Franklin Street Properties Corp. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed February 19, 2013. This annual filing also reports fourth-quarter results. Franklin Street Properties is a REIT focused mainly on suburban office real estate and reported one continuing segment, real estate operations. It owned 37 properties across 13 states at year-end.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $162.8 million | $138.3 million |
| Income from continuing operations | $23.3 million; $0.28 per diluted share | $19.4 million; $0.24 per diluted share |
| Net income | $7.6 million; $0.09 per diluted share | $43.5 million; $0.53 per diluted share |
| Funds from Operations (FFO, company-defined) | $79.0 million | $71.2 million |
| Property NOI | $89.8 million | $76.2 million |
| Cash from operating activities | $70.4 million | $61.0 million |
| Cash and cash equivalents at year-end | $21.3 million | $23.8 million |
| Total assets / total liabilities | $1,527.2 million / $662.4 million | $1,408.7 million / $487.3 million |
- Rental revenue rose to $151.7 million from $134.2 million. Year-end portfolio occupancy was 94.0%, compared with 88.7% a year earlier; the property table reports 90.3% weighted occupancy based on occupied square feet, using a different measure.
- Same-store NOI increased 4.4% to $66.7 million; comparative same-store NOI, excluding identified nonrecurring items, increased 5.0% to $65.7 million. Property NOI growth also reflected acquisitions.
- Investing activities used $172.3 million, chiefly for real estate and lease acquisitions, partly offset by net Sponsored REIT loan repayments. Financing activities provided $99.4 million; distributions paid were $63.0 million.
- Quarterly distributions remained $0.19 per share throughout 2012 ($0.76 for the year). The board declared another $0.19 distribution in January 2013. Management said comparable dividends were expected to continue, but not guaranteed.
Material changes and unusual items
- Revenue increased $24.5 million year over year, driven mainly by acquisitions, improved occupancy, and a $6.7 million increase in interest income from Sponsored REIT loans.
- Continuing-operations income rose $4.0 million, while total net income fell sharply because discontinued operations included a $14.8 million loss on the December 2012 sale of the Southfield, Michigan property. FY 2011 included $21.9 million of gains on property sales.
- During 2012, the company acquired two office properties in Atlanta and Houston for approximately $207.6 million in aggregate. It sold the Southfield property for $0.3 million. The Houston acquisition contributed approximately $3.0 million of revenue and $2.0 million of net income during 2012.
- The company discontinued syndications of newly formed Sponsored REITs in December 2011; the investment banking segment is presented in discontinued operations. Management said the business had provided limited profit contribution and resources could be used more productively elsewhere.
Debt, liquidity, outlook and risks
- Year-end borrowings totaled $616.8 million: $216.8 million under a revolving facility and a $400 million term loan. The new unsecured $900 million credit facility replaced the prior revolver in September 2012. The revolver initially matures in September 2016, with a conditional one-year extension; the term loan matures in September 2017.
- The term loan’s base LIBOR rate was fixed at 0.75% for five years through a swap; its stated year-end rate was 2.20%. The revolver’s weighted average rate was 1.66%. The swap had a $1.2 million fair-value liability. The company reported compliance with credit covenants at year-end.
- Management believed cash, operating cash generation, and available debt financing would cover working capital and anticipated capital expenditures for at least 12 months. This is management’s assessment, not a guarantee.
- Seven Sponsored REIT loan facilities had maximum commitments of $118.8 million, of which $93.9 million was drawn. Repayment depends on underlying property cash flows, refinancing, or other capital events, creating borrower credit risk.
- Management reported a stable leasing environment in most markets and modest lease expirations over the next two years; 3.6% of portfolio square footage was scheduled to expire in 2013 and 5.3% in 2014. It anticipated reviewing the portfolio for potential dispositions in 2013, while noting market liquidity and pricing remained challenged in many areas.
- Key risks include economic weakness and office-space demand, tenant defaults and lease renewals at lower rates, tenant and geographic concentration, interest-rate exposure on floating-rate debt, refinancing and covenant risk, Sponsored REIT loan repayment, property valuation and environmental risks, and REIT qualification. Approximately 42.7% of portfolio rentable area was leased to the top 20 tenants; Dallas and Houston accounted for 18.7% and 15.1% of portfolio square footage, respectively.
- Future minimum rental income under non-cancelable operating leases totaled $769.4 million. The filing describes ordinary-course legal proceedings but says their disposition was not expected to materially affect financial position, cash flows, or results.
Investor facts to verify
- Reconcile the reported 94.0% leased figure with the 90.3% weighted occupied-square-foot measure and review property-level vacancy, particularly in the West region.
- Assess whether FFO and operating cash flow support the $0.76 annual distribution; note that 2012 distributions were classified for tax purposes as 56.99% return of capital.
- Review debt capacity, covenant headroom, refinancing dates, and the sensitivity of cash flows to variable interest rates.
- Evaluate collateral, maturity, borrower repayment sources, and remaining commitments for the $93.9 million of outstanding Sponsored REIT loans.
- Review the Southfield sale loss and the assumptions supporting property carrying values and leasing forecasts. The filing reports an unqualified audit opinion and effective disclosure controls and internal control over financial reporting.