What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-29 compared with 2024-07-30 · 130 added, 112 removed, 359 unchanged (40% of the section changed)

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

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

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

See Part I, Item 1A.

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We are focused on long-term growth and appreciation, as well as current income.

As of June 30, 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.

As of September 30, 2024, approximately 4.8 million square feet, or approximately 92.8 % 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 six months ended June 30, 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.

On July 8, 2024, we sold a property located in Glen Allen, Virginia for a gross selling price of $31.0 million.

For the nine months ended September 30, 2024 and the year ended December 31, 2023, our disposition strategy resulted in aggregate gross sale proceeds of $66.0 million and $154.5 million, respectively.

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

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On July 10, 2024, we used proceeds from the sale of a property in Glen Allen, Virginia to repay an aggregate of approximately $25.3 million of 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 June 30, 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.

As of February 21, 2024, the interest rate applicable to borrowings under the Senior Notes ceased to be 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 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.

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 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 long-term impact that the COVID-19 pandemic will have on our future financial results at this time.

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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 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.

designated foreign Terrorist Organization, in the Gaza Strip, and between Israel and Hezbollah, a U.S.

designated Foreign Terrorist Organization, in Lebanon 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.

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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%

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

As of June 30, 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.

During 2023 and 2024, the Federal Reserve adjusted the federal funds rate target several times, most recently decreasing it by 50 basis points on September 18, 2024, to a

range of 4.75% to 5.0%.

If interest rates 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, 2024, approximately 50.6% of our total debt constituted unhedged variable rate debt.

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

As of the date of this report, the impact of current economic conditions and geopolitical events and the long-term impact of the COVID-19 pandemic are adversely affecting the demand for office space in the United States.

Real Estate Operations

As of June 30, 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.

As of September 30, 2024, our real estate portfolio was comprised of 15 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 16 properties as our owned and consolidated properties.

Our owned properties were approximately 72.3% leased as of June 30, 2024, a decrease from 74.0% leased as of December 31, 2023.

The 1.7% decrease in leased space was primarily a result of lease maturities that occurred during the six months ended June 30, 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 six months ended June 30, 2024.

As of June 30, 2024, we had approximately 1,456,000 square feet of vacancy in our owned properties compared to approximately 1,445,000 square feet of vacancy at December 31, 2023.

During the six months ended June 30, 2024, we leased approximately 272,000 square feet of office space in our owned properties, of which approximately 180,000 square feet were with existing tenants, at a weighted average term of 6.1 years.

Our owned properties were approximately 70.4% leased as of September 30, 2024, a decrease from 74.0% leased as of December 31, 2023.

The 3.6% decrease in leased space was primarily a result of lease maturities that occurred during the nine months ended September 30, 2024, and the impact on leased percentage from the disposition of a properties on January 26, 2024 and July 8, 2024, respectively.

These decreases were partially offset by new leasing during the nine months ended September 30, 2024.

As of September 30, 2024, we had approximately 1,469,000 square feet of vacancy in our owned properties compared to approximately 1,445,000 square feet of vacancy at December 31, 2023.

During the nine months ended September 30, 2024, we leased approximately 364,000 square feet of office space in our owned properties, of which approximately 242,000 square feet were with existing tenants, at a weighted average term of 5.4 years.

On average, tenant improvements for such leases were $25.30 per square foot, lease commissions were $7.83 per square foot and rent concessions were approximately four months of free rent.

Average GAAP base rents under such leases were $29.94 per square foot, or 10.9% 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 69.7% and 73.3% leased, as of June 30, 2024 and June 30, 2023, respectively.

As of June 30, 2024, leases for approximately 3.1% and 8.7% of the square footage in our owned and consolidated properties are scheduled to expire during 2024 and 2025, respectively.

As the third 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 third quarter of 2024 and potentially in future periods.

Our owned and consolidated properties were approximately 67.7% and 72.4% leased, as of September 30, 2024 and September 30, 2023, respectively.

As of September 30, 2024, leases for approximately 1.5% and 8.4 % of the square footage in our owned and consolidated properties are scheduled to expire during 2024 and 2025, respectively.

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

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

As a result of our obtaining this right

to vote shares, GAAP variable interest entity (VIE) rules required us to consolidate Monument Circle as of January 1, 2023.

In consideration of our agreement to amend and restate the Sponsored REIT Loan, we obtained from the stockholders of Monument Circle the right to vote their shares in favor of any

sale of the property owned by Monument Circle any time on or after January 1, 2023.

As a result of our obtaining this right to vote shares, GAAP variable interest entity (VIE) rules required us to consolidate Monument Circle as of January 1, 2023.

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

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

On September 27, 2024, the Sponsored REIT Loan maturity was extended to September 30, 2025.

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

Dispositions of Properties and Assets Held for Sale

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

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

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

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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 September 30, 2024, the expected loss on this property was increased by $6.6 million after the Company entered into a new agreement to sell the property for a gross sales price of $34.0 million.

The property was sold on October 23, 2024.

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 had been recorded as an impairment as of December 31, 2023.

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The property was sold on July 8, 2024.

On July 10, 2024, the Company used proceeds of $25.3 million, or 90% of the net proceeds from the disposition, to repay outstanding indebtedness.

During the three months ended September 30, 2024, the Company used proceeds of $25.3 million, or 90% of the net proceeds from the disposition, to repay outstanding indebtedness.

During the three months ended September 30, 2024, an additional $0.7 million in costs related to the sale of properties previously sold was recorded.

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

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Results of Operations

The following table shows financial results for the three months ended June 30, 2024 and 2023:

Three months ended June 30,

The following table shows financial results for the three months ended September 30, 2024 and 2023:

Three months ended September 30,

(in thousands)

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Total expenses

Impairment on asset held for sale

Loss on extinguishment of debt

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

Interest income

Loss before taxes

Comparison of the three months ended June 30, 2024 to the three months ended June 30, 2023:

Total revenues decreased by $5.4 million to $30.8 million for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.

Comparison of the three months ended September 30, 2024 to the three months ended September 30, 2023:

Total revenues decreased by $7.2 million to $29.7 million for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $5.4 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 June 30, 2023.

Our leased space in our owned and consolidated properties was 69.7% as of June 30, 2024 and 73.3% as of June 30, 2023.

Total expenses decreased by $4.9 million to $38.9 million for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.

● A decrease in rental revenue of approximately $7.2 million arising primarily from the sale of four properties in 2023, and two properties 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 September 30, 2023.

Our leased space in our owned and consolidated properties was 67.7% as of September 30, 2024 and 72.4% as of September 30, 2023.

Total expenses decreased by $4.9 million to $37.9 million for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023.

The decrease was primarily a result of:

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.6 million is primarily attributable to the property dispositions noted above.

● A decrease in real estate operating expenses and real estate taxes and insurance of approximately $2.8 million, which was primarily attributable to the property dispositions noted above.

● A decrease in depreciation and amortization of approximately $2.5 million, which was primarily attributable to the property dispositions noted above.

● A decrease in general and administrative expenses of $0.1 million, which was primarily attributable to lower personnel expenses during the three months ended June 30, 2024 compared to the same period in 2023.

These decreases were partially offset by:

● An increase in general and administrative expenses of $10,000, which was primarily attributable to higher professional fees during the three months ended September 30, 2024 compared to the same period in 2023.

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

The increase was primarily due to higher interest expense as a result of higher interest rates under the loan amendments we entered into on February 10, 2023, 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.

Impairment on assets held for sale

During the three months ended June 30, 2023, we entered into an agreement to sell a property in Charlotte, North Carolina for a sales price of $9.2 million, at an expected loss of $0.8 million, which was recorded as an impairment.

We classified the property as an asset held for sale as of June 30, 2023.

The property was sold on August 9, 2023.

During the three months ended June 30, 2024, we entered into an agreement to sell a property in Glen Allen, Virginia for a gross sales price of approximately $31.0 million and an expected loss of $13.2 million, which was recorded as an impairment.

We classified the property as an asset held for sale as of June 30, 2024.

The property was sold on July 8, 2024.

Loss on extinguishment of debt

During the three months ended September 30, 2024 and September 30, 2023, we repaid debt and incurred a loss on extinguishment of debt of $477,000 and $39,000, respectively, related to unamortized deferred financing costs on the dates of the repayments.

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, which had been recorded as an impairment during the three months ended June 30, 2023.

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 and increased the loss on sale of the office property located in Charlotte, North Carolina known as 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 as of September 30, 2023.

During the three months ended September 30, 2024, we increased the expected loss on the property in Atlanta, Georgia by $6.6 million after the Company entered into a new agreement to sell the property for a gross sales price of $34.0 million.

On July 8, 2024, we sold a property located in Glen Allen, Virginia at a loss of $13.2 million, which had been recorded as an impairment during the three months ended June 30, 2024.

During the three months ended September 30, 2024, an additional $0.7 million in costs related to the sale of properties previously sold were recorded.

Interest income

During the three months ended June 30, 2024, we invested disposition proceeds in an interest-bearing account and earned $0.3 million in interest income.

During the three months ended September 30, 2024, we invested disposition proceeds in an interest-bearing account and earned $0.3 million in interest income.

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 $48,000 during the three months ended June 30, 2024, compared to $75,000 during the three months ended June 30, 2023.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $56,000 during the three months ended September 30, 2024, compared to $70,000 during the three months ended September 30, 2023.

Net income and loss

Net loss for the three months ended June 30, 2024 was $21.0 million, compared to a net loss of $8.4 million for the three months ended June 30, 2023, for the reasons described above.

The following table shows financial results for the six months ended June 30, 2024 and 2023:

Six months ended June 30,

Net loss for the three months ended September 30, 2024 was $15.6 million, compared to a net loss of $45.7 million for the three months ended September 30, 2023, for the reasons described above.

The following table shows financial results for the nine months ended September 30, 2024 and 2023:

Nine months ended September 30,

(in thousands)

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Gain on consolidation of Sponsored REIT

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

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

Interest income

Loss before taxes

Comparison of the six months ended June 30, 2024 to the six months ended June 30, 2023:

Total revenues decreased by $12.0 million to $62.1 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

Comparison of the nine months ended September 30, 2024 to the nine months ended September 30, 2023:

Total revenues decreased by $19.2 million to $91.7 million for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.

The decrease was primarily a result of:

● A decrease in rental revenue of approximately $12.0 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 June 30, 2023.

Our leased space in our owned and consolidated properties was 69.7% as of June 30, 2024 and 73.3% as of June 30, 2023.

Total expenses decreased by $9.3 million to $78.5 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

● A decrease in rental revenue of approximately $19.2 million arising primarily from the sale of four properties in 2023, and two properties 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 September 30, 2023.

Our leased space in our owned and consolidated properties was 67.7% as of September 30, 2024 and 72.4% as of September 30, 2023.

Total expenses decreased by $14.2 million to $116.4 million for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.

The decrease was primarily a result of:

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These decreases were partially offset by:

● An increase in general and administrative expenses of $0.2 million, which was primarily attributable to higher professional fees related to debt transactions during the six months ended June 30, 2024 compared to the same period in 2023.

● An increase in general and administrative expenses of $0.2 million, which was primarily attributable to higher professional fees related to debt transactions during the nine months ended September 30, 2024 compared to the same period in 2023.

● An increase in interest expense of approximately $2.4 million.

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Loss on extinguishment of debt

During the six months ended June 30, 2024 and June 30, 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.

During the nine months ended September 30, 2024 and September 30, 2023, we repaid debt and incurred a loss on extinguishment of debt of $0.6 million and $0.1 million, respectively, related to unamortized deferred financing costs on the dates of the repayments.

Gain on consolidation of Sponsored REIT

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

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.

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

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

We classified the property as an asset held for sale as of June 30, 2023.

The property was sold on August 9, 2023.

During the six months ended June 30, 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.

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

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

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

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

During the three months ended September 30, 2024, we increased the expected loss on the property in Atlanta, Georgia by $6.6 million after we entered into a new agreement to sell the property for a gross sales price of $34.0 million

During the nine months ended September 30, 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 had been classified as held for sale as of December 31, 2023 and an impairment of $2.1 million had been recorded during the year ended December 31, 2023.

An additional $5,000 of costs related to the sale were recorded during the six months ended June 30, 2024.

We classified the property as an asset held for sale as of June 30, 2024.

The property was sold on July 8, 2024.

During the nine months ended September 30, 2024, we entered into an agreement to sell a property in Glen Allen, Virginia for a gross sales price of approximately $31.0 million at an expected loss of $13.2 million, which was recorded as an impairment, and we classified the property as an asset held for sale as of June 30, 2024.

The property was sold on July 8, 2024, at the expected loss.

During the three months ended September 30, 2024, an additional $0.7 million in costs related to the sale of properties previously sold were recorded.

Interest income

During the six months ended June 30, 2024, we invested disposition proceeds in an interest-bearing account and earned $1.4 million in interest income.

During the nine months ended September 30, 2024, we invested disposition proceeds in an interest-bearing account and earned $1.7 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 $106,000 during the six months ended June 30, 2024, compared to $142,000 during the six months ended June 30, 2023.

Net loss for the six months ended June 30, 2024 was $28.6 million, compared to a net loss of $6.0 million for the six months ended June 30, 2023, for the reasons described above.

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which was $162,000 during the nine months ended September 30, 2024, compared to $212,000 during the nine months ended September 30, 2023.

Net loss for the nine months ended September 30, 2024 was $44.2 million, compared to a net loss of $51.7 million for the nine months ended September 30, 2023, for the reasons described above.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands):

Gain on consolidation of Sponsored REIT

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

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

Depreciation and amortization

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Three Months Ended

Six Months Ended

Nine Months Ended

Three Months Ended

Six Months Ended

Nine Months Ended

(in thousands)

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Items in NOI* (b)

Six Months Ended

Nine Months Ended

Three Months Ended

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Gain on consolidation of Sponsored REIT

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

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

Management fee income

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

The information presented below provides the weighted average GAAP rent per square foot for the six months ended June 30, 2024 for our owned and consolidated properties and weighted occupancy square feet and percentages.

The information presented below provides the weighted average GAAP rent per square foot for the nine months ended September 30, 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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Square Feet (b)

Innsbrook (c)

120 Monument Circle

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Total Owned & Consolidated Properties

(a) Based on weighted occupied square feet for the six months ended June 30, 2024, including month-to-month tenants, divided by the applicable property’s net rentable square footage.

(b) Represents annualized GAAP rental revenue for the six months ended June 30, 2024, per weighted occupied square foot.

(a) Based on weighted occupied square feet for the nine months ended September 30, 2024, 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, 2024, per weighted occupied square foot.

Liquidity and Capital Resources

Cash and cash equivalents were $31.5 million and $127.9 million at June 30, 2024 and December 31, 2023, respectively.

The decrease of $96.4 million is attributable to $7.7 million used in operating activities, plus $21.1 million provided by investing activities less $109.8 million used in financing activities.

Cash and cash equivalents were $42.4 million and $127.9 million at September 30, 2024 and December 31, 2023, respectively.

The decrease of $85.5 million is attributable to $6.7 million provided by operating activities, plus $43.8 million provided by investing activities less $136.0 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.

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Operating Activities

Cash used in operating activities for the six months ended June 30, 2024 of $7.7 million is primarily attributable to a net loss of $28.6 million.

excluding $13.2 million of impairment charges on an asset held for sale, plus the add-back of $25.1 million of non-cash expenses, less a decrease in accounts payable and accrued compensation of $13.9 million, an increase in payment of deferred leasing commissions of $2.7 million, an increase in lease acquisition costs of $0.3 million, an increase in prepaid expenses of $0.4 million and an increase in tenant receivables of $0.2 million.

Cash provided by operating activities for the nine months ended September 30, 2024, of $6.7 million is primarily attributable to a net loss of $44.2 million.

excluding $20.5 million of losses on asset sales and impairments on an asset held for sale, plus the add-back of $38.0 million of non-cash expenses, less a decrease in accounts payable and accrued compensation of $4.8 million, an increase in payment of deferred leasing commissions of $3.2 million, an increase in lease acquisition costs of $0.7 million plus a decrease in tenant receivables of $0.8 million and a decrease in prepaid expenses of $0.3 million.

Investing Activities

Cash provided by investing activities for the six months ended June 30, 2024 of $21.1 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 $13.2 million.

Cash provided by investing activities for the nine months ended September 30, 2024, of $43.8 million is primarily attributable to proceeds from an asset sale of $62.9 million, which was partially offset by purchases of other real estate assets and office equipment investments of $19.1 million.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2024 of $109.8 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 $2.1 million, and payment of deferred financing costs of $5.7 million.

Cash used in financing activities for the nine months ended September 30, 2024 of $136.0 million is primarily attributable to the repayment of a portion of the BMO Term Loan of $36.2 million, repayment of a portion of the BofA Revolver (defined below) of $22.6 million, repayment of a portion of the BofA Term Loan (defined below) of $5.6 million, repayment of a portion of the Senior Notes (defined below) of $62.9 million, payment of deferred financing costs of $5.6 million and payment of distributions to stockholders of $3.1 million.

Liquidity beyond the next 12 months

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BMO Term Loan

We have a term loan borrowing in the aggregate principal amount of approximately $86.0 million as of June 30, 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.

We have a term loan borrowing in the aggregate principal amount of approximately $78.8 million as of September 30, 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.

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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.

On July 10, 2024, we repaid an approximately $7.2 million portion of the BMO Term Loan from asset sale proceeds of a property located in Glen Allen, Virginia.

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

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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 June 30, 2024, the interest rate on the BMO Term Loan was 8.45% per annum.

The weighted average variable interest rate on all amounts outstanding under the BMO Term Loan was 8.45% for the six months ended June 30, 2024.

As of September 30, 2024, the interest rate on the BMO Term Loan was 8.00% per annum.

The weighted average variable interest rate on all amounts outstanding under the BMO Term Loan was 8.44% for the nine months ended September 30, 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.

swap transactions.

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.

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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 June 30, 2024.

We were in compliance with the BMO Term Loan financial covenants as of September 30, 2024.

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 (as defined in the BMO Credit Agreement).

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BofA Term Loan

As of June 30, 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 of September 30, 2024, we have a term loan borrowing in the amount of approximately $61.7 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.

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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

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

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

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On February 21, 2024, as part of the BofA Second Amendment, we repaid an approximately $22.7 million portion of the BofA Revolver.

On July 10, 2024, we repaid an approximately $5.6 million portion of the BofA Term Loan from asset sale proceeds of a property located in Glen Allen, Virginia.

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%.

1 unchanged sentence

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 June 30, 2024, the interest rate on the BofA Term Loan was 8.45% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Term Loan was 8.44% for the six months ended June 30, 2024.

As of September 30, 2024, the interest rate on the BofA Term Loan was 8.00% per annum.

The weighted average variable interest rate on all amounts outstanding under the BofA Term Loan was 8.44% for the nine months ended September 30, 2024.

As of December 31, 2023, the interest rate on the BofA Revolver was 8.47% per annum.

4 unchanged sentences

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 June 30, 2024.

We were in compliance with the BofA Term Loan financial covenants as of September 30, 2024.

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 (as defined in the BofA Credit Agreement).

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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 June 30, 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.

We have senior notes in the aggregate principal amount of approximately $137.1 million as of September 30, 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 $79.5 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 $57.6 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.

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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.

As of June 30, 2024, approximately $86.8 million aggregate principal amount remained outstanding under the Series A Notes and approximately $62.8 million aggregate principal amount remained outstanding under the Series B Notes.

As of June 30, 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.

On July 10, 2024, we repaid an approximately $7.2 million portion of the Series A Notes and an approximately $5.3 million portion of the Series B Notes from asset sale proceeds of a property located in Glen Allen, Virginia.

As of September 30, 2024, approximately $79.5 million aggregate principal amount of the Series A Notes remained outstanding and approximately $57.6 million aggregate principal amount of the Series B Notes remained outstanding.

As of September 30, 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.

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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 June 30, 2024.

We were in compliance with the Note Purchase Agreement financial covenants as of September 30, 2024.

Equity Offering

From time to time, we may issue debt securities, common stock, preferred stock or depository shares under a registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.

corporate purposes.

Stock Repurchase Program

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

Additional information about the Sponsored REIT Loan outstanding as of June 30, 2024, is incorporated herein by reference to Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.

Additional information about the Sponsored REIT Loan outstanding as of September 30, 2024, is incorporated herein by reference to Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.

Other Consideration s

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

For the three and six months ended June 30, 2024 and 2023, respectively, the rental income exceeded the expenses for each individual property, with the exception of Monument Circle for the three and six months ended June 30, 2024 and 2023.

For the three and nine months ended September 30, 2024 and 2023, respectively, the rental income exceeded the expenses for each individual property, with the exception of Monument Circle for the three and nine months ended September 30, 2024 and 2023.

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

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

Monument Circle had approximately $77,000 and $148,000 of rental income, and, $240,000 and $529,000 of operating expenses, for the three and six months ended June 30, 2024, respectively, and was 4.1% leased to two retail tenants as of June 30, 2024.

Monument Circle had approximately $68,000 and $138,000 of rental income, and, $310,000 and $526,000 of operating expenses, for the three and six months ended June 30, 2023, respectively, and was 4.1% leased to two retail tenants as of June 30, 2023.

Monument Circle had approximately $69,000 and $217,000 of rental income, and, $303,000 and $832,000 of operating expenses, for the three and nine months ended September 30, 2024, respectively, and was 4.1% leased to two retail tenants as of September 30, 2024.

Monument Circle had approximately $70,000 and $207,000 of rental income, and, $304,000 and $830,000 of operating expenses, for the three and nine months ended September 30, 2023, respectively, and was 4.1% leased to two retail tenants as of September 30, 2023.

Off-Balance Sheet Arrangements and Contractual Obligations

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis