Franklin Street Properties Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Franklin Street Properties is a REIT focused primarily on office real estate. It owned 34 operating office properties across 10 states, with approximately 9.76 million square feet, and emphasized urban infill and central business district assets in Atlanta, Dallas, Denver, Houston and Minneapolis.
Key financial results
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Total revenue | $272.6 million | $249.9 million | Up $22.7 million, or 9.1%; rental revenue rose to $267.3 million from $244.3 million. |
| Net income (loss) | $(15.9) million | $8.4 million | EPS was $(0.15), versus $0.08. |
| Funds from Operations (FFO, company-defined) | $111.4 million | $106.3 million | Up 4.8%; a non-GAAP measure and not equivalent to operating cash flow. |
| Property NOI | $146.8 million | $136.1 million | Up 7.9%; comparative same-store NOI declined 3.0% to $121.8 million. |
| Operating cash flow | $95.9 million | $94.4 million | Distributions paid were $81.5 million in 2017. |
| Cash and cash equivalents | $9.8 million | $9.3 million | Year-end cash increased $0.4 million. |
| Total assets / liabilities / equity | $1,990.5 million / $1,119.2 million / $871.3 million | $2,088.1 million / $1,126.1 million / $962.0 million | Equity declined $90.8 million. |
Year-end debt principal was approximately $1.048 billion: $78 million on the BAML revolver, $150 million JPM term loan, $400 million BAML term loan, $220 million BMO term loan and $200 million senior notes. The balance-sheet carrying amount is lower because of unamortized financing costs. The company reported no mortgages on its owned properties. It had $600 million of BAML revolving capacity, of which $78 million was drawn at year-end, subject to facility terms and covenants.
Quarterly revenue was $66.8 million in Q4 2017 versus $66.0 million in Q4 2016. Q4 2017 net loss was $4.9 million, compared with net income of $1.7 million in Q4 2016.
Material changes versus prior year
- Revenue increased primarily because of the full-year contribution from properties acquired in 2016; year-end leased occupancy improved to 89.7% from 89.3% according to management.
- Total expenses rose to $264.2 million from $239.2 million, including higher property operating costs, taxes and insurance, depreciation, and interest expense. Interest expense increased $5.8 million to $32.4 million.
- The sale of the Baltimore property generated a $20.8 million loss, net of applicable income taxes; the Milpitas sale generated a $2.3 million gain. The Baltimore loss was the main unusual item driving the annual net loss.
- Equity losses from non-consolidated REIT investments increased to $3.6 million, including a $2.5 million impairment charge.
- The company issued $200 million of senior unsecured notes in December 2017, using proceeds to reduce the BAML revolver. It ended 2017 with $78 million drawn on that revolver, versus $280 million at year-end 2016.
Outlook, risks and other notable items
- Management expected positive leasing activity in 2018 and described most major markets as steady or improving, but provided no specific financial guidance. It believed cash, operating cash generation and debt financing would cover working capital and anticipated capital expenditures for at least 12 months.
- Management reported 89.7% leased occupancy, approximately 1.007 million square feet of vacancy, and 1.471 million square feet leased during 2017. It cited average rents on 2017 leasing activity 12.3% above the comparable properties’ prior-year average. A separate property schedule reports 87.7% weighted occupancy; the filing’s measures have differing bases and should be reconciled.
- The Minneapolis 801 Marquette redevelopment incurred approximately $16.4 million of costs through year-end and was substantially completed in Q2 2017. The property was not operating at year-end; management anticipated net rents of approximately $17–$19 per square foot once leased.
- Major near-term refinancing risk is the $150 million JPM term loan due November 30, 2018. Other stated maturities include the $220 million BMO term loan in 2020 and the BAML revolver beginning in 2022. The company reported compliance with credit-facility financial covenants at year-end.
- Interest-rate exposure remains on unhedged variable-rate borrowings, including the revolver and JPM term loan. Swaps fixed the base LIBOR on the BAML and BMO term loans through September 2021 and August 2020, respectively. Moody’s rating was Baa3, described as investment grade.
- Sponsored REIT lending creates related-party credit exposure: commitments totaled $79.5 million, of which $71.7 million was drawn and outstanding across three entities. Management reported no impaired Sponsored REIT loans.
- Portfolio risks include office-market and tenant demand, lease expirations, tenant defaults, and geographic/industry concentration—particularly Denver, Atlanta, Houston and Dallas, with exposure to energy-sector conditions. Tax reform enacted in December 2017 could affect REITs, tenants and markets in ways management said were difficult to predict.
- Quarterly distributions remained $0.19 per share ($0.76 annually). The board declared a further $0.19-per-share distribution in January 2018; future dividends were not guaranteed. The 2017 distribution was classified for tax purposes as 31.74% ordinary income and 68.26% return of capital.
- The 2017 Act’s effects were uncertain. Management expected adoption of revenue-recognition guidance in 2018 to have no timing impact; it expected the 2019 lease standard to increase reported assets and liabilities by about $3 million, without a material effect on results or liquidity.
Important facts for investors to verify
- Reconcile the reported occupancy figures (89.7% leased in management’s discussion versus 87.7% weighted occupancy in the property schedule), including treatment of redevelopment and measurement dates.
- Assess the cause and durability of the 3.0% decline in comparative same-store NOI despite higher consolidated revenue and NOI.
- Review refinancing plans for the $150 million JPM loan due November 2018, available revolver capacity, covenant headroom and the effect of interest-rate or credit-rating changes.
- Evaluate leasing progress and capital needs at 801 Marquette and the substantially vacant Houston property, as well as the lease-expiration schedule.
- Examine the valuation basis for the $2.5 million non-consolidated REIT impairment, the $20.8 million Baltimore sale loss, and the credit quality and repayment sources for Sponsored REIT loans.
- Compare dividends with recurring cash generation: 2017 operating cash flow was $95.9 million, FFO was $111.4 million, and distributions were $81.5 million; FFO is not a GAAP liquidity measure.