Franklin Street Properties Corp. — FY2013 Form 10-K
Business and reporting period: This annual report covers the fiscal year ended December 31, 2013. Franklin Street Properties is a REIT focused primarily on office properties. It owned 39 properties across 13 states, managed Sponsored REITs, and held six mortgage-secured loans to Sponsored REITs. Its former investment-banking segment was discontinued in 2011.
Financial performance and position
| Metric | FY2013 / December 31, 2013 | FY2012 / December 31, 2012 |
|---|---|---|
| Total revenue | $213.6 million | $161.6 million |
| Income from continuing operations | $17.3 million; $0.18 per share | $23.0 million; $0.28 per share |
| Net income | $19.8 million; $0.21 per share | $7.6 million; $0.09 per share |
| Operating cash flow | $92.0 million | $70.4 million |
| Cash and cash equivalents | $19.6 million | $21.3 million |
| Total assets | $2,044.0 million | $1,526.1 million |
| Total liabilities | $993.9 million | $661.3 million |
| Shareholders’ equity | $1,050.2 million | $864.7 million |
- Revenue rose 32.2%, primarily as acquisitions contributed for more of the year. Rental revenue increased $56.5 million; related-party management fees and loan interest declined $4.3 million, mainly following loan repayments.
- Expenses rose $54.1 million to $194.5 million, including higher property costs, depreciation and interest. Continuing-operations income consequently fell $5.7 million.
- Net income increased largely because 2013 included a $2.2 million property-sale gain, while 2012 included a $14.8 million loss on the Southfield, Michigan sale.
- Management-reported FFO was $100.8 million, up from $80.4 million. FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow. Property NOI was $122.9 million, up 36.8%; comparative same-store NOI increased 2.1% excluding specified nonrecurring items.
- Cash flow from operations was $92.0 million; investing used $562.6 million and financing provided $469.0 million. Investing outflows primarily reflected acquisitions and property investment; financing included a $230.7 million net equity offering and a $220 million term loan.
- Debt at year-end comprised $306.5 million drawn on the revolving facility and $620.0 million of term loans, or $926.5 million total. The revolver balance increased from $216.8 million; the term-loan balance increased from $400 million. No portfolio properties were subject to mortgage debt.
- Year-end portfolio occupancy was approximately 94.1%, versus 94.0% a year earlier. The annual property table reports 92.0% weighted occupancy, a different measure. The company leased approximately 912,000 square feet during 2013; new and renewal leases averaged 8.0% higher GAAP base rent than rents in the applicable properties in 2012.
- Quarterly common distributions remained $0.19 per share; annual distributions were $0.76 per share. The 2013 distribution was classified for tax purposes as 69.58% ordinary income and 30.42% return of capital.
Material changes and notable items
- Acquired three office properties in Atlanta and Denver totaling approximately 1.95 million rentable square feet for about $558 million before closing adjustments. The properties contributed $29.7 million of revenue and $3.8 million of operating net income after acquisition.
- Issued 17.25 million common shares at $14.00 per share in May 2013, raising approximately $230.7 million net of offering costs.
- Borrowed $220 million under a new unsecured seven-year term loan, maturing in 2020. Interest-rate swaps fixed the base LIBOR components on the 2013 and 2012 term loans at 2.32% and 0.75%, respectively. Year-end stated rates were 4.22% and 2.40%; the $306.5 million revolver remained variable-rate debt.
- Sold an office property in Richardson, Texas, for a reported $2.2 million gain. There was no asset held for sale at year-end.
- Had $99.7 million outstanding under six Sponsored REIT loans, against total commitments of up to $111.8 million. These related-party loans are secured by underlying real estate and expose the company to borrower repayment and collateral risks.
Outlook, risks and contingencies
- Management said existing cash, internally generated operating cash and available debt financing should cover working capital and anticipated capital expenditures for at least 12 months. It expected comparable quarterly dividends to continue, but gave no assurance; distributions depend substantially on rental income.
- Management described its portfolio as well stabilized, cited improving occupancy and rental trends in many major markets, and anticipated leasing costs could moderate. It also noted that new leases could be signed below expiring rents. No quantified earnings or FFO guidance was provided.
- Management identified U.S. economic conditions, office demand, tenant defaults, vacancies, lease expirations, interest rates, refinancing, and compliance with debt covenants as material risks. The largest geographic concentrations included Greater Denver (20.7% of portfolio square footage), Atlanta (14.4%), Dallas (13.9%) and Houston (12.3%). The top 20 tenants represented about 38.4% of rentable area.
- The credit agreements include financial covenants; the company reported compliance at year-end. Management warned that covenant breaches or inability to refinance could require repayment and adversely affect distributions and operations. It estimated a 10% increase in revolver rates would reduce annual earnings and cash flows by about $0.6 million.
- Management believed ordinary-course legal matters would not materially affect financial position, cash flows or results. The company also disclosed environmental, property-condition, insurance, REIT-qualification and related-party lending risks.
Important facts for investors to verify
- Reconcile the sharp increase in revenue and FFO with acquisition timing, higher expenses, lower continuing income and the distinction between GAAP earnings and non-GAAP measures.
- Review debt maturity and refinancing exposure, variable-rate revolver borrowings, swap valuations, covenant headroom and available liquidity.
- Assess the performance and repayment sources of the six Sponsored REIT loans, including the $99.7 million drawn balance and related-party concentration.
- Examine occupancy, lease expirations, tenant and market concentration, leasing costs, and whether expected rent growth materializes.
- Confirm the sustainability of the $0.19 quarterly dividend against operating cash flow, capital needs, debt service and REIT distribution requirements.