Franklin Street Properties (FSP) - 2020 Q1 - Quarterly Report

Part I. Financial Information Financial Statements This section presents the unaudited consolidated financial statements for the quarter ended March 31, 2020, including Balance Sheets, Statements of Operations, Comprehensive Income (Loss), Stockholders' Equity, and Cash Flows Consolidated Balance Sheets Total assets increased slightly to $1.848 billion as of March 31, 2020, while total liabilities rose to $1.090 billion, leading to a decrease in stockholders' equity to $757.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,847,627 | $1,842,654 | | Real estate assets, net | $1,639,196 | $1,637,210 | | Cash, cash equivalents and restricted cash | $17,283 | $9,790 | | Total Liabilities | $1,090,309 | $1,056,258 | | Bank note payable | $30,000 | $0 | | Term loans payable, net | $766,124 | $765,733 | | Total Stockholders' Equity | $757,318 | $786,396 | Consolidated Statements of Operations The company reported a net loss of $1.071 million for Q1 2020, an improvement from Q1 2019, driven by lower total expenses despite a revenue decline Q1 Statement of Operations Summary (in thousands, except per share amounts) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Total Revenues | $62,983 | $64,716 | | Total Expenses | $63,986 | $65,950 | | Net Loss | $(1,071) | $(1,205) | | Net Loss Per Share | $(0.01) | $(0.01) | Consolidated Statements of Comprehensive Income (Loss) Comprehensive loss significantly increased to $19.4 million in Q1 2020, primarily due to an $18.4 million unrealized loss on derivative financial instruments Q1 Comprehensive Income (Loss) (in thousands) | Component | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Loss | $(1,071) | $(1,205) | | Unrealized (loss) on derivative instruments | $(18,353) | $(6,791) | | Comprehensive Loss | $(19,424) | $(7,996) | Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased by $29.1 million in Q1 2020, driven by a $19.4 million comprehensive loss and $9.7 million in common stock distributions - Stockholders' equity declined to $757.3 million at March 31, 2020, from $786.4 million at December 31, 2019, primarily due to a comprehensive loss of $19.4 million and common stock distributions of $9.7 million[18] Consolidated Statements of Cash Flows Net cash from operating activities decreased to $7.2 million in Q1 2020, while investing activities used $20.1 million and financing activities provided $20.3 million, resulting in a net cash increase of $7.5 million Q1 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $7,201 | $9,482 | | Net Cash used in Investing Activities | $(20,054) | $(17,095) | | Net Cash from Financing Activities | $20,346 | $5,268 | | Net Increase (Decrease) in Cash | $7,493 | $(2,345) | Notes to Consolidated Financial Statements Notes detail the company's 32 operating properties, adoption of new accounting standards with no material impact, various debt facilities, and $23.0 million in derivative liabilities from interest rate swaps - As of March 31, 2020, the company's portfolio consisted of 32 operating properties and three redevelopment properties[26][27] - The company adopted new accounting standards for leases (ASU 2016-02) and credit losses (ASU 2016-13) with no material impact on financial statements[36][37] - The company utilizes four interest rate swap agreements to hedge variable-rate term loans, resulting in a derivative liability of approximately $23.0 million at March 31, 2020[78][82] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, focusing on U.S. sunbelt office properties, COVID-19 risks, Q1 leasing activity with 85.4% occupancy, and affirming sufficient liquidity for the next 12 months Overview The company's strategy targets infill and central business district office properties in U.S. sunbelt and mountain west regions, with 78% of its portfolio in five key markets as of Q1 2020 - The company's current strategy is to invest in infill and central business district office properties in the U.S. sunbelt and mountain west regions[108] - As of March 31, 2020, approximately 78% of the company's owned portfolio was located in Atlanta, Dallas, Denver, Houston, and Minneapolis[109] Trends and Uncertainties This section highlights significant risks from the COVID-19 outbreak, including uncertainty for leasing and property values, despite 98% rent collection for April 2020 and affirmed liquidity for the next year - The COVID-19 outbreak presents material uncertainty and risk regarding property performance, leasing efforts, occupancy, and future rent collection levels[113] - As of April 28, 2020, the company collected approximately 98% of rental receipts due in April 2020, despite some tenant requests for rent concessions[114] - Management believes existing cash, anticipated cash from operations, and $570 million availability under the BAML Revolver will be sufficient for at least the next 12 months[114] Real Estate Operations The portfolio of 32 operating properties was 85.4% leased in Q1 2020, with approximately 280,000 square feet leased, and updates provided on three redevelopment projects - The 32 operating properties were approximately 85.4% leased as of March 31, 2020, a decrease from 87.6% at December 31, 2019[117] - During Q1 2020, the company leased approximately 280,000 square feet of office space at an average GAAP base rent of $31.17 per square foot, 10.5% higher than 2019 average rents[117] - Progress updates were provided for three redevelopment properties: 801 Marquette in Minneapolis (37.0% leased), Blue Lagoon in Miami (73.1% pre-leased), and Forest Park in Charlotte (35% pre-leased)[119][120][121] Results of Operations Total revenues decreased by $1.7 million to $63.0 million in Q1 2020, offset by a $2.0 million decrease in total expenses, resulting in a net loss of $1.1 million, an improvement from Q1 2019 Comparison of Results for the Three Months Ended March 31 (in thousands) | Item | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $62,983 | $64,716 | $(1,733) | | Total Expenses | $63,986 | $65,950 | $(1,964) | | Net Loss | $(1,071) | $(1,205) | $134 | - The decrease in revenue was primarily due to a $0.8 million drop in rental revenue from lease expirations and a $0.9 million decrease in interest income from Sponsored REIT loans[137] - The decrease in expenses was mainly a result of lower real estate operating expenses ($0.8 million), depreciation ($0.9 million), and interest expense ($0.3 million)[137][138] Non-GAAP Financial Measures The company uses FFO and NOI to evaluate performance, with Q1 2020 FFO at $21.3 million and Same Store NOI decreasing by 0.8% to $32.9 million Funds From Operations (FFO) (in thousands) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Loss | $(1,071) | $(1,205) | | Depreciation and amortization | $22,265 | $23,133 | | NAREIT FFO | $21,194 | $21,928 | | Lease Acquisition costs | $98 | $182 | | Funds From Operations | $21,292 | $22,110 | Same Store Net Operating Income (NOI) (in thousands) | Metric | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | Same Store NOI | $32,902 | $33,179 | (0.8)% | Liquidity and Capital Resources Cash and cash equivalents increased to $17.3 million in Q1 2020, with the company in compliance with all debt covenants and sufficient liquidity affirmed for the next 12 months - Cash, cash equivalents and restricted cash increased by $7.5 million during the quarter to $17.3 million as of March 31, 2020[157] - The company was in compliance with all financial covenants related to its JPM Term Loan, BMO Term Loan, BAML Credit Facility, and Senior Notes as of March 31, 2020[165][170][180][185] - As of March 31, 2020, the company had one outstanding loan of $21 million to a Sponsored REIT[187] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate changes on floating-rate debt, managed through interest rate swap agreements that fix rates on specific term loans, with details provided on these derivative instruments - The company is exposed to interest rate risk primarily from its floating-rate borrowing arrangements, specifically the BAML Revolver and the unhedged portion of the JPM Term Loan[199] - To manage this risk, the company has entered into interest rate swap agreements to fix the base LIBOR rates on its BAML Term Loan, BMO Term Loan, and a $100 million portion of its JPM Term Loan[202] Derivative Instruments as of March 31, 2020 (in thousands) | Instrument | Notional Value | Strike Rate | Expiration Date | Fair Value | | :--- | :--- | :--- | :--- | :--- | | 2017 Interest Rate Swap | $400,000 | 1.12% | Sep-21 | $(4,902) | | 2013 BMO Interest Rate Swap | $220,000 | 2.32% | Aug-20 | $(1,616) | | 2019 JPM Interest Rate Swap | $100,000 | 2.44% | Nov-21 | $(3,529) | | 2019 BMO Interest Rate Swap | $220,000 | 2.39% | Jan-24 | $(12,988) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[209] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[210] Part II. Other Information Legal Proceedings The company anticipates that legal proceedings arising in the ordinary course of business will not have a material adverse effect on its financial position, cash flows, or results of operations - The company believes that the final disposition of any legal matters arising in the ordinary course of business will not have a material adverse effect on its financial position or results of operations[212] Risk Factors A new risk factor details the severe disruptions from the COVID-19 pandemic, expected to adversely impact financial results, including tenant rent payments, real estate demand, and capital market access - A new risk factor was added detailing the severe disruptions caused by the COVID-19 outbreak, which is expected to have an adverse impact on the company's financial condition and results of operations[214] - Specific risks from the pandemic include tenants' inability to pay rent, difficulty accessing debt and equity capital, operational disruptions, and reduced demand for office space, particularly in energy-influenced markets[217][226] - The full extent of the pandemic's impact is uncertain and will depend on future developments, including the duration of the outbreak and the global economic slowdown[222] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds from such sales during the quarter - None[223] Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the quarter - None[224] Mine Safety Disclosures This item is not applicable to the company - None[225] Other Information The company reported no other information required to be disclosed in this section - None[228] Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and iXBRL formatted financial statements - The list of exhibits includes CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as iXBRL data files[230]