Franklin Street Properties (FSP) - 2019 Q2 - Quarterly Report

Part I. Financial Information This section provides the company's unaudited consolidated financial statements, management's analysis of financial condition and operations, market risk disclosures, and internal controls assessment Financial Statements This section presents the unaudited consolidated financial statements for Q2 2019, showing a net income increase for the quarter but a decrease for the six-month period year-over-year Consolidated Balance Sheets Total assets decreased from $1,898,102 thousand at year-end 2018 to $1,843,342 thousand as of June 30, 2019, alongside reductions in total liabilities and stockholders' equity Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,843,342 | $1,898,102 | | Real estate assets, net | $1,627,681 | $1,625,773 | | Cash, cash equivalents and restricted cash | $13,100 | $11,177 | | Total Liabilities | $1,042,834 | $1,060,468 | | Term loans payable, net | $765,005 | $764,278 | | Total Stockholders' Equity | $800,508 | $837,634 | Consolidated Statements of Income Net income for Q2 2019 increased to $1,633 thousand from $665 thousand in Q2 2018, but the six-month net income decreased significantly to $428 thousand from $2,090 thousand year-over-year Income Statement Summary (in thousands, except per share amounts) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $66,813 | $66,694 | $131,529 | $133,587 | | Total Expenses | $65,099 | $65,672 | $131,049 | $130,953 | | Net Income | $1,633 | $665 | $428 | $2,090 | | Net Income Per Share | $0.02 | $0.01 | $0.00 | $0.02 | Consolidated Statements of Comprehensive Income The company reported a comprehensive loss of $9,828 thousand in Q2 2019, a significant reversal from the $3,120 thousand comprehensive income in Q2 2018, primarily due to unrealized derivative losses Comprehensive Income (Loss) (in thousands) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $1,633 | $665 | $428 | $2,090 | | Unrealized gain (loss) on derivatives | $(11,461) | $2,455 | $(18,252) | $9,030 | | Comprehensive Income (Loss) | $(9,828) | $3,120 | $(17,824) | $11,120 | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $837.6 million at year-end 2018 to $800.5 million by June 30, 2019, driven by comprehensive loss and cash distributions - Total stockholders' equity decreased by $37.1 million in the first six months of 2019, from $837.6 million to $800.5 million[19] - The company distributed $0.09 per share in dividends in Q1 and Q2 2019, totaling $19.3 million for the six-month period[19][95] Consolidated Statements of Cash Flows Net cash from operating activities for the first six months of 2019 decreased to $24,650 thousand, while investing activities provided $21,656 thousand, and financing activities used $44,383 thousand Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $24,650 | $33,709 | | Net cash provided by (used in) investing activities | $21,656 | $(23,041) | | Net cash used in financing activities | $(44,383) | $(10,039) | | Net increase in cash | $1,923 | $629 | Notes to Consolidated Financial Statements This section details the company's accounting policies, property portfolio, adoption of new accounting standards, financing arrangements, and subsequent dividend declarations - As of June 30, 2019, the company owned and operated a portfolio of 32 operating properties and three redevelopment properties[27][28] - The company adopted new accounting standards for Leases (ASU 2016-02) and Derivatives and Hedging (ASU 2017-12) on January 1, 2019[37][39] - The company uses interest rate swaps to hedge variable interest rate risk on its BAML, BMO, and JPM term loans[84] The net fair value of these derivatives was a liability of approximately $3.5 million as of June 30, 2019[87][88] - On July 5, 2019, the Board declared a cash distribution of $0.09 per share of common stock[114] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strategy of investing in U.S. sunbelt office properties, noting a slight decrease in portfolio occupancy and a decline in H1 2019 FFO, while maintaining liquidity through cash flow and credit facilities - The company's strategy is to invest in infill and central business district properties in the U.S. sunbelt and mountain west regions[117] As of June 30, 2019, 78% of the portfolio was concentrated in Atlanta, Dallas, Denver, Houston, and Minneapolis[118] - The operating property portfolio was 88.1% leased as of June 30, 2019, a decrease from 89.0% at December 31, 2018[130] Funds From Operations (FFO) (in thousands) | Period | FFO | FFO per Share (Calculated) | | :--- | :--- | :--- | | Q2 2019 | $23,769 | $0.22 | | Q2 2018 | $25,393 | $0.24 | | 6 Months 2019 | $45,879 | $0.43 | | 6 Months 2018 | $51,757 | $0.48 | - Liquidity is supported by cash on hand ($13.1 million), operating cash flow, and various credit facilities, including a $600 million BAML Revolver which was undrawn as of June 30, 2019[174][191] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on floating-rate debt, which is actively managed through interest rate swaps to hedge the majority of its term loans - The company is primarily exposed to interest rate risk from its floating-rate borrowing arrangements[214] - Interest rate swaps are used to fix the base LIBOR rates on the BAML Term Loan (2.47% effective rate), BMO Term Loan (3.57% effective rate), and a $100 million portion of the JPM Term Loan (3.69% effective rate)[216] - A hypothetical 10% increase in market rates on the unhedged portion of floating rate debt would decrease future annual earnings and cash flows by approximately $0.2 million[214] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2019[223] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[224] Part II. Other Information This section covers legal proceedings, risk factors, equity sales, defaults, mine safety disclosures, other information, and a list of exhibits Legal Proceedings The company does not anticipate any material adverse effects on its financial position or operations from ordinary course legal proceedings - The company does not expect any ordinary course legal proceedings to have a material adverse effect on its financial position, cash flows, or results of operations[226] Risk Factors No material changes to the risk factors previously disclosed in the 2018 Annual Report on Form 10-K have occurred - There have been no material changes to the risk factors previously disclosed in the 2018 Form 10-K[227] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds reported during the period - None[228] Defaults Upon Senior Securities No defaults upon senior securities were reported by the company - None[229] Mine Safety Disclosures The company reported no mine safety disclosures - None[230] Other Information No other material information was reported by the company - None[231] Exhibits This section lists the exhibits filed with the quarterly report, including required CEO and CFO certifications and iXBRL financial data - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[233]