Franklin Street Properties Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The company is a REIT focused on commercial office properties, with 35 operating properties and one property in redevelopment. Its strategy emphasizes urban infill and central business district assets, particularly in Atlanta, Dallas, Denver, Houston and Minneapolis.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or prior date |
|---|---|---|
| Total revenue | $68.8 million | $59.8 million |
| Net income | $4.5 million; $0.04 per share | $2.6 million; $0.03 per share |
| Funds from Operations (FFO, non-GAAP) | $28.5 million | $26.0 million |
| Net cash from operating activities | $12.0 million | $7.8 million |
| Cash and cash equivalents | $11.1 million | $9.3 million at December 31, 2016 |
| Total assets | $2.08 billion | $2.09 billion at December 31, 2016 |
| Total stockholders’ equity | $948.0 million | $962.0 million at December 31, 2016 |
Rental revenue rose $9.0 million, mainly from properties acquired in 2016; total revenue increased 15.0%. Expenses rose $9.2 million, including higher property expenses, depreciation and interest. The $2.3 million gain from a January property sale materially contributed to higher GAAP net income. Interest expense was $7.6 million, up $1.1 million. The filing does not provide a single standardized operating-margin figure.
Reported property NOI was $36.9 million, up 10.2%, reflecting acquisitions. Comparative same-store NOI declined 2.2% after adjustment for nonrecurring items (reported same-store NOI declined 3.2%). The portfolio was 89.6% leased at quarter-end, versus 89.3% at year-end 2016. A separate property schedule reports 88.0% weighted occupancy; the filing does not reconcile the difference in these measures.
Investing activities used $4.8 million, including $11.6 million for property improvements, partly offset by $6.2 million of sale proceeds. Financing activities used $5.4 million: $20.4 million in stockholder distributions was partly offset by $15.0 million of net revolver borrowings. The quarterly distribution was $0.19 per share.
Debt was approximately $1.065 billion gross: $295 million under the revolving facility and $770 million in term loans. The $500 million revolver had $295 million drawn, leaving nominal undrawn capacity of $205 million, subject to facility terms and covenants. Debt maturities include $445 million in 2018, $220 million in 2020 and $400 million in 2021. The company reported compliance with its financial covenants. It had $11.1 million of cash and stated existing cash, internally generated funds and debt financing should meet working capital and anticipated capital needs for at least 12 months.
Changes, outlook and risks
- Newly acquired properties drove revenue and total NOI growth, while same-store NOI weakened. Management attributed higher expenses partly to the acquired properties and higher interest rates and borrowings.
- During the quarter, the company leased approximately 206,000 square feet at a weighted average term of 5.6 years. GAAP base rents on those leases averaged $28.36 per square foot, 7.4% above the comparable property averages cited by the company.
- Management anticipated continued positive leasing activity in 2017 and described its portfolio as well stabilized. This is commentary, not quantified earnings or FFO guidance. It cautioned that results are not necessarily indicative of full-year performance.
- The vacant 801 Marquette Avenue property in Minneapolis was being redeveloped. Estimated total cost, including leasing costs, was approximately $20 million; completion was expected by the end of Q2 2017. Management projected about 128,000 net rentable square feet and rents of $17–$19 per square foot, compared with prior net rent of approximately $4.75.
- Management cited economic and office-market conditions, occupancy and rent levels, possible tenant defaults or bankruptcies, interest-rate increases, borrowing costs, and unanticipated operating costs as risks. Sponsored REIT loans create related-party credit exposure: $81.5 million was drawn against $90.3 million of total commitments; management reported none impaired.
- The Milpitas, California property sale closed January 6, 2017, producing a $2.3 million gain. A subsequent-event distribution of $0.19 per share was declared April 7, payable May 11, 2017.
- No material changes to previously disclosed risk factors were reported. Management said disclosure controls were effective and no material internal-control change occurred during the quarter.
Key facts for investors to verify
- Reconcile the reported 89.6% leased rate with the property schedule’s 88.0% weighted occupancy measure, and assess leasing and renewal trends.
- Separate acquisition-driven revenue and NOI growth from same-store performance; investigate the 2.2% comparative same-store NOI decline.
- Assess recurring earnings and distribution coverage excluding the $2.3 million property-sale gain; compare distributions with operating cash flow and FFO, noting FFO is non-GAAP and not a liquidity measure.
- Review refinancing plans for the $445 million of debt due in 2018, the variable-rate exposure, and remaining revolver availability and covenant headroom.
- Track redevelopment spending, completion, leasing, and realized rents at 801 Marquette against management’s estimates.
- Evaluate collection and repayment prospects for Sponsored REIT loans, including their related-party nature and upcoming maturities.