FRANKLIN STREET PROPERTIES CORP. 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 endedDecember 31, 2020 . 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, adverse changes in general economic or local market conditions, including as a result of the COVID-19 pandemic and other potential infectious disease outbreaks and terrorist attacks or other acts of violence, which may negatively affect the markets in which we and our tenants operate, adverse changes in energy prices, which if sustained, could negatively impact occupancy and rental rates in the markets in which we own properties, including energy-influenced markets such asDallas ,Denver andHouston , changes in interest rates as a result of economic market conditions or a downgrade in our credit rating, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, changes in energy prices, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, delays in construction schedules, unanticipated increases in construction costs, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. See Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 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. OverviewFSP 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 of
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 look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur. In 2021, we determined that further debt reduction would provide greater financial flexibility and potentially increase shareholder value. Accordingly, we have adopted a strategy to dispose of certain properties in 2021 where we believe our valuation objective has been met. Pursuant to this strategy we anticipate dispositions in 2021 will result in estimated aggregate gross proceeds in the range of$350 million to$450 million . As we execute this strategy, our revenue and Funds From Operations are likely to decrease in the short term. Proceeds from these potential dispositions would be used primarily for the repayment of debt, which will likely decrease our interest expense in the short term. Further to this strategy, we previously announced that we entered into a purchase and sale agreement with respect to the following properties: One andTwo Ravinia Drive inAtlanta, Georgia ; andOne Overton Park inAtlanta, Georgia . Aggregate gross proceeds under the purchase and sale agreement would be approximately$219.5 million . The potential sale of One
andTwo Ravinia Drive and 19 Table of Contents
One
Trends and Uncertainties COVID-19 Outbreak Beginning inJanuary 2020 , there was a global outbreak of COVID-19, which continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. It has already disrupted global travel supply chains, adversely impacted global commercial activity, and its long-term economic impact remains uncertain. Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects on the population, as well as the availability and effectiveness of vaccines, therapeutics and any responses taken on a national and local level by government authorities and businesses. The travel restrictions, limits on hours of operations and/or closures of various businesses and other efforts to curb the spread of COVID-19 have significantly disrupted business activity globally, including in the markets where we own properties, and we expect them to have an adverse impact on our business. Many of our tenants are subject to various quarantine restrictions, and the restrictions could be in place for an extended period of time. The pandemic has had an adverse impact on economic and market conditions and triggered a global economic slowdown. The reduction in economic activity worldwide has had a significant negative effect on energy prices, which, if sustained, could have an adverse impact on occupancy and rental rates in energy-influenced markets such asDallas ,Denver andHouston , where we have a significant concentration of properties. However, the evolving nature of the pandemic makes it difficult to ascertain the long-term impact it will have on commercial real estate markets and our business. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to the performance of our properties and our financial results, such as the potential negative impact to the businesses of our tenants, the potential negative impact to leasing efforts and occupancy at our properties, the potential closure of certain of our assets for an extended period, uncertainty regarding future rent collection levels or requests for rent concessions from our tenants, the occurrence of a default under any of our debt agreements, the potential for increased borrowing costs, a potential downgrade in our credit rating that could lead to increased borrowing costs or reduce our access to funding sources in credit and capital markets, our ability to refinance existing indebtedness or to secure new sources of capital on favorable terms, fluctuations in our level of dividends, increased costs of operations, our ability to complete required capital expenditures in a timely manner and on budget, decrease in values of our real estate assets, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We are unable to estimate the impact the COVID-19 pandemic will have on our future financial results at this time. See Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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. We have implemented working from home policies for our employees. During the three months endedMarch 31, 2021 and as ofApril 30, 2021 , all of our properties remained open for business. Although some of our tenants have requested rent concessions, and more tenants may request rent concessions or may not pay rent in the future, as ofMarch 31, 2021 , we had collected in excess of approximately 99% of rental receipts due inMarch 2021 . Future rent concession requests or nonpayment of rent could lead to increased rent delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions or lower occupancy, extended lease terms, increased tenant improvement capital expenditures, or reduced rental rates to maintain occupancies. We review each rent concession request on a case by case basis and may or may not provide rent concessions, depending on the specific circumstances involved. Cash, cash equivalents and restricted cash were$4.1 million as ofMarch 31, 2021 . Management believes that existing cash, cash anticipated to be generated internally by operations and our existing availability under the BAML Revolver ($572.5 million as ofMarch 31, 2021 ) will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties. 20 Table of Contents Economic Conditions
The economy inthe United States has been adversely impacted as a result of the COVID-19 pandemic. Economic conditions directly affect the demand for office space, our primary income producing asset. The broad economic market conditions inthe United States are typically affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, the pace of economic growth and/or recessionary concerns, uncertainty about government fiscal, monetary, trade and tax policies, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit, and interest rates. As of the date of this report, the impact of the COVID-19 pandemic and related fallout from containment and mitigation measures, such as work from home arrangements and the closing of various businesses, is adversely affecting current economic conditions inthe United States . Real Estate Operations As ofMarch 31, 2021 , our real estate portfolio was comprised of 33 operating properties, which we refer to as our operating properties, and one redevelopment property, which we refer to as our redevelopment property, that is in the process of being redeveloped. We collectively refer to our operating and our redevelopment properties as our owned portfolio. Our 33 operating properties were approximately 81.9% leased as ofMarch 31, 2021 , a decrease from 85.0% leased as ofDecember 31, 2020 . The 3.1% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded leasing completed during the three months endedMarch 31, 2021 . As ofMarch 31, 2021 , we had approximately 1,725,000 square feet of vacancy in our operating properties compared to approximately 1,397,000 square feet of vacancy atDecember 31, 2020 . During the three months endedMarch 31, 2021 , we leased approximately 377,000 square feet of office space, of which approximately 370,000 square feet were with existing tenants, at a weighted average term of 9.3 years. On average, tenant improvements for such leases were$18.67 per square foot, lease commissions were$10.23 per square foot and rent concessions were approximately nine months of free rent. Average GAAP base rents under such leases were$28.46 per square foot, or 1.7% lower than average rents in the respective properties as applicable compared to the year endedDecember 31, 2020 . We reclassify redevelopment properties as operating properties when the property redevelopment is complete and leasing has stabilitized. Given the length of the redevelopment and lease-up process, the reclassification of a property may take a significant amount of time. As ofMarch 31, 2021 , our sole redevelopment property was an approximately 111,000 square foot property known as Stonecroft inChantilly, Virginia . The redevelopment of Stonecroft commenced inAugust 2020 . We expect to incur total redevelopment and lease-up costs of$18.5 million , which includes significant interior work to make the space suitable for multiple tenants, or to accommodate a tenant with accredited security requirements. As ofMarch 31, 2021 , we had incurred approximately$2.3 million in redevelopment costs. We anticipate completing the redevelopment byJuly 31, 2021 . 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 ofMarch 31, 2021 , the property had leases signed and a tenant occupying approximately 73.1% of the rentable square feet of the property. OnSeptember 13, 2019 , we entered into a lease agreement with a new tenant with an initial term of 16 years for approximately 156,000 square feet, or 73.1% of the property's rentable square feet. As ofMarch 31, 2021 , leases for approximately 4.9% and 8.8% of the square footage in our owned portfolio are scheduled to expire during 2021 and 2022, respectively. As the second quarter of 2021 begins, we believe that our operating properties are well stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants. While leasing activity at our properties has continued, we believe that the COVID-19 pandemic and related containment and mitigation measures may limit or delay new tenant leasing during at least the second quarter of 2021 and potentially in future periods. While we cannot generally predict when an existing vacancy in our owned portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates. Also, we believe the potential exists for any of our tenants to default on its lease or to seek the protection 21
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of bankruptcy. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in cash available for distribution to our stockholders. Critical Accounting Policies
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
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.
Recent Accounting Standards InMarch 2020 , the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently assessing the potential impact that the adoption of ASU 2020-04 may have on its consolidated financial statements. Results of Operations The following table shows financial results for the three months endedMarch 31, 2021 and 2020: Three months ended March 31, (in thousands) 2021 2020 Change Revenues: Rental$ 58,623 $ 62,567 $ (3,944) Related party revenue:
Management fees and interest income from loans 410 403
7
Other 6 13 (7)
Total revenues 59,039 62,983 (3,944)
Expenses:Real estate operating expenses 15,939 17,298
(1,359)
Real estate taxes and insurance 12,366 11,762
604
Depreciation and amortization 24,381 22,338
2,043
General and administrative 4,146 3,525 621
Interest 8,600 9,063 (463)
Total expenses 65,432 63,986 1,446
Loss before taxes (6,393) (1,003) (5,390)
Tax expense 67 68 (1)
Net loss $ (6,460) $ (1,071) $ (5,389)
22
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Comparison of the three months ended
Revenues Total revenues decreased by$3.9 million to$59.0 million for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 . The decrease was primarily a result of:
A decrease in rental revenue of approximately
from the sale of a property and a tenant bankruptcy in
losses of rental income from leases that expired after
? during the three months ended
ended
earned from leases commencing after
operating properties was 81.9% at
Expenses Total expenses increased by$1.4 million to$65.4 million for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 . The increase was primarily a result of:
? An increase to depreciation and amortization of approximately
? An increase in general and administrative expenses of
primarily from higher professional fees and personnel costs.
These increases were partially offset by:
? A decrease in real estate operating expenses and real estate taxes and
insurance of approximately
A decrease in interest expense of approximately
? primarily from lower debt outstanding during the three months ended
2021 compared to the same period in 2020. Tax expense on income Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues fromTexas properties, which increased$1,000 during the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Net loss Net loss for the three months endedMarch 31, 2021 was$6.5 million compared to a net loss of$1.1 million for the three months endedMarch 31, 2020 , for the reasons described above. 23 Table of Contents 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 mortgage loans, properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs. FFO should not be considered as an alternative to net income or loss (determined in accordance with GAAP), nor as an indicator of the Company's financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund
all of the Company's needs. Other real estate companies and 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 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
Three Months Ended
March 31,
(in thousands): 2021 2020
Net loss $ (6,460) $ (1,071)
Gain on sale of property - -
Depreciation and amortization 24,349 22,265
NAREIT FFO 17,889 21,194
Lease Acquisition costs 116 98
Funds From Operations $ 18,005 $ 21,292
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which
we refer to as NOI. Management believes that investors are interested in this
information. NOI is a non-GAAP financial measure that the Company defines as net
income or loss (the most directly comparable GAAP financial measure) plus
selling, general and administrative expenses, depreciation and amortization,
including amortization of acquired above and below market lease intangibles and
impairment charges, interest expense, less equity in earnings of nonconsolidated
REITs, interest income, management fee income, hedge ineffectiveness, gains or
losses on the sale of assets and excludes non-property specific income and
expenses. The information presented includes footnotes and the data is shown by
region with properties owned in the periods presented, which we call Same Store.
The comparative Same Store results include properties held for the periods
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
24
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reported by other REITs that define NOI differently. NOI should not be
considered an alternative to net income or loss as an indication of our
performance or to cash flows as a measure of the Company's liquidity or its
ability to make distributions. The calculations of NOI are shown in the
following table:
Net Operating Income (NOI)*
Rentable
Square
Three Months Three Months
Feet Ended Ended Inc %
(in thousands) or RSF 31-Mar-21 31-Mar-20 (Dec) Change
Region
East 573 $ 949 $ 1,325 $ (376) (28.4) %
MidWest 1,557 5,378 5,485 (107) (2.0) %
South 4,387 12,423 13,290 (867) (6.5) %
West 2,624 10,369 11,463 (1,094) (9.5) %
Property NOI* from Operating
Properties 9,141 29,119 31,563 (2,444) (7.7) %
Dispositions and Redevelopment
Properties (a) 519 642 1,311 (669) (1.8) %
Property NOI* 9,660 $ 29,761 $ 32,874 $ (3,113) (9.5) %
Same Store $ 29,119 $ 31,563 $ (2,444) (7.7) %
Less Nonrecurring
Items in NOI* (b) 32 26 6 (0.1) %
Comparative
Same Store $ 29,087 $ 31,537 $ (2,450) (7.8) %
Three Months Three Months
Ended Ended
Reconciliation to Net Income (Loss) 31-Mar-21 31-Mar-20
Net loss $ (6,460) $ (1,071)
Add (deduct):
Management fee income (465) (478)
Depreciation and amortization 24,381 22,338
Amortization of above/below market
leases (32) (73)
General and administrative 4,146 3,525
Interest expense 8,600 9,063
Interest income (394) (382)Non-property specific items, net (15)
(48) Property NOI*$ 29,761 $ 32,874
We define redevelopment properties as properties being developed, redeveloped (a) or where redevelopment is complete, but are in lease-up and that are not
stabilized. We also include properties that have been placed in service, but
that do not have operating activity for all periods presented.
Nonrecurring Items in NOI include proceeds from bankruptcies, lease (b) 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.
25
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The information presented below provides the weighted average GAAP rent per square foot for the three months endedMarch 31, 2021 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans. Weighted Occupied Weighted Year Built Weighted Percentage as of Average or Net Rentable Occupied March 31, Rent per Occupied Property Name City State Renovated Square Feet Sq. Ft. 2021 (a) Square Feet (b) Forest Park Charlotte NC 1999/2020 64,198 22,136 34.5 % $ 25.93 Meadow Point Chantilly VA 1999 138,537 97,419 70.3 % 24.72 Innsbrook Glen Allen VA 1999 298,183 170,680 57.2 % 18.65 Loudoun Tech Center Dulles VA 1999 136,658 135,209 98.9 % 20.73 Stonecroft (c) Chantilly VA 2008 111,469 - - % - East total 749,045 425,444 56.8 % 21.08 Northwest Point Elk Grove Village IL 1999 177,095 177,095 100.0 % 29.90 909 Davis Street Evanston IL 2002 195,098 182,104 93.3 % 40.68 River Crossing Indianapolis IN 1998 205,729 204,700 99.5 % 25.16 Timberlake Chesterfield MO 1999 234,496 224,319 95.7 % 32.88 Timberlake East Chesterfield MO 2000 117,036 97,866 83.6 % 26.99 121 South 8th Street Minneapolis MN 1974 297,209 249,269 83.9 % 23.75 801 Marquette Ave Minneapolis MN 1923/2017 129,821 48,021 37.0 % 35.11 Plaza Seven Minneapolis MN 1987 330,096 283,024 85.7 % 32.61 Midwest total 1,686,580 1,466,398 86.9 % 30.49 Blue Lagoon Drive Miami FL 2002/2021 213,182 103,862 48.7 % 26.23 One Overton Park Atlanta GA 2002 387,267 361,010 93.2 % 21.58 Park Ten Houston TX 1999 157,460 112,962 71.7 % 31.29 Addison Circle Addison TX 1999 289,325 242,194 83.7 % 31.40 Collins Crossing Richardson TX 1999 300,887 251,241 83.5 % 27.42 26 Table of Contents
The information presented below provides the weighted average GAAP rent per square foot for the three months endedMarch 31, 2021 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans. Weighted Occupied Weighted Year Built Weighted Percentage as of Average or Net Rentable Occupied March 31, Rent per Occupied Property Name City State Renovated Square Feet Sq. Ft. 2021 (a) Square Feet (b) Eldridge Green Houston TX 1999 248,399 248,399 100.0 % $ 29.01 Park Ten Phase II Houston TX 2006 156,746 148,924 95.0 % 29.14 Liberty Plaza Addison TX 1985 216,952 157,898 72.8 % 23.12 Legacy Tennyson Center Plano TX 1999/2008 207,049 125,741 60.7 % 15.28 One Legacy Circle Plano TX 2008 214,110 120,672 56.4 % 38.79 One Ravinia Drive Atlanta GA 1985 386,602 306,537 79.3 % 26.49 Two Ravinia Drive Atlanta GA 1987 411,047 276,594 67.3 % 27.24 Westchase I & II Houston TX 1983/2008 629,025 329,609 52.4 % 28.03 Pershing Park Plaza Atlanta GA 1989 160,145 158,447 98.9 % 33.67 999 Peachtree Atlanta GA 1987 621,946 524,363 84.3 % 34.52 South Total 4,600,142 3,468,453 75.4 % 28.45 380 Interlocken Broomfield CO 2000 240,359 175,703 73.1 % 33.73 1999 Broadway Denver CO 1986 680,255 480,940 70.7 % 33.20 1001 17th Street Denver CO 1977/2006 655,420 627,958 95.8 % 37.08 600 17th Street Denver CO 1982 610,730 526,877 86.3 % 32.26 Greenwood Plaza Englewood CO 2000 196,236 196,236 100.0 % 25.21 390 Interlocken Broomfield CO 2002 241,512 239,990 99.4 % 33.03 West Total 2,624,512 2,247,704 85.6 % 33.39Total Owned Properties 9,660,279 7,607,999 78.8 % $ 29.89
Based on weighted occupied square feet for the three months ended
rentable square footage.
(b) Represents annualized GAAP rental revenue for the three months ended March
31, 2021, per weighted occupied square foot.
We define redevelopment properties as properties being developed, redeveloped (c) or where redevelopment is complete, but are in lease-up and that are not
stabilized.
27
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Liquidity and Capital Resources
Cash, cash equivalents and restricted cash were$4.1 million and$4.2 million atMarch 31, 2021 andDecember 31, 2020 , respectively. The decrease of$0.1 million is attributable to$1.6 million provided by operating activities, less$16.0 million used for investing activities plus$14.3 million 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. We have extension options on our JPM Term Loan and BAML Revolver (discussed below), which management expects to exercise, or we may seek to replace this indebtedness with new loans or extend the current loans. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties. Operating Activities
Cash provided by operating activities for the three months endedMarch 31, 2021 of$1.6 million is primarily attributable to a net loss of$6.5 million plus the add-back of$23.1 million of non-cash expenses, plus a decrease in tenant rent receivables of$3.3 million . These increases were partially offset by a decrease in accounts payable and accrued compensation of$12.1 million , an increase in payment of deferred leasing commissions of$5.1 million , an increase in tenant security deposits of$0.6 million and an increase in prepaid expenses and other assets of$0.5 million . Investing Activities Cash used for investing activities for the three months endedMarch 31, 2021 of$16.0 million is primarily attributable to purchases of other real estate assets and office equipment investments. Financing Activities
Cash provided by financing activities for the three months ended
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 provides a single unsecured bridge loan in the aggregate principal amount of$150 million (the "JPM Term Loan"). OnDecember 24, 2020 , the Company repaid$50 million of the JPM Term Loan with a portion of the proceeds from theDecember 23, 2020 sale of itsDurham, North Carolina property, so that$100 million remains fully advanced and outstanding under the JPM Term Loan. The JPM Term Loan matures onNovember 30, 2021 , which maturity date may be extended by two additional six-month periods, or untilNovember 30, 2022 (subject to specified exceptions). The JPM Term Loan was previously evidenced by a Credit Agreement, datedNovember 30, 2016 , among the Company, JPMorgan, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, datedOctober 18, 2017 . The JPM Term Loan bears interest at either (i) a number of basis points over a LIBOR-based rate depending on the Company's credit rating (125.0 basis points over the LIBOR-based rate atMarch 31, 2021 ) or (ii) a number of basis points over the base rate depending on the Company's credit rating (25.0 basis points over the base rate atMarch 31, 2021 ). 28 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. 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 the$100 million remaining portion of the JPM Term Loan untilNovember 30, 2021 . Accordingly, based upon the Company's credit rating, as ofMarch 31, 2021 , the effective interest rate on the JPM
Term Loan was 3.69% per annum. Based upon the Company's credit rating, as ofDecember 31, 2020 , the weighted average interest rate on the unhedged$50 million portion of the JPM Term Loan during the year endedDecember 31, 2020 was approximately 1.90% per annum. The$50 million portion of the JPM Term Loan was repaid onDecember 24, 2020 . 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. We were in compliance with the JPM Term Loan financial covenants as ofMarch 31, 2021 . BMO Term Loan OnSeptember 27, 2018 , the Company entered into a Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (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 onNovember 30, 2021 and the tranche B term loan matures onJanuary 31, 2024 . The BMO Credit Agreement also includes an accordion feature that allows up to$100 million of additional loans, subject to receipt of lender commitments and satisfaction
of certain customary conditions. The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company's credit rating (125 basis points over LIBOR atMarch 31, 2021 ) or (ii) a number of basis points over the base rate depending on the Company's credit rating (25 basis points over the base rate atMarch 31, 2021 ). Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into 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 expired 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 ofMarch 31, 2021 , the effective interest rate on the BMO Term Loan was 3.64% 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 29
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ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BMO Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BMO Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BMO Credit Agreement immediately due and payable, terminate the lenders' commitments to make loans under the BMO Credit Agreement, and enforce any and all rights of the lenders or administrative agent under the BMO Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. We were in compliance with the BMO Term Loan financial covenants as ofMarch 31, 2021 . BAML Credit Facility OnJuly 21, 2016 , the Company entered into a First Amendment (the "BAML First Amendment"), and onOctober 18, 2017 , the Company entered into a Second Amendment (the "BAML Second Amendment"), to the Second Amended and Restated Credit Agreement datedOctober 29, 2014 among the Company, the lending institutions party thereto andBank of America, N.A ., as administrative agent, L/C Issuer and SwingLine 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
? 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
Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and
reborrowed from time to time until the initial maturity date of
? 2022. The Company has the right to extend the maturity date of the BAML
Revolver by two additional six month periods, or until
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
applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt
of lender commitments and satisfaction of certain customary conditions. As ofMarch 31, 2021 , there were borrowings of$27.5 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 atMarch 31, 2021 ) or (ii) a margin over the base rate depending on the Company's credit rating (0.20% over the base rate atMarch 31, 2021 ). The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company's credit rating. The facility fee is assessed against the total amount of the BAML Revolver, or$600 million (0.25% atMarch 31, 2021 ). Based upon the Company's credit rating, as ofMarch 31, 2021 , the interest rate on the BAML Revolver was 1.31% per annum. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the three months endedMarch 31, 2021 was approximately 1.31% per annum. As ofDecember 31, 2020 , there were$3.5 million of borrowings outstanding under the BAML Revolver. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year endedDecember 31, 2020 was approximately 1.65% per annum. BAML Term Loan Highlights
? The BAML Term Loan is for
? The BAML Term Loan matures on
The BAML Credit Facility includes an accordion feature that allows for an
? aggregate amount of up to
applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt
of lender commitments and satisfaction of certain customary conditions.
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On
? 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 atMarch 31, 2021 ) or (ii) a margin over the base rate depending on the Company's credit rating (0.35% over the base rate atMarch 31, 2021 ). Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into 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 BAML Term Loan at 1.12% per annum for the period beginning onSeptember 27, 2017 and ending onSeptember 27, 2021 . Accordingly, based upon the Company's credit rating, as ofMarch 31, 2021 , 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 ofMarch 31, 2021 . The Company may use the proceeds of the loans under the BAML Credit Facility to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BAML Credit Facility. Senior Notes 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 million of senior unsecured notes consisting of (i) 3.99% Series A Senior Notes dueDecember 20, 2024 in an aggregate principal amount of$116 million (the "Series A Notes") and (ii) 4.26% 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 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
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Agreement. The Senior Notes financial covenants require, among other things, the
maintenance of a fixed charge coverage ratio of at least 1.50; a maximum
leverage ratio and an unsecured leverage ratio of no more than 60% (65% if there
were a significant acquisition for a short period of time). In addition, the
Note Purchase Agreement provides that the Note Purchase Agreement will
automatically incorporate additional financial and other specified covenants
(such as limitations on investments and distributions) that are effective from
time to time under the existing credit agreements, other material indebtedness
or certain other private placements of debt of the Company and its subsidiaries.
The Note Purchase Agreement contains customary events of default, including
payment defaults, cross defaults with certain other indebtedness, breaches of
covenants and bankruptcy events. In the case of an event of default, the
Purchasers may, among other remedies, accelerate the payment of all obligations.
The Company was in compliance with the Senior Notes financial covenants asofMarch 31, 2021 .Equity Securities From time to time, we expect to issue debt securities, common stock, preferred stock or depository shares under a registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes. Contingencies
From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage. As ofMarch 31, 2021 , we had one loan outstanding for$21 million principal amount with one Sponsored REIT under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes. We anticipate that advances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or another other capital event. We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations. Related Party Transactions
We intend to draw on the BAML Credit Facility in the future for a variety of corporate purposes, including the acquisition of properties that we acquire directly for our portfolio and for Sponsored REIT Loans as described below.
Loans to Sponsored REITs
Sponsored REIT Loans
From time to time we may make secured loans ("Sponsored REIT Loans") to
Sponsored REITs in the form of mortgage loans or revolving lines of credit to
fund construction costs, capital expenditures, leasing costs and for other
purposes. We anticipate that 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
capital event. Each Sponsored REIT Loan is secured by a mortgage on the
underlying property and has a term of approximately two to three years.
Our Sponsored REIT Loans subject us to credit risk. However, we believe that our
position as asset manager of each of the Sponsored REITs helps mitigate that
risk by providing us with unique insight and the ability to rely on qualitative
analysis of the Sponsored REITs. Before making a Sponsored REIT Loan, we
consider a variety of subjective factors, including the quality of the
underlying real estate, leasing, the financial condition of the applicable
Sponsored REIT and local and national market conditions. These factors are
subject to change and we do not apply a formula or assign relative weights to
the factors. Instead, we make a subjective determination after considering
such
factors collectively.
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Additional information about our Sponsored REIT Loans outstanding as of March
31, 2021 , including a summary table of our Sponsored REIT Loans, is incorporated
herein by reference to Part 1, Item 1, Note 2, "Related Party Transactions and
Investments in Non-Consolidated Entities - Management fees and interest income
from loans", in the Notes to Consolidated Financial Statements included inthis report. Other Considerations We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties. For the three months endedMarch 31, 2021 and 2020, respectively, the rental income exceeded the expenses for each individual property, with the exception of Stonecroft for the three months endedMarch 31, 2020 .
Stonecroft had approximately 111,000 square feet of rentable space and became
vacant in
Off-Balance Sheet Arrangements and Contractual Obligations
There have been no material changes to our contractual obligations and
off-balance-sheet arrangements as disclosed in our Annual Report on Form 10-K
for the year ended
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