Franklin Street Properties Corp. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unaudited results; amounts below are in U.S. dollars unless otherwise noted.
Business context
FSP operates commercial real estate properties and provides investment banking, syndication, financing and management services to sponsored REITs. At quarter-end, its portfolio comprised 33 properties totaling approximately 6.42 million rentable square feet and was 85% leased. It acquired two Minneapolis office buildings totaling approximately 470,000 square feet on June 29 for approximately $40.5 million, excluding closing costs and adjustments.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $31.1 million | $30.1 million | $62.7 million | $60.6 million |
| Net income | $6.0 million | $4.9 million | $11.5 million | $12.7 million |
| Basic and diluted EPS | $0.07 | $0.07 | $0.14 | $0.18 |
| Funds from operations (FFO) | $16.7 million | $17.4 million | $33.4 million | $34.7 million |
| Operating cash flow | Not provided by quarter | $21.1 million | $31.5 million |
Q2 revenue rose about 3% and net income about 22% year over year; first-half revenue rose about 4%, while net income fell about 9%. First-half rental revenue increased $1.0 million, partly reflecting properties acquired in 2009. Related-party syndication and transaction fee revenue also increased. Lower equity earnings from non-consolidated REITs, particularly East Wacker, and higher operating, administrative and interest costs weighed on first-half earnings. Management reported that Q2 2009 depreciation included accelerated amortization of lease assets after a tenant bankruptcy, affecting the comparison.
For the first half, operating cash flow was $21.1 million; investing used $50.7 million and financing provided $23.7 million. Cash declined $5.9 million to $21.5 million. Distributions paid were $30.3 million, or $0.38 per share for the half-year. FSP reported total assets of $1.187 billion and stockholders’ equity of $918.9 million at June 30.
Debt and liquidity
Debt totaled approximately $238.0 million: $163.0 million drawn on a $250 million unsecured revolver and a $75 million unsecured term loan. Revolver borrowings carried a 1.35% rate at quarter-end; the term loan’s rate was fixed at 5.84% through its initial October 2011 maturity. The revolver matures in August 2011; the term loan has two optional one-year extensions. The company said it complied with both facilities’ covenants. Management believed cash, operating cash generation, expected sponsored-REIT equity proceeds and available debt financing would meet working-capital needs and anticipated capital expenditures for at least 12 months.
Outlook, risks and notable items
- Management anticipated potential additional property acquisitions in the rest of 2010 and said acquisitions could add accretive rental income. It also noted that property dispositions remained constrained by market liquidity and pricing, although conditions appeared to be improving in some markets.
- Management expected the investment-services business to improve over 2009 for full-year 2010, but emphasized that results and capital raising are unpredictable and depend on sourcing suitable properties and investor demand. Equity raised for sponsored REITs was $10.4 million in the first half versus $0.6 million a year earlier.
- Several properties had significant lease expirations in the remainder of 2010. FSP expected lower occupancy or rental income at affected properties, while reporting prospective tenant interest; re-leasing could be at market rents below expiring rates. Tenant defaults, bankruptcies and lease rejections remain risks.
- FSP had commitments of up to $85.8 million for secured loans to six sponsored REITs, of which $46.3 million was drawn. These related-party loans are expected to be repaid from property financing, cash flow or other capital events. A further $2.5 million was advanced under the 385 Interlocken construction loan after quarter-end.
- The company had not sold shares under its May 2010 agreement allowing up to $75 million of at-the-market common stock sales. The two private placements still in process at quarter-end were completed July 9, 2010. The board declared a $0.19-per-share distribution payable August 20.
- Management cited U.S. economic weakness, debt-market disruption, property-market conditions, investor demand, leasing costs and unforeseen property expenses as risks. It reported no material change in market-risk exposure, no material change in risk factors, and no legal proceedings expected to materially affect the company.
Important facts for investors to verify
- Lease expirations, actual occupancy and renewal or re-leasing terms, particularly at properties facing 2010 rollovers.
- Repayment and collateral performance of the $46.3 million in sponsored-REIT loans outstanding and the remaining commitment capacity.
- Liquidity and covenant headroom as the revolver and term loan approach their 2011 maturities, including any extension or refinancing plans.
- Cash available after property acquisitions, leasing commissions and distributions, and the sustainability of the $0.19 quarterly distribution.
- Whether sponsored-REIT fundraising and management’s anticipated investment-services improvement materialize; the filing provides no quantified earnings or FFO guidance.