Franklin Street Properties Corp. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results. Amounts below are in millions of dollars, except per-share data, percentages, and where otherwise noted.
Business context
The company is a REIT operating in real estate and investment banking/investment services. At June 30, it owned 34 properties totaling about 6.75 million rentable square feet and held interests in 16 Sponsored REITs. Revenue includes recurring property rent as well as more variable syndication, transaction, management, and loan-related income.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $40.4 | $28.9 | $73.5 | $58.3 |
| Income from continuing operations | $7.9 | $4.8 | $12.7 | $9.2 |
| Net income | $10.4 | $6.0 | $35.1 | $11.5 |
| Net income per diluted share | $0.13 | $0.07 | $0.43 | $0.14 |
| Funds from Operations (FFO) | $20.1 | $16.7 | $36.4 | $33.4 |
- Q2 revenue increased 40% year over year; six-month revenue increased 26%. Rental revenue rose to $33.6 million for Q2 and $64.7 million for the half-year. Related-party syndication and transaction fees also increased materially.
- Six-month net income included $21.9 million of gains on property sales; Q2 included a $2.3 million gain. Continuing-operations income and FFO provide context apart from these sale gains. FFO is a non-GAAP measure and the company cautions it is not a substitute for net income or operating cash flow.
- Six-month operating cash flow was $26.4 million, investing cash outflow was $88.5 million, and financing cash inflow was $22.8 million. Cash declined to $28.9 million from $68.2 million at year-end 2010.
- Total assets were $1.304 billion and stockholders’ equity was $926.4 million at June 30. Bank debt was $345 million; no term loan remained. The unsecured revolver had $600 million of availability and matures in February 2014, with a one-year extension option. The company reported covenant compliance.
- Borrowings outstanding under the new revolver carried a weighted-average rate of 2.33% at June 30. Six-month interest expense increased to $6.0 million from $3.4 million, primarily due to higher debt outstanding and borrowing costs.
- The company paid $0.19 per share in each of Q1 and Q2. After quarter-end, the board declared another $0.19 per-share distribution, payable August 19, 2011.
Material changes and operating developments
- Three properties totaling approximately 676,000 rentable square feet were acquired in the first half for about $166 million, excluding closing costs and adjustments. The portfolio had 34 properties versus 33 at June 30, 2010.
- Portfolio occupancy was 86.9% at June 30, 2011, compared with approximately 85% a year earlier. Management’s stated objective was to return occupancy to above 90% and it expected to make progress during the remainder of 2011, assuming economic stability.
- Two properties were sold in the first half: Falls Church, Virginia, in January and Savage, Maryland, in June. Sale proceeds were $96.8 million; reported aggregate gains were $21.9 million.
- Sponsored REIT offerings raised $50.1 million in the first half, versus $10.4 million in the comparable 2010 period. The Union Centre offering remained underway at June 30, with $45.3 million closed against a stated $62 million capitalization target.
- Outstanding loans to Sponsored REITs were $61.9 million. The company was committed to fund up to $85.8 million across six facilities, leaving potential additional advances subject to facility terms.
Outlook, risks, and contingencies
- Management said cash, internally generated funds, future Sponsored REIT offerings, and available financing were expected to cover working capital and anticipated capital expenditures for at least the next 12 months. This is management’s expectation, not a guarantee.
- Management was actively pursuing property acquisitions and anticipated further acquisitions in the remainder of 2011. It also described property dispositions as selective, noting that sales-market liquidity and pricing remained challenged despite improvement in some markets.
- Management cautioned that leasing and renewals are uncertain and that new or renewed rents may be below expiring rates. Tenant defaults or bankruptcies could reduce cash available for distributions. Four properties had rent insufficient to cover ordinary operating expenses in at least some reported periods; Southfield, Michigan, was notably 39.2% leased after a significant tenant downsized.
- Risks include weak U.S. economic and employment conditions, real estate market and occupancy weakness, debt-market disruptions and interest-rate changes, unpredictable investor demand for illiquid Sponsored REIT investments, and unanticipated operating, repair, insurance, utility, or tax costs. The filing reported no material change to previously disclosed risk factors.
- Ordinary-course legal claims may arise; management did not expect their disposition to materially affect financial position or results. No material change in market-risk exposure was reported. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of reported earnings growth is repeatable rental and continuing-operations performance versus property-sale gains and transactional related-party fees.
- Whether occupancy improves toward management’s above-90% objective, and how lease expirations, rent levels, tenant downsizing, and underperforming properties affect cash flow.
- Revolver borrowing, interest costs, covenant headroom, and repayment sources for the $61.9 million of Sponsored REIT loans and remaining loan commitments.
- Completion and economics of the Union Centre syndication and the sustainability of capital-raising and transaction-fee revenue.
- Cash requirements for acquisitions, leasing commissions, capital expenditures, and distributions; the filing does not provide a specific full-year earnings or FFO forecast.