Franklin Street Properties Corp. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The unaudited company is a REIT focused on commercial real estate, primarily suburban office properties, and also provides management services and secured financing to affiliated Sponsored REITs. At quarter-end, it owned 37 properties, including one held for sale, and managed 16 Sponsored REITs.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $41.8 million | $34.4 million | $119.4 million | $100.5 million |
| Income from continuing operations | $5.6 million | $3.9 million | $17.3 million | $13.7 million |
| Net income (loss) | $(9.0) million | $3.3 million | $2.2 million | $38.5 million |
| FFO, company-defined | $19.9 million | $16.4 million | $58.5 million | $52.8 million |
- Revenue growth reflected property acquisitions, improved occupancy, and higher management fees and interest income from loans to Sponsored REITs. Nine-month rental revenue was $110.1 million; management fees and loan interest income were $9.1 million.
- For the nine months, operating cash flow was $49.6 million, investing cash outflow $29.8 million, and financing cash outflow $19.6 million. Cash ended at $24.0 million, versus $23.8 million at December 31, 2011.
- At September 30, total debt was $482 million: a $400 million term loan and $82 million drawn on a $500 million revolver. The term loan’s base LIBOR rate was swapped to 0.75% for five years; the stated all-in rate was 2.20%. The revolver rate was 1.67%. The company reported compliance with its credit covenants.
- The new credit facility totals $900 million and replaced the prior $600 million revolver. The revolver matures in September 2016, with a conditional one-year extension; the term loan matures in September 2017. An additional $250 million accordion is subject to lender commitments and conditions.
- Occupancy was 89.9% at quarter-end, compared with 88.7% at December 31, 2011. Same-store NOI increased 6.3% for the nine months; comparative same-store NOI, excluding nonrecurring items, increased 4.7%.
- The company paid $0.19 per share each quarter in 2012. Nine-month distributions to shareholders totaled $47.3 million.
Changes, outlook and notable items
- Continuing-operations income improved year over year, but Q3 reported a net loss primarily because the Southfield, Michigan office property was classified as held for sale and a $14.3 million after-tax loss provision was recorded. The property was 39.6% leased and management expected a sale within one year.
- Nine-month net income fell from 2011, which included $21.9 million of gains on property sales in discontinued operations. The investment banking segment was discontinued in December 2011; management said its prospective profit contribution was limited.
- Management cited steady leasing progress and anticipated higher year-end occupancy. It expected existing cash, internally generated cash and debt financing to cover working capital and anticipated capital expenditures for at least 12 months, while noting dividends depend significantly on rental income. No specific earnings or FFO guidance was provided.
- During the nine months, the company leased 521,574 square feet at a weighted average lease term of 4.3 years. Approximately 1.2% of portfolio area was scheduled to expire in the remainder of 2012 and 5.9% in 2013. Management cautioned that renewal rents may be below expiring rents and tenants may default or enter bankruptcy.
- After quarter-end, the company agreed to acquire two Houston office buildings totaling approximately 629,000 square feet for $154.8 million, with closing anticipated around November 1, 2012. The board also declared a $0.19-per-share distribution payable November 15.
- Sponsored REIT lending is a material related-party exposure: eight mortgage-secured facilities had $133.8 million of total commitments, with $108.2 million drawn at quarter-end. Management described repayment as dependent on property cash flows, refinancing or other capital events. Loans expose the company to borrower credit risk.
- Risks highlighted include economic weakness and office-space demand, interest-rate and debt-market conditions, tenant and industry concentration, property operating costs, and leasing and disposition uncertainty. About 22% of tenants operated in banking and credit services. Management said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Reconcile debt disclosures: the balance sheet and credit-facility note show $82 million revolver plus $400 million term loan, but the market-risk discussion contains inconsistent figures, including references to $482 million and $494 million revolver balances.
- Review the valuation assumptions and likely sale proceeds for Southfield; the $14.3 million provision used third-party offers and Level 3 valuation inputs.
- Assess collectability, maturity and refinancing prospects for the $108.2 million in Sponsored REIT loans, and the company’s related-party concentration.
- Evaluate funding for the planned $154.8 million Houston acquisition, including revolver usage, covenant headroom and liquidity after closing; the filing does not state the final funding mix.
- Compare recurring property performance and cash generation with FFO and shareholder distributions; FFO is a non-GAAP measure and is not a substitute for cash flow or liquidity.