UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017.March 31, 2021.
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-32470
Franklin Street Properties Corp.
(Exact name of registrant as specified in its charter)
| ||
Maryland | | 04-3578653 |
(State or other jurisdiction of incorporation | | (I.R.S. Employer Identification No.) |
or organization) | | |
401 Edgewater Place, Suite 200
Wakefield, MA01880
(Address of principal executive offices)(Zip Code)
(781) (781) 557-1300
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||
Common Stock, $.0001 par value per share | | FSP | | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES Yes ☒ NO No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES Yes ☒ NO No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ||
Large | | Accelerated |
| | |
Non-accelerated | | Smaller |
| | |
| | |
Emerging |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES Yes ☐ NO No ☒
The number of shares of common stock outstanding as of October 26, 2017April 30, 2021 was 107,231,155.107,328,199.
Franklin Street Properties Corp.
Form 10-Q
Quarterly ReportSeptember 30, 2017March 31, 2021
| | | | ||
| | Page | |||
| | | |||
| | | | | |
| | | | ||
| | | | | |
| | | | 3 | |
| | | | | |
| | | | 4 | |
| | | | | |
| | | | 5 | |
| | | | | |
| | | | 6 | |
| | | | | |
| | | |
| |
| | | | | |
| | | |
| |
| | | | | |
| | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| |
| | | | | |
| | |
| ||
| | | | | |
| | |
| ||
| | | | | |
| | | |||
| | | | | |
| | |
| ||
| | | | | |
| | |
| ||
| | | | | |
| | |
| ||
| | | | | |
| | |
| ||
| | | | | |
| | |
| ||
| | | | | |
| | |
| ||
| | | | | |
| | | 37 | ||
| | | | | |
|
|
PART I — FINANCIAL INFORMATION
Franklin Street Properties Corp.
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | | |
| | March 31, | | December 31, |
| ||
(in thousands, except share and par value amounts) |
| 2021 |
| 2020 |
| ||
Assets: | | | | | | | |
Real estate assets: | | | | | | | |
Land |
| $ | 189,155 |
| $ | 189,155 | |
Buildings and improvements | |
| 1,954,838 | |
| 1,938,629 | |
Fixtures and equipment | |
| 13,308 | |
| 12,949 | |
| |
| 2,157,301 | |
| 2,140,733 | |
Less accumulated depreciation | |
| 555,688 | |
| 538,717 | |
Real estate assets, net | |
| 1,601,613 | |
| 1,602,016 | |
Acquired real estate leases, less accumulated amortization of $53,670 and $55,447, respectively | |
| 25,836 | |
| 28,206 | |
Cash, cash equivalents and restricted cash | |
| 4,113 | |
| 4,150 | |
Tenant rent receivables | |
| 4,337 | |
| 7,656 | |
Straight-line rent receivable | |
| 69,743 | |
| 67,789 | |
Prepaid expenses and other assets | |
| 5,873 | |
| 5,752 | |
Related party mortgage loan receivables | |
| 21,000 | |
| 21,000 | |
Office computers and furniture, net of accumulated depreciation of $1,459 and $1,443, respectively | |
| 147 | |
| 163 | |
Deferred leasing commissions, net of accumulated amortization of $26,384 and $30,411, respectively | |
| 56,771 | |
| 56,452 | |
Total assets |
| $ | 1,789,433 |
| $ | 1,793,184 | |
| | | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | |
Liabilities: | | | | | | | |
Bank note payable |
| $ | 27,500 |
| $ | 3,500 | |
Term loans payable, less unamortized financing costs of $2,332 and $2,677, respectively | |
| 717,668 | |
| 717,323 | |
Series A & Series B Senior Notes, less unamortized financing costs of $781 and $822, respectively | | | 199,219 | | | 199,178 | |
Accounts payable and accrued expenses | |
| 63,456 | |
| 72,058 | |
Accrued compensation | |
| 1,390 | |
| 3,918 | |
Tenant security deposits | |
| 8,041 | |
| 8,677 | |
Lease liability | | | 1,444 | | | 1,536 | |
Other liabilities: derivative liabilities | |
| 13,698 | |
| 17,311 | |
Acquired unfavorable real estate leases, less accumulated amortization of $3,959 and $4,031, respectively | |
| 1,433 | |
| 1,592 | |
Total liabilities | |
| 1,033,849 | |
| 1,025,093 | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
| | | | | | | |
Stockholders’ Equity: | | | | | | | |
Preferred stock, $.0001 par value, 20,000,000 shares authorized, NaN issued or outstanding | |
| — | |
| — | |
Common stock, $.0001 par value, 180,000,000 shares authorized, 107,328,199 and 107,328,199 shares issued and outstanding, respectively | |
| 11 | |
| 11 | |
Additional paid-in capital | |
| 1,357,131 | |
| 1,357,131 | |
Accumulated other comprehensive loss | |
| (13,698) | |
| (17,311) | |
Accumulated distributions in excess of accumulated earnings | |
| (587,860) | |
| (571,740) | |
Total stockholders’ equity | |
| 755,584 | |
| 768,091 | |
Total liabilities and stockholders’ equity |
| $ | 1,789,433 |
| $ | 1,793,184 | |
(Unaudited)
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
(in thousands, except share and par value amounts) |
| 2017 |
| 2016 |
| ||
Assets: |
|
|
|
|
|
|
|
Real estate assets: |
|
|
|
|
|
|
|
Land |
| $ | 191,578 |
| $ | 196,178 |
|
Buildings and improvements |
|
| 1,800,831 |
|
| 1,822,183 |
|
Fixtures and equipment |
|
| 5,017 |
|
| 4,136 |
|
|
|
| 1,997,426 |
|
| 2,022,497 |
|
Less accumulated depreciation |
|
| 361,720 |
|
| 337,228 |
|
Real estate assets, net |
|
| 1,635,706 |
|
| 1,685,269 |
|
Acquired real estate leases, less accumulated amortization of $105,997 and $112,441, respectively |
|
| 96,282 |
|
| 125,491 |
|
Investment in non-consolidated REITs |
|
| 73,405 |
|
| 75,165 |
|
Asset held for sale |
|
| 31,615 |
|
| 3,871 |
|
Cash and cash equivalents |
|
| 12,647 |
|
| 9,335 |
|
Restricted cash |
|
| 63 |
|
| 31 |
|
Tenant rent receivables, less allowance for doubtful accounts of $125 and $100, respectively |
|
| 3,990 |
|
| 3,113 |
|
Straight-line rent receivable, less allowance for doubtful accounts of $50 and $50, respectively |
|
| 52,272 |
|
| 50,930 |
|
Prepaid expenses and other assets |
|
| 6,282 |
|
| 5,231 |
|
Related party mortgage loan receivables |
|
| 71,985 |
|
| 81,780 |
|
Other assets: derivative asset |
|
| 10,771 |
|
| 12,907 |
|
Office computers and furniture, net of accumulated depreciation of $1,390 and $1,277, respectively |
|
| 319 |
|
| 313 |
|
Deferred leasing commissions, net of accumulated amortization of $20,842 and $18,301, respectively |
|
| 36,348 |
|
| 34,697 |
|
Total assets |
| $ | 2,031,685 |
| $ | 2,088,133 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity: |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Bank note payable |
| $ | 300,000 |
| $ | 280,000 |
|
Term loans payable, less unamortized financing costs of $3,817 and $4,783, respectively |
|
| 766,183 |
|
| 765,217 |
|
Accounts payable and accrued expenses |
|
| 57,593 |
|
| 57,259 |
|
Accrued compensation |
|
| 3,000 |
|
| 3,784 |
|
Tenant security deposits |
|
| 5,431 |
|
| 5,355 |
|
Other liabilities: derivative liabilities |
|
| 3,721 |
|
| 5,551 |
|
Acquired unfavorable real estate leases, less accumulated amortization of $7,397 and $8,422, respectively |
|
| 6,371 |
|
| 8,923 |
|
Total liabilities |
|
| 1,142,299 |
|
| 1,126,089 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
Preferred stock, $.0001 par value, 20,000,000 shares authorized, none issued or outstanding |
|
| — |
|
| — |
|
Common stock, $.0001 par value, 180,000,000 shares authorized, 107,231,155 and 107,231,155 shares issued and outstanding, respectively |
|
| 11 |
|
| 11 |
|
Additional paid-in capital |
|
| 1,356,457 |
|
| 1,356,457 |
|
Accumulated other comprehensive loss |
|
| 4,954 |
|
| 5,478 |
|
Accumulated distributions in excess of accumulated earnings |
|
| (472,036) |
|
| (399,902) |
|
Total stockholders’ equity |
|
| 889,386 |
|
| 962,044 |
|
Total liabilities and stockholders’ equity |
| $ | 2,031,685 |
| $ | 2,088,133 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Franklin Street Properties Corp.
Condensed Consolidated Statements of IncomeOperations
(Unaudited)
| | | | | | | |
| | | | | | | |
| | For the Three Months Ended March 31, | | ||||
(in thousands, except per share amounts) |
| 2021 |
| 2020 |
| ||
| | | | | | | |
Revenues: | | | | | | | |
Rental | | $ | 58,623 | | $ | 62,567 | |
Related party revenue: | | | | | | | |
Management fees and interest income from loans | |
| 410 | |
| 403 | |
Other | |
| 6 | |
| 13 | |
Total revenues | |
| 59,039 | |
| 62,983 | |
Expenses: | | | | | | | |
Real estate operating expenses | |
| 15,939 | |
| 17,298 | |
Real estate taxes and insurance | |
| 12,366 | |
| 11,762 | |
Depreciation and amortization | |
| 24,381 | |
| 22,338 | |
General and administrative | |
| 4,146 | |
| 3,525 | |
Interest | |
| 8,600 | |
| 9,063 | |
Total expenses | |
| 65,432 | |
| 63,986 | |
| | | | | | | |
Loss before taxes | |
| (6,393) | |
| (1,003) | |
Tax expense | |
| 67 | |
| 68 | |
| | | | | | | |
Net loss | | $ | (6,460) | | $ | (1,071) | |
| | | | | | | |
Weighted average number of shares outstanding, basic and diluted | |
| 107,328 | |
| 107,269 | |
| | | | | | | |
Net loss per share, basic and diluted | | $ | (0.06) | | $ | (0.01) | |
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||||||
(in thousands, except per share amounts) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
| $ | 67,339 |
| $ | 61,925 |
| $ | 201,710 |
| $ | 179,738 |
|
Related party revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees and interest income from loans |
|
| 1,278 |
|
| 1,338 |
|
| 4,014 |
|
| 4,108 |
|
Other |
|
| 9 |
|
| 17 |
|
| 29 |
|
| 54 |
|
Total revenues |
|
| 68,626 |
|
| 63,280 |
|
| 205,753 |
|
| 183,900 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operating expenses |
|
| 17,898 |
|
| 16,905 |
|
| 52,492 |
|
| 47,126 |
|
Real estate taxes and insurance |
|
| 11,882 |
|
| 10,218 |
|
| 35,880 |
|
| 29,522 |
|
Depreciation and amortization |
|
| 24,988 |
|
| 23,298 |
|
| 75,599 |
|
| 68,095 |
|
Selling, general and administrative |
|
| 3,286 |
|
| 3,419 |
|
| 9,806 |
|
| 10,443 |
|
Interest |
|
| 8,258 |
|
| 6,767 |
|
| 23,730 |
|
| 19,617 |
|
Total expenses |
|
| 66,312 |
|
| 60,607 |
|
| 197,507 |
|
| 174,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in losses of non-consolidated REITs, other and gain (loss) on sale of properties and properties held for sale, less applicable income tax and taxes |
|
| 2,314 |
|
| 2,673 |
|
| 8,246 |
|
| 9,097 |
|
Equity in losses of non-consolidated REITs |
|
| (121) |
|
| (196) |
|
| (719) |
|
| (568) |
|
Other |
|
| 67 |
|
| 621 |
|
| 218 |
|
| (388) |
|
Gain (loss) on sale of properties and properties held for sale, less applicable income tax |
|
| (257) |
|
| (523) |
|
| (18,460) |
|
| (1,166) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income |
|
| 2,003 |
|
| 2,575 |
|
| (10,715) |
|
| 6,975 |
|
Taxes on income |
|
| 100 |
|
| 117 |
|
| 297 |
|
| 326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 1,903 |
| $ | 2,458 |
| $ | (11,012) |
| $ | 6,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted |
|
| 107,231 |
|
| 103,709 |
|
| 107,231 |
|
| 101,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic and diluted |
| $ | 0.02 |
| $ | 0.02 |
| $ | (0.10) |
| $ | 0.07 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Franklin Street Properties Corp.
Condensed Consolidated Statements of Other Comprehensive Income (Loss)
(Unaudited)
| | | | | | | |
| | For the | | ||||
| | Three Months Ended | | ||||
| | March 31, | | ||||
(in thousands) |
| 2021 |
| 2020 |
| ||
| | | | | | | |
Net loss | | $ | (6,460) | | $ | (1,071) | |
| | | | | | | |
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on derivative financial instruments | |
| 3,613 | |
| (18,353) | |
| | | | | | | |
Total other comprehensive income (loss) | |
| 3,613 | |
| (18,353) | |
| | | | | | | |
Comprehensive loss | | $ | (2,847) | | $ | (19,424) | |
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the |
| For the |
| ||||||||
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(in thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 1,903 |
| $ | 2,458 |
| $ | (11,012) |
| $ | 6,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative financial instruments |
|
| 14 |
|
| 1,641 |
|
| (524) |
|
| (5,151) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
| 14 |
|
| 1,641 |
|
| (524) |
|
| (5,151) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
| $ | 1,917 |
| $ | 4,099 |
| $ | (11,536) |
| $ | 1,498 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Franklin Street Properties Corp.
Condensed Consolidated Statements of Cash FlowsStockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | Distributions | | | |
| ||
| | | | | | | Additional | | other | | in excess of | | Total |
| ||||
| | Common Stock | | Paid-In | | comprehensive | | accumulated | | Stockholders’ |
| |||||||
(in thousands, except per share amounts) |
| Shares |
| Amount |
| Capital |
| income (loss) |
| earnings |
| Equity |
| |||||
| | | | | | | | | | | | | | | | | |
|
Balance, December 31, 2019 |
| 107,269 | | $ | 11 | | $ | 1,356,794 | | $ | (4,682) | | $ | (565,727) | | $ | 786,396 | |
Comprehensive loss |
| — |
| | — |
| | — |
| | (18,353) |
| | (1,071) |
| | (19,424) | |
Distributions $0.09 per |
| — |
| | — |
| | — |
| | — |
| | (9,654) |
| | (9,654) | |
Balance, March 31, 2020 |
| 107,269 | | $ | 11 | | $ | 1,356,794 | | $ | (23,035) | | $ | (576,452) | | $ | 757,318 | |
| | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 |
| 107,328 | | $ | 11 | | $ | 1,357,131 | | $ | (17,311) | | $ | (571,740) | | $ | 768,091 | |
Comprehensive income (loss) |
| — |
| | — |
| | — |
| | 3,613 |
| | (6,460) |
| | (2,847) | |
Distributions $0.09 per |
| — |
| | — |
| | — |
| | — |
| | (9,660) |
| | (9,660) | |
Balance, March 31, 2021 |
| 107,328 | | $ | 11 | | $ | 1,357,131 | | $ | (13,698) | | $ | (587,860) | | $ | 755,584 | |
(Unaudited)
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, | ||||
(in thousands) |
| 2017 |
| 2016 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Net income (loss) |
| $ | (11,012) |
| $ | 6,649 |
Adjustments to reconcile net income or loss to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization expense |
|
| 77,418 |
|
| 69,750 |
Amortization of above and below market leases |
|
| (941) |
|
| (104) |
Hedge ineffectiveness |
|
| (218) |
|
| 388 |
(Gain) loss on sale of properties and properties held for sale, less applicable income tax |
|
| 18,460 |
|
| 1,166 |
Equity in losses of non-consolidated REITs |
|
| 719 |
|
| 568 |
Increase in allowance for doubtful accounts |
|
| 25 |
|
| 70 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Restricted cash |
|
| (32) |
|
| (25) |
Tenant rent receivables |
|
| (902) |
|
| (503) |
Straight-line rents |
|
| (2,021) |
|
| (2,094) |
Lease acquisition costs |
|
| (876) |
|
| (679) |
Prepaid expenses and other assets |
|
| (1,945) |
|
| (1,667) |
Accounts payable, accrued expenses and other items |
|
| (489) |
|
| 1,478 |
Accrued compensation |
|
| (784) |
|
| (488) |
Tenant security deposits |
|
| 76 |
|
| (110) |
Payment of deferred leasing commissions |
|
| (8,178) |
|
| (9,147) |
Net cash provided by operating activities |
|
| 69,300 |
|
| 65,252 |
Cash flows from investing activities: |
|
|
|
|
|
|
Property acquisitions |
|
| — |
|
| (100,302) |
Property improvements, fixtures and equipment |
|
| (41,743) |
|
| (22,020) |
Office computers and furniture |
|
| (119) |
|
| (77) |
Acquired real estate leases |
|
| — |
|
| (18,873) |
Distributions in excess of earnings from non-consolidated REITs |
|
| 1,041 |
|
| 691 |
Repayment of related party mortgage receivable |
|
| 9,795 |
|
| 39,596 |
Proceeds received on sales of real estate assets |
|
| 6,160 |
|
| 20,058 |
Net cash used in investing activities |
|
| (24,866) |
|
| (80,927) |
Cash flows from financing activities: |
|
|
|
|
|
|
Distributions to stockholders |
|
| (61,122) |
|
| (57,108) |
Proceeds from equity offering |
|
| — |
|
| 83,511 |
Offering costs |
|
| — |
|
| (544) |
Borrowings under bank note payable |
|
| 60,000 |
|
| 155,000 |
Repayments of bank note payable |
|
| (40,000) |
|
| (167,000) |
Deferred financing costs |
|
| — |
|
| (2,975) |
Net cash provided by (used in) financing activities |
|
| (41,122) |
|
| 10,884 |
Net increase (decrease) in cash and cash equivalents |
|
| 3,312 |
|
| (4,791) |
Cash and cash equivalents, beginning of year |
|
| 9,335 |
|
| 18,163 |
Cash and cash equivalents, end of period |
| $ | 12,647 |
| $ | 13,372 |
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
Accrued costs for purchases of real estate assets |
| $ | 6,053 |
| $ | 6,143 |
Accrued offering costs |
|
| — |
|
| 65 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | |
| | For the Three Months Ended March 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (6,460) | | $ | (1,071) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation and amortization expense | |
| 25,088 | |
| 23,086 |
Amortization of above and below market leases | |
| (32) | |
| (73) |
Decrease in allowance for doubtful accounts | |
| — | |
| (13) |
Changes in operating assets and liabilities: | | | | | | |
Tenant rent receivables | |
| 3,319 | |
| 255 |
Straight-line rents | |
| (1,904) | |
| (966) |
Lease acquisition costs | |
| (50) | |
| (470) |
Prepaid expenses and other assets | |
| (532) | |
| (644) |
Accounts payable and accrued expenses | |
| (9,564) | |
| (8,215) |
Accrued compensation | |
| (2,528) | |
| (2,065) |
Tenant security deposits | |
| (636) | |
| 269 |
Payment of deferred leasing commissions | |
| (5,056) | |
| (2,892) |
Net cash provided by operating activities | |
| 1,645 | |
| 7,201 |
Cash flows from investing activities: | | | | | | |
Property improvements, fixtures and equipment | | | (16,022) | | | (20,054) |
Net cash used in investing activities | |
| (16,022) | |
| (20,054) |
Cash flows from financing activities: | | | | | | |
Distributions to stockholders | |
| (9,660) | |
| (9,654) |
Borrowings under bank note payable | |
| 36,500 | |
| 35,000 |
Repayments of bank note payable | |
| (12,500) | |
| (5,000) |
Net cash provided by financing activities | |
| 14,340 | |
| 20,346 |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| (37) | |
| 7,493 |
Cash, cash equivalents and restricted cash, beginning of year | |
| 4,150 | |
| 9,790 |
Cash, cash equivalents and restricted cash, end of period | | $ | 4,113 | | $ | 17,283 |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for: | | | | | | |
Interest | | $ | 5,870 | | $ | 5,899 |
Taxes | | $ | 24 | | $ | — |
Non-cash investing activities: | | | | | | |
Accrued costs for purchases of real estate assets | | $ | 9,585 | | $ | 9,645 |
The accompanying notes are an integral part of these consolidated financial statements.
7
Franklin Street Properties Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards
Organization
Franklin Street Properties Corp. (“FSP Corp.” or the “Company”) holds, directly and indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management LLC, FSP Holdings LLC and FSP Protective TRS Corp.Corp. FSP Property Management LLC provides asset management and property management services. The Company also has a non-controlling common stock interest in six2 corporations organized to operate as real estate investment trusts (“REIT”) and a non-controlling preferred stock interest in two of those REITs.. Collectively, the six2 REITs are referred to as the “Sponsored REITs”.
As of September 30, 2017,March 31, 2021, the Company owned and operated a portfolio of real estate consisting of 3533 operating properties, one1 redevelopment property that was substantially redeveloped and is in lease-up and six2 managed Sponsored REITs;REITs and held four1 promissory notesnote secured by mortgagesa mortgage on real estate owned by a Sponsored REITs, including two mortgage loans and two revolving lines of credit.REIT. From time-to-time, the Company may acquire develop or redevelop real estate or make additional secured loans or acquire a Sponsored REIT.loans. The Company may also pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, or for geographic or property specific reasons.
Properties
The following table summarizes the Company’s number of operating properties and rentable square feet of real estate. In January 2016,As of March 31, 2021 and March 31, 2020, the Company classified one property as non-operating that was substantially redevelopedhad 1 and is in lease-up,3 redevelopment properties, respectively, which isare excluded as of September 30, 2017.
|
|
|
|
|
|
|
| As of September 30, |
| ||
|
| 2017 |
| 2016 |
|
Commercial real estate: |
|
|
|
|
|
Number of properties |
| 35 |
| 36 |
|
Rentable square feet |
| 10,085,889 |
| 9,683,846 |
|
from the table.
| | | | | |
| | As of March 31, |
| ||
|
| 2021 |
| 2020 |
|
Operating Properties: | | | | | |
Number of properties |
| 33 |
| 32 | |
Rentable square feet |
| 9,548,810 |
| 9,506,513 | |
Basis of Presentation
The unaudited condensed consolidated financial statements of the Company include all of the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2016,2020, as filed with the Securities and Exchange Commission.
The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Operating results for the three and nine months ended September 30, 2017March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172021 or for any other period.
7
Financial Instruments
As disclosed in Note 4, the Company’s derivatives are recorded at fair value using Level 2 inputs. The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued expenses, accrued compensation, and tenant security deposits approximate their fair values based on their short-term
8
maturity and the loan receivable, bank note and term loans payable approximate their fair values as they bear interest at variable interest rates or at spreadsrates that approximate market. are at market for similar investments.
Recent Accounting StandardsCash, Cash Equivalents and Restricted Cash
In May 2014,The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which provides guidance for revenue recognition. The standard’s core principle isconsolidated balance sheets that a company will recognize revenue when promised goods or services are transferredsum to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This update is effective for interim and annual reporting periods beginning after December 15, 2017. A substantial portiontotal of our revenue consists of rental income from leasing arrangements, which is specifically excluded from Topic 606. We are continuing to evaluate Topic 606; however, we do not believe there will be a material impact on the timing of our revenue recognitionsame such amounts shown in the consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.statement of cash flows.
| | | | | | |
|
| March 31, |
| March 31, | ||
(in thousands) | | 2021 | | 2020 | ||
Cash and cash equivalents | | $ | 2,613 | | $ | 17,283 |
Restricted cash | |
| 1,500 | |
| — |
Total cash, cash equivalents and restricted cash | | $ | 4,113 | | $ | 17,283 |
Recent Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to establish a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees will continue to recognize lease expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This new standard is effective for annual periods beginning after December 15, 2018, and interim periods thereafter with early adoption permitted. The Company is currently evaluating the potential changes from ASU 2016-02 to future financial reporting and disclosures. The Company expects that the adoption of this standard in 2019 will increase our assets and liabilities by approximately $3 million for the addition of right-of-use assets and lease liabilities related to an operating lease for office space; however, we do not expect the adoption of this standard to have a material impact to our results of operations or liquidity.
In August 2016,March 2020, the FASB issued ASU No. 2016-15, Statement2020-04, Reference Rate Reform (Topic 848): Facilitation of Cash Flows (Topic 230): Classificationthe Effects of Certain Cash ReceiptsReference 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 Cash Payments (“other contracts. The guidance in ASU 2016-15”), which clarifies how reporting entities should present2020-04 is optional and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15may be elected over time as reference rate reform activities occur. The Company is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU 2016-15 will have on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (“ASU 2016-18”), which clarifies how reporting entities should present restricted cash and restricted cash equivalents. Reporting entities will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU 2016-18 will2020-04 may have on ourits consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”), which provides additional guidance on evaluating whether transactions should be accounted for as an acquisition (or disposal) of assets of a business. The update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. This update will be applied prospectively to any transactions occurring within the period of adoption. We are currently assessing the impact of the update; however, subsequent to adoption we believe certain property acquisitions which under previous guidance would have been accounted for as business combinations will be accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under business combination guidance.
8
2. Related Party Transactions and Investments in Non-Consolidated Entities
Investment in Sponsored REITs:
At September 30, 2017each of March 31, 2021 and December 31, 2016,2020, the Company held a non-controlling common stock interest in six and seven2 Sponsored REITs respectively. The Company holds a non-controlling preferred stock investment in two of these Sponsored REITs, FSP 303 East Wacker Drive Corp. (“East Wacker”) and FSP Grand Boulevard Corp. (“Grand Boulevard”), from which it continues to derive economic benefits and risks.
During the year ended December 31, 2016 properties owned by two Sponsored REITs were sold and during the nine months ended September 30, 2017, another property owned by a Sponsored REIT was sold and, thereafter, liquidating distributions for their preferred shareholders were declared and issued. The Company held a mortgage loan with two of these entities, which were secured by the property owned by FSP 385 Interlocken Development Corp. (“385 Interlocken”) and the property owned by FSP 1441 Main Street Corp. (“1441 Main”). The loan with 385 Interlocken in the principal amount of $37,500,000 and the loan with 1441 Main in the principal amount of $9,000,000 were repaid by the proceeds of the sales.
Equity in losses of investment in non-consolidated REITs:
The following table includes equity in losses of investments in non-consolidated REITs
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| ||||
(in thousands) |
| 2017 |
| 2016 |
| ||
|
|
|
|
|
|
|
|
Equity in losses of East Wacker |
| $ | 272 |
| $ | 444 |
|
Equity in losses of Grand Boulevard |
|
| 447 |
|
| 124 |
|
|
| $ | 719 |
| $ | 568 |
|
Equity in losses of investments in non-consolidated REITs is derived from the Company’s share of income or loss in the operations of those entities. The Company exercises influence over, but does not control these entities, and investments are accounted for using the equity method.
Equity in losses of East Wacker is derived from the Company’s preferred stock investment in the entity. In December 2007, the Company purchased 965.75 preferredno longer shares in economic benefit or 43.7% of the outstanding preferred shares of East Wacker for $82,813,000 (which represented $96,575,000 at the offering price net of commissions of $7,726,000, loan fees of $5,553,000 and acquisition fees of $483,000 that were excluded).risk.
Equity in losses of Grand Boulevard is derived from the Company’s preferred stock investment in the entity. In May 2009, the Company purchased 175.5 preferred shares or 27.0% of the outstanding preferred shares of Grand Boulevard for $15,049,000 (which represented $17,550,000 at the offering price net of commissions of $1,404,000, loan fees of $1,009,000 and acquisition fees of $88,000 that were excluded).
The Company recorded distributions of $1,041,000 and $691,000 from non-consolidated REITs during the nine months ended September 30, 2017 and 2016, respectively.
Management fees and interest income from loans:
Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelablecancellable with 30 days notice. Asset management fee income from non-consolidated entitiesamounted to approximately $459,000$16,000 and $474,000$21,000 for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively.
From time to time the Company may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. The Company reviews the need for an allowance under CECL for Sponsored REIT loans for impairmentLoans each reporting period. The Company regularly evaluates the extent and impact of any credit deterioration that could affect performance and the value of the secured property, as well as the financial and operating capability of the borrower. A loanproperty’s operating results and existing cash balances are considered and used to assess whether cash flows from operations are sufficient to cover the current and future operating and debt service requirements. The Company also evaluates the borrower’s competency in managing and operating the secured property and considers the overall economic environment, real estate sector and geographic sub-market in which the secured property is impaired when,
9
based on current information and events, it is probable that the Company will be unable to collect all amounts recorded on the balance sheet.located. The Company applies normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment. NoneNaN of the Sponsored REIT loans have been impaired.
The Company anticipates that eachthe Sponsored REIT Loan will be repaid at maturity or earlier from refinancing, long term financings of the underlying properties,property, cash flows from the underlying propertiesproperty or some other capital event. EachThe Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately one to threetwo years. Except for two mortgage loans which bear interest at a fixed rate, advances under each Sponsored REIT Loan bear interest at a rate equal to the 30-day LIBOR rate plus an agreed upon amount
9
The following is a summary of the Sponsored REIT LoansLoan outstanding as of September 30, 2017:March 31, 2021:
| | | | | | | | | | | | |
|
|
|
|
|
| Maximum |
| Amount | Interest |
| ||
(dollars in thousands, except footnotes) |
| | | Maturity | | Amount | | Outstanding | Rate at |
| ||
Sponsored REIT |
| Location | | Date | | of Loan | | 31-Mar-21 | 31-Mar-21 |
| ||
| | | | | | | | | | | |
|
Mortgage loan secured by property | | | | | | | | | | | | |
FSP Monument Circle LLC (1) | | Indianapolis, IN | | 6-Dec-22 | | $ | 21,000 | | $ | 21,000 | 7.51 | % |
| | | | | | | | | | | | |
| | | | | | $ | 21,000 | | $ | 21,000 | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Maximum |
| Amount |
|
|
|
|
|
| Interest |
| ||
(dollars in thousands) |
|
|
| Maturity |
| Amount |
| Drawn at |
| Interest |
| Draw |
| Rate at |
| |||
Sponsored REIT |
| Location |
| Date |
| of Loan |
| 30-Sep-17 |
| Rate (1) |
| Fee (2) |
| 30-Sep-17 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured revolving lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FSP Satellite Place Corp. |
| Duluth, GA |
| 31-Dec-19 |
| $ | 5,500 |
| $ | 2,385 |
| L+ | 4.4 | % | 0.5 | % | 5.63 | % |
FSP Energy Tower I Corp. (3) |
| Houston, TX |
| 30-Jun-19 |
|
| 20,000 |
|
| 15,600 |
| L+ | 5.0 | % | 0.5 | % | 6.23 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan secured by property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FSP Monument Circle LLC (4) |
| Indianapolis, IN |
| 7-Dec-18 |
|
| 21,000 |
|
| 21,000 |
|
| 4.90 | % | n/a |
| 4.90 | % |
FSP Energy Tower I Corp. (3) (5) |
| Houston, TX |
| 30-Jun-19 |
|
| 33,000 |
|
| 33,000 |
|
| 6.41 | % | n/a |
| 6.41 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 79,500 |
| $ | 71,985 |
|
|
|
|
|
|
|
|
(1) |
| The interest rate is |
|
|
|
|
|
|
|
|
The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $3,554,000$394,000 and $3,634,000$382,000 for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively.
Non-consolidated REITs:
The balance sheet data below for 2017financial instrument was classified within Level 3 of the fair value hierarchy and 2016 includes the 6 and 7 Sponsored REITs the Company held an interest inhad a fair value of approximately $20.3 million as of September 30, 2017 and DecemberMarch 31, 2016, respectively. The operating data below for 2017 and 2016 include the operations of the 7 and 9 Sponsored REITs in which the Company held an interest in during the nine months ended September 30, 2017 and 2016, respectively.2021.
Summarized financial information for these Sponsored REITs is as follows:
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
(in thousands) |
| 2017 |
| 2016 |
| ||
|
|
|
|
|
|
|
|
Balance Sheet Data (unaudited): |
|
|
|
|
|
|
|
Real estate, net |
| $ | 311,999 |
| $ | 345,532 |
|
Other assets |
|
| 77,140 |
|
| 86,594 |
|
Total liabilities |
|
| (151,830) |
|
| (164,820) |
|
Shareholders’ equity |
| $ | 237,309 |
| $ | 267,306 |
|
10
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended |
| ||||
|
| September 30, |
| ||||
(in thousands) |
| 2017 |
| 2016 |
| ||
|
|
|
|
|
|
|
|
Operating Data (unaudited): |
|
|
|
|
|
|
|
Rental revenues |
| $ | 40,775 |
| $ | 40,453 |
|
Other revenues |
|
| 5 |
|
| 36 |
|
Operating and maintenance expenses |
|
| (21,219) |
|
| (21,892) |
|
Depreciation and amortization |
|
| (14,220) |
|
| (13,663) |
|
Interest expense |
|
| (6,256) |
|
| (6,380) |
|
Gain (loss) on sale, less applicable income tax |
|
| (702) |
|
| 26,397 |
|
Net income (loss) |
| $ | (1,617) |
| $ | 24,951 |
|
3. Bank Note Payable and Term Note Payable
JPM Term Loan
On November 30, 2016,December 6, 2020, the Company entered into a second amendment to the Sponsored REIT Loan which qualified as a troubled debt restructuring. The amendment extended the maturity date of the loan for two years and increased the interest rate from 7.19% to 7.51%. There were no commitments to lend additional funds to the Sponsored REIT and the loan is fully collateralized by the mortgage held on the Sponsored REIT's property. Repayment of the Sponsored REIT Loan outstanding with FSP Monument Circle LLC is expected to be provided substantially through the operation or sale of the collateral.
3. Bank Note Payable, Term Loans Payable and Senior Notes
JPM Term Loan
On August 2, 2018, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (“JPM(the “JPM Credit Agreement”), to providewhich provides a single unsecured bridge loan in the aggregate principal amount of $150 million (the “JPM Term Loan”) that. On December 24, 2020, the Company repaid a $50 million portion of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, and $100 million remains fully advanced and outstanding.outstanding under the JPM Term Loan. The JPM Term Loan has a two year term that matures on November 30, 2018. 2021. The Company has the right to extend the maturity date of the JPM Term Loan by 2 additional six month periods, or until November 30, 2022, (subject to specified exceptions). The JPM Term Loan was previously evidenced by a Credit Agreement, dated November 30, 2016, among the Company, JPMorgan, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated October 18, 2017.
The JPM Term Loan bears interest at either (i) a number of basis points over the Eurodollar Ratea LIBOR-based rate depending on the Company’s credit rating (135.0(125.0 basis points over the Eurodollar RateLIBOR-based rate at September 30, 2017)March 31, 2021) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (35.0(25.0 basis points over the base rate at September 30, 2017)March 31, 2021).
Based upon the Company’s credit rating, as of September 30, 2017,Although the interest rate on the JPM Term Loan was 2.60%is variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44% per annum. The weighted averageannum on a $100 million portion of the JPM Term Loan until November 30, 2021. Accordingly, based upon the Company’s credit rating, as of March 31, 2021, the effective interest rate on the JPM Term Loan during the nine months ended September 30, 2017 was approximately 2.38% per annum. The weighted average interest rate onremaining $100 million portion of the JPM Term Loan during the year ended December 31, 2016 was approximately 1.99%3.69% per annum.
The JPM Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in
10
business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The JPM Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, aand minimum unsecured interest coveragecoverage. The JPM 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 maximum ratiochange in control of the Company (as defined in the JPM 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 JPM Credit Agreement immediately due and payable, and enforce any and all rights of the lenders or administrative agent under the JPM Credit Agreement and related documents. For certain investmentsevents of default related to total assets.bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the JPM Term Loan financial covenants as of September 30, 2017.March 31, 2021.
The Company used the net proceeds of the JPM Term Loan to acquire the property located at 600 17th Street, Denver, Colorado on December 1, 2016 and for other general business purposes.
BMO Term Loan
On July 21, 2016,September 27, 2018, the Company entered into a First Amendment (the “BMO First Amendment”) to theSecond Amended and Restated Credit Agreement dated October 29, 2014 among the Company,with the lending institutions party thereto and Bank of Montreal (“BMO”), as administrative agent ( as amended by the BMO First Amendment, the(the “BMO Credit Agreement”). The BMO Credit Agreement provides for a single, unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”) that remains fully advanced and outstanding. The BMO Term Loan consists of a $55 million tranche A term loan and a $165 million tranche B term loan. The tranche A term loan matures on August 26, 2020.November 30, 2021 and the tranche B term loan matures on January 31, 2024. The BMO Credit Agreement also includes an accordion feature that allows up to $50$100 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions. The BMO Term Loan was previously evidenced by an Amended and Restated Credit Agreement, dated October 29, 2014, among the Company, BMO, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated July 21, 2016, and a Second Amendment, dated October 18, 2017.
The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165(125 basis points over LIBOR at September 30, 2017)March 31, 2021) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65(25 basis points over the base rate at September 30, 2017)March 31, 2021).
11
Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into an interest rate swap agreement.transactions. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32%2.32% per annum, which matured on August 26, 2020. 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 seven years, until the period beginning on August 26, 2020 maturity date.and ending January 31, 2024. Accordingly, based upon the Company’s credit rating, as of September 30, 2017,March 31, 2021, the effective interest rate on the BMO Term Loan was 3.97%3.64% per annum.
The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. 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 minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coveragecoverage. 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 maximum ratiochange 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 the administrative agent under the BMO Credit Agreement and related documents. For certain investmentsevents of default related to total assets.bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BMO Term Loan financial covenants as of September 30, 2017.March 31, 2021.
The Company may use the proceeds11
BAML Credit Facility
On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and extended the maturity of aan existing term loan (the “BAML Term Loan”).
BAML Revolver Highlights
| The BAML Revolver is for borrowings, at the |
| Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the initial maturity date of |
| The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to |
As of September 30, 2017,March 31, 2021, there were borrowings$27.5 million of $300 millionborrowings outstanding under the BAML Revolver. The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.25%(1.20% over LIBOR at September 30, 2017)March 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.25%(0.20% over the base rate at September 30, 2017)March 31, 2021). The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating (0.25% at September 30, 2017).rating. The facility fee is assessed against the total amount of the BAML Revolver, or $500 million.$600 million (0.25% at March 31, 2021).
Based upon the Company’s credit rating, as of September 30, 2017,March 31, 2021, the weighted average interest rate on the BAML Revolver was 2.49%1.31% per annum. As of December 31, 2016, the weighted average interest rate on the BAML Revolver was 1.88% per annum and there were borrowings of $280 million outstanding. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the ninethree months ended September 30, 2017March 31, 2021 was approximately 2.26%1.31% per annum. As of December 31, 2020, there were $3.5 million of borrowings outstanding under the BAML Revolver. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 20162020 was approximately 1.73%1.65% per annum.
12
BAML Term Loan Highlights
| The BAML Term Loan is for $400 million. |
| The BAML Term Loan matures on |
| The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to |
| On September 27, 2012, the Company drew down the entire $400 million under the BAML Term Loan and such amount remains fully advanced and outstanding under the BAML |
The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.45%(1.35% over LIBOR at September 30, 2017)March 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.45%(0.35% over the base rate at September 30, 2017)March 31, 2021).
Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into an interest rate swap agreement. On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the BAML Term Loan at 0.75% per annum until September 27, 2017.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 BAML Term Loan at 1.12% per
12
annum for the period beginning on September 27, 2017 and ending on September 27, 2021. Accordingly, based upon the Company’s credit rating, as of September 30, 2017,March 31, 2021, the effective interest rate on the BAML Term Loan was 2.57%2.47% per annum.
BAML Credit Facility General Information
The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type.type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility 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 minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coveragecoverage. The BAML Credit Facility 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 maximum ratiochange in control of the Company (as defined in the BAML Credit Facility). 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 BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents. For certain investmentsevents of default related to total assets.bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BAML Credit Facility financial covenants as of September 30, 2017.March 31, 2021.
The Company may use the proceeds of the loans under the BAML Credit Facility to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BAML Credit Facility.
Senior Notes
On October 24, 2017, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with the various purchasers named therein (the “Purchasers”) in connection with a private placement of senior unsecured notes. Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers an aggregate principal amount of $200 million of senior unsecured notes consisting of (i) 3.99% Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) 4.26% Series B Senior Notes due December 20, 2027 in an aggregate principal amount of $84 million (the “Series B Notes” and, together with the Series A Notes, the “Senior Notes”). On December 20, 2017, the Senior Notes were funded and the proceeds were used to reduce the outstanding balance of the BAML Revolver.
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 BAML Credit Facility, the BMO Credit Agreement and the JPM Credit Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50; a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. The Company was in compliance with the Senior Notes financial covenants as of March 31, 2021.
13
4. Financial Instruments: Derivatives and Hedging
On July 22, 2016, the Company fixed the interest rate for the period beginning on September 27, 2017 and ending on September 27, 2021 on the BAML Term Loan with multiple interest rate swap agreements (the “2017 Interest Rate Swap”). On August 26, 2013,March 7, 2019, the Company fixed the interest rate until August 26, 2020for the period beginning on March 29, 2019 and ending on November 30, 2021 on a $100 million portion of the BMOJPM Term Loan with an interest rate swap agreement (the “BMO“2019 JPM Interest Rate Swap”). On September 27, 2012,February 20, 2019, the Company fixed the interest rate until September 27, 2017for the period beginning August 26, 2020 and ending January 31, 2024 on the BAMLBMO Term Loan with an interest rate swap agreement (the “BAML“2019 BMO Interest Rate Swap”). The variable rates that were fixed under the 2017 Interest Rate Swap, the BMO2019 JPM Interest Rate Swap and the BAML2019 BMO Interest Rate Swap (collectively referred to as the “Interest Rate Swaps”) are described in Note 3.
The 2017 Interest Rate Swap, the BMO Interest Rate Swap and the BAML Interest Rate SwapSwaps qualify as cash flow hedges and have been recognized on the consolidated balance sheetsheets at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings in the same period in which the hedged interest payments affect earnings, which may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.
13
The following table summarizes the notional and fair value of ourthe Company’s derivative financial instruments at September 30, 2017.March 31, 2021. The notional value is an indication of the extent of ourthe Company’s involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Notional |
| Strike |
| Effective |
| Expiration |
| Fair |
| ||||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||
|
| Notional |
| Strike |
| Effective |
| Expiration |
| Fair Value (2) at |
| ||||||||||||||||||
(in thousands) |
| Value |
| Rate |
| Date |
| Date |
| Value |
| | Value | | Rate | | Date | | Date | | March 31, 2021 |
| December 31, 2020 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | |
| | |
| |||||||||||||
2017 Interest Rate Swap |
| $ | 400,000 |
| 1.12 | % | Sep-17 |
| Sep-21 |
| $ | 10,771 |
| | $ | 400,000 |
| 1.12 | % | Sep-17 |
| Sep-21 | | $ | (1,981) | | $ | (2,947) | |
BMO Interest Rate Swap |
| $ | 220,000 |
| 2.32 | % | Aug-13 |
| Aug-20 |
| $ | (3,721) |
| ||||||||||||||||
2019 JPM Interest Rate Swap | | $ | 100,000 |
| 2.44 | % | Mar-19 |
| Nov-21 | | $ | (1,540) | | $ | (2,102) | | |||||||||||||
2019 BMO Interest Rate Swap (1) | | $ | 220,000 |
| 2.39 | % | Aug-20 |
| Jan-24 | | $ | (10,177) | | $ | (12,262) | | |||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||
(1) The Notional Value will decrease to $165 million on November 30, 2021. | (1) The Notional Value will decrease to $165 million on November 30, 2021. | | |||||||||||||||||||||||||||
(2) Classified within Level 2 of the fair value hierarchy. | (2) Classified within Level 2 of the fair value hierarchy. | |
On September 30, 2017,March 31, 2021, the 2017 Interest Rate Swap, was2019 JPM Interest Rate Swap and 2019 BMO Interest Rate Swap were reported as liabilities with an asset at itsaggregate fair value of approximately $10.8$13.7 million and the BMO Interest Rate Swap was reported as a liability at its fair value of approximately $3.7 million. These are included in other liabilities: derivative liability and other assets: derivative asset onliabilities in the consolidated balance sheet at September 30, 2017, respectively. Offsetting adjustments are reported as unrealized gains or lossesMarch 31, 2021.
The gain/(loss) on derivative financial instrumentsthe Company’s Interest Rate Swaps that was recorded in accumulated other comprehensive income (loss) (OCI) and the accompanying consolidated statements of $0.5 million. Duringoperations as a component of interest expense for the ninethree months ended September 30, 2017, $1.4 millionMarch 31, 2021 and 2020, respectively, was reclassified out of other comprehensive income and into interest expense.as follows:
| | | | | | |
(in thousands) | | Three Months Ended March 31, | ||||
Interest Rate Swaps in Cash Flow Hedging Relationships: |
| 2021 |
| 2020 | ||
| | | | | | |
Amounts of gain (loss) recognized in OCI | | $ | 807 | | $ | (18,389) |
Amounts of previously recorded gain/(loss) reclassified from OCI into Interest Expense | | $ | (2,806) | | $ | (36) |
| | | | | | |
Total amount of Interest Expense presented in the consolidated statements of operations | | $ | 8,600 | | $ | 9,063 |
Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. We estimateThe Company estimates that approximately $0.6$7.1 million of the current balance held in accumulated other comprehensive income (loss) will be reclassified into earnings within the next 12 months.
14
The Company is hedging the exposure to variability in anticipated future interest payments on existing debt.
The BMO Term Loan, BAML Term Loan and JPM Term Loan hedging transactions used derivative instruments that involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in either or both of the contracts. The Company requires its derivatives contracts to be with counterparties that have investment grade ratings. As a result, the Company does not anticipate that any counterparty will fail to meet its obligations. However, there can be no assurance that the Company will be able to adequately protect against the foregoing risks or that it will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk. The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the condensed consolidated balance sheets.
The Company’s derivatives are recorded at fair value in other liabilitiesassets: derivative asset and other liabilities: derivative liability in the condensed consolidated balance sheets. Thesheets and the effective portion of the derivatives’ fair value is recorded to other comprehensive income (loss) in the condensed consolidated statements of other comprehensive income (loss) and the ineffective portion of the derivatives’ fair value is recognized directly into earnings as Other in the condensed consolidated statements of income. .
The interest rate swaps effectively fix the interest rate on the BAML Term Loan and BMO Term Loan; however, there is no floor on the variable interest rate of the swaps whereas the BAML Term Loan and BMO Term Loan are subject to a zero percent floor. As a result there is a mismatch and the ineffective portion of the derivatives’ changes in fair value are recognized directly into earnings.
During the three and nine months ended September 30, 2017, the Company recorded $0.1 million and $0.2 million, respectively, of hedge ineffectiveness in earnings. During the three and nine months ended September 30, 2016, the Company recorded ($0.6) million and $0.4 million, respectively, of hedge ineffectiveness in earnings. Hedge ineffectiveness is included in “Other” in the condensed consolidated statements of income.
In the event that LIBOR is negative, the Company will make payments to the hedge counterparty equal to the spread between LIBOR and zero, which will be included in interest expense in the condensed consolidated statements of income.
5. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of Company shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or
14
other contracts to issue shares were exercised or converted into shares. There were no0 potential dilutive shares outstanding at September 30, 2017each of March 31, 2021 and 2016, respectively.2020.
6. Stockholders’ Equity
On August 16, 2016, the Company completed an underwritten public offering of 7,043,750 shares of its common stock (including 918,750 shares issued as a result of the full exercise of an overallotment option by the underwriter) at a price to the public of $12.35 per share. The proceeds from this public offering, net of underwriter discounts and offering costs, totaled approximately $82.9 million.
As of September 30, 2017,March 31, 2021, the Company had 107,231,155107,328,199 shares of common stock outstanding. The Company declared and paid dividends as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
| Dividends Per |
| Total |
| ||
Quarter Paid |
| Share |
| Dividends |
| ||
|
|
|
|
|
|
|
|
First quarter of 2017 |
| $ | 0.19 |
| $ | 20,374 |
|
Second quarter of 2017 |
| $ | 0.19 |
| $ | 20,374 |
|
Third quarter of 2017 |
| $ | 0.19 |
| $ | 20,374 |
|
|
|
|
|
|
|
|
|
First quarter of 2016 |
| $ | 0.19 |
| $ | 19,036 |
|
Second quarter of 2016 |
| $ | 0.19 |
| $ | 19,036 |
|
Third quarter of 2016 |
| $ | 0.19 |
| $ | 19,036 |
|
| | | | | | | |
| | Dividends Per | | Total |
| ||
Quarter Paid |
| Share |
| Dividends |
| ||
| | | | | | | |
First quarter of 2021 |
| $ | 0.09 |
| $ | 9,660 | |
| | | | | | | |
First quarter of 2020 |
| $ | 0.09 |
| $ | 9,654 | |
Equity-Based Compensation
On May 20, 2002, the stockholders of the Company approved the 2002 Stock Incentive Plan (the “Plan”). The Plan is an equity-based incentive compensation plan, and provides for the grants of up to a maximum of 2,000,000 shares of the Company’s common stock (“Awards”). All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted Awards. Awards under the Plan are made at the discretion of the Company’s Board of Directors, and have 0 vesting requirements. Upon granting an Award, the Company will recognize compensation cost equal to the fair value of the Company’s common stock, as determined by the Company’s Board of Directors, on the date of the grant.
On June 4, 2020, the Company granted 58,998 shares under the Plan to non-employee directors at a compensation cost of approximately $337,000, which was recognized during the year ended December 31, 2020 and is included in general and administrative expenses for such period. Such shares were fully vested on the date of issuance. There are currently 1,847,384 shares available for grant under the Plan.
| | | | | | |
| Shares Available | | Compensation |
15
(in thousands) | | for Grant | | Cost | ||
| | | | | | |
Balance December 31, 2019 | | | 1,906,382 | | | 337,000 |
Shares granted 2020 | | | (58,998) | | | 337,000 |
Balance December 31, 2020 | | | 1,847,384 | | $ | 674,000 |
Shares granted 2021 | | | - | | | - |
Balance March 31, 2021 | | | 1,847,384 | | $ | 674,000 |
| | | | | | |
7. Income Taxes
General
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10%10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”). In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 25%20% (25% of taxable years beginning on or before December 31, 2017) of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets. FSP Investments LLC and FSP Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code. The TRSs have gross amounts of net operating losses (“NOLs”) available to those taxable corporations of $4.6 million and $4.4 million as of each of December 31, 2020, and 2019 respectively. The NOLs created prior to 2018 will expire between 2030 and 2047 and the NOLs generated after 2017 will not expire. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured.
Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.
The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company and one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statute of limitations for the
15
Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 20132017 and thereafter.
Net operating losses
Section 382 of the Code restricts a corporation’s ability to use NOLs to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs generated prior to December 31, 2018 will expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured. The gross amount of NOLs available to the Company was $13.0 million as of each of March 31, 2021 and December 31, 2020.
16
Income Tax Expense
The Company is subject to a business tax known as the Revised Texas Franchise Tax. Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax. The Company recorded a provision for the Revised Texas Franchise Tax of $261,000$67,000 and $261,000$68,000 for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively.
Net operating losses
Section 382 of the Code restricts a corporation’s ability to use net operating losses (“NOLs”) to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured. The gross amount of NOLs available to the Company was $13,041,000 as of each of September 30, 2017 and December 31, 2016.
Income Tax Expense
The income tax expense reflected in the condensed consolidated statements of incomeoperations relates primarily to a franchise tax on ourthe Company’s Texas properties. FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties and the tax expenses associated with these activities are reported as Other Taxes in the table below:
|
|
|
|
|
|
|
| |||||||
|
| For the Nine Months Ended September 30, |
| |||||||||||
| | | | | | | | |||||||
| | For the Three Months Ended March 31, |
| |||||||||||
(Dollars in thousands) |
| 2017 |
| 2016 |
|
| 2021 |
| 2020 |
| ||||
|
|
|
|
|
|
|
| |||||||
Revised Texas franchise tax |
| $ | 261 |
| $ | 261 |
| |||||||
| | | | | | |
| |||||||
Revised Texas Franchise Tax | | $ | 67 | | $ | 68 | | |||||||
Other Taxes |
|
| 36 |
|
| 65 |
| |
| — | |
| — | |
Taxes on income |
| $ | 297 |
| $ | 326 |
| |||||||
Tax expense | | $ | 67 | | $ | 68 | |
Taxes on income are a current tax expense. NoNaN deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.
8. Leases
8. Dispositions
Leases as a Lessor:
The Company is a lessor of propertiescommercial real estate with operations that include the leasing of office and industrial properties. Many of the leases with customers contain options to extend leases at a fair market rate and may also include options to terminate leases. The Company considers several inputs when evaluating the amount it expects to derive from its leased assets at the end of the lease terms, such as the remaining useful life, expected market conditions, fair value of lease payments, expected fair values of underlying assets, and expected deployment of the underlying assets. The Company’s strategy to address its risk for the residual value in its commercial real estate is to re-lease the commercial space.
DuringThe Company has elected to apply the practical expedient to not separate non-lease components from the related lease component of real estate leases. This combined component is primarily comprised of fixed lease payments, early termination fees, common area maintenance cost reimbursements, and parking lease payments. The Company applies ASC 842-Leases to the combined lease and non-lease components.
A minority of the Company’s leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in the CPI are not estimated as part of the Company’s measurement of straight-line rent revenue, to the extent that the actual CPI is greater or less than the CPI at lease commencement, there could be changes to realized income or loss.
For the three months ended June 30, 2017,March 31, 2021 and 2020, the Company reached a decision to classify an office property located in Baltimore, Maryland as an asset held for sale. In evaluatingrecognized the Baltimore, Maryland property, management considered various subjective factors, including the time, cost and likelihoodfollowing amounts of successfully leasing the property, the effect of the property’s results on its unencumbered asset value, which is part of the leverage ratio used to compare to a maximum leverage covenant in the JPM Term Loan, BMO Term Loan and the BAML Credit Facility, future capital costs to upgrade and reposition the multi-tenant property andincome relating to lease up the building, recent leasing and economic activity in the local area, and offers to purchase the property. The Company concluded that selling the property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $0.3 million and $20.7 million for the three and nine months ended September 30, 2017, respectively, net of applicable income taxes, and was classified as an asset held for sale at September 30, 2017. The Company estimated the fair value of the property, less estimated costs to sell using the offers to purchase the property made by third parties (Level 3 inputs, as there is no active market).payments:
| | | | | | |
Income relating to lease payments: | | | ||||
| | Three Months Ended | ||||
(in thousands) |
| March 31, 2021 |
| March 31, 2020 | ||
Income from leases (1) | | $ | 56,709 | | $ | 61,529 |
| | $ | 56,709 | | $ | 61,529 |
| | | | | | |
(1) Amounts recognized from variable lease payments were $14,688 and $15,629 for the three months ended March 31, 2021 and 2020, respectively. | | | | | | |
16
17
During the three months ended December 31, 2016, we reached an agreement to sell an office property located in Milpitas, California. The property was classified as an asset held for sale at December 31, 2016 and was sold on January 6, 2017 at approximately a $2.3 million gain.
During the year ended December 31, 2016, the Company sold an office property located in Maryland Heights, Missouri on April 5, 2016, at a $4.2 million gain. During the three months ended June 30, 2016, the Company reached a decision to classify its office property located in Federal Way, Washington, as an asset held for sale. In evaluating the Federal Way, Washington property, management considered various subjective factors. The Company concluded that selling the property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $0.5 million and $5.3 million during the three and nine months ended September 30, 2016, respectively, net of applicable income taxes and was classified as an asset held for sale. The Company sold the property on December 16, 2016 for $7.3 million of net proceeds resulting in a total loss of $7.1 million, net of applicable income taxes.
The disposals did not represent a strategic shift that has a major effect on the Company's operations and financial results. Accordingly, the properties remain classified within continuing operations for all periods presented.
On October 6, 2017,April 2, 2021, the Board of Directors of the Company declared a cash distribution of $0.19$0.09 per share of common stock payable on November 9, 2017May 7, 2021 to stockholders of record on October 20, 2017.April 16, 2021.
On October 18, 2017, the Company recast the BAML Credit Facility to, among other things, (i) increase the BAML Revolver from $500 million to $600 million, (ii) extend the BAML Revolver maturity date from October 29, 2018 to January 12, 2022 (with two optional six month extensions), (iii) extend the BAML Term Loan maturity date from September 27,March 5, 2021, to January 12, 2023, (iv) decrease the interest rate margins, (v) reset the minimum tangible net worth threshold, (vi) increase certain leverage ratios for three fiscal quarters (instead of two fiscal quarters) succeeding a significant acquisition, and (v) increase the accordion feature from $350 million to $500 million. The Company also simultaneously amended the BMO Credit Agreement and the JPM Credit Agreement to conform to certain provisions of the BAML Credit Facility, including updating financial covenants, certain definitions and making other conforming changes.
On October 20, 2017, the Company sold the office property in Baltimore, Maryland described in Note 8, “Dispositions of properties,” for approximately $31.6 million in net proceeds.
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 connectionand Sale Agreement with a private placementthird-party buyer for the disposition of senior unsecured notes. Under the Note Purchase Agreement,3 office properties located in Atlanta, Georgia for a purchase price of approximately $219.5 million. The buyer’s due diligence inspection period expired on April 15, 2021 and the Company will sellhad no assurance the sale was probable as of March 31, 2021. Assuming satisfaction of certain customary conditions to close, the Purchasers an aggregate principal amount of $200,000,000 of senior unsecured notes consisting of (i) 3.99% Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) 4.26% 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 “Notes”). The fundingclosing of the Notessale of the properties is expected to occurtake place on or about December 20, 2017, subjectMay 17, 2021; provided, however, that seller and buyer each have a 1-time right to customaryextend the closing conditions. The Company intendsdate by up to usethirty (30) days by providing notice to the proceeds fromother party at least three (3) business days prior to the private placement to reduce the outstanding balance of the BAML Revolver. then scheduled closing date.
1718
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. Historical results and percentage relationships set forth in the condensed consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, adverse changes in general economic or local market conditions, including as a result of the COVID-19 pandemic and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the United States,markets in which we own properties, including energy-influenced markets such as Dallas, Denver and Houston, changes in interest rates as a result of economic market conditions or a downgrade in our credit rating, 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, changes in energy prices, 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, additional staffing, insurance increases and real estate tax valuation reassessments. See Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20162020 and Part II, Item 1A. “Risk Factors” below. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.
Overview
FSP Corp., or we or the Company, operates in a single reportable segment: real estate operations. The real estate operations market involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development. Our current strategy is to invest in select urban infill and central business district office properties with primary emphasis on our five core markets of Atlanta, Dallas, Denver, Houstonin the United States sunbelt and Minneapolis.mountain west regions as well as select opportunistic markets. We believe that our five core marketsthe United States sunbelt and mountain west regions have macro-economic drivers that have the potential to increase occupancies and rents. We will also monitor other markets for opportunistic investments. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.
As of September 30, 2017,March 31, 2021, approximately 7.67.8 million square feet, or approximately 75.5%80% of our total owned portfolio, was located in our five core markets. From time-to-time we may dispose of our smaller, suburban office assetsAtlanta, Dallas, Denver, Houston and replace them with larger urban infill and central business district office assets located primarily in our five core markets. As we execute this strategy, short term operating results could be adversely impacted. However, we believe that the transformed portfolio has the potential to provide higher profit and asset value growth over a longer period of time. Minneapolis.
The main factor that affects our real estate operations is the broad economic market conditions in the United States. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on broader economic/market conditions. We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.
In 2021, we determined that further debt reduction would provide greater financial flexibility and potentially increase shareholder value. Accordingly, we have adopted a strategy to dispose of certain properties in 2021 where we believe our valuation objective has been met. Pursuant to this strategy we anticipate dispositions in 2021 will result in estimated aggregate gross proceeds in the range of $350 million to $450 million. As we execute this strategy, our revenue and Funds From Operations are likely to decrease in the short term. Proceeds from these potential dispositions would be used primarily for the repayment of debt, which will likely decrease our interest expense in the short term. Further to this strategy, we previously announced that we entered into a purchase and sale agreement with respect to the following properties: One and Two Ravinia Drive in Atlanta, Georgia; and One Overton Park in Atlanta, Georgia. Aggregate gross proceeds under the purchase and sale agreement would be approximately $219.5 million. The potential sale of One and Two Ravinia Drive and
19
One Overton Park remain subject to customary closing conditions. These dispositions are expected to close in the second quarter of 2021.
Trends and Uncertainties
COVID-19 Outbreak
Beginning in January 2020, there was a global outbreak of COVID-19, which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. It has already disrupted global travel supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain. Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, as well as the availability and effectiveness of vaccines, therapeutics and any responses taken on a national and local level by government authorities and businesses. The travel restrictions, limits on hours of operations and/or closures of various businesses and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally, including in the markets where we own properties, and we expect them to have an adverse impact on our business. Many of our tenants are subject to various quarantine restrictions, and the restrictions could be in place for an extended period of time. The pandemic has had an adverse impact on economic and market conditions and triggered a global economic slowdown. The reduction in economic activity worldwide has had a significant negative effect on energy prices, which, if sustained, could have an adverse impact on occupancy and rental rates in energy-influenced markets such as Dallas, Denver and Houston, where we have a significant concentration of properties. However, the evolving nature of the pandemic makes it difficult to ascertain the long-term impact it will have on commercial real estate markets and our business. Nevertheless, the COVID-19 pandemic presents 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 potential negative impact to leasing efforts and occupancy at our properties, the potential closure of certain of our assets for an extended period, 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, a potential downgrade in our credit rating that could lead to increased borrowing costs or reduce our access to funding sources in credit and capital markets, 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, our ability to complete required capital expenditures in a timely manner and on budget, decrease 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 impact the COVID-19 pandemic will have on our future financial results at this time. See Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
We have been following and directing our vendors to follow the guidelines from the Centers for Disease Control and other applicable authorities to minimize the spread of COVID-19 among our employees, tenants, vendors and visitors, as well as at our properties. We have implemented working from home policies for our employees. During the three months ended March 31, 2021 and as of April 30, 2021, all of our properties remained open for business. Although some of our tenants have requested rent concessions, and more tenants may request rent concessions or may not pay rent in the future, as of March 31, 2021, we had collected in excess of approximately 99% of rental receipts due in March 2021. Future rent concession requests or nonpayment of rent could lead to increased rent delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions or lower occupancy, extended lease terms, increased tenant improvement capital expenditures, or reduced rental rates to maintain occupancies. We review each rent concession request on a case by case basis and may or may not provide rent concessions, depending on the specific circumstances involved. Cash, cash equivalents and restricted cash were $4.1 million as of March 31, 2021. Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BAML Revolver ($572.5 million as of March 31, 2021) 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. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties.
20
Economic Conditions
The economy in the United States has been adversely impacted as a result of the COVID-19 pandemic. Economic conditions directly affect the demand for office space, our primary income producing asset. The broad economic market conditions in the United States are typically affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, the pace of economic growth and/or recessionary concerns, uncertainty about government fiscal, monetary, trade and tax policies, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit, and interest rates. As of the date of this report, the impact of the COVID-19 pandemic and related fallout from containment and mitigation measures, such as work from home arrangements and the closing of various businesses, is adversely affecting current economic conditions in the United States.
Real Estate Operations
As of March 31, 2021, our real estate portfolio was comprised of 33 operating properties, which we refer to as our operating properties, and one redevelopment property, which we refer to as our redevelopment property, that is in the process of being redeveloped. We collectively refer to our operating and our redevelopment properties as our owned portfolio. Our 33 operating properties were approximately 81.9% leased as of March 31, 2021, a decrease from 85.0% leased as of December 31, 2020. The 3.1% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded leasing completed during the three months ended March 31, 2021. As of March 31, 2021, we had approximately 1,725,000 square feet of vacancy in our operating properties compared to approximately 1,397,000 square feet of vacancy at December 31, 2020. During the three months ended March 31, 2021, we leased approximately 377,000 square feet of office space, of which approximately 370,000 square feet were with existing tenants, at a weighted average term of 9.3 years. On average, tenant improvements for such leases were $18.67 per square foot, lease commissions were $10.23 per square foot and rent concessions were approximately nine months of free rent. Average GAAP base rents under such leases were $28.46 per square foot, or 1.7% lower than average rents in the respective properties as applicable compared to the year ended December 31, 2020.
We reclassify redevelopment properties as operating properties when the property redevelopment is complete and leasing has stabilitized. Given the length of the redevelopment and lease-up process, the reclassification of a property may take a significant amount of time.
As of March 31, 2021, our sole redevelopment property was an approximately 111,000 square foot property known as Stonecroft in Chantilly, Virginia. The redevelopment of Stonecroft commenced in August 2020. We expect to incur total redevelopment and lease-up costs of $18.5 million, which includes significant interior work to make the space suitable for multiple tenants, or to accommodate a tenant with accredited security requirements. As of March 31, 2021, we had incurred approximately $2.3 million in redevelopment costs. We anticipate completing the redevelopment by July 31, 2021.
Our property known as Blue Lagoon in Miami, Florida, was substantially completed during the first quarter of 2021, and had previously been classified as a redevelopment property. As of March 31, 2021, the property had leases signed and a tenant occupying approximately 73.1% of the rentable square feet of the property. On September 13, 2019, we entered into a lease agreement with a new tenant with an initial term of 16 years for approximately 156,000 square feet, or 73.1% of the property’s rentable square feet.
As of March 31, 2021, leases for approximately 4.9% and 8.8% of the square footage in our owned portfolio are scheduled to expire during 2021 and 2022, respectively. As the second quarter of 2021 begins, we believe that our operating properties are well 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 COVID-19 pandemic and related containment and mitigation measures may limit or delay new tenant leasing during at least the second quarter of 2021 and potentially in future periods.
While we cannot generally predict when an existing vacancy in our owned portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates. Also, we believe the potential exists for any of our tenants to default on its lease or to seek the protection
21
of bankruptcy. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.
Critical Accounting Policies
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
18
Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations. No changes to our critical accounting policies have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This update is effective for interim and annual reporting periods beginning after December 15, 2017. A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from Topic 606. We are continuing to evaluate Topic 606: however, we do not believe there will be a material impact on the timing of our revenue recognition in the consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”). ASU 2016-02 requires lessees to establish a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees will continue to recognize lease expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This new standard is effective for annual periods beginning after December 15, 2018, and interim periods thereafter with early adoption permitted. The Company is currently evaluating the potential changes from ASU 2016-02 to future financial reporting and disclosures. The Company expects that the adoption of this standard in 2019 will increase our assets and liabilities by approximately $3 million for the addition of right-of-use assets and lease liabilities related to an operating lease for office space; however, we do not expect the adoption of this standard to have a material impact to our results of operations or liquidity.
In August 2016,March 2020, the FASB issued ASU No. 2016-15, Statement2020-04, Reference Rate Reform (Topic 848): Facilitation of Cash Flows (Topic 230): Classificationthe Effects of Certain Cash ReceiptsReference 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 Cash Payments (“other contracts. The guidance in ASU 2016-15”), which clarifies how reporting entities should present2020-04 is optional and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15may be elected over time as reference rate reform activities occur. The Company is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU 2016-15 will have on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (“ASU 2016-18”), which clarifies how reporting entities should present restricted cash and restricted cash equivalents. Reporting entities will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU 2016-18 will2020-04 may have on ourits consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”), which provides additional guidance on evaluating whether transactions should be accounted for as an acquisition (or disposal) of assets of a business. The update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. This update will be applied prospectively to any transactions occurring within the period of adoption. We are currently assessing the impact of the update; however, subsequent to adoption we believe certain property acquisitions which under previous guidance would have been accounted for as business combinations will be accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under business combination guidance.
19
Trends and Uncertainties
Economic Conditions
The economy in the United States is continuing to experience a period of slow to moderate economic growth, which directly affects the demand for office space, our primary income producing asset. The broad economic market conditions in the United States are affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, the pace of economic growth and/or recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit and interest rates. In addition, the Federal Reserve Bank has indicated that it could raise interest rates further in 2017 and 2018. Any increase in interest rates could result in increased borrowing costs to us. However, we could also benefit from any further improved economic fundamentals and increasing levels of employment. We believe that the economy is in a cyclically-slower but prolonged broad-based upswing. However, future economic factors may negatively affect real estate values, occupancy levels and property income.
Real Estate Operations
Leasing
Our real estate portfolio was approximately 88.7% leased as of September 30, 2017, a decrease from 89.3% as of December 31, 2016. The 0.6% decrease in leased space was a result of lease expirations and terminations during the nine months ended September 30, 2017. As of September 30, 2017, we had approximately 1,141,000 square feet of vacancy in our portfolio compared to approximately 1,086,000 square feet of vacancy at December 31, 2016. During the nine months ended September 30, 2017, we leased approximately 936,000 square feet of office space, of which approximately 729,000 square feet were with existing tenants, at a weighted average term of 6.6 years. On average, tenant improvements for such leases were $22.43 per square foot, lease commissions were $8.83 per square foot and rent concessions were approximately three months of free rent. Average GAAP base rents under such leases were $29.61 per square foot, or 8.3% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2016.
In January 2016, our property at 801 Marquette Avenue in Minneapolis, Minnesota, with approximately 170,000 square feet of space, became vacant and we subsequently redeveloped the property. Interior demolition and construction work commenced during the three months ended September 30, 2016. As of September 30, 2017, we had incurred approximately $15.6 million in total redevelopment costs. Delivery of the substantially completed project was achieved at the end of the second quarter of 2017. Redevelopment of 801 Marquette Avenue has resulted in approximately 130,000 of net rentable square feet for the property. We anticipate the project, when leased, will attain rents of approximately $17 to $19 net rent per square foot compared to previously expired net rent of approximately $4.75 per square foot.
As of September 30, 2017, leases for approximately 1.4% and 12.7% of the square footage in our portfolio are scheduled to expire during 2017 and 2018, respectively. As the fourth quarter of 2017 begins, we believe that our property portfolio is well stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants. We believe that most of our largest property markets are now experiencing generally steady or improving rental conditions. We anticipate continued positive leasing activity within the portfolio in 2017.
While we cannot generally predict when an existing vacancy in our real estate portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates. Also, we believe the potential for any of our tenants to default on its lease or to seek the protection of bankruptcy exists. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.
20
Real Estate Acquisition and Investment Activity
During 2017:
|
|
|
|
|
|
|
|
|
|
During 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions of Properties and Asset Held for Sale
During the three months ended June 30, 2017, we reached a decision to classify our office property located in Baltimore, Maryland as an asset held for sale. In evaluating the Baltimore, Maryland property, management considered various subjective factors, including the time, cost and likelihood of successfully leasing the property, the effect of the property’s results on its unencumbered asset value, which is part of the leverage ratio used to compare to a maximum leverage covenant in the JPM Term Loan, BMO Term Loan and the BAML Credit Facility, future capital costs to upgrade and reposition the multi-tenant property and to lease up the building, recent leasing and economic activity in the local area, and offers to purchase the property. We concluded that selling the property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $0.3 million and $20.7 million for the three and nine months ended September 30, 2017, respectively, net of applicable income taxes, and was classified as an asset held for sale at September 30, 2017. This property was sold on October 20, 2017 for approximately $31.6 million in net proceeds.
During the three months ended December 31, 2016, we reached an agreement to sell an office property located in Milpitas, California. The property was classified as an asset held for sale at December 31, 2016 and was sold on January 6, 2017 at a $2.3 million gain.
During the year ended December 31, 2016, we sold an office property located in Maryland Heights, Missouri on April 5, 2016, at a $4.2 million gain. During the three months ended June 30, 2016, we reached a decision to classify its office property located in Federal Way, Washington, as an asset held for sale. In evaluating the Federal Way, Washington property,
21
management considered various subjective factors. We concluded that selling the property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale net of applicable income taxes and was classified as an asset held for sale. We sold the property on December 16, 2016 for $7.3 million of net proceeds resulting in a total loss of $7.1 million, net of applicable income taxes.
We will continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time in the ordinary course of business. We believe that the current property sales environment continues to improve in many markets relative to both liquidity and pricing. We believe that both improving office property fundamentals as well as attractive financing availability will likely be required to continue improvement in the marketplace for potential property dispositions. As an important part of our total return strategy, we intend to be active in property dispositions when we believe that market conditions warrant such activity and, as a consequence, we continuously review and evaluate our portfolio of properties for potentially advantageous dispositions.
Results of Operations
The following table shows financial results for the three months ended September 30, 2017March 31, 2021 and 2016:2020:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Three months ended September 30, |
| |||||||||||||||||
| | | | | | | | | | | ||||||||||
| | Three months ended March 31, | | |||||||||||||||||
(in thousands) |
| 2017 |
| 2016 |
| Change |
|
| 2021 |
| 2020 |
| Change |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Rental |
| $ | 67,339 |
| $ | 61,925 |
| $ | 5,414 |
| | $ | 58,623 | | $ | 62,567 | | $ | (3,944) | |
Related party revenue: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Management fees and interest income from loans |
|
| 1,278 |
|
| 1,338 |
|
| (60) |
| |
| 410 | |
| 403 | |
| 7 | |
Other |
|
| 9 |
|
| 17 |
|
| (8) |
| |
| 6 | |
| 13 | |
| (7) | |
Total revenues |
|
| 68,626 |
|
| 63,280 |
|
| 5,346 |
| |
| 59,039 | |
| 62,983 | |
| (3,944) | |
Expenses: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Real estate operating expenses |
|
| 17,898 |
|
| 16,905 |
|
| 993 |
| |
| 15,939 | |
| 17,298 | |
| (1,359) | |
Real estate taxes and insurance |
|
| 11,882 |
|
| 10,218 |
|
| 1,664 |
| |
| 12,366 | |
| 11,762 | |
| 604 | |
Depreciation and amortization |
|
| 24,988 |
|
| 23,298 |
|
| 1,690 |
| |
| 24,381 | |
| 22,338 | |
| 2,043 | |
Selling, general and administrative |
|
| 3,286 |
|
| 3,419 |
|
| (133) |
| ||||||||||
General and administrative | |
| 4,146 | |
| 3,525 | |
| 621 | | ||||||||||
Interest |
|
| 8,258 |
|
| 6,767 |
|
| 1,491 |
| |
| 8,600 | |
| 9,063 | |
| (463) | |
Total expenses |
|
| 66,312 |
|
| 60,607 |
|
| 5,705 |
| |
| 65,432 | |
| 63,986 | |
| 1,446 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Income before equity in losses of non-consolidated REITs, other, gain (loss) on sale of properties and properties held for sale, less applicable income tax and taxes |
|
| 2,314 |
|
| 2,673 |
|
| (359) |
| ||||||||||
Equity in losses of non-consolidated REITs |
|
| (121) |
|
| (196) |
|
| 75 |
| ||||||||||
Other |
|
| 67 |
|
| 621 |
|
| (554) |
| ||||||||||
Loss on sale of properties and properties held for sale, less applicable income tax |
|
| (257) |
|
| (523) |
|
| 266 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Income before taxes on income |
|
| 2,003 |
|
| 2,575 |
|
| (572) |
| ||||||||||
Taxes on income |
|
| 100 |
|
| 117 |
|
| (17) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income |
| $ | 1,903 |
| $ | 2,458 |
| $ | (555) |
| ||||||||||
| | | | | | | | | | | ||||||||||
Loss before taxes | |
| (6,393) | |
| (1,003) | |
| (5,390) | | ||||||||||
Tax expense | |
| 67 | |
| 68 | |
| (1) | | ||||||||||
| | | | | | | | | | | ||||||||||
Net loss | | $ | (6,460) | | $ | (1,071) | | $ | (5,389) | |
22
Comparison of the three months ended September 30, 2017March 31, 2021 to the three months ended September 30, 2016:March 31, 2020:
Revenues
Total revenues increaseddecreased by $5.3$3.9 million to $68.6$59.0 million for the three months ended September 30, 2017,March 31, 2021, as compared to the three months ended September 30, 2016.March 31, 2020. The decrease was primarily a result of:
● | A decrease in rental revenue of approximately $3.9 million arising primarily from the sale of a property and a tenant bankruptcy in December 2020 and other losses of rental income from leases that expired after March 31, 2020 and during the three months ended March 31, 2021, compared to the three months ended March 31, 2020. These decreases were partially offset by rental income earned from leases commencing after March 31, 2020. Our leased space in our operating properties was 81.9% at March 31. 2021 and 85.4% at March 31, 2020. |
Expenses
Total expenses increased by $1.4 million to $65.4 million for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020. The increase was primarily a result of:
| An increase to depreciation and amortization of approximately $2.0 million. |
● | An increase in |
ExpensesThese increases were partially offset by:
Total expenses increased by $5.7 million to $66.3 million for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. The increase was primarily a result of:
|
|
|
|
|
|
Equity in losses of non-consolidated REITs
Equity in losses from non-consolidated REITs decreased approximately $0.1 million during the three months ended September 30, 2017 compared to the same period in 2016. The decrease was primarily attributable to equity in the loss from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, which decreased during the three months ended September 30, 2017 compared to the same period in 2016.
Other
OtherTax expense decreased by $0.6 million for each of the three months ended September 30, 2017 and the three months ended September 30, 2016, which is attributable to hedge ineffectiveness from our derivatives’ fair value. The ineffective portion of the derivatives’ fair value are recognized directly into earnings each quarter as hedge ineffectiveness.
Gain on sale of property and provision for loss on property held for sale
During the three months ended June 30, 2017, we reached a decision to classify our office property located in Baltimore, Maryland as an asset held for sale. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $0.3 million and $20.7 million for the three and nine months
23
ended September 30, 2017, respectively, net of applicable income taxes, and was classified as an asset held for sale at September 30, 2017. This property was sold on October 20, 2017, for approximately $31.6 million in net proceeds.
During the three months ended June 30, 2016, we reached a decision to classify our office property located in Federal Way, Washington, as an asset held for sale. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $0.5 million and $5.3 million for the three and nine months ended September 30, 2016, respectively, net of applicable income taxes and was classified as an asset held for sale. The Company sold the property on December 16, 2016 for $7.3 million of net proceeds resulting in a total loss of $7.1 million, net of applicable income taxes.
During the three months ended September 30, 2016, we sold an office property located in Maryland Heights, Missouri on April 5, 2016, at a $4.2 million gain.
Taxes on income
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreasedincreased $1,000 and other income taxes, which decreased by $16,000 during the three months ended September 30, 2017, respectively,March 31, 2021 compared to the three months ended September 30, 2016. March 31, 2020.
Net loss
Net income
Net incomeloss for the three months ended September 30, 2017March 31, 2021 was $1.9$6.5 million compared to a net incomeloss of $2.5$1.1 million for the three months ended September 30, 2016,March 31, 2020, for the reasons described above.
24
23
The following table shows financial results for the nine months ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
| |||||||
(in thousands) |
| 2017 |
| 2016 |
| Change |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
Rental |
| $ | 201,710 |
| $ | 179,738 |
| $ | 21,972 |
|
Related party revenue: |
|
|
|
|
|
|
|
|
|
|
Management fees and interest income from loans |
|
| 4,014 |
|
| 4,108 |
|
| (94) |
|
Other |
|
| 29 |
|
| 54 |
|
| (25) |
|
Total revenues |
|
| 205,753 |
|
| 183,900 |
|
| 21,853 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
Real estate operating expenses |
|
| 52,492 |
|
| 47,126 |
|
| 5,366 |
|
Real estate taxes and insurance |
|
| 35,880 |
|
| 29,522 |
|
| 6,358 |
|
Depreciation and amortization |
|
| 75,599 |
|
| 68,095 |
|
| 7,504 |
|
Selling, general and administrative |
|
| 9,806 |
|
| 10,443 |
|
| (637) |
|
Interest |
|
| 23,730 |
|
| 19,617 |
|
| 4,113 |
|
Total expenses |
|
| 197,507 |
|
| 174,803 |
|
| 22,704 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in losses of non-consolidated REITs, other, gain (loss) on sale of properties and properties held for sale, less applicable income tax and taxes |
|
| 8,246 |
|
| 9,097 |
|
| (851) |
|
Equity in losses of non-consolidated REITs |
|
| (719) |
|
| (568) |
|
| (151) |
|
Other |
|
| 218 |
|
| (388) |
|
| 606 |
|
Gain (loss) on sale of properties and properties held for sale, less applicable income tax |
|
| (18,460) |
|
| (1,166) |
|
| (17,294) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income |
|
| (10,715) |
|
| 6,975 |
|
| (17,690) |
|
Taxes on income |
|
| 297 |
|
| 326 |
|
| (29) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (11,012) |
| $ | 6,649 |
| $ | (17,661) |
|
Comparison of the nine months ended September 30, 2017 to the nine months ended September 30, 2016:
Revenues
Total revenues increased by $21.9 million to $205.8 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The increase was primarily a result of:
|
|
This increase was partially offset by:
|
|
25
Expenses
Total expenses increased by $22.7 million to $197.5 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The increase was primarily a result of:
|
|
|
|
|
|
Equity in losses of non-consolidated REITs
Equity in losses from non-consolidated REITs increased approximately $0.2 million during the nine months ended September 30, 2017 compared to the same period in 2016. The increase was primarily attributable to equity in the loss from our preferred stock investment in a Sponsored REIT, FSP Grand Boulevard Corp., which increased during the nine months ended September 30, 2017 compared to the same period in 2016.
Other
Other expense was reduced by $0.6 million to $0.2 million during the nine months ended September 30, 2017 and was $0.4 million for the nine months ended September 30, 2016, which are attributable to hedge ineffectiveness from our derivatives’ fair value. The ineffective portion of the derivatives’ fair value are recognized directly into earnings each quarter as hedge ineffectiveness.
Gain on sale of property and provision for loss on property held for sale
During the three months ended June 30, 2017, we reached a decision to classify our office property located in Baltimore, Maryland as an asset held for sale. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $0.3 million and $20.7 million for the three and nine months ended September 30, 2017, respectively, net of applicable income taxes and was classified as an asset held for sale at September 30, 2017. The property was sold on October 20, 2017 for approximately $31.6 million in net proceeds.
During the three months ended December 31, 2016, we reached an agreement to sell an office property located in Milpitas, California. The property was classified as an asset held for sale at December 31, 2016 and was sold on January 6, 2017 at a $2.3 million gain.
During the three months ended June 30, 2016, we reached a decision to classify our office property located in Federal Way, Washington, as an asset held for sale. The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $0.5 million and $5.3 million for the three and nine months ended September 30, 2016, respectively, net of applicable income taxes and was classified as an asset held for sale. The
26
Company sold the property on December 16, 2016 for $7.3 million of net proceeds resulting in a total loss of $7.1 million, net of applicable income taxes.
During the nine months ended September 30, 2016, we sold an office property located in Maryland Heights, Missouri on April 5, 2016, at a $4.2 million gain.
Taxes on income
Included in income taxes is federal and other income taxes, which decreased $29,000 compared to the nine months ended September 30, 2016.
Net income (loss)
Net loss for the nine months ended September 30, 2017 was $11.0 million compared to net income of $6.6 million for the nine months ended September 30, 2016, for the reasons described above.
27
Non-GAAP Financial Measures
Funds From Operations
The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, hedge ineffectiveness, and acquisition costs of newly acquired properties that are not capitalized and lease acquisition costs that are not capitalized plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on mortgage loans, properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income or loss (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT, may define this term in a different manner. We have included the NAREIT FFO definition as of May 17, 2016 in the table and note that other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income or loss and cash flows from operating, investing and financing activities in the consolidated financial statements.
The calculations of FFO are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the |
| For the |
| ||||||||
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(in thousands): |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income (loss) |
| $ | 1,903 | $ |
| 2,458 |
| $ | (11,012) | $ |
| 6,649 |
|
(Gain) loss on sale of properties and properties held for sale, less applicable income tax |
|
| 257 |
| 523 |
|
| 18,460 |
| 1,166 |
| ||
Equity in losses of non-consolidated REITs |
|
| 121 |
|
| 196 |
|
| 719 |
|
| 568 |
|
FFO from non-consolidated REITs |
|
| 874 |
|
| 787 |
|
| 2,465 |
|
| 2,327 |
|
Depreciation and amortization |
|
| 24,903 |
|
| 23,112 |
|
| 74,658 |
|
| 67,991 |
|
NAREIT FFO |
|
| 28,058 |
|
| 27,076 |
|
| 85,290 |
|
| 78,701 |
|
Hedge ineffectiveness |
|
| (67) |
|
| (621) |
|
| (218) |
|
| 388 |
|
Acquisition costs of new properties |
|
| — |
|
| 215 |
|
| 18 |
|
| 349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds From Operations |
| $ | 27,991 |
| $ | 26,670 |
| $ | 85,090 |
| $ | 79,438 |
|
| | | | | | | | |
| | For the | | | ||||
| | Three Months Ended | | | ||||
| | March 31, | |
| ||||
(in thousands): |
| 2021 |
| 2020 |
|
| ||
Net loss | | $ | (6,460) | $ | | (1,071) | | |
Gain on sale of property | |
| — |
| — | | | |
Depreciation and amortization | |
| 24,349 | |
| 22,265 | | |
NAREIT FFO | |
| 17,889 | |
| 21,194 | | |
Lease Acquisition costs | |
| 116 | |
| 98 | | |
| | | | | | | | |
Funds From Operations | | $ | 18,005 | | $ | 21,292 | | |
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which we refer to as NOI. Management believes that investors are interested in this information. NOI is a non-GAAP financial measure that the Company defines as net income or loss (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, hedge ineffectiveness, gains or losses on the sale of assets and excludes non-property specific income and expenses. The information presented includes footnotes and the data is shown by region with properties owned in the periods presented, which we call Same Store. The comparative Same Store results include properties held for the periods
28
presented and exclude properties that are non-operating, being developed or redeveloped,redevelopment properties. We also exclude properties that have been placed in service, but that do not have operating activity for all periods presented, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees. NOI, as defined by the Company, may not be comparable to NOI
24
reported by other REITs that define NOI differently. NOI should not be considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions. The calculations of NOI are shown in the following table:
Net Operating Income (NOI)*
| | | | | | | | | | | | | | |
| | Rentable | | | | | | | | | | | | |
| | Square | | | | | | | | | | | |
|
| | Feet | | Three Months Ended | | Three Months Ended | | Inc | | % |
| |||
(in thousands) |
| or RSF |
| 31-Mar-21 |
| 31-Mar-20 |
| (Dec) |
| Change |
| |||
Region | | | | | | | | | | | | | | |
East |
| 573 |
| $ | 949 |
| $ | 1,325 |
| $ | (376) |
| (28.4) | % |
MidWest |
| 1,557 | |
| 5,378 | |
| 5,485 | |
| (107) |
| (2.0) | % |
South |
| 4,387 | |
| 12,423 | |
| 13,290 | |
| (867) |
| (6.5) | % |
West |
| 2,624 | |
| 10,369 | |
| 11,463 | |
| (1,094) |
| (9.5) | % |
Property NOI* from Operating Properties |
| 9,141 | |
| 29,119 | |
| 31,563 | |
| (2,444) |
| (7.7) | % |
Dispositions and Redevelopment Properties (a) | | 519 | |
| 642 | |
| 1,311 | |
| (669) |
| (1.8) | % |
Property NOI* | | 9,660 |
| $ | 29,761 |
| $ | 32,874 |
| $ | (3,113) |
| (9.5) | % |
| | | | | | | | | | | |
| | |
Same Store | | |
| $ | 29,119 |
| $ | 31,563 |
| $ | (2,444) |
| (7.7) | % |
| | | | | | | | | | | | | | |
Less Nonrecurring | | | | | | | | | | | | | | |
Items in NOI* (b) | | | |
| 32 | |
| 26 | |
| 6 |
| (0.1) | % |
| | | | | | | | | | | | | | |
Comparative | | | | | | | | | | | | | | |
Same Store | | |
| $ | 29,087 |
| $ | 31,537 |
| $ | (2,450) |
| (7.8) | % |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | Three Months Ended | | Three Months Ended | | | | | | | ||
Reconciliation to Net Income (Loss) | | | | 31-Mar-21 | | 31-Mar-20 | | | | | | | ||
Net loss | | |
| $ | (6,460) |
| $ | (1,071) | | | | | | |
Add (deduct): | | | | | | | | | | | | | | |
Management fee income | | | |
| (465) | |
| (478) | | | | | | |
Depreciation and amortization | | | |
| 24,381 | |
| 22,338 | | | | | | |
Amortization of above/below market leases | | | |
| (32) | |
| (73) | | | | | | |
General and administrative | | | |
| 4,146 | |
| 3,525 | | | | | | |
Interest expense | | | |
| 8,600 | |
| 9,063 | | | | | | |
Interest income | | | |
| (394) | |
| (382) | | | | | | |
Non-property specific items, net | | | |
| (15) | |
| (48) | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Property NOI* | | |
| $ | 29,761 |
| $ | 32,874 | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Rentable |
|
|
|
|
|
|
|
|
|
| Nine |
|
|
|
|
|
|
|
|
|
| Nine |
|
|
|
|
|
| ||
|
| Square |
|
|
|
|
|
|
|
|
|
| Months |
|
|
|
|
|
|
|
|
|
| Months |
|
|
|
|
|
| ||
|
| Feet |
| Three Months Ended |
| Ended |
| Three Months Ended |
| Ended |
| Inc |
| % |
| |||||||||||||||||
(in thousands) |
| or RSF |
| 31-Mar-17 |
| 30-Jun-17 |
| 30-Sep-17 |
| 30-Sep-17 |
| 31-Mar-16 |
| 30-Jun-16 |
| 30-Sep-16 |
| 30-Sep-16 |
| (Dec) |
| Change |
| |||||||||
Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East |
| 1,007 |
| $ | 3,917 |
| $ | 3,941 |
| $ | 3,926 |
| $ | 11,784 |
| $ | 3,944 |
| $ | 3,920 |
| $ | 3,954 |
| $ | 11,818 |
| $ | (34) |
| (0.3) | % |
MidWest |
| 1,224 |
|
| 3,017 |
|
| 2,479 |
|
| 2,989 |
|
| 8,485 |
|
| 2,958 |
|
| 3,102 |
|
| 2,974 |
|
| 9,034 |
|
| (549) |
| (6.1) | % |
South |
| 4,437 |
|
| 16,211 |
|
| 15,613 |
|
| 15,763 |
|
| 47,587 |
|
| 17,200 |
|
| 17,441 |
|
| 16,380 |
|
| 51,021 |
|
| (3,434) |
| (6.7) | % |
West |
| 2,010 |
|
| 8,189 |
|
| 8,999 |
|
| 8,519 |
|
| 25,707 |
|
| 8,190 |
|
| 8,355 |
|
| 7,926 |
|
| 24,471 |
|
| 1,236 |
| 5.1 | % |
Same Store |
| 8,678 |
|
| 31,334 |
|
| 31,032 |
|
| 31,197 |
|
| 93,563 |
|
| 32,292 |
|
| 32,818 |
|
| 31,234 |
|
| 96,344 |
|
| (2,781) |
| (2.9) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
| 1,083 |
|
| 4,914 |
|
| 5,325 |
|
| 5,073 |
|
| 15,312 |
|
| — |
|
| 166 |
|
| 1,893 |
|
| 2,059 |
|
| 13,253 |
| 13.5 | % |
Property NOI* from the continuing portfolio |
| 9,761 |
|
| 36,248 |
|
| 36,357 |
|
| 36,270 |
|
| 108,875 |
|
| 32,292 |
|
| 32,984 |
|
| 33,127 |
|
| 98,403 |
|
| 10,472 |
| 10.6 | % |
Dispositions, Non-Operating, Development or Redevelopment |
| 325 |
|
| 625 |
|
| 467 |
|
| 568 |
|
| 1,660 |
|
| 1,175 |
|
| 925 |
|
| 917 |
|
| 3,017 |
|
| (1,357) |
| (1.7) | % |
Property NOI* |
| 10,086 |
| $ | 36,873 |
| $ | 36,824 |
| $ | 36,838 |
| $ | 110,535 |
| $ | 33,467 |
| $ | 33,909 |
| $ | 34,044 |
| $ | 101,420 |
| $ | 9,115 |
| 9.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store |
|
|
| $ | 31,334 |
| $ | 31,032 |
| $ | 31,197 |
| $ | 93,563 |
| $ | 32,292 |
| $ | 32,818 |
| $ | 31,234 |
| $ | 96,344 |
| $ | (2,781) |
| (2.9) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Nonrecurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items in NOI* (a) |
|
|
|
| 65 |
|
| 1,178 |
|
| 1,103 |
|
| 2,346 |
|
| 413 |
|
| 586 |
|
| 146 |
|
| 1,145 |
|
| 1,201 |
| (1.3) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store |
|
|
| $ | 31,269 |
| $ | 29,854 |
| $ | 30,094 |
| $ | 91,217 |
| $ | 31,879 |
| $ | 32,232 |
| $ | 31,088 |
| $ | 95,199 |
| $ | (3,982) |
| (4.2) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine |
|
|
|
|
|
|
|
|
|
|
| Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Months |
|
|
|
|
|
|
|
|
|
|
| Months |
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Ended |
| Three Months Ended |
|
| Ended |
|
|
|
|
|
| ||||||||||||||
Reconciliation to Net Income (Loss) |
|
|
|
| 31-Mar-17 |
|
| 30-Jun-17 |
|
| 30-Sep-17 |
|
| 30-Sep-17 |
|
| 31-Mar-16 |
|
| 30-Jun-16 |
|
| 30-Sep-16 |
|
| 30-Sep-16 |
|
|
|
|
|
|
Net income (loss) |
|
|
| $ | 4,480 |
| $ | (17,395) |
| $ | 1,903 |
| $ | (11,012) |
| $ | 2,579 |
| $ | 1,612 |
| $ | 2,458 |
| $ | 6,649 |
|
|
|
|
|
|
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale of properties and properties held for sale, less applicable income taxes |
|
|
|
| (2,289) |
|
| 20,492 |
|
| 257 |
|
| 18,460 |
|
| — |
|
| 643 |
|
| 523 |
|
| 1,166 |
|
|
|
|
|
|
Hedge ineffectiveness |
|
|
|
| (22) |
|
| (129) |
|
| (67) |
|
| (218) |
|
| — |
|
| 1,009 |
|
| (621) |
|
| 388 |
|
|
|
|
|
|
Management fee income |
|
|
|
| (794) |
|
| (768) |
|
| (791) |
|
| (2,353) |
|
| (660) |
|
| (688) |
|
| (727) |
|
| (2,075) |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
| 25,332 |
|
| 25,279 |
|
| 24,988 |
|
| 75,599 |
|
| 22,445 |
|
| 22,352 |
|
| 23,298 |
|
| 68,095 |
|
|
|
|
|
|
Amortization of above/below market leases |
|
|
|
| (168) |
|
| (687) |
|
| (86) |
|
| (941) |
|
| 81 |
|
| — |
|
| (185) |
|
| (104) |
|
|
|
|
|
|
Selling, general and administrative |
|
|
|
| 3,443 |
|
| 3,077 |
|
| 3,286 |
|
| 9,806 |
|
| 3,530 |
|
| 3,494 |
|
| 3,419 |
|
| 10,443 |
|
|
|
|
|
|
Interest expense |
|
|
|
| 7,579 |
|
| 7,893 |
|
| 8,258 |
|
| 23,730 |
|
| 6,433 |
|
| 6,417 |
|
| 6,767 |
|
| 19,617 |
|
|
|
|
|
|
Interest income |
|
|
|
| (1,214) |
|
| (1,206) |
|
| (1,134) |
|
| (3,554) |
|
| (1,279) |
|
| (1,171) |
|
| (1,184) |
|
| (3,634) |
|
|
|
|
|
|
Equity in losses of non-consolidated REITs |
|
|
|
| 397 |
|
| 201 |
|
| 121 |
|
| 719 |
|
| 286 |
|
| 86 |
|
| 196 |
|
| 568 |
|
|
|
|
|
|
Non-property specific items, net |
|
|
|
| 129 |
|
| 67 |
|
| 103 |
|
| 299 |
|
| 52 |
|
| 155 |
|
| 100 |
|
| 307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI* |
|
|
| $ | 36,873 |
| $ | 36,824 |
| $ | 36,838 |
| $ | 110,535 |
| $ | 33,467 |
| $ | 33,909 |
| $ | 34,044 |
| $ | 101,420 |
|
|
|
|
|
|
(a) |
|
(b) | Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability. |
*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.
29
25
The information presented below provides the weighted average GAAP rent per square foot for the ninethree months ending September 30, 2017ended March 31, 2021 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in nonconsolidatednon-consolidated REITs or those to which we have provided Sponsored REIT Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Occupied |
| Weighted |
| |||||||||||||||||
|
|
|
|
|
| Year Built |
|
|
| Weighted |
| Percentage as of |
| Average |
| |||||||||||||||||
|
|
|
|
|
| or |
| Net Rentable |
| Occupied |
| September 30, |
| Rent per Occupied |
| |||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
| |
| ||||||||||||||||
| | | | | | | | | | | | Occupied | | Weighted |
| |||||||||||||||||
| | | | | | Year Built | | | | Weighted | | Percentage as of | | Average |
| |||||||||||||||||
| | | | | | or | | Net Rentable | | Occupied | | March 31, | | Rent per Occupied |
| |||||||||||||||||
Property Name |
| City |
| State |
| Renovated |
| Square Feet |
| Sq. Ft. |
| 2017 (a) |
| Square Feet (b) |
| | City | | State | | Renovated | | Square Feet | | Sq. Ft. | | 2021 (a) | | Square Feet (b) |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | |
| ||||||||||||||||
Forest Park |
| Charlotte |
| NC |
| 1999 |
| 62,212 |
| 62,212 |
| 100.0 | % | $ | 13.91 |
| | Charlotte | | NC | | 1999/2020 | | 64,198 | | 22,136 | | 34.5 | % | $ | 25.93 | |
Meadow Point |
| Chantilly |
| VA |
| 1999 |
| 138,537 |
| 138,537 |
| 100.0 | % |
| 26.17 |
| | Chantilly | | VA | | 1999 | | 138,537 | | 97,419 | | 70.3 | % | | 24.72 | |
Innsbrook |
| Glen Allen |
| VA |
| 1999 |
| 298,456 |
| 298,456 |
| 100.0 | % |
| 18.10 |
| | Glen Allen | | VA | | 1999 | | 298,183 | | 170,680 | | 57.2 | % |
| 18.65 | |
East Baltimore |
| Baltimore |
| MD |
| 1989 |
| 325,445 |
| 246,752 |
| 75.8 | % |
| 22.56 |
| ||||||||||||||||
Loudoun Tech Center |
| Dulles |
| VA |
| 1999 |
| 136,658 |
| 127,461 |
| 93.3 | % |
| 18.14 |
| | Dulles | | VA | | 1999 | | 136,658 | | 135,209 | | 98.9 | % |
| 20.73 | |
Stonecroft |
| Chantilly |
| VA |
| 2008 |
| 111,469 |
| 111,469 |
| 100.0 | % |
| 37.62 |
| ||||||||||||||||
Emperor Boulevard |
| Durham |
| NC |
| 2009 |
| 259,531 |
| 259,531 |
| 100.0 | % |
| 34.05 |
| ||||||||||||||||
Stonecroft (c) | | Chantilly | | VA | | 2008 | | 111,469 | | — | | — | % |
| — | | ||||||||||||||||
East total |
|
|
|
|
|
|
| 1,332,308 |
| 1,244,418 |
| 93.4 | % |
| 24.75 |
| | | | | | | | 749,045 | | 425,444 | | 56.8 | % |
| 21.08 | |
Northwest Point |
| Elk Grove Village |
| IL |
| 1999 |
| 177,095 |
| 177,095 |
| 100.0 | % |
| 19.17 |
| | Elk Grove Village | | IL | | 1999 | | 177,095 | | 177,095 | | 100.0 | % |
| 29.90 | |
909 Davis Street |
| Evanston |
| IL |
| 2002 |
| 196,581 |
| 152,901 |
| 77.8 | % |
| 27.79 |
| | Evanston | | IL | | 2002 | | 195,098 | | 182,104 | | 93.3 | % |
| 40.68 | |
River Crossing |
| Indianapolis |
| IN |
| 1998 |
| 205,059 |
| 194,868 |
| 95.0 | % |
| 23.07 |
| | Indianapolis | | IN | | 1998 | | 205,729 | | 204,700 | | 99.5 | % |
| 25.16 | |
Timberlake |
| Chesterfield |
| MO |
| 1999 |
| 234,496 |
| 234,496 |
| 100.0 | % |
| 26.27 |
| | Chesterfield | | MO | | 1999 | | 234,496 | | 224,319 | | 95.7 | % |
| 32.88 | |
Timberlake East |
| Chesterfield |
| MO |
| 2000 |
| 117,036 |
| 117,036 |
| 100.0 | % |
| 24.88 |
| | Chesterfield | | MO | | 2000 | | 117,036 | | 97,866 | | 83.6 | % |
| 26.99 | |
121 South 8th Street |
| Minneapolis |
| MN |
| 1974 |
| 293,422 |
| 189,727 |
| 64.7 | % |
| 21.25 |
| | Minneapolis | | MN | | 1974 | | 297,209 | | 249,269 | | 83.9 | % |
| 23.75 | |
801 Marquette Ave | | Minneapolis | | MN | | 1923/2017 | | 129,821 | | 48,021 | | 37.0 | % | | 35.11 | | ||||||||||||||||
Plaza Seven |
| Minneapolis |
| MN |
|
|
| 326,445 |
| 311,298 |
| 95.4 | % |
| 32.41 |
| | Minneapolis | | MN | | 1987 | | 330,096 | | 283,024 | | 85.7 | % |
| 32.61 | |
Midwest total |
|
|
|
|
|
|
| 1,550,134 |
| 1,377,420 |
| 88.9 | % |
| 25.65 |
| | | | | | | | 1,686,580 | | 1,466,398 | | 86.9 | % |
| 30.49 | |
Blue Lagoon Drive |
| Miami |
| FL |
| 2002 |
| 212,619 |
| 212,619 |
| 100.0 | % |
| 22.66 |
| | Miami | | FL | | 2002/2021 | | 213,182 | | 103,862 | | 48.7 | % | | 26.23 | |
One Overton Park |
| Atlanta |
| GA |
| 2002 |
| 387,267 |
| 276,547 |
| 71.4 | % |
| 25.01 |
| | Atlanta | | GA | | 2002 | | 387,267 | | 361,010 | | 93.2 | % |
| 21.58 | |
Park Ten |
| Houston |
| TX |
| 1999 |
| 157,460 |
| 103,247 |
| 65.6 | % |
| 31.23 |
| | Houston | | TX | | 1999 | | 157,460 | | 112,962 | | 71.7 | % |
| 31.29 | |
Addison Circle |
| Addison |
| TX |
| 1999 |
| 288,794 |
| 249,258 |
| 86.3 | % |
| 33.17 |
| | Addison | | TX | | 1999 | | 289,325 | | 242,194 | | 83.7 | % |
| 31.40 | |
Collins Crossing |
| Richardson |
| TX |
| 1999 |
| 300,887 |
| 300,887 |
| 100.0 | % |
| 24.78 |
| | Richardson | | TX | | 1999 | | 300,887 | | 251,241 |
| 83.5 | % | | 27.42 | |
Eldridge Green |
| Houston |
| TX |
| 1999 |
| 248,399 |
| 248,399 |
| 100.0 | % |
| 31.96 |
|
30
26
The information presented below provides the weighted average GAAP rent per square foot for the ninethree months ending September 30, 2017ended March 31, 2021 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in nonconsolidatednon-consolidated REITs or those to which we have provided Sponsored REIT Loans.
| | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
| |
|
|
| | | | | | | | | | | | Occupied | | Weighted |
| |
| | | | | | Year Built | | | | Weighted | | Percentage as of | | Average |
| |
| | | | | | or | | Net Rentable | | Occupied | | March 31, | | Rent per Occupied |
| |
Property Name | | City | | State | | Renovated | | Square Feet | | Sq. Ft. | | 2021 (a) | | Square Feet (b) |
| |
| | | | | | | | | | | | | | | |
|
Eldridge Green | | Houston | | TX | | 1999 | | 248,399 | | 248,399 |
| 100.0 | % | $ | 29.01 | |
Park Ten Phase II | | Houston | | TX | | 2006 | | 156,746 | | 148,924 |
| 95.0 | % | | 29.14 | |
Liberty Plaza | | Addison | | TX | | 1985 | | 216,952 | | 157,898 |
| 72.8 | % | | 23.12 | |
Legacy Tennyson Center | | Plano | | TX | | 1999/2008 | | 207,049 | | 125,741 |
| 60.7 | % | | 15.28 | |
One Legacy Circle | | Plano | | TX | | 2008 | | 214,110 | | 120,672 |
| 56.4 | % | | 38.79 | |
One Ravinia Drive | | Atlanta | | GA | | 1985 | | 386,602 | | 306,537 |
| 79.3 | % | | 26.49 | |
Two Ravinia Drive | | Atlanta | | GA | | 1987 | | 411,047 | | 276,594 |
| 67.3 | % | | 27.24 | |
Westchase I & II | | Houston | | TX | | 1983/2008 | | 629,025 | | 329,609 |
| 52.4 | % | | 28.03 | |
Pershing Park Plaza | | Atlanta | | GA | | 1989 | | 160,145 | | 158,447 | | 98.9 | % | | 33.67 | |
999 Peachtree | | Atlanta | | GA | | 1987 | | 621,946 | | 524,363 |
| 84.3 | % | | 34.52 | |
South Total | | | | | | | | 4,600,142 | | 3,468,453 |
| 75.4 | % | | 28.45 | |
380 Interlocken | | Broomfield | | CO | | 2000 | | 240,359 | | 175,703 |
| 73.1 | % | | 33.73 | |
1999 Broadway | | Denver | | CO | | 1986 | | 680,255 | | 480,940 |
| 70.7 | % | | 33.20 | |
1001 17th Street | | Denver | | CO | | 1977/2006 | | 655,420 | | 627,958 |
| 95.8 | % | | 37.08 | |
600 17th Street | | Denver | | CO | | 1982 | | 610,730 | | 526,877 |
| 86.3 | % | | 32.26 | |
Greenwood Plaza | | Englewood | | CO | | 2000 | | 196,236 | | 196,236 |
| 100.0 | % | | 25.21 | |
390 Interlocken | | Broomfield | | CO | | 2002 | | 241,512 | | 239,990 |
| 99.4 | % | | 33.03 | |
West Total | | | | | | | | 2,624,512 | | 2,247,704 |
| 85.6 | % | | 33.39 | |
| | | | | | | | | | | | | | | | |
Total Owned Properties | | | | | | | | 9,660,279 | | 7,607,999 | | 78.8 | % | $ | 29.89 | |
| | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Occupied |
| Weighted |
| |
|
|
|
|
|
| Year Built |
|
|
| Weighted |
| Percentage as of |
| Average |
| |
|
|
|
|
|
| or |
| Net Rentable |
| Occupied |
| September 30, |
| Rent per Occupied |
| |
Property Name |
| City |
| State |
| Renovated |
| Square Feet |
| Sq. Ft. |
| 2017 (a) |
| Square Feet (b) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Park Ten Phase II |
| Houston |
| TX |
| 2006 |
| 156,746 |
| 69,752 |
| 44.5 | % | $ | 29.20 |
|
Liberty Plaza |
| Addison |
| TX |
| 1985 |
| 218,934 |
| 183,642 |
| 83.9 | % |
| 21.59 |
|
Legacy Tennyson Center |
| Plano |
| TX |
| 1999/2008 |
| 202,600 |
| 132,865 |
| 65.6 | % |
| 20.97 |
|
One Legacy Circle |
| Plano |
| TX |
| 2008 |
| 214,110 |
| 211,669 |
| 98.9 | % |
| 36.83 |
|
One Ravinia Drive |
| Atlanta |
| GA |
| 1985 |
| 386,603 |
| 346,512 |
| 89.6 | % |
| 25.24 |
|
Two Ravinia Drive |
| Atlanta |
| GA |
| 1987 |
| 411,047 |
| 314,574 |
| 76.5 | % |
| 26.66 |
|
Westchase I & II |
| Houston |
| TX |
| 1983/2008 |
| 629,025 |
| 525,865 |
| 83.6 | % |
| 32.34 |
|
Pershing Park Plaza |
| Atlanta |
| GA |
| 1989 |
| 160,145 |
| 155,917 |
| 97.4 | % |
| 35.86 |
|
999 Peachtree |
| Atlanta |
| GA |
| 1987 |
| 621,946 |
| 599,556 |
| 96.4 | % |
| 30.08 |
|
South Total |
|
|
|
|
|
|
| 4,596,582 |
| 3,931,310 |
| 85.5 | % |
| 28.74 |
|
380 Interlocken |
| Broomfield |
| CO |
| 2000 |
| 240,358 |
| 199,209 |
| 82.9 | % |
| 30.90 |
|
1999 Broadway |
| Denver |
| CO |
| 1986 |
| 676,379 |
| 508,908 |
| 75.2 | % |
| 31.97 |
|
1001 17th Street |
| Denver |
| CO |
| 1977/2006 |
| 655,413 |
| 591,510 |
| 90.3 | % |
| 36.98 |
|
600 17th Street |
| Denver |
| CO |
| 1982 |
| 596,728 |
| 534,907 |
| 89.6 | % |
| 33.18 |
|
Greenwood Plaza |
| Englewood |
| CO |
| 2000 |
| 196,236 |
| 196,236 |
| 100.0 | % |
| 25.02 |
|
390 Interlocken |
| Broomfield |
| CO |
| 2002 |
| 241,751 |
| 233,411 |
| 96.6 | % |
| 29.64 |
|
West Total |
|
|
|
|
|
|
| 2,606,865 |
| 2,264,180 |
| 86.9 | % |
| 32.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total |
|
|
|
|
|
|
| 10,085,889 |
| 8,817,328 |
| 87.4 | % | $ | 28.69 |
|
(a) |
| Based on weighted occupied square feet for the |
(b) |
| Represents annualized GAAP rental revenue for the |
(c) | We define redevelopment properties as properties being developed, redeveloped or where redevelopment is complete, but are in lease-up and that are not stabilized. |
31
27
Liquidity and Capital Resources
Cash, and cash equivalents and restricted cash were $12.6$4.1 million and $9.3$4.2 million at September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The increasedecrease of $3.3$0.1 million is attributable to $69.3$1.6 million provided by operating activities, less $24.9$16.0 million used infor investing activities less $41.1plus $14.3 million used inprovided by financing activities. Management believes that existing cash, cash anticipated to be generated internally by operations and our existing debt financing will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. We have extension options on our JPM Term Loan and BAML Revolver (discussed below), which management expects to exercise, or we may seek to replace this indebtedness with new loans or extend the current loans. 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. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties.
Operating Activities
Cash provided by our operating activities for the ninethree months ended September 30, 2017March 31, 2021 of $69.3$1.6 million is primarily attributable to a net loss of $11.0 million excluding a gain on sale of a property of $2.3 million and a provision for loss on a property held for sale of $20.7$6.5 million plus the add-back of $75.0$23.1 million of non-cash expenses.expenses, plus a decrease in tenant rent receivables of $3.3 million. These amountsincreases were partially offset by an increase in payments of deferred leasing commissions of $8.2 million, an increase in prepaid and other assets of $1.9 million, a decrease in accounts payable and accrued expensescompensation of $1.2$12.1 million, an increase in payment of deferred leasing commissions of $5.1 million, an increase in tenant rent receivablessecurity deposits of $0.9$0.6 million and an increase in lease acquisition costsprepaid expenses and other assets of $0.9$0.5 million.
Investing Activities
Cash used infor investing activities for the ninethree months ended September 30, 2017March 31, 2021 of $24.9$16.0 million is primarily attributable to the purchases of other real estate assets and office equipment investments of approximately $41.9 million. These uses were partially offset by net proceeds received from the sale of a property on January 6, 2017 of $6.2 million, repayments received from two related party mortgages receivable of $9.8 million and distributions received from non-consolidated REITs of $1.0 million. investments.
Financing Activities
Cash used inprovided by financing activities for the ninethree months ended September 30, 2017March 31, 2021 of $41.1$14.3 million is primarily attributable to distributions paid to stockholders of $61.1 million, which was partially offset by net borrowings on the BAML Revolver (as defined below) of $20.0$24.0 million and was partially offset by distributions paid to stockholders of $9.7 million.
JPM Term Loan
On November 30, 2016,August 2, 2018, the Company entered into aan Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto (“JPM(the “JPM Credit Agreement”), to providewhich provides a single unsecured bridge loan in the aggregate principal amount of $150 million (the “JPM Term Loan”). On December 24, 2020, the Company repaid $50 million of the JPM Term Loan with a portion of the proceeds from the December 23, 2020 sale of its Durham, North Carolina property, so that $100 million remains fully advanced and outstanding.outstanding under the JPM Term Loan. The JPM Term Loan has a two year term that matures on November 30, 2018.2021, which maturity date may be extended by two additional six-month periods, or until November 30, 2022 (subject to specified exceptions). The JPM Term Loan was previously evidenced by a Credit Agreement, dated November 30, 2016, among the Company, JPMorgan, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated October 18, 2017.
The JPM Term Loan bears interest at either (i) a number of basis points over the Eurodollar Ratea LIBOR-based rate depending on the Company’s credit rating (135.0(125.0 basis points over the Eurodollar RateLIBOR-based rate at September 30, 2017)March 31, 2021) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (35.0(25.0 basis points over the base rate at SeptemberMarch 31, 2021).
28
Although the interest rate on the JPM Term Loan is variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44% per annum on the $100 million remaining portion of the JPM Term Loan until November 30, 2017).2021. Accordingly, based upon the Company’s credit rating, as of March 31, 2021, the effective interest rate on the JPM Term Loan was 3.69% per annum.
Based upon the Company’s credit rating, as of September 30, 2017,December 31, 2020, the weighted average interest rate on the JPM Term Loan was 2.60% per annum. The weighted average interest rate on the JPM Term Loan during the nine months ended September 30, 2017 was approximately 2.38% per annum. The weighted average interest rate onunhedged $50 million portion of the JPM Term Loan during the year ended December 31, 20162020 was approximately 1.99%1.90% per annum. The $50 million portion of the JPM Term Loan was repaid on December 24, 2020.
32
The JPM Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The JPM Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, aand minimum unsecured interest coveragecoverage. The JPM 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 maximum ratiochange in control of the Company (as defined in the JPM 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 JPM Credit Agreement immediately due and payable, and enforce any and all rights of the lenders or administrative agent under the JPM Credit Agreement and related documents. For certain investmentsevents of default related to total assets. Thebankruptcy, insolvency, and receivership, all outstanding obligations of the Company waswill become immediately due and payable. We were in compliance with the JPM Term Loan financial covenants as of September 30, 2017. March 31, 2021.
The Company used the net proceeds of the JPMBMO Term Loan to acquire the property located at 600 17th Street, Denver, Colorado on December 1, 2016 and for other general business purposes.
On October 18, 2017,September 27, 2018, the Company entered into a First Amendment to the JPM Credit Agreement to conform to certain provisions of the BAML Credit Facility as amended by the BAML Second Amendment (each as described further, below), including updating financial covenants, certain definitions and making other conforming changes.
BMO Term Loan
On July 21, 2016, the Company entered into a First Amendment (the “BMO First Amendment”) to the Amended and Restated Credit Agreement dated October 29, 2014 (among the Company,with the lending institutions party thereto and Bank of Montreal, as administrative agent ( as amended by the BMO First Amendment, the(the “BMO Credit Agreement”). The BMO Credit Agreement provides for a single, unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”) that remains fully advanced and outstanding. The BMO Term Loan consists of a $55 million tranche A term loan and a $165 million tranche B term loan. The tranche A term loan matures on August 26, 2020.November 30, 2021 and the tranche B term loan matures on January 31, 2024. The BMO Credit Agreement also includes an accordion feature that allows up to $50$100 million of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions.
The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165(125 basis points over LIBOR at September 30, 2017)March 31, 2021) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65(25 basis points over the base rate at September 30, 2017)March 31, 2021).
Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into an interest rate swap agreement.transactions. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum, which expired on August 26, 2020. 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 seven years, until the period beginning on August 26, 2020 maturity date.and ending January 31, 2024. Accordingly, based upon the Company’s credit rating, as of September 30, 2017,March 31, 2021, the effective interest rate on the BMO Term Loan was 3.97%3.64% per annum.
The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. 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
29
ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coveragecoverage. 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 maximum ratiochange 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 investmentsevents of default related to total assets. Thebankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company waswill become immediately due and payable. We were in compliance with the BMO Term Loan financial covenants as of September 30, 2017.March 31, 2021.
The Company may use the proceeds of the loans under the BMO Credit Agreement to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs, to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BMO Credit Agreement.
On October 18, 2017, the Company entered into a Second Amendment to the BMO Credit Agreement to conform to certain provisions of the BAML Credit Facility as amended by the BAML Second Amendment (each as described further, below), including updating financial covenants, certain definitions and making other conforming changes.
BAML Credit Facility
On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First
33
Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and extended the maturity of aan existing term loan (the “BAML Term Loan”).
BAML Revolver Highlights as of September 30, 2017 (prior to the BAML Second Amendment (as defined below))
| The BAML Revolver |
| Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the initial maturity date |
| The BAML Credit Facility includes an accordion feature that |
As of September 30, 2017,March 31, 2021, there were borrowings of $300$27.5 million outstanding under the BAML Revolver. As of September 30, 2017, theThe BAML Revolver borebears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.25%(1.20% over LIBOR at September 30, 2017)March 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.25%(0.20% over the base rate at September 30, 2017)March 31, 2021). As of September 30, 2017, theThe BAML Credit Facility also obligatedobligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating (0.25% at September 30, 2017).rating. The facility fee wasis assessed against the total amount of the BAML Revolver, or $500$600 million as of September 30, 2017. (0.25% at March 31, 2021).
Based upon the Company’s credit rating, as of September 30, 2017,March 31, 2021, the weighted average interest rate on the BAML Revolver was 2.49%1.31% per annum. As of December 31, 2016, the weighted average interest rate on the BAML Revolver was 1.88% per annum and there were borrowings of $280 million outstanding. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the ninethree months ended September 30, 2017March 31, 2021 was approximately 2.26%1.31% per annum. As of December 31, 2020, there were $3.5 million of borrowings outstanding under the BAML Revolver. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 20162020 was approximately 1.73%1.65% per annum.
BAML Term Loan Highlights as of September 30, 2017 (prior to the BAML Second Amendment (as defined below))
| The BAML Term Loan is for $400 million. |
| The BAML Term Loan |
| The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to |
30
| On September 27, 2012, the Company drew down the entire $400 million under the BAML Term Loan and such amount remains fully advanced and outstanding under the BAML |
As of September 30, 2017, theThe BAML Term Loan borebears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.45%(1.35% over LIBOR at September 30, 2017)March 31, 2021) or (ii) a margin over the base rate depending on the Company’s credit rating (0.45%(0.35% over the base rate at September 30, 2017)March 31, 2021).
Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into an interest rate swap agreement. On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the BAML Term Loan at 0.75% per annum until September 27, 2017.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 BAML Term Loan at 1.12% per annum for the period beginning on September 27, 2017 and ending on September 27, 2021. Accordingly, based upon the Company’s credit rating, as of September 30, 2017,March 31, 2021, the effective interest rate on the BAML Term Loan was 2.57%2.47% per annum.
34
BAML Credit Facility General Information
The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type.type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility 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 minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coveragecoverage. The BAML Credit Facility 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 maximum ratiochange in control of the Company (as defined in the BAML Credit Facility). 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 BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents. For certain investmentsevents of default related to total assets.bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BAML Credit Facility financial covenants as of September 30, 2017.March 31, 2021.
The Company may use the proceeds of the loans under the BAML Credit Facility to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BAML Credit Facility.
Second Amendment to BAML Credit FacilitySenior Notes
On October 18, 2017, the Company recast the BAML Credit Facility by entering into a Second Amendment (the “BAML Second Amendment”) to, among other things, (i) increase the BAML Revolver from $500 million to $600 million, (ii) extend the BAML Revolver maturity date from October 29, 2018 to January 12, 2022 (with two optional six month extensions), (iii) extend the BAML Term Loan maturity date from September 27, 2021 to January 12, 2023, (iv) decrease the interest rate margins (as described further below), (v) reset the minimum tangible net worth threshold, (vi) increase certain leverage ratios for three fiscal quarters (instead of two fiscal quarters) succeeding a significant acquisition, and (v) increase the accordion feature from $350 million to $500 million.
Pursuant to the BAML Second Amendment, the BAML Revolver bears interest at either (i) a margin over LIBOR (or a comparable or successor rate) depending on the Company’s credit rating (1.20% over LIBOR at October 31, 2017) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at October 31, 2017). The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating (0.25% at October 31, 2017). The facility fee is assessed against the total amount of the BAML Revolver as increased pursuant to the BAML Second Amendment, or $600 million. The BAML Term Loan bears interest at either (i) a margin over LIBOR (or a comparable or successor rate) depending on the Company’s credit rating (1.35% over LIBOR at October 31, 2017) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at October 31, 2017).
Equity Offering
On August 16, 2016, the Company completed an underwritten public offering of 7,043,750 shares of its common stock (including 918,750 shares issued as a result of the full exercise of an overallotment option by the underwriter) at a price to the public of $12.35 per share. The proceeds from this public offering, net of underwriter discounts and offering expenses, totaled approximately $82.9 million.
As of September 30, 2017, we had an automatic shelf registration statement on Form S-3 on file with the Securities and Exchange Commission relating to the offer and sale, from time to time, of an indeterminate amount of our debt securities, common stock, preferred stock or depository shares. From time to time, we expect to issue debt securities, common stock, preferred stock or depository shares under our existing automatic shelf registration statements or a different registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.
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 willagreed to sell to the Purchasers an aggregate principal amount of $200,000,000$200 million of senior unsecured notes consisting of (i) 3.99% Series A Senior Notes due December 20, 2024 in an aggregate principal
35
amount of $116 million (the “Series A Notes”) and (ii) 4.26% 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 “Notes”“Senior Notes”). The funding of the Notes is expected to occur on or aboutOn December 20, 2017, subject to customary closing conditions. The Note Purchase Agreement contains customary financial covenants, restrictive covenantsthe Senior Notes were funded and events of default. The Company intends to use proceeds from the private placementwere used to reduce the outstanding balance of the BAML Revolver.
ContingenciesThe 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 BAML Credit Facility, the BMO Credit Agreement and the JPM Credit
31
Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50; a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. The Company was in compliance with the Senior Notes financial covenants as of March 31, 2021.
Equity Securities
From time to time, we expect to 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.
Contingencies
From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage. As of September 30, 2017,March 31, 2021, we were committed to fund up to $79.5had one loan outstanding for $21 million to threeprincipal amount with one Sponsored REITsREIT under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes, of which $72.0 million has been drawn and is outstanding.purposes. We anticipate that advances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or another other capital event.
We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
We intend to draw on the BAML Credit Facility in the future for a variety of corporate purposes, including the acquisition of properties that we acquire directly for our portfolio and for Sponsored REIT Loans as described below.
Loans to Sponsored REITs
Sponsored REIT Loans
From time to time we may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. We anticipate that each Sponsored REIT Loanadvances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or some otheranother capital event. Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately onetwo to three years. Except for two mortgage loans which bear interest at a fixed rate, advances under each Sponsored REIT Loan bear interest at a rate equal to the 30-day LIBOR rate plus an agreed upon amount of basis points and also require a 50 basis point draw fee.
Our Sponsored REIT Loans subject us to credit risk. However, we believe that our position as asset manager of each of the Sponsored REITs helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REITs. Before making a Sponsored REIT Loan, we consider a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the applicable Sponsored REIT and local and national market conditions. These factors are subject to change and we do not apply a formula or assign relative weights to the factors. Instead, we make a subjective determination after considering such factors collectively.
32
Additional information about our Sponsored REIT Loans outstanding as of September 30, 2017,March 31, 2021, including a summary table of our Sponsored REIT Loans, is incorporated herein by reference to Part I,1, Item 1, Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to Condensed Consolidated Financial Statements included in this report.
Other Considerations
We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties. TheFor the three months ended March 31, 2021 and 2020, respectively, the rental income exceeded the expenses for each individual property, with the exception of one property located in Minneapolis, Minnesota for the three and nine months ended September 30, 2017 and 2016 and one property located in Houston, TexasStonecroft for the three months ended September 30, 2017. March 31, 2020.
36
Our property located at 801 Marquette Avenue in Minneapolis, Minnesota hasStonecroft had approximately 170,000111,000 square feet of rentable space and became vacant in January 2016. On June 30, 2016, we commenced a redevelopment plan for the property. As a result of the vacancy, we had no rental income and had operating expenses of $26,000 and $27,000 during the three and nine months ended September 30, 2017, respectively.December 2019. We had no rental income and had operating expenses of $4,000 and $288,000 during the three and nine months ended September 30, 2016, respectively.
Our$172,000 related to this property located at 16290 Katy Freeway in Houston, Texas has approximately 157,000 square feet of rentable space and became substantially vacant on April 30, 2017 when two tenants vacated 155,000 square feet of space. We had no rental income and had operating expenses of $371,000 during the three months ended September 30, 2017. March 31, 2020.
Off-Balance Sheet Arrangements and Contractual Obligations
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Rate Risk
We are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We use interest rate derivative instruments to manage exposure to interest rate changes. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, if market rates on our outstanding borrowings under ourthe BAML Revolver increased by 10% at maturity, or approximately 2513 and 2113 basis points, respectively, over the current variable rate, the increase in interest expense would decrease future earnings and cash flows by $1.1 million$36,000 and $0.9 million$5,000 annually, respectively. Based upon our credit rating, the interest rate on the BAML Revolver as of September 30, 2017March 31, 2021 was LIBOR plus 125120 basis points, or 2.49%1.31% per annum. Based upon our credit rating, the interest rate on the JPM Term Loan as of September 30, 2017 was the Eurodollar Rate plus 135 basis points, or 2.60% per annum . We do not believe that the interest rate risk on the BAML Revolver and the JPM Term Loan is material as of September 30, 2017.March 31, 2021.
Although the interest rates on the BMO Term Loan, the BAML Term Loan and the BAMLJPM Term Loan are variable, the Company fixed the base LIBOR interest rates on the BMO Term Loan and the BAML Term Loan, and the LIBOR-based rate on the remaining $100 million portion of the JPM Term Loan, by entering into interest rate swap agreements. On July 22, 2016, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate for the period beginning on September 27, 2017 and ending on September 27, 2021 on the BAML Term Loan at 1.12% per annum for the period beginning September 27, 2017 and ending September 27, 2021with multiple interest rate swap agreements (the “2017 Interest Rate Swap”). On March 7, 2019, the Company fixed the interest rate for the period beginning on March 29, 2019 and ending on November 30, 2021 for the notional value of $100 million on the JPM Term Loan with interest rate swap agreements (the “2019 JPM Interest Rate Swap”). On February 20, 2019, the Company fixed the interest rate for the period beginning August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate2020 and ending January 31, 2024 on the BMO Term Loan at 2.32% per annum until August 26, 2020 (the “BMO Interest Rate Swap”). On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the BAML Term Loan at 0.75% per annum until September 27, 2017swap agreements (the “BAML“2019 BMO Interest Rate Swap”). Accordingly, based upon our credit rating, as of September 30, 2017,March 31, 2021, the interest rate on the BAML Term Loan was 2.57%2.47% per annum, and the interest rate on the BMO Term Loan was 3.97%3.64% per annum, and the interest rate on $100 million of the JPM Term Loan was 3.69% per annum. The fair value of the 2017 Interest Rate Swap and the BMO Interest Rate Swapthese interest rate swaps are affected by changes in market interest rates. We believe that we have mitigated interest rate risk with respect to the BAML Term Loan through the 2017 Interest Rate Swap from September 27, 2017 until September 27, 2021. We believe that we have mitigated interest rate risk with respect to the BMO Term Loan through the 2019 BMO Interest Rate Swap until August 26, 2020. The 2017January 31, 2024. We believe that we have mitigated the interest rate risk on the remaining $100 million portion of the JPM Term Loan until November 30, 2021 with the 2019 JPM Interest Rate Swap and the BMO Interest Rate SwapSwap. These interest rate swaps were our only derivative instruments as of September 30, 2017.March 31, 2021.
The table below lists our derivative instruments, which are hedging variable cash flows related to interest on our BAML Term Loan, BMO Term Loan and our BMOa portion of the JPM Term Loan as of September 30, 2017March 31, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| Notional |
| Strike |
| Effective |
| Expiration |
| Fair |
| |||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||
|
| Notional |
| Strike |
| Effective |
| Expiration | | Fair Value (2) at March 31, | ||||||||||||||||||
(in thousands) |
| Value |
| Rate |
| Date |
| Date |
| Value |
| | Value | | Rate | | Date | | Date | | 2021 |
| | 2020 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | |
| | | |||||||||||||
2017 Interest Rate Swap |
| $ | 400,000 |
| 1.12 | % | Sep-17 |
| Sep-21 |
| $ | 10,771 |
| | $ | 400,000 |
| 1.12 | % | Sep-17 |
| Sep-21 | | $ | (1,981) | | $ | (4,902) |
BMO Interest Rate Swap |
| $ | 220,000 |
| 2.32 | % | Aug-13 |
| Aug-20 |
| $ | (3,721) |
| |||||||||||||||
2019 JPM Interest Rate Swap | | $ | 100,000 |
| 2.44 | % | Mar-19 |
| Nov-21 | | $ | (1,540) | | $ | (3,529) | |||||||||||||
2019 BMO Interest Rate Swap (1) | | $ | 220,000 |
| 2.39 | % | Aug-20 |
| Jan-24 | | $ | (10,177) | | $ | (12,988) | |||||||||||||
2013 BMO Interest Rate Swap | | $ | 220,000 |
| 2.32 | % | Aug-13 |
| Aug-20 | | $ | — | | $ | (1,616) | |||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||
(1) The Notional Value will decrease to $165 million on November 30, 2021. | | | | | | | | | | | | | | | | |||||||||||||
(2) Classified within Level 2 of the fair value hierarchy. | | | | | | | | | | | | | | | |
Our BMO Term Loan, BAML Term Loan and our BMOJPM Term Loan hedging transactions used derivative instruments that involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in either or both of the contracts. We require our derivatives contracts to be with counterparties that have investment grade ratings. The counterparties to the 2017 Interest Rate Swap are a group of banks and the counterparty to the BMO Interest Rate Swap is Bank of Montreal, both of which
37
have investment grade ratings. As a result, we do not anticipate that eitherany counterparty will fail to meet its obligations. However, there can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
34
The Company’s derivatives are recorded at fair value in other assets and other liabilities in the consolidated balance sheets, the effective portion of the derivatives’ fair value is recorded to other comprehensive income (loss) in the consolidated statements of other comprehensive income (loss) and the ineffective portion of the derivatives’ fair value is recognized directly into earnings as other in the consolidated statements of income. .
The interest rate swaps effectively fix the interest rate on the BAML Term Loan and BMO Term Loan; however, there is no floor on the variable interest rate of the swap whereas the current BAML Term Loan and BMO Term Loan are subject to a zero percent floor. As a result there is a mismatch and the ineffective portion of the derivatives’ changes in fair value are recognized directly into earnings.
During the three and nine months ended September 30, 2017, we recorded $0.1 million and $0.2 million, respectively, of hedge ineffectiveness in earnings, which is included in “Other” in the condensed consolidated statements of income. During the three and nine months ended September 30, 2016, we recorded ($0.6) million and $0.4 million, respectively, of hedge ineffectiveness in earnings. Hedge ineffectiveness is included in other expense in the condensed consolidated statements of income.
The following table presents, as of September 30, 2017,March 31, 2021, our contractual variable rate borrowings under our BAML Revolver, which maturedmatures on October 29, 2018,January 12, 2022, under our JPM Term Loan, which matures on November 30, 2018,2021, under our BAML Term Loan, which maturedmatures on September 27, 2021 andJanuary 12, 2023, under our BMO Term Loan Tranche A, which matures on August 26, 2020. As of SeptemberNovember 30, 2017, we had the right,2021, under our BMO Term Loan Tranche B, which matures on January 31, 2024, under our Series A Notes, which mature on December 20, 2024, and under our Series B Notes, which mature on December 20, 2027. Under the BAML Revolver and the JPM Term Loan, we have the right to extend the initial maturity date by anwith two additional 12 months,six month extensions, or until October 29, 2019,January 12, 2023 and November 30, 2022, respectively, upon payment of a fee and satisfaction of certain customary conditions. Pursuant to the BAML Second Amendment executed on October 18, 2017, the Company extended the BAML Revolver maturity date from October 29, 2018 to January 12, 2022 (with two optional six month extensions) and extended the BAML Term Loan maturity date from September 27, 2021 to January 12, 2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
|
| Payment due by period |
| |||||||||||||||||||||||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||||||||||||||
|
| Total |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
| | Payment due by period |
| |||||||||||||||||||||||||||||||||||||||||
| | (in thousands) |
| |||||||||||||||||||||||||||||||||||||||||
|
| Total |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| |||||||||||||||||||||||||||||
BAML Revolver |
| $ | 300,000 |
| $ | — |
| $ | 300,000 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | 27,500 | | $ | — | | $ | 27,500 | | $ | | | $ | — | | $ | — | | $ | — | |
JPM Term Loan |
|
| 150,000 |
|
| — |
|
| 150,000 |
|
| — |
|
| — |
|
| — |
|
| — |
| | | 100,000 | | | 100,000 | | | — | |
| — | |
| — | | | — | | | — | |
BAML Term Loan |
|
| 400,000 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 400,000 |
|
| — |
| |
| 400,000 | | | — | | | — | |
| 400,000 | |
| — | |
| — | | | — | |
BMO Term Loan |
|
| 220,000 |
|
| — |
|
| — |
|
| — |
|
| 220,000 |
|
| — |
|
| — |
| ||||||||||||||||||||||
BMO Term Loan Tranche A | |
| 55,000 | | | 55,000 | | | — | | | — | | | — | |
| — | |
| — | | ||||||||||||||||||||||
BMO Term Loan Tranche B | | | 165,000 | | | — | | | — | | | — | | | 165,000 | | | — | | | — | | ||||||||||||||||||||||
Series A Notes | | | 116,000 | | | — | | | — | | | — | | | 116,000 | |
| — | |
| — | | ||||||||||||||||||||||
Series B Notes | |
| 84,000 | | | — | | | — | | | — | | | — | |
| — | |
| 84,000 | | ||||||||||||||||||||||
Total |
| $ | 1,070,000 |
| $ | — |
| $ | 450,000 |
| $ | — |
| $ | 220,000 |
| $ | 400,000 |
| $ | — |
| | $ | 947,500 | | $ | 155,000 | | $ | 27,500 | | $ | 400,000 | | $ | 281,000 | | $ | — | | $ | 84,000 | |
Item 4. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.March 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or the Exchange Act,(the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well
38
designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,March 31, 2021, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended September 30, 2017March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
39
35
PART II - OTHER INFORMATION
From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position, cash flows or results of operations.
As of September 30, 2017,March 31, 2021, there have been no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.2020. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2016,2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 20162020 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
None.
4036
Exhibit No. | Description | |
| |
|
| ||
3.1 (1) | | |
| | |
3.2 (2) | | |
| | |
10.1 (3) | | |
| | |
| ||
| ||
| ||
| ||
31.1* | | |
| | |
31.2* | | |
| | |
32.1* | | |
| | |
32.2* | | |
| | |
101* | | The following materials from FSP Corp.’s Quarterly Report on Form 10-Q for the quarter ended |
41
| | |
| | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Footnotes | Description | |
| | |
(1) | | |
(2) | | |
(3) | | |
| | |
* | | Filed herewith. |
4237
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
| FRANKLIN STREET PROPERTIES CORP. |
Date | Signature | Title | ||
| |
| |
|
| ||||
Date: | | /s/ George J. Carter | | Chief Executive Officer and Director |
| | George J. Carter | | (Principal Executive Officer) |
| | | | |
| | | | |
Date: | | /s/ John G. Demeritt | | Chief Financial Officer |
| | John G. Demeritt | | (Principal Financial Officer) |
4338