Franklin Street Properties Corp. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Unaudited. The company operates an office-property portfolio, provides property and asset management, and makes secured loans to sponsored REITs. At quarter-end it owned 36 properties totaling 9.64 million rentable square feet.
Financial highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $61.9 million | $61.2 million | $182.6 million | $187.2 million |
| Net income | $3.2 million | $1.6 million | $19.6 million | $8.9 million |
| Diluted EPS | $0.03 | $0.02 | $0.20 | $0.09 |
| Funds from Operations (FFO) | $27.0 million | $27.9 million | $79.8 million | $84.9 million |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $72.7 million | $75.9 million |
Q3 net margin was approximately 5.1% versus 2.6%; nine-month net margin was approximately 10.7% versus 4.7%. The 2015 nine-month comparison includes $11.4 million of gains on property sales, so net income growth does not reflect only recurring operations. FFO, a company-defined non-GAAP measure, declined about 3.7% for the quarter and 6.0% year to date.
- Revenue and property performance: Q3 revenue rose $0.7 million, while nine-month revenue fell $4.6 million. Rental revenue was $178.2 million year to date, down $4.1 million. Comparative same-store NOI decreased 5.6% for the nine-month period; total property NOI declined 6.7%.
- Costs: Nine-month expenses fell $3.1 million, including lower depreciation and interest, partly offset by higher property taxes, operating costs, and corporate expenses. Q3 expenses declined $0.7 million year over year.
- Liquidity and cash flow: Cash was $19.1 million, up from $7.5 million at year-end. Nine-month investing used $36.0 million and financing used $25.1 million. Management said cash, anticipated operating cash flow, and existing financing should cover working capital and anticipated capital expenditures for at least 12 months.
- Debt: Total borrowings were $920 million: $300 million drawn on a $500 million revolving facility, a $400 million term loan, and a $220 million term loan. The term loans mature in September 2017 and August 2020; the revolver matures in October 2018, with a conditional one-year extension option. The term loans’ effective rates were 2.20% and 3.97%; the revolver’s reported rate was approximately 1.45%. The company reported compliance with facility covenants.
- Dividends: The company paid $0.19 per share in each of the first three quarters, totaling $57.1 million in distributions. After quarter-end, the board declared another $0.19 per share, payable November 12, 2015.
Material changes and notable items
- Portfolio leased percentage was 90.5% at September 30, down from 92.8% at December 31, 2014. Vacancy increased to approximately 915,000 square feet from 689,000 square feet.
- The company acquired a 442,130-square-foot Atlanta office property for $78.0 million in April, approximately 80% leased at acquisition. It sold three properties during the first nine months, recording gains of $1.5 million, $9.0 million, and $0.9 million and receiving $55.7 million in sale proceeds.
- Unrealized derivative losses were $7.8 million for the first nine months and reduced other comprehensive income; derivative liabilities totaled $12.1 million at quarter-end. The company estimated approximately $1.9 million of accumulated derivative amounts would be reclassified into earnings over the next 12 months.
- Sponsored REIT loans totaled $93.6 million drawn against $111.3 million of commitments. The company disclosed credit exposure and reliance on repayment from underlying property cash flows, refinancing, or other capital events.
Outlook, risks, and contingencies
No specific earnings or FFO guidance was provided. Management described the portfolio as well stabilized with a balanced lease-expiration schedule and said it was exploring further investments while continuing to evaluate potential property dispositions. It characterized the U.S. economy as recovering but potentially slow-growing and noted that possible interest-rate increases could raise borrowing costs. Other cited risks include weaker office-space demand, vacancies, tenant defaults or bankruptcies, rent and property-tax changes, unexpected operating costs, and real-estate-market conditions. The company said there were no material changes to the risk factors in its 2014 Form 10-K.
The company reported ordinary-course legal claims that it did not expect to have a material adverse effect. It also noted a Missouri property was 43.7% leased after tenants vacated; that property’s rental income did not cover operating expenses in the 2015 quarter or year-to-date period. The company stated that its disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Key facts for investors to verify
- How much of the year-to-date net-income increase is attributable to the three property-sale gains, and how recurring operating results are trending.
- Whether occupancy and same-store NOI stabilize, including leasing progress at the Missouri property and other vacant space.
- Ability to sustain distributions relative to operating cash flow, FFO, leasing costs, and capital spending.
- Refinancing and covenant capacity ahead of the $400 million term-loan maturity in 2017, and sensitivity of the $300 million floating-rate revolver balance to interest-rate increases.
- Credit quality and repayment prospects for the $93.6 million of related-party Sponsored REIT loans, including the undrawn commitments.