Franklin Street Properties Corp. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Franklin Street Properties (FSP) is a REIT operating in real estate and investment banking/investment services. Its portfolio included 33 properties and approximately 6.42 million rentable square feet at quarter-end.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $32.3 million | $32.1 million | $95.0 million | $92.6 million |
| Net income | $4.8 million | $6.9 million | $16.3 million | $19.6 million |
| Diluted earnings per share | $0.06 | $0.10 | $0.20 | $0.28 |
| Funds from operations (FFO) | $16.1 million | $17.5 million | $49.4 million | $52.3 million |
| Cash provided by operating activities | — | $39.1 million | $51.5 million |
All amounts are in U.S. dollars. FFO is a non-GAAP measure as defined by the company and should not be viewed as a substitute for GAAP income or cash flow.
- Margins and costs: Q3 total expenses rose to $28.0 million from $25.9 million; nine-month expenses rose to $79.9 million from $75.5 million. The filing does not present a standard operating-margin measure.
- Cash flow and distributions: Nine-month operating cash flow was $39.1 million. Investing used $61.0 million, while financing provided $15.1 million. FSP paid $45.4 million in shareholder distributions during the period, including $0.19 per share each quarter.
- Debt and liquidity: At September 30, cash and cash equivalents were $20.6 million. Bank revolver borrowings were $168.0 million and the term loan was $75.0 million, totaling $243.0 million. The revolver had a $250 million limit, matured August 2011, and carried a 1.26% rate at quarter-end; the $75 million term loan matured October 2011, with two optional one-year extensions, and had a fixed 5.84% rate. FSP reported covenant compliance.
- Balance sheet: Total assets were $1.189 billion and stockholders’ equity was $910.3 million at quarter-end. Cash declined from $27.4 million at December 31, 2009.
Changes versus prior period
- Q3 revenue increased only modestly, while net income declined $2.2 million year over year. Higher property operating costs and depreciation, partly reflecting acquisitions, outweighed related-party fee and loan-interest growth; rental revenue was slightly lower.
- For the first nine months, revenue rose $2.4 million, but net income fell $3.3 million. Expenses increased $4.4 million and equity earnings from non-consolidated REITs declined $0.7 million, primarily due to lower earnings from East Wacker.
- Portfolio occupancy fell to approximately 82% from 84% at December 31, 2009. Management attributed vacancy pressure to lease expirations and noted lower rental income at affected properties.
- FSP acquired two Minneapolis office buildings totaling approximately 470,000 square feet in June for about $40.5 million, excluding closing costs and adjustments. Portfolio size increased to 33 properties from 32 a year earlier.
- Sponsored REIT equity raised through private placements totaled $10.7 million in the first nine months, versus $0.6 million in the comparable 2009 period. Two offerings were completed in July.
Outlook, risks and notable items
- Management said it believed full-year 2010 could be the low point in the occupancy cycle, assuming stable or improving economic conditions, and cited meaningful prospective tenant interest and optimism for improved occupancy in 2011. Approximately 8% of portfolio square footage was scheduled to expire in each of 2011, 2012 and 2013. These are expectations, not guarantees.
- Management expected existing cash, operating cash flow, future Sponsored REIT offerings and debt financing to meet working capital, distributions and anticipated capital expenditures for at least 12 months. It expected replacement financing to be arranged by the revolver and term-loan maturities, but gave no assurance of refinancing.
- Risks include continued weak U.S. and local property markets, vacancies and lease defaults or bankruptcies, rent renewals potentially below expiring rates, unpredictable private-placement fundraising, and refinancing risk. Management specifically warned that failure to refinance or otherwise meet debt obligations could harm distributable cash flow and financial condition.
- FSP was committed to fund up to $85.8 million across six Sponsored REIT loan facilities; $53.8 million was drawn at quarter-end. These secured loans depend on repayment from property financing, cash flow or other capital events.
- The company declared a $0.19-per-share distribution after quarter-end, payable November 19, 2010. It also advanced $0.8 million under the Interlocken construction loan on October 25.
- FSP reported no material change in market-risk exposure, no material change in risk factors other than the added refinancing-risk disclosure, and no material adverse effect expected from ordinary-course legal proceedings. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether occupancy and leasing improve, particularly at properties with substantial expirations or vacancies, and whether replacement rents are below prior lease rates.
- Progress on refinancing the revolver before August 2011 and the term loan before October 2011, including the availability and cost of replacement credit.
- Repayment prospects and collateral performance for the $53.8 million drawn on Sponsored REIT loans, and FSP’s ability to meet remaining commitments.
- Whether private-placement activity and related fee income can recover, and how much FSP relies on those proceeds to support growth and distributions.
- How operating cash flow and property income compare with the $0.19 quarterly distribution, capital expenditures and leasing costs; operating cash flow was below distributions in the first nine months.