Franklin Street Properties Corp. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company is a REIT focused on commercial office real estate, leasing, property management, and secured lending. At quarter-end it owned 35 operating properties totaling approximately 9.5 million rentable square feet, had one property in redevelopment, and managed Sponsored REIT investments.
Key financial results
| Metric | Q2 2016 | First half 2016 |
|---|---|---|
| Total revenue | $60.8 million, up 1.0% year over year | $120.6 million, essentially unchanged |
| Net income | $1.6 million; $0.02 per share | $4.2 million; $0.04 per share |
| Funds from operations (FFO, company-defined) | $26.7 million, versus $27.2 million | $52.8 million, versus $52.9 million |
| Operating cash flow | Not separately stated | $32.4 million, versus $45.7 million |
| Property NOI | $33.9 million, versus $33.9 million | $67.4 million, versus $66.9 million |
Q2 net income was down from $3.9 million a year earlier; first-half net income fell from $16.4 million. The first-half comparison was affected particularly by $11.4 million of property-sale gains in 2015, versus a $0.6 million net loss on sale and property held for sale in 2016. The 2016 period also included $1.0 million of hedge ineffectiveness expense and a $4.8 million after-tax provision for the Federal Way property, partly offset by a $4.2 million gain on the Maryland Heights sale. First-half comparative same-store NOI increased 1.1% after the company’s stated adjustment for nonrecurring items.
Balance sheet and liquidity: Total assets were $1.895 billion and stockholders’ equity was $895.0 million at June 30. Cash was $7.5 million, down from $18.2 million at year-end. Debt principal was approximately $930 million: $310 million drawn on the $500 million BAML revolver, a $400 million BAML term loan, and a $220 million BMO term loan. The balance sheet reports debt net of financing costs. The revolver had approximately $190 million of unused capacity, subject to facility terms. Management said cash, internally generated funds, and existing financing were expected to cover working capital and anticipated capital expenditures for at least 12 months. The company was in compliance with its stated debt covenants at quarter-end.
First-half investing cash use was $25.0 million, including the Minneapolis acquisition; financing cash use was $18.1 million, including $38.1 million of shareholder distributions and $20.0 million of net revolver borrowings. Quarterly distributions were $0.19 per share. Interest expense was $12.9 million for the first half, up from $12.6 million; the BAML revolver’s weighted-average rate was 1.68% for the half.
Changes, outlook, and risks
- Portfolio leased occupancy was 90.1% at June 30, down from 91.6% at December 31, 2015; reported vacancy increased to approximately 940,000 square feet. During the first half, the company leased about 599,000 square feet, with average GAAP base rents 6.6% above the applicable prior-year average.
- The company acquired a 325,800-square-foot Minneapolis office property for $82 million on June 6. It began redeveloping its approximately 170,000-square-foot 801 Marquette property after it became vacant. Management said it anticipated continued positive leasing activity in 2016 and described conditions in most major markets as steady or improving; it gave no quantified earnings or FFO guidance.
- Federal Way, Washington, was classified as held for sale, with a sale expected within one year at a loss. Management cited leasing prospects, repositioning costs, local market activity, and purchase offers in its decision.
- After quarter-end, the BAML term loan maturity was extended from September 2017 to September 2021, with covenant and definition changes. A forward swap fixed the base LIBOR rate for the extended term at 1.12%; the BMO facility was amended to conform covenants and definitions. A $0.19-per-share distribution was declared for payment in August.
- Risks highlighted include office-market and tenant demand, lease expirations and defaults, interest-rate and refinancing exposure, property-level costs and tax reassessments, and credit risk from loans to related Sponsored REITs. The company had committed up to $90.3 million in such loans, of which $79.3 million was drawn; it reported none impaired. Management reported no material change to the risk factors in its 2015 Form 10-K and said ordinary-course legal matters were not expected to be material.
Investor verification points
- Track leasing, vacancy, renewal terms, and the redevelopment timeline and costs at 801 Marquette.
- Verify the expected timing, proceeds, and final loss on the Federal Way disposition.
- Assess debt refinancing needs and covenant headroom, including the post-quarter BAML extension and remaining revolver availability.
- Review whether operating cash flow and FFO support the $0.19 quarterly distribution, given first-half distributions exceeded net income.
- Monitor repayment and credit quality of Sponsored REIT loans, related-party exposure, and derivative valuation or hedge ineffectiveness.