Franklin Street Properties Corp. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited GAAP results; dollar amounts below are in millions unless stated otherwise. The company is a REIT focused on office properties and also manages Sponsored REITs and makes secured loans to them.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $58.4 | $41.5 | $150.6 | $118.5 |
| Income from continuing operations | $4.0 | $5.5 | $12.9 | $17.0 |
| Net income (loss) | $4.1 | ($9.0) | $13.2 | $2.2 |
| Net income (loss) per share, diluted | $0.04 | ($0.11) | $0.14 | $0.03 |
| Funds from operations (FFO), company-defined | $27.1 | $19.9 | $69.9 | $58.5 |
| Cash from operating activities | — | $60.3 | $49.6 | |
| Cash used in investing activities | — | ($569.0) | ($29.8) | |
| Cash from (used in) financing activities | — | $513.0 | ($19.6) |
Rental revenue drove growth, while related-party management fees and loan interest declined. Expenses grew with the expanded property base: nine-month depreciation and amortization was $54.9 million, and interest expense was $13.9 million. Continuing-operations income declined despite higher revenue. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Balance sheet, debt and liquidity
- At September 30, 2013, total assets were $2.077 billion, total liabilities $1.017 billion, and stockholders’ equity $1.059 billion. Cash and cash equivalents were $25.5 million, compared with $21.3 million at December 31, 2012.
- Debt totaled $951.5 million: $331.5 million drawn on the revolving facility, a $400 million 2012 term loan, and a $220 million 2013 term loan. Debt at year-end 2012 was $616.8 million. The filing does not provide a clear debt-to-assets or net-debt leverage figure in the supplied text.
- The 2013 term loan matures in August 2020; the 2012 term loan matures in September 2017; the revolver’s initial maturity is September 2016, with a possible one-year extension. Both term loans have interest-rate swaps fixing the base LIBOR component. The revolver remains exposed to variable rates.
- Management said existing cash, internally generated cash and debt financing should cover working capital and anticipated capital expenditures for at least the next 12 months. Both credit agreements’ financial covenants were met at quarter-end.
- The company paid dividends of $0.19 per share in each of the first three quarters of 2013; the board declared another $0.19 per share for payment in November.
Material changes and operating developments
- Total revenue increased 41% in Q3 and 27% for the nine-month period year over year, chiefly because of property acquisitions. The company acquired three offices in Atlanta and Denver during 2013 for an aggregate purchase price of approximately $558 million, excluding closing costs and adjustments; these properties contributed approximately $14.2 million of revenue and $1.4 million of net income during the nine-month period.
- Operating expenses rose with acquisitions, while related-party management fees and loan interest fell following repayment of Sponsored REIT loans in 2012. Equity in earnings of non-consolidated REITs shifted to losses: $0.4 million in Q3 and $0.8 million for nine months.
- Net income comparisons were affected by a $14.3 million provision for loss on a property held for sale recorded in 2012. The 2013 Richardson, Texas property was classified as held for sale; management expected a sale within one year for more than its net book value.
- Reported portfolio leased occupancy was 93.8% at September 30, down from 94.4% at June 30, primarily because a newly acquired Denver property was 88.5% leased. The property schedule separately reports 91.9% weighted occupancy; investors should confirm the difference in definitions or scope.
- For the nine months, the company leased approximately 645,000 square feet, at a weighted average lease term of 7.75 years. Average GAAP base rents were reported as 10.4% above average rents in the respective properties for 2012. Comparative same-store NOI increased 1.5%.
- A May 2013 public offering of 17.25 million shares at $14.00 per share generated approximately $230.7 million net proceeds. Common shares outstanding were 100,187,405 at September 30, up from 82,937,405 at year-end 2012.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said it was exploring additional property investment opportunities and anticipated further investments. It described major markets as showing positive occupancy and rental-rate trends, while noting that U.S. economic growth remained limited and that future property values, occupancy and income could be adversely affected.
- Management cautioned that renewals may be at below-expiring rents and that tenant defaults or bankruptcies could reduce cash available for distribution. It also said property sales markets remained challenged in some locations, though pricing and liquidity were improving in others.
- The company had seven Sponsored REIT loans with $98.8 million outstanding against $118.8 million of total commitments. A Sponsored REIT default could impair repayment and reduce funds available for dividends or other purposes. A further $1.2 million advance was made in October.
- Key financial risks include refinancing the credit facilities at maturity, covenant compliance, and higher costs on unhedged variable-rate debt. The filing estimates a 10% increase in revolver market rates would reduce annual earnings and cash flows by approximately $0.5 million at September 30, 2013. The interest-rate swaps also create counterparty and valuation risks.
- Q3 other comprehensive loss was $7.0 million, primarily reflecting unrealized derivative losses; the nine-month figure was a $1.0 million gain. Management reported no material change in risk factors from the 2012 Form 10-K, apart from specified additional risks. Ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Reconcile the reported 93.8% leased occupancy with the property schedule’s 91.9% weighted occupancy, including their definitions and property coverage.
- Assess acquisition-driven revenue and NOI growth against higher depreciation, operating costs and debt, and separate recurring performance from the prior-year $14.3 million property-loss provision.
- Review the company’s leverage, covenant headroom and refinancing capacity; the supplied filing text does not state a clear leverage ratio.
- Monitor revolver exposure to floating rates, swap fair values, and the $118.8 million of Sponsored REIT loan commitments, including repayment capacity and concentration risks.
- Evaluate the Richardson property sale outcome and whether occupancy, same-store NOI and leasing economics support continued dividend coverage.