Franklin Street Properties Corp. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results; comparisons are with the corresponding 2014 periods unless otherwise noted. The company owns and operates office properties, manages Sponsored REITs, and makes secured loans to them.
Financial performance
| Metric | Q2 2015 | First six months 2015 |
|---|---|---|
| Total revenue | $60.2 million (down 4.0%) | $120.7 million (down 4.2%) |
| Net income | $3.9 million; $0.04 per share | $16.4 million; $0.16 per share |
| Funds from Operations (FFO, non-GAAP) | $27.2 million (down 3.8%) | $52.9 million (down 7.3%) |
| Operating cash flow | Not separately stated for the quarter | $45.7 million, versus $43.1 million |
Q2 expenses were $57.1 million, including $6.4 million of interest expense. For the first half, expenses were $115.0 million and interest expense was $12.6 million. First-half net income included $11.4 million of after-tax gains on property sales; absent those gains, reported net income would have been materially lower. The filing does not provide a standard operating margin measure.
At June 30, total assets were $1.94 billion, total liabilities $984.6 million, and stockholders’ equity $955.5 million. Cash and cash equivalents were $15.8 million, up from $7.5 million at year-end. Debt totaled $920 million: $300 million drawn on the BAML revolver, a $400 million BAML term loan, and a $220 million BMO term loan. The $500 million revolver had approximately $200 million of unused capacity, subject to facility terms. The company reported compliance with debt covenants.
Cash from investing activities was negative $31.3 million, reflecting property acquisitions and improvements partly offset by $55.7 million of sale proceeds. Financing activities used $6.1 million: $38.1 million of shareholder distributions were largely offset by $32.0 million of net revolver borrowings. Quarterly distributions were $0.19 per share; the board declared another $0.19 distribution payable August 13, 2015.
Changes and operating trends
- First-half revenue fell $5.3 million, chiefly because of property dispositions, lower occupancy, and reduced Sponsored REIT loan income. The Atlanta acquisition partly offset these declines.
- Net income increased from $7.3 million to $16.4 million for the first half, primarily because of property-sale gains; Q2 net income rose modestly from $3.7 million to $3.9 million.
- First-half FFO declined to $52.9 million from $57.0 million. Comparative same-store NOI fell 6.1%; total property NOI fell 7.7% to $66.9 million.
- The portfolio comprised 36 properties and 9.64 million rentable square feet at June 30, versus 39 properties and 9.69 million square feet a year earlier. Occupancy was approximately 90.6% leased, down from 92.8% at December 31, 2014; vacancy increased to 902,000 square feet.
- The company acquired a 442,130-square-foot Atlanta office property for approximately $78 million on April 8. It sold three office properties during the first half, recording stated gains of $1.5 million, $9.0 million, and $0.9 million.
Outlook, risks, and contingencies
Management provided no specific earnings or FFO guidance. It expected existing cash, operating cash generation, and debt financing to cover working capital and anticipated capital expenditures for at least the next 12 months. Management described the portfolio as well stabilized with a balanced lease-expiration schedule, while noting that future dividends depend substantially on rental income.
Management cited slow but improving economic conditions, possible Federal Reserve rate increases, and exposure to office demand, occupancy, rents, tenant defaults or bankruptcies, property expenses, and real estate tax reassessments. The $400 million BAML term loan matures in September 2017; the $300 million revolver matures in October 2018, with a conditional one-year extension; the $220 million BMO term loan matures in August 2020. Term-loan base LIBOR exposure is swapped, but the revolver remains floating-rate. A 10% increase in the revolver’s market rate was estimated to raise annual interest expense by about $0.4 million.
The company had committed up to $111.3 million in secured Sponsored REIT loans, of which $93.6 million was drawn. Repayment depends on the borrowers’ property cash flows, refinancing, or other capital events. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported.
Investor verification priorities
- Assess underlying earnings and cash generation separately from the $11.4 million of first-half property-sale gains; review FFO and same-store NOI declines.
- Track leasing, vacancy, lease expirations, and rent trends, including the difference between the filing’s 90.6% leased figure and its separately presented weighted occupancy data.
- Review refinancing and rate exposure around the 2017 term-loan maturity and floating-rate revolver borrowings.
- Evaluate repayment prospects and related-party credit exposure for Sponsored REIT loans, including the $17.7 million of undrawn commitments.
- Confirm dividend sustainability against recurring operating cash flow, property needs, and debt financing availability.