Franklin Street Properties Corp. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report. The company is a REIT-focused owner and operator of commercial real estate, with real estate operations and investment banking/investment services segments.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $123.1 million | $126.3 million |
| Rental revenue | $115.3 million | $120.0 million |
| Income from continuing operations | $17.9 million | $26.7 million |
| Net income | $22.1 million | $27.9 million |
| Basic and diluted earnings per share | $0.28 | $0.38 |
| Funds from operations (FFO) | $66.9 million | $71.4 million |
| Cash from operating activities | $53.1 million | $69.4 million |
| Cash and cash equivalents at year-end | $68.2 million | $27.4 million |
| Total assets / liabilities / shareholders’ equity | $1,238.7 million / $317.2 million / $921.6 million | $1,154.9 million / $217.6 million / $937.3 million |
| Debt at year-end | $284.8 million | $184.0 million |
| Quarterly dividend per share | $0.19 | $0.19 |
Reported quarterly results for Q4 2010 were revenue of $34.2 million, continuing-operations income of $4.8 million, net income of $5.8 million and diluted EPS of $0.07. The filing does not provide a clear standalone quarterly cash-flow or margin figure.
Business and operating performance
- At December 31, 2010, the company owned 33 properties, including 32 office buildings and one industrial property; the portfolio totaled about 6.42 million square feet and was 85.6% leased, versus approximately 84% leased a year earlier. No owned properties were subject to mortgage debt.
- The company acquired two Minneapolis office buildings in June 2010 for approximately $40.5 million. The Falls Church, Virginia property classified as held for sale was sold on January 21, 2011 for approximately $90 million; the filing reports a gain but does not state its amount.
- Sponsored REIT equity raised decreased 11% to $35.9 million from $40.4 million. The investment banking business is transactional and depends on property opportunities, investor demand and financing conditions.
- Scheduled future minimum rental income under non-cancelable leases was $531.8 million, including $83.3 million in 2011. About 10.2% of portfolio square footage was scheduled to expire in 2011, according to management’s leasing discussion.
Changes versus 2009
- Revenue declined $3.2 million, primarily because of lost rental income from expiring leases, partly offset by acquisitions and higher loan and transaction-related income.
- Expenses rose $4.1 million, reflecting property operating costs, depreciation, general and administrative costs, and higher interest expense.
- Net income fell $5.8 million and continuing-operations income fell $8.8 million. FFO declined $4.4 million. Discontinued-operations income rose to $4.2 million from $0.7 million, supporting reported net income.
- Operating cash flow decreased $16.3 million. Cash increased by $40.8 million overall, supported by $101.0 million of net bank borrowings and $21.9 million of net ATM share proceeds; cash distributions to shareholders were $60.6 million.
- Year-end debt increased about $100.8 million, while cash increased. At year-end the company had $209.97 million outstanding on a $250 million revolver and a $74.85 million term loan; it reported compliance with both facilities’ covenants.
Outlook, risks and unusual items
- Management said leasing activity remained slow and did not expect stronger leasing markets until meaningful job growth. New or renewed leases could be at rents below expiring rates. It anticipated possible acquisitions and stated that existing cash, expected operating cash flow, future Sponsored REIT offerings and debt financing should meet working-capital needs and anticipated capital expenditures for at least 12 months.
- The company did not provide numerical earnings or FFO guidance. It said future dividends, maintained at $0.19 per share quarterly in 2010, are not guaranteed and depend significantly on rental income and Sponsored REIT investor demand.
- On February 22, 2011, the company replaced its $250 million revolver and $75 million term loan with a new unsecured revolver of up to $500 million, maturing February 22, 2014, with a potential one-year extension and a conditional $100 million accordion. It drew $246 million, repaid the prior facilities and paid approximately $1.0 million to terminate the interest-rate swap. The new facility has leverage-dependent pricing and financial covenants.
- As of December 31, the company was committed to provide up to $85.8 million in secured Sponsored REIT loans; $57.7 million was drawn. Repayment depends on borrower cash flows, financing, equity offerings or other capital events. A borrower default or incomplete syndication could reduce cash available for dividends or other uses.
- Key risks include weak economic and leasing conditions, tenant defaults and lease expirations, geographic concentration, variable-rate borrowing and refinancing, covenant compliance, Sponsored REIT loan repayment, investor demand, and REIT qualification. Management identified no legal proceedings expected to have a material adverse effect. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the new revolver’s outstanding balance after the February 2011 refinancing, applicable pricing, covenant headroom and liquidity needs.
- Review the realized proceeds and gain on the January 2011 Falls Church property sale and how proceeds were used.
- Assess lease-up and rent trends, including vacancies at Federal Way and Southfield and the concentration of lease expirations in 2011–2016.
- Monitor collections and repayment prospects for the $57.7 million of Sponsored REIT loans outstanding and the remaining unfunded commitments.
- Evaluate recurring cash generation and dividend coverage: 2010 operating cash flow was $53.1 million versus $60.6 million of cash distributions, and the company cautions that FFO is not a measure of liquidity.