business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The JPM Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The JPM Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the JPM Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the JPM Credit Agreement immediately due and payable, and enforce any and all rights of the lenders or administrative agent under the JPM Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the JPM Term Loan financial covenants as of March 31, 2019.
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 March 31, 2019) 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 March 31, 2019).
Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into interest rate swap transactions. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum until August 26, 2020. On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39% per annum for the period beginning on August 26, 2020 and ending January 31, 2024. Accordingly, based upon the Company’s credit rating, as of March 31, 2019, 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 the 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 March 31, 2019.
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, 2018. 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, uncertainties relating to the impact of the enactment of the Tax Cuts and Jobs Act of 2017, 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, 2018 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 infill and central business district properties in the United States sunbelt and mountain west regions, as well as select opportunistic markets. We believe that the United States sunbelt and mountain west regions have macro-economic drivers that have the potential to increase occupancies and rents. We seek value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.
As of March 31, 2019, approximately 7.7 million square feet, or approximately 78% of our total owned portfolio, was located in Atlanta, Dallas, Denver, Houston and Minneapolis. From time-to-time we may dispose of our smaller, suburban office assets and replace them with larger infill and central business district office assets. 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, 2018.
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. Except for the accounting for allowance for doubtful accounts impacted by ASC 842, 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, 2018.
Recent Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (“ASU 2016-02”), in July 2018; the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”); and in December 2018, the FASB issued ASU No. 2018-20 Leases (Topic 842), Narrow-Scope Improvements for Lessors. 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 adopted these standards on January 1, 2019 and applied the package of practical expedients that allows an entity to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Additionally, our leases met the criteria in ASU 2018-11 to not separate non-lease components from the related lease component, therefore the accounting for these leases remained largely unchanged from the previous standard. We applied the optional transition method in ASU 2018-11, which allows entities to initially apply the new lease standard at the adoption date. The Company recorded a right-to-use asset of $2.1 million and a lease liability of $2.2 million upon adoption of this standard.
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’s receivables associated with its real estate operating leases are note within the scope of this standard. The Company is currently assessing the potential impact that the adoption of ASU 2016-13 may have on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The amendment also eases the application of hedge accounting in certain situations, including eliminating the requirement to separately measure and report hedge ineffectiveness for cash flow hedges. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and earlier adoption is permitted. The Company adopted this new standard in the first quarter of 2019 using the modified retrospective method, which requires us to account for ASU 2017-12 as of the date of adoption with any retrospective adjustments applicable to prior periods included as a cumulative-effect adjustment to accumulate other comprehensive loss and retained earnings. No adjustment was necessary to account for the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption because there was no cumulative ineffectiveness that had been recorded on the Company’s existing interest rate swaps as of December 31, 2018, and all trades were highly effective. The amended presentation and disclosure guidance which is required to be presented prospectively is provided in Note 4 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
In August 2018, the FASB issued ASU No. 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 assessing the potential impact that the adoption of ASU 2018-13 may have on its 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. 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 many 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
As of March 31, 2019, our real estate portfolio was comprised of 32 operating properties, which we refer to as our operating properties, and 3 redevelopment properties that are in the process of being redeveloped, or are completed but not yet stabilized, which we refer to as our redevelopment properties. We collectively refer to our operating and our redevelopment properties as our owned portfolio. Our 32 operating properties were approximately 88.5% leased as of March 31, 2019, a decrease from 89.0% as of December 31, 2018. The 0.5% decrease in leased space was a result of the impact of lease expirations and terminations, which exceeded new leasing completed during the three months ended March 31, 2019. As of March 31, 2019, we had approximately 1,089,000 square feet of vacancy in our operating properties compared to approximately 1,046,000 square feet of vacancy at December 31, 2018. During the three months ended March 31, 2019, we leased approximately 460,000 square feet of office space, of which approximately 365,000 square feet were with existing tenants, at a weighted average term of 9.0 years. On average, tenant improvements for such leases were $28.76 per square foot, lease commissions were $13.41 per square foot and rent concessions were approximately three months of free rent. Average GAAP base rents under such leases were $32.32 per square foot, or 9.9% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2018.
As of March 31, 2019, our three redevelopment properties included an approximately 130,000 square foot redevelopment property known as 801 Marquette in Minneapolis, Minnesota, an approximately 213,000 square foot property known as Blue Lagoon in Miami, Florida and an approximately 62,000 square foot property known as Forest Park in Charlotte, North Carolina. Given the length of the redevelopment and lease-up process, these properties are not placed in service until, in some cases, years after we commence the project.
The redevelopment at 801 Marquette was substantially completed at the end of the second quarter of 2017 and is in the process of being leased up; however, it is not stabilized. As of March 31, 2019, we had leases signed for approximately 37.0% of the rentable square feet, 15.8% of which is occupied. We expect to incur redevelopment and lease-up costs of $28.4 million. As of March 31, 2019, we had incurred approximately $19.9 million in total redevelopment and lease up costs for this property.
The redevelopment of Blue Lagoon commenced in December 2018 following the maturity of a lease with a major tenant that occupied 100% of the property. We expect to incur restoration, redevelopment and lease-up costs of $23.6 million, which include work on the roof of the building, costs to make the space suitable for multiple tenants and to increase parking at the property. As of March 31, 2019, we had incurred approximately $2.8 million in total redevelopment costs. We anticipate completing the redevelopment by the end of 2019.
The redevelopment of Forest Park commenced in January 2019 following the maturity of a lease with a major tenant that occupied 100% of the property through December 31, 2018. We expect to incur redevelopment and lease-up costs of $3.7
million, which include interior work to make the space suitable for multiple tenants. As of March 31, 2019, we had incurred approximately $0.1 million in total redevelopment costs. We anticipate completing the redevelopment by the end of the third quarter of 2019.
As of March 31, 2019, leases for approximately 6.5% and 9.3% of the square footage in our owned portfolio are scheduled to expire during 2019 and 2020, respectively. As the second quarter of 2019 begins, we believe that our operating properties are well stabilized, with a balanced lease expiration schedule, and that existing vacancy is being actively marketed to numerous potential tenants. 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 our operating properties during the remainder of 2019 and throughout 2020.
While we cannot generally predict when an existing vacancy in our owned portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates. Also, we believe the potential 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 2019:
|
·
|
|
during the three months ended March 31, we received approximately $0.3 million in cash from FSP Satellite Place Corp., as partial prepayment of a Sponsored REIT Loan, and $2.4 million was drawn from a Sponsored REIT Loan with FSP Energy Tower I Corp.; and
|
|
·
|
|
we have continued to actively explore additional potential real estate investment opportunities and anticipate further real estate investments in the future.
|
During 2018:
|
·
|
|
we received approximately $1.1 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 in the aggregate 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 in the aggregate 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.
|
Results of Operations
The following table shows financial results for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
(in thousands)
|
|
2019
|
|
2018
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
63,359
|
|
$
|
65,628
|
|
$
|
(2,269)
|
|
Related party revenue:
|
|
|
|
|
|
|
|
|
|
|
Management fees and interest income from loans
|
|
|
1,352
|
|
|
1,256
|
|
|
96
|
|
Other
|
|
|
5
|
|
|
9
|
|
|
(4)
|
|
Total revenues
|
|
|
64,716
|
|
|
66,893
|
|
|
(2,177)
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Real estate operating expenses
|
|
|
17,726
|
|
|
17,151
|
|
|
575
|
|
Real estate taxes and insurance
|
|
|
12,102
|
|
|
11,177
|
|
|
925
|
|
Depreciation and amortization
|
|
|
23,245
|
|
|
24,035
|
|
|
(790)
|
|
General and administrative
|
|
|
3,509
|
|
|
3,432
|
|
|
77
|
|
Interest
|
|
|
9,368
|
|
|
9,486
|
|
|
(118)
|
|
Total expenses
|
|
|
65,950
|
|
|
65,281
|
|
|
669
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income and equity in
income (loss) of non-consolidated REITs
|
|
|
(1,234)
|
|
|
1,612
|
|
|
(2,846)
|
|
Tax expense (benefit) on income (loss)
|
|
|
(29)
|
|
|
82
|
|
|
(111)
|
|
Equity in loss of non-consolidated REITs
|
|
|
—
|
|
|
(105)
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,205)
|
|
$
|
1,425
|
|
$
|
(2,630)
|
|
Comparison of the three months ended March 31, 2019 to the three months ended March 31, 2018:
Revenues
Total revenues decreased by $2.2 million to $64.7 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The decrease was primarily a result of:
|
·
|
|
A decrease in rental revenue of approximately $2.2 million arising primarily from the loss of rental income from leases that expired in 2019 and 2018. The decrease was partially offset by rental income earned from leases commencing in 2019 and 2018. Our leased space in our operating properties was 88.5% at March 31, 2019 and at March 31, 2018.
|
Expenses
Total expenses increased by $0.7 million to $66.0 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The increase was primarily a result of:
|
·
|
|
An increase in real estate operating expenses and real estate taxes and insurance of approximately $1.5 million.
|
|
·
|
|
An increase in general and administrative expenses of $0.1 million, which was primarily attributable to lease acquisition costs.
|
This increase was partially offset by:
|
·
|
|
A decrease in depreciation and amortization of approximately $0.8 million.
|
|
·
|
|
A decrease in interest expense of approximately $0.1 million to $9.4 million for the three months ended March 31, 2019 compared to the same period in 2018. The decrease was primarily attributable
|
to lower debt outstanding, which was partially offset by higher floating interest rates during the three months ended March 31, 2019 compared to the same period in 2018.
|
Tax expense (benefit) on income (loss)
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties, which increased $13,000, and federal and other income taxes, which decreased by $124,000, during the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily as a result of a refund arising due to the provisions of the Tax Cuts and Jobs Act of 2017.
Equity in income (loss) of non-consolidated REITs
Equity in loss from non-consolidated REITs was $0.1 million for the three months ended March 31, 2018. Our investments in non-consolidated REITs were liquidated during 2018. The equity in income (loss) during the year ended December 31, 2018 consisted of equity in income from our preferred stock investment in East Wacker of $7.2 million, which sold its property on September 24, 2018, and was partially offset by equity in loss from our preferred stock investment in Grand Boulevard of $0.1 million, which sold its property on July 19, 2018. In addition, during the three months ended June 30, 2018, we recognized an impairment charge of $0.3 million, which represented the other-than-temporary decline in the fair value below the carrying value of the Company’s investments in non-consolidated REITs.
Net income (loss)
Net loss for the three months ended March 31, 2019 was $1.2 million compared to net income of $1.4 million for the three months ended March 31, 2018, for the reasons described above.
Non-GAAP Financial Measures
Funds From Operations
The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders. The Company defines FFO as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, hedge ineffectiveness, acquisition costs of newly acquired properties that are not capitalized and lease acquisition costs that are not capitalized plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income or loss (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT, may define this term in a different manner. We have included the NAREIT FFO definition as of May 17, 2016 in the table and note that other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income or loss and cash flows from operating, investing and financing activities in the consolidated financial statements.
The calculations of FFO are shown in the following table:
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|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
(in thousands):
|
|
2019
|
|
2018
|
|
|
Net income (loss)
|
|
$
|
(1,205)
|
$
|
|
1,425
|
|
|
Equity in (income) loss of non-consolidated REITs
|
|
|
—
|
|
|
105
|
|
|
FFO from non-consolidated REITs
|
|
|
—
|
|
|
884
|
|
|
Depreciation and amortization
|
|
|
23,133
|
|
|
23,950
|
|
|
NAREIT FFO
|
|
|
21,928
|
|
|
26,364
|
|
|
Lease Acquisition costs
|
|
|
182
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Funds From Operations
|
|
$
|
22,110
|
|
$
|
26,364
|
|
|
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which we refer to as NOI. Management believes that investors are interested in this information. NOI is a non-GAAP financial measure that the Company defines as net income or loss (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, hedge ineffectiveness, gains or losses on the sale of assets and excludes non-property specific income and expenses. The information presented includes footnotes and the data is shown by region with properties owned in the periods presented, which we call Same Store. The comparative Same Store results include properties held for the periods presented and exclude properties that are non-operating, being developed or redeveloped, dispositions and significant nonrecurring income such as bankruptcy settlements and lease termination fees. NOI, as defined by the Company, may not
be comparable to NOI reported by other REITs that define NOI differently. NOI should not be considered an alternative to net income or loss as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions. The calculations of NOI are shown in the following table:
Net Operating Income (NOI)*
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feet
|
|
Three Months Ended
|
|
Three Months Ended
|
|
Inc
|
|
%
|
|
(in thousands)
|
|
or RSF
|
|
31-Mar-19
|
|
31-Mar-18
|
|
(Dec)
|
|
Change
|
|
Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East
|
|
945
|
|
$
|
3,185
|
|
$
|
3,802
|
|
$
|
(617)
|
|
(16.2)
|
%
|
MidWest
|
|
1,549
|
|
|
5,163
|
|
|
6,257
|
|
|
(1,094)
|
|
(17.5)
|
%
|
South
|
|
4,382
|
|
|
14,272
|
|
|
14,449
|
|
|
(177)
|
|
(1.2)
|
%
|
West
|
|
2,619
|
|
|
10,559
|
|
|
10,958
|
|
|
(399)
|
|
(3.6)
|
%
|
Property NOI* from Operating Properties
|
|
9,495
|
|
|
33,179
|
|
|
35,466
|
|
|
(2,287)
|
|
(6.4)
|
%
|
Dispositions and Redevelopment Properties
|
|
405
|
|
|
(205)
|
|
|
1,250
|
|
|
(1,455)
|
|
(3.8)
|
%
|
Property NOI*
|
|
9,900
|
|
$
|
32,974
|
|
$
|
36,716
|
|
$
|
(3,742)
|
|
(10.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
|
|
|
$
|
33,179
|
|
$
|
35,466
|
|
$
|
(2,287)
|
|
(6.4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items in NOI* (a)
|
|
|
|
|
35
|
|
|
761
|
|
|
(726)
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
|
|
|
$
|
33,144
|
|
$
|
34,705
|
|
$
|
(1,561)
|
|
(4.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
|
|
|
Reconciliation to Net Income
(Loss)
|
|
|
|
31-Mar-19
|
|
31-Mar-18
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
$
|
(1,205)
|
|
$
|
1,425
|
|
|
|
|
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of properties and properties held for sale
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Hedge ineffectiveness
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Management fee income
|
|
|
|
|
(677)
|
|
|
(746)
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
23,245
|
|
|
24,035
|
|
|
|
|
|
|
Amortization of above/below market leases
|
|
|
|
|
(112)
|
|
|
(85)
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
3,509
|
|
|
3,432
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
9,368
|
|
|
9,486
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
(1,294)
|
|
|
(1,120)
|
|
|
|
|
|
|
Equity in (income) loss of non-consolidated REITs
|
|
|
|
|
—
|
|
|
105
|
|
|
|
|
|
|
Non-property specific items, net
|
|
|
|
|
140
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI*
|
|
|
|
$
|
32,974
|
|
$
|
36,716
|
|
|
|
|
|
|
|
(a)
|
|
Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability.
|
*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.
The information presented below provides the weighted average GAAP rent per square foot for the three months ended March 31, 2019 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupied
|
|
Weighted
|
|
|
|
|
|
|
|
Year Built
|
|
|
|
Weighted
|
|
Percentage as of
|
|
Average
|
|
|
|
|
|
|
|
or
|
|
Net Rentable
|
|
Occupied
|
|
March 31,
|
|
Rent per Occupied
|
|
Property Name
|
|
City
|
|
State
|
|
Renovated
|
|
Square Feet
|
|
Sq. Ft.
|
|
2019 (a)
|
|
Square Feet (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meadow Point
|
|
Chantilly
|
|
VA
|
|
1999
|
|
138,537
|
|
138,537
|
|
100.0
|
%
|
$
|
26.33
|
|
Innsbrook
|
|
Glen Allen
|
|
VA
|
|
1999
|
|
298,456
|
|
170,956
|
|
57.3
|
%
|
|
18.66
|
|
Loudoun Tech Center
|
|
Dulles
|
|
VA
|
|
1999
|
|
136,658
|
|
130,850
|
|
95.8
|
%
|
|
19.48
|
|
Stonecroft
|
|
Chantilly
|
|
VA
|
|
2008
|
|
111,469
|
|
111,469
|
|
100.0
|
%
|
|
33.06
|
|
Emperor Boulevard
|
|
Durham
|
|
NC
|
|
2009
|
|
259,531
|
|
259,531
|
|
100.0
|
%
|
|
34.80
|
|
East total
|
|
|
|
|
|
|
|
944,651
|
|
811,343
|
|
85.9
|
%
|
|
27.24
|
|
Northwest Point
|
|
Elk Grove Village
|
|
IL
|
|
1999
|
|
177,095
|
|
177,095
|
|
100.0
|
%
|
|
32.38
|
|
909 Davis Street
|
|
Evanston
|
|
IL
|
|
2002
|
|
195,098
|
|
172,115
|
|
88.2
|
%
|
|
35.85
|
|
River Crossing
|
|
Indianapolis
|
|
IN
|
|
1998
|
|
205,059
|
|
193,227
|
|
94.2
|
%
|
|
23.80
|
|
Timberlake
|
|
Chesterfield
|
|
MO
|
|
1999
|
|
234,496
|
|
234,496
|
|
100.0
|
%
|
|
26.64
|
|
Timberlake East
|
|
Chesterfield
|
|
MO
|
|
2000
|
|
117,036
|
|
117,036
|
|
100.0
|
%
|
|
25.93
|
|
121 South 8th Street
|
|
Minneapolis
|
|
MN
|
|
1974
|
|
293,460
|
|
234,651
|
|
80.0
|
%
|
|
24.35
|
|
Plaza Seven
|
|
Minneapolis
|
|
MN
|
|
1987
|
|
326,757
|
|
285,259
|
|
87.3
|
%
|
|
35.35
|
|
Midwest total
|
|
|
|
|
|
|
|
1,549,001
|
|
1,413,879
|
|
91.3
|
%
|
|
29.41
|
|
One Overton Park
|
|
Atlanta
|
|
GA
|
|
2002
|
|
387,267
|
|
297,886
|
|
76.9
|
%
|
|
21.98
|
|
Park Ten
|
|
Houston
|
|
TX
|
|
1999
|
|
157,460
|
|
140,879
|
|
89.5
|
%
|
|
28.60
|
|
Addison Circle
|
|
Addison
|
|
TX
|
|
1999
|
|
289,302
|
|
217,179
|
|
75.1
|
%
|
|
31.36
|
|
Collins Crossing
|
|
Richardson
|
|
TX
|
|
1999
|
|
300,887
|
|
299,172
|
|
99.4
|
%
|
|
25.61
|
|
Eldridge Green
|
|
Houston
|
|
TX
|
|
1999
|
|
248,399
|
|
248,399
|
|
100.0
|
%
|
|
30.27
|
|
Park Ten Phase II
|
|
Houston
|
|
TX
|
|
2006
|
|
156,746
|
|
44,704
|
|
28.5
|
%
|
|
23.25
|
|
Liberty Plaza
|
|
Addison
|
|
TX
|
|
1985
|
|
216,851
|
|
170,575
|
|
78.7
|
%
|
|
22.52
|
|
Legacy Tennyson Center
|
|
Plano
|
|
TX
|
|
1999/2008
|
|
202,049
|
|
174,712
|
|
86.5
|
%
|
|
22.96
|
|
One Legacy Circle
|
|
Plano
|
|
TX
|
|
2008
|
|
214,110
|
|
214,110
|
|
100.0
|
%
|
|
38.13
|
|
The information presented below provides the weighted average GAAP rent per square foot for the three months ended March 31, 2019 for our properties and weighted occupancy square feet and percentages. GAAP rent includes the impact of tenant concessions and reimbursements. This table does not include information about properties held by our investments in non-consolidated REITs or those to which we have provided Sponsored REIT Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupied
|
|
Weighted
|
|
|
|
|
|
|
|
Year Built
|
|
|
|
Weighted
|
|
Percentage as of
|
|
Average
|
|
|
|
|
|
|
|
or
|
|
Net Rentable
|
|
Occupied
|
|
March 31,
|
|
Rent per Occupied
|
|
Property Name
|
|
City
|
|
State
|
|
Renovated
|
|
Square Feet
|
|
Sq. Ft.
|
|
2019 (a)
|
|
Square Feet (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Ravinia Drive
|
|
Atlanta
|
|
GA
|
|
1985
|
|
386,602
|
|
350,493
|
|
90.7
|
%
|
$
|
25.78
|
|
Two Ravinia Drive
|
|
Atlanta
|
|
GA
|
|
1987
|
|
411,047
|
|
309,888
|
|
75.4
|
%
|
|
27.07
|
|
Westchase I & II
|
|
Houston
|
|
TX
|
|
1983/2008
|
|
629,025
|
|
511,523
|
|
81.3
|
%
|
|
28.90
|
|
Pershing Park Plaza
|
|
Atlanta
|
|
GA
|
|
1989
|
|
160,145
|
|
156,013
|
|
97.4
|
%
|
|
36.40
|
|
999 Peachtree
|
|
Atlanta
|
|
GA
|
|
1987
|
|
621,946
|
|
526,726
|
|
84.7
|
%
|
|
31.09
|
|
South Total
|
|
|
|
|
|
|
|
4,381,836
|
|
3,662,259
|
|
83.6
|
%
|
|
28.37
|
|
380 Interlocken
|
|
Broomfield
|
|
CO
|
|
2000
|
|
240,358
|
|
219,855
|
|
91.5
|
%
|
|
29.85
|
|
1999 Broadway
|
|
Denver
|
|
CO
|
|
1986
|
|
677,378
|
|
489,880
|
|
72.3
|
%
|
|
32.55
|
|
1001 17th Street
|
|
Denver
|
|
CO
|
|
1977/2006
|
|
655,413
|
|
630,376
|
|
96.2
|
%
|
|
35.17
|
|
600 17th Street
|
|
Denver
|
|
CO
|
|
1982
|
|
608,733
|
|
519,858
|
|
85.4
|
%
|
|
33.03
|
|
Greenwood Plaza
|
|
Englewood
|
|
CO
|
|
2000
|
|
196,236
|
|
196,236
|
|
100.0
|
%
|
|
26.58
|
|
390 Interlocken
|
|
Broomfield
|
|
CO
|
|
2002
|
|
241,512
|
|
237,141
|
|
98.2
|
%
|
|
32.69
|
|
West Total
|
|
|
|
|
|
|
|
2,619,630
|
|
2,293,346
|
|
87.5
|
%
|
|
32.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Properties
|
|
|
|
|
|
|
|
9,495,118
|
|
8,180,827
|
|
86.2
|
%
|
|
29.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopment Properties (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest Park
|
|
Charlotte
|
|
NC
|
|
1999
|
|
62,212
|
|
—
|
|
—
|
%
|
|
—
|
|
Blue Lagoon Drive
|
|
Miami
|
|
FL
|
|
2002
|
|
212,619
|
|
—
|
|
—
|
%
|
|
—
|
|
801 Marquette Ave
|
|
Minneapolis
|
|
MN
|
|
1923/2017
|
|
129,821
|
|
20,538
|
|
15.8
|
%
|
|
16.45
|
|
Total Redevelopment Properties
|
|
|
|
|
|
|
|
404,652
|
|
20,538
|
|
5.1
|
%
|
|
16.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
|
|
|
|
|
|
9,899,770
|
|
8,201,365
|
|
82.8
|
%
|
$
|
29.60
|
|
|
(a)
|
|
Based on weighted occupied square feet for the three months ended March 31, 2019, including month-to-month tenants, divided by the Property’s net rentable square footage.
|
|
(b)
|
|
Represents annualized GAAP rental revenue for the three months ended March 31, 2019, per weighted occupied square foot.
|
|
(c)
|
|
Redevelopment Properties include properties in the process of being redeveloped, or are completed but not yet stabilized.
|
Liquidity and Capital Resources
Cash, restricted cash and cash equivalents were $8.8 million and $11.2 million at March 31, 2019 and December 31, 2018, respectively. The decrease of $2.3 million is attributable to $9.4 million provided by operating activities, less $17.0 million used by investing activities plus $5.3 million provided by financing activities. Management believes that existing cash, cash anticipated to be generated internally by operations and our existing debt financing will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our real estate properties.
Operating Activities
Cash provided by operating activities for the three months ended March 31, 2019 of $9.4 million is primarily attributable to a net loss of $1.2 million plus the add-back of $22.6 million of non-cash expenses and an increase in prepaid and other assets of $1.5 million. These amounts were partially offset by a decrease to accounts payable and accrued expenses and accrued compensation of $8.1 million, an increase in payments of deferred leasing commissions of $4.2 million, an increase in lease acquisition costs of $0.7 million and a decrease tenant rent recivables of $0.5 million.
Investing Activities
Cash used by investing activities for the three months ended March 31, 2019 of $17.0 million is primarily attributable to the purchases of other real estate assets and office equipment investments of approximately $15.2 million and an investment in related party mortgage loan receivable of $2.4 million. These uses were partially offset by repayments received from one related party mortgage receivable of $0.3 million and proceeds received from a liquidating trust of $0.3 million.
Financing Activities
Cash provided by financing activities for the three months ended March 31, 2019 of $5.3 million is primarily attributable to net borrowings on the BAML Revolver (as defined below) of $15.0 million and was partially offset by distributions paid to stockholders of $9.7 million.
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 a LIBOR-based rate depending on the Company’s credit rating (125.0 basis points over the LIBOR-based rate at March 31, 2019) 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 March 31, 2019).
Although the interest rate on the JPM Term Loan is variable under the JPM Credit Agreement, the Company fixed the LIBOR-based rate on a portion of the JPM Term Loan by entering into interest rate swap transactions. On March 7, 2019, the Company entered into ISDA Master Agreements with various financial institutions to hedge a $100 million portion of the future LIBOR-based rate risk under the JPM Credit Agreement. Effective March 29, 2019, the Company fixed the LIBOR-based rate at 2.44% per annum on a $100 million portion of the JPM Term Loan until November 30, 2021. Accordingly, based upon the Company’s credit rating, as of March 31, 2019, the effective interest rate on a $100 million portion of the JPM Term Loan was 3.69% per annum.
Based upon the Company’s credit rating, as of March 31, 2019, the effective interest rate on the unhedged $50 million portion of the JPM Term Loan was 3.75% per annum. The weighted average interest rate on the unhedged $50 million portion of the JPM Term Loan during the three months ended March 31, 2019 was approximately 3.79% per annum. The weighted average interest rate on the JPM Term Loan during the year ended December 31, 2018 was approximately 3.33% 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 become immediately due and payable. The Company was in compliance with the JPM Term Loan financial covenants as of March 31, 2019.
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 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 March 31, 2019) 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 March 31, 2019).
Although the interest rate on the BMO Term Loan is variable under the BMO Credit Agreement, the Company fixed the base LIBOR interest rate by entering into interest rate swap transactions. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum until August 26, 2020. On February 20, 2019, the Company entered into ISDA Master Agreements with a group of banks that fixed the base LIBOR interest rate on the BMO Term Loan at 2.39% per annum for the period beginning on August 26, 2020 and ending January 31, 2024. Accordingly, based upon the Company’s credit rating, as of March 31, 2019, 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 the 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 March 31, 2019.
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 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
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·
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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.
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·
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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.
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·
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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.
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As of March 31, 2019, there were borrowings of $40 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 March 31, 2019) or (ii) a margin over the base rate depending on the Company’s credit rating (0.20% over the base rate at March 31, 2019). 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 March 31, 2019).
Based upon the Company’s credit rating, as of March 31, 2019 the interest rate on the BAML Revolver was 3.69% per annum. The weighted average interest rate on all amounts outstanding on the BAML Revolver during the three months ended March 31, 2019 was approximately 3.69% per annum. As of December 31, 2018, there were borrowings of $25 million outstanding under the BAML Revolver at an interest rate of 3.63% per annum.
BAML Term Loan Highlights
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·
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The BAML Term Loan is for $400 million.
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·
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The BAML Term Loan matures on January 12, 2023.
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·
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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.
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·
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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.
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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 March 31, 2019) or (ii) a margin over the base rate depending on the Company’s credit rating (0.35% over the base rate at March 31, 2019).
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 March 31, 2019, the effective interest rate on the BAML Term Loan was 2.47% per annum.
BAML Credit Facility General Information
The BAML Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and transactions with affiliates. The BAML Credit Facility also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, and minimum unsecured interest coverage. The BAML Credit Facility provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the BAML Credit Facility). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the BAML Credit Facility immediately due and payable, terminate the lenders’ commitments to make loans under the BAML Credit Facility, and enforce any and all rights of the lenders or administrative agent under the BAML Credit Facility and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable. The Company was in compliance with the BAML Credit Facility financial covenants as of March 31, 2019.
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.
Equity Securities
As of March 31, 2019, we had an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission relating to the offer and sale, from time to time, of an indeterminate amount of our debt securities, common stock, preferred stock or depository shares. From time to time, we expect to issue debt securities, common stock, preferred stock or depository shares under our existing automatic shelf registration statements or a different registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.
Contingencies
From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage. As of March 31, 2019, we were committed to fund up to $79.5 million to three Sponsored REITs under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes, of which $72.8 million has been drawn and is outstanding. We anticipate that advances made under these facilities will be repaid at their maturity date or earlier from refinancing, long term financings of the underlying properties, cash flows from the underlying properties or another other capital event.
We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
We intend to draw on the BAML Credit Facility in the future for a variety of corporate purposes, including the acquisition of properties that we acquire directly for our portfolio and for Sponsored REIT Loans as described below.
Loans to Sponsored REITs
Sponsored REIT Loans
From time to time we may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes. We anticipate that 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 two to three years. Except for two mortgage loans which bear interest at a fixed rate, advances under each Sponsored REIT Loan bear
interest at a rate equal to the 30-day LIBOR rate plus an agreed upon amount of basis points and advances also require a 50 basis point draw fee.
Our Sponsored REIT Loans subject us to credit risk. However, we believe that our position as asset manager of each of the Sponsored REITs helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REITs. Before making a Sponsored REIT Loan, we consider a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the applicable Sponsored REIT and local and national market conditions. These factors are subject to change and we do not apply a formula or assign relative weights to the factors. Instead, we make a subjective determination after considering such factors collectively.
Additional information about our Sponsored REIT Loans outstanding as of March 31, 2019, including a summary table of our Sponsored REIT Loans, is incorporated herein by reference to Part I, Item 1, Note 2, “Related Party Transactions and Investments in Non-Consolidated Entities, Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements included in this report.
Other Consideration
s
We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties. For the three months ended March 31, 2019 and 2018, respectively, the rental income exceeded the expenses for each individual property, with the exception of one property located in Houston, Texas and one property located in Minneapolis, Minnesota for each of the three months ended March 31, 2019 and 2018, respectively.
Our property located at 801 Marquette Avenue in Minneapolis, Minnesota (“801 Marquette Avenue”) had approximately 170,000 square feet of rentable space and became vacant in January 2016. On June 30, 2016, we commenced a redevelopment plan for the property and substantially completed the redevelopment in the second quarter of 2017. Redevelopment of 801 Marquette Avenue resulted in approximately 129,800 of net rentable square feet for the property. As of March 31, 2019, we have signed leases for 48,000 square feet, or 37% of rentable square feet at the property including two tenants that now occupy 20,500 square feet, or 15.8% of rentable square feet at the property. As a result, we had rental income of $84,000 and operating expenses of $286,000 during the three months ended March 31, 2019; and we had no rental income and operating expenses of $37,000 during the three months ended March 31, 2018.
The property located in Houston, Texas has approximately 157,000 square feet of rentable space and became substantially vacant on April 30, 2017 when two tenants vacated 155,000 square feet of space. The property has signed leases for approximately 103,000 square feet, or 65.5% of the square feet of the property and is moving tenants in. For the three months ended March 31, 2019, we had rental income of $262,000 and operating expenses of $375,000. For the three months ended March 31, 2018, we had rental income of $2,000 and operating expenses of $370,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Rate Risk
We are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We use interest rate derivative instruments to manage exposure to interest rate changes. As of March 31, 2019 and December 31, 2018, if market rates on our outstanding borrowings under the BAML Revolver and the floating rate portion of the JPM Term Loan increased by 10% at maturity, or approximately 37 and 38 basis points, respectively, over the current variable rate, the increase in interest expense would decrease future earnings and cash flows by $0.3 million and $0.7 million annually, respectively. Based upon our credit rating, the interest rate on the BAML Revolver as of March 31, 2019 was LIBOR plus 120 basis points, or 3.69% per annum. Based upon our credit rating, the interest rate on the $50 million portion of the JPM Term Loan that is not subject to interest rate swap transactions as of March 31, 2019 was the LIBOR-based rate plus 125 basis points, or 3.75% per annum. We do not believe that the interest rate risk on the BAML Revolver and the JPM Term Loan is material as of March 31, 2019.
Although the interest rates on the BMO Term Loan, the BAML Term Loan and the JPM Term Loan are variable, the Company fixed the base LIBOR interest rates on the BMO Term Loan and the BAML Term Loan, and the LIBOR-based rate
on a $100 million portion of the JPM Term Loan, by entering into interest rate swap agreements. 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 “2013 BMO Interest Rate Swap”). On March 7, 2019, the Company fixed the interest rate for the period beginning on March 29, 2019 and ending on November 30, 2021 for the notional value of $100 million on the JPM Term Loan (the “2019 JPM Interest Rate Swap”). On February 20, 2019, the Company 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”). Accordingly, based upon our credit rating, as of March 31, 2019, the interest rate on the BAML Term Loan was 2.47% per annum, the interest rate on the BMO Term Loan was 3.57% per annum, and the interest rate on $100 million of the JPM Term Loan was 3.69% per annum. The fair value of these interest rate swaps are affected by changes in market interest rates. We believe that we have mitigated interest rate risk with respect to the BAML Term Loan through the 2017 Interest Rate Swap from September 27, 2017 until September 27, 2021. We believe that we have mitigated interest rate risk with respect to the BMO Term Loan through the 2013 BMO Interest Rate Swap and the 2019 BMO Interest Rate Swap until January 31, 2024. We believe that we have mitigated the interest rate risk on a $100 million portion of the JPM Term Loan until November 30, 2021 with the 2019 JPM Interest Rate Swap. These interest rate swaps were our only derivative instruments as of March 31, 2019.
The table below lists our derivative instruments, which are hedging variable cash flows related to interest on our BAML Term Loan, BMO Term Loan and a portion of the JPM Term Loan as of March 31, 2019 (in thousands):
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Notional
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Strike
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Effective
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Expiration
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Fair
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(in thousands)
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Value
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Rate
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|
Date
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|
Date
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Value
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
2017 Interest Rate Swap
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|
$
|
400,000
|
|
1.12
|
%
|
Sep-17
|
|
Sep-21
|
|
$
|
10,469
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|
2013 BMO Interest Rate Swap
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|
$
|
220,000
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|
2.32
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%
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Aug-13
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|
Aug-20
|
|
$
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(1,888)
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|
2019 JPM Interest Rate Swap
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$
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100,000
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|
2.44
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%
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Mar-19
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Nov-21
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$
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(604)
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2019 BMO Interest Rate Swap (1)
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$
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220,000
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2.39
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%
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Aug-20
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Jan-24
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$
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(4)
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(1) The Notional Value will decrease to $165 million on November 30, 2021.
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Our BMO Term Loan, BAML Term Loan and JPM Term Loan hedging transactions used derivative instruments that involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in either or both of the contracts. We require our derivatives contracts to be with counterparties that have investment grade ratings. As a result, we do not anticipate that any counterparty will fail to meet its obligations. However, there can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
The Company’s derivatives are recorded at fair value in other liabilities in the consolidated balance sheets, the effective portion of the derivatives’ fair value is recorded to other comprehensive income in the consolidated statements of other comprehensive income (loss) and the ineffective portion of the derivatives’ fair value is recognized directly into earnings as Other in the consolidated statements of income.
The following table presents, as of March 31, 2019, our contractual variable rate borrowings under our BAML Revolver, which matures on January 12, 2022, under our JPM Term Loan, which matures on November 30, 2021, under our BAML Term Loan, which matures on January 12, 2023, under our BMO Term Loan, for which tranche A matures on November 30, 2021 and tranche B matures on January 31, 2024, under our Series A Notes, which mature on December 20, 2024, and under our Series B Notes, which mature on December 20, 2027. Under the BAML Revolver, we have the right to
extend the initial maturity date with two additional six month extensions, or until January 12, 2023, upon payment of a fee and satisfaction of certain customary conditions.
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Payment due by period
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(in thousands)
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Total
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2019
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2020
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2021
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2022
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2023
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Thereafter
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BAML Revolver
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$
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40,000
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$
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—
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|
$
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—
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|
$
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—
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$
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40,000
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|
$
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—
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|
$
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—
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|
JPM Term Loan
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150,000
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|
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—
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—
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150,000
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|
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—
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|
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—
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|
|
—
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|
BAML Term Loan
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400,000
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|
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—
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|
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—
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|
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—
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|
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—
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|
|
400,000
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|
|
—
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|
BMO Term Loan Tranche A
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55,000
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|
|
—
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|
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—
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|
|
55,000
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|
|
—
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|
|
—
|
|
|
—
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|
BMO Term Loan Tranche B
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|
|
165,000
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|
|
—
|
|
|
—
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|
|
—
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|
|
—
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|
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—
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|
|
165,000
|
|
Series A Notes
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|
|
116,000
|
|
|
—
|
|
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
116,000
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|
Series B Notes
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|
|
84,000
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|
|
—
|
|
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—
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|
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—
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|
|
—
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|
|
—
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|
|
84,000
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|
Total
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$
|
1,010,000
|
|
$
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—
|
|
$
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—
|
|
$
|
205,000
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|
$
|
40,000
|
|
$
|
400,000
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|
$
|
365,000
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|
Item 4. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.