Franklin Street Properties Corp. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results; dollar amounts below are in millions unless otherwise noted.
Business context
The REIT operated 39 commercial properties totaling approximately 9.69 million rentable square feet, managed 11 sponsored REITs, and held six mortgage-secured loans to sponsored REITs. Its strategy emphasizes office properties in selected urban and central business district markets, particularly Atlanta, Dallas, Denver, Houston, and Minneapolis.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $61.2 | $58.4 | $187.2 | $150.6 |
| Net income | $1.6 | $4.1 | $8.9 | $13.2 |
| Net income per share, basic and diluted | $0.02 | $0.04 | $0.09 | $0.14 |
| Funds from operations (FFO), non-GAAP | $27.9 | $27.6 | $84.9 | $71.6 |
| Operating cash flow | — | $75.9 | $60.3 |
- Nine-month rental revenue rose $36.7 million, primarily reflecting the full-period contribution of three properties acquired in 2013. Total expenses rose $39.9 million, including higher property operating costs, depreciation and interest expense; net income consequently declined.
- Q3 net income fell despite higher revenue, as expenses increased $5.1 million, including $1.4 million more interest expense. Management attributed the interest increase to higher debt outstanding and the 2013 term loan.
- Nine-month property NOI from the continuing portfolio was $108.0 million, up 26.1%, substantially reflecting acquisitions. Comparative same-store NOI increased 2.8% after excluding nonrecurring items; same-store NOI before that adjustment increased 3.5%.
- At September 30, assets were $1.967 billion, cash and cash equivalents $15.9 million, total liabilities $968.9 million, and stockholders’ equity $998.4 million. Debt was $905 million: $285 million drawn on the revolver and $620 million in term loans.
- Cash decreased $3.7 million from year-end 2013. Nine-month cash flows were $75.9 million provided by operations, $1.0 million used in investing, and $78.6 million used in financing. Financing use chiefly reflected $57.1 million of shareholder distributions and net revolver repayments.
- The company paid $0.19 per share in each of the first three quarters of 2014. The board declared another $0.19 distribution, payable November 13, 2014.
Material changes, outlook, and risks
- The portfolio was approximately 93.3% leased at September 30, down 0.8 percentage points from December 31, 2013. During the first nine months, approximately 602,000 square feet were leased at a weighted average term of 6.5 years. Management reported average GAAP base rents on those leases of $27.02 per square foot, 13.4% above average rents in the respective properties.
- Management expected existing cash, internally generated cash, and debt financing to cover working capital and anticipated capital expenditures for at least 12 months. It noted that maintaining or increasing distributions depends significantly on rental income. No specific earnings or FFO guidance was provided.
- Management described office-market conditions as generally steady or improving in most major markets, while noting the broader economy remained in a slow-growth phase. It cited potential benefit from improving employment and economic fundamentals, but cautioned that economic weakness could reduce property values, occupancy, and income.
- Sponsored REIT loans totaled $88.4 million outstanding against $116.8 million of maximum commitments. These related-party, property-secured loans expose the company to borrower and real-estate credit risk; repayment depends on property cash flows, refinancing, or other capital events.
- Interest-rate swaps hedge the term loans’ base LIBOR exposure. The company reported a $4.8 million swap liability and a $4.6 million swap asset; $5.4 million was reclassified from accumulated other comprehensive income into interest expense during the nine months. Revolver borrowings remain variable-rate exposure.
- The company reported compliance with financial covenants and effective disclosure controls. It said there were no material changes to previously disclosed risk factors and that ordinary-course legal matters were not expected to have a material adverse effect.
- Unusual comparative item: 2013 included income from discontinued operations for a Richardson, Texas property sold in October 2013 for $12.3 million, with a reported $2.2 million gain. The 2014 periods had no discontinued-operations income.
Important facts for investors to verify
- Whether leasing and occupancy trends, particularly the 2015 lease expirations, support rent growth and recurring cash flows.
- How acquisition-related revenue growth compares with rising operating, depreciation, and financing costs, and whether same-store NOI growth persists.
- The sustainability and cash-flow coverage of the $0.19 quarterly distribution, including the distinction between GAAP earnings, FFO, and cash available for distributions.
- Debt maturities, variable-rate revolver exposure, swap valuation and reclassification effects, and continued covenant compliance.
- Credit quality and repayment plans for the sponsored-REIT loan portfolio and remaining loan commitments.