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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 March 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _________ to __________.
Commission File Number: 0-32615
Franklin Street Properties Corp.
(Exact name of registrant as specified in its charter)
Maryland 04-3578653
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
401 Edgewater Place, Suite 200
Wakefield, MA 01880-6210
(Address of principal executive offices)
Registrant's telephone number: (781) 557-1300
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 ninety days.
YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |X| NO |_|
The number of shares of common stock outstanding as of April 29, 2005 was
49,631,513.
Franklin Street Properties Corp.
Form 10-Q
Quarterly Report
March 31, 2005
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004....................................... 3
Consolidated Statements of Income for the three months
ended March 31, 2005 and 2004........................... 4
Consolidated Statements of Stockholders' Equity as of
March 31, 2005 and December 31, 2004.................... 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004.............. 6
Notes to Consolidated Financial Statements.............. 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 16-26
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................. 27
Item 4. Controls and Procedures................................. 28
Part II. Other Information
Item 1. Legal Proceedings....................................... 29
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds................................................ 29
Item 3. Defaults upon Senior Securities......................... 29
Item 4. Submission of Matters to a Vote of Security Holders..... 29
Item 5. Other Information....................................... 29
Item 6. Exhibits................................................ 30
Signatures ........................................................ 31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Franklin Street Properties Corp.
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
(in thousands, except shares and par value amounts) 2005 2004
===========================================================================================================
Assets:
Real estate investments, at cost:
Land $ 71,267 $ 71,267
Buildings and improvements 405,157 404,830
Fixtures and equipment 885 885
- ----------------------------------------------------------------------------------------------------------
477,309 476,982
Less accumulated depreciation 40,046 37,227
- ----------------------------------------------------------------------------------------------------------
Real estate investments, net 437,263 439,755
Acquired real estate leases, net of accumulated amortization of
$3,501 and $3,020, respectively 6,002 6,483
Investment in non-consolidated REITs 4,243 4,270
Assets held for syndication 74,300 59,246
Cash and cash equivalents 47,271 52,752
Restricted cash 1,076 1,033
Tenant rent receivables, less allowance for doubtful accounts of
$350 and $350, respectively 769 769
Straight-line rent receivables, less allowance for doubtful accounts of
$460 and $460, respectively 5,177 4,947
Prepaid expenses 1,305 901
Other assets 2,664 1,097
Office computers and furniture, net of accumulated depreciation of
$631 and $597, respectively 340 374
Deferred leasing commissions, net of accumulated amortization of
$972 and $873, respectively 1,480 1,484
- ----------------------------------------------------------------------------------------------------------
Total assets $ 581,890 $ 573,111
==========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Bank note payable $ 74,164 $ 59,439
Accounts payable and accrued expenses 7,893 8,846
Accrued compensation 600 705
Tenant security deposits 1,076 1,033
- ----------------------------------------------------------------------------------------------------------
Total liabilities 83,733 70,023
- ----------------------------------------------------------------------------------------------------------
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, 49,631,513 and 49,630,338 issued and outstanding 5 5
Additional paid-in capital 512,834 512,813
Treasury stock, 575 shares, at cost, issued March 2005 -- (10)
Distributions in excess of earnings (14,682) (9,720)
- ----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 498,157 503,088
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 581,890 $ 573,111
==========================================================================================================
See accompanying notes to consolidated financial statements.
3
Franklin Street Properties Corp.
Consolidated Statement of Stockholders' Equity
(Unaudited)
For the
Three Months Ended
March 31,
--------------------
(in thousands, except per share amounts) 2005 2004
================================================================================
Revenue:
Rental $17,234 $18,875
Related party revenue:
Syndication fees 2,519 3,041
Transaction fees 2,442 3,549
Management fees and interest income from loans 970 129
Other 13 5
- --------------------------------------------------------------------------------
Total revenue 23,178 25,599
- --------------------------------------------------------------------------------
Expenses:
Real estate operating expenses 3,575 3,388
Real estate taxes and insurance 2,354 2,471
Depreciation and amortization 3,573 3,336
Selling, general and administrative 1,825 1,688
Commissions 1,324 1,520
Interest 955 264
- --------------------------------------------------------------------------------
Total expenses 13,606 12,667
- --------------------------------------------------------------------------------
Income before interest income, equity in earnings of
non-consolidated REITs and taxes on income 9,572 12,932
Interest income 230 236
Equity in earnings of non-consolidated REITs 665 379
- --------------------------------------------------------------------------------
Income before taxes on income 10,467 13,547
Income tax expense 44 328
- --------------------------------------------------------------------------------
Net income $10,423 $13,219
================================================================================
Weighted average number of shares outstanding,
basic and diluted 49,630 49,624
================================================================================
Net income per share, basic and diluted $ 0.21 $ 0.27
================================================================================
See accompanying notes to consolidated financial statements.
4
Franklin Street Properties Corp.
Consolidated Statement of Stockholders' Equity
(Unaudited)
Common Stock Additional Distributions Total
------------------ Paid-In Treasury in excess of Stockholders'
(in thousands) Shares Amount Capital Stock Earnings Equity
===============================================================================================================
Balance, December 31, 2004 49,630 $ 5 $512,813 $ (10) $ (9,720) $503,088
Shares issued 2 -- 21 -- -- 21
Treasury shares issued -- -- -- 10 -- 10
Net income -- -- -- -- 10,423 10,423
Distributions -- -- -- -- (15,385) (15,385)
- ---------------------------------------------------------------------------------------------------------------
Balance, March 31, 2005 49,632 $ 5 $512,834 $ -- $(14,682) $498,157
===============================================================================================================
See accompanying notes to consolidated financial statements.
5
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(Unaudited)
For the
Three Months Ended
March 31,
--------------------------
(in thousands) 2005 2004
================================================================================================================================
Cash flows from operating activities:
Net income $ 10,423 $ 13,219
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 3,374 3,200
Amortization of above market lease 59 59
Sponsored REIT income during consolidation -- (247)
Equity in earnings from non-consolidated REITs (665) (379)
Distributions from non-consolidated REITs 599 582
Shares issued as compensation 31 162
Changes in operating assets and liabilities:
Restricted cash (43) 14
Tenant rent receivables, net -- (229)
Straight-line rents, net (230) (340)
Operations of assets held for syndication, net (236) --
Prepaid expenses and other assets, net (1,971) (164)
Accounts payable and accrued expenses (953) 472
Accrued compensation (105) (1,134)
Tenant security deposits 43 (14)
Payment of deferred leasing commissions (95) (151)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,231 15,050
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets, office computers and furniture, capitalized merger costs (327) (117)
Investment in non-consolidated REITs -- (4,248)
Investment in assets held for syndication, net (14,725) 4,117
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (15,052) (248)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distibutions to stockholders (15,385) (15,382)
Purchase of treasury shares -- (146)
Borrowings (repayments) under bank note payable, net 14,725 (4,117)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (660) (19,645)
- -------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (5,481) (4,843)
Cash and cash equivalents, beginning of period 52,752 58,793
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 47,271 $ 53,950
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 905 $ 264
Income taxes 401 100
See accompanying notes to consolidated financial statements.
6
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Properties, Basis of Presentation and Recent Accounting
Pronouncements
Organization
Franklin Street Properties Corp. ("FSP Corp." or the "Company", known as
Franklin Street Partners Limited Partnership, or the "Partnership", prior to
January 1, 2002) was formed as a Massachusetts limited partnership on February
4, 1997. FSP Corp. holds, directly and indirectly, 100% of the interest in three
former subsidiaries of the Partnership: FSP Investments LLC, FSP Property
Management LLC, and FSP Holdings LLC. The Company also has a non-controlling
common stock interest in sixteen corporations organized to operate as real
estate investment trusts ("REITs").
In December 2001, the limited partners of the Partnership approved the
conversion of the Partnership from a partnership into a corporation (the
"Conversion"). The Conversion was effective January 1, 2002, and was
accomplished as a tax-free reorganization by merging the Partnership with and
into a wholly owned subsidiary, Franklin Street Properties Corp., with the
subsidiary as the surviving entity. In 2002, the Company elected to be taxed as
a real estate investment trust ("REIT"). As part of the Conversion, all of the
Partnership's outstanding units were converted on a one-for-one basis into
24,586,249 shares of common stock of the Company. The Conversion was accounted
for as a reorganization of affiliated entities, with assets and liabilities
recorded at their historical costs.
On May 30, 2003, the shareholders of the Company approved the Company's
acquisition by merger of 13 REITs (the "2003 Target REITs"). The mergers were
effective June 1, 2003 and, as a result, the Company issued 25,000,091 shares in
a tax-free exchange for all the outstanding preferred shares of the 2003 Target
REITs. The mergers were accounted for as a purchase and the acquired assets and
liabilities were recorded at their fair value.
On August 13, 2004, the Company entered into an agreement to acquire four real
estate investment trusts (the "Target REITs"), by the merger of the four Target
REITs with and into four of the Company's wholly-owned subsidiaries. The Company
completed the mergers on April 30, 2005. Upon the consummation of these mergers,
the Company issued 10,894,994 shares of common stock to holders of preferred
stock in these Target REITs.
The Company operates in two business segments: real estate operations and
investment banking/investment services. FSP Investments provides real estate
investment and broker/dealer services. FSP Investments' services include: (i)
the organization of REIT entities (the "Sponsored REITs"), which are syndicated
through private placements; (ii) sourcing of the acquisition of real estate on
behalf of the Sponsored REITs; and (iii) the sale of preferred stock in
Sponsored REITs. FSP Property Management provides asset management and property
management services for the Sponsored REITs.
Properties
The following table summarizes the Company's investment in real estate assets,
excluding assets held for syndication:
As of
March 31,
2005 2004
--------------- --------------
Residential real estate
Number of properties 4 4
Number of apartments 837 837
Commercial real estate
Number of properties 24 24
Square feet 3,051,748 3,049,357
7
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Properties, Basis of Presentation and Recent Accounting
Pronouncements (continued)
Basis of Presentation
The unaudited consolidated financial statements of the Company include all the
accounts of the Company and its wholly and majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated. These
financial statements should be read in conjunction with the Company's financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 2004, 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 accounting principles
generally accepted in the United States of America 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 accounting principles generally accepted in the United States of
America 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 months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005 or for any other period.
Reclassifications
Certain balances in the interim 2004 financial statements have been reclassified
to conform to presentation contained in the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 2004. The reclassifications primarily
were related to Sponsored REIT income and expenses. Prior to December 31, 2004
the Company presented its proportionate share of Sponsored REIT's revenues and
expenses and has since reclassified those amounts to consolidate the real estate
operations activity from inception of the Sponsored REIT until the initiation of
syndication upon which the equity method of accounting is applied. These
reclassifications changed rental revenues, operating and maintenance expenses,
depreciation and amortization, other income and equity in earnings of
non-consolidated REITs. There was no change to income from continuing operations
or net income for any period presented as a result of these reclassifications.
Recent Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. In December 2003, the FASB revised
FIN 46 with certain modifications and clarifications. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A VIE exists when either the total equity
investment at risk is not sufficient to permit the entity to finance its
activities by itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Application of this
guidance was effective for interests in certain VIEs commonly referred to as
special-purpose entities (SPEs) as of December 31, 2003. The provisions of this
interpretation became effective upon issuance. The adoption of this standard had
no impact on the Company's financial position, operations or cash flow.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
was effective for financial instruments entered into or modified after May 31,
2003 and otherwise effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities which are subject to the provisions of this
Statement for the first fiscal period beginning after December 15, 2003. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
adoption of this standard had no impact on our financial position, results of
operations or cash flows.
8
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
2. Investment Banking/Investment Services Activity
During the three months ended March 31, 2005, the Company sold on a best efforts
basis, through private placements, preferred stock in the following Sponsored
REITs:
Date Syndication Gross Proceeds
Sponsored REIT Property Location Completed (in thousands)(1)
-------------------------------------------------------------------------------------------------------
FSP 505 Waterford Corp. Plymouth, MN January 28, 2005 3,000
FSP Galleria North Corp. Dallas, TX 33,950(2)
-------------------
Total $ 36,950
===================
1. The syndication of FSP 505 Waterford Corp. and FSP Galleria North
Corp. commenced in the fourth quarter of 2004.
2. The syndication of FSP Galleria North Corp. was not complete at
March 31, 2005. This amount represents the gross proceeds syndicated
during the three months ended March 31, 2005.
3. Related Party Transactions and Investments in Non-Consolidated Entities
Investment in Sponsored REITs
At March 31, 2005, the Company held an interest in sixteen Sponsored REITs.
Fourteen were fully syndicated and the Company no longer derives economic
benefits or risks from the common stock interest it has retained in them. The
Company also holds a preferred stock investment in one of these Sponsored REITs,
FSP Blue Lagoon Corp., from which it continues to derive economic benefit and
risk. The remaining two entities were not fully syndicated and have a value of
approximately $74.3 million on the accompanying consolidated balance sheets and
are classified as assets held for syndication.
The table below shows the Company's share of income and expenses from Sponsored
REITs prior to consolidation. Management fees of $5,000 and $5,000 for the three
months ended March 31, 2005 and 2004, respectively; and interest expenses are
eliminated in consolidation.
Three Months Ended
March 31,
(in thousands) 2005 2004
---- ----
Operating Data:
Rental revenues $ 694 $ 830
Operating and maintenance expenses 177 240
Depreciation and amortization 199 136
Interest expense 174 216
Interest income 2 9
------- -------
$ 146 $ 247
======= =======
9
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
3. Related Party Transactions and Investments in Non-consolidated Entities,
Continued
Equity in earnings of investment in non-consolidated REITs:
The following table includes equity in earnings of investments in
non-consolidated REITs:
Three Months Ended
March 31,
(in thousands) 2005 2004
---- ----
Equity in earnings of Sponsored REITs $ 602 $ 335
Equity in earnings of Blue Lagoon 63 44
------- -------
$ 665 $ 379
======= =======
Equity in earnings of investments in Sponsored REITs is derived from the
Company's share of income following the commencement of syndication of Sponsored
REITs. Following the commencement of syndication the Company exercises influence
over, but does not control these entities and investments are accounted for
using the equity method. Equity in earnings of Blue Lagoon is derived from the
Company's preferred stock investment in the entity, which was acquired in
January 2004.
The Company recorded distributions received or declared of $599,000 and $582,000
from Sponsored REITs during the three months ended March 31, 2005 and 2004,
respectively.
Non-consolidated REITs
The Company has in the past acquired by merger entities similar to the Sponsored
REITs. On August 13, 2004, the Company entered into an agreement to acquire by
merger (the "2004 Merger Agreement") four Sponsored REITs (the Target REITs) and
consummated the transactions on April 30, 2005. The Company's business model for
growth includes the potential acquisition by merger in the future of Sponsored
REITs. Following consummation of the transactions contemplated by the 2004
Merger Agreement, 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.
At March 31, 2005, December 31, 2004 and March 31, 2004, the Company had
ownership interests in sixteen, fifteen and nine Sponsored REITs, respectively.
Summarized financial information for these Sponsored REITs is as follows:
March 31, December 31,
-------------------------------
2005 2004
-------------------------------
(in thousands)
Balance Sheet Data (unaudited):
Real estate, net $ 482,320 $ 293,722
Other assets 65,222 57,207
Total liabilities (44,729) (4,833)
---------- ----------
Shareholders equity $ 502,813 $ 346,096
========== ==========
10
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
3. Related Party Transactions and Investments in Non-Consolidated Entities,
Continued
For the
Three Months Ended
March 31,
2005 2004
-------------------------
(in thousands)
Operating Data (unaudited):
Rental revenue $ 19,865 $ 13,006
Other revenue 281 120
Operating and maintenance expenses (7,188) (3,853)
Depreciation and amortization (3,730) (3,050)
Interest expense and commitment fees (2,316) (3,332)
---------- ----------
Net income (loss) $ 6,912 $ 2,891
========== ==========
Syndication fees and Transaction fees:
The Company provides syndication and real estate acquisition advisory services
for Sponsored REITs. Syndication and transaction fees from non-consolidated
entities amounted to approximately $4,961,000 and $6,590,000 for the three
months ended March 31, 2005 and 2004, respectively.
Management fees and interest income from loans:
Asset management fees range from 1% to 5% of collected rents and the applicable
contracts are cancelable with 30 days notice. Asset management fee income from
non-consolidated entities amounted to approximately $225,000 and $115,000, for
the three months ended March 31, 2005 and 2004, respectively. The Company is
typically entitled to interest on funds advanced to Sponsored REITs. The Company
recognized interest income of approximately $745,000 and $14,000 for the three
months ended March 31, 2005 and 2004, respectively, relating to these loans.
4. Bank Note Payable
The Company has a revolving line of credit agreement (the "Loan Agreement") with
a group of banks providing for borrowings at the Company's election of up to
$125,000,000. Borrowings under the Loan Agreement bear interest at either the
bank's base rate (5.75% at March 31, 2005) or at a LIBOR plus 125 basis points
(4.1% at March 31, 2005), as defined. The balance outstanding was $74,164,000
and $59,439,000 at March 31, 2005 and December 31, 2004, respectively. The
weighted average interest rate on amounts outstanding during the three months
ended March 31, 2005 was 5.0% and for the year ended December 31, 2004 was
approximately 3.62%.
The Loan Agreement includes restrictions on property liens and requires
compliance with various financial covenants. Financial covenants include the
maintenance of at least $1,500,000 in operating cash accounts, a minimum
tangible net worth and compliance with various debt and operating income ratios,
as defined in the Loan Agreement. The Company was in compliance with the Loan
Agreement's financial covenants as of March 31, 2005 and December 31, 2004. The
Loan Agreement matures on August 18, 2005.
5. 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 March 31, 2005 and 2004.
11
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
6. Business Segments
The Company operates in two business segments: real estate operations (including
real estate leasing, interim acquisition financing and asset/property
management) and investment banking/investment services (including real estate
acquisition and broker/dealer services). The Company has identified these
segments because this information is the basis upon which management makes
decisions regarding resource allocation and performance assessment. The
accounting policies of the reportable segments are the same as those described
in the "Significant Accounting Policies" " in Note 2 to the Company's
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 2004. The Company's operations are located in the
United States of America.
The Company evaluates the performance of its reportable segments based on Cash
Available for Distribution ("CAD") as management believes that CAD represents
the most accurate measure of the reportable segment's activity and is the basis
for distributions paid to equity holders. The Company defines CAD as: net income
as computed in accordance with accounting principles generally accepted in the
United States of America ("GAAP"); excluding gains or losses on the sale of real
estate and non-cash income from Sponsored REITs; plus certain non-cash items
included in the computation of net income (depreciation and amortization,
certain non-cash compensation expenses and straight-line rent adjustments); plus
distributions received from Sponsored REITs; plus the net proceeds from the sale
of land; less purchases of property and equipment ("Capital Expenditures") and
payments for deferred leasing commissions, plus proceeds from (payments to) cash
reserves established at the acquisition date of the property. Depreciation and
amortization, gain or loss on the sale of real estate, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital expenditures, payments of deferred leasing
commissions and the proceeds from (payments to) the funded reserve are an
adjustment to CAD, as they represent cash items not reflected in net income.
The funded reserve represents funds that the Company has set aside in
anticipation of future capital needs. These reserves are typically used for the
payment of capital expenditures, deferred leasing commissions and certain tenant
allowances; however, there are no legal restrictions on their use and they may
be used for any Company purpose. CAD should not be considered as an alternative
to net income (determined in accordance with GAAP), as an indicator of the
Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. We believe that in order to facilitate a clear
understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the consolidated financial statements.
12
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
6. Business Segments (continued)
The calculation of CAD by business segment is shown in the following table :
Investment
Real Banking/
Estate Investment
(in thousands) Operations Services Total
---------------------------------
Three Months Ended March 31, 2005
Net Income $ 10,346 $ 77 $ 10,423
Equity in income of non-consolidated REITs (665) -- (665)
Distributions from non-consolidated REITs 599 -- 599
Depreciation and amortization 3,399 34 3,433
Straight line rent (230) -- (230)
Non-cash compensation expense 4 27 31
Capital Expenditures (327) -- (327)
Payment of deferred leasing costs (95) -- (95)
Merger costs (87) -- (87)
Proceeds from funded reserves 422 -- 422
-------- ----- --------
Cash Available for Distribution $ 13,366 $ 138 $ 13,504
======== ===== ========
Three Months Ended March 31, 2004
Net Income $ 12,739 $ 480 $ 13,219
Sponsored REIT income during consolidation (247) -- (247)
Equity in income of non-consolidated REITs (379) -- (379)
Distributions from non-consolidated REITs 582 -- 582
Depreciation and amortization 3,235 24 3,259
Straight line rent (340) -- (340)
Non-cash compensation expense -- 162 162
Capital Expenditures (100) (17) (117)
Payment of deferred leasing costs (151) -- (151)
Proceeds from funded reserves 251 -- 251
-------- ----- --------
Cash Available for Distribution $ 15,590 $ 649 $ 16,239
======== ===== ========
13
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
6. Business Segments (continued)
The following table is a summary of other financial information by business
segment:
Investment
Real Banking/
Estate Investment
Operations Services Total
====================================================================
(in thousands)
March 31, 2005:
Revenue $ 20,342 $2,836 $ 23,178
Interest income 222 8 230
Interest expense 955 -- 955
Capital expenditures 327 -- 327
Identifiable assets 578,220 3,670 581,890
March 31, 2004:
Revenue $ 21,837 $3,762 $ 25,599
Interest income 220 16 236
Interest expense 264 -- 264
Capital expenditures 100 17 117
Identifiable assets 518,255 3,334 521,589
7. Cash Dividends
The Company declared and paid dividends as follows (in thousands, except per
share amounts):
Dividends Total
Quarter Paid Per Share Dividends
------------------------------- --------- ---------
First quarter of 2005 $ .31 $ 15,385
First quarter of 2004 $ .31 $ 15,382
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 dividends paid to its shareholders, thereby effectively
subjecting the distributed net income of the Company to taxation at the
shareholder level only. The Company must comply with a variety of restrictions
to maintain its status as a REIT. These restrictions include the type of income
it can earn, the type of assets it can hold, the number of shareholders it can
have and the concentration of their ownership, and the amount of the Company's
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 20% of
the value of all of the Company's assets and, when considered together with
other non-real estate assets, cannot exceed 25% of the value of all of the
Company's assets. Effective January 1, 2001, a subsidiary of the Company has
elected to be treated as a TRS. As a result, FSP Investments operates as a
taxable corporation under the Code and has accounted for income taxes in
accordance with the provisions of Statement of Financial Accounting Standard
("SFAS") No. 109, Accounting for Income Taxes. Taxes are provided when FSP
investments has net profits for both financial statement and income tax
purposes.
14
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
8. Income Taxes (continued)
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 income tax expense reflected in the consolidated statements of income
relates only to the TRS. The expense differs from the amounts computed by
applying the Federal statutory rate of 34% to income before income taxes as
follows:
For the
Three Months Ended
March 31,
---------------------
(in thousands) 2005 2004
---------------------
Federal income tax expense at statutory rate $ 37 $ 283
Increase in taxes resulting from:
State income taxes, net of federal impact 7 45
---------------------
$ 44 $ 328
=====================
No deferred income taxes were provided as there were no material temporary
differences between the financial reporting basis and the tax basis of the
taxable REIT subsidiary.
10. Subsequent Events
The Company declared a cash distribution of $0.41 per share on April 19, 2005 to
stockholders of record on April 29, 2005 payable on May 16, 2005. The cash
dividend represents four months of operations.
On April 30, 2005 the Company acquired by merger four Target REITs and issued
10,894,994 of common stock, $0.0001 par value per share in connection with the
mergers.
On April 29, 2005 the Company's Board of Directors authorized the Company to
explore the possibility of the acquisition (by merger or otherwise) of any or
all of five Sponsored REITs: FSP Willow Bend Office Corp., FSP Innsbrook Corp.,
FSP 380 Interlocken Corp., FSP Blue Lagoon Drive Corp. and FSP Eldridge Green
Corp. The Company has no obligation to acquire any or all of these Sponsored
REITs.
15
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, 2004. Historical
results and percentage relationships set forth in the 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 changes
in economic conditions in the markets in which we own properties, changes in the
demand by investors for investment in Sponsored REITs, risks of a lessening of
demand for the types of real estate owned by us, changes in government
regulations, and expenditures that cannot be anticipated such as utility rate
and usage increases, unanticipated repairs, additional staffing, insurance
increases and real estate tax valuation reassessments. See the factors set forth
below under the caption, "Certain Factors That May Affect Future Results".
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 will not update any of the forward looking
statements after the date of 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. operates in two business segments: real estate operations and
investment banking/investment services. The real estate operations segment
involves real estate rental operations, leasing, interim acquisition financing
and asset/property management services. The investment banking/investment
services segment involves providing real estate investment and broker/dealer
services that include the organization of Sponsored REITs, the acquisition of
real estate on behalf of Sponsored REITs and the syndication of Sponsored REITs
through the sale of preferred stock in private placements.
The main factor that affects our real estate operations is the broad economic
market conditions in the United States. These market conditions affect the
occupancy levels and the rent levels on both a national and local level. We have
no influence on the national market conditions. We look to acquire quality
properties in good locations in order to lessen the impact of downturns in the
local markets and to take advantage of upturns in these same local markets when
they occur.
Our investment banking/investment services customers are primarily institutions
and high net-worth individuals. To the extent that the broad capital markets
affect these investors, our business is also affected. These investors have many
investment choices. We must continually search for real estate at a price and at
a competitive risk/reward rate of return that meets our customer's risk/reward
profile for providing a stream of income and as a long-term hedge against
inflation.
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 Conditions and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2004.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Critical Accounting Policies (continued)
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 our Annual
Report on Form 10-K for the year ended December 31, 2004.
Trends and Uncertainties
Real Estate Operations
The trends in our office markets have remained consistent across the last few
quarters with slow employment growth leading to slow improvement in occupancy
and an almost imperceptible improvement in market rents. While market rents for
new leases may be increasing in some areas, the new market rents are generally
lower than expiring rents in most of our markets, particularly for those leases
that were made at the height of the market four to five years ago. We expect to
continue to see a decrease in rents to market rents for leases at our properties
that expire during the rest of the year unless there is dramatic improvement in
market fundamentals.
Our apartment properties are beginning to see improving market conditions,
despite recent competition from condominiums in addition to the usual
competition from other apartments and new homes. If the improvement continues,
we expect it will first manifest itself in higher occupancy and lower rent
concessions, before there is any significant increase in rental rates.
The uncertainty surrounding utility prices in the larger economy creates
uncertainty about our future utility costs. Although many of our leases pass
through the cost of utilities to the tenants, higher utility prices would
increase our overall operating costs.
The following table summarizes property wholly owned by us as of the dates
indicated:
March 31,
---------------------------
2005 2004
Residential:
Number of properties 4 4
Number of apartment units 837 837
Commercial:
Number of properties 24 24
Square footage 3,051,748 3,049,357
17
Investment Banking/Investment Services
Unlike our real estate operations business, which provides a rental revenue
stream which is ongoing and recurring in nature, our investment
banking/investment services business is transactional in nature. Both the number
of Sponsored REIT syndications and the amount of equity anticipated to be raised
in 2005 are likely to be below our 2004 levels. Future business in this area is
unpredictable.
Our property acquisition executives are concerned about continued high valuation
levels for prime commercial investment real estate in 2005. It appears that a
combination of factors, including low interest rates, a recovering general
economy and increased capital allocation to real estate assets is increasing
prices on many properties we would have an interest in acquiring. This upward
pressure on prices is causing capitalization rates to fall and prices per square
foot to rise. Consequently, our acquisition executives are having a difficult
time identifying enough property during 2005 at a price acceptable under our
investment criteria to grow our overall investment banking/investment services
business. Lower revenues from this business reduce the cash available for
distribution to stockholders as dividends. As the second quarter of 2005 begins,
valuation levels for many top quality investment properties remain at
historically high levels, with significant competition from a variety of capital
sources to acquire them. Lower capitalization rates on properties acquired for
investment syndication mean lower initial cash flow yields for potential equity
investors in our Sponsored REITs. Consequently we expect slower sales of these
investments to our clients and prospective clients. We continue to rely solely
on our in-house investment executives to access interested investors who have
capital they can afford to place in an illiquid position for an indefinite
period of time (i.e., invest in a Sponsored REIT). We also continue to evaluate
our in-house sales force, as to whether we are capable, either through our
existing client base or through new clients, of raising sufficient investment
capital in Sponsored REITs to achieve future performance objectives.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations
The following table shows each segment for the three months ended March 31, 2005
and 2004.
(in thousands)
Three months ended March 31,
-------------------------------------
Real Estate Operations 2005 2004 Change
---- ---- ------
Revenues:
Rental income $ 17,234 $ 18,875 $(1,641)
Transaction fees 2,125 2,828 (703)
Management fees and interest income from loans 970 129 841
Other 13 5 8
--------------------------------------
20,342 21,837 (1,495)
--------------------------------------
Expenses:
Real estate operating expenses 3,575 3,388 187
Real estate taxes and insurance 2,354 2,471 (117)
Depreciation and amortization 3,539 3,312 227
Selling, general and administrative 460 262 198
Interest 955 264 691
--------------------------------------
10,883 9,697 1,186
--------------------------------------
Other items:
Interest income 222 220 2
Equity in earnings of non-consolidated REIT's 665 379 286
--------------------------------------
887 599 288
--------------------------------------
Contribution from real estate operations 10,346 12,739 (2,393)
--------------------------------------
Investment Banking/Investment Services
Revenues:
Syndication fees 2,519 3,041 (522)
Transaction fees 317 721 (404)
--------------------------------------
2,836 3,762 (926)
--------------------------------------
Expenses:
Commissions 1,324 1,520 (196)
Depreciation and amortization 34 24 10
Selling, general and administrative 1,365 1,426 (61)
--------------------------------------
2,723 2,970 (247)
--------------------------------------
Other items:
Interest income 8 16 (8)
Taxes on income (44) (328) 284
--------------------------------------
(36) (312) 276
--------------------------------------
Contribution from investment banking/investment services 77 480 (403)
--------------------------------------
Net income $ 10,423 $ 13,219 $(2,796)
======================================
19
Comparison of the three months ended March 31, 2005 to the three months ended
March 31, 2004
Total revenues decreased $2.4 million, or 9.5%, to $23.2 million for the
three months ended March 31, 2005, as compared to $25.6 million for the three
months ended March 31, 2004. Total expenses were $13.6 million for the three
months ended March 31, 2005; an increase of $0.9 million, or 7.4%, compared to
the three months ended March 31, 2004. The real estate segment included 28 owned
properties for each three month period.
During the three months ended March 31, 2005 our investment
banking/investment services segment had total gross proceeds of $37.0 million,
which included completion of the syndication for FSP 505 Waterford Corp. and a
continuing syndication of FSP Galleria North Corp., which had been started in
the fourth quarter of 2004. During the three months ended March 31, 2004, our
investment banking/investment services segment had total gross proceeds of $49.2
million, which included completion of the syndication of FSP Blue Lagoon Drive
Corp., which had been started in the fourth quarter of 2003; and of FSP Eldridge
Green Corp. As a result, total gross proceeds decreased $12.2 million or 24.8%
for the three months ended March 31, 2005 compared to three months ended March
31, 2004. This decrease was attributable to a slower pace of closings in 2005
compared to 2004. Revenues and expenses for investment banking/investment
services are directly related to the gross proceeds of these syndications.
Each segment is discussed below.
Real Estate Operations
Contribution from the real estate segment was $10.3 million for the three
months ended March 31, 2005; a decrease of $2.4 million, or 18.8%, compared to
the three months ended March 31, 2004. The decrease is primarily attributable
to:
o A decrease to revenues of $1.5 million, of which $1.2 million
resulted from a lease termination payment made by a tenant during
the three months ended March 31, 2004 that did not recur during the
three months ended March 31, 2005, $0.4 million resulted from
decreases in occupancy and lower rental rates in the portfolio; and
$0.7 million resulted from a decrease in transaction (loan
commitment) fees, which was principally caused by the decrease in
gross syndication proceeds in the quarter compared to the same
period in 2004. These decreases were partially offset by increases
in management fees and interest income of $0.8 million.
o An increase in selling, general and administrative costs of $0.2
million related primarily to costs of monitoring and managing a
larger portfolio of REITs, and an increase to franchise taxes.
o An increase in interest expense of $0.7 million resulting from
larger loan balances outstanding for syndications in process during
the three months ended March 31, 2005 compared to the three months
ended March 31, 2004.
o An increase in equity in income from non-consolidated REITs of $0.3
million as a result of Sponsored REITs in syndication with greater
net operating income during the three months ended March 31, 2005
compared to the three months ended March 31, 2004.
o There were insignificant changes to real estate operating expenses,
real estate taxes, insurance, depreciation and interest income
during the three months ended March 31, 2005 compared to the three
months ended March 31, 2004.
Investment Banking/Investment Services
Contribution of the investment banking and services segment was $0.1
million for the three months ended March 31, 2005; a decrease of $0.4 million,
compared to the three months ended March 31, 2004. The decrease was primarily
attributable to:
o A decrease in syndication fee revenues of $0.9 million, which was
primarily attributable to a lower level of gross syndication
proceeds during the three months ended March 31, 2005 compared to
the three months ended March 31, 2004.
o A decrease in commission expense of $0.2 million, which relates to
the decrease in gross syndication proceeds.
o These decreases were offset by a decrease in taxes on income of $0.3
million as a result of the lower taxable income during the three
months ended March 31, 2005 compared to the three months ended March
31, 2004.
o There were insignificant changes to selling, general and
administrative costs, depreciation and interest income during the
three months ended March 31, 2005 compared to the three months ended
March 31, 2004.
Net Income
Net income from contribution of both segments for the three months ended
March 31, 2005 decreased $2.8 million to $10.4 million compared to $13.2 million
for the reasons discussed above.
20
Liquidity and Capital Resources
Cash and cash equivalents were $47.3 million and $52.8 million at March
31, 2005 and December 31, 2004, respectively. This decrease of $5.5 million is
attributable to $10.2 million provided by operating activities, less $15.0
million used for investing activities, less $0.7 million used for financing
activities. Management believes that existing cash, cash anticipated to be
generated internally by operations, cash anticipated to be generated by the sale
of preferred stock in future Sponsored REITs and our line of credit will be
sufficient to meet working capital requirements and anticipated capital
expenditures for at least the next 12 months.
Operating Activities
The cash provided by our operating activities of $10.2 million is
primarily attributable to net income of $10.4 million, plus the add-back of $3.2
million of non-cash activity and was partially offset by increases in prepaid
and other assets of $2.0 million, decreases in accounts payable and accrued
expenses and compensation of $1.1 million and increases in other operating
assets of $0.3 million.
Investing Activities
Our cash used by investing activities of $15.0 million is primarily
attributable to an additional $14.7 million invested in assets held for
syndication and $0.3 million to acquire or improve real estate assets.
Financing Activities
Our cash used by financing activities of $0.7 million is attributable to
$15.4 million of distributions to shareholders and net borrowings of $14.7
million made during the three months ended March 31, 2005, which related to
assets held for syndication.
Line of Credit
We have a revolving line of credit agreement with a group of banks
providing for borrowings of up to $125 million. Borrowings under the line of
credit bear interest at either the bank's base rate (5.75% at March 31, 2005) or
at LIBOR plus 125 basis points (4.1% at March 31, 2005), as defined. Borrowings
outstanding under the line of credit at March 31, 2005 were $74.2 million. We
are in compliance with all bank covenants required by this line of credit. The
maturity date of the line of credit is August 18, 2005, and we intend to
evaluate extension, renewal or replacement of the facility.
Contingencies
We are subject to various legal proceedings and claims that arise in the
ordinary course of its business. Although occasional adverse decisions (or
settlements) may occur, we believe that the final disposition of such matters
will not have a material adverse effect on our financial position or results of
operations.
Assets Held for Syndication
As of March 31, 2005 there are two assets held for syndication. As of
December 31, 2004 we also had two assets held for syndication. One syndication
was completed in January 2005, and the second asset was purchased during the
three months ended March 31, 2005, but the syndication has not commenced.
Related Party Transactions
In the three months ended March 31, 2005, we completed the syndication of
FSP 505 Waterford Corp., and continued the syndication of FSP Galleria North
Corp. We did not enter into any other significant transactions with related
parties during the quarter ended March 31, 2005. For a discussion of
transactions between us and related parties during 2004, see Footnote No. 5
"Related Party Transactions" to the Consolidated Financial Statements of the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
Other Considerations
We generally pay the ordinary annual operating expenses of our properties
from the rental revenue generated by the properties. For the three months ended
March 31, 2005 and 2004 the rental income exceeded the expenses for each
individual property, with the exception of Blue Ravine and Lyberty Way. The
single tenant lease at the Blue Ravine property located in Folsom, California,
expired June 30, 2003. The single tenant lease at the Lyberty Way property
located in Westford, Massachusetts expired October 31, 2004. We have not re-let
either property and expect that these properties will not produce revenue to
cover their expenses in the second quarter.
21
Management believes that cash and cash equivalents, as of March 31, 2005,
are in excess of our known needs for extraordinary expenses or capital
improvements within the next twelve months.
Although there is no guarantee that we will be able to obtain the funds
necessary for our future growth, we anticipate generating funds from continuing
real estate operations and from fees and commissions from the sale of shares in
newly formed Sponsored REITs. We believe that we have adequate funds to cover
unusual expenses and capital improvements, in addition to normal operating
expenses. Our ability to maintain or increase our level of dividends to
stockholders, however, depends in part upon the level of interest on the part of
investors in purchasing shares of Sponsored REITs and the level of rental income
from our real properties.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
If we are not able to collect sufficient rents from each of our owned real
properties, we may suffer significant operating losses or a reduction in cash
available for future dividends.
A substantial portion of our revenues are generated by the rental income
of our real properties. If our properties do not provide us with a steady rental
income, our revenues will decrease and may cause us to incur operating losses in
the future.
We face risks in continuing to attract investors for Sponsored REITs.
Our investment banking/investment services business continues to depend
upon its ability to attract purchasers of equity interests in Sponsored REITs.
Our success in this area will depend on the propensity and ability of investors
who have previously invested in Sponsored REITs to continue to invest in future
Sponsored REITs and on our ability to expand the investor pool for the Sponsored
REITs by identifying new potential investors. Moreover, our investment
banking/investment services business may be affected to the extent existing
Sponsored REITs incur losses or have operating results that fail to meet
investors' expectations.
If we are unable to fully syndicate a Sponsored REIT, we may be required to keep
a balance outstanding on our line of credit or use our cash balance to repay our
line of credit, which may reduce cash available for distribution to our
stockholders.
We typically draw on our line of credit to make an interim mortgage loan
to a Sponsored REIT, so that it can acquire real property prior to the
consummation of the offering of its equity interests; this interim loan is
secured by a first mortgage of the real property acquired by the Sponsored REIT.
Once the offering has been completed, the Sponsored REIT repays the loan out of
the offering proceeds. If we are unable to fully syndicate a Sponsored REIT, the
Sponsored REIT could be unable to fully repay the loan, and we would have to
satisfy our obligation under our line of credit through other means. If we are
required to use cash for this purpose, we would have less cash available for
distribution to our stockholders.
Failure to renew, replace or extend our line of credit could have a material
adverse effect on the cash available for distribution to our stockholders and
would limit our growth.
Our line of credit matures in August 2005. We typically draw on our line
of credit to make an interim mortgage loan to a sponsored REIT, so that the
sponsored REIT can acquire real property prior to the consummation of the
offering of such sponsored REIT's equity interests. Once the offering has been
completed, the sponsored REIT repays the loan out of the offering proceeds. An
inability to renew, replace or extend our line of credit could result in
difficulty financing growth in the investment banking/investment services
segment of our business. It could also result in a reduction in the cash
available for distribution to our stockholders because revenue for our
investment banking/investment services segment is directly related to the amount
of equity raised by sponsored REITs which we syndicate. In addition, a
significant part of our growth strategy is to acquire additional real properties
by cash purchase or by acquisition of sponsored REITs, and the loss of the line
of credit would make it substantially more difficult to pursue acquisitions by
either method. To the extent we have a balance outstanding on the line of credit
on the date of its maturity, we would have to satisfy our obligation through
other means. If we are required to use cash for this purpose, we would have less
cash available for distribution to its stockholders.
We may not be able to find properties that meet our criteria for purchase.
Growth in our investment banking/investment services business and our
portfolio of real estate is dependent on the ability of our acquisition
executives to find properties for sale which meet our investment criteria. To
the extent they fail to find such properties, we will be unable to syndicate
offerings of Sponsored REITs to investors, and this segment of our business
could have lower revenue, which would reduce the cash available for distribution
to our stockholders, and we would be unable to increase the size of our
portfolio of real estate.
22
We are dependent on key personnel.
We depend on the efforts of George Carter, our Chief Executive Officer,
and our other executive officers. If they were to resign, our operations could
be adversely affected. We do not have employment agreements with Mr. Carter or
any other of our executive officers.
Our level of dividends may fluctuate.
Because our investment banking/investment services business is
transactional in nature and real estate occupancy levels and rental rates can
fluctuate, there is no predictable recurring level of revenue from such
activities. As a result of this, the amount of cash available for distribution
may fluctuate, which may result in us not being able to maintain or grow
dividend levels in the future.
The real properties held by us may significantly decrease in value.
As of March 31, 2005, we owned 28 properties. We acquired an additional
four properties on April 30, 2005. Some or all of these properties may decline
in value. To the extent our real properties decline in value, our stockholders
could lose some or all the value of their investments. Although currently there
is no public market for the shares of our common stock, the value of our common
stock may still be adversely affected if the real properties held by us decline
in value since these real properties represent the majority of the tangible
assets held by us. Moreover, if either we are forced to sell or lease the real
property held by us below its initial purchase price or its carrying costs or if
we are forced to lease real property at below market rates because of the
condition of the property, our results of operations would be adversely affected
and such negative results of operations may result in lower dividends being paid
to holders of our common stock.
New acquisitions may fail to perform as expected.
We may acquire new properties, whether by direct FSP Corp. cash purchase,
by acquisition of Sponsored REITs or other properties by cash or through the
issuance of shares of our stock or by investment in a Sponsored REIT. We
acquired four Sponsored REITs and the properties they own on April 30, 2005.
Newly acquired properties may fail to perform as expected, in which case, our
results of operations could be adversely affected.
We face risks in owning and operating real property.
An investment in us is subject to the risks incident to the ownership and
operation of real estate-related assets. These risks include the fact that real
estate investments are generally illiquid, which may impact our ability to vary
our portfolio in response to changes in economic and other conditions, as well
as the risks normally associated with:
o changes in general and local economic conditions;
o the supply or demand for particular types of properties in
particular markets;
o changes in market rental rates;
o the impact of environmental protection laws; and
o changes in tax, real estate and zoning laws.
Certain significant costs, such as real estate taxes, utilities, insurance
and maintenance costs, generally are not reduced even when a property's rental
income is reduced. In addition, environmental and tax laws, interest rate
levels, the availability of financing and other factors may affect real estate
values and property income. Furthermore, the supply of commercial and
multi-family residential space fluctuates with market conditions.
We face risks from tenant defaults or bankruptcies.
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.
We may encounter significant delays in reletting vacant space, resulting in
losses of income.
When leases expire, we will incur expenses and may not be able to re-lease
the space on the same terms. Certain leases provide tenants the right to
terminate early if they pay a fee. If we are unable to re-lease space promptly,
if the terms are significantly less favorable than anticipated or if the costs
are higher, we may have to reduce distributions to our stockholders. For
example, approximately $10,393,000, or 17.6%, of our annualized rental revenue
from commercial and residential apartment properties derives from leases which
expire during 2005. Some of these leases have been renewed during the first
quarter and some have not.
23
We face risks from geographic concentration.
The properties in our portfolio as of March 31, 2005, by aggregate square
footage, are distributed geographically as follows: Southwest - 26%, Northeast -
31%, Midwest - 19%, West - 16% and Southeast 8%. However, within certain of
those regions, we hold a larger concentration of our properties in Houston,
Texas - 18% and Washington, DC - 13%. We are likely to face risks to the extent
that any of these areas in which we hold a larger concentration of our
properties suffer deteriorating economic conditions.
We compete with national, regional and local real estate operators and
developers, which could adversely affect our cash flow.
Competition exists in every market in which our properties are currently
located and in every market in which our properties will be located. We compete
with, among others, national, regional and numerous local real estate operators
and developers. Such competition may adversely affect the percentage of leased
space and the rental revenues of our properties, which could adversely affect
our cash flow from operations and our ability to make expected distributions to
our stockholders. Some of our competitors may have more resources than we do or
other competitive advantages. Competition may be accelerated by any increase in
availability of funds for investment in real estate. For example, decreases in
interest rates tend to increase the availability of funds and therefore can
increase competition. To the extent that our properties continue to operate
profitably, this will likely stimulate new development of competing properties.
The extent to which we are affected by competition will depend in significant
part on local market conditions.
There is limited potential for an increase in leased space gains in our
properties.
We anticipate that future increases in revenue from our properties will be
primarily the result of scheduled rental rate increases or rental rate increases
as leases expire. Properties with higher rates of vacancy are generally located
in soft economic markets so that it may be difficult to realize increases in
revenue when vacant space is re-leased.
We are subject to possible liability relating to environmental matters, and we
cannot assure you that we have identified all possible liabilities.
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its property.
Such laws may impose liability without regard to whether the owner or operator
knew of, or caused, the release of such hazardous substances. The presence of
hazardous substances on a property may adversely affect the owner's ability to
sell such property or to borrow using such property as collateral, and it may
cause the owner of the property to incur substantial remediation costs. In
addition to claims for cleanup costs, the presence of hazardous substances on a
property could result in the owner incurring substantial liabilities as a result
of a claim by a private party for personal injury or a claim by an adjacent
property owner for property damage.
In addition, we cannot assure you that:
o future laws, ordinances or regulations will not impose any material
environmental liability;
o the current environmental conditions of our properties will not be
affected by the condition of properties in the vicinity of such
properties (such as the presence of leaking underground storage
tanks) or by third parties unrelated to us;
o tenants will not violate their leases by introducing hazardous or
toxic substances into our properties that could expose us to
liability under federal or state environmental laws; or
o environmental conditions, such as the growth of bacteria and toxic
mold in heating and ventilation systems or on walls, will not occur
at our properties and pose a threat to human health.
We are subject to compliance with the Americans With Disabilities Act and fire
and safety regulations which could require us to make significant capital
expenditures.
All of our properties are required to comply with the Americans With
Disabilities Act (ADA), and the regulations, rules and orders that may be issued
thereunder. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Compliance with ADA
requirements might require, among other things, removal of access barriers and
noncompliance could result in the imposition of fines by the U.S. government, or
an award of damages to private litigants.
In addition, we are required to operate our properties in compliance with
fire and safety regulations, building codes and other land use regulations, as
they may be adopted by governmental agencies and bodies and become applicable to
our properties. Compliance with such requirements may require us to make
substantial capital expenditures, which expenditures would reduce cash otherwise
available for distribution to its stockholders.
24
There are significant conditions to our obligation to redeem shares of our
common stock, and any such redemption will result in the stockholders tendering
shares receiving less than their estimated fair market value.
Under our redemption plan, we are only obligated to use our best efforts
to redeem shares of our common stock from stockholders wishing to have them
redeemed. Stockholders wishing to have their shares redeemed must so request on
or before the July 1 which precedes the January 1 date on which the redemption
will be effective, and any such request will be irrevocable. There are
significant conditions to our obligation to redeem shares of our common stock
including:
o we cannot be insolvent or be rendered insolvent by the redemption;
o the redemption cannot impair our capital or operations;
o the redemption cannot contravene any provision of federal or state
securities laws;
o the redemption cannot result in our failing to qualify as a REIT;
and
o our management must determine that the redemption is in our best
interests.
Any redemption effected by us under this plan would result in those
stockholders tendering shares of our common stock receiving 90% of the estimated
fair market value of such shares, as determined by our board of directors in its
sole and absolute discretion, and not their full estimated fair market value. If
our common stock becomes listed for trading on AMEX or any other national
securities exchange or the NASDAQ National Market, we will no longer be
obligated to, and do not intend to, effect any redemption. We did not receive
any requests for redemption from the time of the mailing of the Consent
Solicitation/Prospectus related to the mergers, which occurred on March 1, 2005,
until the effective date of the mergers, which was April 30, 2005.
We may lose capital investment or anticipated profits if an uninsured event
occurs.
We carry or our tenants carry comprehensive liability, fire and extended
coverage with respect to each of our properties, with policy specification and
insured limits customarily carried for similar properties. There are, however,
certain types of losses, such as from wars, pollution or earthquakes, that may
be either uninsurable or not economically insurable (although most properties
located in California have earthquake insurance). Should an uninsured material
loss occur, we could lose both capital invested in the property and anticipated
profits.
Contingent or unknown liabilities acquired in mergers or similar transactions
could require us to make substantial payments.
The properties which we acquired in mergers were acquired subject to
liabilities and without any recourse with respect to liabilities, whether known
or unknown. As a result, if liabilities were asserted against us based upon any
of these properties, we might have to pay substantial sums to settle them, which
could adversely affect our results of operations and financial condition and our
cash flow and ability to make distributions to our stockholders. Unknown
liabilities with respect to properties acquired might include:
o liabilities for clean-up or remediation of environmental conditions;
o claims of tenants, vendors or other persons dealing with the former
owners of the properties; and
o liabilities incurred in the ordinary course of business.
We would incur adverse tax consequences if we failed to qualify as a REIT.
The provisions of the tax code governing the taxation of real estate
investment trusts are very technical and complex, and although we expect that we
will be organized and will operate in a manner that will enable us to meet such
requirements, no assurance can be given that we will always succeed in doing so.
In addition, as a result of our acquisition of the target REITs pursuant to the
mergers, we might no longer qualify as a real estate investment trust. We could
lose our ability to so qualify for a variety of reasons relating to the nature
of the assets acquired from the target REITs, the identity of the shareholders
of the target REITs who become our shareholders or the failure of one or more of
the target REITs to have previously qualified as a real estate investment trust.
Moreover, you should note that if one or more of the REITs that we acquired in
June 2003 or April 2005 did not qualify as a real estate investment trust
immediately prior to the consummation of its acquisition, we could be
disqualified as a REIT as a result of such acquisition.
If in any taxable year we do not qualify as a real estate investment
trust, we would be taxed as a corporation and distributions to our stockholders
would not be deductible by us in computing our taxable income. In addition, if
we were to fail to qualify as a real estate investment trust, we could be
disqualified from treatment as a real estate investment trust in the year in
which such failure occurred and for the next four taxable years and,
consequently, we would be taxed as a regular corporation during such years.
Failure to qualify for even one taxable year could result in a significant
reduction of our cash available for distribution to our stockholders or could
require us to incur indebtedness or liquidate investments in order to generate
sufficient funds to pay the resulting federal income tax liabilities.
25
Provisions in our organizational documents may prevent changes in control.
Our Articles of Incorporation and Bylaws contain provisions, described
below, which may have the effect of discouraging a third party from making an
acquisition proposal for us and may thereby inhibit a change of control under
circumstances that could otherwise give the holders of our common stock the
opportunity to realize a premium over the then-prevailing market prices.
Ownership Limits. In order for us to maintain our qualification as a real
estate investment trust, the holders of our common stock may be limited to
owning, either directly or under applicable attribution rules of the Internal
Revenue Code, no more than 9.8% of the lesser of the value or the number of
equity shares of us, and no holder of common stock may acquire or transfer
shares that would result in our shares of common stock being beneficially owned
by fewer than 100 persons. Such ownership limit may have the effect of
preventing an acquisition of control of us without the approval of our board of
directors. Our Articles of Incorporation give our board of directors the right
to refuse to give effect to the acquisition or transfer of shares by a
stockholder in violation of these provisions.
Staggered Board. Our board of directors is divided into three classes. The
terms of these classes will expire in 2006, 2007 and 2008, respectively.
Directors of each class are elected for a three-year term upon the expiration of
the initial term of each class. The staggered terms for directors may affect our
stockholders' ability to effect a change in control even if a change in control
were in the stockholders' best interests.
Preferred Stock. Our Articles of Incorporation authorize our board of
directors to issue up to 20,000,000 shares of preferred stock, par value $.0001
per share, and to establish the preferences and rights of any such shares
issued. The issuance of preferred stock could have the effect of delaying or
preventing a change in control even if a change in control were in our
stockholders' best interest.
Increase of Authorized Stock. Our board of directors, without any vote or
consent of the stockholders, may increase the number of authorized shares of any
class or series of stock or the aggregate number of authorized shares we have
authority to issue. The ability to increase the number of authorized shares and
issue such shares could have the effect of delaying or preventing a change in
control even if a change in control were in our stockholders' best interest.
Amendment of Bylaws. Our board of directors has the sole power to amend
our Bylaws. This power could have the effect of delaying or preventing a change
in control even if a change in control were in our stockholders' best interests.
Stockholder Meetings. Our Bylaws require advance notice for stockholder
proposals to be considered at annual meetings of stockholders and for
stockholder nominations for election of directors at special meetings of
stockholders. Our Bylaws also provide that stockholders entitled to cast more
than 50% of all the votes entitled to be cast at a meeting must join in a
request by stockholders to call a special meeting of stockholders. These
provisions could have the effect of delaying or preventing a change in control
even if a change in control were in the best interests of our stockholders.
Supermajority Votes Required. Our Articles of Incorporation require the
affirmative vote of the holders of no less than 80% of the shares of capital
stock outstanding and entitled to vote in order (i) to amend the provisions of
our Articles of Incorporation relating to the classification of directors,
removal of directors, limitation of liability of officers and directors or
indemnification of officers and directors or (ii) to amend our Articles of
Incorporation to impose cumulative voting in the election of directors. These
provisions could have the effect of delaying or preventing a change in control
even if a change in control were in our stockholders' best interest.
The listing of our common stock on the American Stock Exchange or another
national securities exchange and the trading price of our common stock following
such listing are uncertain. Our common stock could trade at a lower price than
anticipated.
Although we have filed an application to list our common stock on the
AMEX, and the AMEX has approved the application, there can be no assurances that
our common stock will be listed for trading. Therefore, a trading market may not
develop at all, or if one does, it may not be meaningful. If a trading market
does develop, the market prices for our common stock may fluctuate with changes
in market and economic conditions, including the market perception of REITs in
general, and changes in the financial condition of our securities. Such
fluctuations may depress the market price of our common stock independent of the
financial performance of FSP Corp. The market conditions for REIT stocks
generally could affect the market price of our common stock.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We were not a party to any derivative financial instruments at or during the
three months ended March 31, 2005.
We borrow from time-to-time on our line of credit. These borrowings bear
interest at the bank's base rate (5.75% at March 31, 2005) or at LIBOR plus 125
basis points (4.1% at March 31, 2005), as elected by us when requesting funds as
defined. As of March 31, 2005, $74,164,000 was outstanding under the line of
credit consisting of one borrowing of $30,164,000 at the bank's base rate and a
borrowing of $44,000,000 at the LIBOR plus 125 basis point rate. We have used
the funds drawn on our line of credit only for the purpose of making interim
mortgage loans to Sponsored REITs. These mortgage loans bear interest at the
same variable rate payable by us under our line of credit. We therefore believe
that we have mitigated our interest rate risk with respect to our borrowings.
27
Item 4. Controls and Procedures.
Our management, with the participation of FSP Corp.'s President and Chief
Executive Officer and FSP Corp.'s Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(d) under the Exchange Act) as of March 31, 2005. Based on
this evaluation, FSP Corp.'s President and Chief Executive Officer and FSP
Corp.'s Chief Financial Officer concluded that, as of March 31, 2005, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to FSP Corp.'s President and Chief Executive Officer and FSP Corp.'s Chief
Financial Officer by others within these entities as appropriate to allow timely
decisions regarding required disclosure, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
No change to our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter
ended March 31, 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
(c) The following table provides information about purchases by Franklin
Street Properties Corp. during the quarter ended March 31, 2005 of equity
securities that are registered by the Company pursuant to Section 12 of the
Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Number of Maximum Number (or
Shares (or Units) Approximate Dollar Value)
Purchased as Part of Shares (or Units) that
Total Number of of Publicly May Yet Be Purchased
Shares (or Units) Average Price Paid Announced Plans or Under the Plans or
Period Purchased (1) per Share (or Unit) Programs (1) Programs (1)
- -----------------------------------------------------------------------------------------------------------------------
01/01/05-01/31/05 0 N/A 0 0
- -----------------------------------------------------------------------------------------------------------------------
02/01/05-02/28/05 0 N/A 0 0
- -----------------------------------------------------------------------------------------------------------------------
03/01/05-03/30/05 0 N/A 0 0
- -----------------------------------------------------------------------------------------------------------------------
Total: 0 N/A 0 0
- -----------------------------------------------------------------------------------------------------------------------
FSP Corp. does not have any publicly announced repurchase plans or programs.
However, FSP Corp.'s Articles of Incorporation provide that FSP Corp. will use
its best efforts to redeem shares of its common stock from stockholders who
request such redemption. Any FSP Corp. stockholder wishing to have shares
redeemed must make such a request no later than July 1 of any year for a
redemption that would be effective the following January 1.
This obligation is subject to significant conditions, including that (i) FSP
Corp. cannot be insolvent or rendered insolvent by the redemption, (ii) the
redemption cannot impair the capital or operations of FSP Corp., (iii) the
redemption cannot contravene any provision of federal or state securities law,
(iv) the redemption cannot result in FSP Corp.'s failing to qualify as a REIT,
and (v) the management of FSP Corp. must determine that the redemption is in the
best interest of FSP Corp. Redemptions pursuant to these provisions result in
redeeming stockholders receiving cash in an amount of 90% of the fair market
value of the stock redeemed, as determined by FSP Corp.'s Board of Directors.
If our common stock becomes listed for trading on AMEX or any other national
securities exchange or the NASDAQ National Market, we will no longer be
obligated to, and do not intend to, effect any redemption. We did not receive
any requests for redemption from the time of the mailing of the Consent
Solicitation/Prospectus related to the mergers, which occurred on March 1, 2005,
until the effective date of the mergers, which was April 30, 2005.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Other Information:
For purposes of Regulation FD the Company has attached a table regarding
the investors in Sponsored REITs attached as Exhibit 99.1 hereto.
29
PART II - OTHER INFORMATION (Continued)
Item 6. Exhibits:
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of August
13, 2004, by and among the Registrant and the parties thereto
(incorporated by reference to Exhibit 2.2 to the Registrant's
Current Report on Form 8-K dated April 29, 2005).
3.2 Restated Bylaws of FSP Corp.
31.1 Certification of the President and Chief Executive Officer of the
Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of the Chief Financial Officer of the Registrant
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Executive Officer of the
Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer of the Registrant
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.1 Table regarding investors in Sponsored REITs.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Franklin Street Properties Corp.
Date Signature Title
---- --------- -----
May 6, 2005 /s/ George J. Carter Chief Executive Officer and
-------------------- Director (Principal Executive Officer)
George J. Carter
May 6, 2005 /s/ John G. Demeritt Senior Vice President and Chief Financial
-------------------- Officer (Principal Financial Officer)
John G. Demeritt
31