Stock-Based Compensation

3 Months Ended

Mar. 31, 2023

Share-Based Payment Arrangement [Abstract]

The Company has several types of stock-based compensation — stock options, restricted stock, restricted stock units ("RSUs"), and the Employee Stock Purchase Plan ("ESPP").

The Company's compensation expense for the three months ended March 31, 2023 relates to restricted stock and RSUs awarded in 2023, 2022, 2021, and 2020, and the ESPP. Compensation expense for the three months ended March 31, 2022 relates to restricted stock, RSUs awarded in 2022, 2021, 2020, and 2019, and the ESPP. Restricted stock, the 2023 RSUs, 2022 RSUs, 2021 RSUs, and the 2020 RSUs are equity-classified awards (settled in shares of the Company) for which compensation expense per share is fixed. The 2019 RSUs were liability-classified awards (settled in cash) for which the expense fluctuated from period to period dependent, in part, on the Company's stock price. For the three months ended March 31, 2023 and 2022, stock-based compensation expense, net of forfeitures, was recorded as follows ($ in thousands):


	Three Months Ended March 31,
	2023		2022
Equity-classified awards:
Restricted stock	$	858	$	780
Market-based RSUs	1,751		1,212
Performance-based RSUs	480		372
Director grants	385		332
Employee Stock Purchase Plan	37		52
Total equity-classified award expense, net of forfeitures	3,511		2,748

Liability-classified awards
Time-vested RSUs	61		132
Dividend equivalent units	—		15


Total liability-classified award expense, net of forfeitures	61		147
Total stock-based compensation expense, net of forfeitures	$	3,572	$	2,895

Information on the Company's stock compensation plan, including information on the Company's equity-classified and liability-classified awards is discussed in note 15 of the notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Grants of Equity-Classified Awards

Under the 2019 Plan, in February 2023, the Company granted three types of equity-classified awards to key employees: (1) RSUs based on the Total Stockholder Return ("TSR") of the Company, as defined in the award documents, relative to that of office peers included in the Nareit Office Index (the "Market-based RSUs"), (2) RSUs based on the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (the “Performance-based RSUs”), and (3) restricted stock.

The RSU awards are equity-classified awards to be settled in stock with issuance dependent upon the attainment of required service, market, and performance criteria. For the Market-based RSUs the Company expenses an estimate of the fair value of the awards on the grant date, calculated using a Monte Carlo valuation at grant date, ratably over the vesting period, adjusting only for forfeitures when they occur. The expense of these Market-based RSUs is not adjusted for the number of awards that actually vest. For the Performance-based RSUs, the Company expenses the awards over the vesting period using the grant date fair market value of the Company's stock on the grant date. The expense is recognized ratably over the vesting period and adjusted each quarter based on the number of shares expected to vest and for forfeitures when they occur. The performance period for the Performance-based RSUs and TSR measurement period for the Market-based RSUs awarded is three years starting on January 1 of the year of issuance and ending on December 31. The ultimate settlement of these awards can range from zero percent to 200% of the targeted number of units depending on the achievement of the market and performance metrics described above.

On February 6, 2023, the Company made modifications to its Market-based RSU awards granted in 2022, 2021, and 2020. The modifications were made to clarify the definition of the peer group used to measure TSR award achievement and resulted in $247,000 of compensation expense recorded in February 2023 for the change in fair value on the modification date.

The restricted stock vests ratably over three years from the grant date. The Company records restricted stock in common stock and additional paid-in capital at fair value on the grant date, with the offsetting deferred compensation also recorded in additional paid-in capital. The Company records compensation expense over the vesting period.

The following table summarizes the grants of equity-classified awards made by the Company in the first quarter of 2023:


			Shares and Targeted Units Granted
Market-based RSUs			164,430
Performance-based RSUs			70,472
Restricted stock			164,221

The Monte Carlo valuation used to determine the grant date fair value of the equity-classified Market-based RSUs included the following assumptions for those RSUs granted in the first quarter of 2023:


		Assumptions for RSUs Granted
Volatility	(1)	40.50	%
Risk-free rate	(2)	4.35	%
Stock beta	(3)	1.03	%

(1) Based on historical volatility over three years using daily stock price.

(2) Reflects the yield on three-year Treasury bonds as reported by the Federal Reserve in the H.15 release.

(3) Betas are calculated with up to three years of daily stock price data.