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Section 1: 10-Q (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, 2018.

 

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)

 

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, 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 25,  2018 was 107,231,155.

 

 

 


 

Table of Contents

Franklin Street Properties Corp.
Form 10-Q

 

Quarterly Report
September 30, 2018

 

Table of Contents

 

 

 

 

 

 

 

 

    

 

    

Page

 

 

 

 

 

Part I. 

 

Financial Information

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 

 

5

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

6

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7-19

 

 

 

 

 

 

 

 

Item 2.

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

 

20-37

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

39

 

 

 

 

 

Part II. 

 

Other Information

 

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

40

 

 

 

 

 

 

 

 

Item 1A.

Risk Factors

 

40

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

40

 

 

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

40

 

 

 

 

 

 

 

 

Item 5.

Other Information

 

40

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

41

 

 

 

 

 

Signatures 

 

42

 

 

 


 

Table of Contents

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)

    

2018

    

2017

 

Assets:

 

 

 

 

 

 

 

Real estate assets:

 

 

 

 

 

 

 

Land

 

$

191,578

 

$

191,578

 

Buildings and improvements

 

 

1,848,362

 

 

1,811,631

 

Fixtures and equipment

 

 

7,842

 

 

5,614

 

 

 

 

2,047,782

 

 

2,008,823

 

Less accumulated depreciation

 

 

419,746

 

 

376,131

 

Real estate assets, net

 

 

1,628,036

 

 

1,632,692

 

Acquired real estate leases, less accumulated amortization of $98,890 and $109,771, respectively

 

 

65,687

 

 

86,520

 

Investment in non-consolidated REITs

 

 

 —

 

 

70,164

 

Cash, cash equivalents and restricted cash

 

 

10,434

 

 

9,819

 

Tenant rent receivables, less allowance for doubtful accounts of $225 and $250, respectively

 

 

3,206

 

 

3,123

 

Straight-line rent receivable, less allowance for doubtful accounts of $50 and $50, respectively

 

 

53,056

 

 

53,194

 

Prepaid expenses and other assets

 

 

9,259

 

 

8,387

 

Related party mortgage loan receivables

 

 

70,925

 

 

71,720

 

Other assets: derivative asset

 

 

22,265

 

 

13,925

 

Office computers and furniture, net of accumulated depreciation of $1,493 and $1,420, respectively

 

 

216

 

 

289

 

Deferred leasing commissions, net of accumulated amortization of $24,059 and $22,276, respectively

 

 

45,475

 

 

40,679

 

Total assets

 

$

1,908,559

 

$

1,990,512

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Bank note payable

 

$

17,000

 

$

78,000

 

Term loans payable, less unamortized financing costs of $6,086 and $5,099, respectively

 

 

763,914

 

 

764,901

 

Series A&B Senior Notes, less unamortized financing costs of $1,191 and $1,308, respectively

 

 

198,809

 

 

198,692

 

Accounts payable and accrued expenses

 

 

62,699

 

 

61,039

 

Accrued compensation

 

 

2,844

 

 

3,641

 

Tenant security deposits

 

 

5,619

 

 

5,383

 

Other liabilities: derivative liabilities

 

 

 —

 

 

1,759

 

Acquired unfavorable real estate leases, less accumulated amortization of $7,985 and $7,638, respectively

 

 

4,261

 

 

5,805

 

Total liabilities

 

 

1,055,146

 

 

1,119,220

 

 

 

 

 

 

 

 

 

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, 107,231,155 and 107,231,155 shares issued and outstanding, respectively

 

 

11

 

 

11

 

Additional paid-in capital

 

 

1,356,457

 

 

1,356,457

 

Accumulated other comprehensive income

 

 

22,265

 

 

12,166

 

Accumulated distributions in excess of accumulated earnings

 

 

(525,320)

 

 

(497,342)

 

Total stockholders’ equity

 

 

853,413

 

 

871,292

 

Total liabilities and stockholders’ equity

 

$

1,908,559

 

$

1,990,512

 

 

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

 

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Franklin Street Properties Corp.

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

(in thousands, except per share amounts)

    

2018

    

2017

    

2018

    

2017

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental

 

$

67,436

 

$

67,339

 

$

198,473

 

$

201,710

 

Related party revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees and interest income from loans

 

 

1,261

 

 

1,278

 

 

3,793

 

 

4,014

 

Other

 

 

 8

 

 

 9

 

 

26

 

 

29

 

Total revenues

 

 

68,705

 

 

68,626

 

 

202,292

 

 

205,753

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate operating expenses

 

 

17,946

 

 

17,898

 

 

52,051

 

 

52,492

 

Real estate taxes and insurance

 

 

11,651

 

 

11,882

 

 

35,120

 

 

35,880

 

Depreciation and amortization

 

 

23,277

 

 

24,988

 

 

70,903

 

 

75,599

 

General and administrative

 

 

3,394

 

 

3,286

 

 

9,908

 

 

9,806

 

Interest

 

 

9,935

 

 

8,258

 

 

29,174

 

 

23,730

 

Total expenses

 

 

66,203

 

 

66,312

 

 

197,156

 

 

197,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before equity in income (loss) of non-consolidated REITs, other, gain (loss) on sale of properties and properties held for sale, less applicable income tax and taxes

 

 

2,502

 

 

2,314

 

 

5,136

 

 

8,246

 

Equity in income (loss) of non-consolidated REITs

 

 

7,180

 

 

(121)

 

 

6,793

 

 

(719)

 

Other

 

 

 —

 

 

67

 

 

 —

 

 

218

 

Gain (loss) on sale of properties and properties held for sale, less applicable income tax

 

 

 —

 

 

(257)

 

 

 —

 

 

(18,460)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes on income

 

 

9,682

 

 

2,003

 

 

11,929

 

 

(10,715)

 

Taxes on income

 

 

74

 

 

100

 

 

231

 

 

297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,608

 

$

1,903

 

$

11,698

 

$

(11,012)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic and diluted

 

 

107,231

 

 

107,231

 

 

107,231

 

 

107,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share, basic and diluted

 

$

0.09

 

$

0.02

 

$

0.11

 

$

(0.10)

 

 

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

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Franklin Street Properties Corp.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the

 

For the

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,608

 

$

1,903

 

$

11,698

 

$

(11,012)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative financial instruments

 

 

1,069

 

 

14

 

 

10,099

 

 

(524)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

 

1,069

 

 

14

 

 

10,099

 

 

(524)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

10,677

 

$

1,917

 

$

21,797

 

$

(11,536)

 

 

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

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Franklin Street Properties Corp.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

(in thousands)

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

11,698

 

$

(11,012)

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

73,127

 

 

77,418

Amortization of above and below market leases

 

 

(405)

 

 

(941)

Hedge ineffectiveness

 

 

 —

 

 

(218)

Loss on sale of properties and properties held for sale, less applicable income tax

 

 

 —

 

 

18,460

Equity in (income) loss of non-consolidated REITs

 

 

(6,793)

 

 

719

Increase (decrease) in allowance for doubtful accounts

 

 

(25)

 

 

25

Changes in operating assets and liabilities:

 

 

 

 

 

 

Tenant rent receivables

 

 

(58)

 

 

(902)

Straight-line rents

 

 

821

 

 

(2,021)

Lease acquisition costs

 

 

(683)

 

 

(876)

Prepaid expenses and other assets

 

 

(487)

 

 

(1,945)

Accounts payable and accrued expenses

 

 

(2,665)

 

 

(489)

Accrued compensation

 

 

(797)

 

 

(784)

Tenant security deposits

 

 

236

 

 

76

Payment of deferred leasing commissions

 

 

(11,051)

 

 

(8,178)

Net cash provided by operating activities

 

 

62,918

 

 

69,332

Cash flows from investing activities:

 

 

 

 

 

 

Property improvements, fixtures and equipment

 

 

(35,901)

 

 

(41,862)

Investment in non-consolidated REITs

 

 

74,931

 

 

 —

Distributions in excess of earnings from non-consolidated REITs

 

 

710

 

 

1,041

Repayment of related party mortgage receivable

 

 

795

 

 

9,795

Proceeds received on sales of real estate assets

 

 

 —

 

 

6,160

Net cash provided by (used in) investing activities

 

 

40,535

 

 

(24,866)

Cash flows from financing activities:

 

 

 

 

 

 

Distributions to stockholders

 

 

(39,676)

 

 

(61,122)

Borrowings under bank note payable

 

 

30,000

 

 

60,000

Repayments of bank note payable

 

 

(91,000)

 

 

(40,000)

Deferred financing costs

 

 

(2,162)

 

 

 —

Net cash used in financing activities

 

 

(102,838)

 

 

(41,122)

Net increase in cash, cash equivalents and restricted cash

 

 

615

 

 

3,344

Cash, cash equivalents and restricted cash, beginning of year

 

 

9,819

 

 

9,366

Cash, cash equivalents and restricted cash, end of period

 

$

10,434

 

$

12,710

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

25,388

 

$

21,885

Taxes

 

$

485

 

$

583

Non-cash investing activities:

 

 

 

 

 

 

Accrued costs for purchases of real estate assets

 

$

9,465

 

$

6,053

 

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

 

 

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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 three corporations organized to operate as real estate investment trusts (“REIT”).  Collectively, the three REITs are referred to as the “Sponsored REITs”.

 

As of September 30, 2018, the Company owned and operated a portfolio of real estate consisting of 34 operating properties, one property that was substantially redeveloped and is in lease-up and three managed Sponsored REITs; and held four promissory notes secured by mortgages on real estate owned by Sponsored REITs, including two mortgage loans and two revolving lines of credit.  From time-to-time, the Company may acquire, develop or redevelop real estate, make additional secured loans or acquire a Sponsored REIT.  The Company may also pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, or for geographic or property specific reasons.

 

Properties

 

The following table summarizes the Company’s number of operating properties and rentable square feet of real estate.  In January 2016, the Company classified one property as non-operating that was substantially redeveloped and is in lease-up, which is excluded as of September 30, 2018 and 2017.

 

 

 

 

 

 

 

 

As of September 30,

 

 

    

2018

    

2017

 

Commercial real estate:

 

 

 

 

 

Number of properties

 

34

 

35

 

Rentable square feet

 

9,760,699

 

10,085,889

 

 

Basis of Presentation

 

The unaudited consolidated financial statements of the Company include all of the accounts of the Company and its majority-owned 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, 2017, 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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any other period.

 

Financial Instruments

 

As disclosed in Note 4, the Company’s derivatives are recorded at fair value using Level 2 inputs.  The Company estimates that the carrying values of cash, cash equivalents and restricted cash, receivables and tenant security deposits approximate

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their fair values based on their short-term maturity and the loan receivable, bank note and term loans payable approximate their fair values as they bear interest at variable interest rates at spreads that approximate market. 

 

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)

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,434

 

$

12,647

 

Restricted cash

 

 

 —

 

 

63

 

Total cash, cash equivalents and restricted cash

 

$

10,434

 

$

12,710

 

 

Amounts included in restricted cash represent amounts set aside for the payments to be made pursuant to our employees’ flexible medical spending accounts. 

 

Recent Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which provides guidance for revenue recognition.  The standard’s core principle is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services.  This update is effective for interim and annual reporting periods beginning after December 15, 2017.  A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from Topic 606.  The Company adopted Topic 606 using the modified retrospective approach effective January 1, 2018 and the adoption did not have an impact on the amount or timing of revenue recognition in the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”).  ASU 2016-02 requires lessees to establish a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term on their balance sheets.  Lessees will continue to recognize lease expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.  This new standard is effective for annual periods beginning after December 15, 2018, and interim periods thereafter with early adoption permitted.  The Company is currently evaluating the potential changes from ASU 2016-02 to future financial reporting and disclosures.  The Company expects the adoption of this standard in 2019 will increase its assets and liabilities by approximately $3 million for the addition of right-of-use assets and lease liabilities related to an operating lease for office space in which the Company is a tenant; however, the Company does not expect the standard to have a material impact to its results of operations or liquidity. 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses.  The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the potential impact the adoption of ASU 2016-13 will have on its consolidated financial statements. 

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which clarifies how reporting entities should present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance during the first quarter of 2018 and applied it retrospectively. Pursuant to the adoption, the Company elected the cumulative earnings

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approach related to the distributions received from its equity method investments. The adoption did not have an impact on the Company’s consolidated statements of cash flows.      

 

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (“ASU 2016-18”), which clarifies how reporting entities should present restricted cash and restricted cash equivalents. Reporting entities will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Upon the adoption of ASU 2016-18, the Company reconciled both cash and cash equivalents and restricted cash and restricted cash equivalents, whereas under the previous guidance the Company explained the changes during the period for cash and cash equivalents only.  Prior periods were retrospectively adjusted to conform to the current period’s presentation.

 

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”), which provides additional guidance on evaluating whether transactions should be accounted for as an acquisition (or disposal) of assets of a business.  The update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs.  ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years.  This update will be applied prospectively to any transactions occurring within the period of adoption.  Certain property acquisitions which under previous guidance would have been accounted for as business combinations will be accounted for as acquisitions of assets.  In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under business combination guidance.

 

In August 2018, the FASB issued No. ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The ASU is intended to improve the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for all entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. This ASU amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. ASU 2018-13 will be effective for the Company as of January 1, 2020, and earlier adoption is permitted. The Company is currently reviewing the effect of this ASU to the consolidated financial statements.   

 

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

 

Investment in Sponsored REITs:

 

At September 30, 2018 and December 31, 2017, the Company held a common stock interest in three  and six Sponsored REITs, respectively.  The Company held a non-controlling preferred stock investment in two Sponsored REITs, FSP 303 East Wacker Drive Corp. (“East Wacker”) and FSP Grand Boulevard Corp. (“Grand Boulevard”), which were liquidated during the three months ended September 30, 2018.  As of September 30, 2018, the Company held a beneficial interest in the East Wacker and Grand Boulevard liquidating trusts.

 

In December 2007, the Company purchased 965.75 preferred shares or 43.7% of the outstanding preferred shares of one of its Sponsored REITs, East Wacker.  On September 24, 2018, the property owned by East Wacker was sold and, thereafter, East Wacker declared and issued a liquidating distribution for its preferred shareholders, from which the Company was entitled to $70.0 million.  On September 27, 2018, the Company received $69.0 million in an initial cash distribution.  As a result of the sale, the Company recognized a gain on liquidation of $7.1 million.  As of September 30, 2018, the Company held a beneficial interest in the East Wacker liquidating trust in the amount of $1.0 million, which is included in other assets in the accompanying consolidated balance sheet. 

 

In May 2009, the Company purchased 175.5 preferred shares or 27.0% of the outstanding preferred shares of one of its Sponsored REITs, Grand Boulevard.  On July 19, 2018, the property owned by Grand Boulevard was sold and, thereafter, Grand Boulevard declared and issued a liquidating distribution for its preferred shareholders, from which the Company was entitled to $6.2 million.  On August 17, 2018, the Company received $5.9 million in an initial cash distribution.  As a result of the sale, the Company recognized a loss on liquidation of $0.1 million.  As of September 30, 2018, the Company held a beneficial interest in the Grand Boulevard liquidating trust in the amount of $0.3 million, which is included in other assets in the accompanying consolidated balance sheet.  

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Equity in income (loss) of investments in non-consolidated REITs is derived from the Company’s share of income or loss in the operations of those entities and includes gain or loss on liquidation.  The Company exercised influence over, but did not control these entities, and investments are accounted for using the equity method.

 

Equity in income (loss) of investments in non-consolidated REITs:

 

The following table includes equity in income (loss) of investments in non-consolidated REITs

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

(in thousands)

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Equity in income (loss) of East Wacker

 

$

7,209

 

$

(272)

 

Equity in (loss) of Grand Boulevard

 

 

(107)

 

 

(447)

 

Impairment charge

 

 

(309)

 

 

 —

 

 

 

$

6,793

 

$

(719)

 

 

Equity in income (loss) of East Wacker was derived from the Company’s preferred stock investment in the entity.  In December 2007, the Company purchased 965.75 preferred shares or 43.7% of the outstanding preferred shares of East Wacker.  On September 24, 2018, the property owned by East Wacker was sold at a gain, which is included in equity in income (loss) of non-consolidated REITs on the consolidated statements of income. 

 

Equity in losses of Grand Boulevard is derived from the Company’s preferred stock investment in the entity.  In May 2009, the Company purchased 175.5 preferred shares or 27.0% of the outstanding preferred shares of Grand Boulevard.  On July 19, 2018, the property owned by Grand Boulevard was sold at a loss, which is included in equity in income (loss) of non-consolidated REITs on the consolidated statements of income.

 

At June 30, 2018, the Company recognized an impairment charge of $309,000, which represented the other-than-temporary decline in the fair value below the carrying value of one of the Company’s investments in non-consolidated REITs.  The Company estimated the fair value of its equity investment by estimating the fair value of the property, less estimated costs to sell using a purchase and sale agreement to purchase the property made by third parties (Level 3 inputs, as there is no active market). 

 

The Company received distributions of $710,000 and $1,041,000 from non-consolidated REITs during the nine months ended September 30, 2018 and 2017, respectively.    

 

Management fees and interest income from loans:

 

Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelable with 30 days notice.  Asset management fee income from non-consolidated entities amounted to approximately $375,000 and $459,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

From time to time the Company 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. The Company reviews Sponsored REIT loans for impairment each reporting period. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts recorded on the balance sheet. The Company applies normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment. None of the Sponsored REIT loans have been impaired.  

 

The Company anticipates that each Sponsored REIT Loan will be repaid at maturity or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or some other capital event.  Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately one to three years.  Except for two mortgage loans which bear interest at a fixed rate, advances under each Sponsored REIT Loan bear

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interest at a rate equal to the 30-day LIBOR rate plus an agreed upon amount of basis points and also require a 50 basis point draw fee.

 

The following is a summary of the Sponsored REIT Loans outstanding as of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

    

Maximum

    

Amount

    

 

    

    

    

    

Interest

 

(dollars in thousands)

    

 

 

Maturity

 

Amount

 

Drawn at

 

Interest

 

Draw

 

Rate at

 

Sponsored REIT

    

Location

 

Date

 

of Loan

 

30-Sep-18

 

Rate (1)

 

Fee (2)

 

30-Sep-18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Satellite Place Corp.

 

Duluth, GA

 

31-Dec-19

 

$

5,500

 

$

1,325

 

L+

4.4

%  

0.5

%  

6.51

%

FSP Energy Tower I Corp.

 

Houston, TX

 

30-Jun-19

 

 

20,000

 

 

15,600

 

L+

5.0

%  

0.5

%  

7.11

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan secured by property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Monument Circle LLC (3)

 

Indianapolis, IN

 

7-Dec-18

 

 

21,000

 

 

21,000

 

 

4.90

%  

n/a

 

4.90

%

FSP Energy Tower I Corp. (4)

 

Houston, TX

 

30-Jun-19

 

 

33,000

 

 

33,000

 

 

6.41

%  

n/a

 

6.41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

79,500

 

$

70,925

 

 

 

 

 

 

 

 

 


(1)

The interest rate is 30-day LIBOR rate plus the additional rate indicated, otherwise a fixed rate.

(2)

The draw fee is a percentage of each new advance, and is paid at the time of each new draw.

(3)

This mortgage loan includes an origination fee of $164,000 and an exit fee of $38,000 when repaid by the borrower.

(4)

This mortgage loan includes an annual extension fee of $108,900 paid by the borrower. 

 

The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $3,418,000 and $3,554,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

Non-consolidated REITs:

 

The balance sheet data below for 2018 and 2017 includes the 3 Sponsored REITs the Company held an interest in as of September 30, 2018 and the 6 Sponsored REITs the Company held an interest in as of December 31, 2017.  The operating data below for 2018 and 2017 include the operations of the 6 and 7 Sponsored REITs in which the Company held an interest in during the nine months ended September 30, 2018 and 2017, respectively.

 

Summarized financial information for these Sponsored REITs is as follows:

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

(in thousands)

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Balance Sheet Data (unaudited):

 

 

 

 

 

 

 

Real estate, net

 

$

97,253

 

$

312,861

 

Other assets

 

 

19,528

 

 

74,076

 

Total liabilities

 

 

(76,359)

 

 

(151,092)

 

Shareholders’ equity

 

$

40,422

 

$

235,845

 

 

 

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For the Nine Months Ended

 

 

 

September 30,

 

(in thousands)

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Operating Data (unaudited):

 

 

 

 

 

 

 

Rental revenues

 

$

35,714

 

$

40,775

 

Other revenues

 

 

 1

 

 

 5

 

Operating and maintenance expenses

 

 

(18,479)

 

 

(21,219)

 

Depreciation and amortization

 

 

(11,451)

 

 

(14,220)

 

Interest expense

 

 

(5,692)

 

 

(6,256)

 

Gain (loss) on sale, less applicable income tax

 

 

17,095

 

 

(702)

 

Net income (loss)

 

$

17,188

 

$

(1,617)

 

 

 

3.  Bank Note Payable and Term Note Payable

 

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 provides a single unsecured bridge loan in the aggregate principal amount of $150 million (the “JPM Term Loan”) that remains fully advanced and outstanding.  The JPM Term Loan matures on November 30, 2021.    The JPM Term Loan was previously evidenced by a Credit Agreement, dated November 30, 2016, among the Company, JPMorgan, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated October 18, 2017.     

 

The JPM Term Loan bears interest at either (i) a number of basis points over the Eurodollar Rate depending on the Company’s credit rating (125.0 basis points over the Eurodollar Rate at September 30, 2018) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (25.0 basis points over the base rate at September 30, 2018).

 

Based upon the Company’s credit rating, as of September 30, 2018, the interest rate on the JPM Term Loan was 3.38% per annum.  The weighted average interest rate on the JPM Term Loan during the nine months ended September 30, 2018 was approximately 3.24% per annum.  The weighted average interest rate on the JPM Term Loan during the year ended December 31, 2017 was approximately 2.45% per annum. 

 

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

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become immediately due and payable. The Company was in compliance with the JPM Term Loan financial covenants as of September 30, 2018.

 

The Company used the net proceeds of the JPM Term Loan to acquire the property located at 600 17th Street, Denver, Colorado on December 1, 2016 and for other general business purposes.   

 

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 (“BMO”), as administrative agent (the “BMO Credit Agreement”). The BMO Credit Agreement provides for a single, unsecured term loan borrowing in the amount of $220 million (the “BMO Term Loan”) that remains fully advanced and outstanding. The BMO Term Loan consists of a $55 million tranche A term loan and a $165 million tranche B term loan.  The tranche A term loan matures on November 30, 2021 and the 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 was previously evidenced by an Amended and Restated Credit Agreement, dated October 29, 2014, among the Company, BMO, as administrative agent and lender, and the other lending institutions party thereto, as amended by a First Amendment, dated July 21, 2016, and a Second Amendment, dated October 18, 2017. 

 

The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (125 basis points over LIBOR at September 30, 2018) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (25 basis points over the base rate at September 30, 2018).

 

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 an interest rate swap agreement. 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 until August 26, 2020.  Accordingly, based upon the Company’s credit rating, as of September 30, 2018, the effective interest rate on the BMO Term Loan was 3.57% per annum. 

 

The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage 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 BMO 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 September 30, 2018.

 

The Company may use the proceeds of the loans under the BMO Credit Agreement 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 BMO Credit Agreement. 

 

BAML Credit Facility

 

On July 21, 2016, the Company entered into a First Amendment (the “BAML First Amendment”), and on October 18, 2017, the Company entered into a Second Amendment (the “BAML Second Amendment”), to the Second Amended and Restated

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Credit Agreement dated October 29, 2014 among the Company, the lending institutions party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (as amended by the BAML First Amendment and the BAML Second Amendment, the “BAML Credit Facility”) that continued an existing unsecured revolving line of credit (the “BAML Revolver”) and an existing term loan (the “BAML Term Loan”). 

 

BAML Revolver Highlights

 

·

The BAML Revolver is for borrowings, at the Company's election, of up to $600 million.  Borrowings made pursuant to the BAML Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $600 million outstanding at any time.

·

Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the maturity date of January 12, 2022.  The Company has the right to extend the maturity date of the BAML Revolver by two additional 6 month periods, or until January 12, 2023, upon payment of a fee and satisfaction of certain customary conditions.

·

The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity applicable to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.

 

As of September 30, 2018, there were borrowings of $17 million outstanding under the BAML Revolver.  The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.20% over LIBOR at September 30, 2018) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at September 30, 2018). The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating. The facility fee is assessed against the total amount of the BAML Revolver, or $600 million (0.25% at September 30, 2018).

 

Based upon the Company’s credit rating, as of September 30, 2018 the interest rate on the BAML Revolver was 3.33% per annum.  The weighted average interest rate on all amounts outstanding on the BAML Revolver during the nine months ended September 30, 2018 was approximately 3.07% per annum.  As of December 31, 2017, there were borrowings of $78 million outstanding under the BAML Revolver at an interest rate of 2.63% per annum.

 

BAML Term Loan Highlights

 

·

The BAML Term Loan is for $400 million.

·

The BAML Term Loan matures on January 12, 2023.

·

The BAML Credit Facility includes an accordion feature that allows for an aggregate amount of up to $500 million of additional borrowing capacity to the BAML Revolver and/or the BAML Term Loan, subject to receipt of lender commitments and satisfaction of certain customary conditions.

·

On September 27, 2012, the Company drew down the entire $400 million under the BAML Term Loan and such amount remains fully advanced and outstanding under the BAML Term Loan.

 

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.35% over LIBOR at September 30, 2018) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at September 30, 2018).

 

Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into an interest rate swap agreement.  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 BAML Term Loan at 1.12% per annum for the period beginning on September 27, 2017 and ending on September 27, 2021.  Accordingly, based upon the Company’s credit rating, as of September 30, 2018, the effective interest rate on the BAML Term Loan was 2.47% per annum.

 

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BAML Credit Facility General Information

 

The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BAML Credit Facility provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BAML Credit Facility). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable.  The Company was in compliance with the BAML Credit Facility financial covenants as of September 30, 2018.

 

The Company may use the proceeds of the loans under the BAML Credit Facility to finance the acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored REITs to refinance or retire indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the BAML Credit Facility.

 

Senior Notes

 

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 million of senior unsecured notes consisting of (i) 3.99% Series A Senior Notes due December 20, 2024 in an aggregate principal amount of $116 million (the “Series A Notes”) and (ii) 4.26% 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 BAML Revolver.

 

The Note Purchase Agreement contains customary financial covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a maximum unencumbered leverage ratio. The Note Purchase Agreement also contains restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into transactions with affiliates, merge, consolidate, create liens, make certain restricted payments, enter into certain agreements or prepay certain indebtedness. Such financial and restrictive covenants are substantially similar to the corresponding covenants contained in the BAML Credit Facility, the BMO Credit Agreement and the JPM Credit 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. 

 

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4.  Financial Instruments: Derivatives and Hedging

 

On July 22, 2016, the Company fixed the interest rate for the period beginning on September 27, 2017 and ending on September 27, 2021 on the BAML Term Loan with multiple interest rate swap agreements (the “2017 Interest Rate Swap”).  On August 26, 2013, the Company fixed the interest rate until August 26, 2020 on the BMO Term Loan with an interest rate swap agreement (the “BMO Interest Rate Swap”).  The variable rates that were fixed under the 2017 Interest Rate Swap and the BMO Interest Rate Swap are described in Note 3.

 

The 2017 Interest Rate Swap and the BMO Interest Rate Swap qualify as cash flow hedges and have 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 immediately recognized in 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 our derivative financial instruments at September 30, 2018. The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Notional

    

Strike

  

Effective

    

Expiration

    

Fair

 

(in thousands)

 

Value

 

Rate

 

Date

 

Date

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 Interest Rate Swap

 

$

400,000

 

1.12

%  

Sep-17

 

Sep-21

 

$

20,297

 

BMO Interest Rate Swap

 

$

220,000

 

2.32

%  

Aug-13

 

Aug-20

 

$

1,968

 

 

On September 30, 2018, the 2017 Interest Rate Swap was reported as an asset at its fair value of approximately $20.3 million and the BMO Interest Rate Swap was reported as an asset at its fair value of approximately $2.0 million.    These are included in other assets: derivative asset on the consolidated balance sheet at September 30, 2018.  Offsetting adjustments are reported as unrealized gains or losses on derivative financial instruments in accumulated other comprehensive income of $11.6  million.  During the nine months ended September 30, 2018,  $1.5  million was reclassified out of other comprehensive income and into interest expense.

 

Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings.  The Company estimates that approximately $7.8  million of the current balance held in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

 

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

 

The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk.  The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the consolidated balance sheets.

 

The Company’s derivatives are recorded at fair value in other assets in the consolidated balance sheets.  The effective portion of the derivatives’ fair value is recorded to comprehensive income in the consolidated statements of other comprehensive income and the ineffective portion of the derivatives’ fair value is recognized directly into earnings as Other in the consolidated statements of income.  

 

The interest rate swaps effectively fix the interest rate on the BAML Term Loan and BMO Term Loan; however, prior to October 18, 2017, there was no floor on the variable interest rate of the swaps whereas the BAML Term Loan and BMO Term Loan were subject to a zero percent floor. As a result there was a mismatch and the ineffective portion of the

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derivatives’ changes in fair value were recognized directly into earnings.  On October 18, 2017, the Company amended the BMO Term Loan and BAML Term Loan to, among other changes, provide that the deemed zero percent interest rate floor is not applicable to any loan where there is a corresponding interest rate swap contract in place. 

 

During the three and nine months ended September 30, 2017, the Company recorded $67,000 and $218,000, respectively, of hedge ineffectiveness in earnings.  Hedge ineffectiveness is included in “Other” in the consolidated statements of income.   

 

 

5.  Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of Company shares outstanding during the period.  Diluted net income 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, 2018 and 2017.    

 

6.  Stockholders’ Equity

 

As of September 30, 2018, the Company had 107,231,155 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

 

 

 

 

 

 

 

 

 

First quarter of 2018

 

$

0.19

 

$

20,374

 

Second quarter of 2018

 

$

0.09

 

$

9,651

 

Third quarter of 2018

 

$

0.09

 

$

9,651

 

 

 

 

 

 

 

 

 

First quarter of 2017

 

$

0.19

 

$

20,374

 

Second quarter of 2017

 

$

0.19

 

$

20,374

 

Third quarter of 2017

 

$

0.19

 

$

20,374

 

 

 

 

7.  Income Taxes

 

General

 

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only.  The Company must comply with a variety of restrictions to maintain its status as a REIT.  These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.

 

One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”).  In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20% of the value of all of the Company’s assets beginning with calendar year 2018 and 25% for previous years and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets.  FSP Investments LLC and FSP Protective TRS Corp. are the Company’s TRSs operating as taxable corporations under the Code.

 

Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities.  In estimating future tax consequences, potential future events are considered except for

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potential changes in income tax law or in rates.  The Tax Cuts and Job Act of 2017 is not expected to have a material impact on the Company’s income taxes. 

 

Interest and penalties will be recorded as income tax expense, if the Company records a liability in the future.  The Company and one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2014 and thereafter.

 

The Company is subject to a business tax known as the Revised Texas Franchise Tax.  Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts.  Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax.  The Company recorded a provision for the Revised Texas Franchise Tax of $200,000 and $261,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

Net operating losses

 

Section 382 of the Code restricts a corporation’s ability to use net operating losses (“NOLs”) to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured.  The Tax Cuts and Jobs Act of 2017 is not expected to have an impact on the Company’s ability to use NOLs or the valuation allowance.  The gross amount of NOLs available to the Company was $13,041,000 as of each of September 30, 2018 and December 31, 2017.

 

Income Tax Expense

 

The income tax expense reflected in the consolidated statements of income relates primarily to a franchise tax on our Texas properties.  FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties and the tax expenses associated with these activities are reported as Other Taxes in the table below:

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

(Dollars in thousands)

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Revised Texas franchise tax

 

$

200

 

$

261

 

Other Taxes

 

 

31

 

 

36

 

Taxes on income

 

$

231

 

$

297

 

 

Taxes on income are a current tax expense.  No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.

 

8.  Dispositions of properties

 

During the three months ended June 30, 2017, the Company reached a decision to classify an office property located in Baltimore, Maryland as an asset held for sale.  In evaluating the Baltimore, Maryland property, management considered various subjective factors, including the time, cost and likelihood of successfully leasing the property, the effect of the property’s results on its unencumbered asset value, which is part of the leverage ratio used to compare to a maximum leverage covenant in the JPM Term Loan, BMO Term Loan and the BAML Credit Facility, future capital costs to upgrade and reposition the multi-tenant property and to lease up the building, recent leasing and economic activity in the local area, and offers to purchase the property.  The Company concluded that selling the property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property.   The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $20.5 million net of applicable income

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taxes and was classified as an asset held for sale of $31.9 million at June 30, 2017.  During the three months ended September 30, 2017, the Company increased the provision for loss by $0.3 million to $20.7 million net of applicable income taxes, and the property was classified as an asset held for sale in the amount of $31.6 million at September 30, 2017.  The Company sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million, net of applicable income taxes.

 

During the three months ended December 31, 2016, the Company reached an agreement to sell an office property located in Milpitas, California.  The property was classified as an asset held for sale at December 31, 2016 and was sold on January 6, 2017 at approximately a $2.3 million gain.

 

The disposals did not represent a strategic shift that has a major effect on the Company's operations and financial results.  Accordingly, the properties remain classified within continuing operations for all periods presented. 

 

9.  Subsequent Events

 

On October 5, 2018, the Board of Directors of the Company declared a cash distribution of $0.09 per share of common stock payable on November 8, 2018 to stockholders of record on October 19, 2018.

 

   

 

   

 

  

   

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2017.  Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations.  The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements.  Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, economic conditions in the United States, changes in interest rates, 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, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.  See Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and Part II, Item 1A. “Risk Factors” below.  Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.

 

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 select urban infill and central business district properties, with primary emphasis on our five core markets of Atlanta, Dallas, Denver, Houston and Minneapolis.  We believe that our five core markets have macro-economic drivers that have the potential to increase occupancies and rents.  We will also monitor other markets for opportunistic investments.  We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.

 

As of September 30, 2018, approximately 7.7 million square feet, or approximately 78% of our total owned portfolio, was located in our five core markets.  From time-to-time we may dispose of our smaller, suburban office assets and replace them with larger urban infill and central business district office assets located primarily in our five core markets.  As we execute this strategy, short term operating results could be adversely impacted.  However, we believe that the transformed portfolio has the potential to provide higher profit and asset value growth over a longer period of time.  

 

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.

 

Critical Accounting Policies

 

We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies.  We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances.  On an on-going basis, we evaluate our estimates.  In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information.  The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates.  We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations.  No changes to our critical accounting policies have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Recent Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which provides guidance for revenue recognition.  The standard’s core principle is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services.  This update is effective for interim and annual reporting periods beginning after December 15, 2017.  A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from Topic 606.  The Company adopted Topic 606 using the modified retrospective approach effective January 1, 2018 and the adoption did not have an impact on the amount or timing of revenue recognition in the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”).  ASU 2016-02 requires lessees to establish a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term on their balance sheets.  Lessees will continue to recognize lease expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.  This new standard is effective for annual periods beginning after December 15, 2018, and interim periods thereafter with early adoption permitted.  We are currently evaluating the potential changes from ASU 2016-02 to future financial reporting and disclosures.  We expect the adoption of this standard in 2019 will increase our assets and liabilities by approximately $3 million for the addition of right-of-use assets and lease liabilities related to an operating lease for office space; however, we do not expect the standard to have a material impact to our results of operations or liquidity. 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses.  The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU 2016-13 will have in our consolidated financial statements. 

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which clarifies how reporting entities should present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this guidance during the first quarter of 2018 and applied it retrospectively. Pursuant to the adoption, we elected the cumulative earnings approach related to the distributions received from its equity method investments. The adoption did not have an impact on our Consolidated Statements of Cash Flows. 

 

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (“ASU 2016-18”), which clarifies how reporting entities should present restricted cash and restricted cash equivalents. Reporting entities will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Upon the adoption of ASU 2016-18, we reconciled both cash and cash equivalents and restricted cash and restricted cash equivalents, whereas under the previous guidance we explained the changes during the period for cash and cash equivalents only.  Prior periods were retrospectively adjusted to conform to the current period’s presentation.   

 

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In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”), which provides additional guidance on evaluating whether transactions should be accounted for as an acquisition (or disposal) of assets of a business.  The update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs.  ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years.  This update will be applied prospectively to any transactions occurring within the period of adoption.  Certain property acquisitions which under previous guidance would have been accounted for as business combinations will be accounted for as acquisitions of assets.  In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under business combination guidance.

 

In August 2018, the FASB issued No. ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The ASU is intended to improve the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for all entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. This ASU amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. ASU 2018-13 will be effective for the Company as of January 1, 2020, and earlier adoption is permitted. The Company is currently reviewing the effect of this ASU to the consolidated financial statements. 

 

Trends and Uncertainties

 

Economic Conditions

 

The economy in the United States is continuing to experience a period of economic growth, which directly affects the demand for office space, our primary income producing asset.  The broad economic market conditions in the United States are 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.  In addition, the Federal Reserve Bank has indicated that it could raise interest rates further in 2018 and 2019.  Any increase in interest rates could result in increased borrowing costs to us.  However, we could also benefit from any further improved economic fundamentals and increasing levels of employment.  We believe that the economy is improving in some markets and appears to be in a broad-based upswing.  However, future economic factors may negatively affect real estate values, occupancy levels and property income.

 

Real Estate Operations

 

Leasing

 

Our real estate portfolio of operating properties was approximately 90.5% leased as of September 30, 2018, an increase from 89.7% as of December 31, 2017.  The 0.8% increase in leased space was a result of leasing transactions signed in 2018, which were partially offset by lease expirations and terminations during the nine months ended September 30, 2018.  As of September 30, 2018, we had approximately 931,000 square feet of vacancy in our portfolio compared to approximately 1,007,000 square feet of vacancy at December 31, 2017.  During the nine months ended September 30, 2018, we leased approximately 1,283,000 square feet of office space, including at our property at 801 Marquette Avenue in Minneapolis, Minnesota (“801 Marquette Avenue”), discussed below, of which approximately 940,000 square feet were with existing tenants, at a weighted average term of 7.3 years.  On average, tenant improvements for such leases were $29.16 per square foot, lease commissions were $9.06 per square foot and rent concessions were approximately four and one-half months of free rent.  Average GAAP base rents under such leases were $30.94 per square foot, or 6.0% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2017. 

 

In January 2016, our property at 801 Marquette Avenue with approximately 170,000 square feet of space, became vacant and we subsequently redeveloped the property.  Interior demolition and construction work commenced during the three months ended September 30, 2016.  As of September 30, 2018, we had incurred approximately $17.7 million in total redevelopment costs.  Delivery of the substantially completed project was achieved at the end of the second quarter of 2017.  Redevelopment of 801 Marquette Avenue has resulted in approximately 130,000 of net rentable square feet for the property.  We anticipate the project, when leased, will attain rents of approximately $17 to $19 net rent per square foot compared to previously expired net rent of approximately $4.75 per square foot.

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As of September 30, 2018, leases for approximately 5.8% and 9.8% of the square footage in our operating portfolio are scheduled to expire during 2018 and 2019, respectively.  As the fourth quarter of 2018 begins, we believe that our property portfolio is well stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants.  We believe that most of our largest property markets are now experiencing generally steady or improving rental conditions.  We are seeing increased potential leasing activity in the energy influenced markets of Houston and Denver, compared to the last several years.  We anticipate positive leasing activity within the portfolio during the remainder of 2018.

 

While we cannot generally predict when an existing vacancy in our real estate 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 for any of our tenants to default on its lease or to seek the protection of bankruptcy exists.  If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment.  In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.

 

Real Estate Acquisition and Investment Activity

 

During 2018:

 

·

during the nine months ended September 30, we received approximately $0.8 million in cash from FSP Satellite Place Corp., as partial prepayment of a Sponsored REIT Loan;

·

on July 19, 2018, an office property owned by a Sponsored REIT, Grand Boulevard,  was sold to a third party.  The Company held an equity investment in Grand Boulevard and received a liquidating distribution of its investment of $6.2 million on July 20, 2018.  The Company received an initial cash distribution of $5.9 million from the liquidating trust of Grand Boulevard on August 17, 2018, and anticipates receiving additional liquidating distributions of approximately $0.3 million as the trust is liquidated;

·

on September 24, 2018, an office property owned by a Sponsored REIT, East Wacker, was sold to a third party.  The Company held an equity investment in East Wacker and received a liquidating distribution of its investment of $70.0 million on September 25, 2018.  The Company received an initial cash distribution of $69.0 million from the liquidating trust of East Wacker on September 27, 2018, and anticipates receiving additional liquidating distributions of approximately $1.0 million as the trust is liquidated; and

·

we have continued to actively explore additional potential real estate investment opportunities and anticipate further real estate investments in the future.

 

During 2017:

 

·

on January 6, we received approximately $6.2 million in proceeds from the sale of a property located in Milpitas, California;   

·

on June 7, we received approximately $9.0 million in cash from FSP 1441 Main Street Corp. as repayment in full of a Sponsored REIT Loan;

·

during the year ended December 31, we received approximately $1.1 million in cash from FSP Satellite Place Corp., as partial prepayment of a Sponsored REIT Loan; and

·

on October 20, we received approximately $31.6 million in proceeds from the sale of a property located in Baltimore, Maryland.

 

 

Dispositions of Properties and Asset Held for Sale

 

During the three months ended June 30, 2017, we reached a decision to classify our office property located in Baltimore, Maryland as an asset held for sale.  The property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of $20.5 million net of applicable income taxes and was classified as an asset held for sale of $31.9 million at June 30, 2017.  During the three months ended September 30, 2017, we increased the

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provision for loss by $0.3 million to $20.7 million net of applicable income taxes and the property was classified as an asset held for sale in the amount of $31.6 million at September 30, 2017.  We sold the property on October 20, 2017 for net proceeds of $31.6 million resulting in a total loss of $20.8 million, net of applicable income taxes. 

 

 

Results of Operations

 

The following table shows financial results for the three months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

(in thousands)

    

2018

    

2017

    

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Rental

 

$

67,436

 

$

67,339

 

$

97

 

Related party revenue:

 

 

 

 

 

 

 

 

 

 

Management fees and interest income from loans

 

 

1,261

 

 

1,278

 

 

(17)

 

Other

 

 

 8

 

 

 9

 

 

(1)

 

Total revenues

 

 

68,705

 

 

68,626

 

 

79

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Real estate operating expenses

 

 

17,946

 

 

17,898

 

 

48

 

Real estate taxes and insurance

 

 

11,651

 

 

11,882

 

 

(231)

 

Depreciation and amortization

 

 

23,277

 

 

24,988

 

 

(1,711)

 

General and administrative

 

 

3,394

 

 

3,286

 

 

108

 

Interest

 

 

9,935

 

 

8,258

 

 

1,677

 

Total expenses

 

 

66,203

 

 

66,312

 

 

(109)