Franklin Street Properties (FSP) - 2019 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The company reported a net loss of $1.2 million for the first quarter of 2019, a significant downturn from a net income of $1.4 million in the same period of 2018, with total assets slightly decreasing to $1.891 billion and cash flows from operations at $9.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,891,245 | $1,898,102 | | Real estate assets, net | $1,624,833 | $1,625,773 | | Cash, cash equivalents and restricted cash | $8,832 | $11,177 | | Total Liabilities | $1,071,258 | $1,060,468 | | Term loans payable, net | $764,642 | $764,278 | | Bank note payable | $40,000 | $25,000 | | Total Stockholders' Equity | $819,987 | $837,634 | Consolidated Statement of Income Highlights (in thousands, except per share amounts) | Account | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Total Revenues | $64,716 | $66,893 | | Rental Revenue | $63,359 | $65,628 | | Total Expenses | $65,950 | $65,281 | | Net Income (Loss) | $(1,205) | $1,425 | | Net Income (Loss) Per Share | $(0.01) | $0.01 | Consolidated Statements of Comprehensive Income Comprehensive loss for Q1 2019 was $(8.0) million, a stark contrast to the comprehensive income of $8.0 million in Q1 2018. This change was driven by an unrealized loss on derivative financial instruments of $(6.8) million in 2019 versus a gain of $6.6 million in 2018[14] Consolidated Statements of Stockholders' Equity - Total stockholders' equity decreased from $837.6 million at the end of 2018 to $820.0 million as of March 31, 2019. The decrease was primarily due to a comprehensive loss of $(8.0) million and common stock distributions of $9.7 million[16] - The company paid a dividend of $0.09 per share of common stock in Q1 2019, totaling $9.7 million. This is a reduction from the $0.19 per share dividend paid in Q1 2018, which totaled $20.4 million[16] Consolidated Statements of Cash Flows Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,482 | $15,078 | | Net cash used in investing activities | $(17,095) | $(10,154) | | Net cash provided by (used in) financing activities | $5,268 | $(388) | | Net (decrease) increase in cash | $(2,345) | $4,536 | Notes to Consolidated Financial Statements - As of March 31, 2019, the company's portfolio consisted of 32 operating properties and three redevelopment properties. This is a decrease from 34 operating properties as of March 31, 2018[24][25][26] - The company adopted new lease accounting standards (ASU 2016-02) on January 1, 2019, resulting in the recognition of a right-to-use asset of $2.1 million and a lease liability of $2.2 million[33] - The company has four outstanding Sponsored REIT Loans totaling $72.8 million as of March 31, 2019, which generated approximately $1.3 million in interest income and fees for the quarter[47][49] - The company utilizes several interest rate swaps to hedge its variable-rate debt, qualifying them as cash flow hedges. As of March 31, 2019, the net fair value of these derivatives resulted in a derivative asset of $10.5 million and derivative liabilities of $2.5 million[77][80] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the decline in revenues and FFO due to lease expirations and increased costs, alongside the company's strategic focus on U.S. sunbelt and mountain west properties with an 88.5% leased portfolio Overview - The company's current strategy is to invest in infill and central business district properties in the U.S. sunbelt and mountain west regions, seeking value-oriented investments with long-term growth potential[109] - As of March 31, 2019, approximately 78% of the company's owned portfolio (7.7 million square feet) is concentrated in Atlanta, Dallas, Denver, Houston, and Minneapolis[110] Trends and Uncertainties - The 32 operating properties were 88.5% leased as of March 31, 2019, a slight decrease from 89.0% at year-end 2018[121] - During Q1 2019, the company leased approximately 460,000 square feet of office space with a weighted average term of 9.0 years. Average GAAP base rents for these new leases were $32.32 per square foot, 9.9% higher than average rents in the respective properties compared to the prior year[121] - The company is actively redeveloping three properties: 801 Marquette in Minneapolis, Blue Lagoon in Miami, and Forest Park in Charlotte, with expected total costs of $28.4 million, $23.6 million, and $3.7 million, respectively[122][123][124][125] Results of Operations Comparison of Results of Operations (in thousands) | Account | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $64,716 | $66,893 | $(2,177) | | Total Expenses | $65,950 | $65,281 | $669 | | Net Income (Loss) | $(1,205) | $1,425 | $(2,630) | - The $2.2 million decrease in rental revenue was primarily due to the loss of income from leases that expired in 2018 and 2019[132] - The $0.7 million increase in total expenses was driven by a $1.5 million rise in real estate operating expenses, taxes, and insurance, partially offset by a $0.8 million decrease in depreciation and amortization[133] Non-GAAP Financial Measures Funds From Operations (FFO) Reconciliation (in thousands) | Account | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net income (loss) | $(1,205) | $1,425 | | Depreciation and amortization | $23,133 | $23,950 | | Other adjustments | $182 | $989 | | Funds From Operations | $22,110 | $26,364 | - Property Net Operating Income (NOI) from operating properties decreased by 6.4% to $33.2 million in Q1 2019 from $35.5 million in Q1 2018. On a comparative same-store basis, NOI decreased by 4.5%[146] Liquidity and Capital Resources - Cash and cash equivalents decreased by $2.3 million during the quarter to $8.8 million as of March 31, 2019. The decrease resulted from $17.0 million used in investing activities, which was not fully offset by $9.4 million provided by operations and $5.3 million from financing activities[155] - As of March 31, 2019, the company had $40 million outstanding under its $600 million BAML Revolver[173] Major Debt Facilities Outstanding (as of March 31, 2019) | Facility | Principal Amount | Maturity Date | | :--- | :--- | :--- | | JPM Term Loan | $150 million | Nov 30, 2021 | | BMO Term Loan | $220 million | Nov 30, 2021 / Jan 31, 2024 | | BAML Term Loan | $400 million | Jan 12, 2023 | | Senior Notes | $200 million | Dec 20, 2024 / Dec 20, 2027 | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk on its floating-rate debt through swaps, with a hypothetical 10% market rate increase on unhedged debt estimated to decrease annual earnings by $0.3 million - The company uses interest rate swaps to mitigate risk on its variable-rate term loans. As of March 31, 2019, swaps were in place for the $400 million BAML Term Loan, the $220 million BMO Term Loan, and $100 million of the $150 million JPM Term Loan[195] - The unhedged floating rate exposure is on the BAML Revolver ($40 million outstanding) and a $50 million portion of the JPM Term Loan. A 10% increase in market rates would result in an estimated $0.3 million annual increase in interest expense[193] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of March 31, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[201] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2019, that materially affected, or are reasonably likely to materially affect, internal controls[202] Part II. Other Information Legal Proceedings The company does not anticipate any material adverse effects on its financial position or operations from current legal proceedings - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its financial condition or operations[205] Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K have occurred - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018, have occurred as of March 31, 2019[206] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL financial statements - Exhibits filed with this report include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL data files (101)[211]