Franklin Street Properties Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Franklin Street Properties is a REIT focused on U.S. office real estate, with 32 operating properties, three redevelopment properties, and interests in three managed Sponsored REITs. Its strategy emphasizes infill and central business district properties, particularly in the Sunbelt and Mountain West.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $64.7 million | $66.9 million; down 3.3% |
| Net income (loss) | $(1.2) million; $(0.01) per share | $1.4 million; $0.01 per share |
| Funds from Operations (FFO), company-defined | $22.1 million | $26.4 million; down 16.1% |
| Same-store comparative NOI | $33.1 million | $34.7 million; down 4.5% |
| Cash provided by operating activities | $9.5 million | $15.1 million |
| Cash, cash equivalents and restricted cash | $8.8 million at March 31 | $11.2 million at December 31, 2018 |
| Debt | $1.010 billion principal; approximately $1.004 billion carrying value | — |
Rental revenue declined $2.3 million, largely due to lease expirations, partly offset by new leases. Real estate operating costs and taxes/insurance increased by a combined $1.5 million; lower depreciation and interest expense partly offset the increase. Interest expense was $9.4 million. Comprehensive loss was $8.0 million, including a $6.8 million unrealized derivative loss recorded in other comprehensive income.
Operating properties were 88.5% leased at quarter-end, versus 89.0% at December 31, 2018. The company leased approximately 460,000 square feet during the quarter, at a weighted average term of 9.0 years. The filing reports weighted occupancy of 86.2% for operating properties using a separate quarterly-weighted calculation.
Balance sheet, debt and capital allocation
Total assets were $1.891 billion and stockholders’ equity was $820.0 million at March 31, 2019. Principal debt comprised $600 million of term loans, a $400 million BAML term loan, $200 million of senior notes, and $40 million drawn on the BAML revolver. The revolver has a $600 million commitment; unused capacity is subject to facility terms and covenants. Effective rates at quarter-end included 2.47% on the BAML term loan, 3.57% on the BMO term loan, 3.69% on the hedged $100 million JPM portion and BAML revolver, and 3.75% on the unhedged $50 million JPM portion. The company reported compliance with its credit and note covenants.
Cash from operations of $9.5 million was below investing outflows of $17.1 million, primarily reflecting $15.2 million of property improvements and a $2.4 million related-party mortgage loan advance. Financing provided $5.3 million, including net revolver borrowing; cash distributions were $9.7 million. The quarterly distribution fell to $0.09 per share from $0.19 in Q1 2018. The board declared a further $0.09-per-share distribution payable May 9, 2019.
Changes, outlook and material risks
- Management said existing cash, internally generated cash and current debt financing should cover working capital and anticipated capital expenditures for at least the next 12 months. It expects positive leasing activity through the rest of 2019 and 2020, while cautioning results may vary with market conditions.
- Management cited generally steady or improving rental conditions in many markets and increased potential leasing activity in Houston and Denver. The company’s portfolio transformation—potentially selling smaller suburban assets and investing in larger infill or central business district properties—may adversely affect short-term results.
- Three properties are in redevelopment or lease-up. Expected remaining project costs include $8.5 million at 801 Marquette (total expected cost $28.4 million; 37% leased), $20.8 million at Blue Lagoon (total expected cost $23.6 million; completion expected by year-end 2019), and approximately $3.6 million at Forest Park (total expected cost $3.7 million; completion expected by Q3 2019).
- Sponsored REIT loans totaled $72.8 million drawn against $79.5 million of commitments. These related-party loans are secured by underlying properties but expose the company to borrower, refinancing and real estate-market risk; two Energy Tower facilities mature June 30, 2019.
- Interest-rate exposure remains on floating-rate borrowings. The company hedged portions of its term loans with swaps; its sensitivity estimate for a 10% increase in market rates on the BAML revolver and unhedged JPM portion was a $0.3 million annual reduction in future earnings and cash flow. Derivative fair values and future reclassifications from accumulated other comprehensive income can affect reported results.
- Other risks noted include office demand, occupancy and rents; tenant defaults or bankruptcy; property expenses and taxes; credit-market access; and REIT qualification requirements. Management reported no material change to previously disclosed risk factors, no material legal proceeding, and effective disclosure controls.
The company adopted the new lease standard on January 1, 2019, recording a $2.1 million right-of-use asset and $2.2 million lease liability. It also adopted revised hedge-accounting guidance; no opening equity adjustment was required.
Investor verification points
- Confirm the drivers and durability of declining rental revenue, same-store NOI and FFO, and the implications for distributions.
- Review lease-up progress and remaining funding needs at the three redevelopment properties, especially Blue Lagoon and 801 Marquette.
- Check repayment or refinancing of Sponsored REIT loans nearing maturity and assess related-party credit exposure.
- Assess debt maturities, variable-rate exposure, swap terms, covenant headroom and available revolver capacity.
- Reconcile the reported 88.5% leased rate with the 86.2% weighted occupancy measure, which uses a different calculation basis.