Franklin Street Properties Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. The company is a REIT focused on office properties, with 34 operating properties and approximately 9.76 million rentable square feet at quarter-end, plus one redeveloped property in lease-up and interests in six managed Sponsored REITs.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 / prior date | Change |
|---|---|---|---|
| Total revenue | $66.9 million | $68.8 million | Down $1.9 million |
| Net income | $1.4 million; $0.01 per share | $4.5 million; $0.04 per share | Down $3.1 million |
| Funds from Operations (FFO, non-GAAP) | $26.4 million | $28.5 million | Down 7.6% |
| Property NOI (non-GAAP) | $36.7 million | $36.9 million | Down 0.4%; same-store NOI rose 1.1% before nonrecurring items |
| Operating cash flow | $15.1 million | $12.0 million | Up $3.1 million |
| Cash and restricted cash | $14.4 million | $9.8 million at Dec. 31, 2017 | Up $4.5 million |
| Total assets / stockholders’ equity | $1.986 billion / $858.9 million | $1.991 billion / $871.3 million at Dec. 31, 2017 | Assets and equity decreased |
Rental revenue fell $1.7 million, mainly reflecting lease expirations and properties sold in 2017; related-party fees and loan interest also declined. Expenses decreased $0.8 million, but interest expense rose $1.9 million to $9.5 million, primarily due to the senior notes, higher short-term rates and financing-cost amortization. The prior-year quarter included a $2.3 million gain on a property sale, contributing to the net income decline. The filing does not provide a single operating-margin figure.
Debt carrying amounts were approximately $1.062 billion; stated principal obligations totaled $1.068 billion. Debt comprised a $150 million JPM term loan, $220 million BMO term loan, $400 million BAML term loan, $98 million BAML revolver borrowing and $200 million senior notes. The BAML revolver had $502 million of nominal unused capacity, subject to facility terms and covenants. The company reported compliance with financial covenants. Q1 investing activities used $10.2 million, including $10.8 million for property improvements and equipment; distributions to stockholders were $20.4 million, or $0.19 per share.
Material changes and operating trends
- Portfolio leased occupancy was 88.5% at March 31, down from 89.7% at year-end 2017; vacancy increased to approximately 1.119 million square feet from 1.007 million. The company leased about 109,000 square feet during the quarter.
- Average GAAP base rents on those new and renewed leases were $30.42 per square foot, 2.9% below average rents in the respective properties. Lease terms averaged 5.9 years.
- The 2017 sale of the Baltimore property generated a previously recorded $20.8 million after-tax loss; no property-sale gain or loss was recorded in Q1 2018. The Milpitas property sale contributed a $2.3 million gain in Q1 2017.
- Unrealized derivative gains increased accumulated other comprehensive income; the company reported $6.6 million of Q1 unrealized gains and estimated $5.4 million would be reclassified into earnings over the next 12 months.
Outlook, risks and contingencies
Management expected existing cash, internally generated cash and current debt financing to cover working capital and anticipated capital expenditures for at least 12 months. It anticipated positive leasing activity in 2018 and said most major markets had steady or improving rental conditions. These are expectations, not guaranteed results; management gave no quantified earnings or FFO guidance.
The company identified economic and office-market conditions, occupancy and rents, rising interest rates, debt-market disruption, property expenses and tenant defaults or bankruptcies as risks. The $150 million JPM term loan matures November 30, 2018, creating a near-term refinancing or repayment requirement. Sponsored REIT loans totaled $71.5 million drawn against $79.5 million of commitments; management reported none impaired and relies on repayment from property cash flows, refinancing or other capital events. The company also disclosed ordinary-course legal matters that it did not expect to materially affect its financial position or results.
Management declared a subsequent cash distribution of $0.09 per share on April 6, payable May 10, compared with the $0.19-per-share distribution paid for Q1. The filing does not explain the difference in the excerpted disclosure; investors should verify the distribution schedule and applicable period.
Most important facts to verify
- Repayment or refinancing plans for the $150 million JPM loan due November 2018 and the company’s remaining debt maturities.
- Whether occupancy stabilizes or improves, particularly at properties with significant vacancies, and the leasing progress at redeveloped 801 Marquette Avenue.
- The sustainability of distributions in light of cash flow, capital spending, debt service and the subsequent $0.09-per-share declaration.
- Performance and repayment prospects of the $71.5 million in Sponsored REIT loans, including their related-party nature and variable-rate exposure.
- Interest-rate sensitivity: management estimated a 10% increase in rates on the BAML revolver would reduce annual future earnings and cash flow by about $0.8 million.