UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2018.~~March 31, 2019.

☐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, MA 01880

(Address of principal executive offices)(Zip Code)

(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)

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 ☒ 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 ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
~~(Do not check if a smaller reporting company)~~
		Emerging growth company ☐

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 ☐ NO ☒

The number of shares of common stock outstanding as of ~~July 26, 2018~~April 25, 2019 was 107,231,155.

Table of Contents

Franklin Street Properties Corp.
Form 10-Q

Quarterly Report
~~June 30, 2018~~March 31, 2019

Table of Contents


			Page

Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018	3

		Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	4

		Consolidated Statements of Comprehensive Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	5

		Consolidated Statements of ~~Cash Flows~~Stockholders’ Equity for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	6

		Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	7

		Notes to Consolidated Financial Statements	~~7-18~~8-21

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~19-37~~ 22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

	Item 4.	Controls and Procedures	39

Part II.	Other Information

	Item 1.	Legal Proceedings	40

	Item 1A.	Risk Factors	40

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

	Item 3.	Defaults Upon Senior Securities	40

	Item 4.	Mine Safety Disclosures	40

	Item 5.	Other Information	40

	Item 6.	Exhibits	41

Signatures			42

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PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

Franklin Street Properties Corp.

Consolidated Balance Sheets

(Unaudited)


	June 30,		December 31,		March 31,		December 31,
(in thousands, except share and par value amounts)	2018		2017		2019		2018
Assets:
Real estate assets:
Land	$	191,578	$	191,578	$	191,578	$	191,578
Buildings and improvements		1,833,470		1,811,631		1,872,082		1,857,935
Fixtures and equipment		7,565		5,614		9,153		8,839
		2,032,613		2,008,823		2,072,813		2,058,352
Less accumulated depreciation		405,115		376,131		447,980		432,579
Real estate assets, net		1,627,498		1,632,692		1,624,833		1,625,773
Acquired real estate leases, less accumulated amortization of $96,899 and $109,771, respectively		71,861		86,520
Investment in non-consolidated REITs		69,067		70,164
Acquired real estate leases, less accumulated amortization of $74,681 and $101,897, respectively						53,948		59,595
Cash, cash equivalents and restricted cash		10,448		9,819		8,832		11,177
Tenant rent receivables, less allowance for doubtful accounts of $170 and $250, respectively		4,039		3,123
Straight-line rent receivable, less allowance for doubtful accounts of $50 and $50, respectively		53,294		53,194
Tenant rent receivables						4,489		3,938
Straight-line rent receivable						55,836		54,006
Prepaid expenses and other assets		7,444		8,387		10,469		10,400
Related party mortgage loan receivables		71,190		71,720		72,795		70,660
Other assets: derivative asset		21,196		13,925		10,469		14,765
Office computers and furniture, net of accumulated depreciation of $1,473 and $1,420, respectively		236		289
Deferred leasing commissions, net of accumulated amortization of $23,698 and $22,276, respectively		43,254		40,679
Office computers and furniture, net of accumulated depreciation of $1,410 and $1,512, respectively						166		197
Deferred leasing commissions, net of accumulated amortization of $25,249 and $24,318, respectively						49,408		47,591
Total assets	$	1,979,527	$	1,990,512	$	1,891,245	$	1,898,102

Liabilities and Stockholders’ Equity:
Liabilities:
Bank note payable	$	98,000	$	78,000	$	40,000	$	25,000
Term loans payable, less unamortized financing costs of $4,382 and $5,099, respectively		765,618		764,901
Series A&B Senior Notes, less unamortized financing costs of $1,232 and $1,308, respectively		198,768		198,692
Term loans payable, less unamortized financing costs of $5,358 and $5,722, respectively						764,642		764,278
Series A & Series B Senior Notes, less unamortized financing costs of $1,108 and $1,150, respectively						198,892		198,850
Accounts payable and accrued expenses		52,651		61,039		52,248		59,183
Accrued compensation		1,778		3,641		1,073		3,043
Tenant security deposits		5,576		5,383		6,352		6,319
Lease liability						2,141		—
Other liabilities: derivative liabilities		—		1,759		2,496		—
Acquired unfavorable real estate leases, less accumulated amortization of $8,118 and $7,638, respectively		4,749		5,805
Acquired unfavorable real estate leases, less accumulated amortization of $5,144 and $6,605, respectively						3,414		3,795
Total liabilities		1,127,140		1,119,220		1,071,258		1,060,468

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		11		11
Additional paid-in capital		1,356,457		1,356,457		1,356,457		1,356,457
Accumulated other comprehensive income		21,196		12,166		7,973		14,765
Accumulated distributions in excess of accumulated earnings		(525,277)		(497,342)		(544,454)		(533,599)
Total stockholders’ equity		852,387		871,292		819,987		837,634
Total liabilities and stockholders’ equity	$	1,979,527	$	1,990,512	$	1,891,245	$	1,898,102

The accompanying notes are an integral part of these consolidated financial statements.

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Franklin Street Properties Corp.

Consolidated Statements of Income

(Unaudited)



	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
(in thousands, except per share amounts)	2018		2017		2018		2017		2019		2018

Revenues:
Rental	$	65,409	$	66,995	$	131,037	$	134,371	$	63,359	$	65,628
Related party revenue:
Management fees and interest income from loans		1,276		1,366		2,532		2,736		1,352		1,256
Other		9		10		18		20		5		9
Total revenues		66,694		68,371		133,587		137,127		64,716		66,893
Expenses:
Real estate operating expenses		16,954		17,286		34,105		34,594		17,726		17,151
Real estate taxes and insurance		12,292		11,595		23,469		23,998		12,102		11,177
Depreciation and amortization		23,591		25,279		47,626		50,611		23,245		24,035
General and administrative		3,082		3,077		6,514		6,520		3,509		3,432
Interest		9,753		7,893		19,239		15,472		9,368		9,486
Total expenses		65,672		65,130		130,953		131,195		65,950		65,281

Income before equity in losses of non-consolidated REITs, other and gain on sale of properties and properties held for sale, less applicable income tax and taxes		1,022		3,241		2,634		5,932
Equity in losses of non-consolidated REITs		(282)		(201)		(387)		(598)
Other		—		129		—		151
Gain (loss) on sale of properties and properties held for sale, less applicable income tax		—		(20,492)		—		(18,203)

Income (loss) before taxes on income		740		(17,323)		2,247		(12,718)
Taxes on income		75		72		157		197
Income (loss) before taxes on income and equity in income (loss) of non-consolidated REITs										(1,234)		1,612
Tax expense (benefit) on income (loss)										(29)		82
Equity in loss of non-consolidated REITs										—		(105)

Net income (loss)	$	665	$	(17,395)	$	2,090	$	(12,915)	$	(1,205)	$	1,425

Weighted average number of shares outstanding, basic and diluted		107,231		107,231		107,231		107,231		107,231		107,231

Net income (loss) per share, basic and diluted	$	0.01	$	(0.16)	$	0.02	$	(0.12)	$	(0.01)	$	0.01

The accompanying notes are an integral part of these consolidated financial statements.

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Franklin Street Properties Corp.

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the				For the				For the
	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(in thousands)	2018		2017		2018		2017		2019		2018

Net income (loss)	$	665	$	(17,395)	$	2,090	$	(12,915)	$	(1,205)	$	1,425

Comprehensive income (loss):
Comprehensive income:
Unrealized gain (loss) on derivative financial instruments		2,455		(2,411)		9,030		(538)		(6,791)		6,575

Total comprehensive income (loss)		2,455		(2,411)		9,030		(538)		(6,791)		6,575

Comprehensive income (loss)	$	3,120	$	(19,806)	$	11,120	$	(13,453)	$	(7,996)	$	8,000

The accompanying notes are an integral part of these consolidated financial statements.

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Franklin Street Properties Corp.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


						Accumulated		Distributions
				Additional		other		in excess of		Total
	Common Stock			Paid-In		comprehensive		accumulated		Stockholders’
(in thousands)	Shares	Amount		Capital		income (loss)		earnings		Equity

Balance, December 31, 2017	107,231	$	11	$	1,356,457	$	12,166	$	(497,342)	$	871,292
Comprehensive income	—		—		—		6,575		1,425		8,000
Distributions $0.19 per share of common stock	—		—		—		—		(20,374)		(20,374)
Balance, March 31, 2018	107,231	$	11	$	1,356,457	$	18,741	$	(516,291)	$	858,918

Balance, December 31, 2018	107,231	$	11	$	1,356,457	$	14,765	$	(533,599)	$	837,634
Comprehensive income	—		—		—		(6,791)		(1,205)		(7,996)
Distributions $0.09 per share of common stock	—		—		—		—		(9,651)		(9,651)
Balance, March 31, 2019	107,231	$	11	$	1,356,457	$	7,974	$	(544,455)	$	819,987

The accompanying notes are an integral part of these consolidated financial statements.

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Franklin Street Properties Corp.

Consolidated Statements of Cash Flows

(Unaudited)


	For the Six Months Ended June 30,				For the Three Months Ended March 31,
(in thousands)	2018		2017		2019		2018
Cash flows from operating activities:
Net income (loss)	$	2,090	$	(12,915)	$	(1,205)	$	1,425
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		49,050		51,823		23,962		24,748
Amortization of above and below market leases		(208)		(855)		(112)		(85)
Hedge ineffectiveness		—		(151)
(Gain) loss on sale of properties and properties held for sale, less applicable income tax		—		18,203
Equity in losses of non-consolidated REITs		387		598
Increase (decrease) in allowance for doubtful accounts		(80)		25
Equity in (income) loss of non-consolidated REITs						—		105
Increase (decrease) in allowance for doubtful accounts and write-off of accounts receivable						(60)		75
Changes in operating assets and liabilities:
Tenant rent receivables		(836)		(1,618)		(491)		(363)
Straight-line rents		299		(1,897)		(1,140)		40
Lease acquisition costs		(398)		(318)		(689)		(276)
Prepaid expenses and other assets		325		(503)		1,497		(274)
Accounts payable, accrued expenses and other items		(8,609)		(6,829)
Accounts payable and accrued expenses						(6,101)		(6,911)
Accrued compensation		(1,863)		(1,855)		(1,970)		(2,529)
Tenant security deposits		193		12		33		205
Payment of deferred leasing commissions		(6,641)		(3,632)		(4,242)		(1,082)
Net cash provided by operating activities		33,709		40,088		9,482		15,078
Cash flows from investing activities:
Property improvements, fixtures and equipment		(24,281)		(28,464)		(15,223)		(10,774)
Distributions in excess of earnings from non-consolidated REITs		710		691		—		355
Repayment of related party mortgage receivable		530		9,530
Proceeds received on sales of real estate assets		—		6,160
Investment in related party mortgage loan receivable						(2,400)		—
Repayment of related party mortgage loan receivable						265		265
Proceeds received from liquidating trust						263		—
Net cash used in investing activities		(23,041)		(12,083)		(17,095)		(10,154)
Cash flows from financing activities:
Distributions to stockholders		(30,025)		(40,748)		(9,651)		(20,374)
Borrowings under bank note payable		30,000		40,000		30,000		30,000
Repayments of bank note payable		(10,000)		(25,000)		(15,000)		(10,000)
Deferred financing costs		(14)		—		(81)		(14)
Net cash used in financing activities		(10,039)		(25,748)
Net increase in cash, cash equivalents and restricted cash		629		2,257
Net cash provided by (used in) financing activities						5,268		(388)
Net increase (decrease) in cash, cash equivalents and restricted cash						(2,345)		4,536
Cash, cash equivalents and restricted cash, beginning of year		9,819		9,366		11,177		9,819
Cash, cash equivalents and restricted cash, end of period	$	10,448	$	11,623	$	8,832	$	14,355

Supplemental disclosure of cash flow information:
Cash paid for:
Interest	$	18,001	$	14,542	$	6,978	$	7,143
Taxes	$	485	$	583	$	42	$	69
Non-cash investing and financing activities:
Non-cash investing activities:
Accrued costs for purchases of real estate assets	$	5,360	$	10,041	$	6,609	$	4,339

The accompanying notes are an integral part of these consolidated financial statements.

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Franklin Street Properties Corp.
Notes to 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. FSP Property Management LLC provides asset management and property management services. The Company also has a non-controlling common stock interest in ~~five~~three corporations organized to operate as real estate investment trusts (“REIT”) ~~and a non-controlling preferred stock interest in two of those REITs.~~. Collectively, the ~~five~~three REITs are referred to as the “Sponsored REITs”.

As of ~~June 30, 2018,~~March 31, 2019, the Company owned and operated a portfolio of real estate consisting of 3432 operating properties, ~~one property that was substantially redeveloped~~three redevelopment properties and ~~is in lease-up and five~~three managed Sponsored ~~REITs;~~REITs and held four promissory notes secured by mortgages on real estate owned by Sponsored REITs, including two mortgage loans and two revolving lines of credit. 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, 2019 and March 31, 2018, the Company ~~classified~~had three redevelopment properties and one redevelopment property, ~~as non-operating that was substantially redeveloped and is in lease-up,~~respectively, which isare excluded ~~as of June 30, 2018 and 2017.~~from the table.


	As of June 30,		As of March 31,
	2018	2017	2019	2018
Commercial real estate:
Operating Properties:
Number of properties	34	35	32	34
Rentable square feet	9,760,699	10,084,710	9,495,118	9,760,657

Basis of Presentation

The unaudited 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, ~~2017,~~2018, 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 six~~ months ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018~~2019 or for any other period.

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, ~~and~~ 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

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~~their fair values based on their short-term~~ 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 ~~spreads~~rates that ~~approximate market.~~are at market for similar investments. .

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows.


	June 30,		June 30,		March 31,		March 31,
(in thousands)	2018		2017		2019		2018

Cash and cash equivalents	$	10,448	$	11,537	$	8,832	$	14,355
Restricted cash		—		86		—		—
Total cash, cash equivalents and restricted cash	$	10,448	$	11,623	$	8,832	$	14,355

~~Amounts included in restricted cash represent amounts set aside for the payments to be made pursuant to our employees’ flexible medical spending accounts.~~

Recent Accounting Standards

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. ~~2014-09, Revenue from Contracts with Customers~~2016-02, Leases (“~~Topic 606”~~ASU 2016-02”)~~, 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. The Company adopted Topic 606 using the modified retrospective approach effective January 1,July 2018, ~~and the adoption did not have an impact on the amount or timing of revenue recognition in the consolidated financial statements.~~

~~In February 2016,~~ the FASB issued ASU ~~2016-02,~~No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU ~~2016-02”~~2018-11”).; and in December 2018, the FASB issued ASU No. 2018-20 Leases (Topic 842), Narrow-Scope Improvements for Lessors. 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~~adopted these standards on January 1, 2019 and applied the ~~potential changes~~package of practical expedients that allows an entity to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Additionally, the Company’s leases met the criteria in ASU 2018-11 to not separate non-lease components from ~~ASU 2016-02 to future financial reporting and disclosures.~~the related lease component, therefore the accounting for these leases remained largely unchanged from the previous standard. The Company ~~expects~~applied the optional transition method in ASU 2018-11, which allows entities to initially apply the new lease standard at the adoption date. The Company recorded a right-to-use asset of $2.1 million and a lease liability of $2.2 million upon adoption of this standard. The presentation and disclosure that is required to be presented under the new lease standard is provided in 2019 will increase its 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 in which the Comanpany is a tenant; however, the Company does not expect the standard to have a material impact to its results of operations or liquidity.Note 8.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company’s receivables associated with its real estate operating leases are not within the scope of this standard. The Company is currently assessing the potential impact that the adoption of ASU 2016-13 ~~will~~may have on its consolidated financial statements.

In August ~~2016,~~2017, the FASB issued ASU No. ~~2016-15, Statement of Cash Flows~~2017-12, Derivatives and Hedging (Topic ~~230)~~815): ~~Classification of Certain Cash Receipts and Cash Payments~~Targeted Improvements to Accounting for Hedging Activities (“ASU ~~2016-15”~~2017-12”), which ~~clarifies how reporting entities should~~amends and simplifies existing guidance in order to allow companies to more accurately present ~~and classify certain cash receipts and cash payments~~the economic effects of risk management activities in the ~~statement~~financial statements. The amendment also eases the application of hedge accounting in certain situations, including eliminating the requirement to separately measure and report hedge ineffectiveness for cash ~~flows.~~flow hedges. ASU ~~2016-15~~2017-12 is effective for fiscal years beginning after December 15, ~~2017, including interim periods within those fiscal years.~~2018, and earlier adoption is permitted. The Company adopted this ~~guidance during~~new standard in the first quarter of ~~2018 and applied it retrospectively. Pursuant to~~2019 using the ~~adoption,~~modified retrospective method, which requires the Company ~~elected~~to account for ASU 2017-12 as of the date of adoption with any retrospective adjustments applicable to prior periods included as a cumulative-effect adjustment to accumulate other comprehensive loss and retained earnings. No adjustment was necessary to account for the cumulative ~~earnings~~effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption because there was no cumulative ineffectiveness that had been recorded on the Company’s existing interest

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~~approach related~~rate swaps as of December 31, 2018, and all trades were highly effective. The amended presentation and disclosure guidance which is required to ~~the distributions received from its equity method investments. The adoption did not have an impact on the Company’s Consolidated Statements of Cash Flows.~~ be presented prospectively under this new standard is provided in Note 4.

In ~~November 2016,~~August 2018, the FASB issued ASU No. ~~2016-18, Restricted Cash~~2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU ~~2016-18”~~2018-13”)~~, which clarifies how reporting entities should present restricted cash and restricted cash equivalents. Reporting entities will show~~. The ASU is intended to improve the ~~changes in the total~~effectiveness 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.fair value measurement disclosures. ASU ~~2016-18~~2018-13 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon the adoption of ASU 2016-18, the Company reconciled both cash and cash equivalents and restricted cash and restricted cash equivalents, whereas under the previous guidance the Company explained the changes during the period for cash and cash equivalents only. Prior periods were retrospectively adjusted to conform to the current period’s presentation.

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 effectiveall entities for annual periods beginning after December 15, ~~2017, including~~2019, and interim periods within those fiscal years. This ~~update~~ASU amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. ASU 2018-13 will be ~~applied prospectively to any transactions occurring within~~effective for the ~~period~~Company as of ~~adoption. Certain property acquisitions which under previous guidance would~~January 1, 2020, and earlier adoption is permitted. The Company is currently assessing the potential impact that the adoption of ASU 2018-13 may 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.on its consolidated financial statements.

2. Related Party Transactions and Investments in Non-Consolidated Entities

Investment in Sponsored REITs:

At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company held a common stock interest in ~~five and six~~three Sponsored ~~REITs, respectively.~~REITs. The Company ~~holds~~held 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”), which were liquidated during the three months ended September 30, 2018.

In December 2007, the Company purchased 965.75 preferred shares or 43.7% of the outstanding preferred shares of one of its Sponsored REITs, East Wacker. On September 24, 2018, the property owned by East Wacker was sold and, thereafter, East Wacker declared and issued a liquidating distribution for its preferred shareholders, from which ~~it continues~~the Company was entitled to ~~derive economic benefits~~$70.0 million. On September 27, 2018, the Company received $69.0 million in an initial cash distribution. As a result of the sale, the Company recognized a gain on liquidation of $7.1 million. As of March 31, 2019, the Company held a beneficial interest in the East Wacker liquidating trust in the amount of $1.0 million, which is included in other assets in the accompanying consolidated balance sheet.

In May 2009, the Company purchased 175.5 preferred shares or 27.0% of the outstanding preferred shares of one of its Sponsored REITs, Grand Boulevard. On July 19, 2018, the property owned by Grand Boulevard was sold and, ~~risks.~~thereafter, Grand Boulevard declared and issued a liquidating distribution for its preferred shareholders, from which the Company was entitled to $6.2 million. On August 17, 2018, the Company received $5.9 million in an initial cash distribution. As a result of the sale, the Company recognized a loss on liquidation of $0.1 million. As of March 31, 2019, the Company held a beneficial interest in the Grand Boulevard liquidating trust in the amount of $0.1 million, which is included in other assets in the accompanying consolidated balance sheet.

Equity in ~~losses of investment in non-consolidated REITs:~~

~~The following table includes equity in losses of investments in non-consolidated REITs~~

Six Months Ended June 30,

(in thousands)

2018

2017

Equity in losses of East Wacker

$
26

$
251

Equity in losses of Grand Boulevard

52

347

Impairment charge

309

—

$
387

$
598

~~Equity in losses~~income (loss) of investments in non-consolidated REITs is derived from the Company’s share of income or loss in the operations of those ~~entities.~~entities and includes gain or loss on liquidation. The Company ~~exercises~~exercised influence over, but ~~does~~did not control these entities, and investments are accounted for using the equity method.

Equity in ~~losses~~income (loss) of ~~East Wacker is derived from the Company’s preferred stock investment~~investments in the entity. In December 2007, the Company purchased 965.75 preferred shares 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).non-consolidated REITs:

~~Equity~~The following table includes equity in ~~losses~~loss of ~~Grand Boulevard is derived~~investments in non-consolidated REITs:


	Three Months Ended March 31,
(in thousands)	2019		2018

Equity in loss of East Wacker	$	—	$	(77)
Equity in loss of Grand Boulevard		—		(28)
Total	$	—	$	(105)

The Company received distributions of $355,000 from non-consolidated REITs during 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~~three months ended March 31, 2018.

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~~$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).~~

At June 30, 2018, the Company recognized an impairment charge of $309,000, which represented the other-than-temporary decline in the fair value below the carrying value of one of the Company’s investments in non-consolidated REITs. The Company estimated the fair value of its equity investment by estimating the fair value of the property, less estimated costs to sell using a purchase and sale agreement to purchase the property made by third parties (Level 3 inputs, as there is no active market).

~~The Company received distributions of $710,000 and $691,000 from non-consolidated REITs during the six months ended June 30, 2018 and 2017, respectively.~~

Management fees and interest income from loans:

Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelable with 30 days notice. Asset management fee income from non-consolidated entities amounted to approximately ~~$271,000~~$58,000 and ~~$316,000~~$136,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ 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 Sponsored REIT loans for impairment each reporting period. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts recorded on the balance sheet. The Company applies normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment. None of the Sponsored REIT loans have been impaired.

The Company anticipates that each Sponsored REIT Loan will be repaid at maturity or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or some other capital event. Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately one 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.

The following is a summary of the Sponsored REIT Loans outstanding as of ~~June 30, 2018:~~March 31, 2019:


			Maximum		Amount							Interest				Maximum		Amount							Interest
(dollars in thousands)		Maturity	Amount		Drawn at		Interest			Draw		Rate at
(dollars in thousands, except footnotes)															Maturity	Amount		Drawn at		Interest			Draw		Rate at
Sponsored REIT	Location	Date	of Loan		30-Jun-18		Rate (1)			Fee (2)		30-Jun-18		Location	Date	of Loan		31-Mar-19		Rate (1)			Fee (2)		31-Mar-19

Secured revolving lines of credit
FSP Satellite Place Corp.	Duluth, GA	31-Dec-19	$	5,500	$	1,590	L+	4.4	%	0.5	%	6.40	%	Duluth, GA	31-Dec-19	$	5,500	$	795	L+	4.4	%	0.5	%	6.88	%
FSP Energy Tower I Corp.	Houston, TX	30-Jun-19		20,000		15,600	L+	5.0	%	0.5	%	7.00	%	Houston, TX	30-Jun-19		20,000		18,000	L+	5.0	%	0.5	%	7.48	%

Mortgage loan secured by property
FSP Monument Circle LLC (3)	Indianapolis, IN	7-Dec-18		21,000		21,000		4.90	%	n/a		4.90	%	Indianapolis, IN	6-Dec-20		21,000		21,000		7.19	%	n/a		7.19	%
FSP Energy Tower I Corp. (4)	Houston, TX	30-Jun-19		33,000		33,000		6.41	%	n/a		6.41	%	Houston, TX	30-Jun-19		33,000		33,000		6.41	%	n/a		6.41	%

			$	79,500	$	71,190										$	79,500	$	72,795

(1)

The interest rate is 30-day LIBOR rate plus the additional rate indicated, otherwise a fixed rate.

(2)

The draw fee is a percentage of each new advance, and is paid at the time of each new draw.

(3)

This mortgage loan includes an origination fee of $164,000 and an exit fee of $38,000 when repaid by the borrower.

(4)

This mortgage loan includes an annual extension fee of $108,900 paid by the borrower.

The Company recognized interest income and fees from the Sponsored REIT Loans of approximately ~~$2,262,000~~$1,294,000 and ~~$2,420,000~~$1,120,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, respectively.

Non-consolidated REITs:

The balance sheet data below for 2019 and ~~2017,~~2018 includes the 3 Sponsored REITs the Company held an interest in as of March 31, 2019 and December 31, 2018. The operating data below for 2019 and 2018 include the operations of the 3 and 6 Sponsored REITs in which the Company held an interest in during the three months ended March 31, 2019 and 2018, respectively.

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~~Non-consolidated REITs:~~

The balance sheet data below for 2018 and 2017 includes the 5 Sponsored REITs the Company held an interest in as of June 30, 2018 and the 6 Sponsored REITs the Company held an interest in as of December 31, 2017. The operating data below for 2018 and 2017 include the operations of the 6 and 7 Sponsored REITs in which the Company held an interest in during the six months ended June 30, 2018 and 2017, respectively.

Summarized financial information for these Sponsored REITs is as follows:


	June 30,		December 31,		March 31,		December 31,
(in thousands)	2018		2017		2019		2018

Balance Sheet Data (unaudited):
Real estate, net	$	296,588	$	312,861	$	95,623	$	97,034
Other assets		69,439		74,076		19,003		18,532
Total liabilities		(148,896)		(151,092)		(76,258)		(75,382)
Shareholders’ equity	$	217,131	$	235,845	$	38,368	$	40,184


	For the Six Months Ended				For the Three Months Ended
	June 30,				March 31,
(in thousands)	2018		2017		2019		2018

Operating Data (unaudited):
Rental revenues	$	25,755	$	28,084	$	3,429	$	13,229
Other revenues		1		4		—		1
Operating and maintenance expenses		(13,175)		(14,466)		(1,795)		(6,892)
Depreciation and amortization		(8,606)		(9,943)		(1,329)		(4,369)
Interest expense		(4,030)		(4,226)		(1,287)		(2,006)
Gain (loss) on sale, less applicable income tax		9,393		—
Net income (loss)	$	9,338	$	(547)	$	(982)	$	(37)

3. Bank Note Payable and Term Note Payable

JPM Term Loan

On ~~October 18, 2017,~~August 2, 2018, the Company entered into ~~a First Amendment (the “JPM First Amendment”) to the~~an Amended and Restated Credit Agreement ~~dated November 30, 2016, among the Company,~~with JPMorgan Chase Bank, N.A., as administrative agent and lender (“JPMorgan”), and the other lending institutions party thereto ~~(as amended by the JPM First Amendment, the~~(the “JPM Credit Agreement”), which provides a single unsecured bridge loan in the aggregate principal amount of $150 million (the “JPM Term Loan”) that remains fully advanced and outstanding. The JPM Term Loan ~~has a two year term that~~ matures on November 30, ~~2018.~~2021. 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 Rate~~a LIBOR-based rate depending on the Company’s credit rating ~~(135.0~~(125.0 basis points over the ~~Eurodollar Rate~~LIBOR-based rate at ~~June 30, 2018)~~March 31, 2019) 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 ~~June~~March 31, 2019).

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 a $100 million portion of the JPM Term Loan until November 30, ~~2018).~~2021. Accordingly, based upon the Company’s credit rating, as of March 31, 2019, the effective interest rate on a $100 million portion of the JPM Term Loan was 3.69% per annum.

Based upon the Company’s credit rating, as of ~~June 30, 2018,~~March 31, 2019, the effective interest rate on the unhedged $50 million portion of the JPM Term Loan was ~~3.48%~~3.75% per annum. The weighted average interest rate on the unhedged $50 million portion of the JPM Term Loan during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 was approximately ~~3.16%~~3.79% per annum. The weighted average interest rate on the JPM Term Loan during the year ended December 31, ~~2017~~2018 was approximately ~~2.45%~~3.33% per annum.

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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

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leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. 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 change 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 events of default related to 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 ~~June 30, 2018.~~March 31, 2019.

~~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, the Company entered into a First Amendment (the “BMO First Amendment”), and on October 18, 2017,~~September 27, 2018, the Company entered into a Second ~~Amendment (the “BMO Second 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 (“BMO”), as administrative agent ~~(as amended by the BMO First Amendment and the BMO Second 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 ~~June 30, 2018)~~March 31, 2019) 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 ~~June 30, 2018)~~March 31, 2019).

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 until 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 ~~June 30, 2018,~~March 31, 2019, the effective interest rate on the BMO Term Loan was ~~3.97%~~3.57% per annum.

The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, 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 coverage. The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or ~~BMO~~the administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BMO Term Loan financial covenants as of ~~June 30, 2018.~~March 31, 2019.

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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.

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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 an existing term loan (the “BAML Term Loan”).

BAML Revolver Highlights

The BAML Revolver is for borrowings, at the Company's election, of up to $600 million. Borrowings made pursuant to the BAML Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $600 million outstanding at any time.

Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the maturity date of January 12, 2022. The Company has the right to extend the maturity date of the BAML Revolver by two additional 6 month periods, or until January 12, 2023, upon payment of a fee and satisfaction of certain customary conditions.

The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.

As of ~~June 30, 2018,~~March 31, 2019, there were borrowings of ~~$98~~$40 million outstanding under the BAML Revolver. The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.20% over LIBOR at ~~June 30, 2018)~~March 31, 2019) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at ~~June 30, 2018)~~March 31, 2019). 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. The facility fee is assessed against the total amount of the BAML Revolver, or $600 million (0.25% at ~~June 30, 2018)~~March 31, 2019).

Based upon the Company’s credit rating, as of ~~June 30, 2018~~March 31, 2019, the interest rate on the BAML Revolver was ~~3.24%~~3.69% per ~~annum and there were borrowings of $98 million outstanding.~~annum. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 was approximately ~~2.96%~~3.69% per annum. As of December 31, ~~2017,~~2018, there were borrowings of ~~$78~~$25 million outstanding under the BAML Revolver at an interest rate of ~~2.63%~~3.63% per annum.

BAML Term Loan Highlights

The BAML Term Loan is for $400 million.

The BAML Term Loan matures on January 12, 2023.

The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.

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 Term Loan.

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.35% over LIBOR at ~~June 30, 2018)~~March 31, 2019) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at ~~June 30, 2018)~~March 31, 2019).

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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 ~~June 30, 2018,~~March 31, 2019, the effective interest rate on the BAML Term Loan was 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, 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 coverage. 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 change 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 events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BAML Credit Facility financial covenants as of ~~June 30, 2018.~~March 31, 2019.

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 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

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

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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��~~Swap”). On August 26, 2013, the Company fixed the interest rate until August 26, 2020 on the BMO Term Loan ~~with an interest rate swap agreement~~ (the ~~“BMO~~“2013 BMO Interest Rate Swap”). On ~~September 27, 2012,~~March 7, 2019, the Company fixed the interest rate ~~until September 27, 2017~~for the period beginning on March 29, 2019 and ending on November 30, 2021 on a $100 million portion of the JPM Term Loan (the “2019 JPM Interest Rate Swap”). On February 20, 2019, the Company fixed the interest rate for the period beginning August 26, 2020 and ending January 31, 2024 on the ~~BAML~~BMO 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 2013 BMO Interest Rate Swap, the 2019 JPM Interest Rate Swap and the ~~BAML~~2019 BMO Interest Rate Swap (collectively referred to as the “Interest Rate Swaps”) are described in Note 3.

The ~~2017~~ Interest Rate ~~Swap and the BMO Interest Rate Swap~~Swaps qualify as cash flow hedges and have been recognized on the consolidated balance ~~sheet~~sheets at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be ~~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.

The following table summarizes the notional and fair value of our derivative financial instruments at ~~June 30, 2018.~~March 31, 2019. The notional value is an indication of the extent of our 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
(in thousands)	Value		Rate		Date	Date	Value		Value		Rate		Date	Date	Value

2017 Interest Rate Swap	$	400,000	1.12	%	Sep-17	Sep-21	$	19,824	$	400,000	1.12	%	Sep-17	Sep-21	$	10,469
BMO Interest Rate Swap	$	220,000	2.32	%	Aug-13	Aug-20	$	1,372
2013 BMO Interest Rate Swap									$	220,000	2.32	%	Aug-13	Aug-20	$	(1,888)
2019 JPM Interest Rate Swap									$	100,000	2.44	%	Mar-19	Nov-21	$	(604)
2019 BMO Interest Rate Swap (1)									$	220,000	2.39	%	Aug-20	Jan-24	$	(4)

(1) The Notional Value will decrease to $165 million on November 30, 2021.

On ~~June 30, 2018,~~March 31, 2019, the 2017 Interest Rate Swap was reported as an asset at its fair value of approximately ~~$19.8~~$10.5 million, ~~and the BMO Interest Rate Swap was reported as an asset at its fair value of approximately $1.4 million. These are~~which is included in other assets: derivative asset on the consolidated balance sheet at ~~June 30, 2018.~~March 31, 2019. The 2013 BMO Interest Rate Swap, the 2019 JPM Interest Rate Swap and the 2019 BMO Interest Rate Swap were reported as a liabilities in the aggregate fair value of approximately $2.5 million and are included in other liabilities: derivative liabilities in the consolidated balance sheet at March 31, 2019. Offsetting adjustments are reported as unrealized gains or losses on derivative financial instruments in accumulated other comprehensive income or loss of ~~$9.7~~$6.8 million. During the ~~six~~three months ended ~~June 30, 2018, $0.7~~March 31, 2019, $1.5 million was reclassified out of other comprehensive income (“OCI”) and into interest expense.

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The gain/(loss) on the Company’s Interest Rate Swaps that was recorded in OCI and the accompanying consolidated statements of income as a component of interest expense for the three months ended March 31, 2019 and 2018, respectively, was as follows:


(in thousands)	Three Months Ended March 31,
Interest Rate Swaps in Cash Flow Hedging Relatioships:	2019		2018

Amounts of gain (loss) recognized in OCI	$	(8,266)	$	6,491
Amounts of previously recorded gain/(loss) reclassified from OCI into Interest Expense	$	1,475	$	84

Total amount of Interest Expense presented in the consolidated statements of income	$	9,368	$	9,486

Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. The Company estimates that approximately ~~$6.7~~$6.8 million of the current balance held in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

The Company is hedging the exposure to variability in anticipated future interest payments on existing debt.

The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk. The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the consolidated balance sheets.

The Company’s derivatives are recorded at fair value in other assets and other liabilities in the consolidated balance sheets. The ~~effective portion of the~~ derivatives’ fair value is recorded to comprehensive income in the consolidated statements of other comprehensive ~~income and the ineffective portion of the derivatives’ fair value is recognized directly into earnings as Other in the consolidated statements of~~ income.

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The interest rate swaps effectively fix the interest rate on the BAML Term Loan and BMO Term Loan; however, prior to October 18, 2017, there was no floor on the variable interest rate of the swaps whereas the BAML Term Loan and BMO Term Loan were subject to a zero percent floor. As a result there was a mismatch and the ineffective portion of the derivatives’ changes in fair value were recognized directly into earnings. On October 18, 2017, the Company amended the BMO Term Loan and BAML Term Loan to, among other changes, provide that the deemed zero percent interest rate floor is not applicable to any loan where there is a corresponding interest rate swap contract in place.

During the three and six months ended June 30, 2017, the Company recorded $129,000 and $151,000, respectively, of hedge ineffectiveness in earnings. Hedge ineffectiveness is included in “Other” in the 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 other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at each of ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

6. Stockholders’ Equity

As of ~~June 30, 2018,~~March 31, 2019, the Company had 107,231,155 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 2018

$
0.19

$
20,374

Second quarter of 2018

$
0.09

$
9,651

First quarter of 2017

$
0.19

$
20,374

Second quarter of 2017

$
0.19

$
20,374


	Dividends Per		Total
Quarter Paid	Share		Dividends

First quarter of 2019	$	0.09	$	9,651

First quarter of 2018	$	0.19	$	20,374

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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% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”). In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20% of the value of all of the Company’s assets beginning with calendar year 2018 and 25% for previous years 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~~TRSs operating as taxable corporations under the Code.

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

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potential changes in income tax law or in rates. The Tax Cuts and Job Act of 2017 isdid not ~~expected to~~ have a material impact on the Company’s income taxes.

Interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company and one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from ~~2014~~2015 and thereafter.

The Company is subject to a business tax known as the Revised Texas Franchise Tax. Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax. The Company recorded a provision for the Revised Texas Franchise Tax of ~~$134,000~~$83,000 and ~~$176,000~~$70,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ 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 Tax Cuts and Jobs Act of 2017 is not expected to have an impact on the Company’s ability to use NOLs or the valuation allowance. The gross amount of NOLs available to the Company was $13,041,000 as of each of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

Income Tax Expense

The income tax expense reflected in the consolidated statements of income relates primarily to a franchise tax on our Texas properties. FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties, and the tax

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expenses associated with these activities and a refund receivable of $0.1 million was recorded during the three months ended March 31, 2019 are reported as Other Taxes in the table below:


	For the Six Months Ended June 30,				For the Three Months Ended March 31,
(Dollars in thousands)	2018		2017		2019		2018

Revised Texas franchise tax	$	134	$	176
Revised Texas Franchise Tax					$	83	$	70
Other Taxes		23		21		(112)		12
Taxes on income	$	157	$	197
Tax expense (benefit)					$	(29)	$	82

Taxes on income are a current tax expense. No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.

8. ~~Dispositions of properties~~Leases

~~During~~Leases as a Lessee:

The Company entered into a noncancelable contract with a third party to obtain office space that commenced on September 1, 2010. The contract was amended on October 25, 2016 to extend the ~~three months ended June~~contract through September 30, ~~2017,~~2024. The Company adopted ASU 2016-02 on January 1, 2019 and applied the package of practical expedients that allows an entity to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. As of March 31, 2019, the Company’s right-to-use asset was $2,059,192, which is included in prepaid and other assets on the consolidated balance sheet as of March 31, 2019.

The Company ~~reached a decision~~has an option to ~~classify an~~extend the terms of its office ~~property located in Baltimore, Maryland as an asset held for sale. In evaluating~~space lease with one 5-year extension. As of March 31, 2019, the ~~Baltimore, Maryland property, management considered various subjective factors, including the time, cost and likelihood of successfully leasing the property, the effect~~exercise of the ~~property’s results on its unencumbered asset value, which~~extension option was not reasonably certain. Therefore, the extension option is not recognized as part of the ~~leverage ratio used~~Company’s right-of-use asset and lease liability.

A discount rate equal to ~~compare~~the Company’s incremental borrowing rate of 3.86% is applied to the 66 future monthly contractual lease payments remaining on March 31, 2019 to compute the lease liability. The incremental borrowing rate is the rate equal to the closest borrowing under the BAML Revolver at the time of the Company’s adoption of ASU 2016-02.

The Company has elected to apply the practical expedient to not separate non-lease components from the related lease component of its real estate lease, therefore the accounting for the lease remains largely unchanged from the previous standard.

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Lease Costs	For the
	Three Months Ended
(in thousands)	March 31, 2019
Operating lease cost	$	105
	$	105

Other information
Cash paid for amounts included in the measurement of lease liabilities	$	103
Weighted average remaining lease terms in years - operating leases		5.5
Weighted average discount rate - operating leases		3.86%

Maturity analysis for liabilities	Total
	Undiscounted
(in thousands)	Cash Flows
Discount rate at commencement		3.86%
2019	$	310
2020		421
2021		429
2022		438
2023		447
2024 and thereafter		340
	$	2,385

Present value lease liability	$	2,141

Difference between undiscounted cash flows and discounted cash flows	$	244

Leases as a ~~maximum leverage covenant~~Lessor:

The Company is a lessor of commercial real estate with operations that include the leasing of office and industrial properties. Many of the leases with customers contain options to extend leases at a fair market rate and may also include options to terminate leases. The Company considers several inputs when evaluating the amount it expects to derive from its leased assets at the end of the lease terms, such as the remaining useful life, expected market conditions, fair value of lease payments, expected fair values of underlying assets, and expected deployment of the underlying assets. The Company’s strategy to address its risk for the residual value in its commercial real estate is to re-lease the commercial space.

The Company has elected to apply the practical expedient to not separate non-lease components from the related lease component of real estate leases. This combined component is primarily comprised of fixed lease payments, early termination fees, common area maintenance cost reimbursements, and parking lease payments. The Company applies ASC 842-Leases to the combined lease and non-lease components.

A minority of the Company’s leases are subject to annual changes 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~~Consumer Price Index (“CPI”). Although increases in the ~~local area, and offers~~CPI are not estimated as part of the Company’s measurement of straight-line rent revenue, to ~~purchase~~ the ~~property. The Company concluded~~extent that ~~selling~~ the ~~property was~~actual CPI is greater or less than the ~~more prudent decision and outweighed the potential future benefit of continuing~~CPI at lease commencement, there could be changes 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 $20.5 million net of applicable~~realized income or loss.

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~~taxes and was classified as an asset held for sale of $31.9 million at June 30, 2017. During~~

For the three months ended ~~September 30, 2017,~~March 31, 2019, the Company ~~increased~~recognized the ~~provision for loss by $0.3 million~~following amounts of income relating to $20.7 million net of applicable income taxes, and the property was classified as an asset held for sale in the amount of $31.6 million at September 30, 2017. The Company sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million, net of applicable income taxes.lease payments:


Income relating to lease payments:	For the
	Three Months Ended
(in thousands)	March 31, 2019
Income from leases (1)	$	62,107
	$	62,107

Undiscounted Cash Flows	Year ending
(in thousands)	December 31,
2019	$	126,740
2020		163,304
2021		146,901
2022		120,546
2023		103,410
2024 and thereafter		308,469
	$	969,370

(1) Amount from variable lease payments $16,605

During the three months ended December 31, 2016, the Company 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.

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.

9. Subsequent Events

On ~~July 6, 2018,~~April 5, 2019, the Board of Directors of the Company declared a cash distribution of $0.09 per share of common stock payable on ~~August~~May 9, ~~2018~~2019 to stockholders of record on ~~July 20, 2018.~~

~~On July~~April 19, 2018, an office property owned by a Sponsored REIT, Grand Boulevard, was sold to a third party. The Company held an equity investment in Grand Boulevard and anticipates receiving distributions of approximately $6.3 million as this investment is liquidated.

2019.

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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, ~~2017.~~2018. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, economic conditions in the United States, changes in interest rates, 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, uncertainties relating to the impact of the enactment of the Tax Cuts and Jobs Act of 2017, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, 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, ~~2017~~2018 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 properties ~~with primary emphasis on our five core markets of Atlanta, Dallas, Denver, Houston~~in the United States sunbelt and ~~Minneapolis.~~mountain west regions, as well as select opportunistic markets. We believe that ~~our five core markets~~the 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 ~~June 30, 2018,~~March 31, 2019, approximately 7.7 million square feet, or approximately ~~78.0%~~78% of our total owned portfolio, was located in ~~our five core markets.~~Atlanta, Dallas, Denver, Houston and Minneapolis. From time-to-time we may dispose of our smaller, suburban office assets and replace them with larger ~~urban~~ infill and central business district office ~~assets located primarily in our five core markets.~~assets. 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.

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.

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, ~~2017.~~2018.

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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. NoExcept for the accounting for allowance for doubtful accounts impacted by ASC 842, 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, ~~2017.~~2018.

Recent Accounting Standards

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. ~~2014-09, Revenue from Contracts with Customers~~2016-02, Leases (“~~Topic 606”~~ASU 2016-02”), ~~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. The Company adopted Topic 606 using the modified retrospective approach effective January 1, 2018 and the adoption did not have an impact on the amount or timing of revenue recognition in the consolidated financial statements.

~~In February 2016,~~July 2018; the FASB issued ASU ~~2016-02,~~No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU ~~2016-02”~~2018-11”).; and in December 2018, the FASB issued ASU No. 2018-20 Leases (Topic 842), Narrow-Scope Improvements for Lessors. 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 adopted these standards on January 1, 2019 and applied the package of practical expedients that allows an entity to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Additionally, our leases met the criteria in ASU 2018-11 to not separate non-lease components from the related lease component, therefore the accounting for these leases remained largely unchanged from the previous standard. We ~~are currently evaluating~~applied the ~~potential changes from~~optional transition method in ASU ~~2016-02~~2018-11, which allows entities to ~~future financial reporting~~initially apply the new lease standard at the adoption date. The Company recorded a right-to-use asset of $2.1 million and ~~disclosures. We expect the~~a lease liability of $2.2 million upon 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 standard to have a material impact to our results of operations or liquidity.standard.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. WeThe Company’s receivables associated with its real estate operating leases are note within the scope of this standard. The Company is currently assessing the potential impact that the adoption of ASU 2016-13 ~~will~~may have ~~in our~~on its consolidated financial statements.

In August ~~2016,~~2017, the FASB issued ASU No. ~~2016-15, Statement of Cash Flows~~2017-12, Derivatives and Hedging (Topic ~~230)~~815): ~~Classification of Certain Cash Receipts and Cash Payments~~Targeted Improvements to Accounting for Hedging Activities (“ASU ~~2016-15”~~2017-12”), which ~~clarifies how reporting entities should~~amends and simplifies existing guidance in order to allow companies to more accurately present ~~and classify certain cash receipts and cash payments~~the economic effects of risk management activities in the ~~statement~~financial statements. The amendment also eases the application of hedge accounting in certain situations, including eliminating the requirement to separately measure and report hedge ineffectiveness for cash ~~flows.~~flow hedges. ASU ~~2016-15~~2017-12 is effective for fiscal years beginning after December 15, ~~2017, including~~2018, and earlier adoption is permitted. The Company adopted this new standard in the first quarter of 2019 using the modified retrospective method, which requires us to account for ASU 2017-12 as of the date of adoption with any retrospective adjustments applicable to prior periods included as a cumulative-effect adjustment to accumulate other comprehensive loss and retained earnings. No adjustment was necessary to account for the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption because there was no cumulative ineffectiveness that had been recorded on the Company’s existing interest rate swaps as of December 31, 2018, and all trades were highly effective. The amended presentation and disclosure guidance which is required to be presented prospectively is provided in Note 4 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The ASU is intended to improve the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for all entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. We adopted this guidance during the first quarter of 2018 and applied it retrospectively. Pursuant to the adoption, we elected the cumulative earnings approach related to the distributions received from its equity method investments. The adoption did not have an impact on our Consolidated Statements of Cash Flows.

~~In November 2016, the FASB issued~~This ASU ~~No. 2016-18, Restricted Cash (“~~amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. ASU ~~2016-18”), which clarifies how reporting entities should present restricted cash and restricted cash equivalents. Reporting entities~~2018-13 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 isbe effective for ~~fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon~~ the adoption of ASU 2016-18, we reconciled both cash and cash equivalents and restricted cash and restricted cash equivalents, whereas under the previous guidance we explained the changes during the period for cash and cash equivalents only. Prior periods were retrospectively adjusted to conform to the current period’s presentation.

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InCompany as of January ~~2017,~~1, 2020, and earlier adoption is permitted. The Company is currently assessing the ~~FASB issued~~potential impact that the adoption of ASU ~~No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”), which provides additional guidance~~2018-13 may have 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. 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.its consolidated financial statements.

Trends and Uncertainties

Economic Conditions

The economy in the United States is continuing to experience a period of ~~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, monetary, trade and tax ~~policy,~~policies, 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 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 improving in ~~some~~many markets and appears to be in a broad-based upswing. However, future economic factors may negatively affect real estate values, occupancy levels and property income.

Real Estate Operations

Leasing

~~Our~~As of March 31, 2019, our real estate portfolio was comprised of 32 operating properties, ~~was~~which we refer to as our operating properties, and 3 redevelopment properties that are in the process of being redeveloped, or are completed but not yet stabilized, which we refer to as our redevelopment properties. We collectively refer to our operating and our redevelopment properties as our owned portfolio. Our 32 operating properties were approximately ~~89.0%~~88.5% leased as of ~~June 30, 2018,~~March 31, 2019, a decrease from ~~89.7%~~89.0% as of December 31, ~~2017.~~2018. The ~~0.7%~~0.5% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded new leasing completed during the three months ended ~~June 30, 2018.~~March 31, 2019. As of ~~June 30, 2018,~~March 31, 2019, we had approximately ~~1,071,000~~1,089,000 square feet of vacancy in our ~~portfolio~~operating properties compared to approximately ~~1,007,000~~1,046,000 square feet of vacancy at December 31, ~~2017.~~2018. During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we leased approximately ~~768,000~~460,000 square feet of office space, ~~including at our property at 801 Marquette Avenue in Minneapolis, Minnesota (“801 Marquette Avenue”), discussed below,~~ of which approximately ~~602,000~~365,000 square feet were with existing tenants, at a weighted average term of ~~7.3~~9.0 years. On average, tenant improvements for such leases were ~~$27.28~~$28.76 per square foot, lease commissions were ~~$8.35~~$13.41 per square foot and rent concessions were approximately ~~four~~three months of free rent. Average GAAP base rents under such leases were ~~$31.96~~$32.32 per square foot, or ~~6.2%~~9.9% higher than average rents in the respective properties as applicable compared to the year ended December 31, ~~2017.~~2018.

~~In January 2016,~~As of March 31, 2019, our three redevelopment properties included an approximately 130,000 square foot redevelopment property known as 801 Marquette in Minneapolis, Minnesota, an approximately 213,000 square foot property known as Blue Lagoon in Miami, Florida and an approximately 62,000 square foot property known as Forest Park in Charlotte, North Carolina. Given the length of the redevelopment and lease-up process, these properties are not placed in service until, in some cases, years after we commence the project.

The redevelopment at 801 Marquette Avenue 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 June 30, 2018, we had incurred approximately $17.1 million in total redevelopment costs. Delivery of thewas substantially completed ~~project was achieved~~ at the end of the second quarter of ~~2017. Redevelopment~~2017 and is in the process of ~~801 Marquette Avenue has resulted in~~being leased up; however, it is not stabilized. As of March 31, 2019, we had leases signed for approximately ~~130,000~~37.0% of ~~net~~the rentable square feet, 15.8% of which is occupied. We expect to incur redevelopment and lease-up costs of $28.4 million. As of March 31, 2019, we had incurred approximately $19.9 million in total redevelopment and lease up costs for this property.

The redevelopment of Blue Lagoon commenced in December 2018 following the maturity of a lease with a major tenant that occupied 100% of the property. We expect to incur restoration, redevelopment and lease-up costs of $23.6 million, which include work on the roof of the building, costs to make the space suitable for multiple tenants and to increase parking at the property. As of March 31, 2019, we had incurred approximately $2.8 million in total redevelopment costs. We anticipate completing the ~~project, when leased, will attain rents~~redevelopment by the end of 2019.

The redevelopment of Forest Park commenced in January 2019 following the maturity of a lease with a major tenant that occupied 100% of the property through December 31, 2018. We expect to incur redevelopment and lease-up costs of $3.7

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million, which include interior work to make the space suitable for multiple tenants. As of March 31, 2019, we had incurred approximately ~~$17 to $19 net rent per square foot compared to previously expired net rent~~$0.1 million in total redevelopment costs. We anticipate completing the redevelopment by the end of ~~approximately $4.75 per square foot.~~the third quarter of 2019.

As of ~~June 30, 2018,~~March 31, 2019, leases for approximately ~~7.2%~~6.5% and ~~11.9%~~9.3% of the square footage in our ~~operating~~owned portfolio are scheduled to expire during ~~2018~~2019 and ~~2019,~~2020, respectively. As the ~~third~~second quarter of ~~2018~~2019 begins, we believe that our ~~property portfolio is~~operating properties are 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 are seeing increased potential leasing activity in the energy influenced markets of Houston and Denver compared to the last several years. We anticipate positive leasing activity within our operating properties during the ~~portfolio during 2018.~~remainder of 2019 and throughout 2020.

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While we cannot generally predict when an existing vacancy in our ~~real estate~~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 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.

Real Estate Acquisition and Investment Activity

During ~~2018:~~

2019:

during the ~~six~~three months ended ~~June 30,~~March 31, we received approximately ~~$0.5~~$0.3 million in cash from FSP Satellite Place Corp., as partial prepayment of a Sponsored REIT Loan, and $2.4 million was drawn from a Sponsored REIT Loan with FSP Energy Tower I Corp.; and

we have continued to actively explore additional potential real estate investment opportunities and anticipate further real estate investments in the future.

During 2018:

we received approximately $1.1 million in cash from FSP Satellite Place Corp., as partial prepayment of a Sponsored REIT Loan;

on July 19, 2018, an office property owned by a Sponsored REIT, Grand Boulevard, was sold to a third party. The Company held an equity investment in Grand Boulevard and received a liquidating distribution of its investment of $6.2 million on July 20, 2018. The Company received an initial cash distribution of $5.9 million from the liquidating trust of Grand Boulevard on August 17, 2018, and anticipates receiving additional liquidating distributions of approximately ~~$6.3~~$0.3 million in the aggregate as ~~this~~the trust is liquidated;

on September 24, 2018, an office property owned by a Sponsored REIT, East Wacker, was sold to a third party. The Company held an equity investment in East Wacker and received a liquidating distribution of its investment of $70.0 million on September 25, 2018. The Company received an initial cash distribution of $69.0 million from the liquidating trust of East Wacker on September 27, 2018, and anticipates receiving additional liquidating distributions of approximately $1.0 million in the aggregate as the trust is liquidated; and

we have continued to actively explore additional potential real estate investment opportunities and anticipate further real estate investments in the future.

~~During 2017:~~

~~on January 6, we received approximately $6.2 million in proceeds from the sale of a property located in Milpitas, California;~~

~~on June 7, we received approximately $9.0 million in cash from FSP 1441 Main Street Corp. as repayment in full of a Sponsored REIT Loan;~~

~~during the year ended December 31, we received approximately $1.1 million in cash from FSP Satellite Place Corp., as partial prepayment of a Sponsored REIT Loan; and~~

~~on October 20, we received approximately $31.6 million in proceeds from the sale of a property located in Baltimore, Maryland.~~

~~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. 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 $20.5 million net of applicable income taxes and was classified as an asset held for sale of $31.9 million at June 30, 2017. During the three months ended September 30, 2017, we increased the provision for loss by $0.3 million to $20.7 million net of applicable income taxes and the property was classified as an asset held for sale in the amount of $31.6 million at September 30, 2017. We sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million, net of applicable income taxes.

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.

The disposal of these properties did not represent a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly, the properties remained classified within continuing operations for all periods presented.

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

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~~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 ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three months ended June 30,						Three months ended March 31,
(in thousands)	2018		2017		Change		2019		2018		Change
Revenues:
Rental	$	65,409	$	66,995	$	(1,586)	$	63,359	$	65,628	$	(2,269)
Related party revenue:
Management fees and interest income from loans		1,276		1,366		(90)		1,352		1,256		96
Other		9		10		(1)		5		9		(4)
Total revenues		66,694		68,371		(1,677)		64,716		66,893		(2,177)
Expenses:
Real estate operating expenses		16,954		17,286		(332)		17,726		17,151		575
Real estate taxes and insurance		12,292		11,595		697		12,102		11,177		925
Depreciation and amortization		23,591		25,279		(1,688)		23,245		24,035		(790)
General and administrative		3,082		3,077		5		3,509		3,432		77
Interest		9,753		7,893		1,860		9,368		9,486		(118)
Total expenses		65,672		65,130		542		65,950		65,281		669

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		1,022		3,241		(2,219)
Equity in losses of non-consolidated REITs		(282)		(201)		(81)
Other		—		129		(129)
Gain (loss) on sale of properties and properties held for sale, less applicable income tax		—		(20,492)		20,492

Income (loss) before taxes on income		740		(17,323)		18,063
Taxes on income		75		72		3
Income (loss) before taxes on income and equity in income (loss) of non-consolidated REITs								(1,234)		1,612		(2,846)
Tax expense (benefit) on income (loss)								(29)		82		(111)
Equity in loss of non-consolidated REITs								—		(105)		105

Net income (loss)	$	665	$	(17,395)	$	18,060	$	(1,205)	$	1,425	$	(2,630)

Comparison of the three months ended ~~June 30, 2018~~March 31, 2019 to the three months ended ~~June 30, 2017:~~March 31, 2018:

Revenues

Total revenues decreased by ~~$1.7~~$2.2 million to ~~$66.7~~$64.7 million for the three months ended ~~June 30, 2018,~~March 31, 2019, as compared to the three months ended ~~June 30, 2017.~~March 31, 2018. The decrease was primarily a result of:

An decrease in rental revenue of approximately $1.6 million arising primarily from lower rental revenue from lease expirations in the portfolio and from sales of a property on January 6, 2017 and another property on October 20, 2017. Our leased space decreased 0.7% to 89.0% at June 30, 2018 compared to 89.7% at December 31, 2017.

A decrease in ~~interest~~rental revenue of approximately $2.2 million arising primarily from the loss of rental income from ~~loans to Sponsored REITs of approximately $0.1 million as a result of repayments of Sponsored REIT Loans, which~~leases that expired in 2019 and 2018. The decrease was partially offset by ~~higher interest rates~~rental income earned from leases commencing in ~~2018 compared to 2017.~~2019 and 2018. Our leased space in our operating properties was 88.5% at March 31, 2019 and at March 31, 2018.

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Expenses

Total expenses increased by ~~$0.5~~$0.7 million to ~~$65.7~~$66.0 million for the three months ended ~~June 30, 2018,~~March 31, 2019, as compared to the three months ended ~~June 30, 2017.~~March 31, 2018. The increase was primarily a result of:

An increase in real estate operating expenses and real estate taxes and insurance of approximately ~~$0.7~~$1.5 million.

An increase in ~~interest expense~~general and administrative expenses of ~~approximately $1.8~~$0.1 million, ~~to $9.8 million for the three months ended June 30, 2018 compared to the same period in 2017. The increase~~which was primarily attributable to interest accruing on the Senior Notes (as defined below), which were issued on December 20, 2017 at a weighted average rate of approximately 4.10%, and used to reduce the outstanding balance on the BAML Revolver (as defined below), a 0.27% increase in the average interest rate on the BAML Term Loan (as defined below), higher short-term interest rates on the BAML Revolver, and an increase in amortization of deferred financing costs during the three months ended June 30, 2018, as compared to the same period in 2017.lease acquisition costs.

~~These increases were~~This increase was partially offset by:

A decrease in ~~real estate operating expenses of approximately $0.3 million and a decrease in~~ depreciation and amortization of approximately ~~$1.7~~$0.8 million.

A decrease in interest expense of approximately $0.1 million to $9.4 million for the three months ended March 31, 2019 compared to the same period in 2018. The decrease was primarily attributable

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to lower debt outstanding, which was partially offset by higher floating interest rates during the three months ended March 31, 2019 compared to the same period in 2018.

~~Equity in losses of non-consolidated REITs~~

Equity in losses from non-consolidated REITs increased approximately $0.1 million during the three months ended June 30, 2018, compared to the same period in 2017. The increase was primarily attributable to an impairment charge we recognized of $0.3 million in the three months ended June 30, 2018, which represented the other-than-temporary decline in the fair value below the carrying value of one of the Company’s investments in non-consolidated REITs. The increase was partially offset by lower equity in losses from our preferred stock investments in two Sponsored REITs of $0.2 million during the three months ended June 30, 2018, compared to the same period in 2017.

~~Other~~

~~Other~~Tax expense during the three months ended June 30, 2017 was attributable to hedge ineffectiveness from our derivatives’ fair value prior to October 18, 2017. The ineffective portion of the derivatives’ fair value was recognized directly into earnings each quarter as hedge ineffectiveness.

~~Gain (loss) on sale of properties, less applicable income tax~~

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 $20.5 million net of applicable income taxes and the property was classified as an asset held for sale of $31.9 million at June 30, 2017. During the three months ended September 30, 2017, we increased the provision for loss by $0.3 million to $20.7 million net of applicable income taxes and the property was classified as an asset held for sale in the amount of $31.6 million at September 30, 2017. We sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million, net of applicable income taxes.

~~Taxes~~(benefit) on income (loss)

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which ~~decreased $23,000,~~increased $13,000, and federal and other income taxes, which ~~increased~~decreased by ~~$26,000~~$124,000, during the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily as a result of a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017.

Equity in income (loss) of non-consolidated REITs

Equity in loss from non-consolidated REITs was $0.1 million for the three months ended March 31, 2018. Our investments in non-consolidated REITs were liquidated during 2018. The equity in income (loss) during the year ended December 31, 2018 consisted of equity in income from our preferred stock investment in East Wacker of $7.2 million, which sold its property on September 24, 2018, and was partially offset by equity in loss from our preferred stock investment in Grand Boulevard of $0.1 million, which sold its property on July 19, 2018. In addition, during the three months ended June 30, 2018, ~~compared to the three months ended June 30, 2017.~~

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~~Net income (loss)~~

~~Net income (loss) for the three months ended June 30, 2018 was $0.7 million compared to a net loss of $17.4 million for the three months ended June 30, 2017, for the reasons described above.~~

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~~The following table shows financial results for the six months ended June 30, 2018 and 2017:~~

Six months ended June 30,

(in thousands)

2018

2017

Change

Revenues:

Rental

$
131,037

$
134,371

$
(3,334)

Related party revenue:

Management fees and interest income from loans

2,532

2,736

(204)

Other

18

20

(2)

Total revenues

133,587

137,127

(3,540)

Expenses:

Real estate operating expenses

34,105

34,594

(489)

Real estate taxes and insurance

23,469

23,998

(529)

Depreciation and amortization

47,626

50,611

(2,985)

General and administrative

6,514

6,520

(6)

Interest

19,239

15,472

3,767

Total expenses

130,953

131,195

(242)

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

2,634

5,932

(3,298)

Equity in losses of non-consolidated REITs

(387)

(598)

211

Other

—

151

(151)

Gain (loss) on sale of properties and properties held for sale, less applicable income tax

—

(18,203)

18,203

Income (loss) before taxes on income

��
2,247

(12,718)

14,965

Taxes on income

157

197

(40)

Net income (loss)

$
2,090

$
(12,915)

$
15,005

~~Comparison of the six months ended June 30, 2018 to the six months ended June 30, 2017:~~

~~Revenues~~

~~Total revenues decreased by $3.5 million to $133.6 million for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. The decrease was primarily a result of:~~

An decrease in rental revenue of approximately $3.3 million arising primarily from lower rental revenue from lease expirations in the portfolio and from sales of a property on January 6, 2017 and another property on October 20, 2017. Our leased space decreased 0.7% to 89.0% at June 30, 2018 compared to 89.7% at December 31, 2017.

A decrease in interest income from loans to Sponsored REITs of approximately $0.2 million as a result of repayments of Sponsored REIT Loans, which was partially offset by higher interest rates in 2018 compared to 2017.

~~Expenses~~

~~Total expenses decreased by $0.2 million to $131.0 million for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. The decrease was primarily a result of:~~

~~An decrease in real estate operating expenses and real estate taxes and insurance of approximately $1.0 million and a decrease in depreciation and amortization of approximately $3.0 million.~~

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~~These decreases were partially offset by:~~

An increase in interest expense of approximately $3.8 million to $19.2 million for the six months ended June 30, 2018 compared to the same period in 2017. The decrease was primarily attributable to interest accruing on the Senior Notes (as defined below), which were issued on December 20, 2017 at a weighted average rate of approximately 4.10%, and used to reduce the outstanding balance on the BAML Revolver (as defined below), a 0.27% increase in the average interest rate on the BAML Term Loan (as defined below), higher short-term interest rates on the BAML Revolver, and an increase in amortization of deferred financing costs during the six months ended June 30, 2018, as compared to the same period in 2017.

~~Equity in losses of non-consolidated REITs~~

Equity in losses from non-consolidated REITs decreased approximately $0.2 million during the six months ended June 30, 2018, compared to the same period in 2017. The decrease was primarily attributable to lower equity in losses from our preferred stock investments in two Sponsored REITs of $0.5 million during the six months ended June 30, 2018 compared to the same period in 2017. The decrease was partially offset bywe recognized an impairment charge ~~we recognized~~ of $0.3 million, which represented the other-than-temporary decline in the fair value below the carrying value of ~~one of~~ the Company’s investments in non-consolidated REITs. .

~~Other~~

Other expense during the six months ended June 30, 2017 was attributable to hedge ineffectiveness from our derivatives’ fair value prior to October 18, 2017. The ineffective portion of the derivatives’ fair value was recognized directly into earnings each quarter as hedge ineffectiveness.

~~Gain (loss) on sale of properties, less applicable income tax~~

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 $20.5 million net of applicable income taxes and the property was classified as an asset held for sale of $31.9 million at June 30, 2017. During the three months ended September 30, 2017, we increased the provision for loss by $0.3 million to $20.7 million net of applicable income taxes and the property was classified as an asset held for sale in the amount of $31.6 million at September 30, 2017. We sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million, net of applicable income taxes.

~~Taxes on income~~

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which decreased $42,000, and federal and other income taxes, which increased by $2,000 during the six months ended June 30, 2018 compared to the six months ended June 30, 2017.

Net income (loss)

Net ~~income~~loss for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 was ~~$2.1~~$1.2 million compared to a net ~~loss~~income of ~~$12.9~~$1.4 million for the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, for the reasons described above.

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Non-GAAP Financial Measures

Funds From Operations

The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, hedge ineffectiveness, ~~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 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					For the
	Three Months Ended					Six Months Ended					Three Months Ended
	June 30,					June 30,					March 31,
(in thousands):	2018			2017		2018			2017		2019			2018
Net income (loss)	$	665	$		(17,395)	$	2,090	$		(12,915)	$	(1,205)	$		1,425
(Gain) on sale of properties and properties held for sale, less applicable income tax		—			20,492		—			18,203
Equity in losses of non-consolidated REITs		282			201		387			598
Equity in (income) loss of non-consolidated REITs												—			105
FFO from non-consolidated REITs		978			800		1,862			1,591		—			884
Depreciation and amortization		23,468			24,592		47,418			49,755		23,133			23,950
NAREIT FFO		25,393			28,690		51,757			57,232		21,928			26,364
Hedge ineffectiveness		—			(129)		—			(151)
Acquisition costs of new properties		—			10		—			18
Lease Acquisition costs												182			—

Funds From Operations	$	25,393		$	28,571	$	51,757		$	57,099	$	22,110		$	26,364

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

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presented and exclude properties that are non-operating, being developed or redeveloped, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees. NOI, as defined by the Company, may not

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be comparable to NOI reported by other REITs that define NOI differently. NOI should not be considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions. The calculations of NOI are shown in the following table:

Net Operating Income (NOI)*


	Rentable																	Rentable
	Square					Six Months						Six Months						Square
	Feet	Three Months Ended				Ended		Three Months Ended				Ended		Inc		%		Feet	Three Months Ended		Three Months Ended		Inc		%
(in thousands)	or RSF	31-Mar-18		30-Jun-18		30-Jun-18		31-Mar-17		30-Jun-17		30-Jun-17		(Dec)		Change		or RSF	31-Mar-19		31-Mar-18		(Dec)		Change
Region
East	1,007	$	3,991	$	4,123	$	8,114	$	3,917	$	3,941	$	7,858	$	256	3.3	%	945	$	3,185	$	3,802	$	(617)	(16.2)	%
MidWest	1,549		6,257		4,955		11,212		4,365		3,908		8,273		2,939	35.5	%	1,549		5,163		6,257		(1,094)	(17.5)	%
South	4,597		15,431		15,223		30,654		17,008		16,463		33,471		(2,817)	(8.4)	%	4,382		14,272		14,449		(177)	(1.2)	%
West	2,608		10,958		11,061		22,019		10,958		12,045		23,003		(984)	(4.3)	%	2,619		10,559		10,958		(399)	(3.6)	%
Same Store	9,761		36,637		35,362		71,999		36,248		36,357		72,605		(606)	(0.8)	%

Acquisitions	—		—		—		—		—		—		—		—	—	%
Property NOI* from the continuing portfolio	9,761		36,637		35,362		71,999		36,248		36,357		72,605		(606)	(0.8)	%
Dispositions, Non-Operating, Development or Redevelopment	-		79		(38)		41		625		467		1,092		(1,051)	(1.4)	%
Property NOI* from Operating Properties																		9,495		33,179		35,466		(2,287)	(6.4)	%
Dispositions and Redevelopment Properties																		405		(205)		1,250		(1,455)	(3.8)	%
Property NOI*	9,761	$	36,716	$	35,324	$	72,040	$	36,873	$	36,824	$	73,697	$	(1,657)	(2.2)	%	9,900	$	32,974	$	36,716	$	(3,742)	(10.2)	%

Same Store		$	36,637	$	35,362	$	71,999	$	36,248	$	36,357	$	72,605	$	(606)	(0.8)	%		$	33,179	$	35,466	$	(2,287)	(6.4)	%

Less Nonrecurring
Items in NOI* (a)			761		1,141		1,902		65		1,178		1,243		659	(0.9)	%			35		761		(726)	1.9	%

Comparative
Same Store		$	35,876	$	34,221	$	70,097	$	36,183	$	35,179	$	71,362	$	(1,265)	(1.8)	%		$	33,144	$	34,705	$	(1,561)	(4.5)	%


							Six Months						Six Months
		Three Months Ended					Ended	Three Months Ended					Ended						Three Months Ended		Three Months Ended
Reconciliation to Net Income (Loss)			31-Mar-18		30-Jun-18		30-Jun-18		31-Mar-17		30-Jun-17		30-Jun-17						31-Mar-19		31-Mar-18
Net income (loss)		$	1,425	$	665	$	2,090	$	4,480	$	(17,395)	$	(12,915)						$	(1,205)	$	1,425
Add (deduct):
(Gain) loss on sale of properties and properties held for sale, less applicable income taxes			—		—		—		(2,289)		20,492		18,203
Gain (loss) on sale of properties and properties held for sale																				—		—
Hedge ineffectiveness			—		—		—		(22)		(129)		(151)							—		—
Management fee income			(746)		(746)		(1,492)		(794)		(768)		(1,562)							(677)		(746)
Depreciation and amortization			24,035		23,591		47,626		25,332		25,279		50,611							23,245		24,035
Amortization of above/below market leases			(85)		(123)		(208)		(168)		(687)		(855)							(112)		(85)
General and administrative			3,432		3,082		6,514		3,443		3,077		6,520							3,509		3,432
Interest expense			9,486		9,753		19,239		7,579		7,893		15,472							9,368		9,486
Interest income			(1,120)		(1,141)		(2,261)		(1,214)		(1,206)		(2,420)							(1,294)		(1,120)
Equity in losses of non-consolidated REITs			105		282		387		397		201		598
Equity in (income) loss of non-consolidated REITs																				—		105
Non-property specific items, net			184		(39)		145		129		67		196							140		184


Property NOI*		$	36,716	$	35,324	$	72,040	$	36,873	$	36,824	$	73,697						$	32,974	$	36,716

(a)

Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability.

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

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The information presented below provides the weighted average GAAP rent per square foot for the ~~six~~three months ~~ending June 30, 2018~~ended March 31, 2019 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 non-consolidated REITs or those to which we have provided Sponsored REIT Loans.


							Weighted									Weighted
							Occupied		Weighted							Occupied		Weighted
				Year Built		Weighted	Percentage as of		Average				Year Built		Weighted	Percentage as of		Average
				or	Net Rentable	Occupied	June 30,		Rent per Occupied				or	Net Rentable	Occupied	March 31,		Rent per Occupied
Property Name	City	State		Renovated	Square Feet	Sq. Ft.	2018 (a)		Square Feet (b)		City	State	Renovated	Square Feet	Sq. Ft.	2019 (a)		Square Feet (b)

Forest Park	Charlotte	NC		1999	62,212	62,212	100.0	%	$	13.76
Meadow Point	Chantilly	VA		1999	138,537	138,537	100.0	%		26.77	Chantilly	VA	1999	138,537	138,537	100.0	%	$	26.33
Innsbrook	Glen Allen	VA		1999	298,456	298,456	100.0	%		12.46	Glen Allen	VA	1999	298,456	170,956	57.3	%		18.66
Loudoun Tech Center	Dulles	VA		1999	136,658	130,850	95.8	%		18.41	Dulles	VA	1999	136,658	130,850	95.8	%		19.48
Stonecroft	Chantilly	VA		2008	111,469	111,469	100.0	%		35.42	Chantilly	VA	2008	111,469	111,469	100.0	%		33.06
Emperor Boulevard	Durham	NC		2009	259,531	259,531	100.0	%		34.09	Durham	NC	2009	259,531	259,531	100.0	%		34.80
East total			��		1,006,863	1,001,055	99.4	%		23.46				944,651	811,343	85.9	%		27.24
Northwest Point	Elk Grove Village	IL		1999	177,095	177,095	100.0	%		32.09	Elk Grove Village	IL	1999	177,095	177,095	100.0	%		32.38
909 Davis Street	Evanston	IL		2002	195,098	162,575	83.3	%		36.39	Evanston	IL	2002	195,098	172,115	88.2	%		35.85
River Crossing	Indianapolis	IN		1998	205,059	193,760	94.5	%		23.66	Indianapolis	IN	1998	205,059	193,227	94.2	%		23.80
Timberlake	Chesterfield	MO		1999	234,496	234,496	100.0	%		28.29	Chesterfield	MO	1999	234,496	234,496	100.0	%		26.64
Timberlake East	Chesterfield	MO		2000	117,036	117,036	100.0	%		28.23	Chesterfield	MO	2000	117,036	117,036	100.0	%		25.93
121 South 8th Street	Minneapolis	MN		1974	293,460	219,625	74.8	%		21.11	Minneapolis	MN	1974	293,460	234,651	80.0	%		24.35
Plaza Seven	Minneapolis	MN		1987	326,483	232,398	89.6	%		34.72	Minneapolis	MN	1987	326,757	285,259	87.3	%		35.35
Midwest total					1,548,727	1,336,985	90.2	%		29.29				1,549,001	1,413,879	91.3	%		29.41
Blue Lagoon Drive	Miami	FL		2002	212,619	212,619	100.0	%		23.43
One Overton Park	Atlanta	GA		2002	387,267	234,374	60.5	%		24.14	Atlanta	GA	2002	387,267	297,886	76.9	%		21.98
Park Ten	Houston	TX		1999	157,460	107,986	68.6	%		28.92	Houston	TX	1999	157,460	140,879	89.5	%		28.60
Addison Circle	Addison	TX		1999	288,794	273,344	94.7	%		32.71	Addison	TX	1999	289,302	217,179	75.1	%		31.36
Collins Crossing	Richardson	TX		1999	300,887	300,887	100.0	%		24.72	Richardson	TX	1999	300,887	299,172	99.4	%		25.61
Eldridge Green	Houston	TX		1999	248,399	248,399	100.0	%		30.62	Houston	TX	1999	248,399	248,399	100.0	%		30.27
Park Ten Phase II											Houston	TX	2006	156,746	44,704	28.5	%		23.25
Liberty Plaza											Addison	TX	1985	216,851	170,575	78.7	%		22.52
Legacy Tennyson Center											Plano	TX	1999/2008	202,049	174,712	86.5	%		22.96
One Legacy Circle											Plano	TX	2008	214,110	214,110	100.0	%		38.13

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						Weighted									Weighted
						Occupied		Weighted							Occupied		Weighted
			Year Built		Weighted	Percentage as of		Average				Year Built		Weighted	Percentage as of		Average
			or	Net Rentable	Occupied	June 30,		Rent per Occupied				or	Net Rentable	Occupied	March 31,		Rent per Occupied
Property Name	City	State	Renovated	Square Feet	Sq. Ft.	2018 (a)		Square Feet (b)		City	State	Renovated	Square Feet	Sq. Ft.	2019 (a)		Square Feet (b)

Park Ten Phase II	Houston	TX	2006	156,746	2,147	1.4	%	$	9.96
Liberty Plaza	Addison	TX	1985	218,934	189,553	86.6	%		21.94
Legacy Tennyson Center	Plano	TX	1999/2008	202,600	143,684	70.9	%		19.57
One Legacy Circle	Plano	TX	2008	214,110	214,110	100.0	%		37.49
One Ravinia Drive	Atlanta	GA	1985	386,602	352,310	91.1	%		25.69	Atlanta	GA	1985	386,602	350,493	90.7	%	$	25.78
Two Ravinia Drive	Atlanta	GA	1987	411,047	305,038	74.2	%		27.68	Atlanta	GA	1987	411,047	309,888	75.4	%		27.07
Westchase I & II	Houston	TX	1983/2008	629,025	529,639	84.2	%		29.13	Houston	TX	1983/2008	629,025	511,523	81.3	%		28.90
Pershing Park Plaza	Atlanta	GA	1989	160,145	156,013	97.4	%		36.16	Atlanta	GA	1989	160,145	156,013	97.4	%		36.40
999 Peachtree	Atlanta	GA	1987	621,946	546,317	87.8	%		32.11	Atlanta	GA	1987	621,946	526,726	84.7	%		31.09
South Total				4,596,581	3,816,420	83.0	%		28.53				4,381,836	3,662,259	83.6	%		28.37
380 Interlocken	Broomfield	CO	2000	240,358	207,213	86.2	%		29.74	Broomfield	CO	2000	240,358	219,855	91.5	%		29.85
1999 Broadway	Denver	CO	1986	676,379	526,832	77.9	%		30.43	Denver	CO	1986	677,378	489,880	72.3	%		32.55
1001 17th Street	Denver	CO	1977/2006	655,413	601,604	91.8	%		35.03	Denver	CO	1977/2006	655,413	630,376	96.2	%		35.17
600 17th Street	Denver	CO	1982	598,630	505,304	84.4	%		33.09	Denver	CO	1982	608,733	519,858	85.4	%		33.03
Greenwood Plaza	Englewood	CO	2000	196,236	196,236	100.0	%		25.19	Englewood	CO	2000	196,236	196,236	100.0	%		26.58
390 Interlocken	Broomfield	CO	2002	241,512	236,633	98.0	%		30.28	Broomfield	CO	2002	241,512	237,141	98.2	%		32.69
West Total				2,608,528	2,273,822	87.2	%		31.71				2,619,630	2,293,346	87.5	%		32.62

Total Operating Properties													9,495,118	8,180,827	86.2	%		29.63

Redevelopment Properties (c)
Forest Park										Charlotte	NC	1999	62,212	—	—	%		—
Blue Lagoon Drive										Miami	FL	2002	212,619	—	—	%		—
801 Marquette Ave										Minneapolis	MN	1923/2017	129,821	20,538	15.8	%		16.45
Total Redevelopment Properties													404,652	20,538	5.1	%		16.45

Grand Total				9,760,699	8,428,282	87.0	%	$	28.91				9,899,770	8,201,365	82.8	%	$	29.60

(a)

Based on weighted occupied square feet for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b)

Represents annualized GAAP rental revenue for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, per weighted occupied square foot.

(c)

Redevelopment Properties include properties in the process of being redeveloped, or are completed but not yet stabilized.

Table of Contents

Liquidity and Capital Resources

Cash, restricted cash and cash equivalents were ~~$10.4~~$8.8 million and ~~$9.8~~$11.2 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The ~~increase~~decrease of ~~$0.6~~$2.3 million is attributable to ~~$33.7million~~$9.4 million provided by operating activities, less ~~$23.1~~$17.0 million used inby investing activities ~~less $10.0~~plus $5.3 million ~~used in~~provided 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. 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 operating activities for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 of ~~$33.7~~$9.4 million is primarily attributable to a net ~~income~~loss of ~~$2.1~~$1.2 million plus the add-back of ~~$49.5~~$22.6 million of non-cash expenses ~~a decrease~~and an increase in prepaid and other ~~expenses~~assets of ~~$0.3 million and a decrease in tenant security deposits of $0.2~~$1.5 million. These amounts were partially offset by ~~an increase in~~a decrease to accounts payable and accrued expenses and accrued compensation ~~expenses~~ of ~~$10.5~~$8.1 million, an increase in payments of deferred leasing commissions of ~~$6.6~~$4.2 million, ~~an increase in tenant rent receivables of $0.9 million and~~ an increase in lease acquisition costs of ~~$0.4~~$0.7 million and a decrease tenant rent recivables of $0.5 million.

Investing Activities

Cash used inby investing activities for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 of ~~$23.1~~$17.0 million is primarily attributable to the purchases of other real estate assets and office equipment investments of approximately ~~$24.3~~$15.2 million and an investment in related party mortgage loan receivable of $2.4 million. ~~This use was~~These uses were partially offset by repayments received from one related party mortgage receivable of ~~$0.5~~$0.3 million and ~~distributions~~proceeds received from ~~non-consolidated REITs~~a liquidating trust of ~~$0.7~~$0.3 million.

Financing Activities

Cash ~~used in~~provided by financing activities for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 of ~~$10.0~~$5.3 million is primarily attributable to ~~distributions paid to stockholders of $30.0 million, which was partially offset by~~ net borrowings on the BAML Revolver (as defined below) of ~~$20.0~~$15.0 million and was partially offset by distributions paid to stockholders of $9.7 million.

JPM Term Loan

Table of Contents

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 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, 2019, the effective interest rate on a $100 million portion of the JPM Term Loan was 3.69% per annum.

~~Table of Contents~~

The JPM Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, 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, and minimum unsecured interest coverage. 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 change 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 events of default related to 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 ~~June 30, 2018.~~

~~The Company used the proceeds from 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.~~ March 31, 2019.

BMO Term Loan

Table of Contents

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 coverage. The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or ~~BMO~~the administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all

~~Table of Contents~~

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 ~~June 30, 2018.~~March 31, 2019.

BAML Credit Facility

BAML Revolver Highlights

Based upon the Company’s credit rating, as of ~~June 30, 2018,~~March 31, 2019 the interest rate on the BAML Revolver was ~~3.24%~~3.69% per ~~annum and there were borrowings of $98 million outstanding.~~annum. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 was approximately ~~2.96%~~3.69% per annum. As of December 31, ~~2017,~~2018, there were borrowings of ~~$78~~$25 million outstanding under the BAML Revolver at an interest rate of ~~2.63%~~3.63% per annum.

Table of Contents

BAML Term Loan Highlights

The BAML Term Loan is for $400 million.

The BAML Term Loan matures on January 12, 2023.

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 Term Loan.

~~Table of Contents~~

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 for five years, until September 27, 2017. 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 ~~June 30, 2018,~~March 31, 2019, the effective interest rate on the BAML Term Loan was 2.47% per annum.

BAML Credit Facility General Information

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 proceeds were used to reduce the outstanding balance of the BAML Revolver.

Table of Contents

~~Table of Contents~~

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.

Equity Securities

As of ~~June 30,2018,~~March 31, 2019, we had an automatic shelf registration statement on Form S-3 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.

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 ~~June 30, 2018,~~March 31, 2019, we were committed to fund up to $79.5 million to three Sponsored REITs under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes, of which ~~$71.2~~$72.8 million has been drawn and is outstanding. 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


Exhibit No.		Description

3.1 (1)		Articles of Incorporation.

3.2 (2)		Amended and Restated By-laws.

31.1*		Certification of FSP Corp.’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of FSP Corp.’s Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

32.1*		Certification of FSP Corp.’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of FSP Corp.’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		The following materials from FSP Corp.’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2018,~~March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Other Comprehensive Income; and (v) the Notes to Consolidated Financial Statements.


Footnotes		Description

(1)		Incorporated by reference to FSP Corp.’s Form 8-A, filed on April 5, 2005 (File No. 001-32470).

(2)		Incorporated by reference to FSP Corp.’s Current Report on Form 8-K, filed on February 6, 2018 (File No. 001-32470).



*		Filed herewith.


Date	Signature	Title

Date: ~~July 31, 2018~~April 30, 2019	/s/ George J. Carter	Chief Executive Officer and Director
	George J. Carter	(Principal Executive Officer)


Date: ~~July 31, 2018~~April 30, 2019	/s/ John G. Demeritt	Chief Financial Officer
	John G. Demeritt	(Principal Financial Officer)


	Six Months Ended June 30,
(in thousands)	2018		2017

Equity in losses of East Wacker	$	26	$	251
Equity in losses of Grand Boulevard		52		347
Impairment charge		309		—
	$	387	$	598


	Payment due by period														Payment due by period
	(in thousands)														(in thousands)
	Total		2018		2019		2020		2021		2022		Thereafter		Total		2019		2020		2021		2022		2023		Thereafter
BAML Revolver	$	98,000	$	—	$	—	$	—	$	—	$	98,000	$	—	$	40,000	$	—	$	—	$	—	$	40,000	$	—	$	—
JPM Term Loan		150,000		150,000		—		—		—		—		—		150,000		—		—		150,000		—		—		—
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		116,000		—		—		—		—		—		116,000
Series B Notes		84,000		—		—		—		—		—		84,000		84,000		—		—		—		—		—		84,000
Total	$	1,068,000	$	150,000	$	—	$	220,000	$	—	$	98,000	$	600,000	$	1,010,000	$	—	$	—	$	205,000	$	40,000	$	400,000	$	365,000