Franklin Street Properties Corp. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The unaudited filing covers a REIT with two segments: real estate operations and investment banking/investment services. At quarter-end, the company owned 35 properties totaling approximately 6.93 million rentable square feet.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $35.7 million | $30.1 million | $109.3 million | $88.4 million |
| Income from continuing operations | $3.3 million | $3.6 million | $16.0 million | $12.8 million |
| Net income | $3.3 million | $4.8 million | $38.5 million | $16.3 million |
| Diluted earnings per share | $0.04 | $0.06 | $0.47 | $0.20 |
| Funds from operations (FFO) | $16.4 million | $16.1 million | $52.8 million | $49.4 million |
| Cash from operating activities | — | — | $44.9 million | $39.1 million |
Q3 revenue rose 18.5% year over year, led by rental income and related-party fees, while continuing-operations income decreased. Higher property expenses, depreciation and interest expense offset revenue growth. Nine-month net income includes a $21.9 million after-tax gain on property sales; without that unusual gain, reported net income growth would have been substantially lower. FFO is a company-defined non-GAAP measure and should be considered alongside GAAP results and cash flows.
Rental revenue was $33.7 million in Q3, versus $29.2 million a year earlier. The company reported an 88.1% portfolio lease rate, up from 82.0%. Nine-month syndication and transaction fees together were approximately $7.9 million, versus $1.8 million in 2010.
Balance sheet, cash flow and capital
- At September 30, 2011, total assets were $1.346 billion, total liabilities $413.8 million and stockholders’ equity $932.0 million. Cash and cash equivalents were $44.0 million, down from $68.2 million at year-end 2010.
- Debt consisted of $375 million outstanding on the unsecured revolving credit facility; there was no term loan outstanding. The facility limit was increased to $600 million, matures February 2014, and permits a one-year extension subject to a fee. The reported quarter-end borrowing rate was 2.19%; the company said it was in compliance with facility covenants.
- Nine-month investing cash outflow was $124.0 million, including substantial property and lease acquisitions, partly offset by $96.8 million in property-sale proceeds. Financing cash inflow was $54.9 million, including net borrowing, ATM share proceeds, distributions and debt-related costs.
- The company acquired four properties totaling approximately 871,000 rentable square feet for an aggregate purchase price of approximately $203 million excluding closing costs and adjustments. It sold properties in Falls Church, Virginia, and Savage, Maryland, realizing the reported gain.
- During Q3, it sold 1.5 million shares through its at-the-market program at an average $12 per share, generating approximately $17.4 million net. It paid $0.19 per share in each of the first three quarters; the board declared another $0.19 distribution payable in November.
Outlook, risks and contingencies
- Management said available cash, operating cash generation, potential Sponsored REIT offerings and credit financing were expected to cover working capital and anticipated capital expenditures for at least 12 months. This is an expectation, not a guarantee.
- Management’s objective was to move portfolio occupancy above 90% by early 2012. It noted that weak employment growth and financial and regulatory uncertainty were slowing tenants’ decisions, and that new or renewed leases could be at lower market rents.
- Management anticipated additional acquisition activity, while noting property sales markets remained challenged despite improving pricing and liquidity in some markets. No quantified earnings or revenue guidance was provided.
- Capital raising for Sponsored REITs slowed significantly in Q3 and its future volume was described as unpredictable. The Union Centre offering was ongoing and had raised $52.8 million of a stated $62 million capitalization by quarter-end.
- The company had commitments of up to $85.8 million for secured loans to six Sponsored REITs, of which $61.9 million was drawn and outstanding. Repayment depends on property financing, cash flows, equity offerings or other capital events. These related-party exposures warrant attention.
- Other cited risks included economic and debt-market conditions, occupancy and rents, tenant defaults or bankruptcies, property operating costs and taxes, and investor demand for illiquid Sponsored REIT investments. Management reported no material change in previously disclosed risk factors, no material market-risk change, and no legal matters expected to materially affect results. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether occupancy continued toward management’s stated above-90% objective, and the leasing and rent terms behind that progress.
- Whether operating cash generation and recurring earnings support distributions, given the sizable property-sale gain included in nine-month net income.
- Revolver borrowing, covenant headroom, interest costs and refinancing needs, particularly as acquisition activity continues.
- Collection and repayment prospects for the $61.9 million of Sponsored REIT loans outstanding and funding requirements under the remaining commitments.
- Completion and economics of the Union Centre syndication, as well as ongoing demand for Sponsored REIT offerings.
- Acquired-property performance, vacancy and expense trends, and the effect of further share issuance on per-share results.