Table of Contents

 

 

 

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 September 30, 2013.

 

OR

 

o  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

o

 

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

o

 

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 companyo

 

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 October 25, 2013 was 100,187,405.

 

 

 



Table of Contents

 

Franklin Street Properties Corp.

Form 10-Q

 

Quarterly Report

September 30, 2013

 

Table of Contents

 

 

 

Page

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012

4

 

 

 

 

 

 

Condensed Consolidated Statements of Other Comprehensive Income for the three and nine months ended September 30, 2013 and 2012

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7-17

 

 

 

 

 

Item 2.

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

18-33

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

 

 

Item 4.

Controls and Procedures

36

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

 

 

Item 1A.

Risk Factors

37

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

38

 

 

 

 

 

Item 4.

Mine Safety Disclosures

38

 

 

 

 

 

Item 5.

Other Information

38

 

 

 

 

 

Item 6.

Exhibits

38

 

 

 

Signatures

 

39

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

Franklin Street Properties Corp.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

September 30,

 

December 31,

 

(in thousands, except share and par value amounts)

 

2013

 

2012

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Land

 

$

185,479

 

$

141,545

 

Buildings and improvements

 

1,599,519

 

1,172,928

 

Fixtures and equipment

 

985

 

904

 

 

 

1,785,983

 

1,315,377

 

Less accumulated depreciation

 

210,293

 

180,589

 

Real estate assets, net

 

1,575,690

 

1,134,788

 

Acquired real estate leases, less accumulated amortization of $60,589 and $39,203, respectively

 

194,893

 

108,203

 

Investment in non-consolidated REITs

 

81,065

 

81,960

 

Asset held for sale

 

10,143

 

10,575

 

Cash and cash equivalents

 

25,539

 

21,267

 

Restricted cash

 

623

 

575

 

Tenant rent receivables, less allowance for doubtful accounts of $80 and $1,300, respectively

 

6,029

 

1,749

 

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

 

40,086

 

35,374

 

Related party mortgage loan receivables

 

98,846

 

93,896

 

Prepaid expenses and other assets

 

11,303

 

13,761

 

Other assets: derivative asset

 

4,365

 

 

Office computers and furniture, net of accumulated depreciation of $694 and $584, respectively

 

543

 

544

 

Deferred leasing commissions, net of accumulated amortization of $14,402 and $11,812, respectively

 

27,504

 

23,376

 

Total assets

 

$

2,076,629

 

$

1,526,068

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Bank note payable

 

$

331,500

 

$

216,750

 

Term loans payable

 

620,000

 

400,000

 

Accounts payable and accrued expenses

 

39,907

 

31,122

 

Accrued compensation

 

2,432

 

2,540

 

Tenant security deposits

 

3,891

 

2,489

 

Other liabilities: derivative liability

 

4,579

 

1,219

 

Acquired unfavorable real estate leases, less accumulated amortization of $5,936 and $4,618, respectively

 

15,171

 

7,199

 

Total liabilities

 

1,017,480

 

661,319

 

 

 

 

 

 

 

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, 100,187,405 and 82,937,405 shares issued and outstanding, respectively

 

10

 

8

 

Additional paid-in capital

 

1,273,585

 

1,042,876

 

Accumulated other comprehensive loss

 

(214

)

(1,219

)

Accumulated distributions in excess of accumulated earnings

 

(214,232

)

(176,916

)

Total stockholders’ equity

 

1,059,149

 

864,749

 

Total liabilities and stockholders’ equity

 

$

2,076,629

 

$

1,526,068

 

 

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

 

3



Table of Contents

 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

 

 

 

For the
Three Months Ended
September 30,

 

For the
Nine Months Ended
September 30,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Rental

 

$

56,760

 

$

37,944

 

$

145,618

 

$

109,207

 

Related party revenue:

 

 

 

 

 

 

 

 

 

Management fees and interest income from loans

 

1,665

 

3,485

 

4,929

 

9,146

 

Other

 

21

 

39

 

64

 

112

 

Total revenue

 

58,446

 

41,468

 

150,611

 

118,465

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate operating expenses

 

13,991

 

9,642

 

35,877

 

26,938

 

Real estate taxes and insurance

 

8,801

 

5,761

 

22,704

 

16,946

 

Depreciation and amortization

 

22,163

 

13,367

 

54,863

 

39,031

 

Selling, general and administrative

 

3,477

 

3,141

 

9,213

 

7,454

 

Interest

 

5,474

 

4,187

 

13,856

 

11,901

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

53,906

 

36,098

 

136,513

 

102,270

 

 

 

 

 

 

 

 

 

 

 

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

 

4,540

 

5,370

 

14,098

 

16,195

 

Interest income

 

5

 

5

 

10

 

17

 

Equity in earnings (losses) of non-consolidated REITs

 

(431

)

176

 

(814

)

1,061

 

 

 

 

 

 

 

 

 

 

 

Income before taxes on income

 

4,114

 

5,551

 

13,294

 

17,273

 

Taxes on income

 

118

 

80

 

352

 

236

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

3,996

 

5,471

 

12,942

 

17,037

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of income tax

 

98

 

(169

)

294

 

(563

)

Provision for loss on property held for sale of $14,300 less applicable income tax

 

 

(14,300

)

 

(14,300

)

Total discontinued operations

 

98

 

(14,469

)

294

 

(14,863

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,094

 

$

(8,998

)

$

13,236

 

$

2,174

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic and diluted

 

100,187

 

82,937

 

91,720

 

82,937

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted, attributable to:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.04

 

$

0.07

 

$

0.14

 

$

0.21

 

Discontinued operations

 

0.00

 

(0.18

)

0.00

 

(0.18

)

Net income (loss) per share, basic and diluted

 

$

0.04

 

$

(0.11

)

$

0.14

 

$

0.03

 

 

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

 

4



Table of Contents

 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Other Comprehensive Income (Loss)

(Unaudited)

 

 

 

For the
Three Months Ended
September 30,

 

For the
Nine Months Ended
September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,094

 

$

(8,998

)

$

13,236

 

$

2,174

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative financial instruments

 

(6,953

)

 

1,005

 

 

Total other comprehensive income

 

(6,953

)

 

1,005

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(2,859

)

$

(8,998

)

$

14,241

 

$

2,174

 

 

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

 

5



Table of Contents

 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the
Nine Months Ended
September 30,

 

(in thousands)

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

13,236

 

$

2,174

 

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

 

 

 

 

 

Depreciation and amortization expense

 

56,796

 

41,846

 

Amortization of above market lease

 

(277

)

56

 

Provision for loss on property held for sale of $14,300 less applicable income tax

 

 

14,300

 

Equity in (earnings) losses of non-consolidated REITs

 

814

 

(1,061

)

Distributions from non-consolidated REITs

 

 

1,246

 

Increase (decrease) in bad debt reserve

 

(1,220

)

105

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

(48

)

(53

)

Tenant rent receivables, net

 

(3,060

)

173

 

Straight-line rents, net

 

(3,920

)

(3,498

)

Lease acquisition costs

 

(820

)

(2,235

)

Prepaid expenses and other assets, net

 

(1,845

)

(1,278

)

Accounts payable and accrued expenses

 

6,860

 

(25

)

Accrued compensation

 

(108

)

(28

)

Tenant security deposits

 

1,402

 

273

 

Payment of deferred leasing commissions

 

(7,532

)

(2,425

)

Net cash provided by operating activities

 

60,278

 

49,570

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of real estate assets, office computers and furniture

 

(468,893

)

(49,209

)

Acquired real estate leases

 

(100,143

)

(14,376

)

Investments in non-consolidated REITs

 

4,858

 

(1

)

Distributions in excess of earnings from non-consolidated REITs

 

81

 

1,487

 

Investment in related party mortgage loan receivable

 

(4,950

)

(73,920

)

Repayment of related party mortgage loan receivable

 

 

106,200

 

Changes in deposits on real estate assets

 

 

 

Net cash used in investing activities

 

(569,047

)

(29,819

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from stock offering

 

241,500

 

 

Offering costs

 

(10,789

)

 

Distributions to stockholders

 

(50,552

)

(47,274

)

Borrowings under bank note payable

 

160,000

 

160,000

 

Repayment of bank note payable

 

(45,250

)

(527,000

)

Borrowing from term loan payable

 

220,000

 

400,000

 

Deferred financing costs

 

(1,868

)

(5,328

)

Net cash provided by (used in) financing activities

 

513,041

 

(19,602

)

Net increase in cash and cash equivalents

 

4,272

 

149

 

Cash and cash equivalents, beginning of period

 

21,267

 

23,813

 

Cash and cash equivalents, end of period

 

$

25,539

 

$

23,962

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

Accrued costs for purchase of real estate assets

 

$

3,617

 

$

774

 

 

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

 

6



Table of Contents

 

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.  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.  The Company also has a non controlling common stock interest in 15 corporations organized to operate as real estate investment trusts (“REIT”) and a non-controlling preferred stock interest in two of those REITs.  Collectively, the 15 REITs are referred to as the “Sponsored REITs”.

 

As of September 30, 2013, the Company owned and operated a portfolio of real estate consisting of 40 properties, including one asset held for sale, managed 15 Sponsored REITs and held seven promissory notes secured by mortgages on real estate owned by Sponsored REITs, including one mortgage loan, one construction loan and five revolving lines of credit.  From time-to-time, the Company may acquire real estate, make additional secured loans or acquire a Sponsored REIT.  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, including one asset held for sale:

 

 

 

As of September 30,

 

 

 

2013

 

2012

 

Commercial real estate:

 

 

 

 

 

Number of properties

 

40

 

37

 

Rentable square feet

 

9,807,483

 

7,439,195

 

 

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, 2012, 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 nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013 or for any other period.

 

Financial Instruments

 

The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued expenses, accrued compensation, tenant security deposits and the bank note and term loans payable approximate their fair values based on their short-term maturity and prevailing interest rates.

 

Reclassifications

 

Certain amounts from the 2012 financial statements have been reclassified to conform to the 2013 presentation. The reclassifications were related primarily to a property held for sale, which is presented as discontinued operations for all periods presented. Reclassifications of discontinued operations changed rental revenues, operating and maintenance expenses, depreciation and amortization and the related assets. There was no change to net income for any period presented as a result of these reclassifications.

 

7



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

Recent Accounting Standards

 

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. This update was effective for interim and annual reporting periods beginning after December 15, 2012. The adoption of this update did not have a material impact on the disclosures in, or presentation of, our condensed consolidated financial statements.

 

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

 

Investment in Sponsored REITs:

 

At September 30, 2013, the Company held a common stock interest in 15 Sponsored REITs, from which it no longer derives economic benefits or risks.  The Company also holds a non-controlling preferred stock investment in two of these Sponsored REITs, 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.

 

In September 2006, the Company purchased 48 preferred shares or 4.6% of the outstanding preferred shares of one of its Sponsored REITs, FSP Phoenix Tower Corp (“Phoenix Tower”).  On December 20, 2012, the property owned by Phoenix Tower was sold and, thereafter, Phoenix Tower declared and issued a liquidating distribution for its preferred shareholders, from which the Company was entitled to $4,862,000.  The Company received $4,752,000 on January 4, 2013 and $96,000 on September 30, 2013.  As of September 30, 2013, the Company held a beneficial interest in the Phoenix Tower liquidating trust in the amount of $14,000, which is included in other assets in the accompanying consolidated balance sheet.  In connection with its common stock ownership of Phoenix Tower, the Company received $10,000 on September 30, 2013.

 

Equity in earnings (losses) of investment in non-consolidated REITs:

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2013

 

2012

 

Equity in earnings of Phoenix Tower

 

$

 

$

48

 

Equity in earnings (loss) of East Wacker

 

(572

)

1,197

 

Equity in loss of Grand Boulevard

 

(242

)

(184

)

 

 

$

(814

)

$

1,061

 

 

Equity in earnings of investments in non-consolidated REITs is derived from the Company’s share of income (loss) in the operations of those entities.  The Company exercises influence over, but does not control these entities, and investments are accounted for using the equity method.

 

Equity in earnings of Phoenix Tower was derived from the Company’s preferred stock investment in the entity.  On December 20, 2012, the property owned by Phoenix Tower was sold and the Company’s share of the gain was $1,582,000.

 

Equity in earnings (loss) 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 loss 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).

 

8



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

The Company recorded distributions of $81,000 and $2,733,000 from non-consolidated REITs during the nine months ended September 30, 2013 and 2012, 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 or otherwise, 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 2013 and 2012 includes operations of the 15 and 16 Sponsored REITs the Company held an interest in as of September 30, 2013 and 2012, respectively.

 

At September 30, 2013, December 31, 2012 and September 30, 2012, the Company had ownership interests in 15, 15 and 16 Sponsored REITs, respectively.  Summarized financial information for these Sponsored REITs is as follows:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Balance Sheet Data (unaudited):

 

 

 

 

 

Real estate, net

 

$

694,469

 

$

659,655

 

Other assets

 

164,153

 

156,785

 

Total liabilities

 

(322,608

)

(316,311

)

Shareholders’ equity

 

$

536,014

 

$

500,129

 

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Operating Data (unaudited):

 

 

 

 

 

Rental revenues

 

$

70,427

 

$

83,933

 

Other revenues

 

52

 

93

 

Operating and maintenance expenses

 

(36,395

)

(42,134

)

Depreciation and amortization

 

(23,638

)

(26,452

)

Interest expense

 

(10,261

)

(13,633

)

Net income

 

$

185

 

$

1,807

 

 

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 $794,000 and $847,000 for the nine months ended September 30, 2013 and 2012, respectively.

 

From time to time the Company may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes.  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 some other 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.  Except for the mortgage loan which bears interest at a fixed rate, advances under each Sponsored REIT Loan bear interest at a rate equal to the 30-day LIBOR rate plus an agreed upon amount of basis points and most advances also require a 50 basis point draw fee.

 

9



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

The following is a summary of the Sponsored REIT Loans outstanding as of September 30, 2013:

 

(dollars in thousands)

 

 

 

 

 

 

 

Maximum

 

Amount

 

 

 

 

 

Interest

 

 

 

 

 

Maturity

 

Amount

 

Drawn at

 

Interest

 

Draw

 

Rate at

 

Sponsored REIT

 

Location

 

Date

 

of Loan

 

30-Sep-13

 

Rate (1)

 

Fee (2)

 

30-Sep-13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Highland Place I Corp.

 

Centennial, CO

 

31-Dec-13

 

$

5,500

 

$

1,575

 

L+4.4%

 

0.5

%

4.58

%

FSP Satellite Place Corp.

 

Duluth, GA

 

31-Mar-14

 

5,500

 

5,500

 

L+4.4%

 

0.5

%

4.58

%

FSP 1441 Main Street Corp.

 

Columbia, SC

 

31-Mar-14

 

10,800

 

9,000

 

L+4.4%

 

0.5

%

4.58

%

FSP 505 Waterford Corp.

 

Plymouth, MN

 

30-Nov-13

 

7,000

 

2,350

 

L+4.4%

 

0.5

%

4.58

%

FSP Galleria North Corp.

 

Dallas, TX

 

30-Jan-15

 

15,000

 

9,880

 

L+5.0%

 

0.5

%

5.18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured construction loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP 385 Interlocken Development Corp.

 

Broomfield, CO

 

30-Apr-14

 

42,000

 

37,541

 

L+4.4%

 

n/a

 

4.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan secured by property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Energy Tower I Corp. (3)

 

Houston, TX

 

5-Jul-14

 

33,000

 

33,000

 

6.41%

 

n/a

 

6.41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

118,800

 

$

98,846

 

 

 

 

 

 

 

 


(1)          The interest rate is 30-day LIBOR rate plus the additional rate indicated, otherwise a fixed rate.

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

(3)          The loan has a secured fixed mortgage amount of $33,000,000.  A loan fee of $300,630 was paid at the time of closing and funding of the loan on July 5, 2012.  The borrower is required to pay the Company an exit fee in the amount of 0.982% of  the principal repayment amount.

 

The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $4,135,000 and $8,299,000 for the nine months ended September 30, 2013 and 2012, respectively.

 

3.              Significant Acquisitions

 

During the nine months ended September 30, 2013, the Company acquired three properties with an aggregate of approximately 1,951,000 rentable square feet at an aggregate purchase price of approximately $558 million excluding closing costs and adjustments.  One property is located in Atlanta, Georgia and two properties are located in Denver, Colorado.  The Company expensed acquisition costs of approximately $556,000 related to these acquisitions.

 

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:

 

Real estate assets

 

$

454,447

 

Value of acquired real estate leases

 

110,039

 

Acquired unfavorable leases

 

(9,897

)

Total

 

$

554,589

 

 

10



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

3.              Significant Acquisitions (continued)

 

The Company assessed the fair value of the acquired real estate leases based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs are Level 3 in the fair value hierarchy.

 

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, 2012.  The results are not necessarily indicative of what the Company’s actual results of operations would have been for the periods indicated, nor do they purport to represent the results of operations of any future periods.

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

(unaudited)

 

September 30,

 

September 30,

 

(in thousands except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

61,300

 

$

53,895

 

$

178,322

 

$

155,747

 

Income from continuing operations

 

$

4,080

 

$

2,539

 

$

8,175

 

$

7,687

 

Net income

 

$

4,178

 

$

(11,930

)

$

8,469

 

$

(7,176

)

Weighted average shares outstanding

 

100,187

 

82,937

 

91,720

 

82,937

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per share

 

$

0.04

 

$

0.03

 

$

0.09

 

$

0.09

 

Net income per share

 

$

0.04

 

$

(0.14

)

$

0.09

 

$

(0.09

)

 

During the nine months ended September 30, 2013, the Company recognized approximately $14.2 million of revenues and $1.4 million of net income from operations of these acquisitions.

 

4.              Bank note payable

 

2013 Term Loan

 

On August 26, 2013, the Company and certain of its wholly-owned subsidiaries entered into a Credit Agreement (the “2013 Credit Agreement”) with the lending institutions referenced in the 2013 Credit Agreement and those lenders from time to time party thereto and Bank of Montreal, as administrative agent, to provide for a single unsecured term loan borrowing on the closing date in the amount of $220,000,000 (the “2013 Term Loan”).  On August 26, 2013, the Company drew down $220,000,000 under the 2013 Term Loan.  The 2013 Term Loan has a seven year term that matures on August 26, 2020.  The 2013 Term Loan includes an accordion feature that allows for up to $50,000,000 of additional loans subject to receipt of lender commitments and satisfaction of certain customary conditions.

 

The 2013 Term Loan bears interest at either (i) a rate equal to LIBOR plus 145 to 220 basis points depending on the Company’s total leverage ratio for the applicable period (LIBOR plus 145 basis points, or 1.63% at September 30, 2013) or (ii) a rate equal to the bank’s base rate plus 45 to 120 basis points depending on our total leverage ratio for the applicable period (the bank’s base rate plus 45 basis points, or 3.70% at September 30, 2013).  The actual LIBOR rate or base rate is determined based on the Company’s total leverage ratio for the applicable period as described in the table below:

 

Leverage Ratio

 

 

 

Base

 

Greater

 

 

 

Less Than

 

LIBOR

 

Rate

 

Than

 

 

 

or Equal to

 

Margin

 

Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25%

 

145.0

bps

45.0

bps

25%

 

and

 

35%

 

155.0

bps

55.0

bps

35%

 

and

 

45%

 

165.0

bps

65.0

bps

45%

 

and

 

55%

 

190.0

bps

90.0

bps

55%

 

and

 

 

 

220.0

bps

120.0

bps

 

11



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4.              Bank note payable (continued)

 

Notwithstanding the Company’s actual leverage ratio and the table above, during the period from closing and funding on August 26, 2013 until the Company furnishes Bank of Montreal with its compliance certificate (the “Compliance Certificate”) for the quarter ended September 30, 2013, the 2013 Term Loan bears interest at the < 25% leverage ratio.  From and after the Company furnishes the Compliance Certificate to Bank of Montreal, the 2013 Term Loan will bear interest based on the Company’s actual total leverage ratio for the applicable period as described in the table above.

 

Although the interest rate on the 2013 Term Loan is variable, the Company fixed the base LIBOR interest rate on the 2013 Term Loan by entering into an interest rate swap agreement. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the 2013 Term Loan at 2.32% per annum for seven years.  Accordingly, based upon the Company’s leverage ratio, as of September 30, 2013, the interest rate on the 2013 Term Loan was 3.77% per annum.

 

The 2013 Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to join certain subsidiaries as co-borrowers under the 2013 Credit Agreement and transactions with affiliates. The 2013 Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, a minimum unencumbered debt service coverage ratio, a maximum ratio of certain investments to total assets and a maximum amount of secured recourse indebtedness. The 2013 Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the 2013 Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the 2013 Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the 2013 Credit Agreement, and enforce any and all rights of the lenders or administrative agent under the 2013 Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable.  The Company was in compliance with the 2013 Term Loan financial covenants as of September 30, 2013.

 

The Company may use the proceeds of the 2013 Term Loan to finance the acquisition of real properties and for other permitted investments, to finance investments associated with Sponsored REITs, to refinance or retire existing indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the 2013 Credit Agreement.

 

2012 Credit Facility

 

As of September 30, 2013, the Company had bank notes payable to a group of banks for an unsecured credit facility comprised of both a revolving line of credit and a term loan (the “2012 Credit Facility”). The revolving line of credit portion of the 2012 Credit Facility is for borrowings, at the Company’s election, of up to $500,000,000 (the “2012 Revolver”). The term loan portion of the 2012 Credit Facility is for $400,000,000 (the “2012 Term Loan”).  The 2012 Revolver includes an accordion feature that allows for up to $250,000,000 of additional borrowing capacity subject to receipt of lender commitments and satisfaction of certain customary conditions.

 

On September 27, 2012, the Company and certain of its wholly-owned subsidiaries entered into an Amended and Restated Credit Agreement (as amended, the “2012 Credit Agreement”) with the lending institutions referenced in the 2012 Credit Agreement and those lenders from time to time party thereto and Bank of America, N.A., as administrative agent, letter of credit issuer and swing line lender, for the 2012 Credit Facility.  On September 27, 2012, the Company drew down the entire $400,000,000 under the 2012 Term Loan and $82,000,000 under the 2012 Revolver. The Company’s $600,000,000 revolving credit facility (the “2011 Revolver”) that was scheduled to mature on February 22, 2014 was amended and restated in its entirety by the 2012 Credit Agreement and the $482,000,000 in advances outstanding under the 2011 Revolver were repaid from the proceeds of the 2012 Credit Facility.

 

The 2012 Term Loan has a five year term that matures on September 27, 2017. Borrowings made pursuant to the 2012 Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $500,000,000 outstanding at any time. Borrowings made pursuant to the 2012 Revolver may be borrowed, repaid and reborrowed from time to time for four years until September 27, 2016, the initial maturity date of the 2012 Revolver. The Company has the right to extend the initial maturity date of

 

12



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4.              Bank note payable (continued)

 

the 2012 Revolver by an additional 12 months, or until September 27, 2017, upon payment of a fee and satisfaction of certain customary conditions.

 

The 2012 Credit Facility bears interest at either (i) a rate equal to LIBOR plus 135 to 190 basis points depending on the Company’s total leverage ratio at the time of the borrowing (LIBOR plus 140 basis points, or 1.58% at September 30, 2013) or (ii) a rate equal to the bank’s base rate plus 35 to 90 basis points depending on our total leverage ratio at the time of the borrowing (the bank’s base rate plus 40 basis points, or 3.65% at September 30, 2013).  The 2012 Credit Facility also obligates the Company to pay an annual facility fee of 20 to 40 basis points depending on the Company’s total leverage ratio (25 basis points at September 30, 2013).  The facility fee is assessed against the total amount of the 2012 Credit Facility, or $900,000,000. The actual amount of any applicable facility fee, LIBOR rate or base rate is determined based on the Company’s total leverage ratio as described in the table below:

 

Leverage Ratio

 

 

 

 

 

Base

 

Greater

 

 

 

Less Than

 

Facility

 

LIBOR

 

Rate

 

Than

 

 

 

or Equal to

 

Fee

 

Margin

 

Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25%

 

20.0

bps

135.0

bps

35.0

bps

25%

 

and

 

35%

 

25.0

bps

140.0

bps

40.0

bps

35%

 

and

 

45%

 

30.0

bps

145.0

bps

45.0

bps

45%

 

and

 

55%

 

35.0

bps

165.0

bps

65.0

bps

55%

 

and

 

 

 

40.0

bps

190.0

bps

90.0

bps

 

For purposes of the 2012 Credit Facility, base rate means, for any day, a fluctuating rate per annum equal to the highest of: (i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 1/2 of 1.00%, and (iii) the one month LIBOR base rate for such day plus 1.00%.

 

Although the interest rate on the 2012 Credit Facility is variable, under the 2012 Credit Agreement, the Company fixed the base LIBOR interest rate on the 2012 Term Loan by entering into an interest rate swap agreement. On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the 2012 Term Loan at 0.75% per annum for five years.  Accordingly, based upon the Company’s leverage ratio, as of September 30, 2013, the interest rate on the 2012 Term Loan was 2.20% per annum.  In addition, based upon the Company’s leverage ratio, as of September 30, 2013, there were borrowings of $331,500,000 outstanding under the 2012 Revolver at a weighted average rate of 1.65% per annum.  The weighted average interest rate on all amounts outstanding on the 2012 Revolver during the nine months ended September 30, 2013 was approximately 1.63% per annum.

 

As of December 31, 2012, there were borrowings of $216,750,000 outstanding under the 2012 Revolver at a weighted average rate of 2.23% per annum.

 

The 2012 Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in business, certain restricted payments, the requirement to join certain subsidiaries as co-borrowers under the 2012 Credit Agreement and transactions with affiliates. The 2012 Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, a minimum unencumbered debt service coverage ratio, a maximum ratio of certain investments to total assets and a maximum amount of secured recourse indebtedness. The 2012 Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the 2012 Credit Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all obligations under the 2012 Credit Agreement immediately due and payable, terminate the lenders’ commitments to make loans under the 2012 Credit Agreement, and enforce any and all rights of the lenders or administrative agent under the 2012 Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company will become immediately due and payable.  The Company was in compliance with the 2012 Credit Facility financial covenants as of September 30, 2013.

 

13



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4.              Bank note payable (continued)

 

The Company may use the proceeds of the loans under the 2012 Credit Agreement to finance the acquisition of real properties and for other permitted investments, to finance investments associated with Sponsored REITs, to refinance or retire existing indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the 2012 Credit Agreement.

 

5.              Financial Instruments: Derivatives and Hedging

 

On August 26, 2013, the Company fixed the interest rate for seven years on the 2013 Term Loan with an interest rate swap agreement (the “2013 Interest Rate Swap”) and on September 27, 2012, the Company fixed the interest rate for five years on the 2012 Term Loan with an interest rate swap agreement (the “2012 Interest Rate Swap”). The variable rates that were fixed under the 2013 Interest Rate Swap and the 2012 Interest Rate Swap are described in Note 4.

 

The 2013 Interest Rate Swap and the 2012 Interest Rate Swap qualify as cash flow hedges and have been recognized on the consolidated balance sheet at fair value.  If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings.  The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings, which may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.

 

The following table summarizes the notional and fair value of our derivative financial instruments at September 30, 2013.  The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.

 

 

 

Notional

 

Strike

 

Effective

 

Expiration

 

Fair

 

(in thousands)

 

Value

 

Rate

 

Date

 

Date

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 Interest Rate Swap

 

$

220,000

 

2.32

%

Aug-13

 

Aug-20

 

$

(4,579

)

2012 Interest Rate Swap

 

$

400,000

 

0.75

%

Sep-12

 

Sep-17

 

$

4,365

 

 

On September 30, 2013, the 2013 Interest Rate Swap was reported as a liability at its fair value of approximately $4.6 million and the 2012 Interest Rate Swap was reported as an asset at its fair value of approximately $4.4 million.  These are included in other liabilities: derivative liability and other assets: derivative asset on the consolidated balance sheet at September 30, 2013, respectively.  Offsetting adjustments are reported as unrealized gains or losses on derivative financial instruments in accumulated other comprehensive income of $1.0 million.  During the nine months ended September 30, 2013, $2.1 million was reclassified out of other comprehensive income and into interest expense.

 

Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings.  We estimate that approximately $0.4 million of the current balance held in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

 

We are hedging the exposure to variability in future cash flows for forecasted transactions in addition to anticipated future interest payments on existing debt.

 

The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the condensed consolidated balance sheet.

 

14



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

6.              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 September 30, 2013 and 2012, respectively.

 

7.              Stockholders’ Equity

 

As of September 30, 2013, the Company had 100,187,405 shares of common stock outstanding.

 

Equity Offerings

 

On May 15, 2013, the Company completed an underwritten public offering of 17,250,000 shares of its common stock (including 2,250,000 shares issued as a result of the full exercise of an overallotment option by the underwriter) at a price to the public of $14.00 per share. The proceeds from this public offering, net of underwriter discounts and offering costs, totaled approximately $230.7 million (after payment of offering costs of approximately $10.8 million).

 

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”).  The on demand offering sales agreement for the ATM Sales Program was amended on April 27, 2012 in connection with the Company’s filing of a new Registration Statement on Form S-3.  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 MKT 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 three and nine months ended September 30, 2013, the Company did not sell any shares under the ATM Sales Program.  As of September 30, 2013, the Company was authorized to offer and sell a remainder of approximately $34.3 million of its shares of common stock under the ATM Sales Program.

 

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

 

Quarter Paid

 

Dividends Per
Share

 

Total
Dividends

 

 

 

 

 

 

 

First quarter of 2013

 

$

0.19

 

$

15,758

 

Second quarter of 2013

 

$

0.19

 

$

15,758

 

Third quarter of 2013

 

$

0.19

 

$

19,036

 

 

 

 

 

 

 

First quarter of 2012

 

$

0.19

 

$

15,758

 

Second quarter of 2012

 

$

0.19

 

$

15,758

 

Third quarter of 2012

 

$

0.19

 

$

15,758

 

 

8.                        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 distributions 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.

 

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.  FSP Investments and FSP Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code.

 

15



Table of Contents

 

Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

8.                        Income Taxes (continued)

 

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 2010 and thereafter.

 

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.

 

The Company is subject to business tax (the “Revised Texas 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 income statement of $337,000 and $234,000 for the nine months ended September 30, 2013 and 2012, respectively.

 

The income tax expense reflected in the consolidated statements of income relates primarily to a franchise tax on our Texas properties.  FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties and the tax expenses associated with these activities are reported as Other Taxes in the table below:

 

 

 

For the

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Revised Texas franchise tax

 

$

337

 

$

234

 

Other Taxes

 

15

 

2

 

Income tax expense

 

$

352

 

$

236

 

 

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.

 

9.                        Discontinued Operations

 

The Company reports the results of operations of its properties either sold or held for sale as discontinued operations in its consolidated statements of income, which includes rental income, rental operating expenses, real estate taxes and insurance, depreciation and amortization.

 

During the three months ended September 30, 2013, the Company reached an agreement to sell an office property located in Richardson, Texas.  The property was classified as an asset held for sale at September 30, 2013 and is expected to be sold within one year in excess of its net book value.  The Company sold an office property located in Southfield, Michigan, on December 21, 2012.  Accordingly, both properties were classified as discontinued for all periods presented.

 

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Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

9.                                      Discontinued Operations (Continued)

 

The operating results for discontinued operations are summarized below.

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Rental revenue

 

$

305

 

$

560

 

$

917

 

$

1,795

 

Rental operating expenses

 

 

(282

)

 

(889

)

Real estate taxes and insurance

 

(2

)

(73

)

(7

)

(278

)

Depreciation and amortization

 

(205

)

(374

)

(616

)

(1,191

)

Loss from discontinued operations

 

$

98

 

$

(169

)

$

294

 

$

(563

)

 

10.                               Subsequent Events

 

On October 11 2013, the Board of Directors of the Company declared a cash distribution of $0.19 per share of common stock payable on November 14, 2013 to stockholders of record on October 25, 2013.

 

On October 10, 2013, the Company made a $1.2 million advance pursuant to a Sponsored REIT loan to FSP Galleria North Corp.

 

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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, 2012.  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, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, geopolitical events, 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 we, operate in the real estate operations segment. The real estate operations segment involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development.  Our current strategy is to invest in select urban infill and central business district office properties, with primary emphasis on our top five markets of Atlanta, Dallas, Denver, Houston and Minneapolis. We will also monitor San Diego, Silicon Valley, Greater Boston, Raleigh-Durham, and Greater Washington, DC, as well as other markets, for opportunistic investments.  FSP Corp. seeks value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.

 

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 broader economic/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.

 

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, 2012.

 

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, 2012.

 

Recent Accounting Standards

 

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. This update was effective for interim and annual reporting periods beginning after December 15, 2012. The adoption of this update did not have a material impact on the disclosures in, or presentation of, our condensed consolidated financial statements.

 

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Table of Contents

 

Trends and Uncertainties

 

Economic Conditions

 

The economy in the United States is continuing to experience a period of limited economic growth, including high levels of unemployment, which directly affects the demand for office space, our primary income producing asset.  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 economic growth and/or recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of debt and interest rate fluctuations.  Future economic factors may negatively affect real estate values, occupancy levels and property income.  At this time, we cannot predict the extent or duration of any negative impact that the current state of the United States economy could have on our business.

 

Real Estate Operations

 

Leasing

 

Our real estate portfolio was approximately 93.8% leased as of September 30, 2013, a decrease from 94.4% as of June 30, 2013.  The drop in leased percentage for the third quarter was primarily attributable to the acquisition of a 655,420 square foot office building in Denver, Colorado that was 88.5% leased at the time of acquisition.  We believe this property offers an excellent opportunity to increase occupancy and rental income stream within a vibrant and growing Denver central business district office market, creating incremental value for the Company.  During the nine months ended September 30, 2013, we leased approximately 645,000 square feet of office space, of which approximately 457,000 square feet were with existing tenants, at a weighted average term of 7.75 years.  On average, tenant improvements for such leases were $22.14 per square foot, lease commissions were $9.14 per square foot and rent concessions were approximately four months of free rent.  Average GAAP base rents under such leases were $23.13 per square foot, or 10.4% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2012.

 

As of September 30, 2013, approximately 0.6% of the square footage in our portfolio is scheduled to expire during the remainder of 2013, and approximately 4.9% is scheduled to expire during 2014.  As the fourth quarter of 2013 begins, our property portfolio is well stabilized, with a balanced lease expiration schedule.  We believe that most of our largest property markets are now experiencing positive trends in both occupancies and rental rates.

 

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 could 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.

 

Real Estate Acquisitions and Investments

 

During 2013:

 

·                  on May 22, we acquired an office property with approximately 680,277 rentable square feet of space for $183.0 million located in the central business district of Denver, Colorado;

·                  on July 1, we acquired an office property with approximately 621,007 rentable square feet for $157.9 million located in the midtown submarket of Atlanta, Georgia;

·                  on August 28, we acquired an office property with approximately 655,565 rentable square feet of space for $217.0 million located in the central business district of Denver, Colorado; and

·                  funded advances on Sponsored REIT Loans for revolving lines of credit of an aggregate of approximately $5.0 million.

 

Additional potential real estate investment opportunities are actively being explored and we would anticipate further real estate investments in the future.

 

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Table of Contents

 

During 2012, we:

 

·                  acquired two properties directly into our portfolio with a total of approximately 1,016,000 rentable square feet at an aggregate purchase price of approximately $207.6 million.  On July 31, 2012, we acquired an office property with approximately 387,000 square feet for approximately $52.8 million in Atlanta, Georgia and on November 1, 2012 we acquired an office property with approximately 629,000 square feet for approximately $154.8 million in Houston, Texas;

·                  funded advances on Sponsored REIT Loans for revolving lines of credit of an aggregate of approximately $41.6 million including $30 million during March 2012 to FSP 50 South Tenth Street Corp., and $11.6 million for revolving lines of credit made during the year ended December 31, 2012;

·                  received repayments on Sponsored REIT Loans of $121.2 million, including $106.2 million on July 27, 2012 from a first mortgage loan on a property owned by FSP 50 South Tenth Street Corp., and $15.0 million on December 20, 2012 from a secured revolving line of credit with FSP Phoenix Tower Corp.; and

·                  made and funded a Sponsored REIT Loan on July 5, 2012, in the form of a first mortgage loan in the principal amount of $33 million to a wholly-owned subsidiary of a Sponsored REIT, FSP Energy Tower I Corp., which owns a property in Houston, Texas.

 

Property Dispositions

 

We include properties sold or held for sale as discontinued operations in our consolidated financial statements for all periods presented.  During the three months ended September 30, 2013, we reached an agreement to sell an office property located in Richardson, Texas.  The property was classified as an asset held for sale at September 30, 2013 and is expected to be sold within one year in excess of its net book value.  The Company sold an office property located in Southfield, Michigan, on December 21, 2012.  Accordingly, both properties were classified as discontinued 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 in many markets relative to both liquidity and pricing.  However, we also believe that we are witnessing improving pricing and liquidity in certain markets.  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 potential 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 continuously review and evaluate our portfolio of properties for potentially advantageous dispositions.

 

Results of Operations

 

Impact of Real Estate Acquisitions and Investment Activity:

 

The results of operations for each of the acquired properties are included in our operating results as of their respective purchase dates and the funding and repayment dates for mortgage investments.  Increases or decreases in interest income and increases in rental revenues and expenses for the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012, are primarily a result of the timing of these acquisitions and subsequent contribution of these acquired properties as well as the effect on interest income from the dates of funding and repayment on our mortgage investments.

 

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The following table shows results for the three months ended September 30, 2013 and 2012:

 

 

 

Three months ended September 30,

 

(in thousands)

 

2013

 

2012

 

Change

 

Revenue:

 

 

 

 

 

 

 

Rental

 

$

56,760

 

$

37,944

 

$

18,816

 

Related party revenue:

 

 

 

 

 

 

 

Management fees and interest income from loans

 

1,665

 

3,485

 

(1,820

)

Other

 

21

 

39

 

(18

)

Total revenue

 

58,446

 

41,468

 

16,978

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

13,991

 

9,642

 

4,349

 

Real estate taxes and insurance

 

8,801

 

5,761

 

3,040

 

Depreciation and amortization

 

22,163

 

13,367

 

8,796

 

Selling, general and administrative

 

3,477

 

3,141

 

336

 

Interest

 

5,474

 

4,187

 

1,287

 

Total expenses

 

53,906

 

36,098

 

17,808

 

 

 

 

 

 

 

 

 

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

 

4,540

 

5,370

 

(830

)

Interest income

 

5

 

5

 

 

Equity in earnings (losses) of non-consolidated REITs

 

(431

)

176

 

(607

)

 

 

 

 

 

 

 

 

Income before taxes on income

 

4,114

 

5,551

 

(1,437

)

Taxes on income

 

118

 

80

 

38

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

3,996

 

5,471

 

(1,475

)

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of income tax

 

98

 

(169

)

267

 

Provision for loss on property held for sale of $14,300 less applicable income tax

 

 

(14,300

)

14,300

 

Total discontinued operations

 

98

 

(14,469

)

14,567

 

 

 

 

 

 

 

 

 

Net income

 

$

4,094

 

$

(8,998

)

$

13,092

 

 

Comparison of the three months ended September 30, 2013 to the three months ended September 30, 2012:

 

Revenues

 

Total revenues increased by $17.0 million to $58.4 million for the quarter ended September 30, 2013, as compared to the quarter ended September 30, 2012.  The increase was primarily a result of:

 

·                  An increase in rental revenue of approximately $18.8 million arising primarily from property acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013, which were included in the quarter ended September 30, 2013; and to a lesser extent, leasing, which raised occupancy approximately 2.5% in the continuing real estate portfolio at September 30, 2013 compared to September 30, 2012.

 

·                  The increase was partially offset by a $1.8 million decrease in interest income from loans to Sponsored REITs, which was primarily a result of repayment of two loans that were outstanding during the three months ended September 30, 2012 and that were repaid in July and December 2012.  These repayments resulted in lower average loan receivable balances from which interest income is derived, during the three months ended September 30, 2013, as compared to the three months ended September 30, 2012.

 

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Table of Contents

 

Expenses

 

Total expenses increased by $17.8 million to $53.9 million for the quarter ended September 30, 2013, as compared to the quarter ended September 30, 2012.  The increase was primarily a result of:

 

·                  An increase in real estate operating expenses and real estate taxes and insurance of approximately $7.4 million, and depreciation and amortization of $8.8 million, which were primarily from property acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013, which were included in the quarter ended September 30, 2013.

 

·                  An increase to interest expense of approximately $1.3 million to $5.5 million during the three months ended September 30, 2013 compared to the same period in 2012.  The increase was attributable to a higher amount of debt outstanding, which was partially offset by lower average interest rates during the third quarter of 2013 compared to the third quarter of 2012.

 

·                  An increase in selling, general and administrative expenses of approximately $0.3 million, which was primarily the result of increased personnel related expenses, acquisition costs and professional fees.  We had 35 and 35 employees as of September 30, 2013 and 2012, respectively, at our headquarters in Wakefield, Massachusetts.

 

Equity in earnings (losses) of non-consolidated REITs

 

Equity in earnings (losses) from non-consolidated REITs decreased approximately $0.6 million to a loss of $0.4 million during the three months ended September 30, 2013 compared to income of $0.2 million for the same period in 2012.  The decrease was primarily because equity in income from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, decreased $0.6 million during the three months ended September 30, 2013 compared to the same period in 2012.

 

Taxes on income

 

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $25,000 and federal income taxes of $13,000 for the three months ended September 30, 2013, compared to the three months ended September 30, 2012.

 

Income from continuing operations

 

Income from continuing operations for the three months ended September 30, 2013 was $4.0 million compared to $5.5 million for the three months ended September 30, 2012, for the reasons described above.

 

Discontinued operations and provision for sale of property

 

Income from discontinued operations increased $14.6 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.  During September 2013, we reached an agreement to sell an office property located in Richardson, Texas in excess of its net book value.  In September 2012, we reached a decision to classify an office property in Southfield Michigan and recorded a provision for loss on the property of $14.3 million.  The property was sold in December 2012.  These assets are classified as held for sale on our balance sheet and resulted in a reclassification of real estate income and expenses of these properties to discontinued operations for all periods presented.

 

Net income

 

Net income for the three months ended September 30, 2013 was $4.1 million compared to a net loss of $9.0 million for the three months ended September 30, 2012, for the reasons described above.

 

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Table of Contents

 

The following table shows results for the nine months ended September 30, 2013 and 2012:

 

 

 

Nine months ended September 30,

 

(in thousands)

 

2013

 

2012

 

Change

 

Revenue:

 

 

 

 

 

 

 

Rental

 

$

145,618

 

$

109,207

 

$

36,411

 

Related party revenue:

 

 

 

 

 

 

 

Management fees and interest income from loans

 

4,929

 

9,146

 

(4,217

)

Other

 

64

 

112

 

(48

)

Total revenue

 

150,611

 

118,465

 

32,146

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

35,877

 

26,938

 

8,939

 

Real estate taxes and insurance

 

22,704

 

16,946

 

5,758

 

Depreciation and amortization

 

54,863

 

39,031

 

15,832

 

Selling, general and administrative

 

9,213

 

7,454

 

1,759

 

Interest

 

13,856

 

11,901

 

1,955

 

Total expenses

 

136,513

 

102,270

 

34,243

 

 

 

 

 

 

 

 

 

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

 

14,098

 

16,195

 

(2,097

)

Interest income

 

10

 

17

 

(7

)

Equity in earnings (losses) of non-consolidated REITs

 

(814

)

1,061

 

(1,875

)

 

 

 

 

 

 

 

 

Income before taxes on income

 

13,294

 

17,273

 

(3,979

)

Taxes on income

 

352

 

236

 

116

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

12,942

 

17,037

 

(4,095

)

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of income tax

 

294

 

(563

)

857

 

Provision for loss on property held for sale of $14,300 less applicable income tax

 

 

(14,300

)

14,300

 

Total discontinued operations

 

294

 

(14,863

)

15,157

 

 

 

 

 

 

 

 

 

Net income

 

$

13,236

 

$

2,174

 

$

11,062

 

 

Comparison of the nine months ended September 30, 2013 to the nine months ended September 30, 2012:

 

Revenues

 

Total revenues increased by $32.1 million to $150.6 million for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012.  The increase was primarily a result of:

 

·                  An increase in rental revenue of approximately $36.4 million arising primarily from property acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013, which were included in the nine months ended September 30, 2013; and to a lesser extent, leasing, which raised occupancy approximately 2.5% in the continuing real estate portfolio at September 30, 2013 compared to September 30, 2012.

 

·                  The increase was partially offset by a $4.2 million decrease in interest income from loans to Sponsored REITs, which was primarily a result of repayment of two loans that were outstanding during the nine months ended September 30, 2012 and that were repaid in July and December 2012.  These repayments resulted in lower average loan receivable balances from which interest income is derived, during the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012.

 

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Table of Contents

 

Expenses

 

Total expenses increased by $34.2 million to $136.5 million for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012.  The increase was primarily a result of:

 

·                  An increase in real estate operating expenses and real estate taxes and insurance of approximately $14.7 million, and depreciation and amortization of $15.8 million, which were primarily from property acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013, which were included in the nine months ended September 30, 2013.

 

·                  An increase to interest expense of approximately $2.0 million to $13.9 million during the nine months ended September 30, 2013 compared to the same period in 2012.  The increase was attributable to a higher amount of debt outstanding, which was partially offset by lower average interest rates during the nine months ended September 30, 2013 compared to the same period in 2012.

 

·                  An increase in selling, general and administrative expenses of approximately $1.7 million, which was primarily the result of increased personnel related expenses, acquisition costs and professional fees.  We had 35 and 35 employees as of September 30, 2013 and 2012, respectively, at our headquarters in Wakefield, Massachusetts.

 

Equity in earnings (losses) of non-consolidated REITs

 

Equity in earnings (losses) from non-consolidated REITs decreased approximately $1.9 million to a loss of $0.8 million during the nine months ended September 30, 2013 compared to income of $1.1 million for the same period in 2012.  The decrease was primarily because equity in income from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, decreased $1.8 million during the nine months ended September 30, 2013 compared to the same period in 2012.

 

Taxes on income

 

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $103,000 and federal income taxes of $13,000 for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012.

 

Income from continuing operations

 

Income from continuing operations for the nine months ended September 30, 2013 was $12.9 million compared to $17.0 million for the nine months ended September 30, 2012, for the reasons described above.

 

Discontinued operations and provision for sale of property

 

Income from discontinued operations increased $15.2 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.  During September 2013, we reached an agreement to sell an office property located in Richardson, Texas in excess of its net book value.  In September 30, 2012, we reached a decision to classify an office property in Southfield Michigan and recorded a provision for loss on the property of $14.3 million.  The property was sold in December 2012.  These assets are classified as held for sale on our balance sheet and resulted in a reclassification of real estate income and expenses of these properties to discontinued operations for all periods presented.

 

Net income

 

Net income for the nine months ended September 30, 2013 was $13.2 million compared to net income of $2.2 million for the nine months ended September 30, 2012, for the reasons described above.

 

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Table of Contents

 

Non-GAAP Financial Measures

 

Funds From Operations

 

The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders.  The Company defines FFO as net income (computed 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, including amortization of acquired above and below market lease intangibles and impairment charges, 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), nor 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 and the National Association of Real Estate Investment Trusts, or NAREIT, may define this term in a different manner.  We have included the NAREIT FFO definition in our table and note that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do.

 

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.

 

The calculations of FFO are shown in the following table:

 

 

 

For the

 

For the

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands):

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,094

 

$

(8,998

)

$

13,236

 

$

2,174

 

(Gain) on sale of properties and Provision for loss on property held for sale of $14,300 less applicable income tax

 

 

14,300

 

 

14,300

 

Equity in earnings (losses) of non-consolidated REITs

 

431

 

(176

)

814

 

(1,061

)

Distribution from non-consolidated REITs

 

27

 

907

 

81

 

2,733

 

Depreciation and amortization

 

22,176

 

13,779

 

55,205

 

40,279

 

NAREIT FFO

 

26,728

 

19,812

 

69,336

 

58,425

 

Acquisition costs of new properties

 

406

 

101

 

556

 

101

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

27,134

 

$

19,913

 

$

69,892

 

$

58,526

 

 

Net Operating Income (NOI)

 

The Company provides property performance based on Net Operating Income, which we refer to as NOI.  Management believes that investors are interested in this information.  NOI is a non-GAAP financial measure that the Company defines as net income (the most directly comparable GAAP financial measure) plus selling, general and administrative expenses, depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated REITs, interest income, management fee income, gains or losses on the sale of assets and excludes non-property specific income and expenses. The information presented includes footnotes and the data is shown by region with properties owned in both periods, which we call Same Store.  The Comparative Same Store results exclude significant nonrecurring income such as bankruptcy settlements and lease termination fees.  NOI, as defined by the Company, may not be comparable to NOI reported by other REITs that define NOI differently. NOI should not be considered an alternative to net income as an indication of our performance or to cash flows as a measure of the Company’s liquidity or its ability to make distributions.  The calculations of NOI are shown in the following table:

 

25



Table of Contents

 

Net Operating Income (NOI)*

 

 

 

Rentable

 

 

 

 

 

 

 

Nine Months

 

 

 

 

 

 

 

Nine Months

 

 

 

 

 

 

 

Square Feet

 

Three Months Ended

 

Ended

 

Three Months Ended

 

Ended

 

Inc

 

%

 

(in thousands)

 

or RSF

 

31-Mar-13

 

30-Jun-13

 

30-Sep-13

 

30-Sep-13

 

31-Mar-12

 

30-Jun-12

 

30-Sep-12

 

30-Sep-12

 

(Dec)

 

Change

 

Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

 

1,441

 

$

4,756

 

$

5,440

 

$

4,914

 

$

15,110

 

$

5,113

 

$

4,723

 

$

4,799

 

$

14,635

 

$

475

 

3.2

%

MidWest

 

1,682

 

4,839

 

5,008

 

4,944

 

14,791

 

5,122

 

4,980

 

5,164

 

15,266

 

(475

)

-3.1

%

South

 

2,508

 

9,307

 

9,393

 

9,230

 

27,930

 

8,963

 

8,764

 

9,218

 

26,945

 

985

 

3.7

%

West

 

1,088

 

2,350

 

2,118

 

2,440

 

6,908

 

2,278

 

2,443

 

2,428

 

7,149

 

(241

)

-3.4

%

Same Store

 

6,719

 

21,252

 

21,959

 

21,528

 

64,739

 

21,476

 

20,910

 

21,609

 

63,995

 

744

 

1.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

2,966

 

3,920

 

5,106

 

11,812

 

20,838

 

 

 

712

 

712

 

20,126

 

31.1

%

Property NOI from the continuing portfolio

 

9,685

 

25,172

 

27,065

 

33,340

 

85,577

 

21,476

 

20,910

 

22,321

 

64,707

 

20,870

 

32.3

%

Dispositions and asset held for sale

 

 

 

252

 

252

 

253

 

757

 

118

 

204

 

155

 

477

 

280

 

0.1

%

Property NOI

 

 

 

$

25,424

 

$

27,317

 

$

33,593

 

$

86,334

 

$

21,594

 

$

21,114

 

$

22,476

 

$

65,184

 

$

21,150

 

32.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store

 

 

 

$

21,252

 

$

21,959

 

$

21,528

 

$

64,739

 

$

21,476

 

$

20,910

 

$

21,609

 

$

63,995

 

$

744

 

1.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Nonrecurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Items in NOI (a)

 

 

 

63

 

557

 

 

620

 

514

 

21

 

307

 

842

 

(222

)

0.3

%