• Thu. Dec 1st, 2022

FRANKLIN STREET PROPERTIES CORP /MA/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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 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 as
Dallas, Denver and Houston, expectations for future property dispositions,
expectations for potential repurchases of our common stock and 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 Item 1A. 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 in the United States sunbelt and mountain west
regions as well as select opportunistic markets. We believe that the 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.


From December 31, 2021approximately 6.0 million square feet, or approximately 86.3% of our total owned portfolio, was located in Atlanta, dallas, denver,
Houston and Minneapolis.



The main factor that affects our real estate operations is the broad economic
market conditions in the United States. These market conditions affect the
occupancy levels and the rent levels on both a national and local level. We have
no influence on broader economic/market conditions. We look to acquire and/or
develop quality properties in good locations in order to lessen the impact of
downturns in the market and to take advantage of upturns when they occur.



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 intend to
continue the strategy we initially adopted in 2021 of seeking to increase
shareholder value through the sale of select properties where we believe that
short to intermediate term valuation potential has been reached. Pursuant to
this strategy, we anticipate that dispositions in 2022 will result in estimated
gross proceeds in the range of approximately $250 million to $350 million. As we
continue to execute this strategy, our revenue, Funds From Operations, and
capital expenditures are likely to decrease in the short term. Proceeds from
dispositions are intended to be used for the repayment of debt, repurchases of
our common stock, any special dividends required to meet REIT requirements, and
other general corporate purposes.



                                       25

  Table of Contents
For the year ended December 31, 2021, our disposition strategy resulted in gross
sale proceeds of approximately $603 million, and we repaid approximately $508
million of debt. Specifically, on May 27, 2021, we sold One Ravinia, Two Ravinia
and One Overton Park in Atlanta Georgia for aggregate gross proceeds of
approximately $219.5 million, on June 29, 2021, we sold Loudoun Technology
Center in Sterling, Virginia for gross proceeds of approximately $17.25 million,
on August 31, 2021, we sold River Crossing in Indianapolis, Indiana for gross
proceeds of $35 million, on September 23, 2021, we sold Timberlake and
Timberlake East, in Chesterfield, Missouri for aggregate gross proceeds of $67
million, on October 22, 2021, we sold 999 Peachtree in Atlanta Georgia for gross
proceeds of approximately $223.9 million and on November 16, 2021, we sold two
office properties in Chantilly, Virginia for aggregate gross proceeds of
approximately $40 million. During the three months ended June 30, 2021, we
repaid approximately $155 million of term loan indebtedness and the
approximately $47.5 million that had been drawn under our revolving line of
credit. During the three months ended September 30, 2021, we repaid $90 million
of term loan indebtedness. During the three months ended December 31, 2021, we
repaid approximately $215 million of indebtedness.



On June 15, 2021, the credit rating for our senior unsecured debt was downgraded
by Moody's Investor Service to Ba1 from Baa3. The interest rate applicable to
borrowings under our credit facilities is based in part on the rating of our
debt. We anticipate that as a result of this downgrade we will incur an
additional approximately $2.4 million in additional interest costs over a full
twelve month period based on our borrowings as of December 31, 2021.





Trends and Uncertainties



COVID-19 Outbreak



Beginning in January 2020, there was a global outbreak of COVID-19, which
continues to adversely impact global commercial activity and has contributed to
significant volatility in financial markets. It has already disrupted global
travel supply chains, adversely impacted global commercial activity, and its
long-term economic impact remains uncertain. Considerable uncertainty still
surrounds the COVID-19 pandemic and its potential effects on the population,
including the spread of more contagious variants of the virus, as well as the
availability, administration rates 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
significantly disrupted business activity globally, including in the markets
where we own properties. Many of our tenants have been subject to various
quarantine restrictions, and 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. 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,
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 "Risk Factors"
in
Item 1A.



                                       26

  Table of Contents

We have been following and directing our vendors to follow the guidelines from
the Centers for Disease Control and other applicable authorities to minimize the
spread of COVID-19 among our employees, tenants, vendors and visitors, as well
as at our properties. During the year ended December 31, 2021, 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 $40.8 million as of December 31, 2021. Management believes that existing
cash, cash anticipated to be generated internally by operations and our existing
availability under the BofA Revolver ($202.5 million available as of February
14, 2022), 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
and the amount, timing and terms of any property dispositions.



Economic Conditions



Various sectors of the economy in the United States have 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. In addition, the
broad economic market conditions in the United States are typically affected by
numerous factors, including but not limited to, inflation and employment levels,
energy prices, the pace of economic growth and/or recessionary concerns,
uncertainty about government fiscal, monetary, trade and tax policies, changes
in currency exchange rates, geopolitical events, the regulatory environment, the
availability of credit, and interest rates. As of the date of this report, the
impact of the COVID-19 pandemic and related fallout from containment and
mitigation measures, such as work from home arrangements and the closing of
various businesses, is adversely affecting the demand for office space in the
United States.





Real Estate Operations



As of December 31, 2021, our real estate portfolio was comprised of 24 operating
properties, which we also refer to as our owned properties. Previously we had
redevelopment properties, which we referred to as our redevelopment properties,
that were in the process of being redeveloped, or were completed but not yet
stabilized. Our 24 operating properties were approximately 78.4% leased as of
December 31, 2021, a decrease from 85.0% leased as of December 31, 2020. The
6.6% decrease in leased space was a result of the impact from the disposition of
ten properties in 2021and lease expirations and terminations, which exceeded
leasing completed during the year ended December 31, 2021. As of December 31,
2021, we had approximately 1,496,000 square feet of vacancy in our operating
properties compared to approximately 1,397,000 square feet of vacancy at
December 31, 2020. During the year ended December 31, 2021, we leased
approximately 1,035,000 square feet of office space, of which approximately
665,000 square feet were with existing tenants, at a weighted average term of
7.7 years. On average, tenant improvements for such leases were $25.89 per
square foot, lease commissions were $11.45 per square foot and rent concessions
were approximately seven months of free rent. Average GAAP base rents under such
leases were $30.86 per square foot, or 2.5% higher than average rents in the
respective properties as applicable compared to the year ended December 31,
2020.



As of December 31, 2021, we had no redevelopment properties. On November 16,
2021, we sold a property known as Stonecroft in Chantilly, Virginia and another
property located in Chantilly, Virginia for aggregate gross sales proceeds of
approximately $40 million. Stonecroft had been our sole redevelopment property
prior to its sale.



Our property known as Blue Lagoon in Miami, Florida, was substantially completed
during the first quarter of 2021, and had previously been classified as a
redevelopment property. As of December 31, 2021, the property had leases signed
and a tenant occupying approximately 73.6% of the rentable square feet of the
property.



                                       27

  Table of Contents

As of December 31, 2021, leases for approximately 7.3% and 4.5% of the square
footage in our owned portfolio are scheduled to expire during 2022 and 2023,
respectively. As the first quarter of 2022 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 COVID-19
outbreak and related containment and mitigation measures may limit or delay new
tenant leasing during at least the first quarter of 2022 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

Current 2021:

to October 29, 2021the Company has agreed to modify and restate its

Sponsored REIT Loan to FSP Monument Circle LLC extend the due date of

December 6, 2022 at June 30, 2023 and advance an additional amount $3.0 million

tranche of indebtedness to FSP Monument Circle LLC with the same June 30, 2023

maturity date, thereby increasing the total principal amount of the

? Sponsored REIT Loan of $21 million at $24 million. Moreover, the company

has agreed to defer all principal and interest payments due under the Sponsored

REIT loan until maturity date June 30, 2023. As part of his

counterparty to agree to amend and restate the Sponsored REIT Loan, the

Company obtained from the shareholders of the parent company of FSP Monument Circle LLC

the right to vote their shares in favor of any sale of the property held by

FSP Monument Circle LLC at any time or after January 1, 2023.

? we continued to actively explore other potential real estate investments

   opportunities.




During 2020:

? we continued to actively explore other potential real estate investments

   opportunities.




During 2019:

during the year ended December 31, 2019we received about $1.1 million

? as full repayment of a REIT sponsored loan with FSP Satellite Place Corp.

(“Satellite Place”) and we received approximately $51 million as a full refund

of a REIT sponsored loan with FSP Energy Tower I Corp.;

to February 2, 2019we received a cash distribution of approximately $0.2

? million from the liquidation trust of Grand Blvd. (defined below) and on

July 29, 2021we received a final liquidating distribution of approximately

$0.1 million; and

? to April 3, 2019 we received a cash distribution of approximately $1.0 million

   from the liquidating trust of East Wacker (defined below);





Dispositions of property and assets held for sale

We sold three office properties located in Atlanta, Georgia on May 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 in Dulles, Virginia on
June 29, 2021 for a sales price of approximately $17.3 million, at a loss of
$2.1 million. We sold an office property located in Indianapolis, Indiana on
August 31, 2021 for a sales price of approximately $35 million, at a loss of
approximately $1.7 million. We sold two office properties located in
Chesterfield, Missouri on September 23, 2021 for

                                       28

Contents

an aggregate sales price of approximately $67 million, at a gain of
approximately $10.3 million. On October 22, 2021, we sold an office property in
Atlanta Georgia for a sales price of approximately $223.9 million, at a gain of
approximately $86.8 million. On November 16, 2021, we sold two office properties
in Chantilly, Virginia for an aggregate sales price of approximately $40
million, at a loss of approximately $2.9 million. There were no properties held
for sale as of December 31, 2021.



We used proceeds from disposals primarily to repay outstanding debt.



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 region of the United States.
Accordingly, the properties sold remained classified within continuing
operations for all periods presented.



In 2020, we sold an office property located in Durham, North Carolina, for a
sales price of approximately $89.7 million, at a gain of approximately $41.9
million. The disposal of this property did not represent a strategic shift that
has a major effect on the Company's operations and financial results.
Accordingly, the property remained classified within continuing operations for
all periods presented and there were no assets held for sale at December 31,
2020 or December 31, 2019.


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 intend to
continue the strategy we initially adopted in 2021 of seeking to increase
shareholder value through the sale of select properties where we believe that
short to intermediate term valuation potential has been reached. Pursuant to
this strategy, we anticipate that dispositions in 2022 will result in estimated
gross proceeds in the range of approximately $250 million to $350 million. As we
continue to execute this strategy, our revenue, Funds From Operations, and
capital expenditures are likely to decrease in the short term. Proceeds from
dispositions are intended to be used for the repayment of debt, repurchases of
our common stock, any special dividends required to meet REIT requirements, and
other general corporate purposes.



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 the purchase price;

? allowance for bad debts;

? provision for losses on mortgage loans;

? evaluation of book values ​​and impairments of long-lived assets;

? useful lives of fixed assets and intangible assets;

? valuation of derivatives;

? classification of leases; and

? ownership of shares in a sponsored REIT and related interests.



                                       29

  Table of Contents

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 the 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 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 expense

We calculate depreciation expense on a straight-line basis 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 the rental

                                       30

Contents

(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.



Ownership of Shares in a Sponsored REIT and Related Interests



We held preferred stock interests in two Sponsored REITs, both of which were
liquidated during 2018. As a result of our common and preferred stock interests
in these two Sponsored REITs, we exercised influence over, but did not control
these entities. These preferred stock interests 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 (i) with respect to any merger in the
same manner that a majority of the other stockholders of the Sponsored REIT vote
for or against the merger and (ii) with respect to any other matter presented to
a vote by the stockholders of these Sponsored REITs in the same proportion as
shares voted by other stockholders of that Sponsored REIT.



Equity investments in sponsored REITs have been tested for impairment each reporting period. The Company has recorded impairment losses when events or circumstances indicate that a decline in fair value below the carrying value of the investment has occurred and such decline is not temporary.




                                       31

  Table of Contents

Results of Operations



The following table shows financial results for the years ended December 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 Earnings before income tax and share of earnings of unconsolidated SCPIs

                                       92,934       32,865        60,069
Tax expense on income                                           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 December 31, 2021 to the year ended December 31, 2020



Revenues



Total revenues decreased by $36.5 million to $209.4 million for the year ended
December 31, 2021, as compared to the year ended December 31, 2020. The decrease
was primarily a result of:


A drop in rental income of approximately $36.6 million mainly resulting

from the sale of ten properties in the last twelve months and one tenant

bankruptcy in December 2020 and other loss of rental income from leases that

? expired after December 31, 2020. These decreases were partly offset by

rental income from leases commencing after December 31, 2020. Our location

space in our operating properties was 78.4% at December 31, 2021 and 85.0% at

   December 31, 2020.




Expenses



Total expenses decreased by $26.3 million to $228.7 million for the year ended
December 31, 2021, as compared to the year ended December 31, 2020. The decrease
was primarily a result of:


A reduction in real estate operating expenses and property taxes and

? insurance of approximately $13.4 millionmainly due to the sale of

ten properties in the last twelve months.

? A decrease in depreciation of approximately $10.0 million,

mainly due to the sale of ten properties in the last twelve months.

                                       32

  Table of Contents

A decrease in interest expense of approximately $3.8 million. The drop was

? mainly debt repayments made in 2021 and lower interest rates

the year has ended December 31, 2021 compared to the year ended December 31, 2020.

These decreases were partially offset by:

? An increase in general and administrative expenses of $0.9 millionwhat was

primarily due to an increase in public company spending.

Loss on extinguishment of debt

During the year ended December 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 ended December 31, 2021, we sold three office properties located
in Atlanta, Georgia on May 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 in Dulles, Virginia on June 29, 2021 for a sales price
of approximately $17.3 million, at a loss of $2.1 million. We sold an office
property located in Indianapolis, Indiana on August 31, 2021, for a sales price
of approximately $35 million, at a loss of approximately $1.7 million. We sold
two office properties located in Chesterfield, Missouri on September 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 in Atlanta,
Georgia on October 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
in Chantilly, Virginia on November 16, 2021, for an aggregate sales price of
approximately $40 million, at a loss of approximately $2.9 million.



During the year ended December 31, 2020, we sold an office property located in
Durham, North Carolina on December 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 from Texas properties, which decreased $16,000 during the year ended
December 31, 2021, as compared to the year ended December 31, 2020. 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 ended December 31, 2021.



Net income


Net income for the year ended December 31, 2021 has been $92.7 million compared to a net income of $32.6 million for the year ended December 31, 2020for the reasons described above.




                                       33

  Table of Contents

The following table shows financial results for the years ended December 31,
2020 and 2019.




                                                        Year ended December 31,
(in thousands)                                      2020         2019         Change
Revenues:
Rental                                            $ 244,207    $ 265,527    $ (21,320)
Related party revenue:
Management fees and interest income from loans        1,610        3,517   
   (1,907)
Other                                                    31           21            10
Total revenues                                      245,848      269,065      (23,217)
Expenses:
Real estate operating expenses                       66,940       72,311   

(5,371)

Real estate taxes and insurance                      48,390       47,871   
       519
Depreciation and amortization                        88,558       90,909       (2,351)
General and administrative                           14,997       14,473           524
Interest                                             36,026       36,757         (731)
Total expenses                                      254,911      262,321       (7,410)

Gain on sale of property                             41,928            -        41,928
Income before taxes on income                        32,865        6,744        26,121
Taxes on income                                         250          269          (19)

Net income                                        $  32,615    $   6,475    $   26,140



Comparison of the year ended December 31, 2020 to the year ended December 31, 2019



Revenue



Total revenues decreased by $23.2 million to $245.8 million for the year ended
December 31, 2020, as compared to the year ended December 31, 2019. The decrease
was primarily a result of:


A drop in rental income of approximately $21.3 million mainly resulting

the loss of rental income from leases that expired after December 31, 2019

and during the year ended December 31, 2020compared to the year ended

December 31, 2019. In December 2020a tenant filed for bankruptcy and was put

? on a cash basis resulting in a $3.1 million allocation to income to be written off

lease receivables. These decreases were partly offset by rents

income from leases commencing after December 31, 2019. Our rented space

   in our operating properties was 85.0% at December 31, 2020 and 87.6% at
   December 31, 2019.

A decrease of approximately $1.8 million in interest income from Sponsored REIT

? Loans resulting mainly from the repayment of approximately $51 million of these

   loans in June 2019.




Expenses



Total expenses decreased by $7.4 million to $255.0 million for the year ended
December 31, 2020, as compared to the year ended December 31, 2019. The decrease
was primarily a result of:


? A reduction in real estate operating expenses and property taxes and

insurance of approximately $4.8 million.

? A decrease in depreciation of approximately $2.4 million.

A decrease in interest expense of approximately $0.7 million. The drop was

? mainly from the decline in interest rates during the year ended December 31, 2020

   compared to the year ended December 31, 2019.






                                       34

  Table of Contents

These decreases were partially offset by:

? An increase in general and administrative expenses of $0.5 millionwhat was

primarily due to an increase in public company spending.




Gain on sale of property



We sold an office building located at Durham, North Carolina to December 23, 2020 for a sale price of approximately $89.7 millionwith a gain of approximately $41.9 million. We did not sell any properties during the year ended December 31, 2019.


Tax expense on income


Included in income taxes is the Revised Texas Franchise Tax, which is a tax on
revenues from Texas properties, which decreased $144,000 and federal and other
income taxes, which increased by $125,000, during the year ended December 31,
2020, as compared to the year ended December 31, 2019, primarily as a result of
a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017
during the year ended December 31, 2019.



Net income


Net income for the year ended December 31, 2020 was $32.6 million compared to a
net income of $6.5 million for the year ended December 31, 2019, for the reasons
described above.



                                       35

  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 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 (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flow from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor necessarily an indication of sufficient cash flows to fund all of the Company’s needs.



Other real estate companies and the National Association of Real Estate
Investment Trusts, or NAREIT may define this term in a different manner. We have
included the NAREIT FFO definition as of May 17, 2016 in the table and note that
other REITs may not define FFO in accordance with the NAREIT definition or may
interpret the current NAREIT definition differently than we do.



We believe that in order to facilitate a clear understanding of the results of
the Company, FFO should be examined in connection with net income and cash flows
from operating, investing and financing activities in the consolidated financial
statements.


FFO calculations are presented in the following table:

                                                     For the Year December 31,
(in thousands):                                   2021           2020         2019
Net income                                     $    92,717    $   32,615    $  6,475
Gain on sale of properties                       (113,134)      (41,928)           -
Equity in income of non-consolidated REITs           (421)             -   

FFO from non-consolidated REITs                        421             -   

Depreciation and amortization                       78,509        88,244   
  90,507
NAREIT FFO                                          58,092        78,931      96,982
Lease Acquisition costs                                387           467         560

Funds From Operations                          $    58,479    $   79,398    $ 97,542




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 reported by other
REITs that define NOI differently. NOI should not be

                                       36

Contents

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-21     31-Dec-20       (Dec)       Change
East                                     298    $    1,615    $    1,537    $       78       5.1 %
MidWest                                1,000        13,085        12,614           471       3.7 %
South                                  2,581        23,757        26,244       (2,487)     (9.5) %
West                                   2,625        40,518        44,656       (4,138)     (9.3) %
Property NOI from the
continuing portfolio                   6,504        78,975        85,051       (6,076)     (7.1) %
Dispositions, Non-Operating,
Development or Redevelopment                        25,106        41,596      (16,490)    (10.7) %
Property NOI                                    $  104,081    $  126,647    $ (22,566)    (17.8) %

Same Store                                      $   78,975    $   85,051    $  (6,076)     (7.1) %

Less Nonrecurring
Items in NOI (a)                                       510         1,532       (1,022)       1.0 %

Comparative
Same Store                                      $   78,465    $   83,519    $  (5,054)     (6.1) %





                                                 Year          Year
                                                 Ended        Ended
Reconciliation to Net income                   31-Dec-21    31-Dec-20
Net Income                                    $    92,717   $   32,615
Add (deduct):
Loss on extinguishment of debt                        901            -
Gain on sale of property                        (113,134)     (41,928)
Management fee income                             (1,559)      (1,872)
Depreciation and amortization                      78,544       88,558
Amortization of above/below market leases            (34)        (313)
General and administrative                         15,898       14,997
Interest expense                                   32,273       36,026
Interest income                                   (1,639)      (1,540)
Equity in losses of non-consolidated REITs          (421)            -
Non-property specific items, net                      535          104
Property NOI                                  $   104,081   $  126,647


Non-recurring items of the NOI include bankruptcy proceeds, (a) lease termination fees or other material non-recurring income or expenses, which

    may affect comparability.




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






                                       37

  Table of Contents

Cash and capital resources



Cash and cash equivalents were $40.8 million and $4.2 million at December 31,
2020 and December 31, 2019, respectively. The increase of $36.6 million is
attributable to $36.3 million provided by operating activities, plus $505.5
million provided by investing activities and less $505.2 million used in
financing activities. Management believes that existing cash, cash anticipated
to be generated internally by operations and our existing availability under the
BofA Revolver ($202.5 million available as of February 14, 2022), 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 properties and our interest costs.



Operating Activities



Cash provided by our operating activities of $36.3 million is primarily
attributable to net income of $92.7 million excluding the gain on sale of a
property of $113.1 million plus the add-back of $77.9 million of non-cash
expenses, plus a decrease in tenant rent receivables of $5.7 million, proceeds
received from a liquidating distribution from a non-consoldiated REIT of $0.4
million and a decrease in prepaid expenses and other assets of $0.1 million.
These increases were partially offset by a $12.2 million increase in payments of
deferred leasing commissions, a $10.3 million increase in accounts payable and
accrued expenses, an increase in tenant security deposits of $2.5 million and an
increase in lease acquisition costs of $2.4 million.



Investing Activities


Cash provided by investing activities for the year ended December 31, 2021 of
$505.5 million is primarily attributable to proceeds from the sale of ten
properties of $573.3 million and partially offset by capital expenditures and
office equipment investments of approximately $64.8 million and an increase in
mortgage lending to a non-consolidated REIT of $3.0 million.



Financing Activities



Cash used in financing activities for the year ended December 31, 2021 of $505.2
million is primarily attributable to repayment of the JPM Term Loan in the
amount of $100.0 million, repayment of a tranche of the BMO Term Loan in the
amount of $55.0 million, repayment of a portion of the BofA Term Loan in the
amount of $290 million, net repayments on the Former BofA Revolver in the amount
of $3.5 million, stock repurchases in the amount of $18.2 million and
distributions paid to stockholders in the amount of $38.5 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 requirements in addition to our free cash flow generated from our investments in real estate. In the past, we considered borrowing from our unsecured line of credit, adding or

                                       38

Contents

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 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


On August 2, 2018, the Company entered into an Amended and Restated Credit
Agreement with JPMorgan Chase Bank, N.A., as administrative agent and lender
("JPMorgan"), and the other lending institutions party thereto (the "JPM Credit
Agreement"), which provided a single unsecured bridge loan in the aggregate
principal amount of $150 million (the "JPM Term Loan"). On December 24, 2020,
the Company repaid a $50 million portion of the JPM Term Loan with a portion of
the proceeds from the December 23, 2020 sale of its Durham, North Carolina
property, and $100 million remained fully advanced and outstanding under the JPM
Term Loan. On June 4, 2021, the Company repaid the remaining $100 million
outstanding on the loan, which had been scheduled to mature on November 30,
2021, and incurred a loss on extinguishment of debt of $0.1 million related to
unamortized deferred financing costs. The repayment was made with a portion of
the proceeds from the May 27, 2021 sales of the three Atlanta properties.



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. On March 7, 2019,
the Company entered into ISDA Master Agreements with various financial
institutions to hedge a $100 million portion of the future LIBOR-based rate risk
under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the
LIBOR-based rate at 2.44% per annum on a $100 million portion of the JPM Term
Loan until November 30, 2021. On June 4, 2021, the Company paid approximately
$1.2 million to terminate the interest rate swap, which was scheduled to mature
on November 30, 2021.



BMO Term Loan



On September 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 initial
amount of $220 million (the "BMO Term Loan"), of which $165 million remains
fully advanced and outstanding. The BMO Term Loan initially consisted of a $55
million tranche A term loan and a $165 million tranche B term loan. On June 4,
2021, the Company repaid the tranche A term loan that was scheduled to mature on
November 30, 2021, and incurred a loss on extinguishment of debt of $0.1 million
related to unamortized deferred financing costs. The repayment was made with a
portion of the proceeds from the May 27, 2021 sales of the three Atlanta
properties. The $165 million tranche B term loan matures on January 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 (165 basis points over LIBOR at
December 31, 2021) 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 at December
31, 2021).




The margin on LIBOR or base rate is determined based on the Company’s credit rating according 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      December 31, 2021, 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. On August 26, 2013, the Company entered into an
ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest
rate on the BMO Term Loan at 2.32% per annum, which matured on August 26, 2020.
On February 20, 2019, the Company entered into ISDA Master Agreements with a
group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at
2.39% per annum for the period beginning on August 26, 2020 and ending January
31, 2024. Accordingly, based upon the Company's credit rating, as of December
31, 2021, the effective interest rate on the BMO Term Loan was 4.04% per annum.
On June 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 on
November 30, 2021.



The BMO Credit Agreement contains customary affirmative and negative covenants
for credit facilities of this type, including limitations with respect to
indebtedness, liens, investments, mergers and acquisitions, disposition of
assets, changes in business, certain restricted payments, the requirement to
have subsidiaries provide a guaranty in the event that they incur recourse
indebtedness and transactions with affiliates. The BMO Credit Agreement also
contains financial covenants that require the Company to maintain a minimum
tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio,
a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio,
and minimum unsecured interest coverage. The BMO Credit Agreement provides for
customary events of default with corresponding grace periods, including failure
to pay any principal or interest when due, certain cross defaults and a change
in control of the Company (as defined in the BMO Credit Agreement). In the event
of a default by the Company, the administrative agent may, and at the request of
the requisite number of lenders shall, declare all obligations under the BMO
Credit Agreement immediately due and payable, terminate the lenders' commitments
to make loans under the BMO Credit Agreement, and enforce any and all rights of
the lenders or 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 of
December 31, 2021.



BofA Revolver


On January 10, 2022, the Company entered into a Credit Agreement (the "BofA
Credit Agreement") with Bank of America, N.A., as administrative agent, a letter
of credit issuer and a lender ("BofA"), and the other lending institutions party
thereto, for a new revolving line of credit for borrowings, at the Company's
election, of up to $217.5 (the "BofA Revolver"). On February 10, 2022, the
Company increased its BofA Revolver availability by $20.0 million to $237.5
million as part of the accordion feature that is available to increase borrowing
capacity. Borrowings made under the BofA Revolver may be revolving loans or
letters of credit, the combined sum of which may not exceed $237.5 million
outstanding at any time. As of February 14, 2022, there were borrowings of $35.0
million drawn and outstanding under the BofA Revolver. Borrowings made pursuant
to the BofA Revolver may be borrowed, repaid and reborrowed from time to time
until the maturity date on January 12, 2024. The Company has the right to
request an extension of the maturity date, subject to acceptance by the lenders
and satisfaction of certain other customary conditions. The BofA Revolver
includes an accordion feature that allows the Company to request an increase in
borrowing capacity to an amount not exceeding $750 million in the aggregate,
subject to receipt of lender commitments and satisfaction of certain customary
conditions.



Borrowings under the BofA Revolver bear interest at a margin over either (i) the
daily simple Secured Overnight Financing Rate ("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. The
margin over SOFR or, if applicable, the base rate varies depending on the
Company's leverage ratio (1.950% over SOFR and 0.950% over the base rate at
February 4, 2022). The Company is also obligated to pay an

                                       40

Contents

annual facility fee and, if applicable, letter of credit fees in amounts that
are also based on the Company's leverage ratio. The facility fee is assessed
against the aggregate amount of lender commitments regardless of usage (0.350%
at February 4, 2022). The actual amount of the facility fee, any letter of
credit fees, and the margin over SOFR or the base rate is 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%




In the event that the Company is assigned an investment grade credit rating, the
Company has 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        

Contents

Section 857 of the Internal Revenue Code or eliminate any income tax or excise to which the Company would otherwise be subject.




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 or
BofA 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.



The Company may use the net proceeds of the BofA Revolver 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 BofA Credit Agreement.



BofA Credit Facility



On July 21, 2016, the Company entered into a First Amendment (the "BofA First
Amendment"), and on October 18, 2017, the Company entered into a Second
Amendment (the "BofA Second Amendment"), to the Second Amended and Restated
Credit Agreement dated October 29, 2014 among the Company, the lending
institutions party thereto and BofA, as administrative agent, L/C Issuer and
Swing Line Lender (as amended by the BofA First Amendment and the BofA Second
Amendment, the "BofA Credit Facility") that continued an existing unsecured
revolving line of credit (the "Former BofA Revolver") and an existing term loan
(the "BofA Term Loan"). Effective simultaneously with the closing of the BofA
Credit Agreement on January 10, 2022, the Company delivered a notice to BofA
terminating the aggregate lender commitments under the Former BofA Revolver
in
their entirety.


Highlights of the old BofA revolver

? From December 31, 2021 and January 10, 2022there were no loans under

the old BofA revolver.

The old BofA revolver was intended for loans, at the option of the company, of a maximum

? at $600 million. Borrowings made under the old BofA Revolver could be

revolving credits, swing line credits or letters of credit, the combined sum of

   which could not exceed $600 million outstanding at any time.




As of December 31, 2021, there were no borrowings outstanding under 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 at
December 31, 2021) or (ii) a margin over the base rate depending on the
Company's credit rating (0.550% over the base rate at December 31, 2021). The
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% at December 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 the following grid.




                                     LIBOR                  Base
                                      Rate     Facility     Rate
Level         Credit Rating          Margin      Fee       Margin
  I      A-    / A3   (or higher)     0.825 %     0.125 %   0.000 %
 II      BBB+  / Baa1                 0.875 %     0.150 %   0.000 %
 III     BBB   / Baa2                 1.000 %     0.200 %   0.000 %
 IV      BBB-  / Baa3                 1.200 %     0.250 %   0.200 %
  V      

monthly rate based on LIBOR for that day plus 1.00%. From December 31, 2021the Company’s credit rating from Moody’s Investors Service was Ba1.

The weighted average interest rate on all amounts outstanding on the Former BofA
Revolver during the year ended December 31, 2021, was approximately 1.33% per
annum. As of December 31, 2020, there were borrowings of $3.5 million
outstanding under the Former BofA Revolver. The weighted average interest rate
on all amounts outstanding on the Former BofA Revolver during the year ended
December 31, 2020, was approximately 1.65% per annum.



BofA Term Loan Highlights


The original principal amount of the BofA term loan was $400 million. At

September 30, 2021the Company reimbursed a $90 million party and on October 25,

? 2021, the Company reimbursed a $200 million part of the BofA term loan and

suffered a loss on the extinction of the debt of $0.7 million relative to

unamortized deferred financing costs. From December 31, 2021, $110 million

outstanding under the BofA term loan.

? The BofA term loan matures on January 12, 2023.

The BofA credit facility includes an accordion feature that allows a

? total amount up to $500 million additional borrowing capacity for

Former BofA Revolver and/or BofA Term Loan, subject to receipt from lender

   commitments and satisfaction of certain customary conditions.




The BofA Term Loan bears interest at either (i) a margin over LIBOR depending on
the Company's credit rating (1.75% over LIBOR at December 31, 2021) or (ii) a
margin over the base rate depending on the Company's credit rating (0.750% over
the base rate at December 31, 2021). The margin over LIBOR rate or base rate is
determined based on the Company's credit rating pursuant to the following grid:




                                    LIBOR Rate    Base Rate
Level        Credit Rating            Margin       Margin
  I     A-    / A3   (or higher)         0.900 %      0.000 %
 II     BBB+  / Baa1                     0.950 %      0.000 %
 III    BBB   / Baa2                     1.100 %      0.100 %
 IV     BBB-  / Baa3                     1.350 %      0.350 %
  V     December 31, 2021,
the Company's credit rating from Moody's Investors Service was Ba1.



The interest rate on the BofA Credit Facility was variable at December 31, 2021.
Previously the Company had fixed the base LIBOR interest rate on the BofA Term
Loan by entering into interest rate swap transactions. On July 22, 2016, the
Company entered into ISDA Master Agreements with a group of banks that fixed the
base LIBOR interest rate on the BofA Term Loan at 1.12% per annum for the period
beginning on September 27, 2017 and ended on September 27, 2021. Based upon the
Company's credit rating, as of December 31, 2021, the interest rate on the BofA
Term Loan was 1.84% per annum. The weighted average variable interest rate on
all amounts outstanding under the BofA Term Loan after the expiration of the
interest rate swaps, on September 27, 2021, during the period from September 28
through December 31, 2021, was approximately 1.85% per annum.



General information on the BofA credit facility




The BofA 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 BofA Credit Facility also
contains financial

                                       43

  Table of Contents

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 BofA 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 BofA 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 BofA Credit Facility
immediately due and payable, terminate the lenders' commitments to make loans
under the BofA Credit Facility, and enforce any and all rights of the lenders or
administrative agent under the BofA 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. We were in
compliance with the BofA Credit Facility financial covenants as of December
31,
2021.



The Company may use the proceeds of the loans under the BofA 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 BofA Credit Facility.



Senior Notes



On October 24, 2017, the Company entered into a note purchase agreement (the
"Note Purchase Agreement") with the various purchasers named therein (the
"Purchasers") in connection with a private placement of senior unsecured notes.
Under the Note Purchase Agreement, the Company agreed to sell to the Purchasers
an aggregate principal amount of $200,000,000 of senior unsecured notes
consisting of (i) Series A Senior Notes due December 20, 2024 in an aggregate
principal amount of $116 million (the "Series A Notes") and (ii) Series B Senior
Notes due December 20, 2027 in an aggregate principal amount of $84 million (the
"Series B Notes," and, together with the Series A Notes, the "Senior Notes"). On
December 20, 2017, the Senior Notes were funded and proceeds were used to reduce
the outstanding balance of the Former BofA Revolver.



The Senior Notes bear interest depending on the Company's credit rating. As of
December 31, 2021, 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 Facility, the BMO Credit Agreement and the JPM
Credit Agreement. The Senior Notes financial covenants require, among other
things, the maintenance of a fixed charge coverage ratio of at least 1.50; a
maximum leverage ratio and an unsecured leverage ratio of no more than 60% (65%
if there were a significant acquisition for a short period of time). In
addition, the Note Purchase Agreement provides that the Note Purchase Agreement
will automatically incorporate additional financial and other specified
covenants (such as limitations on investments and distributions) that are
effective from time to time under the existing credit agreements, other material
indebtedness or certain other private placements of debt of the Company and its
subsidiaries. The Note Purchase Agreement contains customary events of default,
including payment defaults, cross defaults with certain other indebtedness,
breaches of covenants and bankruptcy events. In the case of an event of default,
the Purchasers may, among other remedies, accelerate the payment of all
obligations. We were in compliance with the Senior Notes financial covenants as
of December 31, 2021.



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.



                                       44

  Table of Contents

Stock Repurchases



On June 23, 2021, FSP Corp. announced that the Board of Directors of FSP Corp.
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.



Contingencies


From time to time, we may provide financing to Sponsored REITs in the form of a
construction loan and/or a revolving line of credit secured by a mortgage. As of
December 31, 2021, we had one loan outstanding for $24 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 BofA Revolver 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.



Additional information about our Sponsored REIT Loan outstanding as of December
31, 2021, including a summary table of our Sponsored REIT Loans, 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.



Other Considerations



We generally pay the ordinary annual operating expenses of our properties from
the rental revenue generated by the properties. For the year ended December 31,
2021 and 2020, respectively, the rental income exceeded the expenses

                                       45

Contents


for each individual property, with the exception of Pershing Park for the three
months ended December 31, 2021 and Stonecroft for the year ended December 31,
2020.



Pershing Park has approximately 160,000 square feet of rentable space, which was
12.4% leased at June 30, 2021 due to a large tenant departure on May 31, 2021.
During the three months ended September 30, 2021, we signed a lease with a new
tenant for approximately 100,000 square feet that has not commenced. The
property had $125,000 of rental income and $489,000 of operating expenses for
the three months ended December 31, 2021.



Stonecroft had approximately 111,000 square feet of rentable space and became
vacant in December 2019. We had no rental income and no operating expenses
during the three months ended December 31, 2020 and we had no rental income and
operating expenses of $514,000 for the year ended December 31, 2020. We sold
this property on November 16, 2021, at a loss of approximately $4.8 million.



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 of December 31, 2021 is:




                           Year ending
(in thousands)            December 31,
2022                      $     100,269
2023                            103,107
2024                             97,792
2025                             83,596
2026                             70,718
Thereafter (2027-2037)          259,673
                          $     715,155




Contractual Obligations



The following table sets forth our contractual obligations as of December 31,
2021:




                                                          Payment due by period
Contractual                                                  (in thousands)
Obligations                 Total        2022        2023         2024        2025       2026       Thereafter
Former BofA Revolver
(1) (2)                   $      59    $     59    $       -    $       -    $     -    $     -    $          -
BofA Term Loan (3) (4)      112,104       2,037      110,067            -          -          -               -
BMO Term Loan Tranche
B (3) (5)                   178,888       6,666        6,666      165,556          -          -               -
Series A Notes (3)          131,482       5,208        5,208      121,066          -          -               -
Series B Notes (3)          107,870       3,998        3,998        3,998      3,998      3,998          87,880
Operating Lease               1,225         438          447          340          -          -               -
Total                     $ 531,628    $ 18,406    $ 126,386    $ 290,960    $ 3,998    $ 3,998    $     87,880

(1) Amounts include principal and interest payments.

(2) Amounts reflect service charges calculated at 0.30% of the $600 million

available to be fired.

(3) Amounts include principal and interest payments.



 (4) The BofA Term Loan interest was estimated based on the variable rate in
     effect as of December 31, 2021, which was at an annual rate of 1.85%.

The BMO term loan features an interest rate swap with an effective interest rate

(5) 4.04% per year from December 31, 2021which was used to estimate

     interest.




The operating lease in the table above consists of our lease of corporate office
space, which commenced September 1, 2010, and was amended on October 25, 2016.
The amended lease expires on September 30, 2024 and has

                                       46

Contents

a five-year renewal option. The lease includes a base annual rent and an additional rent for our share of taxes and operating expenses.




In addition to the amounts in the table above, from time to time, we may provide
Sponsored REIT Loans to our Sponsored REITs. As of December 31, 2021, we had one
Sponsored REIT Loan with $24 million principal amount outstanding. Additional
information about our Sponsored REIT Loan outstanding as of December 31, 2021,
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 in December 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. On
December 15, 2011, we announced that our broker/dealer subsidiary, FSP
Investments LLC, would no longer sponsor the syndication of shares of preferred
stock in newly-formed Sponsored REITs. On July 15, 2014, FSP Investments LLC
withdrew its registration as a broker/dealer with FINRA.



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 by
FSP 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 of FSP 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 on September 24, 2018, one that
sold the property owned by it on July 19, 2018 and one that sold the property
owned by it on December 20, 2012 and each made a liquidating distribution to us;
and one we acquired on May 15, 2008 by cash merger and another we acquired on
April 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.



                                       47

  Table of Contents

AT December 31, 20212020 and 2019, we held common equity ownership in 2 sponsored REITs, all of which were fully syndicated and in which we do not share economic benefits or risks.




From time to time, we may provide Sponsored REIT Loans to our Sponsored REITs.
As of December 31, 2021, we had one Sponsored REIT Loan with $24 million
principal amount outstanding. Additional information about our Sponsored REIT
Loan outstanding as of December 31, 2021, 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.

© Edgar Online, source Previews