Franklin Street Properties Corp. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company owns and operates office properties, manages sponsored REITs, and makes secured loans to them. At quarter-end, it held 38 properties totaling approximately 8.53 million rentable square feet.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $48.0 million | $38.7 million | $92.8 million | $77.6 million |
| Net income | $4.7 million | $5.4 million | $9.1 million | $11.2 million |
| Basic and diluted EPS | $0.05 | $0.07 | $0.10 | $0.13 |
| FFO (non-GAAP) | $22.1 million | $19.0 million | $42.8 million | $38.6 million |
- Rental revenue rose to $46.3 million in Q2 and $89.5 million in the first half, largely reflecting acquired properties and improved occupancy. Related-party management-fee and loan-interest revenue fell to $1.6 million in Q2 and $3.3 million for the half, mainly following loan repayments.
- Operating cash flow was $34.2 million for the first half, versus $28.6 million a year earlier. Investing used $194.4 million, principally for property acquisitions; financing provided $163.9 million, mainly from the stock offering.
- Cash and cash equivalents were $25.0 million at June 30. Debt comprised a $400.0 million term loan and $181.5 million revolver borrowings, or $581.5 million total. The term loan bears 2.20% at quarter-end and is hedged through September 2017; revolver borrowings bore 1.65%. The revolver matures in September 2016, with a conditional one-year extension; the term loan matures in September 2017.
- Stockholders’ equity was $1.08 billion and total assets were $1.71 billion at June 30. The company reported compliance with credit-facility financial covenants.
- Comparative same-store NOI, a non-GAAP measure, increased 1.8% for the first half. The filing reports portfolio occupancy of 94.4% in its leasing discussion, while its property table shows 91.4% weighted occupied; these measures may use different definitions.
Material changes versus comparable periods
- Q2 revenue increased $9.3 million year over year, but net income declined $0.7 million. First-half revenue increased $15.2 million, while net income declined $2.0 million.
- Acquisitions lifted rental revenue and also increased property operating costs, taxes, and depreciation. Lower equity earnings from non-consolidated REITs—an equity loss of $0.4 million for the first half versus $0.9 million of earnings in 2012—also weighed on reported income.
- On May 15, the company issued 17.25 million shares at $14 per share, receiving approximately $230.7 million net. Shares outstanding increased from 82.9 million at year-end 2012 to 100.2 million at June 30, 2013.
Outlook, risks and unusual items
- Management said existing cash, expected operating cash generation, and existing debt financing should meet working-capital needs and anticipated capital expenditures for at least 12 months. It anticipated rental revenue growth in the second half of 2013 and believed occupancy could be maintained or increased; no specific earnings or revenue guidance was provided.
- The company acquired a 680,277-square-foot Denver office property on May 22 for approximately $183 million. After quarter-end, it acquired a 621,007-square-foot Atlanta office property for $157.9 million on July 1. It also agreed to acquire a 655,565-square-foot Denver property for $217 million, subject to due diligence and other conditions, with an anticipated August 28 closing.
- At June 30, the company had committed up to $118.8 million in secured loans to seven sponsored REITs, of which $97.8 million was outstanding. Repayment depends on borrower cash flows, refinancing, or other capital events.
- Key risks include weak economic conditions and office-space demand, tenant defaults or bankruptcies, leasing costs, real-estate taxes and operating expenses, and variable-rate borrowing exposure. Management reported no material change to previously disclosed risk factors and no material adverse effect expected from ordinary-course legal matters.
- A $400 million interest-rate swap was recorded as a $6.7 million asset; the first-half unrealized gain was $8.0 million in other comprehensive income. Approximately $1.6 million was expected to be reclassified to interest expense over the following 12 months.
- The quarterly dividend was $0.19 per share, unchanged from 2012; a further $0.19 distribution was declared in July, payable August 15.
Investor verification points
- Reconcile the 94.4% leased figure with the 91.4% weighted-occupied figure and confirm the definitions and property coverage.
- Assess the earnings impact and financing requirements of the July Atlanta acquisition and the proposed Denver acquisition, including closing conditions and integration costs.
- Review the credit quality, collateral, maturities, and repayment sources for the $97.8 million of outstanding sponsored-REIT loans and remaining commitments.
- Evaluate whether operating cash generation and FFO support the dividend and planned acquisitions, keeping in mind that FFO is non-GAAP and is not a liquidity measure.
- Monitor lease-up and commencements, particularly the Englewood property lease covering 61.7% of its rentable space, scheduled to commence in July 2013.