Franklin Street Properties Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Figures below are unaudited; dollar amounts are in millions unless noted.
Business context
FSP is a REIT focused on office real estate, with investments concentrated in Sunbelt and Mountain West markets. At quarter-end, it held 32 operating properties, three redevelopment properties and interests in two sponsored REITs. The operating portfolio comprised approximately 9.50 million rentable square feet.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $66.8 | $66.7 | $131.5 | $133.6 |
| Net income | $1.6 | $0.7 | $0.4 | $2.1 |
| Net income per share, basic and diluted | $0.02 | $0.01 | $0.00 | $0.02 |
| Funds from operations (FFO, non-GAAP) | $23.8 | $25.4 | $45.9 | $51.8 |
| Same-store property NOI (non-GAAP) | — | — | $68.1 | $69.7 |
- Second-quarter revenue was nearly flat year over year; net income increased, helped in part by lower depreciation and interest expense and the absence of the prior-year non-consolidated REIT loss. First-half revenue fell 1.5% and net income fell to $0.4 million from $2.1 million.
- First-half rental revenue declined $2.2 million, primarily due to lease expirations. Total expenses increased slightly: higher property operating costs, taxes and insurance, and G&A offset lower depreciation and interest expense. Same-store NOI decreased 2.3%; total property NOI decreased 6.1%, including redevelopment and disposition effects.
- Cash from operations was $24.7 million, versus $33.7 million in the first half of 2018. Investing activities provided $21.7 million, mainly from $51.5 million of sponsored-REIT loan repayments, partly offset by $28.9 million of property improvements and equipment. Financing used $44.4 million, including $19.3 million in distributions and net repayment of $25 million on the bank revolver.
- Cash and restricted cash totaled $13.1 million at June 30, compared with $11.2 million at year-end 2018. Total assets were $1.84 billion and stockholders’ equity was $800.5 million.
- Debt principal totaled approximately $970 million: $770 million of term loans and $200 million of senior notes. The $600 million BAML revolver had no balance outstanding at quarter-end. Management reported compliance with debt covenants. Effective rates on term loans ranged from 2.47% to 3.69%; swaps hedge substantial portions of variable-rate exposure.
- Quarterly distributions were $0.09 per share in both Q1 and Q2 2019, compared with $0.19 in Q1 2018 and $0.09 in Q2 2018.
Material changes, outlook and risks
- Operating-property occupancy was reported as 88.1% at June 30, 2019, down from 89.0% at December 31, 2018; lease expirations and terminations exceeded new leasing in the first half. Separately, the detailed portfolio table shows 86.3% weighted occupancy for the six-month period, a different measurement basis.
- The company leased approximately 835,000 square feet during the first half, at a weighted average term of 7.6 years. Management said new leases had average GAAP base rents 13.6% above the properties’ respective average rents, while requiring tenant improvements of $26.69 per square foot, commissions of $11.18 per square foot and about three months of free rent on average.
- Management anticipated positive leasing activity during the rest of 2019 and in 2020, and believed existing cash, operating cash flow and debt financing would cover working capital and anticipated capital expenditures for at least 12 months. This is not quantified earnings or FFO guidance.
- Redevelopment spending remained significant: 801 Marquette was 37% leased/occupied and had $27.7 million of expected total redevelopment and lease-up costs, of which $22.0 million had been incurred. Blue Lagoon had $28.1 million of expected costs, with $3.7 million incurred; Forest Park had $3.8 million expected, with $0.5 million incurred. The company anticipated completing Blue Lagoon by year-end 2019 and Forest Park by Q3 2019.
- Sponsored-REIT loan commitments totaled $26.5 million, of which $21.5 million was outstanding. These related-party loans expose FSP to repayment and collateral risks. Interest-rate swaps also carry counterparty and valuation risks; first-half unrealized derivative losses were $18.3 million in other comprehensive income, not an equivalent current-period cash loss.
- Key business risks include office-market and economic conditions, vacancies and lease renewals, tenant defaults or bankruptcies, interest rates and debt-market access, property expenses and redevelopment lease-up. The filing reported no material change to previously disclosed risk factors and no material legal-proceeding impact expected.
Important facts for investors to verify
- Whether occupancy and leasing trends improved after June 30, and how the 88.1% point-in-time figure compares with the 86.3% weighted-period figure.
- Progress, total spending and lease-up at 801 Marquette, Blue Lagoon and Forest Park, including whether expected completion dates were met.
- Debt maturities, covenant headroom, revolver availability and refinancing conditions, especially for the $205 million due in 2021 and $400 million due in 2023.
- Cash generation relative to distributions and property investment; FFO is a non-GAAP measure and is not equivalent to operating cash flow or available cash for distributions.
- Repayment and collateral status of sponsored-REIT loans and the future earnings effects of derivative fair-value changes.