UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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The number of shares of common stock outstanding as of July 27, 2023 was
Franklin Street Properties Corp.
Form 10-Q
Quarterly Report
June 30, 2023
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1.Financial Statements
Franklin Street Properties Corp.
Consolidated Balance Sheets
(Unaudited)
June 30, | December 31, |
| |||||
(in thousands, except share and par value amounts) |
| 2023 |
| 2022 |
| ||
Assets: | |||||||
Real estate assets: | |||||||
Land (amounts related to variable interest entities ("VIEs") of $ |
| $ | |
| $ | | |
Buildings and improvements (amounts related to VIEs of $ |
| |
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Fixtures and equipment |
| |
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| |
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Less accumulated depreciation (amounts related to VIEs of $ |
| |
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Real estate assets, net (amounts related to VIEs of $ |
| |
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Acquired real estate leases, less accumulated amortization of $ |
| |
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Asset held for sale | | — | |||||
Cash, cash equivalents and restricted cash (amounts related to VIEs of $ |
| |
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Tenant rent receivables |
| |
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Straight-line rent receivable |
| |
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Prepaid expenses and other assets |
| |
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Related party mortgage loan receivable, less allowance for credit loss of $ |
| — |
| | |||
Other assets: derivative asset |
| — |
| | |||
Office computers and furniture, net of accumulated depreciation of $ |
| |
| | |||
Deferred leasing commissions, net of accumulated amortization of $ |
| |
| | |||
Total assets |
| $ | |
| $ | | |
Liabilities and Stockholders’ Equity: | |||||||
Liabilities: | |||||||
Bank note payable |
| $ | |
| $ | | |
Term loans payable, less unamortized financing costs of $ |
| |
| | |||
Series A & Series B Senior Notes, less unamortized financing costs of $ | | | |||||
Accounts payable and accrued expenses (amounts related to VIEs of $ |
| |
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Accrued compensation |
| |
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Tenant security deposits |
| |
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Lease liability | | | |||||
Acquired unfavorable real estate leases, less accumulated amortization of $ |
| |
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Total liabilities |
| |
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Commitments and contingencies | |||||||
Stockholders’ Equity: | |||||||
Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
| |
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Accumulated other comprehensive income |
| |
| | |||
Accumulated distributions in excess of accumulated earnings |
| ( |
| ( | |||
Total stockholders’ equity |
| |
| | |||
Total liabilities and stockholders’ equity |
| $ | |
| $ | |
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 June 30, | For the Six Months Ended June 30, |
| |||||||||||
(in thousands, except per share amounts) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
| |||||||||||||
Revenues: | |||||||||||||
Rental | $ | | $ | | $ | | $ | | |||||
Related party revenue: | |||||||||||||
Management fees and interest income from loans |
| — |
| |
| — |
| | |||||
Other |
| |
| |
| |
| | |||||
Total revenues |
| |
| |
| |
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Expenses: | |||||||||||||
Real estate operating expenses |
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| |
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Real estate taxes and insurance |
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| |
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Depreciation and amortization |
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General and administrative |
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Interest |
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| |
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Total expenses |
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| |
| |
| | |||||
Loss on extinguishment of debt | — | — | ( | — | |||||||||
Gain on consolidation of Sponsored REIT | — | — | | — | |||||||||
Impairment and loan loss reserve | — | ( | — | ( | |||||||||
Gain on sale of properties and impairment of asset held for sale, net | ( | — | |
| — | ||||||||
Loss before taxes |
| ( |
| ( |
| ( |
| ( | |||||
Tax expense |
| |
| |
| |
| | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Weighted average number of , and |
| |
| |
| |
| | |||||
Net per , and | $ | ( | $ | ( | $ | ( | $ | ( |
The accompanying notes are an integral part of these consolidated financial statements.
4
Franklin Street Properties Corp.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
For the | For the |
| |||||||||||
Three Months Ended | Six Months Ended |
| |||||||||||
June 30, | June 30, |
| |||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
| |||||||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive income (loss): | |||||||||||||
Unrealized gain on derivative financial instruments |
| — |
| |
| |
| | |||||
Reclassification from accumulated other comprehensive income into interest expense | ( | — | ( | — | |||||||||
| |||||||||||||
Total other comprehensive income (loss) |
| ( |
| |
| ( |
| | |||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( |
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, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Comprehensive income (loss) |
| — |
| — |
| — |
| |
| ( |
| | ||||||
Repurchased shares | ( |
| — |
| ( |
| — |
| — |
| ( | |||||||
Distributions $ |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Balance, March 31, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Comprehensive income (loss) |
| — |
| — |
| — |
| |
| ( |
| ( | ||||||
Equity-based compensation | | — | | — | — | | ||||||||||||
Distributions $ |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Balance, June 30, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Balance, December 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Comprehensive income (loss) |
| — |
| — |
| — |
| ( |
| |
| | ||||||
Distributions $ |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Balance, March 31, 2023 |
| | $ | | $ | | $ | | $ | ( | $ | | ||||||
Comprehensive loss |
| — |
| — |
| — |
| ( |
| ( |
| ( | ||||||
Equity-based compensation | | — | | — | — | | ||||||||||||
Distributions $ |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Balance, June 30, 2023 |
| | $ | | $ | | $ | | $ | ( | $ | |
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 Six Months Ended June 30, | ||||||
(in thousands) |
| 2023 |
| 2022 | ||
Cash flows from operating activities: | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||
Depreciation and amortization expense |
| |
| | ||
Amortization of above and below market leases |
| ( |
| ( | ||
Shares issued as compensation | |
| | |||
Amortization of other comprehensive income into interest expense | ( | — | ||||
Loss on extinguishment of debt | | — | ||||
Gain on consolidation of Sponsored REIT | ( | — | ||||
Impairment and loan loss reserve | — | | ||||
Gain on sale of properties and impairment of asset held for sale, net |
| ( |
| — | ||
Changes in operating assets and liabilities: | ||||||
Tenant rent receivables |
| |
| ( | ||
Straight-line rents |
| |
| ( | ||
Lease acquisition costs |
| ( |
| ( | ||
Prepaid expenses and other assets |
| ( |
| ( | ||
Accounts payable and accrued expenses |
| ( |
| ( | ||
Accrued compensation |
| ( |
| ( | ||
Tenant security deposits |
| ( |
| ( | ||
Payment of deferred leasing commissions |
| ( |
| ( | ||
Net cash provided by (used in) operating activities |
| |
| ( | ||
Cash flows from investing activities: | ||||||
Property improvements, fixtures and equipment | ( | ( | ||||
Consolidation of Sponsored REIT |
| | — | |||
Proceeds received from sales of properties | | — | ||||
Net cash provided by (used in) investing activities |
| |
| ( | ||
Cash flows from financing activities: | ||||||
Distributions to stockholders |
| ( |
| ( | ||
Proceeds received from termination of interest rate swap |
| |
| — | ||
Stock repurchases |
| — |
| ( | ||
Borrowings under bank note payable |
| |
| | ||
Repayments of bank note payable |
| ( |
| ( | ||
Repayment of term loan payable | ( |
| — | |||
Deferred financing costs |
| ( |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Net increase (decrease) in cash, cash equivalents and restricted cash |
| |
| ( | ||
Cash, cash equivalents and restricted cash, beginning of year |
| |
| | ||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: | ||||||
Cash paid for: | ||||||
Interest | $ | | $ | | ||
Taxes | $ | | $ | | ||
Non-cash investing activities: | ||||||
Accrued costs for purchases of real estate assets | $ | | $ | | ||
Investment in related party mortgage loan receivable converted to real estate assets | $ | | $ | — |
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,
As of June 30, 2023, the Company owned and operated a portfolio of real estate consisting of
Properties
The following table summarizes the Company’s number of owned and consolidated properties and rentable square feet of real estate.
As of June 30, |
| ||||
| 2023 |
| 2022 |
| |
Owned and Consolidated Properties: | |||||
Number of properties (1) |
| |
| | |
Rentable square feet |
| |
| |
(1) Includes a property that was classified as an asset held for sale as of June 30, 2023.
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, 2022, as filed with the Securities and Exchange Commission.
The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 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.
| June 30, |
| June 30, | |||
(in thousands) | 2023 | 2022 | ||||
Cash and cash equivalents (1) | $ | | $ | | ||
Restricted cash |
| |
| | ||
Total cash, cash equivalents and restricted cash | $ | | $ | |
(1) | Includes $ |
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 $
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
9
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 | $ | |
Value of acquired real estate leases | | |
Total | $ | |
The following is quantitative information about significant unobservable inputs in our 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 | $ | |
| Exit Cap Rate |
| | % | | % | | % | |||||
Discount Rate | | % | | % | | % | ||||||||||
(1) Classified within Level 3 of the fair value hierarchy. | ||||||||||||||||
(2) Unobservable inputs were weighted based on the fair value of the related instrument. |
Prior to January 1, 2023, the Company’s relationship with the Sponsored REIT was considered a VIE in which the Company was not the primary beneficiary. The Company’s maximum exposure to losses associated with this VIE was limited to the principal amount outstanding under the loan from the Company to the Sponsored REIT secured by a mortgage on real estate owned by the Sponsored REIT (the “Sponsored REIT Loan”) net of the allowance for credit loss, the related accrued interest receivable and an exit fee receivable, which were in aggregate approximately $
Recent Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company does not anticipate that the adoption of ASU 2020-04 will have a material impact on the consolidated financial statements.
2. Related Party Transactions and Investments in Non-Consolidated Entities
Investment in Sponsored REITs:
At December 31, 2022, the Company held a non-controlling common stock interest in the Sponsored REIT.
10
Management fees and interest income from loans:
Asset management fees range from
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 (“CECL”) 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 interest income and fees from the Sponsored REIT Loan of approximately $
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 $
The Company recorded a $
For the Six Months Ended June 30, | ||||||
(Dollars in thousands) |
| 2023 |
| 2022 | ||
Beginning allowance for credit losses | $ | ( | $ | — | ||
Additional increases to the allowance for credit losses | — | ( | ||||
Reductions to the allowance for credit losses | | — | ||||
Ending allowance for credit losses | $ | — | $ | ( |
11
The following is quantitative information about significant unobservable inputs in our Level 3 measurement of the collateral of the Sponsored REIT Loan measured at fair value on a nonrecurring basis at December 31, 2022:
| Fair Value (1) at |
|
| Significant |
| Range | Weighted | |||||||||
Description | December 31, 2022 | Valuation Technique | Unobservable Input | Min | Max |
| Average (2) | |||||||||
(in thousands) |
| |||||||||||||||
Sponsored REIT Loan | $ | |
| Exit Cap Rate |
| | % | | % | | % | |||||
Discount Rate | | % | | % | | % | ||||||||||
(1) Classified within Level 3 of the fair value hierarchy. | ||||||||||||||||
(2) Unobservable inputs were weighted based on the fair value of the related instrument. |
3. Bank Note Payable, Term Loans Payable and Senior Notes
BMO Term Loan
On February 10, 2023, the Company entered into a First Amendment to the Second Amended and Restated Credit Agreement with the lending institutions party thereto and Bank of Montreal, as administrative agent (the “BMO First Amendment”). The BMO First Amendment amended the Second Amended and Restated Credit Agreement, dated September 27, 2018, among the Company and the lending institutions party thereto (as amended by the BMO First Amendment, the “BMO Credit Agreement”) to, among other things, extend the maturity date from January 31, 2024 to October 1, 2024 and change the interest rate from a number of basis points over LIBOR depending on the Company’s credit rating to
Effective February 10, 2023 upon entering into the BMO First Amendment, the BMO Term Loan bears interest at either (i)
As of June 30, 2023, the interest rate on the BMO Term Loan was
Although the interest rate on the BMO Term Loan is 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
The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments and repurchases and redemptions of the Company’s common stock; going concern
12
qualifications to our financial statements; and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. In addition, the BMO Credit Agreement also restricts the Company’s ability to make quarterly dividend distributions that exceed $
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. The Company was in compliance with the BMO Term Loan financial covenants as of June 30, 2023.
BofA Revolver
On February 10, 2023, the Company entered into a First Amendment to 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 (the “BofA First Amendment”), for a revolving line of credit for borrowings, at the Company’s election, of up to $
Effective February 10, 2023 upon entering into the BofA First Amendment, the BofA Revolver bears interest at
13
As of June 30, 2023, the interest rate on the BofA Revolver was
The BofA Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, use of proceeds, the amount of cash and cash equivalents that the Company can have on its balance sheet after giving effect to an advance under the BofA Revolver, repurchases and redemptions of the Company’s common stock, going concern qualifications to our financial statements, and the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BofA Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio and a minimum unsecured interest coverage ratio. The BofA Credit Agreement also restricts the Company’s ability to make quarterly dividend distributions that exceed $
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 for permitted investments, working capital and other general business purposes, including for building improvements, tenant improvements and leasing commissions, in each case to the extent permitted under the BofA Credit Agreement.
Former BofA Credit Facility
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 “Amended Former BofA Credit Facility”) that continued an existing unsecured revolving line of credit (the “Former BofA Revolver”) and an existing term loan (the “Former BofA Term Loan”). Effective simultaneously with the closing of the Amended Former BofA Credit Facility on January 10, 2022, the Company delivered a notice to BofA terminating the aggregate lender commitments under the Former BofA Revolver in their entirety. There were
Former BofA Revolver Highlights
● | The Former BofA Revolver was terminated at the Company’s election effective January 10, 2022. |
● | As of December 31, 2021 and January 10, 2022, there were |
The Former BofA Revolver bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (
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fee, and the margin over LIBOR rate or base rate was determined based on the Company’s credit rating pursuant to a pricing grid.
For purposes of the Former BofA Credit Facility, base rate meant, for any day, a fluctuating rate per annum equal to the highest of: (i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus
During 2022 and as of December 31, 2022, there were
Former BofA Term Loan Highlights
● | The Former BofA Term Loan was repaid in its entirety on September 6, 2022. |
● | The original principal amount of the Former BofA Term Loan was $ |
● | If the Company had not prepaid the Former BofA Term Loan in full on September 6, 2022, the Former BofA Term Loan would have matured on January 12, 2023. |
The Former BofA Term Loan bore interest at either (i) a margin over LIBOR depending on the Company’s credit rating (
The interest rate on the Former BofA Term Loan was variable through the date of repayment on September 6, 2022. Previously the Company had fixed the base LIBOR interest rate on the Former BofA Term Loan by entering into interest rate swap transactions. 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 Former BofA Term Loan at
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 $
The Senior Notes bear interest depending on the Company’s credit rating. As of June 30, 2023, the Series A Notes bear interest at
The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BofA Credit Agreement and the BMO Credit Agreement. The Senior Notes
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financial covenants require, among other things, the maintenance of a fixed charge coverage ratio of at least
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 $
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 following table summarizes the notional and fair value of the Company’s derivative financial instrument at December 31, 2022. The notional value is an indication of the extent of the Company’s involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks.
| Notional |
| Strike |
| Effective |
| Expiration |
| Fair Value (1) at |
| ||||||
(in thousands) | Value | Rate | Date | Date | June 30, 2023 |
| December 31, 2022 |
| ||||||||
2019 BMO Interest Rate Swap | $ | |
| | % | Aug-20 |
| Jan-24 | $ | — | $ | | ||||
(1) Classified within Level 2 of the fair value hierarchy. |
The 2019 BMO Interest Rate Swap was reported as an asset with a fair value of approximately $
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 six months ended June 30, 2023 and 2022, was as follows:
(in thousands) | Six Months Ended June 30, | |||||
Interest Rate Swaps in Cash Flow Hedging Relationships: |
| 2023 |
| 2022 | ||
Amounts of gain recognized in OCI | $ | | $ | | ||
Amounts of previously recorded gain (loss) reclassified from OCI into Interest Expense | $ | | $ | ( | ||