Franklin Street Properties Corp. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The unaudited results are not necessarily indicative of full-year results.
Business context
Franklin Street Properties is a REIT focused on U.S. office properties, with emphasis on Atlanta, Dallas, Denver, Houston and Minneapolis. At quarter-end, it owned 36 operating properties totaling approximately 9.68 million rentable square feet, had one property in redevelopment, managed seven Sponsored REITs, and held five mortgage-secured loans to Sponsored REITs.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $63.3 million | $61.9 million | $183.9 million | $182.6 million |
| Net income | $2.5 million | $3.2 million | $6.6 million | $19.6 million |
| Diluted net income per share | $0.02 | $0.03 | $0.07 | $0.20 |
| Funds from operations (FFO, non-GAAP) | $26.7 million | $27.0 million | $79.4 million | $79.8 million |
| Cash from operating activities | — | $65.3 million | $72.7 million | |
| Cash and cash equivalents at period-end | — | $13.4 million | $19.1 million |
Quarterly revenue rose $1.4 million, principally from acquired properties; expenses increased $2.3 million, and net income declined $0.7 million. Nine-month revenue increased $1.3 million, but net income fell $13.0 million, largely because 2015 included $11.4 million of gains on property sales, while 2016 included a loss provision on a property held for sale. Same-store NOI, excluding nonrecurring items, increased 0.3% for the nine months; reported property NOI increased 0.7%.
At September 30, total assets were $1.94 billion, total liabilities $977.5 million and stockholders’ equity $962.9 million. Debt principal was $898 million: a $278 million revolving credit balance and $620 million of term loans. Cash was $13.4 million. The $500 million revolver had $278 million outstanding; availability is subject to facility terms and any other usage. Management said cash, operating cash generation and existing debt financing should meet working-capital needs and anticipated capital expenditures for at least 12 months. The company was in compliance with its disclosed debt covenants.
Operating cash flow was $65.3 million; investing used $80.9 million; financing provided $10.9 million. The financing inflow included approximately $82.9 million net proceeds from an August equity offering, partly offset by $57.1 million of stockholder distributions and net revolver repayments. The quarterly dividend remained $0.19 per share.
Material changes and operating developments
- Leased occupancy was 89.5% at September 30, down from 91.6% at December 31, 2015; vacancy was approximately 1.016 million square feet. The property table also reports 89.1% weighted occupancy, so definitions and measurement dates should be checked.
- The company acquired two office properties in 2016 for approximately $127.5 million: one in Minneapolis for $82 million and one in Atlanta for $45.5 million.
- The Federal Way, Washington property was classified as held for sale. The company recorded a $5.3 million nine-month loss provision and expects a sale within one year at a loss.
- Cash-funded acquisitions, improvements and leasing costs contributed to investing outflows. Related-party mortgage receivables declined to $79.0 million from $118.6 million, including $39.6 million of repayments during the period.
Outlook, risks and unusual items
Management anticipated continued positive leasing activity through the remainder of 2016 and into 2017, and described conditions in most major markets as steady or improving. It estimated redevelopment of the vacant 801 Marquette property in Minneapolis at $15–$20 million, including leasing costs, with completion expected by the end of Q1 2017. Management expected approximately 120,000 net rentable square feet and rents of about $15–$18 per square foot, compared with previously expired rents of approximately $4.75.
No formal company-wide earnings or revenue guidance is provided. Management cautioned that economic and office-market conditions, tenant defaults or bankruptcies, higher interest rates, debt-market disruption, unanticipated property costs, and changes in government policy or regulation could affect results, property values, occupancy and distributions. The company also faces credit risk on Sponsored REIT loans; $79.0 million was outstanding against $90.3 million of stated commitments. It reported no loan impairments. Interest-rate swaps hedge term-loan exposure, but their fair-value changes and hedge ineffectiveness affect reported results; derivative liabilities totaled $12.7 million.
Other notable items include the 2016 equity offering of 7,043,750 shares at $12.35 per share and a $4.2 million gain on the April sale of a Missouri property. The filing reports ordinary-course legal matters that management does not expect to have a material adverse effect, and no material changes to previously disclosed risk factors. Management assessed disclosure controls as effective.
Important facts for investors to verify
- Whether leasing and occupancy improve, particularly given the increase in vacancy and the approaching 2017 lease expirations.
- The sale timing and final proceeds or loss for the Federal Way property, and the cost, schedule and leasing progress of the Minneapolis redevelopment.
- Debt balances, revolver availability, interest-rate exposure, swap accounting effects and continued covenant compliance.
- Repayment prospects and credit quality of the $79.0 million in Sponsored REIT loans, including related-party exposures.
- Whether recurring operating cash flow and FFO adequately support the $0.19-per-share quarterly distribution and planned capital needs; FFO is non-GAAP and is not a liquidity measure.
- The occupancy figures’ differing presentation (89.5% in MD&A versus 89.1% in the portfolio table) and the classification/sign of hedge-ineffectiveness amounts across the filing disclosures.