Franklin Street Properties Corp. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The company is a REIT focused on office properties, leasing, property management and secured financing. It owned 35 operating properties and had one property in redevelopment, with 9.3 million rentable square feet.
Financial performance and position
- Revenue: $59.8 million, down $0.7 million (1.1%) from $60.5 million. Rental revenue was $58.4 million.
- Profit: Net income was $2.6 million, or $0.03 per diluted share, versus $12.5 million, or $0.13 per share. The prior-year quarter included a $10.5 million after-tax property-sale gain; there was no comparable gain in Q1 2016.
- Operating measures: FFO was $26.0 million versus $25.7 million. Comparative same-store NOI was $32.1 million, up 1.4%; reported property NOI was $33.5 million, up 1.3%. These are non-GAAP measures as defined by the company.
- Cash flow: Operating activities provided $7.8 million, compared with $15.1 million. Investing activities provided $32.4 million, including $39.1 million in related-party mortgage repayments, partly offset by $6.7 million of property improvements and equipment. Financing activities used $44.0 million, including $19.0 million of shareholder distributions and $25.0 million of net revolver repayments. Cash fell to $14.3 million from $18.2 million.
- Debt and liquidity: Debt principal totaled $885 million: $265 million drawn on the BAML revolver, a $400 million BAML term loan and a $220 million BMO term loan. The balance sheet reported $882.9 million of debt net of financing costs. The company said cash, expected operating cash flow and existing financing should cover working capital and anticipated capital expenditures for at least 12 months. It was in compliance with debt covenants at quarter-end.
- Equity and distributions: Stockholders’ equity was $913.1 million. The company paid $0.19 per share, totaling $19.0 million, and declared another $0.19 distribution payable in May 2016.
Material changes and operating developments
- Total expenses declined $1.1 million to $56.9 million, mainly from lower real estate taxes and insurance, depreciation and amortization, and general and administrative costs. Interest expense increased $0.2 million, primarily reflecting higher interest rates.
- Portfolio leased occupancy was reported as 90.2% at March 31, down from 91.6% at year-end; vacancy increased to 917,000 square feet from 800,000. The filing also presents 88.9% weighted occupancy in its property table, using a different stated calculation basis.
- The company leased about 178,000 square feet during the quarter, at a weighted average term of 6.6 years. Average GAAP base rent on those leases was $28.69 per square foot, 3.3% above the applicable prior rents, with tenant improvements of $13.47 and leasing commissions of $10.75 per square foot on average.
- A 170,000-square-foot Minneapolis property became vacant and entered redevelopment. Management chose to redevelop the existing building rather than demolish it for a new mixed-use tower.
- A Missouri property was classified as held for sale at quarter-end and sold April 5, 2016, for an approximately $4.1 million gain. The sale occurred after the reporting period.
Outlook, risks and contingencies
- Management described the portfolio as stabilized, expected positive leasing activity in 2016, and said rental conditions in most major markets were steady or improving. The company continues to reposition its portfolio toward larger urban infill and central business district properties, principally in Atlanta, Dallas, Denver, Houston and Minneapolis; management cautioned that the strategy may weigh on short-term results.
- Management cited slow but improving U.S. economic conditions and possible further Federal Reserve rate increases. Risks include weaker office-space demand, falling occupancy or rents, tenant defaults or bankruptcies, higher borrowing costs, property expenses and real estate taxes, and disruptions in debt markets. No numerical earnings or FFO guidance was provided.
- Interest-rate swaps fixed the base rates on the BMO and BAML term loans; the reported effective rates were 3.97% and 2.20%, respectively. The $265 million revolver remained floating-rate debt, at a reported weighted average 1.69% at quarter-end. Derivative liabilities totaled about $13.2 million, and $3.3 million of accumulated other comprehensive loss was expected to be reclassified into earnings within 12 months.
- The company had committed up to $90.3 million to four Sponsored REIT loans, of which $79.6 million was drawn. These related-party loans are secured by real estate; repayment depends on property cash flows, refinancing or another capital event. Management reported no impaired Sponsored REIT loans.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the occupancy measures: 90.2% leased in MD&A versus 88.9% weighted occupancy in the property table, including their calculation bases.
- Assess whether operating cash generation can support distributions and planned capital spending; Q1 operating cash flow was below the $19.0 million distribution paid.
- Review refinancing and interest-rate exposure, particularly the $400 million BAML term loan maturing in September 2017 and the $265 million floating-rate revolver.
- Monitor leasing and redevelopment progress, especially the vacant Minneapolis property, and the timing and economics of the portfolio repositioning strategy.
- Track repayment and credit risk of Sponsored REIT loans and the effect of the post-quarter Missouri property sale.