UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10 - Q

 

(Mark One)

[ X ]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011.

 

OR

 

[   ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                     .

 

Commission File Number:  001-32470

 

Franklin Street Properties Corp.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

04-3578653

(State or other jurisdiction of incorporation

 

(I.R.S. Employer Identification No.)

or organization)

 

 

 

401 Edgewater Place, Suite 200

Wakefield, MA 01880

(Address of principal executive offices)(Zip Code)

 

(781) 557-1300

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES     x

NO     ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES     x

NO     ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

 

 

Non-accelerated filer   o (Do not check if a smaller reporting company)

Smaller reporting company o

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q, Continued

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES     o

NO     x

 

The number of shares of common stock outstanding as of July 29, 2011 was 81,437,405.

 



 

Franklin Street Properties Corp.

 

Form 10-Q

 

Quarterly Report

June 30, 2011

 

Table of Contents

 

 

 

Page

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010

4

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010

5

 

 

 

 

 

 

Condensed Consolidated Statements of Other Comprehensive Income for the three and six months ended June 30, 2011 and 2010

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8-21

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22-32

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

 

 

Item 1A.

Risk Factors

34

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

34

 

 

 

 

 

Item 4.

(Removed and Reserved)

34

 

 

 

 

 

Item 5.

Other Information

34

 

 

 

 

 

Item 6.

Exhibits

34

 

 

 

 

Signatures

35

 



 

PART I – FINANCIAL INFORMATION

Item 1.            Financial Statements

 

Franklin Street Properties Corp.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

June 30,

 

December 31,

 

(in thousands, except share and par value amounts)

 

2011

 

2010

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Land

 

$

129,800

 

$

121,720

 

Buildings and improvements

 

982,821

 

863,317

 

Fixtures and equipment

 

726

 

578

 

 

 

1,113,347

 

985,615

 

Less accumulated depreciation

 

137,216

 

122,917

 

Real estate assets, net

 

976,131

 

862,698

 

Acquired real estate leases, less accumulated amortization of $23,215 and $19,294, respectively

 

81,455

 

40,578

 

Investment in non-consolidated REITs

 

88,654

 

89,327

 

Assets held for syndication, net

 

11,206

 

2,976

 

Assets held for sale

 

 

74,947

 

Cash and cash equivalents

 

28,881

 

68,213

 

Restricted cash

 

459

 

420

 

Tenant rent receivables, less allowance for doubtful accounts of $1,235 and $1,600, respectively

 

1,846

 

1,922

 

Straight-line rent receivable, less allowance for doubtful accounts of $135 and $700, respectively

 

23,745

 

18,752

 

Prepaid expenses

 

1,255

 

1,654

 

Related party mortgage loan receivable

 

61,916

 

57,684

 

Other assets

 

5,760

 

685

 

Office computers and furniture, net of accumulated depreciation of $582 and $493, respectively

 

477

 

503

 

Deferred leasing commissions, net of accumulated amortization of $7,773 and $7,175, respectively

 

21,979

 

18,376

 

Total assets

 

$

1,303,764

 

$

1,238,735

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Bank note payable

 

$

345,000

 

$

209,968

 

Term loan payable

 

 

74,850

 

Accounts payable and accrued expenses

 

21,431

 

22,435

 

Accrued compensation

 

1,070

 

1,803

 

Tenant security deposits

 

2,476

 

1,930

 

Other liabilities: derivative termination value

 

447

 

1,077

 

Acquired unfavorable real estate leases, less accumulated amortization of $3,082 and $2,744, respectively

 

6,950

 

5,114

 

Total liabilities

 

377,374

 

317,177

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.0001 par value, 20,000,000 shares authorized, none issued or outstanding

 

-

 

-

 

Common stock, $.0001 par value, 180,000,000 shares authorized, 81,437,405 and 81,437,405 shares issued and outstanding, respectively

 

8

 

8

 

Additional paid-in capital

 

1,025,491

 

1,025,491

 

Accumulated other comprehensive loss

 

(447

)

(1,077

)

Accumulated distributions in excess of accumulated earnings

 

(98,662

)

(102,864

)

Total stockholders’ equity

 

926,390

 

921,558

 

Total liabilities and stockholders’ equity

 

$

1,303,764

 

$

1,238,735

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

 

For the
Three Months Ended
June 30,

 

For the
Six Months Ended
June 30,

 

 

(in thousands, except per share amounts)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

Rental

 

$

33,605

 

$

27,046

 

$

64,705

 

$

55,634

 

 

Related party revenue:

 

 

 

 

 

 

 

 

 

 

Syndication fees

 

2,973

 

541

 

3,490

 

662

 

 

Transaction fees

 

2,685

 

753

 

3,376

 

899

 

 

Management fees and interest income from loans

 

1,150

 

559

 

1,958

 

1,091

 

 

Other

 

7

 

6

 

13

 

15

 

 

Total revenue

 

40,420

 

28,905

 

73,542

 

58,301

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Real estate operating expenses

 

8,765

 

7,335

 

17,495

 

15,284

 

 

Real estate taxes and insurance

 

5,228

 

4,038

 

9,987

 

9,011

 

 

Depreciation and amortization

 

12,067

 

8,485

 

22,850

 

16,945

 

 

Selling, general and administrative

 

2,396

 

2,559

 

4,764

 

4,730

 

 

Commissions

 

1,555

 

336

 

1,843

 

450

 

 

Interest

 

3,578

 

1,735

 

5,986

 

3,388

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

33,589

 

24,488

 

62,925

 

49,808

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before interest income, equity in earnings of non-consolidated REITs and taxes

 

6,831

 

4,417

 

10,617

 

8,493

 

 

Interest income

 

9

 

9

 

20

 

17

 

 

Equity in earnings of non-consolidated REITs

 

1,166

 

380

 

2,134

 

633

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes on income

 

8,006

 

4,806

 

12,771

 

9,143

 

 

Taxes on income (benefit)

 

68

 

5

 

118

 

(64

)

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

7,938

 

4,801

 

12,653

 

9,207

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

97

 

1,153

 

556

 

2,309

 

 

Gain on sale of property less applicable income tax

 

2,346

 

-

 

21,939

 

-

 

 

Total discontinued operations

 

2,443

 

1,153

 

22,495

 

2,309

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,381

 

$

5,954

 

$

35,148

 

$

11,516

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic and diluted

 

81,437

 

79,681

 

81,437

 

79,681

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted, attributable to:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.10

 

$

0.06

 

$

0.15

 

$

0.11

 

 

Discontinued operations

 

0.03

 

0.01

 

0.28

 

0.03

 

 

Net income per share, basic and diluted

 

$

0.13

 

$

0.07

 

$

0.43

 

$

0.14

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Other Comprehensive Income

(Unaudited)

 

 

 

 

For the
Three Months Ended
June 30,

 

For the
Six Months Ended
June 30,

 

 

(in thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,381

 

$

5,954

 

$

35,148

 

$

11,516

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

Unrealized gain on derivative financial instruments

 

-

 

260

 

94

 

341

 

 

Amortized gain on derivative financial instruments

 

381

 

-

 

536

 

-

 

 

Total other comprehensive income

 

381

 

260

 

630

 

341

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

10,762

 

$

6,214

 

$

35,778

 

$

11,857

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6



 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the
Six Months Ended
June 30,

 

(in thousands)

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

35,148

 

$

11,516

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization expense

 

23,670

 

18,597

 

Amortization of above market lease

 

(62

)

1,147

 

Gain on sale of real estate assets

 

(21,939

)

-

 

Equity in earnings of non-consolidated REITs

 

(2,844

)

(633

)

Distributions from non-consolidated REITs

 

2,982

 

2,731

 

Increase (decrease) in bad debt reserve

 

(365

)

480

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

(39

)

275

 

Tenant rent receivables, net

 

441

 

402

 

Straight-line rents, net

 

(5,176

)

(1,759

)

Prepaid expenses and other assets, net

 

914

 

(224

)

Accounts payable and accrued expenses

 

(726

)

(4,139

)

Accrued compensation

 

(733

)

(376

)

Tenant security deposits

 

546

 

196

 

Payment of deferred leasing commissions

 

(5,386

)

(7,085

)

Net cash provided by operating activities

 

26,431

 

21,128

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of real estate assets, office computers and furniture

 

(128,054

)

(45,848

)

Acquired real estate leases

 

(45,032

)

-

 

Investments in non-consolidated REITs

 

(10

)

-

 

Investment in related party mortgage loan receivable

 

(4,232

)

(9,735

)

Changes in deposits on real estate assets

 

200

 

-

 

Investment in assets held for syndication, net

 

(8,200

)

4,858

 

Proceeds received on sales of real estate assets

 

96,790

 

-

 

Net cash used in investing activities

 

(88,538

)

(50,725

)

Cash flows from financing activities:

 

 

 

 

 

Distributions to stockholders

 

(30,946

)

(30,279

)

Equity offering costs

 

(90

)

(1

)

Borrowings under bank note payable

 

345,000

 

53,960

 

Repayment of bank note payable

 

(209,968

)

-

 

Repayment of term loan payable

 

(74,850

)

-

 

Deferred financing costs

 

(5,389

)

-

 

Swap termination payment

 

(982

)

-

 

Net cash provided by (used in) financing activities

 

22,775

 

23,680

 

Net decrease in cash and cash equivalents

 

(39,332

)

(5,917

)

Cash and cash equivalents, beginning of period

 

68,213

 

27,404

 

Cash and cash equivalents, end of period

 

$

28,881

 

$

21,487

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

Accrued costs for purchase of real estate assets

 

$

657

 

$

1,054

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.     Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards

 

Organization

 

Franklin Street Properties Corp. (“FSP Corp.” or the “Company”), holds, directly and indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management LLC, FSP Holdings LLC and FSP Protective TRS Corp.  The Company also has a non-controlling common stock interest in 16 corporations organized to operate as real estate investment trusts (“REITs”) and a non-controlling preferred stock interest in three of those REITs.

 

The Company operates in two business segments: real estate operations and investment banking/investment services. FSP Investments LLC provides real estate investment and broker/dealer services. FSP Investments LLC’s services include: (i) the organization of REIT entities (the “Sponsored REITs”), which are syndicated through private placements; (ii) sourcing of the acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale of preferred stock in Sponsored REITs.  FSP Investments LLC is a registered broker/dealer with the Securities and Exchange Commission and is a member of the Financial Industry Regulatory Authority, or FINRA.  FSP Property Management LLC provides asset management and property management services for the Sponsored REITs.

 

The Company owns and operates a portfolio of real estate, which consisted of 34 properties as of June 30, 2011.  From time-to-time, the Company may acquire real estate or invest in real estate by purchasing shares of preferred stock offered in syndications of Sponsored REITs.  The Company may also pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, or for geographic or property specific reasons.

 

Properties

 

The following table summarizes the Company’s investment in real estate assets, excluding assets held for syndication and assets held for sale:

 

 

 

As of June 30,

 

 

 

2011

 

2010

 

Commercial real estate:

 

 

 

 

 

Number of properties

 

34

 

33

 

Rentable square feet

 

6,747,815

 

6,418,835

 

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements of the Company include all the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2010, as filed with the Securities and Exchange Commission.

 

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included.  Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any other period.

 

Reclassifications

 

Certain balances in the 2010 financial statements have been reclassified to conform to the 2011 presentation.  The reclassifications were primarily related to the disposition of two properties sold in 2011, one of which was classified as an asset held for sale at December 31, 2010 and are presented as discontinued operations for all periods presented.  These reclassifications changed rental revenues, operating and maintenance expenses, depreciation and amortization, selling, general and administrative expenses and the related assets.  There was no change to net income for any period presented as a result of these reclassifications.

 

8



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.     Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards (continued)

 

Financial Instruments

 

The Company estimates that the carrying value of cash and cash equivalents, restricted cash, and the bank note payable approximate their fair values based on their short-term maturity and prevailing interest rates.

 

Recent Accounting Standards

 

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income.  This standard eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity and instead requires the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This standard is intended to enhance comparability between entities that report under GAAP and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity.  This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company adopted this update with no material changes to the disclosures in the condensed consolidated financial statements.

 

2.     Investment Banking/Investment Services Activity

 

During the six months ended June 30, 2011, the Company sold on a best efforts basis, through private placements, preferred stock in the following Sponsored REITs:

 

Sponsored REIT

 

Property Location

 

Gross Proceeds (1)

 

 

 

 

 

(in thousands)

 

FSP Monument Circle Corp.

 

Indianapolis, IN

 

  $

4,750

 

FSP Union Centre Corp.

 

West Chester, OH

 

45,325

 

 

 

Total

 

  $

50,075

 

 

(1)   The syndication of FSP Monument Circle Corp. (“Monument Circle”) commenced in October 2010 and was fully subscribed on March 1, 2011.  The syndication of FSP Union Centre Corp. (“Union Centre”), which commenced in March 2011, was not complete at June 30, 2011.

 

3.     Related Party Transactions and Investments in Non-Consolidated Entities

 

Investment in Sponsored REITs:

 

At June 30, 2011, the Company held an interest in 16 Sponsored REITs.  15 were fully syndicated and the Company no longer derives economic benefits or risks from the common stock interest that is retained in them.  One entity was not fully syndicated at June 30, 2011, which was Union Centre.  The Company holds a non-controlling preferred stock investment in three of these Sponsored REITs, FSP Phoenix Tower Corp. (“Phoenix Tower”), FSP 303 East Wacker Drive Corp. (“East Wacker”) and FSP Grand Boulevard Corp. (“Grand Boulevard”), from which it continues to derive economic benefits and risks.

 

9



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

3.     Related Party Transactions and Investments in Non-consolidated Entities (continued)

 

Equity in earnings of investment in non-consolidated REITs:

 

The following table includes equity in earnings of investments in non-consolidated REITs:

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Equity in earnings of Sponsored REITs

 

  $

948

 

  $

162

 

Equity in earnings (loss) of Phoenix Tower

 

(11)

 

(9)

 

Equity in earnings of East Wacker

 

1,186

 

367

 

Equity in earnings of Grand Boulevard

 

11

 

113

 

 

 

  $

2,134

 

  $

633

 

 

Equity in earnings of investments in Sponsored REITs is derived from the Company’s share of income (loss) following the commencement of syndication of Sponsored REITs.  Following the commencement of syndication the Company exercises influence over, but does not control these entities, and investments are accounted for using the equity method.

 

Equity in earnings (loss) of Phoenix Tower is derived from the Company’s preferred stock investment in the entity.  In September 2006, the Company purchased 48 preferred shares or 4.6% of the outstanding preferred shares of Phoenix Tower for $4,116,000 (which represented $4,800,000 at the offering price net of commissions of $384,000 and acquisition fees of $300,000 that were excluded).

 

Equity in earnings of East Wacker is derived from the Company’s preferred stock investment in the entity.  In December 2007, the Company purchased 965.75 preferred shares or 43.7% of the outstanding preferred shares of East Wacker for $82,813,000 (which represented $96,575,000 at the offering price net of commissions of $7,726,000, loan fees of $5,553,000 and acquisition fees of $483,000 that were excluded).

 

Equity in earnings of Grand Boulevard is derived from the Company’s preferred stock investment in the entity.  In May 2009, the Company purchased 175.5 preferred shares or 27.0% of the outstanding preferred shares of Grand Boulevard for $15,049,000 (which represented $17,550,000 at the offering price net of commissions of $1,404,000, loan fees of $1,009,000 and acquisition fees of $88,000 that were excluded).

 

The Company recorded distributions of $2,982,000 and $2,731,000 from non-consolidated REITs during the six months ended June 30, 2011 and 2010, respectively.

 

Non-consolidated REITs:

 

The Company has in the past acquired by merger entities similar to the Sponsored REITs.  The Company’s business model for growth includes the potential acquisition by merger in the future of Sponsored REITs.  The Company has no legal or any other enforceable obligation to acquire or to offer to acquire any Sponsored REIT.  In addition, any offer (and the related terms and conditions) that might be made in the future to acquire any Sponsored REIT would require the approval of the boards of directors of the Company and the Sponsored REIT and the approval of the shareholders of the Sponsored REIT.

 

The operating data below for 2011 includes operations of the 16 Sponsored REITs the Company held an interest in as of June 30, 2011.  The operating data for 2010 includes operations of the 14 Sponsored REITs the Company held an interest in as of June 30, 2010.

 

10



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

3.             Related Party Transactions and Investments in Non-consolidated Entities (continued)

 

At June 30, 2011, December 31, 2010 and June 30, 2010, the Company had ownership interests in 16, 15 and 14 Sponsored REITs, respectively.  Summarized financial information for these Sponsored REITs is as follows:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2011

 

 

2010

 

 

 

 

 

 

 

 

Balance Sheet Data (unaudited):

 

 

 

 

 

 

Real estate, net

 

  $

763,264

 

 

  $

767,938

 

Other assets

 

99,666

 

 

105,218

 

Total liabilities

 

(253,077

)

 

(256,612

)

Shareholders’ equity

 

  $

609,853

 

 

  $

616,544

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2011

 

 

2010

 

 

 

 

 

 

 

 

Operating Data (unaudited):

 

 

 

 

 

 

Rental revenues

 

  $

54,495

 

 

  $

46,001

 

Other revenues

 

33

 

 

98

 

Operating and maintenance expenses

 

(26,935

)

 

(25,797

)

Selling, general and administrative

 

(789

)

 

-

 

Depreciation and amortization

 

(16,426

)

 

(12,749

)

Interest expense

 

(9,234

)

 

(4,576

)

Net income

 

  $

1,144

 

 

  $

2,977

 

 

Syndication fees and Transaction fees:

 

The Company provides syndication and real estate acquisition advisory services for Sponsored REITs.  Syndication, development and transaction fees from non-consolidated entities amounted to approximately $6,866,000 and $1,561,000 for the six months ended June 30, 2011 and 2010, respectively.

 

Management fees and interest income from loans:

 

Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelable with 30 days notice.  Asset management fee income from non-consolidated entities amounted to approximately $464,000 and $397,000 for the six months ended June 30, 2011 and 2010, respectively.

 

The Company typically makes an acquisition loan (“Acquisition Loan”) to each Sponsored REIT which is secured by a mortgage on the borrower’s real estate.  These loans enable Sponsored REITs to acquire their respective properties prior to the consummation of the offerings of their equity interests.  The Company anticipates that each Acquisition Loan will be repaid at maturity or earlier from the proceeds of the Sponsored REIT’s equity offering.  Each Acquisition Loan has a term of two years and bears interest at approximately the same rate paid by FSP Corp. for borrowings under the New Revolver (as defined in Note 5 below).  The Company had one Acquisition Loan outstanding for the syndication of Union Centre as of June 30, 2011 and one Acquisition Loan outstanding for the syndication of Monument Circle as of December 31, 2010.  Acquisition Loans are classified as assets held for syndication.

 

11



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

3.             Related Party Transactions and Investments in Non-consolidated Entities (continued)

 

From time-to-time the Company may also make secured loans (“Sponsored REIT Loans”) to Sponsored REITs to fund construction costs, capital expenditures and leasing costs or for other purposes.  The Company has provided Sponsored REIT Loans in the form of revolving lines of credit to five Sponsored REITs, or to wholly-owned subsidiaries of those Sponsored REITs, and a construction loan to one wholly-owned subsidiary of another Sponsored REIT.  The Company anticipates that each Sponsored REIT Loan will be repaid at maturity or earlier from long term financings of the underlying properties, cash flows from the underlying properties or a capital event.  Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately two to three years.  Advances under each Sponsored REIT Loan bear interest at a rate equal to the 30-day LIBOR rate plus an agreed upon number of basis points and most advances also require a 50 basis point draw fee.  The Company received a $210,000 loan commitment fee at the time of the closing of the Sponsored REIT Loan that is structured as a construction loan.

 

The following is a summary of the Sponsored REIT Loans outstanding as of June 30, 2011:

 

(dollars in 000’s)

 

 

 

Maximum

 

Amount

 

 

 

 

 

Interest

 

 

 

Maturity

 

Amount

 

Drawn at

 

Interest

 

Draw

 

Rate at

 

Sponsored REIT

 

Date

 

of Loan

 

30-Jun-11

 

Rate (1)

 

Fee (2)

 

30-Jun-11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Highland Place I Corp. (3)

 

31-Dec-12

 

$

5,500

 

$

1,125

 

L+4.4%

 

0.5%

 

4.59%

 

FSP Satellite Place Corp. (4)

 

31-Mar-13

 

5,500

 

5,500

 

L+4.4%

 

0.5%

 

4.59%

 

FSP 1441 Main Street Corp.(4) (a)

 

31-Mar-13

 

10,800

 

7,300

 

L+4.4%

 

0.5%

 

4.59%

 

FSP 505 Waterford Corp. (4)

 

30-Nov-12

 

7,000

 

1,150

 

L+4.4%

 

0.5%

 

4.59%

 

FSP Phoenix Tower Corp. (4) (b)

 

30-Nov-12

 

15,000

 

9,300

 

L+4.4%

 

0.5%

 

4.59%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loan

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP 385 Interlocken

 

 

 

 

 

 

 

 

 

 

 

 

 

Development Corp. (4) (c) (d)

 

30-Apr-13

 

42,000

 

37,541

 

L+4.4%

 

n/a

 

4.59%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

85,800

 

$

61,916

 

 

 

 

 

 

 

 

(1) The interest rate is 30-Day LIBOR rate plus the additional rate indicated.

(2) The draw fee is a percentage of each new advance, and is paid at the time of each new draw.

(3) Effective January 1, 2011 and February 1, 2011, the interest rate was 30-day LIBOR plus 3% and effective March 1, 2011 became LIBOR plus 4.4% until maturity.  Effective January 31, 2011, any future draws will require a draw fee in an amount equal to 0.5%.

(4) Effective January 1, 2011 through March 30, 2011, the interest rate was 30-day LIBOR plus 3%.

 

(a) The Borrower is FSP 1441 Main Street LLC, a wholly-owned subsidiary.

(b) The Borrower is FSP Phoenix Tower Limited Partnership, a wholly-owned subsidiary.

(c) The Borrower is FSP 385 Interlocken LLC, a wholly-owned subsidiary.

(d) The Borrower paid a commitment fee of $210,000 at loan origination in March 2009.

 

 

The Company recognized interest income and fees from the Acquisition Loan and Sponsored REIT Loans of approximately $1,494,000 and $694,000 for the six months ended June 30, 2011 and 2010, respectively.

 

12



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

4.     Significant Acquisitions

 

During the six months ended June 30, 2011, the Company acquired three properties with an aggregate of approximately 676,000 rentable square feet at an aggregate purchase price of approximately $166 million excluding closing costs and adjustments.  One property is located in North Carolina and two are located in Texas.

 

The purchase price of the properties was allocated to real estate investments and leases, including lease origination costs.  Lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar lease, including leasing commission, legal, vacancy, and other related costs).  The value assigned to buildings approximates their replacement cost; the value assigned to land approximates its appraised value; and the value assigned to leases approximates their fair value.  Other assets and liabilities are recorded at their historical costs, which approximates fair value.

 

The following table summarizes the estimated fair value of the assets acquired at the date of acquisition:

 

 

 

Value of Assets Acquired

 

 

 

(in thousands)

 

 

 

 

 

Real estate assets

 

 

$

120,750

 

 

 

Value of acquired real estate leases

47,474

 

 

 

Acquired unfavorable leases

 

 

(2,441

)

 

 

 

 

 

 

 

 

 

Total

 

 

$

165,783

 

 

 

 

 

Pro forma operating results for the Company and the acquisitions are shown in the following table.  The results assume that the properties were acquired on January 1, 2010.  The results are not necessarily indicative of what the Company’s actual results of operations would have been for the period indicated, nor do they purport to represent the results of operations of any future period.

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(unaudited)

 

June 30,

 

June 30,

 

(in thousands except per share amounts)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

40,420

 

$

32,863

 

$

76,959

 

$

66,216

 

Income from continuing operations

 

$

7,938

 

$

4,585

 

$

12,635

 

$

8,775

 

Net income

 

$

10,381

 

$

5,738

 

$

35,130

 

$

11,084

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

81,437

 

79,681

 

81,437

 

79,681

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per share

 

$

0.10

 

$

0.06

 

$

0.15

 

$

0.11

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

$

0.13

 

$

0.07

 

$

0.43

 

$

0.14

 

 

 

5.     Bank note payable and term note payable

 

The Company had a bank note payable, which was an unsecured revolving line of credit (the “Revolver”) for advances up to $250 million that was repaid on February 22, 2011, and a term note payable, which was an unsecured term loan (the “Term Loan”) of approximately $75 million that was repaid on February 22, 2011.  The Revolver and the Term Loan were with a group of banks.

 

13



 

Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

5.     Bank note payable and term note payable (continued)

 

The Revolver and Term Loan included restrictions on property liens and required compliance with various financial covenants. Financial covenants included the maintenance of at least $1.5 million in operating cash accounts, a minimum unencumbered cash and liquid investments balance and tangible net worth, limitations on permitted secured debt and compliance with various debt and operating income ratios, as defined in the loan agreement. The Company was in compliance with the Revolver and Term Loan financial covenants as of December 31, 2010.

 

On February 22, 2011, the Company entered into a new unsecured revolving line of credit (the “New Revolver”) for advances up to $500 million with a group of banks.  On May 19, 2011, the Company increased availability under the New Revolver by $100 million to $600 million by fully exercising an accordion featureThe New Revolver matures on February 22, 2014 with a one-year extension available at the Company’s election and payment of a fee.

 

Proceeds from the New Revolver were used to repay and terminate the Revolver and the Term Loan on February 22, 2011.  Borrowings under the New Revolver bear interest at either the bank’s base rate plus 85 to 200 basis points depending upon a leverage ratio at the time of borrowing (the bank’s base rate plus 110 basis points, or 4.35% at June 30, 2011) or a rate equal to LIBOR plus 185 to 300 basis points depending upon a leverage ratio at the time of borrowing (LIBOR plus 210 basis points, or 2.29% at June 30, 2011).  The loan terms include a facility fee at an annual rate of 30 to 50 basis points depending upon a leverage ratio (40 basis points at June 30, 2011), which is applied to the total amount of the New Revolver.  There were borrowings of $345,000,000 outstanding at a weighted average rate of 2.33% as of June 30, 2011.  The weighted average interest rate on amounts outstanding during the six months ended June 30, 2011 on the New Revolver and the Revolver was approximately 2.03%.

 

The New Revolver requires compliance with various financial covenants, including minimum tangible net worth, maximum leverage ratios, maximum secured leverage ratios, minimum fixed charge leverage ratios, maximum unencumbered leverage ratios, minimum unsecured debt service coverage, dividend and distribution requirements, investment requirements and maximum secured recourse indebtedness values.  The Company was in compliance with the New Revolver financial covenants as of June 30, 2011.

 

Borrowings under the Revolver bore interest at either the bank’s prime rate or a rate equal to LIBOR plus 100 basis points.  There were borrowings of $209,968,000 at a weighted average rate of 1.26% outstanding under the Revolver at December 31, 2010.  The weighted average interest rate on amounts outstanding during the six months ended June 30, 2010 was approximately 1.29%; and for the year ended December 31, 2010 was approximately 1.33%.

 

The Term Loan had an interest rate option equal to LIBOR (subject to a 2% floor) plus 200 basis points and a requirement that the Company fix the interest rate for the initial three-year term of the Term Loan pursuant to an interest rate swap agreement which the Company did at an interest rate of 5.84% per annum pursuant to an interest rate swap agreement.  The Company repaid and terminated the Term Loan and related interest rate swap from the proceeds of the New Revolver on February 22, 2011.

 

The Company intends to draw on the New Revolver in the future for a variety of corporate purposes, including the funding of interim mortgage loans to Sponsored REITs and the acquisition of properties that it acquires directly for its portfolio.  The Company typically causes mortgage loans to Sponsored REITs to be secured by a first mortgage against the real property owned by the Sponsored REIT.  The Company makes these loans to enable a Sponsored REIT to acquire real property prior to the consummation of the offering of its equity interests, and the loan is repaid out of the offering proceeds.  The Company also may make secured loans to Sponsored REITs for the purpose of funding capital expenditures, costs of leasing or for other purposes which would be repaid from long-term financing of the property, cash flows from the property or a capital event.

 

6.     Financial Instruments: Derivatives and Hedging

 

The Company’s hedging activity was limited to an interest rate swap.  The purpose of the interest rate swap, which was terminated on February 22, 2011, was to fix the interest rate for the term of the loan and protect the Company from future interest rate increases on the Term Loan that is described in Note 5.

 

The fair value of the Company’s derivative instrument was determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve. This financial instrument was classified within Level 2 of the fair value hierarchy and was classified as a liability on the condensed consolidated balance sheets.

 

14



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

6.     Financial Instruments: Derivatives and Hedging (continued)

 

The following table provides the fair value information for the Company’s interest rate swap as of December 31, 2010:

 

(dollars in thousands)

 

Notional
Value

 

Strike Rate

 

Effective
Date

 

Expiration
Date

 

Fair Value

 

Interest Rate Swap

 

$

75,000

 

5.840%

 

10/2008

 

10/2011

 

$

(1,077)

 

 

The interest rate swap represented a cash flow hedge and was recorded at fair value and classified as a liability.  Changes in the recorded fair value of the interest rate swap were recorded to other comprehensive income. On February 22, 2011, the interest rate swap agreement applicable to the Term Loan with a value of approximately $75 million was terminated and a payment was made of approximately $982,000.  The payment to terminate the interest rate swap liability will be amortized into interest expense through October 15, 2011.  As of June 30, 2011, the unamortized balance was approximately $447,000.

 

The interest amortization for the Company’s terminated interest rate swap reclassified from Accumulated Other Comprehensive Income into interest expense during the three and six months ended June 30, 2011 was as follows:

 

 

 

Three Months

 

Six Months

 

 

 

Ended

 

Ended

 

(in thousands)

 

June 30,

 

June 30,

 

Income Statement Location

 

2011

 

2011

 

 

 

 

 

 

 

Interest expense

 

$

381

 

$

536

 

 

 

The effective portion of the loss on outstanding derivative recognized in Other Comprehensive Income for the three and six months ended June 30, 2011 was as follows:

 

 

 

Three Months

 

Six Months

 

 

 

Ended

 

Ended

 

(in thousands)

 

June 30,

 

June 30,

 

Income Statement Location

 

2011

 

2011

 

 

 

 

 

 

 

Interest rate swap

 

$

381

 

$

536

 

 

7.     Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of Company shares outstanding during the period.  Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares.  There were no potential dilutive shares outstanding at June 30, 2011 and 2010.

 

8.     Stockholders’ Equity

 

As of June 30, 2011, the Company had 81,437,405 shares of common stock outstanding.

 

On May 6, 2010, the Company entered into an on demand offering sales agreement whereby the Company may offer and sell up to an aggregate gross sales price of $75 million of its common stock from time to time (the “ATM Sales Program”).  Sales of shares of the Company’s common stock depend upon market conditions and other factors determined by the Company and may be deemed to be “at the market offerings” as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on the NYSE Amex or sales made to or through a market maker other than on an exchange, as well as in negotiated transactions, if and to the extent agreed by the Company in writing.  The Company has no obligation to sell any shares of its common stock, and may at any time suspend solicitation and offers.  During the six months ended June 30, 2011, the Company did not sell any shares under the ATM Sales Program.

 

15



 

Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

8.     Stockholders’ Equity (continued)

 

The Company declared and paid dividends as follows (in thousands, except per share amounts):

Quarter Paid

 

Dividends Per
Share

 

Total
Dividends

 

 

 

 

 

 

 

First quarter of 2011

 

$

0.19

 

$

15,473

 

Second quarter of 2011

 

$

0.19

 

$

15,473

 

 

 

 

 

 

 

First quarter of 2010

 

$

0.19

 

$

15,139

 

Second quarter of 2010

 

$

0.19

 

$

15,140

 

 

 

9.     Business Segments

 

The Company operates in two business segments: real estate operations (including real estate leasing, making interim acquisition loans and other financing and asset/property management) including discontinued operations and investment banking/investment services (including real estate acquisition, development and broker/dealer services).  The Company has identified these segments because this information is the basis upon which management makes decisions regarding resource allocation and performance assessment.  The accounting policies of the reportable segments are the same as those described in “Significant Accounting Policies” in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2010.  The Company’s operations are located in the United States of America.

 

The Company evaluates the performance of its reportable segments based on Funds From Operations (“FFO”) as management believes that FFO represents the most accurate measure of the reportable segment’s activity and is the basis for distributions paid to equity holders.  The Company defines FFO as net income (determined in accordance with GAAP), excluding gains (or losses) from sales of property and acquisition costs of newly acquired properties that are not capitalized, plus depreciation and amortization, and after adjustments to exclude non-cash income (or losses) from non-consolidated or Sponsored REITs, plus distributions received from non-consolidated or Sponsored REITs.

 

FFO should not be considered as an alternative to net income (determined in accordance with GAAP), as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.  Other real estate companies may define this term in a different manner.  We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income and cash flows from operating, investing and financing activities in the consolidated financial statements.

 

16



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

9.     Business Segments (continued)

 

The calculation of FFO by business segment for the three and six months ended June 30, 2011 are shown in the following table:

 

(in thousands)

 

Real Estate
Operations

 

Investment
Banking/
Investment
Services

 

Total

 

Three Months Ended March 31, 2011

 

 

 

 

 

 

 

Net income (loss)

 

$

24,607

 

$

160

 

$

24,767

 

Gain on sale of property

 

(19,593)

 

-

 

(19,593)

 

Equity in income of non-consolidated REITs

 

(1,772)

 

-

 

(1,772)

 

Distributions from non-consolidated REITs

 

1,767

 

-

 

1,767

 

Acquisition costs

 

269

 

-

 

269

 

Depreciation and amortization

 

10,774

 

38

 

10,812

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

16,052

 

$

198

 

$

16,250

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2011

 

 

 

 

 

 

 

Net income (loss)

 

$

7,107

 

$

3,274

 

$

10,381

 

Gain on sale of property

 

(2,346)

 

-

 

(2,346)

 

Equity in income of non-consolidated REITs

 

(1,166)

 

-

 

(1,166)

 

Distributions from non-consolidated REITs

 

1,215

 

-

 

1,215

 

Acquisition costs

 

9

 

-

 

9

 

Depreciation and amortization

 

12,010

 

37

 

12,047

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

16,829

 

$

3,311

 

$

20,140

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2011

 

 

 

 

 

 

 

Net income (loss)

 

$

31,714

 

$

3,434

 

$

35,148

 

Gain on sale of property

 

(21,939)

 

-   

 

(21,939)

 

Equity in income of non-consolidated REITs

 

(2,938)

 

-   

 

(2,938)

 

Distributions from non-consolidated REITs

 

2,982

 

-   

 

2,982

 

Acquisition costs

 

278

 

-   

 

278

 

Depreciation and amortization

 

22,784

 

75

 

22,859

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

32,881

 

$

3,509

 

$

36,390

 

 

17



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

9.     Business Segments (continued)

 

The calculation of FFO by business segment for the three and six months ended June 30, 2010 are shown in the following table:

 

(in thousands)

 

 

Real Estate
Operations

 

Investment
Banking/
Investment
Services

 

Total

Three Months Ended March 31, 2010

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,041

 

 

$

(479

)

 

$

5,562

 

Equity in income of non-consolidated REITs

 

(253

)

 

-

 

 

(253

)

Distributions from non-consolidated REITs

 

1,407

 

 

-

 

 

1,407

 

Depreciation and amortization

 

9,901

 

 

33

 

 

9,934

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

17,096

 

 

$

(446

)

 

$

16,650

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2010

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

5,691

 

 

$

263

 

 

$

5,954

 

Equity in income of non-consolidated REITs

 

(380

)

 

-

 

 

(380

)

Distributions from non-consolidated REITs

 

1,324

 

 

-

 

 

1,324

 

Acquisition costs

 

129

 

 

-

 

 

129

 

Depreciation and amortization

 

9,636

 

 

39

 

 

9,675

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

16,400

 

 

$

302

 

 

$

16,702

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2010

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,732

 

 

$

(216

)

 

$

11,516

 

Equity in income of non-consolidated REITs

 

(633

)

 

-

 

 

(633

)

Distributions from non-consolidated REITs

 

2,731

 

 

-

 

 

2,731

 

Acquisition costs

 

129

 

 

-

 

 

129

 

Depreciation and amortization

 

19,537

 

 

72

 

 

19,609

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

33,496

 

 

$

(144

)

 

$

33,352

 

 

18



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

9.     Business Segments (continued)

 

The following table is a summary of other financial information by business segment:

 

(in thousands)

 

 

Real Estate
Operations

 

Investment
Banking/
Investment
Services

 

Total

 

Three Months Ended June 30, 2011:

 

 

 

 

 

 

 

Revenue

 

$

34,762

 

$

5,658

 

$

40,420

 

Interest income

 

5

 

4

 

9

 

Interest expense

 

3,578

 

-

 

3,578

 

Capital expenditures

 

4,091

 

-

 

4,091

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2011

 

 

 

 

 

 

 

Revenue

 

$

66,676

 

$

6,866

 

$

73,542

 

Interest income

 

15

 

5

 

20

 

Interest expense

 

5,986

 

-

 

5,986

 

Investment in non-consolidated REITs

 

88,654

 

-

 

88,654

 

Capital expenditures

 

7,046

 

-

 

7,046

 

 

 

 

 

 

 

 

 

Identifiable assets as of June 30, 2011

 

$

1,293,933

 

$

9,831

 

$

1,303,764

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2010:

 

 

 

 

 

 

 

Revenue

 

$

27,612

 

$

1,293

 

$

28,905

 

Interest income

 

9

 

-

 

9

 

Interest expense

 

1,735

 

-

 

1,735

 

Capital expenditures

 

1,371

 

62

 

1,433

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2010

 

 

 

 

 

 

 

Revenue

 

$

56,741

 

$

1,560

 

$

58,301

 

Interest income

 

17

 

-

 

17

 

Interest expense

 

3,388

 

-

 

3,388

 

Investment in non-consolidated REITs

 

90,782

 

-

 

90,782

 

Capital expenditures

 

3,056

 

62

 

3,118

 

 

 

 

 

 

 

 

 

Identifiable assets as of June 30, 2010

 

$

1,183,161

 

$

3,740

 

$

1,186,901

 

 

10.  Income Taxes

 

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company generally is entitled to a tax deduction for dividends paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only.  The Company must comply with a variety of restrictions to maintain its status as a REIT.  These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.

 

19



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

10.  Income Taxes (continued)

 

One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”).  In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 25% of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets.   Effective January 1, 2002, a subsidiary of the Company, FSP Investments LLC, became a TRS.  As a result, FSP Investments LLC, which is part of the Company’s investment banking/investment services segment, operates as a taxable corporation under the Code.

 

Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities.  In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.

 

Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future.  The Company and one or more of its subsidiaries files income tax returns in the U.S federal jurisdiction and various state jurisdictions.  The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2007 and thereafter.

 

The income tax expense (benefit) reflected in the condensed consolidated statements of income relates to the TRSs and Texas Franchise tax.  The expense (benefit) differs from the amounts computed by applying the federal statutory rate to income before taxes as follows:

 

 

 

For the

 

 

Six Months Ended

 

 

June 30,

(in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Federal income tax expense (benefit) at statutory rate

 

$

190

 

 

$

(354

)

Increase (decrease) in taxes resulting from:

 

 

 

 

 

 

State income tax (benefit), net of federal impact

 

-

 

 

(65

)

Valuation allowance on tax benefit

 

(187

)

 

242

 

Revised Texas franchise tax

 

115

 

 

113

 

Income tax expense (benefit)

 

$

118

 

 

$

(64

)

 

 

Taxes on income are a current tax expense.  No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.  For the six months ended June 30, 2011 a release of $187,000 of the valuation allowance on the federal tax benefit was used to offset the 2011 tax expense of FSP Investments LLC.  A valuation allowance of approximately $242,000 was recorded to reduce the tax benefit resulting from the 2010 loss attributable to FSP Investments LLC as future use of the tax benefit at the federal and state level may be uncertain.  A valuation allowance of $65,000 for Massachusetts taxes recorded to reduce the tax benefit from the 2010 losses from FSP Investments LLC due to unitary reporting requirements enacted during 2009 in Massachusetts and the likely hindrances to using the loss carry-forwards.

 

In May 2006, the State of Texas enacted a business tax (the “Revised Texas Franchise Tax”) that replaced its existing franchise tax. The Revised Texas Franchise Tax is a tax at a rate of approximately 0.7% of revenues at Texas properties commencing with 2007 revenues.  Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure it is considered an income tax. The Company recorded a provision for income taxes on its condensed consolidated statement of income of $115,000 and $113,000 for the six months ended June 30, 2011 and 2010, respectively.

 

20



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

11.  Discontinued Operations

 

The Company reached agreements to sell an office property located in Falls Church, Virginia, which was sold on January 21, 2011, and was classified as held for sale at December 31, 2010 and an industrial property located in Savage, Maryland, which was sold on June 24, 2011.  Both properties were sold at a gain.  Accordingly, the operating results for these properties have been reflected as discontinued operations for all periods presented, and are summarized below:

 

 

 

For the Three Months Ended

 

For the Six Months Ended

(in thousands)

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

Rental revenue

 

  $

159

 

 

  $

2,214

 

 

  $

689

 

 

  $

4,426

 

Rental operating expenses

 

(3

)

 

(23

)

 

(5

)

 

(47

)

Real estate taxes and insurance

 

(23

)

 

(280

)

 

(56

)

 

(553

)

Depreciation and amortization

 

(36

)

 

(758

)

 

(72

)

 

(1,517

)

Net income from discontinued operations

 

  $

97

 

 

  $

1,153

 

 

  $

556

 

 

  $

2,309

 

 

 

12.  Subsequent Events

 

On July 15, 2011, the Board of Directors of the Company declared a cash distribution of $0.19 per share of common stock payable on August 19, 2011 to stockholders of record on July 29, 2011.

 

21



 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2010.  Historical results and percentage relationships set forth in the condensed consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations.  The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements.  Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, economic conditions in the United States, disruptions in the debt markets, economic conditions in the markets in which we own properties, changes in the demand by investors for investment in Sponsored REITs, risks of a lessening of demand for the types of real estate owned by us, changes in government regulations, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.  See Item 1A. “Risk Factors” below.  Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.

 

Overview

 

FSP Corp., or the Company, operates in two business segments: real estate operations and investment banking/investment services.  The real estate operations segment involves real estate rental operations, leasing, secured financing of real estate for interim acquisition or other property financing, and services provided for asset management, property management, property acquisitions, dispositions and development.  The investment banking/investment services segment involves the structuring of real estate investments and broker/dealer services that include the organization of Sponsored REITs, the acquisition and development of real estate on behalf of Sponsored REITs and the raising of capital to equitize the Sponsored REITs through sale of preferred stock in private placements.

 

The main factor that affects our real estate operations is the broad economic market conditions in the United States.  These market conditions affect the occupancy levels and the rent levels on both a national and local level.  We have no influence on the national market conditions.  We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.

 

Our investment banking/investment services customers are primarily institutions and high net-worth individuals.  To the extent that the broad capital markets affect these investors our business is also affected.  These investors have many investment choices.  We must continually search for real estate at a price and at a competitive risk/reward rate of return that meets our customer’s risk/reward investment profile.

 

Due to the transactional nature of significant portions of our business, our quarterly financial metrics have historically been quite variable.  We do not manage our business to quarterly targets but rather manage our business to longer-term targets.  Consequently, we consider annual financial results to be much more meaningful for performance and trend measurements.

 

Critical Accounting Policies

 

We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies.  We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances.  On an on-going basis, we evaluate our estimates.  In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information.  The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates.  We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations.  No changes to our critical accounting policies have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

22



 

Trends and Uncertainties

 

Economic Conditions

 

The economy in the United States is continuing to experience a period of limited economic growth, including historically high levels of unemployment, the failure and near failure of a number of financial institutions and increased credit risk premiums for a number of market participants.  The broad economic market conditions in the United States are affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow growth and/or recessionary concerns, changes in currency exchange rates, geopolitical events and the availability of debt and interest rate fluctuations.  The current state of the U.S. economy has affected our business, resulting in a decline in occupancy in our real estate portfolio in 2009 and 2010, and may affect real estate values, occupancy levels, property income and the propensity and the ability of investors to invest in our Sponsored REITs in the future.  At this time, we cannot predict the extent or duration of any negative impact that the current state of the U.S. economy will have on our business.

 

Real Estate Operations

 

Leasing

 

Our real estate portfolio was approximately 86.9% leased as of June 30, 2011 and approximately 85% leased as of June 30, 2010.  As of June 30, 2011, approximately 3.0% of the square footage in our portfolio was scheduled to expire during the remainder of 2011, and approximately 4.4% was scheduled to expire during 2012.  We believe that most of the rental/leasing markets where our properties are located have stabilized, albeit at lower levels than before the recent economic downturn.  It is our objective to move overall occupancy levels in the portfolio back to the ninety-plus percentage range as soon as possible.  Assuming some level of continuing stability in the broader U.S. economic and employment picture, we believe that we can make meaningful progress toward that objective during the remainder of 2011.

 

While we cannot generally predict when existing vacancy in our real estate portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which in many cases may be below the expiring rates.  Also, even as the economy recovers, we believe the potential for any of our tenants to default on its lease or to seek the protection of bankruptcy still exists.  If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment.  In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.

 

Acquisitions

 

During the six months ended June 30, 2011, we acquired three properties directly into our portfolio with an aggregate of approximately 676,000 rentable square feet at an aggregate purchase price of approximately $166 million, excluding closing costs and adjustments.  One property is located in North Carolina and two are located in Texas.  Additional property acquisitions are a major objective of FSP and we are actively pursuing new acquisition opportunities.  We anticipate that our acquisition efforts will result in additional property acquisitions during the remainder of 2011.  New property acquisitions are anticipated to provide additional accretive rental income.

 

Discontinued Operations and Property Dispositions

 

We did not dispose of any properties during 2010.  However, we did dispose of an office property located in Falls Church, Virginia on January 21, 2011 at a gain and an industrial property located in Savage, Maryland on June 24, 2011, also at a gain.  Accordingly, these properties have been reflected as discontinued operations in the financial statements for all periods presented.

 

We will continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time in the ordinary course of business.  We believe that the current property sales environment remains challenged relative to both liquidity and pricing.  However, we also believe that we are witnessing improving pricing and liquidity in certain markets, extending a trend that we believe began in the second half of 2009.  We believe that both improving office property fundamentals as well as plentiful and attractive financing availability will likely be required to broadly improve the marketplace for property dispositions.  As an important part of our total return strategy, we intend to be active in property dispositions when we believe that market conditions warrant such activity and, as a consequence, we continue to consider some of our properties for possible disposition.

 

23



 

Investment Banking/Investment Services

 

Unlike our real estate operations business, which provides a rental revenue stream which is ongoing and recurring in nature, our investment banking/investment services business is transactional in nature.  Equity raised for Sponsored REIT syndications was $50.1 million during the six months ended June 30, 2011 compared to $10.4 million for the six months ended June 30, 2010.  For the year ended December 31, 2010, syndication proceeds decreased 11% to $36.0 million compared to $40.4 million in 2009.

 

In October 2010, one of our Sponsored REITs, FSP Monument Circle Corp., purchased an office and retail property in Indianapolis, Indiana.  Permanent equity capitalization of the property was structured as a private placement offering of preferred stock totaling $30 million, which was fully subscribed on March 1, 2011.  In January 2011, one of our Sponsored REITs, FSP Union Centre Corp., purchased an office property in West Chester, Ohio.  Permanent equity capitalization of the property was structured as a private placement offering of preferred stock totaling $62 million, $45.3 million of which had been closed in as of June 30, 2011.  This private placement offering is ongoing as of the beginning of the third quarter of 2011.

 

While we believe that general investor confidence and interest in commercial real estate investing continues to slowly improve, capital raising efforts over any specific period of time will likely remain unpredictable.  A significant slowdown in our investment banking business actually began in the third quarter of 2007 and, at this point, it remains unclear when or if a sustainable higher volume of equity investment in Sponsored REITs will return.  Business in this area, while always uncertain, has been affected by the uncertainty surrounding the future performance of commercial property markets, the amount of available mortgage financing for adequate capitalization of those markets and an increasing desire by our traditional target market clientele for liquidity in their investments which our Sponsored REITs do not offer.  We believe that our traditional investor’s confidence and interest in commercial real estate is changeable and very dependent on broader capital market/stock market activity.  In addition, the timing of property acquisitions that could be attractive for syndication is also unpredictable.  We also continue to rely solely on our in-house investment executives to access interested investors who have capital they can afford to place in an illiquid position for an indefinite period of time (i.e., invest in a Sponsored REIT).  We continue to evaluate whether our in-house sales force is capable, either through our existing client base or through new clients, of raising sufficient investment capital in Sponsored REITs to achieve future performance objectives.

 

24



 

The following table shows results for the three months ended June 30, 2011 and 2010:

 

(in thousands)

 

 

 

 

 

 

 

 

 

Three months ended June 30,

Revenue:

 

2011

 

2010

 

 Change 

 

Rental

 

  $

33,605

 

  $

27,046

 

  $

6,559

 

Related party revenue:

 

 

 

 

 

 

 

Syndication fees

 

2,973

 

541

 

2,432

 

Transaction fees

 

2,685

 

753

 

1,932

 

Management fees and interest income from loans

 

1,150

 

559

 

591

 

Other

 

7

 

6

 

1

 

Total revenue

 

40,420

 

28,905

 

11,515

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

8,765

 

7,335

 

1,430

 

Real estate taxes and insurance

 

5,228

 

4,038

 

1,190

 

Depreciation and amortization

 

12,067

 

8,485

 

3,582

 

Selling, general and administrative

 

2,396

 

2,559

 

(163

)

Commissions

 

1,555

 

336

 

1,219

 

Interest

 

3,578

 

1,735

 

1,843

 

Total expenses

 

33,589

 

24,488

 

9,101

 

 

 

 

 

 

 

 

 

Income before interest income, equity in earnings in non-consolidated REITs and taxes

 

6,831

 

4,417

 

2,414

 

Interest income

 

9

 

9

 

-

 

Equity in earnings of non-consolidated REITs

 

1,166

 

380

 

786

 

 

 

 

 

 

 

 

 

Income before taxes

 

8,006

 

4,806

 

3,200

 

Income tax expense (benefit)

 

68

 

5

 

63

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

7,938

 

4,801

 

3,137

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Income from discontinued operations

 

97

 

1,153

 

(1,056

)

Gain on sale of property less applicable income tax

 

2,346

 

-

 

2,346

 

Total discontinued operations

 

2,443

 

1,153

 

1,290

 

 

 

 

 

 

 

 

 

Net income

 

  $

10,381

 

  $

5,954

 

  $

4,427

 

 

 

Comparison of the three months ended June 30, 2011 to the three months ended June 30, 2010:

 

Revenues

 

Total revenues increased by $11.5 million to $40.4 million for the quarter ended June 30, 2011, as compared to $28.9 million for the quarter ended June 30, 2010.  The increase was primarily a result of:

 

o

An increase in rental revenue of approximately $6.5 million arising primarily from the acquisition of three properties in March 2011 and a property in June 2010, that were included in the results for the three months ended June 30, 2011, and leasing, which raised occupancy to 87% at June 30, 2011 compared to 85% at June 30, 2010.

 

 

o

A $4.4 million increase in syndication fees and transaction fees, which was principally a result of an increase in gross syndication proceeds for the quarter ended June 30, 2011 compared to the same period in 2010.

 

 

o

A $0.6 million increase in interest income from loans to Sponsored REITs, which was principally a result of a larger loan receivable balance and a higher interest rate charged during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, from which interest income is derived.

 

25



 

Expenses

 

Total expenses increased by $9.1 million to $33.6 million for the quarter ended June 30, 2011 as compared to the quarter ended June 30, 2010.  The increase was primarily a result of:

 

o

An increase in real estate operating expenses and real estate taxes and insurance of approximately $2.6 million, and depreciation of $3.6 million, which were primarily from the acquisition of three properties in March 2011 and another property in June 2010.

 

 

o

An increase to interest expense of approximately $1.8 million to $3.6 million during the three months ended June 30, 2011 compared to $1.7 million for the same period in 2010.  The increase was attributable to a higher amount of debt outstanding and an increase in interest rate associated with our New Revolver, which closed on February 22, 2011 compared to the Revolver and Term Loan that were used during the three months ended June 30, 2010.

 

 

o

An increase in commissions of $1.2 million, which was principally a result of an increase in gross syndication proceeds for the quarter ended June 30, 2011 compared to the same period in 2010.

 

These increases were partially offset by:

 

o

A decrease in general and administrative expenses of $0.1 million, which was primarily the result of approximately a $0.1 million decrease in acquisition costs, which related to the acquisition of a property during the three months ended June 30, 2010.  We had 44 and 42 employees as of June 30, 2011 and 2010, respectively, at our headquarters in Wakefield, Massachusetts.

 

 

Equity in earnings of non-consolidated REITs

 

Equity in earnings from non-consolidated REITs increased approximately $0.8 million to $1.2 million during the three months ended June 30, 2011 compared to the same period in 2010.  The increase was primarily due to an increase of $0.5 million in equity in income from our investment in FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, and an increase of $0.3 million from syndications in process during the second quarter of 2011 compared to the second quarter of 2010.

 

Taxes on income

 

Taxes on income increased by $0.1 million to $0.1 million compared to the three months ended June 30, 2010.  We placed a valuation allowance on future tax benefits from losses in 2010 as we had carried back losses in prior years and a portion of that valuation allowance reduced income tax expense for the second quarter of 2011.   Tax losses arose primarily from reduced activity in the investment banking and investment services business.  Included in income taxes for both periods is the Revised Texas Franchise Tax, which is derived from an income based measure it is considered an income tax.

 

Income from continuing operations

 

Income from continuing operations for the three months ended June 30, 2011 was $7.9 million compared to $4.8 million for the three months ended June 30, 2010, for the reasons described above.

 

Discontinued operations and gain on sale of property

 

During 2010, we reached an agreement to sell an office property, located in Falls Church, Virginia, which was sold on January 21, 2011 at a gain.  On June 24, 2011, we sold an industrial property in Savage, Maryland at a gain.  Accordingly, these properties have been reflected as discontinued operations in the financial statements for all periods presented.  Income from discontinued operations of the property was approximately $0.1 million and $1.2 million for the three months ended June 30, 2011 and 2010, respectively.  For the three months ended June 30, 2011, we reported a $2.3 million gain on the sale of the property located in Savage, Maryland.

 

Net income

 

Net income for the three months ended June 30, 2011 was $10.4 million compared to $5.9 million for the three months ended June 30, 2010, for the reasons described above.

 

26



 

The following table shows results for the six months ended June 30, 2011 and 2010:

 

(in thousands)

 

 

 

 

 

 

 

 

 

Six months ended June 30,

Revenue:

 

2011

 

2010

 

 Change 

 

Rental

 

  $

64,705

 

  $

55,634

 

  $

9,071

 

Related party revenue:

 

 

 

 

 

 

 

Syndication fees

 

3,490

 

662

 

2,828

 

Transaction fees

 

3,376

 

899

 

2,477

 

Management fees and interest income from loans

 

1,958

 

1,091

 

867

 

Other

 

13

 

15

 

(2

)

Total revenue

 

73,542

 

58,301

 

15,241

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

17,495

 

15,284

 

2,211

 

Real estate taxes and insurance

 

9,987

 

9,011

 

976

 

Depreciation and amortization

 

22,850

 

16,945

 

5,905

 

Selling, general and administrative

 

4,764

 

4,730

 

34

 

Commissions

 

1,843

 

450

 

1,393

 

Interest

 

5,986

 

3,388

 

2,598

 

Total expenses

 

62,925

 

49,808

 

13,117

 

 

 

 

 

 

 

 

 

Income before interest income, equity in earnings (losses) in non-consolidated REITs and taxes

 

10,617

 

8,493

 

2,124

 

Interest income

 

20

 

17

 

3

 

Equity in earnings in non-consolidated REITs

 

2,134

 

633

 

1,501

 

 

 

 

 

 

 

 

 

Income before taxes

 

12,771

 

9,143

 

3,628

 

Income tax benefit

 

118

 

(64

)

182

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

12,653

 

9,207

 

3,446

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Income from discontinued operations

 

556

 

2,309

 

(1,753

)

Gain on sale of property less applicable income tax

 

21,939

 

-

 

21,939

 

Total discontinued operations

 

22,495

 

2,309

 

20,186

 

 

 

 

 

 

 

 

 

Net income

 

  $

35,148

 

  $

11,516

 

  $

23,632

 

 

 

Comparison of the six months ended June 30, 2011 to the six months ended June 30, 2010:

 

Revenues

 

Total revenues increased by $15.2 million to $73.5 million for the six months ended June 30, 2011, as compared to $58.3 million for the six months ended June 30, 2010.  The increase was primarily a result of:

 

o

An increase in rental revenue of approximately $9.1 million arising primarily from the acquisition of three properties in March 2011 and a property in June 2010, that were included in the results for the six months ended June 30, 2011, and leasing, which raised occupancy to 87% at June 30, 2011 compared to 85% at June 30, 2010.

o

A $5.3 million increase in syndication fees and transaction fees, which was principally a result of an increase in gross syndication proceeds for the six months ended June 30, 2011 compared to the same period in 2010.

 

27



 

o                 A $0.8 million increase in interest income from loans to Sponsored REITs, which was principally a result of a larger loan receivable balance and a higher interest rate charged during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, from which interest income is derived.

 

Expenses

 

Total expenses increased by $13.1 million to $62.9 million for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010.  The increase was primarily a result of:

 

o                 An increase in real estate operating expenses and real estate taxes and insurance of approximately $3.2 million, and depreciation of $5.9 million, which were primarily from the acquisition of three properties in March 2011 and another property in June 2010.

 

o                 An increase to interest expense of approximately $2.6 million to $6.0 million during the six months ended June 30, 2011 compared to $3.4 million for the same period in 2010.  The increase was attributable to a higher amount of debt outstanding and an increase in interest rate associated with our New Revolver, which closed on February 22, 2011 compared to the Revolver and Term Loan that were used during the six months ended June 30, 2010.

 

o                 An increase in commissions of $1.4 million, which was principally a result of an increase in gross syndication proceeds for the six months ended June 30, 2011 compared to the same period in 2010.

 

Equity in earnings of non-consolidated REITs

 

Equity in earnings from non-consolidated REITs increased approximately $1.5 million to $2.1 million during the six months ended June 30, 2011 compared to the same period in 2010.  The increase was primarily due to an increase of $0.8 million in equity in income from our investment in East Wacker and an increase of $0.7 million from syndications in process during the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

 

Taxes on income

 

Taxes on income increased by $0.2 million to $0.1 million compared to the six months ended June 30, 2010.  We placed a valuation allowance on future tax benefits from losses in 2010 as we had carried back losses in prior years and a portion of that valuation allowance reduced income tax expense for the second quarter of 2011.   Tax losses arose primarily from reduced activity in the investment banking and investment services business.  Included in income taxes for both periods is the Revised Texas Franchise Tax, which is derived from an income based measure it is considered an income tax.

 

Income from continuing operations

 

Income from continuing operations for the six months ended June 30, 2011 was $12.6 million compared to $9.2 million for the six months ended June 30, 2010, for the reasons described above.

 

Discontinued operations and gain on sale of property

 

During 2010, we reached an agreement to sell an office property, located in Falls Church, Virginia, which was sold on January 21, 2011 at a gain.  On June 24, 2011, we sold an industrial property in Savage, Maryland at a gain.  Accordingly, these properties have been reflected as discontinued operations in the financial statements for all periods presented.  Income from discontinued operations of the property was approximately $0.6 million and $2.3 million for the six months ended June 30, 2011 and 2010, respectively.  For the six months ended June 30, 2011, we reported a $21.9 million in gains on the sale of these properties.

 

Net income

 

Net income for the six months ended June 30, 2011 was $35.1 million compared to $11.5 million for the six months ended June 30, 2010, for the reasons described above.

 

28



 

Liquidity and Capital Resources

 

Cash and cash equivalents were $28.9 million and $68.2 million at June 30, 2011 and December 31, 2010, respectively. This decrease of $39.3 million is attributable to $26.4 million provided by operating activities less $88.5 million used by investing activities, plus $22.8 million provided by financing activities.  Management believes that existing cash, cash anticipated to be generated internally by operations, cash anticipated to be generated by the sale of preferred stock in future Sponsored REITs and our existing debt financing will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.  Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations and from fees and commissions from the sale of shares in newly formed Sponsored REITs.  We believe that we have adequate funds to cover unusual expenses and capital improvements in addition to normal operating expenses.  Our ability to maintai