Franklin Street Properties Corp. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited results; dollar amounts below are in millions unless stated otherwise. The company is a REIT with real estate operations and investment banking/investment services, including Sponsored REIT syndications.
Financial results and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $33.3 | $29.6 |
| Rental revenue | $31.3 | $28.8 |
| Income from continuing operations | $4.8 | $4.5 |
| Net income | $24.8 | $5.6 |
| Diluted EPS | $0.30 | $0.07 |
| Funds from operations (FFO) | $16.3 | $16.7 |
| Cash from operating activities | $10.4 | $5.9 |
| Cash and cash equivalents | $49.5 | $68.2 at Dec. 31, 2010 |
| Total assets | $1,366.9 | $1,238.7 at Dec. 31, 2010 |
| Bank debt | $404.0 | $284.8 combined revolver and term loan at Dec. 31, 2010 |
- Operating expenses were $29.4 million, up from $25.4 million; interest expense rose to $2.4 million from $1.7 million. The filing attributes much of the expense growth to property acquisitions, higher debt outstanding and the new credit facility.
- Net income included a $19.6 million gain on the sale of a Falls Church, Virginia property. Excluding that gain, continuing-operations income was $4.8 million. FFO, a company-defined non-GAAP measure, declined about 2% year over year.
- Cash flow: investing activities used $127.4 million, including property purchases and syndication assets, partly offset by $89.4 million in sale proceeds. Financing activities provided $98.3 million, primarily from net new-revolver borrowings. Cash declined $18.7 million during the quarter.
- The company paid $0.19 per share in Q1 distributions ($15.5 million total). Operating cash flow was below distributions paid in the quarter.
Changes, operations and outlook
- Revenue rose 12.6%, primarily from higher rents, improved leasing and related-party fees. Portfolio occupancy was 88.4% at March 31, versus 85.6% at December 31, 2010; management reported generally lower rental rates on new leases.
- The company acquired three properties totaling approximately 676,000 rentable square feet for about $166 million, excluding closing costs and adjustments. It said it was pursuing further acquisitions and expected additional purchases in 2011, subject to opportunities.
- The Falls Church property was sold January 21, 2011. The sale generated $89.4 million in proceeds and the reported $19.6 million gain.
- Sponsored REIT preferred-stock syndication proceeds were $7.5 million in Q1 2011 versus $2.1 million in Q1 2010. Monument Circle was fully subscribed March 1; Union Centre’s $62 million offering remained in progress, with $2.8 million closed by quarter-end. Management cautioned that syndication activity and investor demand remain unpredictable.
- On February 22, 2011, the company replaced its prior revolver and term loan with a $500 million unsecured revolver maturing in February 2014, with a one-year extension option. At quarter-end, $404 million was drawn at a weighted-average rate of 2.20%; the company reported compliance with covenants. An additional $100 million accordion is subject to lender commitments and customary conditions.
- Management said existing cash, operating cash flow, future syndication proceeds and available financing should meet working-capital needs and anticipated capital expenditures for at least 12 months. This is not a guarantee of financing or future dividend levels; dividends depend in part on rents and Sponsored REIT investor demand.
Risks, contingencies and unusual items
- Management cited weak or uncertain economic conditions, debt-market disruption, property-market and occupancy risks, potential tenant defaults or bankruptcies, and unanticipated property costs, taxes, insurance and repairs. Management expected leasing progress if the broader economy remained stable, but noted renewals may be at below-expiring rents.
- At March 31, the company had commitments of up to $85.8 million for secured loans to six Sponsored REITs; $60.1 million was drawn. Repayment depends on property financing, cash flows, offerings or other capital events. Related-party lending and fee income are material features of the business.
- Several properties generated rental income below ordinary operating expenses, including Southfield, Michigan and Englewood, Colorado; Glen Allen, Virginia was approximately break-even in Q1 2011.
- The company had a $75 million at-the-market common-stock sales program and an automatic shelf registration, but reported no ATM share sales in Q1. The filing reported 81,437,405 common shares outstanding at March 31.
- Management reported no material change in market-risk exposure, no material change in internal control over financial reporting, and no material change to previously disclosed risk factors. It stated ordinary-course legal matters were not expected to have a material adverse effect. No specific quantitative earnings guidance was provided.
Important facts for investors to verify
- Whether the 88.4% leased occupancy level translated into sustained rent and cash-flow growth, given lower rates on some new leases and upcoming expirations.
- The recurring earnings picture apart from the property-sale gain, including FFO trends and the drivers of higher depreciation and interest expense.
- Debt availability, interest-rate exposure and covenant headroom under the new revolver, including the extent to which the stated undrawn capacity is practically available.
- Collection and repayment prospects for the $60.1 million of outstanding Sponsored REIT loans and the remaining lending commitments, as well as the related-party nature of those exposures.
- Progress and economics of the Union Centre syndication, future investor demand, additional acquisitions and management’s ability to support distributions from recurring cash flows.