Franklin Street Properties Corp. — Q2 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2012; balance-sheet comparisons are against December 31, 2011. Franklin Street Properties is a REIT operating 36 properties totaling approximately 7.05 million rentable square feet, managing 16 sponsored REITs and making secured loans to them. The company discontinued syndications of newly formed sponsored REITs in December 2011.
Key financial metrics
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Total revenue | $38.9 million | $78.2 million |
| Income from continuing operations | $5.4 million | $11.2 million |
| Net income | $5.4 million | $11.2 million |
| Diluted EPS | $0.07 | $0.13 |
| Funds from Operations (FFO, non-GAAP) | $19.0 million | $38.6 million |
For the first six months, operating cash flow was $28.6 million; investing used $43.3 million and financing provided $13.5 million. Cash was $22.6 million at June 30, versus $23.8 million at year-end. The company paid $0.19 per share in each of the first two quarters.
Total assets were $1.43 billion, total liabilities $529.3 million, and stockholders’ equity $901.0 million. Bank debt was $494.0 million, up from $449.0 million at year-end; it was outstanding under a $600 million unsecured revolver at a weighted-average rate of 2.34%. The company reported covenant compliance. Related-party mortgage loan receivables were $177.5 million; the company had committed up to $207.0 million under sponsored-REIT loan facilities at quarter-end.
Material changes versus prior comparable periods
- Q2 revenue rose $4.2 million year over year, while six-month revenue rose $11.6 million. Management attributed the increase mainly to properties acquired in 2011, improved leasing, and higher sponsored-REIT loan interest income.
- Six-month continuing-operations income increased to $11.2 million from $9.2 million. Six-month FFO increased to $38.6 million from $36.4 million; Q2 FFO decreased to $19.0 million from $20.1 million.
- Reported net income fell from $10.4 million to $5.4 million for Q2 and from $35.1 million to $11.2 million for six months, principally because 2011 included discontinued-operation income and property-sale gains absent in 2012. Continuing operations improved.
- Portfolio occupancy was 90.0% at June 30, compared with 88.7% at December 31, 2011 and 87.0% a year earlier. Same-store NOI increased 6.7% for the first half; comparative same-store NOI, excluding nonrecurring items, increased 4.7%.
- Interest expense increased to $7.7 million for the first half from $6.0 million, reflecting higher debt outstanding and borrowing costs. Equity earnings from non-consolidated REITs declined to $0.9 million from $2.1 million.
Outlook, risks and unusual items
Management said cash, internally generated cash and existing financing should cover working capital and anticipated capital expenditures for at least the next 12 months. It anticipated further real estate investment activity, but gave no quantified earnings or revenue guidance. The board declared a $0.19-per-share distribution after quarter-end, payable August 16, 2012.
Subsequent events included a $106.2 million sponsored-REIT loan repayment plus a $0.52 million exit fee on July 27; a $33.0 million sponsored-REIT mortgage loan funded July 5; and a July 31 Atlanta office acquisition of approximately 387,000 square feet for about $52.8 million. After subsequent transactions, the company reported $133.8 million of sponsored-REIT loan commitments, with $105.3 million drawn, as of July 31.
Risks include economic weakness affecting occupancy, rents and property values; tenant defaults, bankruptcies and lease renewals potentially below expiring rents; and credit exposure from loans to sponsored REITs. Approximately 22% of tenants operated in banking and credit services. Management noted two properties were not covering ordinary operating expenses during certain reported periods. Market risk had not changed materially since year-end; exposure includes floating-rate borrowings. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The filing reported no material changes to other previously disclosed risk factors.
Important facts for investors to verify
- Whether occupancy and same-store NOI gains continue, especially in weaker properties and after near-term lease expirations.
- Revolver refinancing and maturity plans ahead of its February 2014 maturity, covenant headroom, and sensitivity to interest-rate increases.
- Repayment and performance of sponsored-REIT loans, including collateral values, borrower concentration, and remaining funding commitments.
- Whether operating cash flow can support distributions, property investment and leasing costs; the filing cautions that distributions depend substantially on rental income.
- Results and financing impact of the post-quarter Atlanta acquisition and other expected investment activity.