Franklin Street Properties Corp. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The company is a REIT focused primarily on suburban office properties; it reported one continuing operating segment, real estate operations. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and portfolio
- Owned 36 properties totaling approximately 7.05 million rentable square feet across 14 states; portfolio occupancy was 88.7% at year-end, up from 85.6% a year earlier.
- Acquired five properties during 2011, with approximately 994,000 rentable square feet, for about $214 million. Sold two properties during the year, recognizing gains.
- Also managed Sponsored REITs, held preferred investments in three of them, and made secured loans to Sponsored REITs.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $139.5 million | $117.2 million |
| Income from continuing operations | $18.0 million | $16.7 million |
| Net income | $43.5 million | $22.1 million |
| Basic and diluted EPS | $0.53 | $0.28 |
| Funds from operations (FFO, company-defined) | $71.2 million | $66.9 million |
| Cash from operating activities | $61.0 million | $49.6 million |
| Cash and cash equivalents at year-end | $23.8 million | $68.2 million |
| Total assets / total liabilities | $1,408.7 million / $487.3 million | $1,238.7 million / $317.2 million |
- Rental revenue rose 18% to $135.4 million, reflecting acquisitions and improved occupancy. Total expenses rose to $124.9 million from $101.5 million, including higher depreciation and interest costs.
- Net income included $21.9 million of after-tax gains on property sales; continuing-operations income was $18.0 million. FFO excludes property-sale gains and other adjustments and is not a GAAP measure or a substitute for cash flow.
- Investing activities used $218.3 million, principally for property acquisitions and improvements and Sponsored REIT loans. Financing activities provided $112.9 million, including net revolver borrowings; cash declined $44.4 million during the year.
- Year-end debt was $449.0 million under an unsecured, variable-rate revolving credit facility with $600 million of capacity. The weighted-average borrowing rate was 2.24%; the facility matures February 22, 2014, with a one-year extension option. The company reported compliance with covenants at year-end. Its properties were not subject to mortgage debt.
- Sponsored REIT loan commitments totaled $192.0 million, of which $140.5 million was drawn and outstanding at year-end. These loans are secured by underlying real estate; repayment depends on property cash flows, refinancing, or other capital events.
Material changes and fourth-quarter results
- The company discontinued sponsorship of syndications for newly formed Sponsored REITs in December 2011, citing limited expected future profit contribution and a more productive use of resources. The investment banking activities are presented as discontinued operations.
- 2011 quarterly revenue was $38.1 million in the fourth quarter, versus $30.6 million in fourth-quarter 2010. Fourth-quarter 2011 continuing-operations income was $5.3 million, net income was $5.1 million, and EPS was $0.06. Fourth-quarter results included a discontinued-operations loss of $0.2 million.
- Cash distributions remained $0.19 per share quarterly ($0.76 for 2011), unchanged from 2010. The board declared a further $0.19-per-share distribution in January 2012; management said comparable future distributions were expected, but not guaranteed.
- Common shares outstanding increased to 82.9 million at year-end from 81.4 million, including 1.5 million shares sold through the at-the-market program for approximately $17.4 million net proceeds.
Outlook, risks, and unusual items
- Management targeted returning portfolio occupancy to above 90% during 2012. It described leasing markets as stable or moderately improving, while noting that new leases may be signed at rates below expiring rents. Management believed cash, internally generated funds, and available debt financing would meet working-capital needs and anticipated capital expenditures for at least 12 months.
- Key risks include weak economic or local office-market conditions, tenant defaults or bankruptcies, vacancies and lease rollover, geographic concentration, declining property values, and property operating or compliance costs.
- The $449 million revolver is variable-rate debt; rising rates could increase interest expense. Refinancing at maturity is not assured, and covenant breaches could restrict borrowing or require repayment. Management estimated a 10% increase in market borrowing rates would reduce annual earnings and cash flows by approximately $1.0 million.
- Three properties—Southfield, Michigan; Englewood, Colorado; and Federal Way, Washington—were identified as having rental income insufficient to cover ordinary operating expenses in at least one of the reported years. Southfield was 39.2% leased at year-end 2011 and Englewood 48.9%.
- Other exposures include environmental liabilities, uninsured losses, REIT qualification and tax risks, and commitments to fund Sponsored REIT loans. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of year-end.
Important facts for investors to verify
- Whether occupancy and leasing rates improved toward management’s 2012 target, and the rent and tenant-improvement costs associated with new leases.
- How the $449 million variable-rate revolver will be refinanced or repaid by its 2014 maturity, and current covenant headroom and borrowing costs.
- Credit quality, collateral values, maturities, and repayment plans for the $140.5 million outstanding Sponsored REIT loans and remaining lending commitments.
- How much of reported earnings and distributions is supported by recurring operations versus property-sale gains, equity-method income, or other nonrecurring items; compare GAAP results with company-defined FFO and operating cash flow.
- The continuing costs and earnings effects of ending new Sponsored REIT syndications, and the sustainability of the $0.19 quarterly distribution.