The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. 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 Annual Report on Form 10-K may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, adverse changes in general economic or local market conditions, including the impact of recessionary concerns, inflation, energy prices and interest rates, as well as those resulting from the COVID-19 pandemic, including the impact of work-from-home policies, and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the markets in which we own properties, including energy-influenced markets such asDallas ,Denver andHouston , expectations for future property dispositions, uncertainty relating to the completion and timing of the disposition of the properties under agreement, expectations for the potential payment of special dividends, changes in interest rates as a result of economic market conditions, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, delays in construction schedules, unanticipated increases in construction costs, unanticipated repairs, increases in the level of general and administrative costs as a percentage of revenues as revenues decrease as a result of property dispositions, additional staffing, insurance increases and real estate tax valuation reassessments. See "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 infill and central business district office properties inthe United States sunbelt and mountain west regions as well as select opportunistic markets. We believe thatthe United States sunbelt and mountain west regions have macro-economic drivers that have the potential to increase occupancies and rents. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income. As ofDecember 31, 2022 , approximately 5.3 million square feet, or approximately 85.4% of our total owned portfolio, was located inDallas ,Denver ,Houston andMinneapolis . The main factor that affects our real estate operations is the broad economic market conditions inthe 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 may 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. We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets and we will seek to increase shareholder value by (1) pursuing the sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) striving to lease vacant space. As we continue to execute this strategy, our revenue, Funds From Operations, and capital expenditures may decrease in the short term. Proceeds from dispositions are intended to be used primarily for the repayment of debt. 24
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For the year endedDecember 31, 2022 , our disposition strategy resulted in gross sale proceeds of$130.3 million and we repaid$128.9 million of debt. Specifically, onAugust 31, 2022 , we sold two office properties located inBroomfield, Colorado for aggregate gross proceeds of$102.5 million , at a gain of approximately$24.1 million . OnSeptember 6, 2022 , we prepaid our$110 million term loan withBank of America, N.A . as administrative agent and the other lending institutions party thereto (the "Former BofA Term Loan"). If we had not prepaid the Former BofA Term Loan in full, it would have matured by its own terms onJanuary 12, 2023 . In addition, onDecember 28, 2022 , we sold one office property located inEvanston, Illinois for gross proceeds of$27.8 million , at a gain of$3.9 million . OnDecember 29, 2022 andDecember 30, 2022 , we repaid$7 million and$20 million , respectively, that had been drawn under our revolving line of credit withBank of America, N.A . as administrative agent and the other lending institutions party thereto (the "BofA Revolver"). InJuly 2022 , we adopted a variable quarterly dividend policy, which replaced our previous regular quarterly dividend policy. Under the new variable quarterly dividend policy, the Board of Directors will determine quarterly dividends based upon a variety of factors, including the Company's estimates of its annual taxable income and the amount that the Company is required to distribute annually in the aggregate to enable the Company to continue to qualify as a real estate investment trust for federal income tax purposes. OnJune 15, 2021 , the credit rating for our senior unsecured debt was downgraded by Moody's Investor Service to Ba1 from Baa3. As ofDecember 31, 2022 , the interest rate applicable to borrowings under the BMO Term Loan, theBofA Revolver and the Senior Notes (each as defined in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources) was based in part on the rating of our debt. OnFebruary 10, 2023 , we entered into amendments to the BMO Term Loan and theBofA Revolver that, among other things, caused the interest rate applicable to those borrowings to no longer be based in part on the rating of our debt. The interest rate applicable to borrowings under the Senior Notes continues to be based in part on the rating of our debt. We anticipate that as a result of this downgrade we will incur approximately$1.0 million in additional interest costs from the Senior Notes over a full twelve-month period based on our borrowings as of
February 10, 2023 . Trends and Uncertainties COVID-19 Pandemic The COVID-19 pandemic continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. It has disrupted global travel supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain. Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, including the spread of more contagious variants of the virus. Many of our tenants still do not fully occupy the space that they lease. The pandemic has had an adverse impact on economic and market conditions in various sectors of the economy. However, the evolving nature of the pandemic makes it difficult to ascertain the long-term impact it will have on commercial real estate markets and our business. The COVID-19 pandemic continues to present material uncertainty and risk with respect to the performance of our properties and our financial results, such as the potential negative impact to the businesses of our tenants, the impact of work-from-home policies, the potential negative impact to leasing efforts and occupancy at our properties, uncertainty regarding future rent collection levels or requests for rent concessions from our tenants, the occurrence of a default under any of our debt agreements, the potential for increased borrowing costs, negative impacts on our ability to refinance existing indebtedness or to secure new sources of capital on favorable terms, fluctuations in our level of dividends, increased costs of operations, making more difficult our ability to complete required capital expenditures in a timely manner and on budget, decreases in values of our real estate assets, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We are unable to estimate the full extent of the impact that the COVID-19 pandemic will have on our future financial results at this time. See "Risk Factors" in Item 1A. 25
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We have been following and directing our vendors to follow the guidelines from theCenters for Disease Control and other applicable authorities to minimize the spread of COVID-19 among our employees, tenants, vendors and visitors, as well as at our properties. During the year endedDecember 31, 2022 , all of our properties remained open for business. Some of our tenants have requested rent concessions, and more tenants may request rent concessions or may not pay rent in the future. Future rent concession requests or nonpayment of rent could lead to increased rent delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions or lower occupancy, extended lease terms, increased tenant improvement capital expenditures, or reduced rental rates to maintain occupancies. We review each rent concession request on a case by case basis and may or may not provide rent concessions, depending on the specific circumstances involved. Cash, cash equivalents and restricted cash were$6.6 million as ofDecember 31, 2022 . Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BofA Revolver ($45 million available as ofFebruary 10, 2023 ) and proceeds from dispositions of properties, will be sufficient to meet working capital requirements, term loan repayment 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 pay dividends to stockholders and the level of such dividends, however, depends in significant part upon the level of rental income from our real estate properties and the amount, timing and terms of any property dispositions.
Economic Conditions
The global economy is experiencing significant disruptions as a result of various factors, including geopolitical events such as the ongoing conflict betweenRussia andUkraine , the COVID-19 pandemic and continuing supply chain difficulties. In addition, negative gross domestic product growth, inflation, energy prices and interest rates and declining consumer confidence and spending are contributing to recessionary concerns for the economy ofthe United States . Economic conditions directly affect the demand for office space, our primary income producing asset. In addition, the broad economic market conditions inthe United States are typically affected by numerous other factors, including but not limited to, inflation and employment levels, energy prices, uncertainty about government fiscal, monetary, trade and tax policies, changes in currency exchange rates, the regulatory environment and the availability of credit. During 2022 and as ofFebruary 10, 2023 , theFederal Reserve raised the federal funds rate target several times, most recently by 25 basis points onFebruary 1, 2023 , to a range of 4.50% to 4.75%. TheFederal Reserve has indicated that ongoing increases in the target range will be appropriate, which could also increase interest rates. In addition, inApril 2022 , theFederal Reserve confirmed its plan to reduce its balance sheet at a rapid pace beginning inMay 2022 and inSeptember 2022 indicated it would continue to reduce its holdings ofTreasury Securities and agency debt and agency mortgage-backed securities. If interest rates continue to increase, then the interest costs on our unhedged variable rate debt would be adversely affected, which could in turn adversely affect our cash flow, our ability to pay principal and interest on our debt and our ability to make distributions to stockholders. As ofDecember 31, 2022 , approximately 12% of our total debt constituted unhedged variable rate debt. Increasing interest rates could also decrease the amount third parties are willing to pay for our assets and limit our ability to incur new debt or refinance existing debt when it matures. As of the date of this report, the impact of current economic conditions and geopolitical events and the ongoing effects of the COVID-19 pandemic are adversely affecting the demand for office space inthe United States . Real Estate Operations As ofDecember 31, 2022 , our real estate portfolio was comprised of 21 operating properties, which we also refer to as our owned properties. Our 21 operating properties were approximately 75.6% leased as ofDecember 31, 2022 , a decrease from 78.4% leased as ofDecember 31, 2021 . The 2.8% decrease in leased space was primarily a result of lease maturities that occurred during the year endedDecember 31, 2022 . As ofDecember 31, 2022 , we had approximately 1,524,000 square feet of vacancy in our owned properties compared to approximately 1,496,000 square feet of vacancy atDecember 31, 2021 . During the year endedDecember 31, 2022 , we leased approximately 435,000 square feet of office space, of which approximately 160,000 square feet were with existing tenants, at a weighted average term of 6.4 years. On average, tenant improvements for such leases were$31.86 per square foot, lease commissions were$11.80 per square foot and rent concessions were approximately six months of free rent. Average GAAP base rents 26 Table of Contents
under such leases were
rents in the respective properties as applicable compared to the year ended
During 2022, we had no redevelopment properties. OnNovember 16, 2021 , we sold a property known as Stonecroft inChantilly, Virginia and another property located inChantilly, Virginia for aggregate gross sales proceeds of approximately$40 million . Stonecroft had been our sole redevelopment property prior to its sale. Our property known asBlue Lagoon inMiami, Florida , was substantially completed during the first quarter of 2021, and had previously been classified as a redevelopment property. As ofDecember 31, 2022 , the property had leases signed for 98.5% of the rentable square feet of the property, including one tenant occupying approximately 73.6% of the rentable square feet of the property. As ofDecember 31, 2022 , leases for approximately 6.4% and 13.8% of the square footage in our owned portfolio are scheduled to expire during 2023 and 2024, respectively. As the first quarter of 2023 begins, we believe that our operating properties are stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants. While leasing activity at our properties has continued, we believe that the impact of geopolitical events, current economic conditions and the ongoing effects of the COVID-19 pandemic may limit or delay new tenant leasing during at least the first quarter of 2023 and potentially in future periods. While we cannot generally predict when an existing vacancy in our owned portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates. Also, we believe the potential exists for any of our tenants to default on its lease or to seek the protection of bankruptcy. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in cash available for distribution to our stockholders.
Real Estate Acquisition and Investment Activity
During 2022:
? we continued to actively explore additional potential real estate investment
opportunities. During 2021:
on
Loan to extend the maturity date from
advance an additional
the aggregate principal amount of the Sponsored REIT Loan from
?
interest payments due under the Sponsored REIT Loan until the maturity date on
the Sponsored REIT Loan, the Company obtained from the stockholders of the
parent of
any sale of the property owned by
? we continued to actively explore additional potential real estate investment
opportunities. During 2020:
? we continued to actively explore additional potential real estate investment
opportunities.
Property Dispositions and Assets Held for Sale
During 2022, we sold two office properties located inBroomfield, Colorado onAugust 31, 2022 for an aggregate sales price of$102.5 million , at a gain of approximately$24.1 million . We also sold an office property inEvanston, Illinois onDecember 28, 2022 for a sales price of approximately$27.8 million , at a gain of$3.9 million . There were no properties held for sale as ofDecember 31, 2022 . 27 Table of Contents
During 2021, we sold three office properties located inAtlanta, Georgia onMay 27, 2021 for an aggregate sales price of approximately$219.5 million , at a net gain of approximately$22.8 million . We sold an office property inDulles, Virginia onJune 29, 2021 for a sales price of approximately$17.3 million , at a loss of$2.1 million . We sold an office property located inIndianapolis, Indiana onAugust 31, 2021 for a sales price of approximately$35 million , at a loss of approximately$1.7 million . We sold two office properties located inChesterfield, Missouri onSeptember 23, 2021 for an aggregate sales price of approximately$67 million , at a gain of approximately$10.3 million . OnOctober 22, 2021 , we sold an office property inAtlanta Georgia for a sales price of approximately$223.9 million , at a gain of approximately$86.8 million . OnNovember 16, 2021 , we sold two office properties inChantilly, Virginia for an aggregate sales price of approximately$40 million , at a loss of approximately$2.9 million . During 2020, we sold an office property located inDurham, North Carolina , for a sales price of approximately$89.7 million , at a gain of approximately$41.9 million .
We used the proceeds of the dispositions principally to repay outstanding
indebtedness.
The dispositions of these properties did not represent a strategic shift that has a major effect on our operations and financial results. Our current strategy is to continue to invest in the sunbelt and mountain west regions ofthe United States . Accordingly, the properties sold remained classified within continuing operations for all periods presented. We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets, and we will seek to increase shareholder value by (1) pursuing the sale of select properties where we believe that short to intermediate term valuation potential has been reached and (2) striving to lease vacant space. As we continue to execute this strategy, our revenue, Funds From Operations, and capital expenditures may decrease in the short term. Proceeds from dispositions are intended to be used primarily for the repayment of debt.
Critical Accounting Estimates
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 below. Significant estimates in the consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets, impairment considerations and the valuation of derivatives. 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 estimates are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in Sponsored REITs and our investments in real property. These policies affect our:
? allocation of purchase price;
? allowance for doubtful accounts;
? allowance for loan losses on mortgage loans;
? assessment of the carrying values and impairments of long lived assets;
? useful lives of fixed assets and intangibles;
? valuation of derivatives;
? classification of leases; and
? ownership of stock in a Sponsored REIT and related interests.
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These policies involve significant judgments made based upon our experience,
including judgments about current valuations, ultimate realizable value,
estimated useful lives, salvage or residual value, the ability of our tenants to
perform their obligations to us, current and future economic conditions and
competitive factors in the markets in which our properties are located.
Competition, economic conditions and other factors may cause occupancy declines
in the future. In the future we may need to revise our carrying value
assessments to incorporate information which is not now known and such revisions
could increase or decrease our depreciation expense related to properties we
own, result in the classification of our leases as other than operating leases
or decrease the carrying values of our assets.
Allocation of Purchase Price
We allocate the value of real estate acquired among land, buildings, improvements and identified intangible assets and liabilities, which may consist of the value of above market and below market leases, the value of in-place leases, and the value of tenant relationships. Purchase price allocations and the determination of the useful lives are based on management's estimates. Under some circumstances we may rely upon studies commissioned from independent real estate appraisal firms in determining the purchase price allocations. Purchase price allocated to land and building and improvements is based on management's determination of the relative fair values of these assets assuming the property was vacant. Management determines the fair value of a property using methods similar to those used by independent appraisers. Purchase price allocated to above or below market leases is based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases including consideration of potential lease renewals and (ii) our estimate of fair market lease rates for the corresponding leases, measured over a period equal to the remaining non-cancelable terms of the respective leases. This aggregate value is allocated between in-place lease values and tenant relationships based on management's evaluation of the specific characteristics of each tenant's lease; however, the value of tenant relationships has not been separated from in-place lease value because such value and its consequence to amortization expense is immaterial for acquisitions reflected in our financial statements. Factors considered by us in performing these analyses include (i) an estimate of carrying costs during the expected lease-up periods, including real estate taxes, insurance and other operating income and expenses, and (ii) costs to execute similar leases in current market conditions, such as leasing commissions, legal and other related costs. If future acquisitions result in our allocating material amounts to the value of tenant relationships, those amounts would be separately allocated and amortized over the estimated life of the relationships.
Allowance for Doubtful Accounts
We provided an allowance for doubtful accounts based on collectability. We recognize the effect of a change in our assessment of whether the collectability of operating lease receivables are probable as an adjustment to lease income rather than bad debt expense.
Impairment
We periodically evaluate our real estate properties for impairment indicators. These indicators may include lower or declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that permanently reduce the value of our investments. If indicators of impairment are present, we evaluate the carrying value of the property by comparing it to its expected future undiscounted cash flows. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to the present value of these expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. If we misjudge or estimate incorrectly or if future tenant profitability, market or industry factors differ from our expectations, we may record an impairment charge which is inappropriate or fail to record a charge when we should have done so, or the amount of such charges may be inaccurate.
Depreciation and Amortization Expense
We compute depreciation expense using the straight-line method over estimated
useful lives of up to 39 years for buildings and improvements, and up to 15
years for personal property. Costs incurred in connection with leasing
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(primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period. The allocated cost of land is not depreciated. The value of above or below-market leases is amortized over the remaining non-cancelable periods of the respective leases as an adjustment to rental income. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is also amortized over the remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off. Inappropriate allocation of acquisition costs, or incorrect estimates of useful lives, could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods, as is required by generally accepted accounting principles.
Derivative Instruments
We recognize derivatives on the balance sheet at fair value. Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders' equity. Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. The ineffective portion of a derivative's change in fair value will be recognized in earnings in the same period in which the hedged interest payments affect earnings, which may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. We currently have no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes in interest rates and counterparty credit risk. To the extent we enter into fair value hedges in the future, the results of such variability could be a significant increase or decrease in our derivative assets, derivative liabilities, book equity, and/or earnings.
Lease Classification
Some of our real estate properties are leased on a triple net basis, pursuant to
non-cancelable, fixed term, operating leases. Each time we enter a new lease or
materially modify an existing lease we evaluate whether it is appropriately
classified as a financing lease or as an operating lease. The classification of
a lease as financing or operating affects the carrying value of a property, as
well as our recognition of rental payments as revenue. These evaluations require
us to make estimates of, among other things, the remaining useful life and
market value of a property, discount rates and future cash flows. Incorrect
assumptions or estimates may result in misclassification of our leases.
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Results of Operations
The following table shows financial results for the years ended December 31,
2022 and 2021.
Year ended December 31,
(in thousands) 2022 2021 Change
Revenues:
Rental $ 163,739 $ 207,581 $ (43,842)
Related party revenue:
Management fees and interest income from loans 1,855
1,700 155 Other 21 77 (56) Total revenues 165,615 209,358 (43,743) Expenses: Real estate operating expenses 52,820 60,881 (8,061) Real estate taxes and insurance 34,620 41,061 (6,441) Depreciation and amortization 63,808 78,544 (14,736) General and administrative 13,885 15,898 (2,013) Interest 22,808 32,273 (9,465) Total expenses 187,941 228,657 (40,716)
Loss on extinguishment of debt (78) (901) 823 Impairment and loan loss reserve (4,237) - (4,237) Gain on sale of properties, net 27,939
113,134 (85,195)
Income (loss) before taxes and equity in income of
non-consolidated REITs
1,298 92,934 (91,636) Tax expense 204 638 (434) Equity in income of non-consolidated REITs -
421 (421) Net income (loss)$ 1,094 $ 92,717 $ (91,623)
Comparison of the year ended
2021
Revenues Total revenues decreased by$43.7 million to$165.6 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The decrease was primarily a result of:
A decrease in rental revenue of approximately
the sale of thirteen properties during 2021 and 2022 and the loss of rental
? income from lease expirations during the periods presented. These decreases
were partially offset by rental income earned from leases that commenced during
the periods presented. Our leased space in our operating properties was 75.6%
at
This decrease was partially offset by:
? An increase in interest income of approximately
principal balance on the Sponsored REIT Loan during 2022 compared to 2021.
Expenses Total expenses decreased by$40.7 million to$187.9 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The decrease was primarily a result of:
A decrease in real estate operating expenses and real estate taxes and
? insurance of approximately
dispositions noted above.
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? A decrease in depreciation and amortization of approximately
primarily attributable to the property dispositions noted above.
A decrease in general and administrative expenses of approximately
? million, which was primarily due to lower personnel costs of
professional fees and expenses of
A decrease in interest expense of approximately
primarily from lower interest expense as a result of a lower principal amount
of debt outstanding, which was partially offset by higher interest rates during
? the year ended
In addition, the decrease was higher in 2022 as a result of interest swap
breakage costs in 2021 of
in term loan debt on
Loss on extinguishment of debt
During the year endedDecember 31, 2022 and 2021, we repaid debt and incurred a loss on extinguishment of debt of$0.1 million and$0.9 million , respectively, related to unamortized deferred financing costs on the dates of the repayments.
Impairment and loan reserve
During the year ended
receivable of
Gain on sale of properties, net
During the year endedDecember 31, 2022 , we sold two office properties located inBroomfield, Colorado onAugust 31, 2022 for an aggregate sales price of$102.5 million , at a gain of$24.1 million . We also sold an office property inEvanston, Illinois onDecember 28, 2022 for a sales price of approximately$27.8 million , at a gain of$3.9 million . During the year endedDecember 31, 2021 , we sold three office properties located inAtlanta, Georgia onMay 27, 2021 for an aggregate sales price of approximately$219.5 million , at a net gain of approximately$22.8 million . We sold an office property inDulles, Virginia onJune 29, 2021 for a sales price of approximately$17.3 million , at a loss of$2.1 million . We sold an office property located inIndianapolis, Indiana onAugust 31, 2021 , for a sales price of approximately$35 million , at a loss of approximately$1.7 million . We sold two office properties located inChesterfield, Missouri onSeptember 23, 2021 for an aggregate sales price of approximately$67 million , at a gain of approximately$10.3 million . We sold an office property located inAtlanta, Georgia onOctober 22, 2021 , for a sales price of approximately$223.9 million , at a gain of approximately$86.8 million . We sold two office properties located inChantilly, Virginia onNovember 16, 2021 , for an aggregate sales price of approximately$40 million , at a loss of approximately$2.9 million .
Tax expense on income
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues fromTexas properties, which was$239,000 during the year endedDecember 31, 2022 compared to$234,000 during the year endedDecember 31, 2021 . We received state tax refunds of$35,000 during the year endedDecember 31, 2022 . We incurred$404,000 in state income taxes as a result of using some net operating loss carryforwards, which are not fully useable for some state income tax purposes during the year endedDecember 31, 2021
Net income (loss)
Net income for the year endedDecember 31, 2022 was$1.1 million compared to net income of$92.7 million for the year endedDecember 31, 2021 , for the reasons described above. 32 Table of Contents The following table shows financial results for the years endedDecember 31, 2021 and 2020. Year ended December 31, (in thousands) 2021 2020 Change Revenues: Rental$ 207,581 $ 244,207 $ (36,626) Related party revenue:
Management fees and interest income from loans 1,700
1,610 90 Other 77 31 46 Total revenues 209,358 245,848 (36,490) Expenses: Real estate operating expenses 60,881 66,940 (6,059) Real estate taxes and insurance 41,061 48,390 (7,329) Depreciation and amortization 78,544 88,558 (10,014) General and administrative 15,898 14,997 901 Interest 32,273 36,026 (3,753) Total expenses 228,657 254,911 (26,254)
Loss on extinguishment of debt (901) - (901) Gain on sale of properties, net 113,134
41,928 71,206
Income before taxes on income and equity in income of
non-consolidated REITs
92,934 32,865 60,069 Tax expense 638 250 388 Equity in income of non-consolidated REITs 421
- 421 Net income$ 92,717 $ 32,615 $ 60,102
Comparison of the year ended
2020
Revenues Total revenues decreased by$36.5 million to$209.4 million for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . The decrease was primarily a result of:
A decrease in rental revenue of approximately
from the sale of ten properties during 2021 and a tenant bankruptcy in December
? 2020 and other losses of rental income from leases that expired after December
31, 2020. These decreases were partially offset by rental income earned from
leases commencing after
properties was 78.4% at
Expenses Total expenses decreased by$26.3 million to$228.7 million for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . The decrease was primarily a result of:
A decrease in real estate operating expenses and real estate taxes and
? insurance of approximately
ten properties during 2021.
? A decrease to depreciation and amortization of approximately
primarily as a result of the sale of ten properties during 2021.
A decrease in interest expense of approximately
? primarily from debt repayments made during 2021 and lower interest rates during
the year ended
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These decreases were partially offset by:
? An increase in general and administrative expenses of
primarily attributable to an increase in public company related expenses.
Loss on extinguishment of debt
During the year endedDecember 31, 2021 , we repaid debt and incurred a loss on extinguishment of debt of$0.9 million related to unamortized deferred financing costs on the dates of the repayments.
Gain on sale of properties, net
During the year endedDecember 31, 2021 , we sold three office properties located inAtlanta, Georgia onMay 27, 2021 for an aggregate sales price of approximately$219.5 million , at a net gain of approximately$22.8 million . We sold an office property inDulles, Virginia onJune 29, 2021 for a sales price of approximately$17.3 million , at a loss of$2.1 million . We sold an office property located inIndianapolis, Indiana onAugust 31, 2021 , for a sales price of approximately$35 million , at a loss of approximately$1.7 million . We sold two office properties located inChesterfield, Missouri onSeptember 23, 2021 for an aggregate sales price of approximately$67 million , at a gain of approximately$10.3 million . We sold an office property located inAtlanta, Georgia onOctober 22, 2021 , for a sales price of approximately$223.9 million , at a gain of approximately$86.8 million . We sold two office properties located inChantilly, Virginia onNovember 16, 2021 , for an aggregate sales price of approximately$40 million , at a loss of approximately$2.9 million . During the year endedDecember 31, 2020 , we sold an office property located inDurham, North Carolina onDecember 23, 2020 for a sales price of approximately$89.7 million , at a gain of approximately$41.9 million .
Tax expense on income
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues fromTexas properties, which decreased$16,000 during the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . We incurred$404,000 in state income taxes as a result of using some net operating loss carryforwards, which were not fully useable for some state income tax purposes during the year endedDecember 31, 2021 .
Net income
Net income for the year ended
net income of
reasons described above.
34
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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,
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. We exclude FFO from any Sponsored REIT that is
consolidated from the calculation of FFO.
FFO should not be considered as an alternative to net income (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 theNational Association of Real Estate Investment Trusts , or NAREIT may define this term in a different manner. We have included the NAREIT FFO definition as ofMay 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 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 Year December 31, (in thousands): 2022 2021 2020 Net income$ 1,094 $ 92,717 $ 32,615
Impairment and loan loss reserve 4,237 -
-
Gain on sale of properties (27,939) (113,134)
(41,928)
Equity in income of non-consolidated REITs - (421)
-
FFO from non-consolidated REITs - 421
-
Depreciation and amortization 63,689 78,509
88,244 NAREIT FFO 41,081 58,092 78,931 Lease Acquisition costs 262 387 467 Funds From Operations$ 41,343 $ 58,479 $ 79,398 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. We exclude the NOI from any Sponsored REIT that is consolidated from the calculation of NOI. 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
35
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presented and exclude properties that are redevelopment properties. We also
exclude properties that have been placed in service, but that do not have
operating activity for all periods presented, dispositions and significant
nonrecurring income such as bankruptcy settlements and lease termination fees.
NOI, as defined by the Company, may not be comparable to NOI 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)*
Year Year
(in thousands) Rentable Ended Ended Inc %
Region Square Feet 31-Dec-22 31-Dec-21 (Dec) Change
East 362 $ 1,889 $ 2,222 $ (333) (15.0) %
MidWest 935 13,015 10,268 2,747 26.8 %
South 2,797 25,226 26,227 (1,001) (3.8) %
West 2,146 27,108 34,341 (7,233) (21.1) %
Property NOI from the
continuing portfolio 6,240 67,238 73,058 (5,820) (8.0) %
Dispositions, Non-Operating,
Development or Redevelopment 7,344 31,023
(23,679) (20.3) % Property NOI$ 74,582 $ 104,081 $ (29,499) (28.3) % Same Store$ 67,238 $ 73,058 $ (5,820) (8.0) % Less Nonrecurring Items in NOI (a) 2,843 510 2,333 (3.2) % Comparative Same Store$ 64,395 $ 72,548 $ (8,153) (11.2) % Year Year Ended Ended Reconciliation to Net income 31-Dec-22 31-Dec-21 Net Income$ 1,094 $ 92,717 Add (deduct): Loss on extinguishment of debt 78 901 Impairment and loan loss reserve 4,237 - Gain on sale of property (27,939) (113,134) Management fee income (1,127) (1,559) Depreciation and amortization 63,808 78,544
Amortization of above/below market leases (118) (34)
General and administrative
13,886 15,898 Interest expense 22,808 32,273 Interest income (1,828) (1,639) Equity in income of non-consolidated REITs - (421) Non-property specific items, net (317) 535 Property NOI$ 74,582 $ 104,081
Nonrecurring Items in NOI include proceeds from bankruptcies, lease
(a) 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.
36
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Liquidity and Capital Resources
Cash and cash equivalents were$6.6 million and$40.8 million atDecember 31, 2022 andDecember 31, 2021 , respectively. The decrease of$34.2 million is attributable to$15.2 million provided by operating activities, plus$74.0 million provided by investing activities less$123.4 million used in financing activities. Management believes that existing cash, cash anticipated to be generated internally by operations, including property dispositions, and our existing availability under the BofA Revolver ($45 million available as ofFebruary 10, 2023 ), will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations and property dispositions. 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 properties, property dispositions and our interest costs.
Operating Activities
Cash provided by our operating activities of$15.2 million is primarily attributable to net income of$1.1 million excluding gains on sale of properties of$27.9 million and the impairment of a mortgage loan receivable of$4.2 million plus the add-back of$60.1 million of non-cash expenses, less$8.2 million increase in payments of deferred leasing commissions, a$7.0 million increase in accounts payable and accrued expenses, a$4.5 million increase in lease acquisition costs, a$1.8 million increase in prepaid expenses and other assets, a$0.5 million increase in tenant security deposits and a$0.3 million increase in tenant rent receivables.
Investing Activities
Cash provided by investing activities for the year endedDecember 31, 2022 of$74.0 million is primarily attributable to proceeds from the sale of three properties of$128.9 million and was partially offset by capital expenditures and office equipment investments of approximately$54.9 million .
Financing Activities
Cash used in financing activities for the year endedDecember 31, 2022 of$123.4 million is primarily attributable to repayment of the Former BofA Term Loan in the amount of$110.0 million , distributions paid to stockholders in the amount of$54.0 million , stock repurchases in the amount of$4.8 million , and payment of deferred financing costs of$2.6 million , which was partially offset by net borrowings under the BofA Revolver of$48.0 million .
Liquidity beyond the next 12 months
Our ability to generate cash adequate to meet our needs is dependent primarily
on income from real estate investments, the sale of real estate investments,
leveraging of real estate investments, availability of bank borrowings, proceeds
from public offerings of stock, private placement of debt and access to the
capital markets. The acquisition of new properties, the payment of expenses
related to real estate operations, capital improvement expenses, debt service
payments, general and administrative expenses, and distribution requirements
place demands on our liquidity.
We intend to operate our properties from the cash flows generated by our
properties. However, our expenses are affected by various factors, including
inflation. See Part I, Item 1A, Risk Factors for additional factors. Increases
in operating expenses are predominantly borne by our tenants. To the extent that
increases cannot be passed on to our tenants through rent reimbursements, such
expenses would reduce the amount of available cash flow, which can adversely
affect the market value of the applicable property.
We have used a variety of sources to fund our cash needs in addition to our free
cash flow generated from our investments in real estate. In the past, we
considered borrowing on our unsecured line of credit facility, adding or
refinancing existing term debt or raising capital through public offerings or At
The Market (ATM) programs of our common stock. See Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
37
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Operations, Contractual Obligations. We believe these sources of funds will
provide sufficient funds to adequately meet our obligations beyond the next
twelve months.
JPM Term Loan
OnAugust 2, 2018 , the Company entered into an Amended and Restated Credit Agreement withJPMorgan Chase Bank, N.A ., as administrative agent and lender ("JPMorgan"), and the other lending institutions party thereto (the "JPM Credit Agreement"), which provided a single unsecured bridge loan in the aggregate principal amount of$150 million (the "JPM Term Loan"). OnDecember 24, 2020 , the Company repaid a$50 million portion of the JPM Term Loan with a portion of the proceeds from theDecember 23, 2020 sale of itsDurham, North Carolina property, and$100 million remained fully advanced and outstanding under the JPM Term Loan. OnJune 4, 2021 , the Company repaid the remaining$100 million outstanding on the loan, which had been scheduled to mature onNovember 30, 2021 , and incurred a loss on extinguishment of debt of$0.1 million related to unamortized deferred financing costs. Although the interest rate on the JPM Term Loan was variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. OnMarch 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. EffectiveMarch 29, 2019 , the Company fixed the LIBOR-based rate at 2.44% per annum on a$100 million portion of the JPM Term Loan untilNovember 30, 2021 . OnJune 4, 2021 , the Company paid approximately$1.2 million to terminate the interest rate swap, which was scheduled to mature onNovember 30, 2021 . BMO Term Loan
OnFebruary 10, 2023 , the Company entered into a First Amendment to Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (the "BMO First Amendment"). The BMO First Amendment amended the Second Amended and Restated Credit Agreement datedSeptember 27, 2018 (as amended by the BMO First Amendment, the "BMO Credit Agreement") among the Company and the lending institutions party thereto to, among other things, extend the maturity date fromJanuary 31, 2024 toOctober 1, 2024 and change the interest rate from a number of basis points over LIBOR depending on the Company's credit rating to 300 basis points over SOFR (Secured Overnight Financing Rate). The BMO Credit Agreement initially provided for an unsecured term loan borrowing in the amount of$220 million (the "BMO Term Loan"), of which$125 million remains outstanding. The BMO Term Loan initially consisted of a$55 million tranche A term loan and a$165 million tranche B term loan. OnJune 4, 2021 , the Company repaid the tranche A term loan that was scheduled to mature onNovember 30, 2021 , and incurred a loss on extinguishment of debt of$0.1 million related to unamortized deferred financing costs. OnFebruary 10, 2023 , as part of the BMO First Amendment, the Company repaid a$40 million portion of the$165 million tranche B term loan, so that$125 million remains outstanding. On or beforeApril 1, 2024 , we are required to repay an additional$25 million of the BMO Term Loan. The tranche B term loan matures onOctober 1, 2024 . EffectiveFebruary 10, 2023 upon entering into the BMO First Amendment, the BMO Term Loan bears interest at either (i) 300 basis points over one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively, or (ii) 200 basis points over the base rate. Prior toFebruary 10, 2023 , the BMO Term Loan bore interest at either (i) a number of basis points over LIBOR depending on the Company's credit rating (165 basis points over LIBOR atDecember 31, 2022 ) or (ii) a number of basis points over the base rate depending on the Company's credit rating (65 basis points over the base rate atDecember 31, 2022 ). 38
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The margin over LIBOR rate or base rate was determined based on the Company's
credit rating pursuant to the following grid:
CREDIT LIBOR RATE BASE RATE LEVEL RATING MARGIN MARGIN I A- / A3 (or higher) 85.0 bps - bps II BBB+ / Baa1 90.0 bps - bps III BBB / Baa2 100.0 bps - bps IV BBB- / Baa3 125.0 bps 25.0 bps V <BBB- / Baa3 165.0 bps 65.0 bps EffectiveFebruary 10, 2023 upon entering into the BMO First Amendment, base rate means, for any day, a fluctuating rate per annum equal to the highest of: (i) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its "prime commercial rate", (ii) the Federal Funds Rate plus 1/2 of 1% (0.50%), (iii) term SOFR for one month plus 1.00% and (iv) 1.00%. If the base rate is being used because SOFR is not able to be determined, base rate is the greater of clauses (i) and, (ii) and (iv). Prior toFebruary 10, 2023 , base rate meant, for any day, a fluctuating rate per annum equal to the highest of: (i) the bank's prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one-month LIBOR based rate for such day plus 1.00%. As ofDecember 31, 2022 , the Company's credit rating from Moody's Investors Service was Ba1. 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 interest rate swap transactions. OnAugust 26, 2013 , the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum, which matured onAugust 26, 2020 . OnFebruary 20, 2019 , the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39% per annum for the period beginning onAugust 26, 2020 and endingJanuary 31, 2024 . Accordingly, based upon the Company's credit rating, as ofDecember 31, 2022 , the effective interest rate on the BMO Term Loan was 4.04% per annum. OnJune 4, 2021 , the Company paid approximately$0.6 million to terminate the portion of the interest rate swap on tranche A, which was scheduled to mature onNovember 30, 2021 . OnFebruary 8, 2023 , we terminated all remaining interest rate swaps applicable to the BMO Term Loan and, onFebruary 10, 2023 , we received an aggregate of approximately$4.3 million as a result of such terminations. The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments and repurchases and redemptions of the Company's common stock; going concern qualifications to our financial statements; and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. In addition, the BMO Credit Agreement also restricts the Company's ability to make quarterly dividend distributions that exceed$0.01 per share of the Company's common stock; provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company's good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company's status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject. The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders' commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders 39 Table of Contents will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. We were in compliance with the BMO Term Loan financial covenants as ofDecember 31, 2022 .
BofA Revolver
OnFebruary 10, 2023 , the Company entered into a First Amendment to Credit Agreement withBank of America, N.A ., as administrative agent, a letter of credit issuer and a lender ("BofA"), and the other lending institutions party thereto (the "BofA First Amendment"), for a revolving line of credit for borrowings, at the Company's election, of up to$150 million (the "BofA Revolver"). The BofA First Amendment amended the Credit Agreement datedJanuary 10, 2022 (as amended by the BofA First Amendment, the "BofA Credit Agreement") among the Company and the lending institutions party thereto to, among other things, extend the maturity date fromJanuary 12, 2024 toOctober 1, 2024 , reduce availability for borrowings, at the Company's election, from up to$237.5 million to up to$150 million , and to change the interest rate from a number of basis points over SOFR depending on the Company's credit rating to 300 basis points over SOFR. Borrowings made under the BofA Revolver may be revolving loans or letters of credit, the combined sum of which may not exceed$150 million outstanding at any time. EffectiveOctober 1, 2023 , availability under theBofA Revolver will be reduced to$125 million and, effectiveApril 1, 2024 , availability under the BofA Revolver will be further reduced to$100 million . As ofDecember 31, 2022 , there were borrowings of$48.0 million drawn and outstanding under the BofA Revolver. As ofFebruary 10, 2023 , there were borrowings of$105 million drawn and outstanding under the BofA Revolver, which borrowings include$40.0 million that the Company borrowed onFebruary 10, 2023 to repay a portion of the BMO Term Loan. Borrowings made pursuant to theBofA Revolver may be borrowed, repaid and reborrowed from time to time until the maturity date onOctober 1, 2024 . EffectiveFebruary 10, 2023 upon entering into the BofA First Amendment, the BofA Revolver bears interest at 300 basis points over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively. In addition, under certain circumstances, such as if SOFR was not able to be determined, the BofA Revolver will instead bear interest at 200 basis points over the base rate. Prior toFebruary 10, 2023 , borrowings under theBofA Revolver bore interest at a margin over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively. In addition, under certain circumstances, such as if SOFR is not able to be determined, the BofA Revolver will instead bear interest at a margin over a specified base rate. Prior toFebruary 10, 2023 , the margin over SOFR or, if applicable, the base rate varied depending on the Company's leverage ratio (1.750% over SOFR and 0.750% over the base rate atDecember 31, 2022 ). EffectiveFebruary 10, 2023 upon entering into the BofA First Amendment, the Company is also obligated to pay an annual facility fee on the unused portion of theBofA Revolver at the rate of 0.350% per annum and, if applicable, letter of credit fees. Prior toFebruary 10, 2023 , the Company was also obligated to pay an annual facility fee and, if applicable, letter of credit fees in amounts that were also based on the Company's leverage ratio. The previous facility fee was assessed against the aggregate amount of lender commitments regardless of usage (0.350% atDecember 31, 2022 ). Prior toFebruary 10, 2023 , the actual amount of the facility fee, any letter of credit fees, and the margin over SOFR or the base rate was determined based on the per annum percentages in the following grids: Daily SOFR Rate Loans, Term SOFR Loans and Letter of Level Leverage Ratio Credit Fees Facility Fee Base Rate Loans I < 35.00% 1.550% 0.300% 0.550% II ? 35.00% - 1.650% 0.300% 0.650% < 40.00% III ? 40.00% - 1.750% 0.350% 0.750% < 45.00% IV ? 45.00% - 1.950% 0.350% 0.950% < 50.00% V ? 50.00% - 2.150% 0.350% 1.150% < 55.00% VI ? 55.00% 2.350% 0.400% 1.350% 40 Table of Contents Prior toFebruary 10, 2023 , in the event that the Company was assigned an investment grade credit rating, the Company had a one-time right to elect to convert to a different, credit-based pricing grid with the following per annum percentages: Daily SOFR Rate Loans, Term SOFR Loans and Letter of Level Credit Rating Credit Fees Facility Fee Base Rate Loans I A-/A3 (or higher) 0.725% 0.125% 0.000% II BBB+/Baa1 0.775% 0.150% 0.000% III BBB/Baa2 0.850% 0.200% 0.000% IV BBB-/Baa3 1.050% 0.250% 0.050% V <BBB-/Baa3 1.400% 0.300% 0.400% Base rate means, for any day, a fluctuating rate per annum equal to the highest of: (i) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its "prime rate", (ii) the Federal Funds Rate plus 1/2 of 1% (0.50%), (iii) term SOFR for one month plus 1.00% and (iv) 1.00%. If the base rate is being used because SOFR is not able to be determined, base rate is the greater of clauses (i), (ii) and (iv). Based upon the Company's credit rating, as ofDecember 31, 2022 , the interest rate on the BofA Revolver was 6.22% per annum. The weighted average variable interest rate on all amounts outstanding under the BofA Revolver throughDecember 31, 2022 was approximately 2.52% per annum. The BofA Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, use of proceeds, the amount of cash and cash equivalents that the Company can have on its balance sheet after giving effect to an advance under the BofA Revolver, and repurchases and redemptions of the Company's common stock, going concern qualifications to our financial statements, and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BofA Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio and a minimum unsecured interest coverage ratio. The BofA Credit Agreement also restricts the Company's ability to make quarterly dividend distributions that exceed$0.01 per share of the Company's common stock; provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company's good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company's status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject. The Company was in compliance with the BofA Revolver financial covenants as ofDecember 31, 2022 . The BofA Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with the provisions of the BofA Credit Agreement, certain cross defaults and a change in control of the Company (as defined in the BofA Credit Agreement). In the event of a default by the Company,BofA , in its capacity as administrative agent, may, and at the request of the requisite number of lenders shall, declare all obligations under the BofA Credit Agreement immediately due and payable and enforce any and all rights of the lenders orBofA under the BofA Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable. 41
Table of Contents
The Company may use the net proceeds of the BofA Revolver for permitted
investments and for working capital and other general business purposes,
including for building improvements, tenant improvements and leasing
commissions, in each case to the extent permitted under the BofA Credit
Agreement.
Former BofA Credit Facility
OnJuly 21, 2016 , the Company entered into a First Amendment (the "BofA First Amendment"), and onOctober 18, 2017 , the Company entered into a Second Amendment (the "BofA Second Amendment"), to the Second Amended and Restated Credit Agreement datedOctober 29, 2014 among the Company, the lending institutions party thereto andBofA , as administrative agent, L/C Issuer and SwingLine Lender (as amended by the BofA First Amendment and the BofA Second Amendment, the "Former BofA Credit Facility") that continued an existing unsecured revolving line of credit (the "Former BofA Revolver") and an existing term loan (the "Former BofA Term Loan"). Effective simultaneously with the closing of the Former BofA Credit Agreement onJanuary 10, 2022 , the Company delivered a notice toBofA terminating the aggregate lender commitments under the Former BofA Revolver in their entirety. There were no amounts drawn on the Former BofA Revolver as ofDecember 31, 2021 andJanuary 10, 2022 .
Former BofA Revolver Highlights
? The Former BofA Revolver was terminated at the Company's election effective
? As of
the Former BofA Revolver.
The Former BofA Revolver bore interest at either (i) a margin over LIBOR depending on the Company's credit rating (1.550% over LIBOR atDecember 31, 2021 ) or (ii) a margin over the base rate depending on the Company's credit rating (0.550% over the base rate atDecember 31, 2021 ). The Former BofA Credit Facility also obligated the Company to pay an annual facility fee in an amount that is also based on the Company's credit rating. The facility fee was assessed against the total amount of the Former BofA Revolver, or$600 million (0.30% atDecember 31, 2021 ). The amount of any applicable facility fee, and the margin over LIBOR rate or base rate was determined based on the Company's credit rating pursuant to a pricing grid. For purposes of the Former BofA Credit Facility, base rate meant, for any day, a fluctuating rate per annum equal to the highest of: (i) the bank's prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one month LIBOR based rate for such day plus 1.00%. As ofDecember 31, 2021 , the Company's credit rating from Moody's Investors Service was Ba1.
As of
Former BofA Revolver. The weighted average interest rate on all amounts
outstanding on the Former BofA Revolver during the year ended
was approximately 1.33% per annum.
Former BofA Term Loan Highlights
? The Former BofA Term Loan was repaid in its entirety on
The original principal amount of the Former BofA Term Loan was
2021, the Company repaid a
? and incurred a loss on extinguishment of debt of
unamortized deferred financing costs. On
the remaining
incurred a loss of extinguishment of debt of
unamortized deferred financing costs.
? If the Company had not prepaid the Former BofA Term Loan in full on September
6, 2022, the Former BofA Term Loan would have matured on
The Former BofA Term Loan bore interest at either (i) a margin over LIBOR depending on the Company's credit rating (1.75% over LIBOR at the date of repayment onSeptember 6, 2022 ) or (ii) a margin over the base rate depending on the Company's credit rating (0.750% over the base rate at the date of repayment onSeptember 6, 2022 ). 42 Table of Contents
The margin over LIBOR rate or base rate was determined based on the Company's
credit rating pursuant to a pricing grid.
For purposes of the Former BofA Credit Facility, base rate meant, for any day, a fluctuating rate per annum equal to the highest of: (i) the bank's prime rate for such day, (ii) the Federal Funds Rate for such day, plus 0.50%, and (iii) the one month LIBOR based rate for such day plus 1.00%. At the date of repayment onSeptember 6, 2022 , the Company's credit rating from Moody's Investors Service was Ba1. The interest rate on the Former BofA Credit Facility was variable through the date of repayment onSeptember 6, 2022 . Previously the Company had fixed the base LIBOR interest rate on the Former BofA Term Loan by entering into interest rate swap transactions. OnJuly 22, 2016 , the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the Former BofA Term Loan at 1.12% per annum for the period beginning onSeptember 27, 2017 and ended onSeptember 27, 2021 . The weighted average variable interest rate on all amounts outstanding under the Former BofA Term Loan through the date of repayment onSeptember 6, 2022 was approximately 2.65% per annum. Based upon the Company's credit rating, as ofDecember 31, 2021 , the interest rate on the Former BofA Term Loan was 1.84% per annum. The weighted average variable interest rate on all amounts outstanding under the Former BofA Term Loan after the expiration of the interest rate swaps, onSeptember 27, 2021 , during the period fromSeptember 28 through December 31, 2021 , was approximately 1.85%
per annum. Senior Notes OnOctober 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$200,000,000 of senior unsecured notes consisting of (i) Series A Senior Notes dueDecember 20, 2024 in an aggregate principal amount of$116 million (the "Series A Notes") and (ii) Series B Senior Notes dueDecember 20, 2027 in an aggregate principal amount of$84 million (the "Series B Notes," and, together with the Series A Notes, the "Senior Notes"). OnDecember 20, 2017 , the Senior Notes were funded and proceeds were used to reduce the outstanding balance of the Former BofA Revolver. The Senior Notes bear interest depending on the Company's credit rating. As ofDecember 31, 2022 , the Series A Notes bear interest at 4.49% per annum and the Series B Notes bear interest at 4.76% per annum. The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BofA Credit Agreement and the BMO Credit Agreement. The Senior Notes financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least 1.50; a maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there were a significant acquisition for a short period of time). In addition, the Note Purchase Agreement provides that the Note Purchase Agreement will automatically incorporate additional financial and other specified covenants (such as limitations on investments and distributions) that are effective from time to time under the existing credit agreements, other material indebtedness or certain other private placements of debt of the Company and its subsidiaries. The Note Purchase Agreement contains customary events of default, including payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Purchasers may, among other remedies, accelerate the payment of all obligations. We were in compliance with the Senior Notes financial covenants as ofDecember 31, 2022 . Equity Offering From time to time, we may issue debt securities, common stock, preferred stock or depository shares under a registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes. 43 Table of Contents Stock Repurchases OnJune 23, 2021 , we announced that our Board of Directors had authorized the repurchase of up to$50 million of the Company's common stock from time to time in the open market, privately negotiated transactions or other manners as permitted by federal securities laws. The repurchase authorization may be suspended or discontinued at any time. OnFebruary 10, 2023 , we disclosed in a Current Report on Form 8-K that our Board of Directors had discontinued the repurchase authorization.
Contingencies
As ofDecember 31, 2022 , the Sponsored REIT Loan had$24 million principal amount outstanding. The Sponsored REIT Loan is secured by a mortgage on the underlying property and has a current term of less than one year. We anticipate that the Sponsored REIT Loan will be repaid through cash flow from property operations or sale of the underlying property, although the actual amount and timing of any repayment is uncertain and will likely depend on prevailing market conditions at the time of any such sale. 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
To the extent permitted by the BofA Credit Agreement, we intend to draw on the BofA Revolver in the future for a variety of corporate purposes, including for the Sponsored REIT Loan as described below.
Loan to Sponsored REIT
Sponsored REIT Loan
The Sponsored REIT Loan is secured by a mortgage on the underlying property and has a current term of less than one year. We anticipate that the Sponsored REIT Loan will be repaid through cash flow from property operations or sale of the underlying property, although the actual amount and timing of any repayment is uncertain and will likely depend on prevailing market conditions at the time of any such sale. The Sponsored REIT Loan subjects us to credit risk. However, we believe that our position as asset manager of the Sponsored REIT helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REIT. Before making the Sponsored REIT Loan, we considered a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the Sponsored REIT and local and national market conditions. These factors are subject to change and we do not apply a formula or assign relative weights to the factors. Instead, we make a subjective determination after considering such factors collectively. Additional information about the Sponsored REIT Loan outstanding as ofDecember 31, 2022 , including a summary table of the Sponsored REIT Loan, is incorporated herein by reference to Note 3, "Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans", in the Notes to Consolidated Financial Statements included in this report. 44 Table of Contents Other Considerations We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties. For the years endedDecember 31, 2022 and 2021, respectively, the rental income exceeded the expenses for each individual property, with the exception ofPershing Park for the year endedDecember 31, 2022 and for the three months endedDecember 31, 2021 .Pershing Park has approximately 160,000 square feet of rentable space, which was 12.4% leased atJune 30, 2021 due to a large tenant departure onMay 31, 2021 . During the three months endedSeptember 30, 2021 , we signed a lease with a new tenant. During the three months endedMarch 31, 2022 , we signed an expansion of space with that same tenant. The new lease inclusive of the expansion space is for approximately 101,000 square feet and has commenced.Pershing Park had approximately$1,977,000 of rental income and$2,269,000 of operating expenses for the year endedDecember 31, 2022 , and was 79.2% leased as ofDecember 31, 2022 . The property had$125,000 of rental income and$489,000 of operating expenses for the three months endedDecember 31, 2021 .
Rental Income Commitments
Our commercial real estate operations include the leasing of office buildings subject to leases with terms greater than one year. The leases thereon expire at various dates through 2037. Approximate undiscounted cash flows of rental income from non-cancelable operating leases as ofDecember 31, 2022 is: Year ending (in thousands) December 31, 2023$ 98,712 2024 90,567 2025 77,525 2026 66,597 2027 56,357 Thereafter (2028-2037) 220,931$ 610,689 Contractual Obligations The following table sets forth our contractual obligations as ofDecember 31, 2022 : Payment due by period Contractual (in thousands) Obligations Total 2023 2024 2025 2026 2027 Thereafter BofA Revolver (1) (2)$ 51,923 $ 3,818 $ 48,105 $ - $ - $ - $ - BMO Term Loan Tranche B (3) (4) 172,232 6,666 165,566 - - - - Series A Notes (3) 126,274 5,208 121,066 - - - - Series B Notes (3) 103,870 3,998 3,998 3,998 3,998 87,878 - Operating Lease 787 447 340 - - - - Total$ 455,086 $ 20,137 $ 339,075 $ 3,998 $ 3,998 $ 87,878 $ -
(1) Amounts include principal and interest payments.
(2) Amounts reflect a facility fee calculated as 0.35% of the
available to be drawn.
(3) Amounts include principal and interest payments.
The BMO Term Loan has an interest rate swap with an effective interest rate
(4) of 4.04% per annum as of
interest.
The operating lease in the table above consists of our lease of corporate office space, which commencedSeptember 1, 2010 , and was amended onOctober 25, 2016 . The amended lease expires onSeptember 30, 2024 and has one five year renewal option. The lease includes a base annual rent and additional rent for our share of taxes and operating costs. 45 Table of Contents As ofDecember 31, 2022 , the Sponsored REIT Loan had$24 million of principal and$2.3 million in accrued interest and exit fees outstanding. Additional information about our Sponsored REIT Loan outstanding as ofDecember 31, 2022 , including a summary table of our Sponsored REIT Loan, is incorporated herein by reference to Note 3, "Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans", in the Notes to Consolidated Financial Statements included in this report.
Off-Balance Sheet Arrangements
Investments in Sponsored REITs
Previously we operated in the investment banking segment, and inDecember 2011 , we discontinued those activities. The investment banking segment involved the structuring of real estate investments and broker/dealer services that included the organization of Sponsored REITs, the acquisition and development of real estate on behalf of Sponsored REITs and the raising of capital to equitize the Sponsored REITs through sale of preferred stock in private placements. The Sponsored REITs own real estate, purchases of which were financed through the private placement of equity in those entities, typically through syndication. These Sponsored REITs are operated in a manner intended to qualify as real estate investment trusts. We earned fees related to the sale of preferred stock in the Sponsored REITs in these syndications. The Sponsored REITs issued both common stock and preferred stock. The common stock is owned byFSP Corp. Generally the preferred stock is owned by unaffiliated investors, however, we held an interest in preferred shares of two Sponsored REITs, which were liquidated during 2018. In addition, directors and officers ofFSP Corp. , have from time to time invested in Sponsored REITs. Following consummation of the offerings, the preferred stockholders in each of the Sponsored REITs were entitled to 100% of the Sponsored REIT's cash distributions. Subsequent to the completion of the offering of preferred shares, except for the preferred stock we previously owned, we do not share in any of the Sponsored REIT's earnings, or any related dividend, and the common stock ownership interests have virtually no economic benefit or risk. As a common stockholder, we have no rights to the Sponsored REIT's earnings or any related cash distributions. However, upon liquidation of a Sponsored REIT, we are entitled to our percentage interest as a common stockholder in any proceeds remaining after the preferred stockholders have recovered their investment. Our common stock percentage interest in each Sponsored REIT is less than 1%. The affirmative vote of the holders of a majority of the Sponsored REIT's preferred stockholders is required for any actions involving merger, sale of property, amendment to charter or issuance of additional capital stock. In addition, all of the Sponsored REITs allow the holders of more than 50% of the outstanding preferred shares to remove (without cause) and replace one or more members of that Sponsored REIT's board of directors. We previously acquired a preferred stock interest in three Sponsored REITs, including one that sold the property owned by it onSeptember 24, 2018 , one that sold the property owned by it onJuly 19, 2018 and one that sold the property owned by it onDecember 20, 2012 and each made a liquidating distribution to us; and one we acquired onMay 15, 2008 by cash merger and another we acquired onApril 30, 2006 by merger. As a result of our common stock interest and during the period we owned our preferred stock interests in the remaining two Sponsored REITs, we exercised influence over, but did not control these entities. These preferred share investments were accounted for using the equity method. Under the equity method of accounting our cost basis was adjusted by our share of the Sponsored REITs' operations and distributions received. We also agreed to vote our preferred shares in any matter presented to a vote by the stockholders of these Sponsored REITs in the same proportion as shares voted by other stockholders of the Sponsored REITs. AtDecember 31, 2022 , 2021 and 2020, we held a common stock interest in 1, 2 and 2 Sponsored REITs, respectively, all of which were fully syndicated and in which we do not share economic benefit or risk.
As of
amount outstanding. Additional information about the Sponsored REIT Loan as of
46
Table of Contents
REIT Loan, is incorporated herein by reference to Note 3, "Related Party Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans", in the Notes to Consolidated Financial Statements included in this report.
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