Franklin Street Properties Corp. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. The company owns and operates office properties, manages sponsored REITs, and provides secured financing. At quarter-end it had 37 properties totaling approximately 7.86 million rentable square feet.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $44.8 million | $39.0 million | +$5.8 million |
| Net income | $4.4 million | $5.7 million | -$1.3 million |
| Basic and diluted EPS | $0.05 | $0.07 | -$0.02 |
| Operating cash flow | $10.0 million | $12.9 million | -$3.0 million |
| Funds from Operations (FFO) | $20.6 million | $19.6 million | +$1.0 million |
| Property NOI | $25.4 million | $21.6 million | +$3.8 million |
Rental revenue rose $6.8 million, largely from two properties acquired in 2012 and improved occupancy; related-party management fees and loan interest fell $1.0 million, mainly following loan repayments. Expenses increased $6.9 million, including higher property costs, depreciation and interest. Equity-method results from non-consolidated REITs shifted from $0.4 million of earnings to a $0.2 million loss. Continuing-operations income was $4.4 million versus $6.1 million. The prior-year quarter included a $0.3 million loss from discontinued operations related to a property sold in December 2012.
Same-store NOI decreased 1.0% to $21.5 million; comparative same-store NOI, excluding specified nonrecurring items, increased 1.1%. FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow.
Balance sheet, debt and liquidity
- Total assets were $1.513 billion and stockholders’ equity was $853.8 million at March 31, 2013.
- Debt comprised a $400 million term loan and $221.75 million outstanding on the revolving facility, or $621.75 million total. The term loan matures in September 2017; the revolver initially matures in September 2016, with a one-year extension option subject to conditions.
- The term loan’s base LIBOR rate was fixed at 0.75% through September 2017 under a swap; its stated rate was 2.20% at quarter-end. Revolver borrowings were at 1.65%. The company reported compliance with credit-facility financial covenants.
- Cash and cash equivalents were $17.3 million, down $4.0 million from year-end. Q1 cash flows were $10.0 million provided by operations, $3.2 million used in investing, and $10.8 million used in financing. Investing included a $4.8 million distribution from the liquidation of a REIT investment; financing included $15.8 million of shareholder distributions.
- The quarterly distribution was $0.19 per share, unchanged from Q1 2012. Management said cash, expected operating cash generation and existing debt financing should cover working capital and anticipated capital expenditures for at least 12 months; dividend capacity depends significantly on rental income.
Operating trends, outlook and risks
- The portfolio was approximately 94.4% leased at March 31, compared with approximately 94% at December 31, 2012. The filing also reports 91.0% weighted occupancy for Q1 across the portfolio, a different occupancy measure.
- During Q1, the company leased approximately 352,000 square feet at an average term of 8.25 years. Management cited average GAAP base rent of $24.66 per square foot, 10.0% above average rents at the applicable properties in 2012. Lease expirations were 2.2% of portfolio area for the rest of 2013 and 4.9% for 2014.
- Management anticipated rental-revenue growth in the second half of 2013 as recent leases take effect and expressed optimism about improving occupancy. No numerical earnings or FFO guidance was provided.
- The company had agreed to acquire a 621,007-square-foot Atlanta office property for $157.9 million, with closing anticipated July 1, 2013. A subsequent agreement covered a 680,277-square-foot Denver property for $183.0 million, subject to due diligence and other conditions, with closing expected around July 1. Management was exploring additional investments and anticipated further investment activity in 2013.
- The company had committed to fund up to $118.8 million across seven secured Sponsored REIT loan arrangements; $96.9 million was drawn at quarter-end. These loans create borrower credit risk. After quarter-end, the maturity of a construction loan with $37.5 million drawn was extended from April 30, 2013 to April 30, 2014.
- Key risks include weak economic growth and office-space demand, vacancies and tenant defaults or bankruptcies, potential rent declines on renewals, property expenses and tax reassessments, floating-rate debt exposure, and execution and financing risk on acquisitions. Management noted that a lease covering 61.7% of one Colorado property’s area was not scheduled to commence until July 2013, leaving Q1 rental income below ordinary operating expenses.
- The company reported no material change to previously disclosed risk factors, no material adverse effect expected from ordinary-course legal matters, and effective disclosure controls at quarter-end.
Important facts for investors to verify
- Whether the Atlanta and Denver acquisitions closed as anticipated, and their financing, costs and effect on leverage and cash flow.
- Whether occupancy and management’s expected second-half rental growth materialized, including commencement of the delayed Colorado lease.
- Performance and repayment prospects for the $96.9 million of drawn Sponsored REIT loans and remaining committed capacity.
- Whether operating cash flow and rental income support the $0.19-per-share distribution and future capital needs.
- Debt covenant headroom, revolver availability and sensitivity to interest-rate increases; the filing estimates a 17-basis-point increase in revolver rates would reduce annual earnings and cash flow by approximately $0.4 million.