KBS REAL ESTATE INVESTMENT TRUST III, INC. The following discussion and analysis should be read in conjunction with the accompanying financial statements ofKBS Real Estate Investment Trust III, Inc. and the notes thereto. As used herein, the terms "we," "our" and "us" refer toKBS Real Estate Investment Trust III, Inc. , aMaryland corporation, and, as required by context, KBS Limited Partnership III, aDelaware limited partnership, which we refer to as the "Operating Partnership," and to their subsidiaries. Forward-Looking Statements Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations ofKBS Real Estate Investment Trust III, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements: •The COVID-19 pandemic, together with the resulting measures imposed to help control the spread of the virus, has had a negative impact on the economy and business activity globally. The extent to which the COVID-19 pandemic impacts our operations and those of our tenants and our investment in Prime US REIT (the "SREIT") depends on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. •We are dependent onKBS Capital Advisors LLC ("KBS Capital Advisors "), our advisor, to conduct our operations. •All of our executive officers, our affiliated director and other key professionals are also officers, affiliated directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor and/or other KBS-affiliated entities. As a result, these individuals, our advisor and its affiliates face conflicts of interest, including conflicts created by our advisor's and its affiliates' compensation arrangements with us and other KBS programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in action or inaction that is not in the best interests of our stockholders. •Our advisor and its affiliates currently receive fees in connection with transactions involving the purchase or origination, management and disposition of our investments. Acquisition and asset management fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. We may also pay significant fees during our listing/liquidation stage. Although most of the fees payable during our listing/liquidation stage are contingent on our stockholders first enjoying agreed-upon investment returns, the investment return thresholds may be reduced subject to approval by our conflicts committee and our charter limitations. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase the risk of loss to our stockholders. Our conflicts committee and our board of directors continue to evaluate various alternatives available to us, including whether or not to convert to a perpetual-life net asset value "NAV" REIT. If we convert to an NAV REIT, we would implement a revised advisory fee structure. •We cannot guarantee that we will pay distributions. We have and may in the future fund distributions from sources other than cash flow from operations, including, without limitation, the sale of assets, borrowings, return of capital or offering proceeds. We have no limits on the amounts we may pay from such sources. •We may incur debt until our total liabilities would exceed 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), and we may exceed this limit with the approval of the conflicts committee of our board of directors. High debt levels could limit the amount of cash we have available to distribute and could result in a decline in the value of an investment in us. 33 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) •We depend on tenants for the revenue generated by our real estate investments. Revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases), rent deferrals or abatements, tenants becoming unable to pay their rent and/or lower rental rates, making it more difficult for us to meet our debt service obligations and limiting our ability to pay distributions to our stockholders. SinceMarch 2020 , we have granted rent relief to a number of tenants as a result of the pandemic, and these tenants or additional tenants may request rent relief in future periods or become unable to pay rent. •Our significant investment in the equity securities of the SREIT, a tradedSingapore real estate investment trust, is subject to the risks associated with real estate investments as well as the risks inherent in investing in traded securities, including, in this instance, risks related to the quantity of units held by us relative to the trading volume of the units. The COVID-19 pandemic has caused significant negative pressure in the financial markets. SinceMarch 2020 , the trading price of the common units of the SREIT has experienced substantial volatility; however, the units have recovered a substantial portion of their losses since the low inMarch 2020 . •Because investment opportunities that are suitable for us may also be suitable for other KBS programs or investors, our advisor and its affiliates face conflicts of interest relating to the purchase of investments. •We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes. If such funds are not available, we may have to use a greater proportion of our cash flow from operations to meet cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program. •Continued disruptions in the financial markets, changes in the demand for office properties and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to stockholders. •Our conflicts committee and our board of directors continue to evaluate various alternatives available to us. There is no assurance that any alternative being considered by our board of directors will provide a return to stockholders that equals or exceeds the Company's estimated value per share as ofMay 13, 2021 , and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in this regard. We also can provide no assurances as to whether or when any alternative being considered by our board of directors will be consummated. •Our charter does not require us to liquidate our assets and dissolve by a specified date, nor does our charter require our directors to list our shares for trading by a specified date. No public market currently exists for our shares of common stock. There are limits on the ownership and transferability of our shares. Our shares cannot be readily sold and, if our stockholders are able to sell their shares, they would likely have to sell them at a substantial discount. •InDecember 2019 , the board of directors determined to temporarily suspend Ordinary Redemptions (defined below) under the share redemption program, and Ordinary Redemptions remained suspended throughJune 30, 2021 . Ordinary Redemptions are all redemptions other than Special Redemptions. Redemptions sought in connection with a stockholder's death, "Qualifying Disability" or "Determination of Incompetence" are "Special Redemptions." OnJune 3, 2021 , we announced that, in connection with the approval of a self-tender offer, our board of directors had approved a temporary suspension of all redemptions under the share redemption program, including Special Redemptions. As such, Special Redemptions under the share redemption program were suspended for theJune 30, 2021 redemption date. Subsequent toJune 30, 2021 , our board of directors approved an amended and restated share redemption program (the "Amended Share Redemption Program") and Ordinary Redemptions and Special Redemptions under the Amended Share Redemption Program resumed effective for theJuly 30, 2021 redemption date. See "-Subsequent Events - Amended and Restated Share Redemption Program." As ofAugust 1, 2021 , we had approximately 8.4 million shares available for redemptions for the remainder of 2021 under the Amended Share Redemption Program, including the reserve for Special Redemptions. We cannot predict future redemption demand with any certainty. Moreover, our share redemption program includes numerous restrictions that limit our stockholders' ability to sell their shares to us. If future redemption requests exceed the amount of funding available under our share redemption program, the number of rejected redemption requests will increase over time. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2020 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period endedMarch 31, 2021 , each as filed with theSecurities and Exchange Commission (the "SEC"). 34 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Overview We were formed onDecember 22, 2009 as aMaryland corporation that elected to be taxed as a real estate investment trust ("REIT") beginning with the taxable year endedDecember 31, 2011 and we intend to continue to operate in such a manner. We conduct our business primarily through ourOperating Partnership , of which we are the sole general partner. Subject to certain restrictions and limitations, our business is managed by our advisor pursuant to an advisory agreement and our advisor conducts our operations and manages our portfolio of real estate investments. Our advisor owns 20,857 shares of our common stock. We have no paid employees. We have invested in a diverse portfolio of real estate investments. As ofJune 30, 2021 , we owned 17 office properties, one mixed-use office/retail property and an investment in the equity securities of the SREIT, which is accounted for as an investment in an unconsolidated entity under the equity method of accounting. OnFebruary 4, 2010 , we filed a registration statement on Form S-11 with theSEC to offer a minimum of 250,000 shares and a maximum of up to 280,000,000 shares, or up to$2,760,000,000 of shares, of common stock for sale to the public, of which up to 200,000,000 shares, or up to$2,000,000,000 of shares, were registered in our primary offering and up to 80,000,000 shares, or up to$760,000,000 of shares, were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering onMay 29, 2015 and terminated the primary offering onJuly 28, 2015 . We sold 169,006,162 shares of common stock in our now-terminated primary initial public offering for gross offering proceeds of$1.7 billion . As ofJune 30, 2021 , we had also sold 39,247,713 shares of common stock under our dividend reinvestment plan for gross offering proceeds of$405.6 million . Also as ofJune 30, 2021 , we had redeemed or repurchased 29,997,549 shares for$328.4 million . Additionally, onOctober 3, 2014 , we issued 258,462 shares of common stock, for$2.4 million , in private transactions exempt from the registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933. We continue to offer shares of common stock under our dividend reinvestment plan. In some states, we will need to renew the registration statement annually or file a new registration statement to continue the dividend reinvestment plan offering. We may terminate our dividend reinvestment plan offering at any time. Our conflicts committee and our board of directors continue to evaluate various alternatives available to us, including whether or not to convert to an "NAV REIT." Our conflicts committee and board of directors remain focused on providing stable distributions and enhanced liquidity to stockholders. In the near term, while our conflicts committee and board of directors explore alternatives available to us, we may market certain of our assets for sale. Based on our assessment of alternatives available to us, market conditions and our further assessment of our capital raising prospects, our conflicts committee and board of directors may conclude that it would be in the best interest of our stockholders to (i) convert to an "NAV REIT," (ii) continue to operate as a going concern under our current business plan, or (iii) adopt a plan of liquidation that would involve the sale of our remaining assets (in which event such plan would be presented to stockholders for approval). There is no assurance that any alternative being considered by our board of directors will provide a return to stockholders that equals or exceeds the Company's estimated value per share as ofMay 13, 2021 , and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in this regard. We also can provide no assurances as to whether or when any alternative being considered by our board of directors will be consummated. Section 5.11 of our charter requires that we seek stockholder approval of our liquidation if our shares of common stock are not listed on a national securities exchange bySeptember 30, 2020 , unless a majority of the conflicts committee of our board of directors, composed solely of all of our independent directors, determines that liquidation is not then in the best interest of our stockholders. Pursuant to our charter requirement, the conflicts committee assessed our portfolio of investments, and with consideration of the then current market conditions, including the uncertainty as a result of the COVID-19 pandemic and lack of liquidity in the marketplace, as well as our pursuit of conversion to a perpetual-life NAV REIT, onAugust 11, 2020 , our conflicts committee unanimously determined to postpone approval of our liquidation. Section 5.11 of our charter requires that the conflicts committee revisit the issue of liquidation at least annually. At our annual meeting of stockholders held onMay 7, 2020 , our stockholders approved the removal of Section 5.11 of our charter. As set forth in the proxy statement for our annual meeting of stockholders, implementation of this amendment to our charter and our conversion to an NAV REIT remain subject to further approval of our conflicts committee. 35 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Market Outlook - Real Estate and Real Estate Finance Markets Volatility in global financial markets and changing political environments can cause fluctuations in the performance of theU.S. commercial real estate markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Further, revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases), rent deferrals or abatements, tenants being unable to pay their rent and/or lower rental rates. To the extent there are increases in the cost of financing due to higher interest rates, this may cause difficulty in refinancing debt obligations at terms as favorable as the terms of existing indebtedness. Further, increases in interest rates would increase the amount of our debt payments on our variable rate debt to the extent the interest rates on such debt are not fixed through interest rate swap agreements or limited by interest rate caps. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure. Most recently, the COVID-19 pandemic has had a negative impact on the real estate market as discussed below. COVID-19 Pandemic and Portfolio Outlook As ofJune 30, 2021 , the novel coronavirus, or COVID-19, pandemic is ongoing. During 2020, the COVID-19 pandemic created disruption in theU.S. and global economies, adversely impacting many industries, including theU.S. office real estate industry and the industries of our tenants, directly or indirectly. In 2021, the global economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. Nonetheless, the recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. The outbreak of COVID-19 and its impact on the current financial, economic, capital markets and real estate market environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. Although a recovery is partially underway, it continues to be gradual, uneven and characterized by meaningful dispersion across sectors and regions, and could be hindered by persistent or resurgent infection rates. The most recent round ofU.S. fiscal stimulus could provide meaningful support, along with continued accommodative monetary policy and wider distribution of vaccines. Issues with respect to the distribution and acceptance of vaccines or the spread of new variants of the virus could adversely impact the recovery. Overall, there remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact COVID-19 may have on our business. During the year endedDecember 31, 2020 and the six months endedJune 30, 2021 , we did not experience significant disruptions in our operations from the COVID-19 pandemic. Many of our tenants have suffered reductions in revenue sinceMarch 2020 . Rent collections for the quarter endedJune 30, 2021 were approximately 98%. We have granted a number of lease concessions related to the effects of the COVID-19 pandemic but these lease concessions did not have a material impact to our consolidated balance sheet as ofJune 30, 2021 or consolidated statements of operations for the three and six months endedJune 30, 2021 . As ofJune 30, 2021 , we had entered into lease amendments related to the effects of the COVID-19 pandemic, granting$4.0 million of rent deferrals for the period fromMarch 2020 throughAugust 2021 and granting$2.4 million in rental abatements. As ofJune 30, 2021 , 78 tenants were granted rental deferrals, rental abatements and/or rent restructures, of which 41 of these tenants have begun to pay rent in accordance with their lease agreements subsequent to the deferral and/or abatement period, four of these tenants early terminated their leases and six of these tenant leases were modified at lower rental rates and/or based on a percentage of the tenant's gross receipts. As ofJune 30, 2021 , seven of the 78 tenants continue to be in the rental deferral and/or rental abatement periods as granted in accordance with their agreements. ThroughJune 30, 2021 ,$1.8 million of rent previously deferred has been billed to the tenants, of which$1.6 million was collected. 36 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) As ofJune 30, 2021 , we had$2.3 million of receivables for lease payments that had been deferred as lease concessions related to the effects of the COVID-19 pandemic, of which$1.7 million was reserved for payments not probable of collection, which were included in rent and other receivables, net on the accompanying consolidated balance sheet. For the three and six months endedJune 30, 2021 , we recorded$0.2 million and$0.6 million , respectively, of rental abatements granted to tenants as a result of the COVID-19 pandemic. For the three and six months endedJune 30, 2020 , we recorded$0.6 million of rental abatements granted to tenants as a result of the COVID-19 pandemic. Subsequent toJune 30, 2021 , we have not seen a material impact on our rent collections. We will continue to evaluate any additional short-term rent relief requests from tenants on an individual basis. Not all tenant requests will ultimately result in modified agreements, nor are we forgoing our contractual rights under our lease agreements. In most cases, it is in our best interest to help our tenants remain in business and reopen when restrictions are lifted. Current collections and rent relief requests to date may not be indicative of collections or requests in any future period. During the six months endedJune 30, 2020 , we recognized an impairment charge of$19.9 million for an office/retail property due to the continued deterioration of retail demand at the property which was further impacted by the COVID-19 pandemic. We have also made a significant investment in the common units of the SREIT. Since earlyMarch 2020 , the trading price of the common units of the SREIT has experienced substantial volatility; however, the units have recovered a substantial portion of their losses since the low inMarch 2020 . As ofAugust 11, 2021 , the aggregate value of our investment in the units of the SREIT was$243.2 million , which was based solely on the closing price of the units on theSingapore Exchange Securities Traded Limited (the "SGX-ST") of$0.84 per unit as ofAugust 11, 2021 and did not take into account any potential discount for the holding period risk due to the quantity of units we hold. Should we experience significant reductions in rental revenue in the future related to the impact of the COVID-19 pandemic, this may limit our ability to draw on our revolving credit facilities or exercise our extension options due to covenants described in our loan agreements. However, we believe that our cash flow from operations, cash on hand, proceeds from our dividend reinvestment plan, proceeds from asset sales and current and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future. Our business, like all businesses, is being impacted by the uncertainty regarding the COVID-19 pandemic, the effectiveness of policies introduced to neutralize the disease, and the impact of those policies on economic activity. While there are weakening macroeconomic conditions and some negative impact to our tenants, we believe with our diverse portfolio of core real estate properties with tenants across various industries, and with creditworthy tenants and limited retail exposure in our real estate portfolio, we are positioned to navigate this unprecedented period. Liquidity and Capital Resources Our principal demands for funds during the short and long-term are and will be for operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; and payments of distributions to stockholders. Our primary sources of capital for meeting our cash requirements are as follows: •Cash flow generated by our real estate and real estate-related investments; •Debt financings (including amounts currently available under existing loan facilities); •Proceeds from the sale of our real estate properties and real estate-related investments; and •Proceeds from common stock issued under our dividend reinvestment plan. Our real estate properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate properties is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectability of rent and operating recoveries from our tenants and how well we manage our expenditures. Our investment in the SREIT units generates cash flow in the form of dividend income. As ofJune 30, 2021 , our investment in the SREIT units had a carrying value of$227.0 million . 37 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) As ofJune 30, 2021 , we had mortgage debt obligations in the aggregate principal amount of$1.4 billion , with a weighted-average remaining term of 1.7 years. The maturity dates of certain loans may be extended beyond their current maturity date, subject to certain terms and conditions contained in the loan documents. As ofJune 30, 2021 , we had$472.9 million of notes payable related to the Modified Portfolio Loan Facility maturing during the 12 months endingJune 30, 2022 , which could be extended beyond the next 12 months, subject to certain conditions set forth in the loan agreements. We plan to exercise our extension options available under our loan agreements or pay down or refinance the related notes payable prior to their maturity dates. As ofJune 30, 2021 , our debt obligations consisted of$123.0 million of fixed rate notes payable and$1.3 billion of variable rate notes payable. As ofJune 30, 2021 , the interest rates on$1.1 billion of our variable rate notes payable were effectively fixed through interest rate swap agreements. As ofJune 30, 2021 , we had$406.1 million of revolving debt available for future disbursement under various loans, subject to certain conditions set forth in the loan agreements. In order to provide stockholders with additional liquidity that is in excess of that permitted under our share redemption program, onJune 4, 2021 , we commenced a self-tender offer (the "Self-Tender") for up to 33,849,130 shares of our common stock at a price of$10.34 per share, or approximately$350.0 million of shares. OnJuly 12, 2021 , we accepted for purchase 26,377,990 shares properly tendered and not properly withdrawn at a purchase price of$10.34 per share, or approximately$272.7 million of shares, excluding fees and expenses relating to the tender offer. We funded the purchase of shares in the offer with approximately$100.0 million of available cash on hand and by drawing on our existing credit facilities in an aggregate amount of approximately$172.7 million . We paid cash distributions to our stockholders during the six months endedJune 30, 2021 using cash flow from operations from current and prior periods and proceeds from the sale of real estate. We believe that our cash flow from operations, cash on hand, proceeds from our dividend reinvestment plan, proceeds from asset sales and current and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future. Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four fiscal quarters endedJune 30, 2021 did not exceed the charter-imposed limitation. Cash Flows from Operating Activities During the six months endedJune 30, 2021 and 2020, net cash provided by operating activities was$44.0 million and$42.7 million , respectively. Net cash provided by operating activities was higher in 2021 primarily as a result of the timing of payments of operating expenses. Cash Flows from Investing Activities Net cash provided by investing activities was$64.7 million for the six months endedJune 30, 2021 and consisted of the following: •$98.0 million of net proceeds from the sale of Anchor Centre; offset by •$33.3 million used for improvements to real estate. Cash Flows from Financing Activities During the six months endedJune 30, 2021 , net cash used in financing activities was$46.8 million and primarily consisted of the following: •$38.3 million of net cash distributions, after giving effect to distributions reinvested by stockholders of$26.3 million ; •$6.1 million of cash used for redemptions of common stock; •$1.4 million used for interest rate swap settlements for off-market swap instruments; and •Payment of other organization and offering costs of$0.9 million related to our pursuit of conversion to an NAV REIT and the self-tender offer. 38 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) We expect that our debt financing and other liabilities will be between 45% and 65% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves). There is no limitation on the amount we may borrow for the purchase of any single asset. We limit our total liabilities to 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), meaning that our borrowings and other liabilities may exceed our maximum target leverage of 65% of the cost of our tangible assets without violating these borrowing restrictions. We may exceed the 75% limit only if a majority of the conflicts committee approves each borrowing in excess of this limitation and we disclose such borrowings to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt in excess of this limit. From time to time, our total liabilities could also be below 45% of the cost of our tangible assets due to the lack of availability of debt financing. As ofJune 30, 2021 , our borrowings and other liabilities were approximately 56% of both the cost (before deducting depreciation and other noncash reserves) and book value (before deducting depreciation) of our tangible assets. We also expect to use our capital resources to make certain payments to our advisor. We currently make payments to our advisor in connection with the acquisition of investments, the management of our investments and costs incurred by our advisor in providing services to us. We also pay fees to our advisor in connection with the disposition of investments. We reimburse our advisor and dealer manager for certain stockholder services. In addition, our advisor is entitled to an incentive fee upon achieving certain performance goals. Among the fees payable to our advisor is an asset management fee. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition expenses related thereto (but excludes acquisition fees paid or payable to our advisor). In the case of investments made through joint ventures, the asset management fee is determined based on our proportionate share of the underlying investment (but excluding acquisition fees paid to our advisor). With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination expenses related thereto but is exclusive of acquisition or origination fees paid or payable to our advisor) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination expenses related to the acquisition or funding of such investment (excluding acquisition or origination fees paid or payable to our advisor), as of the time of calculation. We currently do not pay asset management fees to our advisor on our investment in units of the SREIT. Pursuant to the advisory agreement, with respect to asset management fees accruing fromMarch 1, 2014 , our advisor agreed to defer, without interest, our obligation to pay asset management fees for any month in which our modified funds from operations ("MFFO") for such month, as such term is defined in the practice guideline issued by theInstitute for Portfolio Alternatives ("IPA") inNovember 2010 and interpreted by us, excluding asset management fees, does not exceed the amount of distributions declared by us for record dates of that month. We remain obligated to pay our advisor an asset management fee in any month in which our MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an "MFFO Surplus"); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the advisory agreement. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with the advisory agreement. However, notwithstanding the foregoing, any and all deferred asset management fees that are unpaid will become immediately due and payable at such time as our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) an 8% per year cumulative, noncompounded return on net invested capital (the "Stockholders' 8% Return") and (ii) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program. The Stockholders' 8% Return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to receive deferred asset management fees. 39 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) As ofJune 30, 2021 , we had accrued$9.6 million of asset management fees, of which$8.5 million was deferred as ofJune 30, 2021 , pursuant to the provision for deferral of asset management fees under the Advisory Agreement. The amount of asset management fees deferred, if any, will vary on a month-to-month basis and the total amount of asset management fees deferred as well as the timing of the deferrals and repayments are difficult to predict as they will depend on the amount of and terms of the debt we use to acquire assets, the level of operating cash flow generated by our real estate investments and other factors. In addition, deferrals and repayments may occur in the same period, and it is possible that there could be additional deferrals in the future. OnSeptember 27, 2020 , we and our advisor renewed the advisory agreement. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee. Participation Fee Liability and Potential Change in Fee Structure Pursuant to our advisory agreement currently in effect with our advisor, our advisor is due a subordinated participation in our net cash flows (the "Subordinated Participation in Net Cash Flows") upon meeting certain performance goals. After our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program, and (ii) an 8.0% per year cumulative, noncompounded return on such net invested capital, our advisor is entitled to receive 15.0% of our net cash flows, whether from continuing operations, net sale proceeds or otherwise. Net sales proceeds means the net cash proceeds realized by us after deduction of all expenses incurred in connection with a sale, including disposition fees paid to our advisor. The 8.0% per year cumulative, noncompounded return on net invested capital is calculated on a daily basis. In making this calculation, the net invested capital is reduced to the extent distributions in excess of a cumulative, noncompounded, annual return of 8.0% are paid (from whatever source), except to the extent such distributions would be required to supplement prior distributions paid in order to achieve a cumulative, noncompounded, annual return of 8.0% (invested capital is only reduced as described in this sentence; it is not reduced simply because a distribution constitutes a return of capital for federal income tax purposes). The 8.0% per year cumulative, noncompounded return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to participate in our net cash flows. In fact, if our advisor is entitled to participate in our net cash flows, the returns of our stockholders will differ, and some may be less than an 8.0% per year cumulative, noncompounded return. This fee is payable only if we are not listed on an exchange. OnJanuary 9, 2020 , we filed a definitive proxy statement with theSEC in connection with the annual meeting of stockholders to vote on, among other proposals, two proposals related to our pursuit of conversion to an NAV REIT. OnMay 7, 2020 at our annual meeting of stockholders, our stockholders approved the proposal to accelerate the payment of incentive compensation to our advisor, upon our conversion to an NAV REIT. If we convert to an NAV REIT, the proposed acceleration of the payment of incentive compensation to our advisor remains subject to further approval of the conflicts committee, after the proposed amount of the accelerated payment of the incentive fee has been determined. In connection with the determination of theMay 13, 2021 estimated value per share of our common stock, our advisor determined that there would be no liability related to the Subordinated Participation in Net Cash Flows at that time, based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties; however, changes to the fair values of assets and liabilities could have a material impact to the incentive fee calculation. 40 -------------------------------------------------------------------------------- Table of Contents PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Our conflicts committee and our board of directors continue to evaluate various alternatives available to us, including whether or not to convert to an "NAV REIT." Our conflicts committee and board of directors remain focused on providing stable distributions and enhanced liquidity to stockholders. In the near term, while our conflicts committee and board of directors explore alternatives available to us, we may market certain of our assets for sale. Based on our assessment of alternatives available to us, market conditions and our further assessment of our capital raising prospects, our conflicts committee and board of directors may conclude that it would be in the best interest of our stockholders to (i) convert to an "NAV REIT," (ii) continue to operate as a going concern under our current business plan, or (iii) adopt a plan of liquidation that would involve the sale of our remaining assets (in which event such plan would be presented to stockholders for approval). There is no assurance that any alternative being considered by our board of directors will provide a return to stockholders that equals or exceeds the Company's estimated value per share as ofMay 13, 2021 , and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in this regard. We also can provide no assurances as to whether or when any alternative being considered by our board of directors will be consummated. Contractual Obligations The following is a summary of our contractual obligations as ofJune 30, 2021 (in thousands):
Payments Due During the Years Ended
Total Remainder of 2021 2022-2023 2024-2025 Thereafter
Outstanding debt obligations (1) $ 1,396,745 $
472,950
48,879 12,778 34,775 1,326 -
Interest payments on interest rate
swaps (3) (4) 28,401 8,994 19,407 - -
_____________________
(1) Amounts include principal payments only based on maturity dates as of
June 30, 2021 ; subject to certain conditions, the maturity dates of certain
loans may be extended beyond what is shown above.
(2) Projected interest payments are based on the outstanding principal amounts,
maturity dates and interest rates in effect as of June 30, 2021 , consisting of
the contractual interest rate and using interest rate indices as of June 30,
2021 , where applicable.
(3) Projected interest payments on interest rate swaps are calculated based on
the notional amount, effective term of the swap contract, and fixed rate net of
the swapped floating rate in effect as of June 30, 2021 .
(4) We incurred interest expense of $23.5 million , excluding amortization of
deferred financing costs totaling $2.0 million and unrealized gains on
derivative instruments of $9.8 million during the six months ended June 30,
2021 .
Results of Operations
Overview
As of June 30, 2020 , we owned 18 office properties, one mixed-use office/retail
property and an investment in the equity securities of the SREIT, which is
accounted for as an investment in an unconsolidated entity under the equity
method of accounting. In addition, we had originated one real estate loan
receivable secured by a deed of trust in May 2020 . Subsequent to June 30, 2020 ,
we sold one office property and received the repayment on the real estate loan
receivable. As a result, as of June 30, 2021 , we owned 17 office properties, one
mixed-use office/retail property and an investment in the equity securities of
the SREIT. Therefore, the results of operations presented for the three and six
months ended June 30, 2021 and 2020 are not directly comparable.
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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Comparison of the three months ended June 30, 2021 versus the three months ended
June 30, 2020
The following table provides summary information about our results of operations
for the three months ended June 30, 2021 and 2020 (dollar amounts in thousands):
$ Change Due
to Properties
Held
Three Months Ended $ Changes Due to Throughout
June 30, Increase Dispositions and Loan Both Periods
2021 2020 (Decrease) Percentage Change Origination (1) (2)
Rental income $ 69,774 $ 70,608 $ (834) (1) % $ (2,986) $ 2,152
Interest income from real estate loan
receivable - 1,207 (1,207) (100) % (1,207) -
Other operating income 4,080 4,156 (76) (2) % (281) 205
Operating, maintenance and management 16,202 17,098 (896) (5) % (1,050) 154
Real estate taxes and insurance 14,000 14,809 (809) (5) % (485) (324)
Asset management fees to affiliate 4,944 5,219 (275) (5) % (277) 2
General and administrative expenses 1,880 1,519 361 24 % n/a n/a
Depreciation and amortization 27,920 27,358 562 2 % (1,194) 1,756
Interest expense 8,899 13,753 (4,854) (35) % (289) (4,565)
Other interest income 16 14 2 14 % n/a n/a
Equity in income (loss) of an
unconsolidated entity 63 (835) 898 (108) % - 898
Gain on sale of real estate, net - 50,938 (50,938) (100) % (50,938) -
Provision for credit loss - (680) 680 (100) % 680 -
_____________________
(1) Represents the dollar amount increase (decrease) for the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 related to a real
estate disposition and a real estate loan originated on or after April 1, 2020 .
(2) Represents the dollar amount increase (decrease) for the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 related to real
estate investments owned by us throughout both periods presented.
Rental income from our real estate properties decreased from $70.6 million for
the three months ended June 30, 2020 to $69.8 million for the three months ended
June 30, 2021 . The decrease in rental income was primarily due to the
disposition of Anchor Centre in January 2021 , partially offset by an increase in
rental income related to the commencement of a lease at Domain Gateway in
January 2021 . We expect rental income to decrease in future periods to the
extent we dispose of properties and to vary based on occupancy rates and rental
rates of our real estate investments and uncertainty and business disruptions or
recoveries as a result of the COVID-19 pandemic. See "Market Outlook - Real
Estate and Real Estate Finance Markets - COVID-19 Pandemic and Portfolio
Outlook" for a discussion on the impact of the COVID-19 pandemic on our
business.
Interest income from our real estate loan receivable, recognized using the
interest method, was $1.2 million for the three months ended June 30, 2020 . On
May 7, 2020 , in connection with the sale of Hardware Village , we, through an
indirect wholly owned subsidiary, provided seller financing and entered into a
promissory note with the buyer. The promissory note was paid off in full on
December 11, 2020 . We did not own any real estate loans receivable during the
three months ended June 30, 2021 .
Other operating income decreased slightly from $4.2 million during the three
months ended June 30, 2020 to $4.1 million for the three months ended June 30,
2021 . The decrease in other operating income was primarily due to the
disposition of Anchor Centre in January 2021 , partially offset by an increase in
tenant reimbursements for properties held throughout both periods. We expect
other operating income to vary in future periods based on occupancy rates and
parking rates at our real estate properties, and business disruptions or
recoveries as a result of the COVID-19 pandemic and to decrease to the extent we
dispose of properties.
Operating, maintenance and management costs decreased from $17.1 million for the
three months ended June 30, 2020 to $16.2 million for the three months ended
June 30, 2021 . The decrease in operating, maintenance and management costs was
primarily due to the dispositions of Hardware Village in May 2020 and Anchor
Centre in January 2021 . We expect operating, maintenance and management costs
to increase in future periods as a result of general inflation and as physical
occupancy increases as employees return to the office and to decrease to the
extent we dispose of properties.
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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Real estate taxes and insurance decreased slightly from $14.8 million for the
three months ended June 30, 2020 to $14.0 million for the three months ended
June 30, 2021 . The decrease in real estate taxes and insurance was primarily due
to the dispositions of Hardware Village in May 2020 and Anchor Centre in January
2021 and a decrease in real estate taxes due to a lower property tax assessment
for a real estate property held throughout both periods. We expect real estate
taxes and insurance to increase in future periods as a result of general
inflation and general increases due to future property tax reassessments for
properties that we continue to own and to decrease to the extent we dispose of
properties.
Asset management fees with respect to our real estate investments decreased from
$5.2 million for the three months ended June 30, 2020 to $4.9 million for the
three months ended June 30, 2021 , primarily due to the dispositions of Hardware
Village in May 2020 and Anchor Centre in January 2021 . We expect asset
management fees to increase in future periods as a result of any improvements we
make to our properties and to decrease to the extent we dispose of properties.
As of June 30, 2021 , there were $9.6 million of accrued asset management fees,
of which $8.5 million was deferred as of June 30, 2021 . For a discussion of
accrued and deferred asset management fees, see "- Liquidity and Capital
Resources" herein.
General and administrative expenses increased from $1.5 million for the three
months ended June 30, 2020 to $1.9 million for the three months ended June 30,
2021 , primarily due to appraisal fees related to the update of our estimated
value per share in May 2021 and an increase in legal fees incurred during the
three months ended June 30, 2021 . General and administrative costs consisted
primarily of portfolio legal fees, board of directors fees, audit costs and
third party transfer agent fees. We expect general and administrative expenses
to vary in future periods.
Depreciation and amortization increased from $27.4 million for the three months
ended June 30, 2020 to $27.9 million for the three months ended June 30, 2021 ,
primarily due to an increase in capital improvements at properties held
throughout both periods, offset by a decrease as a result of the sale of Anchor
Centre in January 2021 . We expect depreciation and amortization to increase in
future periods as a result of additional capital improvements offset by a
decrease in amortization related to fully amortized tenant origination and
absorption costs and to the extent we dispose of properties.
Interest expense decreased from $13.8 million for the three months ended
June 30, 2020 to $8.9 million for the three months ended June 30, 2021 . Included
in interest expense was (i) $8.9 million and $7.3 million of interest expense
payments for the three months ended June 30, 2020 and 2021, respectively, (ii)
the amortization of deferred financing costs of $1.0 million and $1.0 million
for the three months ended June 30, 2020 and 2021, respectively, and (iii)
interest expense (including gains and losses) incurred as a result of our
derivative instruments, which increased interest expense by $3.9 million and
$0.6 million for the three months ended June 30, 2020 and 2021, respectively.
The decrease in interest expense was primarily due to a lower 30-day LIBOR
during the three months ended June 30, 2021 and its impact on interest expense
related to our variable rate debt and a decrease in interest expense due to
changes in fair values with respect to our interest rate swaps that are not
accounted for as cash flow hedges as well as the pay offs and/or refinancing of
loans during the year ended December 31, 2020 . In general, we expect interest
expense to vary based on fair value changes with respect to our interest rate
swaps that are not accounted for as cash flow hedges, fluctuations in one-month
LIBOR (for our variable rate debt) and our level of future borrowings.
Equity in income (loss) of an unconsolidated entity relates to our investment in
the SREIT. During the three months ended June 30, 2020 , we recorded equity in
loss of an unconsolidated entity of $0.8 million , and during the three months
ended June 30, 2021 , we recorded equity in income of an unconsolidated entity of
$0.1 million . Based on our 27.3% ownership interest in the SREIT as of June 30,
2021 , we exercise significant influence over the operations, financial policies
and decision making with respect to this investment. Accordingly, we accounted
for the investment in the SREIT under the equity method of accounting as of
June 30, 2021 . We expect our equity in income (loss) of an unconsolidated entity
related to our investment in the SREIT to vary based on occupancy rates and
rental rates of the SREIT's real estate investments, due to fair value changes
with respect to the SREIT's interest rate swaps that are not accounted for as
cash flow hedges and uncertainty and business disruptions or recoveries as a
result of the COVID-19 pandemic.
We recognized a gain on sale of real estate of $50.9 million related to
disposition of Hardware Village during the three months ended June 30, 2020 . We
did not dispose of any real estate properties during the three months ended
June 30, 2021 .
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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
We recognized a provision for credit loss of $0.7 million related to our
investment in a real estate loan receivable during the three months ended June
30, 2020 . Under the current expected credit loss (CECL) model, we were required
to measure and record an allowance for credit losses upon the initial
recognition of a real estate loan receivable to present the net amount expected
to be collected, which was re-measured at each balance sheet date based on
changes in facts and circumstances. The allowance was adjusted through the
provision for credit loss on our consolidated statements of operations and was
increased or decreased based on the re-measurement of the allowance for credit
loss at each balance sheet date through the date of repayment of the loan in
December 2020 . We did not own any real estate loans receivable during the three
months ended June 30, 2021 .
Comparison of the six months ended June 30, 2021 versus the six months ended
June 30, 2020
The following table provides summary information about our results of operations
for the six months ended June 30, 2021 and 2020 (dollar amounts in thousands):
$ Change Due
to Properties
Held
Six Months Ended $ Changes Due to Throughout
June 30, Increase Dispositions and Loan Both Periods
2021 2020 (Decrease) Percentage Change Origination (1) (2)
Rental income $ 140,858 $ 142,226 $ (1,368) (1) % $ (6,449) $ 5,081
Interest income from real estate loan
receivable - 1,207 (1,207) (100) % (1,207) -
Other operating income 7,731 10,240 (2,509) (25) % (652) (1,857)
Operating, maintenance and management 32,065 35,355 (3,290) (9) % (2,420) (870)
Real estate taxes and insurance 28,379 28,912 (533) (2) % (948) 415
Asset management fees to affiliate 9,839 10,393 (554) (5) % (651) 97
General and administrative expenses 3,602 3,196 406 13 % n/a n/a
Depreciation and amortization 55,319 54,750 569 1 % (2,377) 2,946
Interest expense 15,714 62,542 (46,828) (75) % (699) (46,129)
Impairment charges on real estate - 19,896 (19,896) (100) % - (19,896)
Other interest income 31 47 (16) (34) % n/a n/a
Equity in income (loss) of an
unconsolidated entity 3,350 (1,996) 5,346 (268) % - 5,346
Loss from extinguishment of debt - (188) 188 (100) % - 188
Gain on sale of real estate, net 20,459 50,938 (30,479) (60) % (30,479) -
Provision for credit loss - (680) 680 (100) % 680 -
_____________________
(1) Represents the dollar amount increase (decrease) for the six months ended
June 30, 2021 compared to the six months ended June 30, 2020 related to real
estate dispositions and a real estate loan originated on or after on or after
January 1, 2020 .
(2) Represents the dollar amount increase (decrease) for the six months ended
June 30, 2021 compared to the six months ended June 30, 2020 related to real
estate investments owned by us throughout both periods presented.
Rental income from our real estate properties decreased from $142.2 million for
the six months ended June 30, 2020 to $140.9 million for the six months ended
June 30, 2021 . The decrease in rental income was primarily due to the
dispositions of Hardware Village in May 2020 and Anchor Centre in January 2021 ,
partially offset by an increase in rental income related to the commencement of
a lease at Domain Gateway in January 2021 , new leases commenced subsequent to
June 30, 2020 and lease termination income received during the six months ended
June 30, 2021 . We expect rental income to decrease in future periods to the
extent we dispose of properties and to vary based on occupancy rates and rental
rates of our real estate investments and uncertainty and business disruptions or
recoveries as a result of the COVID-19 pandemic. See "Market Outlook - Real
Estate and Real Estate Finance Markets - COVID-19 Pandemic and Portfolio
Outlook" for a discussion on the impact of the COVID-19 pandemic on our
business.
Interest income from our real estate loan receivable, recognized using the
interest method, was $1.2 million for the six months ended June 30, 2020 . On May
7, 2020 , in connection with the sale of Hardware Village , we, through an
indirect wholly owned subsidiary, provided seller financing and entered into a
promissory note with the buyer. The promissory note was paid off in full on
December 11, 2020 . We did not own any real estate loans receivable during the
six months ended June 30, 2021 .
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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Other operating income decreased from $10.2 million during the six months ended
June 30, 2020 to $7.7 million for the six months ended June 30, 2021 . The
decrease in other operating income was primarily due to a decrease in parking
revenues for properties held throughout both periods due to a decrease in
physical occupancy as a result of the COVID-19 pandemic and the disposition of
Anchor Centre in January 2021 . We expect other operating income to vary in
future periods based on occupancy rates and parking rates at our real estate
properties, and business disruptions or recoveries as a result of the COVID-19
pandemic and to decrease to the extent we dispose of properties.
Operating, maintenance and management costs decreased from $35.4 million for the
six months ended June 30, 2020 to $32.1 million for the six months ended
June 30, 2021 . The decrease in operating, maintenance and management costs was
primarily due to the dispositions of Hardware Village in May 2020 and Anchor
Centre in January 2021 and an overall decrease in operating costs at properties
held throughout both periods due to a decrease in physical occupancy as a result
of the COVID-19 pandemic. We expect operating, maintenance and management costs
to increase in future periods as a result of general inflation and as physical
occupancy increases as employees return to the office, offset by a decrease due
to the disposition of Anchor Centre and to the extent we dispose of additional
properties.
Real estate taxes and insurance decreased slightly from $28.9 million for the
six months ended June 30, 2020 to $28.4 million for the six months ended
June 30, 2021 . The decrease in real estate taxes and insurance was primarily due
to the dispositions of Hardware Village in May 2020 and Anchor Centre in January
2021 , offset by a net increase in real estate taxes due to higher property tax
assessments for real estate properties held throughout both periods. We expect
real estate taxes and insurance to increase in future periods as a result of
general inflation and general increases due to future property tax reassessments
for properties that we continue to own offset by a decrease due to the
disposition of Anchor Centre and to the extent we dispose of additional
properties.
Asset management fees with respect to our real estate investments decreased from
$10.4 million for the six months ended June 30, 2020 to $9.8 million for the six
months ended June 30, 2021 , primarily due to the dispositions of Hardware
Village in May 2020 and Anchor Centre in January 2021 . We expect asset
management fees to increase in future periods as a result of any improvements we
make to our properties offset by a decrease due to the disposition of Anchor
Centre and to the extent we dispose of additional properties. As of June 30,
2021 , there were $9.6 million of accrued asset management fees, of which
$8.5 million was deferred as of June 30, 2021 . For a discussion of accrued and
deferred asset management fees, see "- Liquidity and Capital Resources" herein.
General and administrative expenses increased from $3.2 million for the six
months ended June 30, 2020 to $3.6 million for the six months ended June 30,
2021 , primarily due to appraisal fees related to the update of our estimated
value per share in May 2021 , an increase in legal fees and proxy costs incurred
during the six months ended June 30, 2021 . General and administrative costs
consisted primarily of portfolio legal fees, board of directors fees, audit
costs and third party transfer agent fees. We expect general and administrative
expenses to vary in future periods.
Depreciation and amortization increased from $54.8 million for the six months
ended June 30, 2020 to $55.3 million for the six months ended June 30, 2021 ,
primarily due to an increase in capital improvements at properties held
throughout both periods, offset by a decrease as a result of the sale of Anchor
Centre in January 2021 . We expect depreciation and amortization to increase in
future periods as a result of additional capital improvements offset by a
decrease in amortization related to fully amortized tenant origination and
absorption costs and to the extent we dispose of properties.
Interest expense decreased from $62.5 million for the six months ended June 30,
2020 to $15.7 million for the six months ended June 30, 2021 . Included in
interest expense was (i) $21.8 million and $14.7 million of interest expense
payments for the six months ended June 30, 2020 and 2021, respectively, (ii) the
amortization of deferred financing costs of $2.1 million and $2.0 million for
the six months ended June 30, 2020 and 2021, respectively, and (iii) interest
expense (including gains and losses) incurred as a result of our derivative
instruments, which increased interest expense by $38.6 million for the six
months ended June 30, 2020 and decreased interest expense by $1.0 million for
the six months ended June 30, 2021 . The decrease in interest expense was
primarily due to a lower 30-day LIBOR during the six months ended June 30, 2021
and its impact on interest expense related to our variable rate debt and a
decrease in interest expense due to changes in fair values with respect to our
interest rate swaps that are not accounted for as cash flow hedges as well as
the pay offs and/or refinancing of loans during the year ended December 31,
2020 . In general, we expect interest expense to vary based on fair value changes
with respect to our interest rate swaps that are not accounted for as cash flow
hedges, fluctuations in one-month LIBOR (for our variable rate debt) and our
level of future borrowings.
45
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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
During the six months ended June 30, 2020 , we recorded non-cash impairment
charges of $19.9 million to write down the carrying value of an office/retail
property to its estimated fair value as a result of changes in cash flow
estimates, including a change to the anticipated hold period of the property,
which triggered the future estimated undiscounted cash flows to be lower than
the net carrying value of the property. The decrease in cash flow projections
was primarily due to the continued lack of demand for the property's retail
component resulting in longer than estimated lease-up periods and lower
projected rental rates, mostly due to the impact of the COVID-19 pandemic. We
did not record any impairment charges on our real estate properties during the
six months ended June 30, 2021 .
Equity in income (loss) of an unconsolidated entity relates to our investment in
the SREIT. We recorded equity in loss of an unconsolidated entity of
$2.0 million and equity in income of an unconsolidated entity of $3.4 million
related to our investment in the SREIT during the six months ended June 30, 2020
and 2021, respectively. Equity in loss of an unconsolidated entity during the
six months ended June 30, 2020 included $4.1 million related to our share of the
net losses from the SREIT offset by a gain of $2.1 million to reflect the net
effect to our investment as a result of the net proceeds raised by the SREIT in
a private offering in February 2020 . Based on our 27.3% ownership interest in
the SREIT as of June 30, 2021 , we exercise significant influence over the
operations, financial policies and decision making with respect to this
investment. Accordingly, we accounted for the investment in the SREIT under the
equity method of accounting as of June 30, 2021 . We expect our equity in income
(loss) of an unconsolidated entity related to our investment in the SREIT to
vary based on occupancy rates and rental rates of the SREIT's real estate
investments, due to fair value changes with respect to the SREIT's interest rate
swaps that are not accounted for as cash flow hedges and uncertainty and
business disruptions or recoveries as a result of the COVID-19 pandemic.
During the six months ended June 30, 2021 , we recognized a gain on sale of real
estate of $20.5 million related to the disposition of Anchor Centre and during
the six months ended June 30, 2020 , we recognized a gain on sale of real estate
of $50.9 million related to disposition of Hardware Village .
We recognized a provision for credit loss of $0.7 million related to our
investment in a real estate loan receivable during the six months ended June 30,
2020 . Under the current expected credit loss (CECL) model, we were required to
measure and record an allowance for credit losses upon the initial recognition
of a real estate loan receivable to present the net amount expected to be
collected, which was re-measured at each balance sheet date based on changes in
facts and circumstances. The allowance was adjusted through the provision for
credit loss on our consolidated statements of operations and was increased or
decreased based on the re-measurement of the allowance for credit loss at each
balance sheet date through the date of repayment of the loan in December 2020 .
We did not own any real estate loans receivable during the six months ended
June 30, 2021 .
Funds from Operations and Modified Funds from Operations
We believe that funds from operations ("FFO") is a beneficial indicator of the
performance of an equity REIT. We compute FFO in accordance with the current
National Association of Real Estate Investment Trusts ("NAREIT") definition. FFO
represents net income, excluding gains and losses from sales of operating real
estate assets (which can vary among owners of identical assets in similar
conditions based on historical cost accounting and useful-life estimates), gains
and losses from change in control, impairment losses on real estate assets,
depreciation and amortization of real estate assets, and adjustments for
unconsolidated partnerships and joint ventures. We believe FFO facilitates
comparisons of operating performance between periods and among other REITs.
However, our computation of FFO may not be comparable to other REITs that do not
define FFO in accordance with the NAREIT definition or that interpret the
current NAREIT definition differently than we do. Our management believes that
historical cost accounting for real estate assets in accordance with U.S.
generally accepted accounting principles ("GAAP") implicitly assumes that the
value of real estate assets diminishes predictably over time. Since real estate
values have historically risen or fallen with market conditions, many industry
investors and analysts have considered the presentation of operating results for
real estate companies that use historical cost accounting to be insufficient by
themselves. As a result, we believe that the use of FFO, together with the
required GAAP presentations, provides a more complete understanding of our
performance relative to our competitors and provides a more informed and
appropriate basis on which to make decisions involving operating, financing, and
investing activities.
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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Changes in accounting rules have resulted in a substantial increase in the
number of non-operating and non-cash items included in the calculation of FFO.
As a result, our management also uses MFFO as an indicator of our ongoing
performance as well as our dividend sustainability. MFFO excludes from FFO:
acquisition fees and expenses (to the extent that such fees and expenses have
been recorded as operating expenses); adjustments related to contingent purchase
price obligations; amounts relating to straight-line rents and amortization of
above and below market intangible lease assets and liabilities; accretion of
discounts and amortization of premiums on debt investments; amortization of
closing costs relating to debt investments; impairments of real estate-related
investments; mark-to-market adjustments included in net income; and gains or
losses included in net income for the extinguishment or sale of debt or hedges.
We compute MFFO in accordance with the definition of MFFO included in the
practice guideline issued by the IPA in November 2010 as interpreted by
management. Our computation of MFFO may not be comparable to other REITs that do
not compute MFFO in accordance with the current IPA definition or that interpret
the current IPA definition differently than we do.
We believe that MFFO is helpful as a measure of ongoing operating performance
because it excludes costs that management considers more reflective of investing
activities and other non-operating items included in FFO. Management believes
that excluding acquisition fees and expenses (to the extent that such fees and
expenses have been recorded as operating expenses) from MFFO provides investors
with supplemental performance information that is consistent with management's
analysis of the operating performance of the portfolio over time. MFFO also
excludes non-cash items such as straight-line rental revenue. Additionally, we
believe that MFFO provides investors with supplemental performance information
that is consistent with the performance indicators and analysis used by
management, in addition to net income and cash flows from operating activities
as defined by GAAP, to evaluate the sustainability of our operating performance.
MFFO provides comparability in evaluating the operating performance of our
portfolio with other non-traded REITs. MFFO, or an equivalent measure, is
routinely reported by non-traded REITs, and we believe often used by analysts
and investors for comparison purposes.
FFO and MFFO are non-GAAP financial measures and do not represent net income as
defined by GAAP. Net income as defined by GAAP is the most relevant measure in
determining our operating performance because FFO and MFFO include adjustments
that investors may deem subjective, such as adding back expenses such as
depreciation and amortization and the other items described above. Accordingly,
FFO and MFFO should not be considered as alternatives to net income as an
indicator of our current and historical operating performance. In addition, FFO
and MFFO do not represent cash flows from operating activities determined in
accordance with GAAP and should not be considered an indication of our
liquidity. We believe FFO and MFFO, in addition to net income and cash flows
from operating activities as defined by GAAP, are meaningful supplemental
performance measures; however, neither FFO nor MFFO reflects adjustments for the
operations of properties sold or under contract to sale during the periods
presented. During periods of significant disposition activity, FFO and MFFO are
much more limited measures of future performance and dividend sustainability. In
connection with our presentation of FFO, MFFO and Adjusted MFFO, we are
providing information related to the proportion of Adjusted MFFO related to
properties sold in 2020 and during the six months ended June 30, 2021 and a real
estate loan receivable paid off in full on December 11, 2020 .
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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Although MFFO includes other adjustments, the exclusion of adjustments for
straight-line rent, the amortization of above- and below-market leases,
amortization of discounts and closing costs, unrealized losses (gains) on
derivative instruments, loss from extinguishment of debt and provision for
credit loss are the most significant adjustments for the periods presented. We
have excluded these items based on the following economic considerations:
•Adjustments for straight-line rent. These are adjustments to rental revenue as
required by GAAP to recognize contractual lease payments on a straight-line
basis over the life of the respective lease. We have excluded these adjustments
in our calculation of MFFO to more appropriately reflect the current economic
impact of our in-place leases, while also providing investors with a useful
supplemental metric that addresses core operating performance by removing rent
we expect to receive in a future period or rent that was received in a prior
period;
•Amortization of above- and below-market leases. Similar to depreciation and
amortization of real estate assets and lease related costs that are excluded
from FFO, GAAP implicitly assumes that the value of intangible lease assets and
liabilities diminishes predictably over time and requires that these charges be
recognized currently in revenue. Since market lease rates in the aggregate have
historically risen or fallen with local market conditions, management believes
that by excluding these charges, MFFO provides useful supplemental information
on the realized economics of the real estate;
•Amortization of discounts and closing costs. Discounts and closing costs
related to debt investments are amortized over the term of the loan as an
adjustment to interest income. This application results in income recognition
that is different than the underlying contractual terms of the debt investments.
We have excluded the amortization of discounts and closing costs related to our
debt investments in our calculation of MFFO to more appropriately reflect the
economic impact of our debt investments, as discounts will not be economically
recognized until the loan is repaid and closing costs are essentially the same
as acquisition fees and expenses on real estate. We believe excluding these
items provides investors with a useful supplemental metric that directly
addresses core operating performance;
•Unrealized losses (gains) on derivative instruments. These adjustments include
unrealized losses (gains) from mark-to-market adjustments on interest rate
swaps. The change in fair value of interest rate swaps not designated as a hedge
are non-cash adjustments recognized directly in earnings and are included in
interest expense. We have excluded these adjustments in our calculation of MFFO
to more appropriately reflect the economic impact of our interest rate swap
agreements;
•Loss from extinguishment of debt. A loss from extinguishment of debt, which
includes prepayment fees related to the extinguishment of debt, represents the
difference between the carrying value of any consideration transferred to the
lender in return for the extinguishment of a debt and the net carrying value of
the debt at the time of settlement. We have excluded the loss from
extinguishment of debt in our calculation of MFFO because these losses do not
impact the current operating performance of our investments and do not provide
an indication of future operating performance; and
•Provision for credit loss on real estate loan receivable. A provision for
credit loss on a real estate loan receivable represents a write-down of the
carrying value of a real estate loan to reflect the net amount expected to be
collected. Although these losses are included in the calculation of net income
(loss), we have excluded the provision for credit loss in our calculation of
MFFO because the provision for credit loss does not impact the current operating
performance of our investment, and may or may not provide an indication of
future operating performance. We believe it is useful to investors to have a
supplemental metric that addresses core operating performance directly and
therefore excludes such things as the provision for credit loss on real estate
loans receivable.
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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Our calculation of FFO, which we believe is consistent with the calculation of
FFO as defined by NAREIT, is presented in the following table, along with our
calculation of MFFO and Adjusted MFFO, for the three and six months ended
June 30, 2021 and 2020, respectively (in thousands). No conclusions or
comparisons should be made from the presentation of these periods.
For the Three Months Ended June For the Six Months Ended June
30, 30,
2021 2020 2021 2020
Net income (loss) attributable to common
stockholders $ 88 $ 39,508 $ 27,511 $ (19,395)
Depreciation of real estate assets 21,596 20,589 42,758 40,807
Amortization of lease-related costs 6,324 6,769 12,561 13,943
Impairment charges on real estate - - - 19,896
Gain on sale of real estate, net - (50,938) (20,459) (50,938)
Adjustments for noncontrolling interests -
consolidated entity (1) - 6,144 - 6,144
Adjustment for investment in an
unconsolidated entity (2) 4,513 4,627 9,029 6,981
FFO attributable to common stockholders (3) 32,521 26,699 71,400 17,438
Straight-line rent and amortization of
above- and below-market leases, net (1,905) (2,072) (4,716) (4,423)
Amortization of discount and closing costs - (530) - (530)
Loss from extinguishment of debt - - - 188
Unrealized (gains) losses on derivative
instruments (3,933) 25 (9,830) 34,016
Provision for credit loss - 680 - 680
Adjustment for investment in an
unconsolidated entity (2) 293 1,288 (2,713) 5,089
MFFO attributable to common stockholders
(3) 26,976 26,090 54,141 52,458
Adjustment for a contractual rent payment
received but deferred (4) - 1,143 - 1,524
Adjusted MFFO attributable to common
stockholders (3) $ 26,976 $ 27,233 $ 54,141 $ 53,982
_____________________
(1) Reflects adjustments to eliminate the noncontrolling interest holder's share
of the adjustments to convert out net income (loss) attributable to common
stockholders to FFO.
(2) Reflects our noncontrolling interest share of adjustments to convert our net
income (loss) attributable to common stockholders to FFO and MFFO for our equity
investment in an unconsolidated entity.
(3) FFO, MFFO and Adjusted MFFO include $0.2 million and $1.0 million of lease
termination income for the three and six months ended June 30, 2021 ,
respectively.
(4) Adjustment for rent contractually due and collected per the terms of a lease
agreement, but deferred and not recognized into rental income for purposes of
GAAP as the tenant improvements were under construction. We began recognizing
this deferred revenue over the term of the lease beginning January 1, 2021 .
Our calculation of Adjusted MFFO above includes amounts related to the
operations of an office property sold on January 19, 2021 and the multifamily
apartment complex held by the Hardware Village joint venture that was sold on
May 7, 2020 as well as interest income from our real estate loan receivable paid
off in full on December 11, 2020 . Please refer to the table below with respect
to the proportion of Adjusted MFFO related to the real estate properties sold
(in thousands).
For the Three Months Ended June
30, For the Six Months Ended June 30,
2021 2020 2021 2020
Adjusted MFFO by component:
Assets held for investment $ 26,976 $ 25,608 $ 54,133 $ 51,319
Real estate properties sold - 1,086 8 2,124
Real estate loan receivable paid off - 539 - 539
Adjusted MFFO $ 26,976 $ 27,233 $ 54,141 $ 53,982
FFO and MFFO may also be used to fund all or a portion of certain capitalizable
items that are excluded from FFO and MFFO, such as tenant improvements, building
improvements and deferred leasing costs.
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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Distributions
Distributions declared, distributions paid and cash flow from operating
activities were as follows for the first and second quarters of 2021 (in
thousands, except per share amounts):
Distributions Distributions Paid (2) Cash Flow from
Distributions Declared Operating
Period Declared Per Share (1) Cash Reinvested Total Activities
First Quarter 2021 $ 27,640 $ 0.149 $ 16,274 $ 11,326 $ 27,600 $ 16,295
Second Quarter 2021 27,755 0.149 22,024 14,959 36,983 27,698
$ 55,395 $ 0.298 $ 38,298 $ 26,285 $ 64,583 $ 43,993
_____________________
(1) Assumes share was issued and outstanding on each monthly record date for
distributions during the period presented. For each monthly record date for
distributions during the period from January 1, 2021 through June 30, 2021 ,
distributions were calculated at a rate of $0.04983333 per share.
(2) Distributions are generally paid on a monthly basis. Distributions for the
monthly record date of a given month are paid on or about the first business day
of the following month; however, we accelerated the payment of the June 2021
distributions due to the timing of the Self-Tender.
For the six months ended June 30, 2021 , we paid aggregate distributions of $64.6
million , including $38.3 million of distributions paid in cash and $26.3 million
of distributions reinvested through our dividend reinvestment plan. Our net
income attributable to common stockholders for the six months ended June 30,
2021 was $27.5 million . FFO for the six months ended June 30, 2021 was $71.4
million and cash flow from operating activities was $44.0 million . See the
reconciliation of FFO to net income attributable to common stockholders above.
We funded our total distributions paid, which includes net cash distributions
and dividends reinvested by stockholders, with $44.0 million of cash flow from
current operating activities, $4.2 million of cash flow from operating
activities in excess of distributions paid during prior periods and
$16.4 million of proceeds from the sale of real estate. For purposes of
determining the source of our distributions paid, we assume first that we use
cash flow from operating activities from the relevant or prior periods to fund
distribution payments.
Over the long-term, we generally expect our distributions will be paid from cash
flow from operating activities from current periods or prior periods (except
with respect to distributions related to sales of our assets and distributions
related to the sales or repayment of real estate-related investments). From time
to time during our operational stage, we may not pay distributions solely from
our cash flow from operating activities, in which case distributions may be paid
in whole or in part from debt financing. To the extent that we pay distributions
from sources other than our cash flow from operating activities, the overall
return to our stockholders may be reduced. Further, our operating performance
cannot be accurately predicted and may deteriorate in the future due to numerous
factors, including those discussed under "Forward-Looking Statements", "-Market
Outlook - Real Estate and Real Estate Finance Markets," "-Liquidity and Capital
Resources," and "-Results of Operations" herein, and the risks discussed in Part
I, Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2020 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period
ended March 31, 2021 , each as filed with the SEC . Those factors include: the
future operating performance of our real estate investments in the existing real
estate and financial environment; the success and economic viability of our
tenants; our ability to refinance existing indebtedness at comparable terms;
changes in interest rates on any variable rate debt obligations we incur; the
level of participation in our dividend reinvestment plan; and the extent to
which the COVID-19 pandemic impacts our operations and those of our tenants and
our investment in the SREIT. In the event our FFO and/or cash flow from
operating activities decrease in the future, the level of our distributions may
also decrease. In addition, future distributions declared and paid may exceed
FFO and/or cash flow from operating activities.
Critical Accounting Policies
Our consolidated interim financial statements have been prepared in accordance
with GAAP and in conjunction with the rules and regulations of the SEC . The
preparation of our financial statements requires significant management
judgments, assumptions and estimates about matters that are inherently
uncertain. These judgments affect the reported amounts of assets and liabilities
and our disclosure of contingent assets and liabilities as of the dates of the
financial statements and the reported amounts of revenue and expenses during the
reporting periods. With different estimates or assumptions, materially different
amounts could be reported in our financial statements. Additionally, other
companies may utilize different estimates that may impact the comparability of
our results of operations to those of companies in similar businesses. A
discussion of the accounting policies that management considers critical in that
they involve significant management judgments, assumptions and estimates is
included in our Annual Report on Form 10-K for the year ended December 31, 2020
filed with the SEC . There have been no significant changes to our policies
during 2021.
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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Subsequent Events
We evaluate subsequent events up until the date the consolidated financial
statements are issued.
Distributions Paid
On August 2, 2021 , we paid distributions of $8.0 million , which related to
distributions in the amount of $0.04983333 per share of common stock to
stockholders of record as of the close of business on July 20, 2021 .
Distributions Authorized
On August 10, 2021 , our board of directors authorized an August 2021
distribution in the amount of $0.04983333 per share of common stock to
stockholders of record as of the close of business on August 20, 2021 , which we
expect to pay in September 2021 , and a September 2021 distribution in the amount
of $0.04983333 per share of common stock to stockholders of record as of the
close of business on September 20, 2021 , which we expect to pay in October 2021 .
Investors may choose to receive cash distributions or purchase additional shares
through our dividend reinvestment plan.
Self-Tender Offer
In order to provide stockholders with additional liquidity that is in excess of
that permitted under our share redemption program, on June 4, 2021 , we commenced
the Self-Tender for up to 33,849,130 shares of common stock at a price of $10.34
per share, or approximately $350.0 million of shares. On July 12, 2021 , we
accepted for purchase 26,377,990 shares properly tendered and not properly
withdrawn at a purchase price of $10.34 per share, or approximately
$272.7 million of shares, excluding fees and expenses relating to the tender
offer. We funded the purchase of shares in the offer with approximately $100.0
million of available cash on hand and by drawing on our existing credit
facilities in an aggregate amount of approximately $172.7 million .
Amended and Restated Share Redemption Program
On July 14, 2021 , our board of directors approved the Amended Share Redemption
Program. Pursuant to the Amended Share Redemption Program, for calendar year
2021, we may redeem up to 5% of the weighted-average number of shares
outstanding during the 2020 calendar year, provided that once we have received
requests for redemptions, whether in connection with Special Redemptions or
otherwise, that if honored, and when combined with all prior redemptions made
during the 2021 calendar year, would result in the number of remaining shares
available for redemption in the 2021 calendar year being 500,000 or less, the
last 500,000 shares available for redemption shall be reserved exclusively for
Special Redemptions.
During any calendar year subsequent to 2021, the Amended Share Redemption
program limits the number of shares we may redeem to those that we could
purchase with the amount of net proceeds from the sale of shares under our
dividend reinvestment plan during the prior calendar year, provided that once we
have received requests for redemptions, whether in connection with Special
Redemptions or otherwise, that if honored, and when combined with all prior
redemptions made during the calendar year, would result in the amount of
remaining funds available for the redemption of additional shares in such
calendar year being $10.0 million or less, the last $10.0 million of available
funds shall be reserved exclusively for Special Redemptions.
Moreover, the Amended Share Redemption Program contains several general
limitations on our ability to redeem shares under the program. During any
calendar year, we may redeem no more than 5% of the weighted-average number of
shares outstanding during the prior calendar year. Additionally, unless the
shares are being redeemed in connection with a Special Redemption, we may not
redeem shares unless the stockholder has held the shares for one year. For
purposes of determining the time period a redeeming stockholder has held each
share, the time period begins as of the date the stockholder acquired the share;
provided, that shares purchased by the redeeming stockholder pursuant to our
dividend reinvestment plan or received as a stock dividend will be deemed to
have been acquired on the same date as the initial share to which the dividend
reinvestment plan shares or stock dividend shares relate. The date of the
share's original issuance by us is not determinative. Further, we have no
obligation to redeem shares if the redemption would violate the restrictions on
distributions under Maryland General Corporation Law, as amended from time to
time, which prohibits distributions that would cause a corporation to fail to
meet statutory tests of solvency.
In addition, under the Amended Share Redemption Program, Ordinary Redemptions
are made at a price per share equal to 96% of our most recent estimated value
per share as of the applicable redemption date, and redemptions made in
connection with Special Redemptions are made at a price per share equal to the
most recent estimated value per share of our common stock as of the applicable
redemption date.
There were no other material changes to our share redemption program.
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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
We may (a) amend, suspend or terminate the Amended Share Redemption Program for
any reason, or (b) consistent with SEC guidance and interpretations, increase or
decrease the funding available for the redemption of shares pursuant to the
Amended Share Redemption Program, each upon ten business days' notice to our
stockholders. We may provide notice by including such information in a (i)
Current Report on Form 8-K or in our annual or quarterly reports, all publicly
filed with the SEC or (ii) separate mailing to stockholders.
The Amended Share Redemption Program became effective for the July 30, 2021
redemption date.
Unsecured Credit Facility
On July 30, 2021 , we, through KBS REIT Properties III, an indirect wholly owned
subsidiary, entered into a two-year unsecured credit facility with two
unaffiliated lenders for a committed amount of up to $75.0 million (the
"Unsecured Credit Facility"), of which $37.5 million is term debt and
$37.5 million is revolving debt. Subject to certain conditions contained in the
loan documents, we may on three occasions request an increase of the aggregate
committed amount, provided that the aggregate commitment under the Unsecured
Credit Facility may not exceed $100.0 million and that the election to fund any
such additional amounts shall be in the sole discretion of the lenders. At
closing, $37.5 million of term debt was funded and $37.5 million of revolving
debt remained available for future disbursements, subject to certain terms and
conditions contained in the loan documents.
The Unsecured Credit Facility matures on July 30, 2023 , with one 12-month
extension option, subject to certain terms and conditions contained in the loan
documents. The Unsecured Credit Facility bears interest at a floating rate of
210 basis points over one-month LIBOR. The Unsecured Credit Facility includes
provisions for a "LIBOR Successor Rate" in the event LIBOR is unascertainable or
ceases to be available. Monthly payments are interest only with the entire
balance and all outstanding interest and fees due at maturity. We have the right
to prepay the loan, without penalty or premium (other than any break funding or
swap breakage fees), in part and in whole subject to certain conditions
contained in the loan documents.
In addition, the Unsecured Credit Facility contains customary representations
and warranties, financial and other affirmative and negative covenants, events
of default and remedies typical for this type of facility, including without
limitation: a maximum leverage ratio, a maximum secured recourse indebtedness
ratio, a limitation on other unsecured indebtedness, a minimum consolidated net
worth requirement, a minimum fixed charge coverage ratio, a minimum liquidity
requirement, and a cross default to the borrower's other material indebtedness
and to the borrower's other agreements with the administrative agent and the
lenders (excluding swaps, unless a swap termination fee has not been paid when
due). If an event of default exists under the Unsecured Credit Facility, our
ability to pay dividends would be limited to the amount necessary to maintain
our status as a REIT.
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