Franklin Street Properties Corp. — Q1 2012 10-Q
Business and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are with December 31, 2011. The company operated 36 properties totaling approximately 7.05 million rentable square feet, managed 16 Sponsored REITs, and held eight mortgage-backed notes. It had discontinued sponsoring syndications of newly formed Sponsored REITs in December 2011. Unless noted otherwise, financial amounts below are in millions.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Total revenue | $39.3 | $31.9 |
| Rental revenue | $36.7 | $31.1 |
| Income from continuing operations | $5.7; $0.07 per share | $4.6; $0.05 per share |
| Net income | $5.7; $0.07 per share | $24.8; $0.30 per share |
| Funds from Operations (FFO), company-defined non-GAAP | $19.6 | $16.3 |
| Cash provided by operating activities | $12.9 | $9.9 |
| Cash and cash equivalents | $29.3 | $23.8 at Dec. 31, 2011 |
| Bank revolver debt | $494.0 | $449.0 at Dec. 31, 2011 |
| Total assets / stockholders’ equity | $1,438.5 / $911.3 | $1,408.7 / $921.4 at Dec. 31, 2011 |
Total expenses were $33.9 million, including $13.3 million of depreciation and amortization and $3.7 million of interest. Income from continuing operations was approximately 14.6% of revenue; the comparable 2011 ratio was approximately 14.3%. Net income in Q1 2011 included $20.2 million of discontinued-operation income, principally a $19.6 million property-sale gain, making the year-over-year net-income comparison unrepresentative of continuing performance.
Operating cash flow was below the $15.8 million of distributions paid in the quarter. Cash from investing activities was negative $36.7 million, including $31.8 million of related-party mortgage-loan funding; financing activities provided $29.2 million, including $45.0 million of revolver borrowings. The quarterly distribution was $0.19 per share. The board declared another $0.19 per share, payable May 17, 2012.
Changes and business developments
- Revenue rose $7.4 million year over year, primarily from a fuller period of contribution from properties acquired in 2011 and higher interest income and fees on Sponsored REIT loans. Management attributed some rental growth to improved occupancy, partly offset by lower rental rates on new leases.
- Expenses increased $5.6 million, led by higher depreciation, real estate taxes and insurance, and interest expense. Interest expense rose $1.3 million, reflecting higher debt balances and rates.
- FFO increased to $19.6 million from $16.3 million. Equity in earnings of non-consolidated REITs fell to $0.4 million from $1.0 million, partly because there were no syndications in process in Q1 2012.
- The company made no direct property acquisitions in Q1 2012. It advanced an additional $30 million under a mortgage loan to a Sponsored REIT for a Minneapolis property, bringing that loan to $106.2 million.
- Portfolio occupancy was 89.0% at March 31, 2012, versus 88.7% at December 31, 2011 and approximately 88% at March 31, 2011. Approximately 3.1% of portfolio area was scheduled to expire during the remainder of 2012 and 6.7% during 2013.
Outlook, risks and contingencies
Management’s stated objective was to move portfolio occupancy back into the 90%-plus range during 2012 and it anticipated further real estate investment activity. These are objectives, not earnings guidance. Management believed cash, internally generated funds and existing debt financing would cover working capital needs and anticipated capital expenditures for at least 12 months, while cautioning that future funding for growth was not assured. It noted that dividends depend significantly on rental income.
The unsecured revolver has $600 million of total capacity, matures February 22, 2014, and has a one-year extension option. At quarter-end, $494 million was drawn, leaving nominal unused capacity of $106 million. The reported quarter-end borrowing rate was 2.34%; the company was in compliance with its financial covenants. Borrowings carry variable-rate exposure.
The company was committed to fund up to $207 million across eight Sponsored REIT loan facilities, of which $172.3 million was drawn. These related-party loans are secured by the underlying properties and generally expected to be repaid at maturity or earlier from refinancing, property cash flows or another capital event. Repayment and refinancing risk, and the concentration of lending to Sponsored REITs, merit attention.
Management cited uncertain U.S. economic conditions, debt-market disruption, property-market demand, tenant defaults or bankruptcies, lease renewals potentially at below-expiring rents, and unanticipated operating costs, taxes and repairs as risks. Three properties—Southfield, Michigan; Englewood, Colorado; and Glen Allen, Virginia—had rental income below ordinary operating expenses in at least one comparative period; management reported Southfield remained below expense in Q1 2012. The filing reported no material change in risk factors, no material legal-proceeding impact expected, and no change in market-risk exposure considered material since year-end.
Important facts for investors to verify
- Whether occupancy reaches management’s 90%-plus objective, and the rent and leasing-cost terms on renewals and new leases.
- Repayment prospects, collateral performance and refinancing plans for the $172.3 million outstanding in Sponsored REIT loans, including the $106.2 million Minneapolis loan.
- Revolver availability, variable interest costs, covenant headroom and the ability to refinance or extend the facility before maturity.
- Whether operating cash flow and FFO sustainably cover distributions, capital needs and property-level costs; FFO is a company-defined non-GAAP measure and is not a substitute for cash flow.
- Performance of under-rented or loss-making properties and any effects from the discontinued investment-banking business.