Franklin Street Properties Corp. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company owns and operates commercial real estate, primarily office properties, and also manages sponsored REITs and provides them secured loans. At quarter-end it held 36 properties totaling 9.31 million rentable square feet.
Financial results and position
- Revenue: $60.5 million, down 4.4% from $63.3 million in Q1 2014. Rental revenue was $59.0 million, down $2.6 million.
- Net income: $12.5 million, or $0.13 per share, versus $3.6 million, or $0.04 per share. The 2015 result included $10.5 million of after-tax property-sale gains; without that unusual contribution, reported earnings growth would look materially different.
- FFO: $25.7 million versus $28.8 million, down about 11%. FFO is a company-defined non-GAAP measure and should be considered alongside GAAP results and cash flows.
- Property NOI: $33.0 million, down 9.7%. Comparative same-store NOI was $32.2 million, down 7.4% from $34.8 million.
- Cash flow: Operating activities provided $15.1 million, compared with $16.4 million a year earlier. Investing activities provided $39.4 million, including $47.7 million of property-sale proceeds; financing activities used $47.0 million, including $19.0 million of shareholder distributions.
- Liquidity: Cash and cash equivalents were $14.9 million at March 31, up from $7.5 million at year-end. Management said cash, expected operating cash generation and existing debt financing should cover working capital and anticipated capital expenditures for at least 12 months.
- Debt: $860 million outstanding: $240 million under a $500 million revolving facility, a $400 million term loan and a $220 million term loan. The revolver had $260 million of nominal unused capacity, subject to facility terms. The term loans mature in 2017 and 2020; the revolver initially matures in 2018. The company reported compliance with financial covenants.
- Balance sheet: Total assets were $1.89 billion and total liabilities were $921.1 million. Stockholders’ equity was $968.3 million.
- Distributions: The company paid $0.19 per share for Q1 2015, totaling $19.0 million, and subsequently declared another $0.19 per share distribution payable May 14, 2015.
Changes versus the prior comparable period
- Revenue declined primarily because of property dispositions and lower portfolio occupancy, as well as reduced interest income from sponsored REIT loans.
- Expenses fell $1.1 million to $58.0 million, reflecting lower depreciation and interest expense, partly offset by higher real estate taxes, operating costs and SG&A.
- Quarter-end leased occupancy was 90.4%, down from 92.8% at December 31, 2014; vacancy increased to 897,000 square feet from 689,000. The filing attributes the decline to expirations and terminations not yet re-leased.
- The company leased approximately 208,000 square feet during the quarter at a weighted average 4.0-year term. Average GAAP base rent on those leases was $24.59 per square foot, 10.5% above the respective properties’ average rents.
- The portfolio had 39 properties and 9.69 million rentable square feet as of March 31, 2014, compared with 36 properties and 9.31 million square feet a year later.
Outlook, risks and unusual items
- Management described the U.S. economy as experiencing slow growth and said it believed a prolonged, broad-based upswing may be developing. It cited potential benefits from improved employment and economic fundamentals but cautioned that economic weakness could hurt property values, occupancy and income.
- The company’s strategy emphasizes urban infill and central business district properties, particularly in Atlanta, Dallas, Denver, Houston and Minneapolis. Management was exploring additional investments and expected further investment activity, but gave no quantified earnings or revenue guidance.
- On April 8, 2015, the company acquired a 442,130-square-foot Atlanta-area office property for $78.0 million. The filing also reports a $4.0 million acquisition deposit paid during Q1.
- Two properties were sold in Q1: Plano, Texas, for a $1.5 million gain and Eden Prairie, Minnesota, for a $9.0 million gain. Management said the sales did not constitute a strategic shift.
- The company had committed to provide up to $111.3 million in secured financing to sponsored REITs; $93.6 million was drawn at quarter-end. These related-party loans expose the company to borrower and underlying-property credit risk.
- Interest-rate swaps hedge the two term loans, but the $240 million revolver remained variable-rate debt. Management estimated a 10% rate increase, approximately 14 basis points, would reduce annual earnings and cash flow by about $0.4 million. Derivative fair values included a $9.8 million liability and a $0.8 million asset.
- Management identified risks including tenant defaults or bankruptcies, lease renewal and vacancy uncertainty, real estate taxes and operating costs, economic and credit-market conditions, and interest-rate and derivative risks. It reported no material change to the risk factors in its 2014 Form 10-K and believed ordinary-course legal matters would not materially affect results.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether occupancy and same-store NOI stabilize after the reported declines, and how much of the 897,000 square feet of vacancy is leased subsequently.
- How much of Q1 net income came from property-sale gains versus recurring operations; compare GAAP income with FFO, NOI and operating cash flow.
- Availability and terms of revolver capacity, upcoming 2017–2018 maturities, covenant headroom and the company’s ability to manage variable-rate exposure.
- Repayment prospects and collateral performance for the $93.6 million of sponsored REIT loans already drawn, as well as remaining commitments.
- Performance, occupancy and financing needs of the newly acquired Atlanta property, and the ongoing affordability of shareholder distributions relative to recurring cash generation.