Franklin Street Properties Corp. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; selected fourth-quarter results are also summarized below. FSP is a REIT focused on office properties and related secured lending and management services. At year-end it owned 38 office properties totaling approximately 9.58 million square feet.
Financial results and operating metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $249.7 million | $213.6 million |
| Rental revenue | $243.3 million | $206.9 million |
| Net income | $13.1 million; $0.13 per share | $19.8 million; $0.21 per share |
| Funds from Operations (FFO), company-defined | $112.5 million | $100.8 million |
| Operating cash flow | $103.2 million | $92.0 million |
| Cash and cash equivalents at year-end | $7.5 million | $19.6 million |
| Total assets / liabilities / equity at year-end | $1,936.4 million / $956.7 million / $979.6 million | $2,044.0 million / $993.9 million / $1,050.2 million |
- Portfolio leased occupancy was 92.8% at December 31, 2014, down from 94.1% a year earlier; reported vacancy increased to approximately 689,000 from 571,000 square feet. The property schedule reports 93.1% weighted occupancy.
- Same-store property NOI rose 2.4% to $104.3 million; comparative same-store NOI, excluding specified nonrecurring items, rose 2.2%. Total property NOI was $143.1 million, up 16.4%, reflecting acquisitions as well as same-store performance.
- Total debt was $888.0 million: $268.0 million drawn on the BAML revolver, a $400.0 million BAML term loan and a $220.0 million BMO term loan. The loans are unsecured; the company reported no mortgage debt on its owned properties.
- The $500 million BAML revolver had $268 million outstanding at year-end and matures in October 2018, with a conditional one-year extension option. The term loans mature in September 2017 and August 2020. Interest-rate swaps fixed the base LIBOR component on the term loans; the reported effective rates were 2.20% and 3.97%, respectively. Revolver borrowings were variable-rate.
- Cash declined by $12.1 million. Operating cash flow of $103.2 million and investing cash flow of $1.8 million were offset by $117.1 million of financing outflows, including $76.1 million of stockholder distributions. The quarterly dividend remained $0.19 per share, or $0.76 for the year.
- Fourth-quarter 2014 revenue was $62.5 million and net income was $4.3 million, or $0.04 per share; fourth-quarter 2013 revenue was $63.0 million and net income was $6.6 million, or $0.07 per share. Fourth-quarter 2013 included discontinued-operations income and a property-sale gain; continuing-operations income was $4.4 million.
Material changes versus the prior period
- Revenue increased $36.0 million, primarily because three properties acquired in 2013 contributed for a full year in 2014. Lower occupancy partly offset rental growth.
- Net income fell $6.7 million. Expenses increased $40.7 million, including higher property operating costs, depreciation and interest; the 2013 comparison also included $2.5 million of discontinued-operations income and sale gains. In 2014, the Colorado Springs sale generated a $0.9 million gain.
- FFO increased $11.6 million, while same-store NOI growth was more modest at 2.4%. No properties were acquired in 2014; 2013 included three acquisitions.
- Debt declined overall from $926.5 million to $888.0 million, mainly as revolver borrowings fell. Cash also decreased, and year-end stockholders’ equity was lower.
Outlook, risks and unusual items
- Management characterized the portfolio as well stabilized and described rental conditions in most major markets as generally steady or improving. It viewed the U.S. economy as being in an early, prolonged upswing, while cautioning that economic conditions could weaken. No quantified earnings, occupancy or FFO guidance was provided.
- Management said existing cash, internally generated cash and debt financing should meet working-capital needs and anticipated capital expenditures for at least 12 months. Future dividend levels remain dependent in significant part on rental income; continued dividends comparable to $0.19 quarterly were expected but not guaranteed.
- Leases covering approximately 7.4% of portfolio square footage expire in 2015 and 10.0% in 2016. Leasing during 2014 totaled approximately 784,000 square feet at an average 6.25-year term; new and renewed leases had average GAAP base rents of $26.89 per square foot.
- FSP had committed to lend up to $111.3 million to four Sponsored REITs, of which $93.6 million was drawn and outstanding. These related-party, property-secured loans expose FSP to repayment and collateral risks. Management reported none impaired at year-end.
- Key risks include tenant defaults, vacancies and rent pressure, geographic and industry concentration, rising rates on variable-rate debt, refinancing and covenant compliance, Sponsored REIT loan repayment, property valuation and environmental risks. Approximately 21.0% of portfolio square footage was in Greater Denver; energy-services tenants represented approximately 15% of rentable square feet.
- FSP agreed to sell a Plano, Texas property for approximately $20.8 million, expected to close in February 2015, with a year-end carrying value of $19.2 million. Management expected a gain. FSP also early adopted a revised discontinued-operations standard in 2014, affecting comparability with prior years.
- The company reported compliance with both credit facilities’ financial covenants at year-end. Moody’s rating was Baa3. The filing also disclosed that Barbara Fournier had announced her retirement and resignation from executive positions.
Important facts for investors to verify
- Review the full audited statements and notes, particularly property-level leasing, lease expirations, straight-line rent receivables and the assumptions underlying FFO and NOI.
- Confirm current revolver borrowing, interest-rate exposure, upcoming debt maturities and covenant headroom; year-end figures do not establish current conditions.
- Assess the performance, collateral values and repayment plans for the Sponsored REIT loans and the two preferred-stock investments.
- Track the Plano property sale closing and proceeds, and compare subsequent occupancy and leasing results with management’s commentary.
- Evaluate the sustainability of the $0.19 quarterly dividend against recurring cash generation and capital requirements; FFO is a non-GAAP measure and is not equivalent to cash available for distribution.