10-Q 1 fsp-20240930x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2024.

OR

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

For the transition period from           to           

Commission File Number: 001-32470

Franklin Street Properties Corp.

(Exact name of registrant as specified in its charter)

Maryland

04-3578653

(State or other jurisdiction of incorporation

(I.R.S. Employer Identification No.)

or organization)

401 Edgewater Place, Suite 200

Wakefield, MA 01880

(Address of principal executive offices)(Zip Code)

(781) 557-1300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, $.0001 par value per share

FSP

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No

The number of shares of common stock outstanding as of October 24, 2024, was 103,566,715.

Franklin Street Properties Corp.
Form 10-Q

Quarterly Report
September 30, 2024

Table of Contents

    

    

Page

Part I.

Financial Information

Item 1.

Financial Statements

Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023

3

Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023

4

Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2024 and 2023

5

Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023

6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023

7

Notes to Consolidated Financial Statements

8-20

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

40

Part II.

Other Information

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults Upon Senior Securities

41

Item 4.

Mine Safety Disclosures

41

Item 5.

Other Information

41

Item 6.

Exhibits

42

Signatures

43

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

Franklin Street Properties Corp.

Consolidated Balance Sheets

(Unaudited)

September 30,

December 31,

 

(in thousands, except share and par value amounts)

    

2024

    

2023

 

Assets:

Real estate assets:

Land (amounts related to variable interest entities ("VIEs") of $6,416 and $6,416 at September 30, 2024 and December 31, 2023, respectively)

 

$

105,298

 

$

110,298

Buildings and improvements (amounts related to VIEs of $13,279 and $13,279 at September 30, 2024 and December 31, 2023, respectively)

 

1,090,551

 

1,133,971

Fixtures and equipment

 

10,776

 

12,904

 

1,206,625

 

1,257,173

Less accumulated depreciation (amounts related to VIEs of $597 and $341 at September 30, 2024 and December 31, 2023, respectively)

 

369,276

 

366,349

Real estate assets, net (amounts related to VIEs of $19,098 and $19,354 at September 30, 2024 and December 31, 2023, respectively)

 

837,349

 

890,824

Acquired real estate leases, less accumulated amortization of $16,465 and $20,413, respectively (amounts related to VIEs of $67 and $305, less accumulated amortization of $30 and $222 at September 30, 2024 and December 31, 2023, respectively)

 

4,695

 

6,694

Assets held for sale

32,926

73,318

Cash, cash equivalents and restricted cash (amounts related to VIEs of $1,608 and $2,167 at September 30, 2024 and December 31, 2023, respectively)

 

42,375

 

127,880

Tenant rent receivables

 

1,349

 

2,191

Straight-line rent receivable

 

38,432

 

40,397

Prepaid expenses and other assets

 

3,243

 

4,239

Office computers and furniture, net of accumulated depreciation of $1,063 and $1,020, respectively

 

80

 

123

Deferred leasing commissions, net of accumulated amortization of $14,724 and $16,008, respectively

 

21,064

 

23,664

Total assets

 

$

981,513

 

$

1,169,330

Liabilities and Stockholders’ Equity:

Liabilities:

Bank note payable

 

$

 

$

90,000

Term loans payable, less unamortized financing costs of $2,956 and $293, respectively

 

137,601

 

114,707

Series A & Series B Senior Notes, less unamortized financing costs of $1,585 and $329, respectively

135,545

199,670

Accounts payable and accrued expenses (amounts related to VIEs of $643 and $590 at September 30, 2024 and December 31, 2023, respectively)

 

32,821

 

41,879

Accrued compensation

 

3,193

 

3,644

Tenant security deposits

 

6,120

 

6,204

Lease liability

763

334

Acquired unfavorable real estate leases, less accumulated amortization of $310 and $396, respectively

 

51

 

87

Total liabilities

 

316,094

 

456,525

Commitments and contingencies

Stockholders’ Equity:

Preferred stock, $.0001 par value, 20,000,000 shares authorized, none issued or outstanding

 

 

Common stock, $.0001 par value, 180,000,000 shares authorized, 103,566,715 and 103,430,353 shares issued and outstanding, respectively

 

10

 

10

Additional paid-in capital

 

1,335,361

 

1,335,091

Accumulated other comprehensive income

 

 

355

Accumulated distributions in excess of accumulated earnings

 

(669,952)

 

(622,651)

Total stockholders’ equity

 

665,419

 

712,805

Total liabilities and stockholders’ equity

 

$

981,513

 

$

1,169,330

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

3

Franklin Street Properties Corp.

Consolidated Statements of Operations

(Unaudited)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(in thousands, except per share amounts)

    

2024

    

2023

    

2024

    

2023

Revenues:

Rental

$

29,662

$

36,903

$

91,705

$

110,927

Other

 

20

 

 

32

 

9

Total revenues

 

29,682

 

36,903

 

91,737

 

110,936

Expenses:

Real estate operating expenses

 

11,574

 

12,797

 

33,620

 

37,627

Real estate taxes and insurance

 

5,512

 

7,115

 

17,175

 

21,257

Depreciation and amortization

 

10,911

 

13,408

 

34,018

 

42,780

General and administrative

 

3,275

 

3,265

 

11,069

 

10,849

Interest

 

6,585

 

6,209

 

20,513

 

18,099

Total expenses

 

37,857

 

42,794

 

116,395

 

130,612

Loss on extinguishment of debt

(477)

(39)

(614)

(106)

Gain on consolidation of Sponsored REIT

394

Loss on sale of properties and impairment of assets held for sale, net

(7,254)

(39,671)

(20,459)

 

(32,085)

Interest income

 

340

 

 

1,696

 

Loss before taxes

 

(15,566)

 

(45,601)

 

(44,035)

 

(51,473)

Tax expense

 

56

 

70

 

162

 

212

Net loss

$

(15,622)

$

(45,671)

$

(44,197)

$

(51,685)

Weighted average number of shares outstanding, basic and diluted

 

103,567

 

103,430

 

103,492

 

103,333

Net loss per share, basic and diluted

$

(0.15)

$

(0.44)

$

(0.43)

$

(0.50)

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

4

Franklin Street Properties Corp.

Consolidated Statements of Comprehensive Loss

(Unaudited)

For the

For the

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

    

2024

    

2023

    

2024

    

2023

Net loss

$

(15,622)

$

(45,671)

$

(44,197)

$

(51,685)

Other comprehensive income (loss):

Unrealized gain on derivative financial instruments

 

 

 

 

177

Reclassification from accumulated other comprehensive income into interest expense

(1,063)

(355)

(3,118)

 

Total other comprehensive loss

 

 

(1,063)

 

(355)

 

(2,941)

Comprehensive loss

$

(15,622)

$

(46,734)

$

(44,552)

$

(54,626)

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

5

Franklin Street Properties Corp.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

Accumulated

Distributions

 

Additional

other

in excess of

Total

 

Common Stock

Paid-In

comprehensive

accumulated

Stockholders’

 

(in thousands, except per share amounts)

    

Shares

    

Amount

    

Capital

    

income (loss)

    

earnings

    

Equity

 

 

Balance, December 31, 2022

 

103,236

$

10

$

1,334,776

$

4,358

$

(570,408)

$

768,736

Comprehensive income (loss)

 

 

 

 

(814)

 

2,406

 

1,592

Distributions $0.01 per
share of common stock

 

 

 

 

 

(1,033)

 

(1,033)

Balance, March 31, 2023

 

103,236

$

10

$

1,334,776

$

3,544

$

(569,035)

$

769,295

Comprehensive loss

 

 

 

 

(1,064)

 

(8,420)

 

(9,484)

Equity-based compensation

194

315

315

Distributions $0.09 per
share of common stock

 

 

 

 

 

(1,032)

 

(1,032)

Balance, June 30, 2023

 

103,430

$

10

$

1,335,091

$

2,480

$

(578,487)

$

759,094

Comprehensive loss

 

 

 

 

(1,063)

 

(45,671)

 

(46,734)

Distributions $0.01 per
share of common stock

 

 

 

 

 

(1,034)

 

(1,034)

Balance, September 30, 2023

 

103,430

$

10

$

1,335,091

$

1,417

$

(625,192)

$

711,326

Balance, December 31, 2023

 

103,430

$

10

$

1,335,091

$

355

$

(622,651)

$

712,805

Comprehensive loss

 

 

 

 

(355)

 

(7,552)

 

(7,907)

Distributions $0.01 per
share of common stock

 

 

 

 

 

(1,034)

 

(1,034)

Balance, March 31, 2024

 

103,430

$

10

$

1,335,091

$

$

(631,237)

$

703,864

Comprehensive loss

 

 

 

 

 

(21,023)

 

(21,023)

Equity-based compensation

137

270

270

Distributions $0.01 per
share of common stock

 

 

 

 

 

(1,034)

 

(1,034)

Balance, June 30, 2024

 

103,567

$

10

$

1,335,361

$

$

(653,294)

$

682,077

Comprehensive loss

 

 

 

 

 

(15,622)

 

(15,622)

Distributions $0.01 per
share of common stock

 

 

 

 

 

(1,036)

 

(1,036)

Balance, September 30, 2024

 

103,567

$

10

$

1,335,361

$

$

(669,952)

$

665,419

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

6

Franklin Street Properties Corp.

Consolidated Statements of Cash Flows

(Unaudited)

For the Nine Months Ended September 30,

(in thousands)

    

2024

    

2023

Cash flows from operating activities:

Net loss

$

(44,197)

$

(51,685)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization expense

 

36,284

 

44,705

Amortization of above and below market leases

 

(17)

 

(39)

Shares issued as compensation

270

 

315

Amortization of other comprehensive income into interest expense

(355)

(2,789)

Loss on extinguishment of debt

614

106

Gain on consolidation of Sponsored REIT

(394)

Loss on sale of properties and impairment of assets held for sale, net

 

20,459

 

32,085

Changes in operating assets and liabilities:

Tenant rent receivables

 

842

 

(653)

Straight-line rents

 

1,249

 

427

Lease acquisition costs

 

(660)

 

(903)

Prepaid expenses and other assets

 

314

 

(644)

Accounts payable and accrued expenses

 

(4,364)

 

(2,516)

Accrued compensation

 

(451)

 

(465)

Tenant security deposits

 

(84)

 

(79)

Payment of deferred leasing commissions

 

(3,168)

 

(5,926)

Net cash provided by operating activities

 

6,736

 

11,545

Cash flows from investing activities:

Property improvements, fixtures and equipment

(19,074)

(26,024)

Consolidation of Sponsored REIT

 

3,048

Proceeds received from sales of properties

62,909

37,062

Net cash provided by investing activities

 

43,835

 

14,086

Cash flows from financing activities:

Distributions to stockholders

 

(3,104)

 

(3,099)

Proceeds received from termination of interest rate swap

 

 

4,206

Borrowings under Bank note payable

 

 

67,000

Repayments of Bank note payable

 

(22,667)

 

(35,000)

Repayments of Term loans payable

 

(41,775)

 

(50,000)

Repayments of Series A&B Senior Notes

(62,870)

 

Deferred financing costs

 

(5,660)

 

(2,327)

Net cash used in financing activities

 

(136,076)

 

(19,220)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(85,505)

 

6,411

Cash, cash equivalents and restricted cash, beginning of year

 

127,880

 

6,632

Cash, cash equivalents and restricted cash, end of period

$

42,375

$

13,043

Supplemental disclosure of cash flow information:

Cash paid for:

Interest

$

16,038

$

16,704

Taxes

$

372

$

337

Non-cash investing activities:

Accrued costs for purchases of real estate assets

$

2,266

$

2,562

Investment in related party mortgage loan receivable converted to real estate assets and acquired real estate leases in conjunction with variable interest entity consolidation

$

$

20,000

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

7

Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)

1.  Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards

Organization

Franklin Street Properties Corp. (“FSP Corp.” or the “Company”) holds, directly and indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management LLC, FSP Holdings LLC and FSP Protective TRS Corp. FSP Property Management LLC provides asset management and property management services. The Company also has a non-controlling common stock interest in the corporation that is the sole member of FSP Monument Circle LLC, which corporation was organized to operate as a real estate investment trust (“Monument Circle” or the “Sponsored REIT”).

As of September 30, 2024, the Company owned and operated a portfolio of real estate consisting of 15 operating properties, and the Sponsored REIT, which was consolidated effective January 1, 2023. The Company may pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, for geographic, property specific reasons or for other general corporate purposes.

Properties

The following table summarizes the Company’s number of owned and consolidated properties and rentable square feet of real estate.

As of September 30,

 

    

2024

    

2023

 

Owned and Consolidated Properties:

Number of properties (1)

 

16

 

20

Rentable square feet

 

5,180,158

 

6,206,460

(1) Includes one property and three properties that were classified as assets held for sale as of September 30, 2024 and September 30, 2023, respectively.

Basis of Presentation

The unaudited consolidated financial statements of the Company include all of the accounts of the Company and its majority-owned and controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission.

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or for any other period.

Financial Instruments

As disclosed in Note 4, the Company’s derivatives were recorded at fair value using Level 2 inputs prior to their termination on February 8, 2023. The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued expenses, accrued compensation, and tenant security deposits

8

approximate their fair values based on their short-term maturity and the bank note and term loans payable approximate their fair values as they bear interest at variable interest rates or at rates that are at market for similar investments.

Cash, Cash Equivalents and Restricted Cash

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

    

September 30,

    

September 30,

(in thousands)

2024

2023

Cash and cash equivalents (1)

$

40,861

$

13,043

Restricted cash

 

1,514

 

Total cash, cash equivalents and restricted cash

$

42,375

$

13,043

(1) Includes $1,608 and $2,445 at September 30, 2024 and 2023, respectively, pertaining to Monument Circle, which the Company is unable to utilize for its own operational purposes.

Restricted cash consists of escrows arising from property sales. Cash held in escrow is paid based on the terms of the closing agreements for the sale.

Variable Interest Entities (VIEs)

The Company determines whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. The determination of whether an entity in which the Company holds a, direct or indirect, variable interest is a VIE is based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. The Company makes judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.

The Company analyzes any investments in VIEs to determine if the Company is the primary beneficiary. In evaluating whether the Company is the primary beneficiary, the Company evaluates its direct and indirect economic interests in the entity. Determining which reporting entity, if any, is the primary beneficiary of a VIE is primarily a qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment.

The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct a proposed sale of the property or merger of the company. In addition, the Company considers the rights of other investors to participate in those decisions, to replace the manager and to amend the corporate charter. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and considers that conclusion upon a reconsideration event.

As of January 1, 2023, the Company’s relationship with the Sponsored REIT was considered a VIE and the Company became the primary beneficiary. Upon this reconsideration event, the entity is included within the Company’s consolidated financial statements and all intercompany accounts and transactions have been eliminated in consolidation. A gain on consolidation of approximately $0.4 million was recognized in the three months ended March 31, 2023. Cash and cash equivalents of $3 million held by Monument Circle was included in the Company’s cash and cash equivalents upon consolidation and is reflected as “Consolidation of Sponsored REIT” in the consolidated statement of cash flows. The cash and cash equivalents held by Monument Circle are unable to be utilized for the Company’s operational purposes. The creditors of Monument Circle’s trade payables do not have any recourse against the Company.

9

The consolidation value of Monument Circle was allocated to real estate investments and leases, including lease origination costs. Lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar lease, including leasing commission, legal, vacancy, and other related costs). The value assigned to building approximates the replacement cost; the value assigned to land approximates its appraised value; and the value assigned to leases approximate their fair value. Other assets and liabilities are recorded at their historical costs, which approximates fair value.

The Company assessed the fair value of the acquired real estate leases based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs are Level 3 in the fair value hierarchy.

The following table summarizes the estimated fair value of the assets acquired at the date of consolidation, January 1, 2023:

(in thousands)

Real estate assets

$

19,695

Value of acquired real estate leases

305

Total

$

20,000

The following is quantitative information about significant unobservable inputs in the Company’s Level 3 measurement of the assets acquired in the consolidation of Monument Circle and were measured at fair value on a nonrecurring basis at January 1, 2023:

    

Fair Value (1) at

    

  

Significant

    

Range

Weighted

Description

January 1, 2023

Valuation Technique

Unobservable Input

Min

Max

 

Average (2)

(in thousands)

 

Monument Circle Consolidation

$

20,000

 

Discounted Cash Flows

Exit Cap Rate

 

7.50

%

7.50

%

7.50

%

Discount Rate

9.50

%

9.50

%

9.50

%

(1) Classified within Level 3 of the fair value hierarchy.

(2) Unobservable inputs were weighted based on the fair value of the related instrument.

The relationships and investments related to the Sponsored REIT are summarized in Note 2.

Recent Accounting Standards

In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”). ASU 2023-06 adds interim and annual disclosure requirements to GAAP at the request of the Securities and Exchange Commission. The guidance in ASU 2023-06 is required to be applied prospectively and the GAAP requirements will be effective when the removal of the related SEC disclosure requirements is effective. If the SEC does not act to remove its related requirements by June 30, 2027, any related FASB amendments will be removed from the Accounting Standards Codification and will not be effective. The Company does not anticipate that the adoption of ASU 2023-06 will have a material impact on the consolidated financial statements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires public entities to disclose significant segment expense and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. The guidance in ASU 2023-07 is applied retrospectively to all periods presented in the financial statements and is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not anticipate that the adoption of ASU 2023-07 will have a material impact on the consolidated financial statements.

10

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 enhances the transparency and decision usefulness of income tax disclosures and disclosures about income taxes paid. The guidance in ASU 2023-09 should be applied prospectively but may be applied retrospectively for each period presented. ASU 2023-09 is effective for public entities for fiscal years beginning after December 15, 2024. The Company does not anticipate that the adoption of ASU 2023-09 will have a material impact on the consolidated financial statements.

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

Management fees and interest income from loans:

Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancellable with 30 days notice. Asset management fee income from non-consolidated entities amounted to approximately $0 and $0 for the nine months ended September 30, 2024 and 2023, respectively.

Prior to the consolidation of Monument Circle on January 1, 2023, the Company held the Sponsored REIT Loan, which was reported in the balance sheet as a related party mortgage loan receivable. The Company reviewed the need for an allowance under the current expected credit loss model for the Sponsored REIT Loan at each reporting period. The measurement of expected credit losses was based upon historical experiences, current conditions, and reasonable and supportable forecasts that affected the collectability of the reported amount. The Company elected to apply the practical expedient for financial assets secured by collateral in instances where the borrower was experiencing financial difficulty and repayment of the Sponsored REIT Loan was expected to be provided substantially through operation or sale of the collateral. The Company used the fair value of the collateral at the reporting date, and an adjustment to the allowance for expected credit losses was recorded when the amortized cost basis of the financial asset exceeded the fair value of the collateral, less costs to sell.

The Company regularly evaluated the extent and impact of any credit deterioration that could affect performance and the value of the secured property, as well as the financial and operating capability of the borrower. A property’s fair value, operating results and existing cash balances were considered and used to assess whether cash flows from operations were sufficient to cover the current and future operating and debt service requirements. The Company also evaluated the borrower’s competency in managing and operating the secured property and considered the overall economic environment, real estate sector and geographic sub-market in which the secured property is located. The Company applied normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment. The outstanding Sponsored REIT Loan is secured by a mortgage on the underlying property and the balances within the borrower’s cash accounts.

    

    

    

    

    

 

The Company recognized no interest income and fees from the Sponsored REIT Loan for the nine months ended September 30, 2024 and 2023, respectively.

On October 29, 2021, the Company agreed to amend and restate the then existing Sponsored REIT Loan to extend the maturity date from December 6, 2022 to June 30, 2023 and to advance an additional $3.0 million tranche of indebtedness to FSP Monument Circle LLC with the same June 30, 2023 maturity date, effectively increasing the aggregate principal amount of the Sponsored REIT Loan from $21 million to $24 million. In addition, the Company agreed to defer all principal and interest payments due under the Sponsored REIT Loan until the maturity date. As part of its consideration for agreeing to amend and restate the Sponsored REIT Loan, the Company obtained from the stockholders of the parent of Monument Circle the right to vote their shares in favor of any sale of the property owned by Monument Circle any time on or after January 1, 2023. There were no commitments to lend additional funds to the Sponsored REIT. On June 26, 2023, the Sponsored REIT Loan maturity was extended to September 30, 2023. On September 26, 2023, the Sponsored REIT Loan maturity was extended to September 30, 2024. On September 27, 2024, the Sponsored REIT Loan maturity was extended to September 30, 2025.

The Company recorded a $4.2 million decrease in its provision for credit losses during the three months ended March 31, 2023. The change in the allowance for credit losses during the three months ended March 31, 2023 was due to the consolidation of Monument Circle. There were no adjustments during the nine months ended September 30, 2024. The following table presents a roll-forward of the Company’s allowance for credit losses.

11

For the Nine Months Ended September 30,

(In thousands)

    

2024

    

2023

Beginning allowance for credit losses

$

$

(4,237)

Additional increases to the allowance for credit losses

Reductions to the allowance for credit losses

4,237

Ending allowance for credit losses

$

$

3.  Bank Note Payable, Term Loans Payable and Senior Notes

BMO Term Loan

As of September 30, 2024, the Company has a term loan borrowing in the aggregate principal amount of approximately $78.8 million (the “BMO Term Loan”) with Bank of Montreal, as administrative agent, and the other lending institutions party thereto, that matures on April 1, 2026. On February 21, 2024, the Company amended the BMO Term Loan by entering into a Second Amendment to Second Amended and Restated Credit Agreement with Bank of Montreal and the other lending institutions party thereto (the “BMO Second Amendment”). The BMO Second Amendment amended the Second Amended and Restated Credit Agreement dated September 27, 2018 (the “Original BMO Credit Agreement”), as amended by the First Amendment to Second Amended and Restated Credit Agreement dated February 10, 2023 (the “BMO First Amendment”), to, among other things: (1) extend the maturity date from October 1, 2024 to April 1, 2026; (2) change the interest rate from either 300 basis points over SOFR or 200 basis points over the base rate to either 300 basis points over SOFR with a floor on SOFR of 500 basis points or 200 basis points over the base rate with a floor on the base rate of 600 basis points; (3) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, BofA Term Loan (defined below) and the Senior Notes (defined below) exceeds $200 million, the spread over SOFR or the base rate, as applicable, will permanently increase by 100 basis points from 300 basis points to 400 basis points in the case of SOFR, and from 200 basis points to 300 basis points in the case of the base rate; (4) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556% to the BMO Term Loan; (b) 20.00000% to the BofA Term Loan; (c) 44.44444% to the Senior Notes; and (d) the remaining 10% to be retained by the Company; (5) require that, within 90 days of the February 21, 2024 effective date of the BMO Second Amendment, certain of the Company’s subsidiaries guarantee the BMO Term Loan; (6) require that, within 90 days of the February 21, 2024 effective date of the BMO Second Amendment, the Company pledge its equity interests in certain of the Company’s subsidiaries as collateral for the BMO Term Loan; (7) reduce the Company’s minimum fixed charge coverage ratio from 1.50x to 1.25x; and (8) reduce the Company’s minimum unsecured interest coverage ratio from 1.75x to 1.25x. The Original BMO Credit Agreement, as amended by the BMO First Amendment and the BMO Second Amendment, is referred to as the BMO Credit Agreement.

On February 21, 2024, as part of the BMO Second Amendment, the Company repaid an approximately $29.0 million portion of the BMO Term Loan. On July 10, 2024, the Company repaid an approximately $7.2 million portion of the BMO Term Loan from asset sale proceeds of a property located in Glen Allen, Virginia.

Effective February 21, 2024, upon entering into the BMO Second Amendment, the BMO Term Loan bears interest at either (i) 300 basis points over one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively, with a floor on SOFR of 5.00% or (ii) 200 basis points over the base rate with a floor on the base rate of 6.00%. In addition, effective February 21, 2024 upon entering into the BMO Second Amendment, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the spread over SOFR or the base rate, as applicable, will permanently increase by 100 basis points from 300 basis points to 400 basis points in the case of SOFR, and from 200 basis points to 300 basis points in the case of the base rate.

As of September 30, 2024, the interest rate on the BMO Term Loan was 8.00% per annum. The weighted average variable interest rate on all amounts outstanding under the BMO Term Loan was 8.44% for the nine months ended September 30, 2024. As of December 31, 2023, the interest rate on the BMO Term Loan was 8.47% per annum. The weighted average

12

variable interest rate on all amounts outstanding under the BMO Term Loan from February 8, 2023, which is when the Company terminated its outstanding interest rate swaps applicable to the BMO Term Loan as described below, through December 31, 2023, was approximately 8.11% per annum.

Although the interest rate on the BMO Term Loan was variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate that previously applied to the BMO Term Loan by entering into interest rate swap transactions. 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. On February 8, 2023, the Company terminated all outstanding interest rate swaps applicable to the BMO Term Loan and, on February 10, 2023, the Company received an aggregate of approximately $4.3 million as a result of such terminations, of which approximately $0.1 million related to interest receivable.

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, use of net cash proceeds from the disposition of property, assets and equity issuances, mandatory prepayments, the requirement to have certain subsidiaries provide guarantees, the requirement to pledge the Company’s equity interests in certain subsidiaries as collateral, changes in business, certain restricted payments, repurchases and redemptions of the Company’s common stock, going concern qualifications to the Company’s financial statements, and transactions with affiliates. In addition, the BMO Credit Agreement also restricts the Company’s ability to make quarterly dividend distributions that exceed $0.01 per share of the Company’s common stock; provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company’s good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company’s status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject. The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The Company was in compliance with the BMO Term Loan financial covenants as of September 30, 2024.

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.

BofA Term Loan

As of September 30, 2024, the Company has a term loan borrowing in the aggregate principal amount of approximately $61.7 million (the “BofA Term Loan”) with Bank of America, N.A. as administrative agent, and other lending institutions party thereto that matures on April 1, 2026. Prior to February 21, 2024, we referred to the BofA Term Loan as the BofA Revolver. On February 21, 2024, the Company amended the BofA Term Loan by entering into a Second Amendment to Credit Agreement with the lending institutions party thereto (the “BofA Second Amendment”). The BofA Second Amendment amended the Credit Agreement dated January 10, 2022 (the Original BofA Credit Agreement, as amended by the First Amendment to Credit Agreement dated February 10, 2023 (the “BofA First Amendment”) to, among other things: (1) extend the maturity date from October 1, 2024 to April 1, 2026; (2) convert borrowings from being either revolving loans or letters of credit to a term loan; (3) change the interest rate from 300 basis points over SOFR to 300 basis points over SOFR with a floor on SOFR of 500 basis points; (4) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the spread over SOFR will permanently increase by 100 basis points from 300 basis points to 400 basis points; (5) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556% to the BMO Term Loan; (b) 20.00000% to the BofA Term Loan; (c) 44.44444% to the Senior Notes; and (d) the remaining 10% to be retained by the Company; (6) require that, within 90 days of

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the February 21, 2024 effective date of the BofA Second Amendment, certain of the Company’s subsidiaries guarantee the BofA Term Loan; (7) require that, within 90 days of the February 21, 2024 effective date of the BofA Second Amendment, the Company pledge its equity interests in certain of the Company’s subsidiaries as collateral for the BofA Term Loan; (8) reduce the Company’s minimum fixed charge coverage ratio from 1.50x to 1.25x; and (9) reduce the Company’s minimum unsecured interest coverage ratio from 1.75x to 1.25x. The Original BofA Credit Agreement, as amended by the BofA First Amendment and the BofA Second Amendment, is referred to as the BofA Credit Agreement.

On February 21, 2024, as part of the BofA Second Amendment, the Company repaid an approximately $22.7 million portion of the BofA Revolver. On July 10, 2024, the Company repaid an approximately $5.6 million portion of the BofA Term Loan from asset sale proceeds of a property located in Glen Allen, Virginia.

Effective February 21, 2024, upon entering into the BofA Second Amendment, the BofA Term Loan bears interest at 300 basis points over either (i) the daily simple SOFR, plus an adjustment of 0.11448%, or (ii) one, three or six month term SOFR, plus a corresponding adjustment of 0.11448%, 0.26161% or 0.42826%, respectively, with a floor on SOFR of 5.00%. In addition, effective February 21, 2024, upon entering into the BofA Second Amendment, under certain circumstances, such as if SOFR is not able to be determined, the BofA Term Loan bears interest at 200 basis points over the base rate with a floor on the base rate of 600 basis points. In addition, effective February 21, 2024 upon entering into the BofA Second Amendment, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the spread over SOFR will permanently increase by 100 basis points from 300 basis points to 400 basis points in the case of SOFR, and from 200 basis points to 300 basis points in the case of the base rate.

As of September 30, 2024, the interest rate on the BofA Term Loan was 8.00% per annum. The weighted average variable interest rate on all amounts outstanding under the BofA Term Loan was 8.44% for the nine months ended September 30, 2024. As of December 31, 2023, the interest rate on the BofA Revolver was 8.47% per annum. The weighted average variable interest rate on all amounts outstanding under the BofA Revolver through December 31, 2023 was approximately 8.05% per annum.

The BofA Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, use of net cash proceeds from the disposition of property, assets and equity issuances, mandatory prepayments, the requirement to have certain subsidiaries provide guarantees, the requirement to pledge the Company’s equity interests in certain subsidiaries as collateral, changes in business, certain restricted payments, repurchases and redemptions of the Company’s common stock, going concern qualifications to the Company’s financial statements, and transactions with affiliates. In addition, the BofA Credit Agreement also restricts the Company’s ability to make quarterly dividend distributions that exceed $0.01 per share of the Company’s common stock; provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company’s good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company’s status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject. The BofA Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The Company was in compliance with the BofA Term Loan financial covenants as of September 30, 2024.

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.

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Senior Notes

As of September 30, 2024, the Company has senior notes in the aggregate principal amount of approximately $137.1 million (the “Senior Notes”) that mature on April 1, 2026. The Senior Notes consist of (i) Series A Senior Notes due April 1, 2026 in an aggregate principal amount of approximately $79.5 million (the “Series A Notes”) and (ii) Series B Senior Notes due April 1, 2026 in the aggregate principal amount of approximately $57.6 million (the “Series B Notes”). On February 21, 2024, the Company amended the terms of the Senior Notes by entering into a First Amendment to Note Purchase Agreement (the “NPA First Amendment”) with the purchasers party thereto. The NPA First Amendment amended the Note Purchase Agreement dated October 24, 2017 (the “Original Note Purchase Agreement”) to, among other things: (1) extend the maturity date of the Series A Notes from December 20, 2024 to April 1, 2026; (2) shorten the maturity date of the Series B Notes from December 20, 2027 to April 1, 2026; (3) increase the interest rate applicable to the Series A Notes from 4.49% per annum to 8.00% per annum; (4) increase the interest rate applicable to the Series B Notes from 4.76% per annum to 8.00% per annum; (5) provide that, if, as of March 31, 2025, the aggregate principal amount outstanding under the BMO Term Loan, the BofA Term Loan and the Senior Notes exceeds $200 million, the per annum interest rates applicable to the Series A Note and the Series B Notes will permanently increase by 1.00% from 8.00% per annum to 9.00% per annum; (6) require mandatory prepayments of the BMO Term Loan, the BofA Term Loan and the Senior Notes with net cash proceeds from the disposition of property, assets and equity issuances as follows: (a) 25.55556% to the BMO Term Loan; (b) 20.00000% to the BofA Term Loan; (c) 44.44444% to the Senior Notes; and (d) the remaining 10% to be retained by the Company; (7) require that, within 90 days of the February 21, 2024 effective date of the NPA First Amendment, certain of the Company’s subsidiaries guarantee the Senior Notes; (8) require that, within 90 days of the February 21, 2024 effective date of the NPA First Amendment, the Company pledge its equity interests in certain of the Company’s subsidiaries as collateral for the Senior Notes; and (9) conform all financial covenants and negative covenants in the Note Purchase Agreement with the BofA Credit Agreement and the BMO Credit Agreement. The Original Note Purchase Agreement, as amended by the NPA First Amendment, is referred to as the Note Purchase Agreement.

On February 21, 2024, as part of the NPA First Amendment, the Company repaid an approximately $29.2 million portion of the Series A Notes and an approximately $21.2 million portion of the Series B Notes. On July 10, 2024, the Company repaid an approximately $7.2 million portion of the Series A Notes and an approximately $5.3 million portion of the Series B Notes from asset sale proceeds of a property located in Glen Allen, Virginia. As of September 30, 2024, approximately $79.5 million aggregate principal amount of the Series A Notes remained outstanding and approximately $57.6 million aggregate principal amount of the Series B Notes remained outstanding.

As of September 30, 2024, the interest rate on the Series A Notes was 8.00% per annum and the interest rate on the Series B Notes was 8.00% per annum. As of December 31, 2023, the interest rate on the Series A Notes was 4.49% per annum and the interest rate on the Series B Notes was 4.76% per annum.

The Note Purchase Agreement contains customary affirmative and negative covenants, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, use of net cash proceeds from the disposition of property, assets and equity issuances, mandatory prepayments, the requirement to have certain subsidiaries provide guarantees, the requirement to pledge the Company’s equity interests in certain subsidiaries as collateral, changes in business, certain restricted payments, repurchases and redemptions of the Company’s common stock, going concern qualifications to the Company’s financial statements, transactions with affiliates, certain restrictions on severance, retention and similar arrangements applicable to the Company’s executive officers, and real estate investment trust compliance requirements. In addition, the Note Purchase Agreement also restricts the Company’s ability to make quarterly dividend distributions that exceed $0.01 per share of the Company’s common stock; provided, however, that notwithstanding such restriction, the Company is permitted to make dividend distributions based on the Company’s good faith estimate of projected or estimated taxable income or otherwise as necessary to retain the Company’s status as a real estate investment trust, to meet the distribution requirements of Section 857 of the Internal Revenue Code or to eliminate any income or excise taxes to which the Company would otherwise be subject. The Note Purchase Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The Company was in compliance with the Note Purchase Agreement financial covenants as of September 30, 2024.

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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.

4.  Financial Instruments: Derivatives and Hedging

On February 20, 2019, the Company entered into interest rate swap transactions that fixed the interest rate for the period beginning August 26, 2020 and ending January 31, 2024 on the BMO Term Loan (the “2019 BMO Interest Rate Swap”). The variable rates that were fixed under the 2019 BMO Interest Rate Swap is described in Note 3. On February 8, 2023, the Company terminated the 2019 BMO Interest Rate Swap applicable to the BMO Term Loan and, on February 10, 2023, the Company received an aggregate of approximately $4.3 million as a result of such terminations, of which approximately $0.1 million related to interest receivable. As of September 30, 2024, there were no derivative instruments.

The 2019 BMO Interest Rate Swap qualified as a cash flow hedge and has been recognized on the consolidated balance sheets at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be recognized in earnings in the same period in which the hedged interest payments affect earnings, which may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.

The gain (loss) on the Company’s 2019 BMO Interest Rate Swap was recorded in other comprehensive income (loss) (OCI), and the accompanying consolidated statements of operations as a component of interest expense for the nine months ended September 30, 2024 and 2023, was as follows:

(in thousands)

Nine Months Ended September 30,

Interest Rate Swaps in Cash Flow Hedging Relationships:

    

2024

    

2023

Amounts of gain recognized in OCI

$

$

177

Amounts of previously recorded gain (loss) reclassified from OCI into Interest Expense

$

355

$

2,055

Total amount of Interest Expense presented in the consolidated statements of operations

$

20,513

$

11,890

Over time, the realized gains in accumulated other comprehensive income were reclassified into earnings as a decrease to interest expense in the same periods in which the hedged interest payments affected earnings.

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

5.  Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of Company shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at each of September 30, 2024 and 2023.

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6.  Stockholders’ Equity

As of September 30, 2024, the Company had 103,566,715 shares of common stock outstanding. The Company declared and paid dividends as follows (in thousands, except per share amounts):

Dividends Per

Total

 

Quarter Paid

    

Share

    

Dividends

 

2024:

First quarter of 2024

 

$

0.01

 

$

1,034

Second quarter of 2024

 

$

0.01

 

$

1,034

Third quarter of 2024