Franklin Street Properties Corp. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company is a REIT focused on commercial office properties and related management and secured-lending activities. At quarter-end it owned 35 operating properties, with 10.1 million rentable square feet, and managed six Sponsored REITs.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $68.6 million | $63.3 million | $205.8 million | $183.9 million |
| Net income (loss) | $1.9 million | $2.5 million | ($11.0 million) | $6.6 million |
| Net income (loss) per share | $0.02 | $0.02 | ($0.10) | $0.07 |
| Funds from operations (FFO, non-GAAP) | $28.0 million | $26.7 million | $85.1 million | $79.4 million |
| Operating cash flow | — | $69.3 million | $65.3 million |
Revenue and costs: Nine-month revenue rose 11.9%, mainly from properties acquired in 2016. Total expenses increased 13.0%, including higher property operating costs, taxes, depreciation and interest. Interest expense increased to $23.7 million for the nine months from $19.6 million. Q3 net margin was approximately 2.8%; the nine-month net margin was approximately negative 5.4%.
Cash flow and liquidity: Nine-month investing cash use was $24.9 million, including $41.7 million for property improvements and equipment, partly offset by property-sale proceeds and loan repayments. Financing cash use was $41.1 million, including $61.1 million of shareholder distributions. Cash was $12.6 million at September 30, up from $9.3 million at year-end 2016. Management said cash, internally generated funds and existing financing should cover working capital and anticipated capital expenditures for at least 12 months.
Debt: Balance-sheet bank notes and term loans totaled approximately $1.066 billion, net of financing costs, versus $1.045 billion at December 31, 2016. This included $300 million drawn on the BAML revolver, $150 million under the JPM term loan, and $620 million in BAML and BMO term loans. The company reported compliance with applicable financial covenants at quarter-end. Interest-rate swaps fixed base rates on the BAML and BMO term loans; the revolver and JPM loan remained exposed to floating rates.
Material changes versus comparable periods
- Q3 revenue increased $5.3 million year over year, while net income declined $0.6 million. Acquisitions drove rental growth, partly offset by dispositions and slightly lower portfolio leasing.
- Nine-month revenue increased $21.9 million, but the company moved from $6.6 million net income to an $11.0 million loss. The principal unusual item was a $20.7 million provision, net of applicable tax, on the Baltimore property classified as held for sale; total reported sale-related loss for the period was $18.5 million.
- Nine-month FFO increased to $85.1 million from $79.4 million. Property NOI rose 9.0% to $110.5 million, reflecting acquisitions, while same-store NOI fell 2.9% to $93.6 million (4.2% lower after the company’s adjustment for nonrecurring items).
- Portfolio leased occupancy declined to 88.7% from 89.3% at December 31, 2016; vacancy increased to approximately 1.141 million square feet from 1.086 million.
Outlook, risks and notable items
- Management expected continued positive leasing activity in 2017 and characterized core-market conditions as generally steady or improving. It noted that the portfolio’s transformation toward urban infill and central business district assets may adversely affect short-term results. No quantified earnings guidance was provided.
- The company leased approximately 936,000 square feet during the first nine months, at a weighted average lease term of 6.6 years. New leases averaged $29.61 per square foot in GAAP base rent, 8.3% above the relevant prior property rents; tenant improvements averaged $22.43 per square foot and concessions averaged three months of free rent.
- After quarter-end, the Baltimore property was sold on October 20 for approximately $31.6 million net proceeds. On October 18, the BAML revolver capacity increased from $500 million to $600 million and its maturity was extended to January 2022, with two optional six-month extensions; the BAML term-loan maturity was extended to January 2023. The company also amended its JPM and BMO agreements.
- On October 24, the company agreed to issue $200 million of senior unsecured notes, subject to customary closing conditions: $116 million at 3.99% due 2024 and $84 million at 4.26% due 2027. Proceeds were intended to reduce the BAML revolver balance.
- The quarterly dividend remained $0.19 per share. The board declared another $0.19 distribution after quarter-end, payable November 9, 2017.
- Risks include office-market and tenant demand, occupancy and lease renewals, interest-rate increases, refinancing and covenant requirements, property capital needs, and collection or repayment risk on related-party Sponsored REIT loans. The company had committed up to $79.5 million in such loans, of which $72.0 million was drawn; it reported none impaired. It disclosed ordinary-course legal matters and said it did not expect them to materially affect results or financial position.
Important facts for investors to verify
- Whether leasing improves from 88.7% leased and whether the reported new-lease rent premiums translate into sustained cash rent and NOI growth.
- The final economics of the Baltimore disposition compared with the recorded provision and the property’s carrying value.
- Completion and terms of the $200 million note placement, use of proceeds, and resulting revolver balance and interest costs.
- Debt maturities, floating-rate exposure, swap effectiveness, and ongoing covenant headroom.
- Dividend coverage relative to operating cash flow, capital expenditures, leasing costs and property redevelopment needs.
- Performance and repayment capacity of Sponsored REIT borrowers, including the undrawn portion of committed facilities.