 2024.

In addition, on February 21, 2024, as part of the NPA First Amendment, we repaid an approximately $21.2 million aggregate principal amount of the Series B Notes so that approximately $62.8 million aggregate principal amount of the Series B Notes remained outstanding as of March 31, 2024.

As of March 31, 2024, the interest rate on the Series A Notes was 8.00% per annum and the interest rate on the Series B Notes was 8.00% per annum.

As of December 31, 2023, the interest rate on the Series A Notes was 4.49% per annum and the interest rate on the Series B Notes was 4.76% per annum.

The Note Purchase Agreement contains customary affirmative and negative covenants, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, use of net cash proceeds from the disposition of property, assets and equity issuances, mandatory prepayments, the requirement to have certain subsidiaries provide guarantees, the requirement to pledge our equity interests in certain subsidiaries as collateral, changes in business, certain restricted payments, repurchases and redemptions of our common stock, going concern qualifications to our financial statements, transactions with affiliates, certain restrictions on severance, retention and similar arrangements applicable to our executive officers, and real estate investment trust compliance requirements.

In addition, the Note Purchase Agreement also restricts our ability to make quarterly dividend distributions that exceed $0.01 per share of our common stock;

The Note Purchase Agreement also contains financial covenants that require us 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.

We were in compliance with the Note Purchase Agreement financial covenants as of March 31, 2024.

Equity Offering

3 unchanged sentences

The repurchase authorization may be suspended or discontinued at any time.

On February 10, 2023, we disclosed in a Current Report on Form 8-K that our Board of Directors had discontinued the repurchase authorization.

February 10, 2023, we disclosed in a Current Report on Form 8-K that our Board of Directors had discontinued the repurchase authorization.

Contingencies

1 unchanged sentence

Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.

Related Party Transactions

To the extent permitted by the BofA Credit Agreement, we intend to draw on the BofA Revolver in the future for a variety of corporate purposes, including for the Sponsored REIT Loan as described below.

What changed 10-Q

Item 2. Management’s Discussion and Analysis