Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10 - Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015.

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to           .

 

Commission File Number:  001-32470

 

Franklin Street Properties Corp.

(Exact name of registrant as specified in its charter)

 

Maryland

 

04-3578653

(State or other jurisdiction of incorporation

 

(I.R.S. Employer Identification No.)

or organization)

 

 

 

401 Edgewater Place, Suite 200

Wakefield, MA 01880

(Address of principal executive offices)(Zip Code)

 

(781) 557-1300

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES  x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x  NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨  NO  x

 

The number of shares of common stock outstanding as of July 24, 2015 was 100,187,405.

 

 

 



Table of Contents

 

Franklin Street Properties Corp.

Form 10-Q

 

Quarterly Report

June 30, 2015

 

Table of Contents

 

 

 

Page

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014

4

 

 

 

 

 

 

Condensed Consolidated Statements of Other Comprehensive Income for the three and six months ended June 30, 2015 and 2014

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7-15

 

 

 

 

 

Item 2.

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

16-30

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

 

 

Item 1A.

Risk Factors

34

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

34

 

 

 

 

 

Item 4.

Mine Safety Disclosures

34

 

 

 

 

 

Item 5.

Other Information

34

 

 

 

 

 

Item 6.

Exhibits

34

 

 

 

 

Signatures

35

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

Franklin Street Properties Corp.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

June 30,

 

December 31,

 

(in thousands, except share and par value amounts)

 

2015

 

2014

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Land

 

$

180,271

 

$

183,930

 

Buildings and improvements

 

1,636,444

 

1,604,984

 

Fixtures and equipment

 

1,800

 

1,677

 

 

 

1,818,515

 

1,790,591

 

Less accumulated depreciation

 

279,172

 

266,284

 

Real estate assets, net

 

1,539,343

 

1,524,307

 

Acquired real estate leases, less accumulated amortization of $110,884 and $101,838, respectively

 

126,926

 

138,714

 

Investment in non-consolidated REITs

 

78,164

 

78,611

 

Cash and cash equivalents

 

15,841

 

7,519

 

Restricted cash

 

48

 

742

 

Tenant rent receivables, less allowance for doubtful accounts of $250 and $325, respectively

 

2,886

 

4,733

 

Straight-line rent receivable, less allowance for doubtful accounts of $50 and $162, respectively

 

46,168

 

47,021

 

Prepaid expenses and other assets

 

9,096

 

10,292

 

Related party mortgage loan receivables

 

93,641

 

93,641

 

Other assets: derivative asset

 

918

 

3,020

 

Office computers and furniture, net of accumulated depreciation of $1,183 and $1,036, respectively

 

562

 

609

 

Deferred leasing commissions, net of accumulated amortization of $18,386 and $16,944, respectively

 

26,508

 

27,181

 

Total assets

 

$

1,940,101

 

$

1,936,390

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Bank note payable

 

$

300,000

 

$

268,000

 

Term loans payable

 

620,000

 

620,000

 

Accounts payable and accrued expenses

 

39,199

 

42,561

 

Accrued compensation

 

2,327

 

3,758

 

Tenant security deposits

 

4,315

 

4,248

 

Other liabilities: derivative liability

 

7,632

 

7,268

 

Acquired unfavorable real estate leases, less accumulated amortization of $9,779 and $8,687, respectively

 

11,082

 

10,908

 

Total liabilities

 

984,555

 

956,743

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.0001 par value, 20,000,000 shares authorized, none issued or outstanding

 

 

 

Common stock, $.0001 par value, 180,000,000 shares authorized,  100,187,405 and 100,187,405 shares issued and outstanding, respectively

 

10

 

10

 

Additional paid-in capital

 

1,273,556

 

1,273,556

 

Accumulated other comprehensive loss

 

(6,714

)

(4,248

)

Accumulated distributions in excess of accumulated earnings

 

(311,306

)

(289,671

)

Total stockholders’ equity

 

955,546

 

979,647

 

Total liabilities and stockholders’ equity

 

$

1,940,101

 

$

1,936,390

 

 

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

 

3



Table of Contents

 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

 

 

 

For the
Three Months Ended
June 30,

 

For the
Six Months Ended
June 30,

 

(in thousands, except per share amounts)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Rental

 

$

58,801

 

$

60,994

 

$

117,814

 

$

122,591

 

Related party revenue:

 

 

 

 

 

 

 

 

 

Management fees and interest income from loans

 

1,412

 

1,671

 

2,885

 

3,314

 

Other

 

20

 

76

 

41

 

99

 

Total revenue

 

60,233

 

62,741

 

120,740

 

126,004

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate operating expenses

 

14,644

 

14,995

 

30,000

 

30,066

 

Real estate taxes and insurance

 

9,469

 

9,763

 

19,517

 

19,014

 

Depreciation and amortization

 

23,207

 

23,563

 

45,879

 

47,863

 

Selling, general and administrative

 

3,401

 

3,148

 

7,092

 

6,420

 

Interest

 

6,365

 

6,891

 

12,552

 

14,067

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

57,086

 

58,360

 

115,040

 

117,430

 

 

 

 

 

 

 

 

 

 

 

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

 

3,147

 

4,381

 

5,700

 

8,574

 

Interest income

 

 

1

 

1

 

2

 

Equity in losses of non-consolidated REITs

 

(38

)

(552

)

(360

)

(1,036

)

Gain on sale of properties, less applicable income tax

 

948

 

 

11,410

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes on income

 

4,057

 

3,830

 

16,751

 

7,540

 

Taxes on income

 

154

 

117

 

315

 

254

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,903

 

$

3,713

 

$

16,436

 

$

7,286

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic and diluted

 

100,187

 

100,187

 

100,187

 

100,187

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted:

 

 

 

 

 

 

 

 

 

Net income per share, basic and diluted

 

$

0.04

 

$

0.04

 

$

0.16

 

$

0.07

 

 

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

 

4



Table of Contents

 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Other Comprehensive Income (Loss)

(Unaudited)

 

 

 

For the
Three Months Ended
June 30,

 

For the
Six Months Ended
June 30,

 

(in thousands)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,903

 

$

3,713

 

$

16,436

 

$

7,286

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative financial instruments

 

2,348

 

(4,335

)

(2,466

)

(6,636

)

Total other comprehensive income (loss)

 

2,348

 

(4,335

)

(2,466

)

(6,636

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

6,251

 

$

(622

)

$

13,970

 

$

650

 

 

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

 

5



Table of Contents

 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the
Six Months Ended
June 30,

 

(in thousands)

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

16,436

 

$

7,286

 

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

 

 

 

 

 

Depreciation and amortization expense

 

46,913

 

48,854

 

Amortization of above market lease

 

(32

)

63

 

Equity in losses of non-consolidated REITs

 

360

 

1,036

 

Gain on sale of properties, less applicable income tax

 

(11,410

)

 

Increase (decrease) in allowance for doubtful accounts

 

(75

)

125

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

694

 

(85

)

Tenant rent receivables

 

1,922

 

2,110

 

Straight-line rents

 

(643

)

(3,323

)

Lease acquisition costs

 

(231

)

(437

)

Prepaid expenses and other assets

 

196

 

503

 

Accounts payable, accrued expenses and other items

 

(4,306

)

(8,405

)

Accrued compensation

 

(1,431

)

(933

)

Tenant security deposits

 

66

 

232

 

Payment of deferred leasing commissions

 

(2,737

)

(3,908

)

Net cash provided by operating activities

 

45,722

 

43,118

 

Cash flows from investing activities:

 

 

 

 

 

Property acquisitions

 

(66,104

)

 

Acquired real estate leases

 

(10,604

)

 

Property improvements, fixtures and equipment

 

(10,333

)

(7,578

)

Distributions in excess of earnings from non-consolidated REITs

 

54

 

54

 

Repayment of related party mortgage loan receivable

 

––

 

13,880

 

Investment in related party mortgage loan receivable

 

 

(2,570

)

Proceeds received on sales of real estate assets

 

55,659

 

 

Net cash provided by (used in) investing activities

 

(31,328

)

3,786

 

Cash flows from financing activities:

 

 

 

 

 

Distributions to stockholders

 

(38,072

)

(38,072

)

Borrowings under bank note payable

 

95,000

 

10,000

 

Repayments of bank note payable

 

(63,000

)

(20,000

)

Net cash used in financing activities

 

(6,072

)

(48,072

)

Net increase in cash and cash equivalents

 

8,322

 

(1,168

)

Cash and cash equivalents, beginning of year

 

7,519

 

19,623

 

Cash and cash equivalents, end of period

 

$

15,841

 

$

18,455

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

Accrued costs for purchase of real estate assets

 

$

2,732

 

$

2,428

 

 

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

 

6



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

Organization

 

Franklin Street Properties Corp. (“FSP Corp.” or the “Company”), holds, directly and indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management LLC, FSP Holdings LLC and FSP Protective TRS Corp.  FSP Property Management LLC provides asset management and property management services.  The Company also has a non-controlling common stock interest in nine corporations organized to operate as real estate investment trusts (“REIT”) and a non-controlling preferred stock interest in two of those REITs.  Collectively, the nine REITs are referred to as the “Sponsored REITs”.

 

As of June 30, 2015, the Company owned and operated a portfolio of real estate consisting of 36 properties, managed nine Sponsored REITs and held five promissory notes secured by mortgages on real estate owned by Sponsored REITs, including one mortgage loan, one construction loan and three revolving lines of credit.  From time-to-time, the Company may acquire real estate, make additional secured loans or acquire a Sponsored REIT.  The Company may also pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, or for geographic or property specific reasons.

 

Properties

 

The following table summarizes the Company’s number of properties and rentable square feet of real estate:

 

 

 

As of June 30,

 

 

 

2015

 

2014

 

Commercial real estate:

 

 

 

 

 

Number of properties

 

36

 

39

 

Rentable square feet

 

9,639,740

 

9,686,215

 

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements of the Company include all the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission.

 

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included.  Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015 or for any other period.

 

Financial Instruments

 

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

 

Recent Accounting Standards

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This update is effective for interim and annual reporting periods beginning after December 15, 2017.  The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the condensed consolidated financial statements.

 

7



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances.  This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted.  The implementation of this update is not expected to cause any significant changes to the condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This update is effective for interim and annual reporting periods beginning after December 15, 2015 and requires retrospective application. The implementation of this update is not expected to cause any material changes to the condensed consolidated financial statements other than the reclassification of debt issuance costs from assets to contra liabilities on the condensed consolidated balance sheets. As of June 30, 2015 and December 31, 2014, $6.6 million and $7.6 million, respectively, would be reclassified from assets to contra liabilities on the condensed consolidated balance sheets.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using: (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments retrospectively. We are currently assessing the potential impact that the adoption of ASU 2015-02 will have on the condensed consolidated financial statements.

 

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

 

Investment in Sponsored REITs:

 

At June 30, 2015 and December 31, 2014, the Company held a common stock interest in 9 and 10 Sponsored REITs, respectively.  The Company holds a non-controlling preferred stock investment in two of these Sponsored REITs, FSP 303 East Wacker Drive Corp. (“East Wacker”) and FSP Grand Boulevard Corp. (“Grand Boulevard”), from which it continues to derive economic benefits and risks.

 

During the year ended December 31, 2014, properties owned by four Sponsored REITs were sold and, thereafter, liquidating distributions for their preferred shareholders were declared and issued.  The Company held a mortgage loan with two of these entities secured by the property owned by FSP Galleria North Corp. (“Galleria”) and the property owned by FSP Highland Place I Corp. (“Highland”).  The loan with Galleria in the principal amount of $13,880,000 was repaid from the proceeds of the sale and the loan with Highland in the principal amount of $3,395,000 was repaid from the proceeds of the sale.

 

During the six months ended June 30, 2015, a property owned by a Sponsored REIT was sold and, thereafter, liquidating distributions for their preferred shareholders were declared and issued.

 

8



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

Equity in losses of investment in non-consolidated REITs:

 

The following table includes equity in losses of investments in non-consolidated REITs

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2015

 

2014

 

Equity in loss of East Wacker

 

$

309

 

$

960

 

Equity in loss of Grand Boulevard

 

51

 

76

 

 

 

$

360

 

$

1,036

 

 

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

 

Equity in losses of East Wacker is derived from the Company’s preferred stock investment in the entity.  In December 2007, the Company purchased 965.75 preferred shares or 43.7% of the outstanding preferred shares of East Wacker for $82,813,000 (which represented $96,575,000 at the offering price net of commissions of $7,726,000, loan fees of $5,553,000 and acquisition fees of $483,000 that were excluded).

 

Equity in losses of Grand Boulevard is derived from the Company’s preferred stock investment in the entity.  In May 2009, the Company purchased 175.5 preferred shares or 27.0% of the outstanding preferred shares of Grand Boulevard for $15,049,000 (which represented $17,550,000 at the offering price net of commissions of $1,404,000, loan fees of $1,009,000 and acquisition fees of $88,000 that were excluded).

 

The Company recorded distributions of $54,000 from non-consolidated REITs during the six months ended June 30, 2015 and 2014.

 

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 $346,000 and $497,000 for the six months ended June 30, 2015 and 2014, respectively.

 

From time to time the Company may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes.  The Company anticipates that each Sponsored REIT Loan will be repaid at maturity or earlier from long term financings of the underlying properties, cash flows from the underlying properties or some other capital event.  Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately one to three years, which may be extended from time to time by one year or longer.  Except for the mortgage loan which bears interest at a fixed rate, advances under each Sponsored REIT Loan bear interest at a rate equal to the 30-day LIBOR rate plus an agreed upon amount of basis points and most advances also require a 50 basis point draw fee.

 

9



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

The following is a summary of the Sponsored REIT Loans outstanding as of June 30, 2015:

 

 

 

 

 

 

 

Maximum

 

Amount

 

 

 

 

 

Interest

 

 

 

 

 

Maturity

 

Amount

 

Drawn at

 

Interest

 

Draw

 

Rate at

 

(dollars in thousands)

 

Location

 

Date

 

of Loan

 

30-Jun-15

 

Rate (1)

 

Fee (2)

 

30-Jun-15

 

Sponsored REIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Satellite Place Corp.

 

Duluth, GA

 

31-Mar-17

 

$

5,500

 

$

5,500

 

L+4.4

%

0.5

%

4.58

%

FSP 1441 Main Street Corp.

 

Columbia, SC

 

31-Mar-16

 

10,800

 

9,000

 

L+4.4

%

0.5

%

4.58

%

FSP Energy Tower I Corp.

 

Houston, TX

 

30-Jun-17

 

20,000

 

8,600

 

L+5.0

%

0.5

%

5.18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured construction loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP 385 Interlocken Development Corp.

 

Broomfield, CO

 

30-Apr-16

 

42,000

 

37,541

 

L+4.4

%

n/a

 

4.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan secured by property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Energy Tower I Corp.

 

Houston, TX

 

30-Jun-17

 

33,000

 

33,000

 

6.41

%

n/a

 

6.41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

111,300

 

$

93,641

 

 

 

 

 

 

 

 


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

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

 

The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $2,539,000 and $2,816,000 for the six months ended June 30, 2015 and 2014, respectively.

 

Non-consolidated REITs:

 

The balance sheet data below for 2015 and 2014 includes the 9 and 10 Sponsored REITs the Company held an interest in as of June 30, 2015 and December 31, 2014, respectively.  The operating data below for 2015 and 2014 include the operations of the 10 and 14 Sponsored REITs in which the Company held an interest in during the six months ended June 30, 2015 and 2014, respectively.

 

Summarized financial information for these Sponsored REITs is as follows:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2015

 

2014

 

Balance Sheet Data (unaudited):

 

 

 

 

 

Real estate, net

 

$

421,429

 

$

451,822

 

Other assets

 

101,701

 

127,259

 

Total liabilities

 

(198,575

)

(203,239

)

Shareholders’ equity

 

$

324,555

 

$

375,842

 

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2015

 

2014

 

Operating Data (unaudited):

 

 

 

 

 

Rental revenues

 

$

28,174

 

$

23,305

 

Other revenues

 

25

 

14

 

Operating and maintenance expenses

 

(15,266

)

(11,746

)

Depreciation and amortization

 

(9,925

)

(7,677

)

Interest expense

 

(4,930

)

(3,431

)

Net income (loss)

 

$

(1,922

)

$

465

 

 

10



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

3.              Bank Note Payable and Term Note Payable

 

BMO Term Loan

 

On October 29, 2014, the Company entered into an Amended and Restated Credit Agreement (the “BMO Credit Agreement”) with the lending institutions referenced in the BMO Credit Agreement and Bank of Montreal, as administrative agent, that continued a single, unsecured term loan borrowing in the amount of $220,000,000 (the “BMO Term Loan”).  On August 26, 2013, the Company drew down the entire $220,000,000 under the BMO Term Loan, which remains fully advanced and outstanding under the BMO Credit Agreement. The BMO Term Loan matures on August 26, 2020. The BMO Credit Agreement also includes an accordion feature that allows up to $50,000,000 of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions.

 

The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at June 30, 2015) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at June 30, 2015).

 

Although the interest rate on the BMO Term Loan is variable, the Company is permitted to hedge the base LIBOR interest rate by entering into an interest rate swap agreement. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum for seven years, until the August 26, 2020 maturity date.  Accordingly, based upon the Company’s credit rating, as of June 30, 2015, the effective interest rate on the BMO Term Loan was 3.97% per annum.

 

The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.  The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, minimum unsecured interest coverage and a maximum ratio of certain investments to total assets. The Company was in compliance with the BMO Term Loan financial covenants as of June 30, 2015.

 

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

 

BAML Credit Facility

 

On October 29, 2014, the Company entered into a Second Amended and Restated Credit Agreement (the “BAML Credit Agreement”) with the lending institutions referenced in the BAML Credit Agreement and those lenders from time to time party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (the “BAML Credit Facility”) that continued an existing unsecured credit facility comprised of both a revolving line of credit (the “BAML Revolver) and a term loan (the “BAML Term Loan”).

 

BAML Revolver Highlights

 

·                  The BAML Revolver is for borrowings, at the Company’s election, of up to $500,000,000.  Borrowings made pursuant to the BAML Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $500,000,000 outstanding at any time.

·                  Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the initial maturity date of October 29, 2018.  The Company has the right to extend the initial maturity date of the BAML Revolver by an additional 12 months, or until October 29, 2019, upon payment of a fee and satisfaction of certain customary conditions.

·                  The BAML Revolver includes an accordion feature that allows for up to $250,000,000 of additional borrowing capacity subject to receipt of lender commitments and satisfaction of certain customary conditions.

 

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Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

3.              Bank Note Payable and Term Note Payable (continued)

 

As of June 30, 2015, there were borrowings of $300,000,000 outstanding under the BAML Revolver.  The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.25% over LIBOR at June 30, 2015) or (ii) a margin over the base rate depending on the Company’s credit rating (0.25% over the base rate at June 30, 2015). The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating. The facility fee is assessed against the total amount of the BAML Revolver, or $500,000,000 (0.25% at June 30, 2015).

 

Based upon the Company’s credit rating, as of June 30, 2015, the weighted average interest rate on the BAML Revolver was 1.43% per annum and there were borrowings of $300,000,000 outstanding.  As of December 31, 2014, the weighted average interest rate on the BAML Revolver was 1.41% per annum and there were borrowings of $268,000,000 outstanding.   The weighted average interest rate on all amounts outstanding on the BAML Revolver during the six months ended June 30, 2015 was approximately 1.43% per annum.  The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2014 was approximately 1.60% per annum.

 

BAML Term Loan Highlights

 

·                  The BAML Term Loan is for $400,000,000.

·                  The BAML Term Loan matures on September 27, 2017.

·                  On September 27, 2012, the Company drew down the entire $400,000,000 and such amount remains fully advanced and outstanding under the BAML Credit Agreement.

 

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.45% over LIBOR at June 30, 2015) or (ii) a margin over the base rate depending on the Company’s credit rating (0.45% over the base rate at June 30, 2015). The actual margin over LIBOR rate or base rate is determined based on the Company’s credit rating.

 

Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into an interest rate swap agreement.  On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the BAML Term Loan at 0.75% per annum for five years, until the September 27, 2017 maturity date.  Accordingly, based upon the Company’s credit rating, as of June 30, 2015, the effective interest rate on the BAML Term Loan was 2.20% per annum.

 

BAML Credit Facility General Information

 

The BAML Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.  The BAML Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, minimum unsecured interest coverage and a maximum ratio of certain investments to total assets. The Company was in compliance with the BAML Credit Facility financial covenants as of June 30, 2015.

 

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

 

4.              Financial Instruments: Derivatives and Hedging

 

On August 26, 2013, the Company fixed the interest rate for seven years on the BMO Credit Agreement with an interest rate swap agreement (the “BMO Interest Rate Swap”) and on September 27, 2012, the Company fixed the interest rate for five years on the BAML Term Loan with an interest rate swap agreement (the “BAML Interest Rate Swap”). The variable rates that were fixed under the BMO Interest Rate Swap and the BAML Interest Rate Swap are described in Note 3.

 

12



Table of Contents

 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4.              Financial Instruments: Derivatives and Hedging (continued)

 

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

 

The following table summarizes the notional and fair value of our derivative financial instruments at June 30, 2015.  The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.

 

 

 

Notional

 

Strike

 

Effective

 

Expiration

 

Fair

 

(in thousands)

 

Value

 

Rate

 

Date

 

Date

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

BMO Interest Rate Swap

 

$

220,000

 

2.32

%

Aug-13

 

Aug-20

 

$

(7,632

)

BAML Interest Rate Swap

 

$

400,000

 

0.75

%

Sep-12

 

Sep-17

 

$

918

 

 

On June 30, 2015, the BMO Interest Rate Swap was reported as a liability at its fair value of approximately $7.6 million and the BAML Interest Rate Swap was reported as an asset at its fair value of approximately $0.9 million.  These are included in other liabilities: derivative liability and other assets: derivative asset on the condensed consolidated balance sheet at June 30, 2015 and December 31, 2014, respectively.  Offsetting adjustments are reported as unrealized gains or losses on derivative financial instruments in accumulated other comprehensive income of $2.5 million.  During the six months ended June 30, 2015, $3.5 million was reclassified out of other comprehensive income and into interest expense.

 

Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings.  We estimate that approximately $1.1 million of the current balance held in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

 

We are hedging the exposure to variability in anticipated future interest payments on existing debt.

 

The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance risk.  The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the condensed consolidated balance sheets.

 

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 June 30, 2015 and 2014, respectively.

 

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Table of Contents

 

Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

6.              Stockholders’ Equity

 

As of June 30, 2015, the Company had 100,187,405 shares of common stock outstanding.  The Company declared and paid dividends as follows (in thousands, except per share amounts):

 

Quarter Paid

 

Dividends Per 
Share

 

Total 
Dividends

 

 

 

 

 

 

 

First quarter of 2015

 

$

0.19

 

$

19,036

 

Second quarter of 2015

 

$

0.19

 

$

19,035

 

 

 

 

 

 

 

First quarter of 2014

 

$

0.19

 

$

19,036

 

Second quarter of 2014

 

$

0.19

 

$

19,035

 

 

7.                        Income Taxes

 

General

 

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only.  The Company must comply with a variety of restrictions to maintain its status as a REIT.  These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.

 

One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”).  In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 25% of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets.   FSP Investments and FSP Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code.

 

Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities.  In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.

 

The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption.  Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future.  The Company’s effective tax rate was not affected by the adoption.  The Company and one or more of its subsidiaries files income tax returns in the U.S federal jurisdiction and various state jurisdictions.  The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2011 and thereafter.

 

The Company is subject to business tax (the “Revised Texas Franchise Tax”).  The Revised Texas Franchise Tax is a tax at a rate of approximately 0.7% of revenues at Texas properties commencing with 2007 revenues.  Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts.  Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure it is considered an income tax.  The Company recorded a provision for the Revised Texas Franchise Tax of $295,000 and $244,000 for the six months ended June 30, 2015 and 2014, respectively.

 

14



Table of Contents

 

Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

7.                        Income Taxes (continued)

 

Net operating losses

 

Section 382 of the Code restricts a corporation’s ability to use net operating losses (“NOLs”) to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured.  The gross amount of NOLs available to the Company was $13,041,000, as of June 30, 2015 and December 31, 2014.

 

Income Tax Expense

 

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

 

 

 

For the

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Revised Texas franchise tax

 

$

295

 

$

244

 

Other Taxes

 

20

 

10

 

Income tax expense

 

$

315

 

$

254

 

 

Taxes on income are a current tax expense.  No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.

 

8.                        Dispositions of properties

 

The Company sold an office property located in Plano, Texas on February 23, 2015 at a $1.5 million gain, an office property located in Eden Prairie, Minnesota on March 31, 2015 at a $9.0 million gain and an office property located in Charlotte, North Carolina on May 13, 2015 at a $0.9 million gain.  The disposal of the properties does not represent a strategic shift that has a major effect on the Company’s operations and financial results.  Accordingly, the properties remain classified within continuing operations for all periods presented.

 

9.                         Subsequent Events

 

On July 10, 2015, the Board of Directors of the Company declared a cash distribution of $0.19 per share of common stock payable on August 13, 2015 to stockholders of record on July 24, 2015.

 

15



Table of Contents

 

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, 2014.  Historical results and percentage relationships set forth in the condensed consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations.  The following discussion and other parts of this Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements.  Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, economic conditions in the United States, disruptions in the debt markets, economic conditions in the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us, uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.  See Part II, Item 1A. “Risk Factors” below.  Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.

 

Overview

 

FSP Corp., or we, or the Company, operates in the real estate operations segment. The real estate operations segment involves real estate rental operations, leasing, secured financing of real estate and services provided for asset management, property management, property acquisitions, dispositions and development.  Our current strategy is to invest in select urban infill and central business district properties, with primary emphasis on our top five markets of Atlanta, Dallas, Denver, Houston and Minneapolis.  We believe that our top five markets have macro-economic drivers that have the potential to increase occupancies and rents.  We will also monitor San Diego, Silicon Valley, Greater Boston, Raleigh-Durham, and Greater Washington, DC, as well as other markets, for opportunistic investments.   FSP Corp. seeks value-oriented investments with an eye towards long-term growth and appreciation, as well as current income.

 

The main factor that affects our real estate operations is the broad economic market conditions in the United States.  These market conditions affect the occupancy levels and the rent levels on both a national and local level.  We have no influence on broader economic/market conditions.  We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.

 

Critical Accounting Policies

 

We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies.  We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances.  On an on-going basis, we evaluate our estimates.  In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information.  The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates.  We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations.  No changes to our critical accounting policies have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Recent Accounting Standards

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This update is effective for interim and annual reporting periods beginning after December 15, 2017.  The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the condensed consolidated financial statements.

 

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Table of Contents

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances.  This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted.  The implementation of this update is not expected to cause any significant changes to the condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This update is effective for interim and annual reporting periods beginning after December 15, 2015 and requires retrospective application. The implementation of this update is not expected to cause any material changes to the condensed consolidated financial statements other than the reclassification of debt issuance costs from assets to contra liabilities on the condensed consolidated balance sheets. As of June 30, 2015 and December 31, 2014, $6.6 million and $7.6 million, respectively, would be reclassified from assets to contra liabilities on the condensed consolidated balance sheets.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using: (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments retrospectively. We are currently assessing the potential impact that the adoption of ASU 2015-02 will have on the condensed consolidated financial statements.

 

Trends and Uncertainties

 

Economic Conditions

 

The economy in the United States is continuing to experience a period of slow economic growth, with slowly declining unemployment from recent high levels, which directly affects the demand for office space, our primary income producing asset.  The broad economic market conditions in the United States are affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow economic growth and/or recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit and interest rates.  In addition, the Federal Reserve Bank has indicated that it may begin to raise interest rates later in 2015.  Any increase in interest rates could result in increased borrowing costs to us.  However, we could also benefit from any further improved economic fundamentals and increasing levels of employment.  We believe that the economy is in the early stages of a cyclically-slower but prolonged broad-based upswing.  However, future economic factors may negatively affect real estate values, occupancy levels and property income.

 

Real Estate Operations

 

Leasing

 

Our real estate portfolio was approximately 90.6% leased as of June 30, 2015, a decrease from 92.8% as of December 31, 2014.  The 2.2% decrease in leased space was a result of lease expirations and terminations during 2015 that were not leased at June 30, 2015, and the impact of the acquisition of a property on April 8, 2015 with 442,130 rentable square feet that was approximately 80% leased and the sale of three properties in 2015 with approximately 380,000 of rentable square feet in the aggregate that were approximately 98% leased in the aggregate.  As of June 30, 2015, we had 902,000 square feet of vacancy in our portfolio compared to 689,000 square feet of vacancy at December 31, 2014.  During the six months ended June 30, 2015, we leased approximately 547,000 square feet of office space, of which approximately 329,000 square feet were with existing tenants, at a weighted average term of 4.8 years.  On average, tenant improvements for such leases were $15.97 per square foot, lease commissions were $5.80 per square foot and rent concessions were approximately three months of free rent.  Average GAAP base rents under such leases were $26.38 per square foot, or 12.9% higher than average rents in the respective properties as applicable compared to the year ended December 31, 2014.

 

As of June 30, 2015, leases for approximately 2.3% and 11.3% of the square footage in our portfolio are scheduled to expire during 2015 and 2016, respectively.  As the third quarter of 2015 begins, we believe that our property portfolio is well stabilized, with a balanced lease expiration schedule.

 

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Table of Contents

 

While we cannot generally predict when existing vacancy in our real estate portfolio will be leased or if existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are located, which could be above or below the expiring rates.  Also, even as the economy continues to slowly recover, we believe the potential for any of our tenants to default on its lease or to seek the protection of bankruptcy still exists.  If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment.  In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.

 

Real Estate Acquisition and Investment Activity

 

During 2015:

 

·                  on April 8, we acquired an office property with approximately 442,130 rentable square feet of space for $78.0 million located in the Central Perimeter Submarket of Atlanta, Georgia.

 

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

 

During 2014:

 

·                  we funded advances on Sponsored REIT Loans for revolving lines of credit in the aggregate amount of approximately $11.2 million;

·                  on June 19, we received approximately $13.9 million from FSP Galleria North Corp. as repayment in full of a Sponsored REIT Loan; and

·                  on December 23, we received approximately $3.4 million from FSP Highland Place I Corp. as repayment in full of a Sponsored REIT Loan.

 

Dispositions of Properties

 

During 2015, we sold an office property located in Plano, Texas on February 23, 2015 at a $1.5 million gain, sold an office property located in Eden Prairie, Minnesota on March 31, 2015 at a $9.0 million gain and sold an office property located in Charlotte, North Carolina on May 13, 2015 at a $0.9 million gain.  During 2014, we sold an office property located in Colorado Springs, Colorado on December 3, 2014 at a $0.9 million gain.

 

We will continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time in the ordinary course of business.  We believe that the current property sales environment continues to improve in many markets relative to both liquidity and pricing.  We believe that both improving office property fundamentals as well as attractive financing availability will likely be required to continue improvement in the marketplace for potential property dispositions.  As an important part of our total return strategy, we intend to be active in property dispositions when we believe that market conditions warrant such activity and, as a consequence, we continuously review and evaluate our portfolio of properties for potentially advantageous dispositions.

 

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Table of Contents

 

Results of Operations

 

The following table shows results for the three months ended June 30, 2015 and 2014:

 

 

 

Three months ended June 30,

 

(in thousands)

 

2015

 

2014

 

Change

 

Revenue:

 

 

 

 

 

 

 

Rental

 

$

58,801

 

$

60,994

 

$

(2,193

)

Related party revenue:

 

 

 

 

 

 

 

Management fees and interest income from loans

 

1,412

 

1,671

 

(259

)

Other

 

20

 

76

 

(56

)

Total revenue

 

60,233

 

62,741

 

(2,508

)

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

14,644

 

14,995

 

(351

)

Real estate taxes and insurance

 

9,469

 

9,763

 

(294

)

Depreciation and amortization

 

23,207

 

23,563

 

(356

)

Selling, general and administrative

 

3,401

 

3,148

 

253

 

Interest

 

6,365

 

6,891

 

(526

)

Total expenses

 

57,086

 

58,360

 

(1,274

)

 

 

 

 

 

 

 

 

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

 

3,147

 

4,381

 

(1,234

)

Interest income

 

 

1

 

(1

)

Equity in losses of non-consolidated REITs

 

(38

)

(552

)

514

 

Gain on sale of properties, less applicable income tax

 

948

 

 

948

 

 

 

 

 

 

 

 

 

Income before taxes on income

 

4,057

 

3,830

 

227

 

Taxes on income

 

154

 

117

 

37

 

 

 

 

 

 

 

 

 

Net income

 

$

3,903

 

$

3,713

 

$

190

 

 

Comparison of the three months ended June 30, 2015 to the three months ended June 30, 2014:

 

Revenues

 

Total revenues decreased by $2.5 million to $60.2 million for the quarter ended June 30, 2015, as compared to the quarter ended June 30, 2014.  The decrease was primarily a result of:

 

·                  A decrease in rental revenue of approximately $2.2 million arising primarily from loss of revenue from the disposition of a property on December 3, 2014, the disposition of another property on February 23, 2015, the disposition of another property on March 31, 2015 and the disposition of another property on May 13, 2015.  In addition, our rental revenues decreased because leased space decreased approximately 3.5 percentage points to 90.6% in the real estate portfolio at June 30, 2015 compared to June 30, 2014.  These decreases were partially offset by increased rental revenue for a property we acquired on April 8, 2015.

·                  A decrease in interest income from loans to Sponsored REITs of approximately $0.3 million as a result of repayments of Sponsored REIT Loans in the last twelve months.

 

Expenses

 

Total expenses decreased by $1.3 million to $57.1 million for the quarter ended June 30, 2015, as compared to the quarter ended June 30, 2014.  The decrease was primarily a result of:

 

·                  A decrease in depreciation and amortization of $0.4 million as a result of the disposition of four properties in the last twelve months, which was partially offset by depreciation and amortization of a property we acquired on April 8, 2015.

 

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·                  A decrease to interest expense of approximately $0.5 million to $6.4 million for the three months ended June 30, 2015 compared to the same period in 2014.  The decrease was primarily attributable to lower interest rates during the three months ended June 30, 2015 compared to the same period in 2014.

·                  A decrease in real estate operating expenses and real estate taxes and insurance of approximately $0.6 million, which was primarily from the disposition of four properties in the last twelve months, which was partially offset by real estate operating expenses from a property we acquired on April 8, 2015.

 

These decreases were partially offset by:

 

·                  An increase in selling, general and administrative expenses of approximately $0.2 million, which was primarily the result of increased personnel related expenses and professional fees.  We had 39 and 38 employees as of June 30, 2015 and 2014, respectively, at our headquarters in Wakefield, Massachusetts.

 

Equity in losses of non-consolidated REITs

 

Equity in losses from non-consolidated REITs decreased approximately $0.5 million to a loss of $38,000 during the three months ended June 30, 2015 compared to the same period in 2014.  The decrease was primarily because equity in loss from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, decreased $0.5 million during the three months ended June 30, 2015 compared to the same period in 2014.

 

Gain on sale of properties, less applicable income tax

 

During the three months ended June 30, 2015, we recorded a gain on sale of a property.  We sold an office property located in Charlotte, North Carolina on May 13, 2015 at a $0.9 million gain.  During the three months ended June 30, 2014, we did not sell any properties.

 

Taxes on income

 

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $32,000 and federal and other income taxes decreased $8,000 for the three months ended June 30, 2015, compared to the three months ended June 30, 2014.

 

Net Income

 

Net Income for the three months ended June 30, 2015 was $3.9 million compared to $3.7 million for the three months ended June 30, 2014, for the reasons described above.

 

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Table of Contents

 

The following table shows results for the six months ended June 30, 2015 and 2014:

 

 

 

Six months ended June 30,

 

(in thousands)

 

2015

 

2014

 

Change

 

Revenue:

 

 

 

 

 

 

 

Rental

 

$

117,814

 

$

122,591

 

$

(4,777

)

Related party revenue:

 

 

 

 

 

 

 

Management fees and interest income from loans

 

2,885

 

3,314

 

(429

)

Other

 

41

 

99

 

(58

)

Total revenue

 

120,740

 

126,004

 

(5,264

)

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

30,000

 

30,066

 

(66

)

Real estate taxes and insurance

 

19,517

 

19,014

 

503

 

Depreciation and amortization

 

45,879

 

47,863

 

(1,984

)

Selling, general and administrative

 

7,092

 

6,420

 

672

 

Interest

 

12,552

 

14,067

 

(1,515

)

Total expenses

 

115,040

 

117,430

 

(2,390

)

 

 

 

 

 

 

 

 

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

 

5,700

 

8,574

 

(2,874

)

Interest income

 

1

 

2

 

(1

)

Equity in losses of non-consolidated REITs

 

(360

)

(1,036

)

676

 

Gain on sale of properties, less applicable income tax

 

11,410

 

 

11,410

 

 

 

 

 

 

 

 

 

Income before taxes on income

 

16,751

 

7,540

 

9,211

 

Taxes on income

 

315

 

254

 

61

 

 

 

 

 

 

 

 

 

Net income

 

$

16,436

 

$

7,286

 

$

9,150

 

 

Comparison of the six months ended June 30, 2015 to the six months ended June 30, 2014:

 

Revenues

 

Total revenues decreased by $5.3 million to $120.7 million for the six months ended June 30, 2015, as compared to the six months ended June 30, 2014.  The decrease was primarily a result of:

 

·                  A decrease in rental revenue of approximately $4.8 million arising primarily from loss of revenue from the disposition of a property on December 3, 2014, the disposition of another property on February 23, 2015, the disposition of another property on March 31, 2015 and the disposition of another property on May 13, 2015.  In addition, our rental revenues decreased because leased space decreased approximately 3.5 percentage points to 90.6% in the real estate portfolio at June 30, 2015 compared to June 30, 2014.    These decreases were partially offset by increased rental revenue for a property we acquired on April 8, 2015.

·                  A decrease in interest income from loans to Sponsored REITs of approximately $0.4 million as a result of repayments of Sponsored REIT Loans in the last twelve months.

 

Expenses

 

Total expenses decreased by $2.4 million to $115.0 million for the six months ended June 30, 2015, as compared to the six months ended June 30, 2014.  The decrease was primarily a result of:

 

·                  A decrease in depreciation and amortization of $2.0 million as a result of the disposition of four properties over the last twelve months, which was partially offset by depreciation and amortization of a property we acquired on April 8, 2015.

·                  A decrease to interest expense of approximately $1.5 million to $12.6 million for the six months ended June 30, 2015 compared to the same period in 2014.  The decrease was attributable to a lower amount of debt outstanding and lower interest rates during the six months ended June 30, 2015 compared to the same period in 2014.

 

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Table of Contents

 

These decreases were partially offset by:

 

·                  An increase in real estate operating expenses and real estate taxes and insurance of approximately $0.4 million, which was primarily from increases to real estate taxes and the acquisition of a property on April 8, 2015 and was  partially offset by dispositions of four properties over the last twelve months.

·                  An increase in selling, general and administrative expenses of approximately $0.7 million, which was primarily the result of increased personnel related expenses and professional fees.  We had 39 and 38 employees as of June 30, 2015 and 2014, respectively, at our headquarters in Wakefield, Massachusetts.

 

Equity in losses of non-consolidated REITs

 

Equity in losses from non-consolidated REITs decreased approximately $0.7 million to a loss of $0.4 million during the six months ended June 30, 2015 compared to the same period in 2014.  The decrease was primarily because equity in loss from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, decreased $0.7 million during the six months ended June 30, 2015 compared to the same period in 2014.

 

Gain on sale of properties, less applicable income tax

 

During the six months ended June 30, 2015, we recorded gains on sale of three properties.  We sold an office property located in Plano, Texas on February 23, 2015 at a $1.5 million gain, an office property located in Eden Prairie, Minnesota on March 31, 2015 at a $9.0 million gain and an office property located in Charlotte, North Carolina on May 13, 2015 at a $0.9 million gain.  During the six months ended June 30, 2014, we did not sell any properties.

 

Taxes on income

 

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $51,000 and federal and other income taxes increased $10,000 for the six months ended June 30, 2015, compared to the six months ended June 30, 2014.

 

Net Income

 

Net Income for the six months ended June 30, 2015 was $16.4 million compared to $7.3 million for the six months ended June 30, 2014, for the reasons described above.

 

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Table of Contents

 

Non-GAAP Financial Measures

 

Funds From Operations

 

The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as management believes that FFO represents the most accurate measure of activity and is the basis for distributions paid to equity holders.  The Company defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and acquisition costs of newly acquired properties that are not capitalized, plus depreciation and amortization, including amortization of acquired above and below market lease intangibles and impairment charges on properties or investments in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.

 

FFO should not be considered as an alternative to net income (determined in accordance with GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.

 

Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT may define this term in a different manner.  We have included the NAREIT FFO definition in our table and note that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do.

 

We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be examined in connection with net income and cash flows from operating, investing and financing activities in the consolidated financial statements.

 

The calculations of FFO are shown in the following table:

 

 

 

For the

 

For the

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands):

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,903

 

$

3,713

 

$

16,436

 

$

7,286

 

Gain on sale or properties, less applicable income tax

 

(948

)

 

(11,410

)

 

Equity in losses of non-consolidated REITs

 

38

 

552

 

360

 

1,036

 

FFO from non-consolidated REITs

 

885

 

351

 

1,486

 

770

 

Depreciation and amortization

 

23,168

 

23,638

 

45,846

 

47,927

 

NAREIT FFO

 

27,046

 

28,254

 

52,718

 

57,019

 

Acquisition costs of new properties

 

142

 

 

142

 

14

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

27,188

 

$

28,254

 

$

52,860

 

$

57,033

 

 

Net Operating Income (NOI)

 

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

 

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Table of Contents

 

Net Operating Income (NOI)*

 

 

 

Rentable

 

 

 

 

 

Six Months

 

 

 

 

 

Six Months

 

 

 

 

 

 

 

Square Feet

 

Three Months Ended

 

Ended

 

Three Months Ended

 

Ended

 

Inc

 

%

 

(in thousands)

 

or RSF

 

31-Mar-15

 

30-Jun-15

 

30-Jun-15

 

31-Mar-14

 

30-Jun-14

 

30-Jun-14

 

(Dec)

 

Change

 

Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

 

1,333

 

$

4,736

 

$

4,648

 

$

9,384

 

$

4,577

 

$

4,655

 

$

9,232

 

$

152

 

1.6

%

MidWest

 

1,530

 

3,469

 

3,563

 

7,032

 

4,586

 

4,541

 

9,127

 

(2,095

)

-23.0

%

South

 

4,026

 

15,781

 

15,995

 

31,776

 

16,796

 

16,183

 

32,979

 

(1,203

)

-3.6

%

West

 

2,309

 

8,216

 

8,571

 

16,787

 

9,388

 

9,290

 

18,678

 

(1,891

)

-10.1

%

Same Store

 

9,198

 

32,202

 

32,777

 

64,979

 

35,347

 

34,669

 

70,016

 

(5,037

)

-7.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

442

 

 

1,057

 

1,057

 

 

 

 

1,057

 

1.5

%

Property NOI from the continuing portfolio

 

9,640

 

32,202

 

33,834

 

66,036

 

35,347

 

34,669

 

70,016

 

(3,980

)

-5.7

%

Dispositions

 

 

 

822

 

61

 

883

 

1,226

 

1,257

 

2,483

 

(1,600

)

-2.1

%

Property NOI

 

 

 

$

33,024

 

$

33,895

 

$

66,919

 

$

36,573

 

$

35,926

 

$

72,499

 

$

(5,580

)

-7.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store

 

 

 

$

32,202

 

$

32,777

 

$

64,979

 

$

35,347

 

$

34,669

 

$

70,016

 

$

(5,037

)

-7.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Nonrecurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Items in NOI (a)

 

 

 

75

 

81

 

156

 

707

 

287

 

994

 

(838

)

1.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store

 

 

 

$

32,127

 

$

32,696

 

$

64,823

 

$

34,640

 

$

34,382

 

$

69,022

 

$

(4,199

)

-6.1

%

 

 

 

Three Months Ended

 

Six Months
Ended

 

Three Months Ended

 

Six Months
Ended

 

Reconciliation to Net income

 

31-Mar-15

 

30-Jun-15

 

30-Jun-15

 

31-Mar-14

 

30-Jun-14

 

30-Jun-14

 

Net Income

 

$

12,533

 

$

3,903

 

$

16,436

 

$

3,573

 

$

3,713

 

$

7,286

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of properties, less applicable income taxes

 

(10,462

)

(948

)

(11,410

)

 

 

 

Management fee income

 

(643

)

(559

)

(1,202

)

(646

)

(682

)

(1,328

)

Depreciation and amortization

 

22,672

 

23,207

 

45,879

 

24,300

 

23,563

 

47,863

 

Amortization of above/below market leases

 

6

 

(39

)

(33

)

(11

)

74

 

63

 

Selling, general and administrative

 

3,691

 

3,401

 

7,092

 

3,272

 

3,148

 

6,420

 

Interest expense

 

6,187

 

6,365

 

12,552

 

7,176

 

6,891

 

14,067

 

Interest income

 

(1,262

)

(1,278

)

(2,540

)

(1,410

)

(1,408

)

(2,818

)

Equity in losses of non-consolidated REITs

 

322

 

38

 

360

 

484

 

552

 

1,036

 

Non-property specific items, net

 

(20

)

(195

)

(215

)

(165

)

75

 

(90

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property NOI

 

$

33,024

 

$

33,895

 

$

66,919

 

$

36,573

 

$

35,926

 

$

72,499

 

 


(a)       Nonrecurring Items in NOI include proceeds from bankruptcies, lease termination fees or other significant nonrecurring income or expenses, which may affect comparability.

 

*Excludes NOI from investments in and interest income from secured loans to non-consolidated REITs.

 

24



Table of Contents

 

The information presented below provides the weighted average GAAP rent per square foot for the six months ending June 30, 2015 for our properties and weighted occupancy square feet and percentages.  GAAP rent includes the impact of tenant concessions and reimbursements.  This table does not include information about properties held by our investments in nonconsolidated REITs or those to which we have provided Sponsored REIT Loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupied

 

Weighted

 

 

 

 

 

 

 

Year Built

 

 

 

Weighted

 

Percentage as of

 

Average

 

 

 

 

 

 

 

or

 

Net Rentable

 

Occupied

 

June 30,

 

Rent per Occupied

 

Property Name

 

City

 

State

 

Renovated

 

Square Feet

 

Sq. Ft.

 

2015(a)

 

Square Feet (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forest Park

 

Charlotte

 

NC

 

1999

 

62,212

 

62,212

 

100.0

%

$

13.77

 

Meadow Point

 

Chantilly

 

VA

 

1999

 

138,537

 

128,313

 

92.6

%

27.29

 

Innsbrook

 

Glen Allen

 

VA

 

1999

 

298,456

 

298,187

 

99.9

%

18.74

 

East Baltimore

 

Baltimore

 

MD

 

1989

 

325,445

 

264,522

 

81.3

%

23.13

 

Loudoun Tech Center

 

Dulles

 

VA

 

1999

 

136,658

 

125,753

 

92.0

%

18.53

 

Stonecroft

 

Chantilly

 

VA

 

2008

 

111,469

 

111,469

 

100.0

%

37.76

 

Emperor Boulevard

 

Durham

 

NC

 

2009

 

259,531

 

259,531

 

100.0

%

36.18

 

East total

 

 

 

 

 

 

 

1,332,308

 

1,249,987

 

93.8

%

25.59

 

Northwest Point

 

Elk Grove Village

 

IL

 

1999

 

176,848

 

176,848

 

100.0

%

23.17

 

909 Davis Street

 

Evanston

 

IL

 

2002

 

195,245

 

192,102

 

98.4

%

35.91

 

River Crossing

 

Indianapolis

 

IN

 

1998

 

205,059

 

198,292

 

96.7

%

19.55

 

Timberlake

 

Chesterfield

 

MO

 

1999

 

234,023

 

102,338

 

43.7

%

24.03

 

Timberlake East

 

Chesterfield

 

MO

 

2000

 

116,197

 

24,297

 

20.9

%

21.03

 

Lakeside Crossing

 

Maryland Heights

 

MO

 

2008

 

127,778

 

127,778

 

100.0

%

24.47

 

121 South 8th Street

 

Minneapolis

 

MN

 

1974

 

475,012

 

428,461

 

90.2

%

15.34

 

Midwest total

 

 

 

 

 

 

 

1,530,162

 

1,250,115

 

81.7

%

22.03

 

Blue Lagoon Drive

 

Miami

 

FL

 

2002

 

212,619

 

212,619

 

100.0

%

23.28

 

One Overton Place

 

Atlanta

 

GA

 

2002

 

387,267

 

302,378

 

78.1

%

24.82

 

Park Ten

 

Houston

 

TX

 

1999

 

157,460

 

99,357

 

63.1

%

31.66

 

Addison Circle

 

Addison

 

TX

 

1999

 

289,974

 

249,813

 

86.2

%

23.77

 

Collins Crossing

 

Richardson

 

TX

 

1999

 

300,472

 

299,000

 

99.5

%

24.15

 

Eldridge Green

 

Houston

 

TX

 

1999

 

248,399

 

248,399

 

100.0

%

31.37

 

Park Ten Phase II

 

Houston

 

TX

 

2006

 

156,746

 

156,746

 

100.0

%

31.43

 

 

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Table of Contents

 

The information presented below provides the weighted average GAAP rent per square foot for the six months ending June 30, 2015 for our properties and weighted occupancy square feet and percentages.  GAAP rent includes the impact of tenant concessions and reimbursements.  This table does not include information about properties held by our investments in nonconsolidated REITs or those to which we have provided Sponsored REIT Loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupied

 

Weighted

 

 

 

 

 

 

 

Year Built

 

 

 

Weighted

 

Percentage as of

 

Average

 

 

 

 

 

 

 

or

 

Net Rentable

 

Occupied

 

June 30,

 

Rent per Occupied

 

Property Name

 

City

 

State

 

Renovated

 

Square Feet

 

Sq. Ft.

 

2015 (a)

 

Square Feet (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Plaza

 

Addison

 

TX

 

1985

 

218,934

 

192,465

 

87.9

%

20.65

 

Legacy Tennyson Center

 

Plano

 

TX

 

1999/2008

 

202,600

 

202,600

 

100.0

%

17.60

 

One Legacy Circle

 

Plano

 

TX

 

2008

 

214,110

 

214,110

 

100.0

%

33.33

 

One Ravinia Drive

 

Atlanta

 

GA

 

1985

 

386,603

 

368,046

 

95.2

%

22.82

 

Two Ravinia Drive

 

Atlanta

 

GA

 

1987

 

442,130

 

335,621

 

75.9

%

24.79

 

Westchase I & II

 

Houston

 

TX

 

1983/2008

 

629,025

 

605,248

 

96.2

%

33.83

 

999 Peachtree

 

Atlanta

 

GA

 

1987

 

621,946

 

595,451

 

95.7

%

28.90

 

South Total

 

 

 

 

 

 

 

4,468,285

 

4,081,852

 

91.4

%

27.08

 

380 Interlocken

 

Broomfield

 

CO

 

2000

 

240,185

 

230,169

 

95.8

%

29.39

 

1999 Broadway

 

Denver

 

CO

 

1986

 

676,379

 

586,962

 

86.8

%

32.16

 

1001 17th Street

 

Denver

 

CO

 

1977/2006

 

655,420

 

544,851

 

83.1

%

34.65

 

Greenwood Plaza

 

Englewood

 

CO

 

2000

 

196,236

 

196,236

 

100.0

%

24.48

 

390 Interlocken

 

Broomfield

 

CO

 

2002

 

241,516

 

172,201

 

71.3

%

28.40

 

Hillview Center

 

Milpitas

 

CA

 

1984

 

36,288

 

36,288

 

100.0

%

16.28

 

Federal Way

 

Federal Way

 

WA

 

1982

 

117,010

 

67,515

 

57.7

%

18.65

 

Montague Business Center

 

San Jose

 

CA

 

1982

 

145,951

 

118,381

 

81.1

%

16.37

 

West Total

 

 

 

 

 

 

 

2,308,985

 

1,952,602

 

84.6

%

29.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

 

 

 

 

 

 

9,639,740

 

8,534,557

 

88.5

%

26.73

 

 


(a)              Based on weighted occupied square feet for the six months ended June 30, 2015, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b)             Represents annualized GAAP rental revenue for the six months ended June 30, 2015 per weighted occupied square foot.

 

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Table of Contents

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $15.8 million and $7.5 million at June 30, 2015 and December 31, 2014, respectively. The increase of $8.3 million is attributable to $45.7 million provided by operating activities less $31.3 million used in investing activities, less $6.1 million used in financing activities.  Management believes that existing cash, cash anticipated to be generated internally by operations and our existing debt financing will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 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.  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 significant part upon the level of rental income from our real properties.

 

Operating Activities

 

The cash provided by our operating activities of $45.7 million is primarily attributable to net income of $16.4 million excluding the gain on sale of properties of $11.4 million, plus the add-back of $46.5 million of non-cash activities, a $1.9 million decrease in tenant rent receivables, a $0.7 million decrease in restricted cash and a $0.2 million decrease in prepaid expenses.  These increases were partially offset by a $5.7 million decrease in accounts payable and accrued expenses, $2.7 million in payments of deferred leasing commissions and a $0.2 million increase in lease acquisition costs.

 

Investing Activities

 

Our cash used in investing activities for the six months ended June 30, 2015 of $31.3 million is primarily attributable to the acquisition of a property for approximately $76.7 million and purchases of real estate assets and office equipment investments and office equipment of approximately $10.3 million.  These uses were partially offset by $55.7 million in proceeds received from the sale of three properties.

 

Financing Activities

 

Our cash used by financing activities for the six months ended June 30, 2015 of $6.1 million is primarily attributable to distributions paid to stockholders of $38.1 million less net borrowings under the BAML Revolver (as defined below) of $32.0 million.

 

BMO Term Loan

 

On October 29, 2014, the Company entered into an Amended and Restated Credit Agreement (the “BMO Credit Agreement”) with the lending institutions referenced in the BMO Credit Agreement and Bank of Montreal, as administrative agent, that continued a single, unsecured term loan borrowing in the amount of $220,000,000 (the “BMO Term Loan”).  On August 26, 2013, the Company drew down the entire $220,000,000 under the BMO Term Loan, which remains fully advanced and outstanding under the BMO Credit Agreement. The BMO Term Loan matures on August 26, 2020. The BMO Credit Agreement also includes an accordion feature that allows up to $50,000,000 of additional loans, subject to receipt of lender commitments and satisfaction of certain customary conditions.

 

The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the Company’s credit rating (165 basis points over LIBOR at June 30, 2015) or (ii) a number of basis points over the base rate depending on the Company’s credit rating (65 basis points over the base rate at June 30, 2015).

 

Although the interest rate on the BMO Term Loan is variable, the Company is permitted to hedge the base LIBOR interest rate by entering into an interest rate swap agreement. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum for seven years, until the August 26, 2020 maturity date.  Accordingly, based upon the Company’s credit rating, as of June 30, 2015, the effective interest rate on the BMO Term Loan was 3.97% per annum.

 

The BMO Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.  The BMO Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, minimum unsecured interest coverage and a maximum ratio of certain investments to total assets. The Company was in compliance with the BMO Term Loan financial covenants as of June 30, 2015.

 

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Table of Contents

 

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

 

BAML Credit Facility

 

On October 29, 2014, the Company entered into a Second Amended and Restated Credit Agreement (the “BAML Credit Agreement”) with the lending institutions referenced in the BAML Credit Agreement and those lenders from time to time party thereto and Bank of America, N.A., as administrative agent, L/C Issuer and Swing Line Lender (the “BAML Credit Facility”) that continued an existing unsecured credit facility comprised of both a revolving line of credit (the “BAML Revolver) and a term loan (the “BAML Term Loan”).

 

BAML Revolver Highlights

 

·                  The BAML Revolver is for borrowings, at the Company’s election, of up to $500,000,000.  Borrowings made pursuant to the BAML Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed $500,000,000 outstanding at any time.

·                  Borrowings made pursuant to the BAML Revolver may be borrowed, repaid and reborrowed from time to time until the initial maturity date of October 29, 2018.  The Company has the right to extend the initial maturity date of the BAML Revolver by an additional 12 months, or until October 29, 2019, upon payment of a fee and satisfaction of certain customary conditions.

·                  The BAML Revolver includes an accordion feature that allows for up to $250,000,000 of additional borrowing capacity subject to receipt of lender commitments and satisfaction of certain customary conditions.

 

As of June 30, 2015, there were borrowings of $300,000,000 outstanding under the BAML Revolver.  The BAML Revolver bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.25% over LIBOR at June 30, 2015) or (ii) a margin over the base rate depending on the Company’s credit rating (0.25% over the base rate at June 30, 2015). The BAML Credit Facility also obligates the Company to pay an annual facility fee in an amount that is also based on the Company’s credit rating. The facility fee is assessed against the total amount of the BAML Revolver, or $500,000,000 (0.25% at June 30, 2015).

 

Based upon the Company’s credit rating, as of June 30, 2015, the weighted average interest rate on the BAML Revolver was 1.43% per annum and there were borrowings of $300,000,000 outstanding.  As of December 31, 2014, the weighted average interest rate on the BAML Revolver was 1.41% per annum and there were borrowings of $268,000,000 outstanding.  The weighted average interest rate on all amounts outstanding on the BAML Revolver during the six months ended June 30, 2015 was approximately 1.43% per annum.  The weighted average interest rate on all amounts outstanding on the BAML Revolver during the year ended December 31, 2014 was approximately 1.60% per annum.

 

BAML Term Loan Highlights

 

·                  The BAML Term Loan is for $400,000,000.

·                  The BAML Term Loan matures on September 27, 2017.

·                  On September 27, 2012, the Company drew down the entire $400,000,000 and such amount remains fully advanced and outstanding under the BAML Credit Agreement.

 

The BAML Term Loan bears interest at either (i) a margin over LIBOR depending on the Company’s credit rating (1.45% over LIBOR at June 30, 2015) or (ii) a margin over the base rate depending on the Company’s credit rating (0.45% over the base rate at June 30, 2015). The actual margin over LIBOR rate or base rate is determined based on the Company’s credit rating.

 

Although the interest rate on the BAML Credit Facility is variable, the Company fixed the base LIBOR interest rate on the BAML Term Loan by entering into an interest rate swap agreement.  On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the BAML Term Loan at 0.75% per annum for five years, until the September 27, 2017 maturity date.  Accordingly, based upon the Company’s credit rating, as of June 30, 2015, the effective interest rate on the BAML Term Loan was 2.20% per annum.

 

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Table of Contents

 

BAML Credit Facility General Information

 

The BAML Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type.  The BAML Credit Agreement also contains financial covenants that require the Company to maintain a minimum tangible net worth, a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, minimum unsecured interest coverage and a maximum ratio of certain investments to total assets. The Company was in compliance with the BAML Credit Facility financial covenants as of June 30, 2015.

 

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

 

Equity Securities

 

On January 12, 2015, we filed a new automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission relating to the offer and sale, from time to time, of an indeterminate amount of our debt securities, common stock, preferred stock or depository shares.  From time-to-time, we expect to issue debt securities, common stock, preferred stock or depository shares under our existing automatic shelf registration statements or a different registration statement to fund the acquisition of additional properties, to pay down any existing debt financing and for other corporate purposes.

 

Contingencies

 

From time to time, we may provide financing to Sponsored REITs in the form of a construction loan and/or a revolving line of credit secured by a mortgage.  As of June 30, 2015, we were committed to fund up to $111.3 million to four Sponsored REITs under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes, of which $93.6 million has been drawn and is outstanding.  We anticipate that advances made under these facilities will be repaid at their maturity date or earlier from long term financings of the underlying properties, cash flows from the underlying properties or another other capital event.

 

We may be subject to various legal proceedings and claims that arise in the ordinary course of our 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.

 

Related Party Transactions

 

We intend to draw on the BAML Credit Facility in the future for a variety of corporate purposes, including the acquisition of properties that we acquire directly for our portfolio and for Sponsored REIT Loans as described below.

 

Loans to Sponsored REITs

 

Sponsored REIT Loans

 

From time to time we may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes.  We anticipate that each Sponsored REIT Loan will be repaid at maturity or earlier from long term financings of the underlying properties, cash flows from the underlying properties or some other capital event.  Each Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately one to three years, which may be extended from time to time by one year or longer.  Except a mortgage loan which bears interest at a fixed rate, advances under each Sponsored REIT Loan bear interest at a rate equal to the 30-day LIBOR rate plus an agreed upon amount of basis points and most advances also require a 50 basis point draw fee.

 

Our Sponsored REIT Loans subject us to credit risk.  However, we believe that our position as asset manager of each of the Sponsored REITs helps mitigate that risk by providing us with unique insight and the ability to rely on qualitative analysis of the Sponsored REITs.  Before making a Sponsored REIT Loan, we consider a variety of subjective factors, including the quality of the underlying real estate, leasing, the financial condition of the applicable Sponsored REIT and local and national market conditions.  These factors are subject to change and we do not apply a formula or assign relative weights to the factors.  Instead, we make a subjective determination after considering such factors collectively.

 

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Table of Contents

 

Additional information about our Sponsored REIT Loans outstanding as of June 30, 2015, including a summary table of our Sponsored REIT Loans, is incorporated herein by reference to Part I, Item 1, Note 2, “Related Party Transactions and Investments in Non-consolidated Entities, Management fees and interest income from loans”, in the Notes to Condensed Consolidated Financial Statements included in this report.

 

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Table of Contents

 

Item 3.                     Quantitative and Qualitative Disclosures About Market Risk

 

Market Rate Risk

 

We are exposed to changes in interest rates primarily from our floating rate borrowing arrangements.  We use interest rate derivative instruments to manage exposure to interest rate changes.  As of June 30, 2015 and December 31, 2014, if market rates on our outstanding borrowings under our BAML Revolver increased by 10% at maturity, or approximately 14 and 14 basis points, respectively, over the current variable rate, the increase in interest expense would decrease future earnings and cash flows by $0.4 million and $0.4 million annually, respectively.  Based upon our credit rating, the interest rate on our borrowings on the BAML Revolver as of June 30, 2015 was LIBOR plus 125 basis points, or 1.43% per annum.  We do not believe that the interest rate risk represented by borrowings under our BAML Revolver is material as of June 30, 2015.

 

Although the interest rates on the BMO Term Loan and the BAML Credit Facility are variable, the Company fixed the base LIBOR interest rates on the BMO Term Loan and the BAML Term Loan by entering into interest rate swap agreements.  On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the BMO Term Loan at 2.32% per annum for seven years (the “BMO Interest Rate Swap”).  On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the BAML Term Loan at 0.75% per annum for five years (the “BAML Interest Rate Swap”).  Accordingly, based upon our credit rating, as of June 30, 2015, the interest rate on the BMO Term Loan was 3.97% per annum and the interest rate on the BAML Term Loan was 2.20% per annum.  The fair value of the BMO Interest Rate Swap and the BAML Interest Rate Swap is affected by changes in market interest rates.  We believe that we have mitigated interest rate risk with respect to the BMO Term Loan through the BMO Interest Rate Swap for the seven year term of the BMO Term Loan.  We believe that we have mitigated interest rate risk with respect to the BAML Term Loan through the BAML Interest Rate Swap for the five year term of the BAML Term Loan. The BMO Interest Rate Swap and the BAML Interest Rate Swap were our only derivative instruments as of June 30, 2015.

 

The table below lists our derivative instruments, which are hedging variable cash flows related to interest on our BMO Term Loan and our BAML Term Loan as of June 30, 2015 (in thousands):

 

 

 

Notional

 

Strike

 

Effective

 

Expiration

 

Fair

 

(in thousands)

 

Value

 

Rate

 

Date

 

Date

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

BMO Interest Rate Swap

 

$

220,000

 

2.32

%

Aug-13

 

Aug-20

 

$

(7,632

)

BAML Interest Rate Swap

 

$

400,000

 

0.75

%

Sep-12

 

Sep-17

 

$

918

 

 

Our BMO Term Loan and our BAML Term Loan hedging transactions used derivative instruments that involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in either or both of the contracts. We require our derivatives contracts to be with counterparties that have investment grade ratings.  The counterparty to the BMO Interest Rate Swap is Bank of Montreal and the counterparty to the BAML Interest Rate Swap is Bank of America, N.A., both of which have investment grade ratings.  As a result, we do not anticipate that either counterparty will fail to meet its obligations.  However, there can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.

 

The BAML Revolver has a term of four years and matures on October 29, 2018.  We have the right to extend the initial maturity date of the BAML Revolver by an additional 12 months, or until October 29, 2019, upon payment of a fee and satisfaction of certain customary conditions. The BAML Revolver includes an accordion feature that allows for up to $250,000,000 of additional borrowing capacity subject to receipt of lender commitments and satisfaction of certain customary conditions.  Upon maturity, our future income, cash flows and fair values relevant to financial instruments will be dependent upon the balance then outstanding and prevalent market interest rates.

 

We borrow from time-to-time under the BAML Revolver.  These borrowings bear interest at either (i) a rate equal to LIBOR plus 87.5 to 165 basis points depending on our credit rating at the time of the borrowing (LIBOR plus 125 basis points, or 1.43% at June 30, 2015) or (ii) a rate equal to the bank’s base rate plus up to 65 basis points depending on our credit rating at the time of the borrowing (the bank’s base rate plus 25 basis points, or 3.50% at June 30, 2015).  There were borrowings totaling $300.0 million and $268.0 million on the BAML Revolver, at a weighted average rate of 1.43% and 1.41% outstanding at June 30, 2015 and December 31, 2014, respectively.  We have drawn on the BAML Revolver, and intend to draw on the BAML Revolver in the future for a variety of corporate purposes, including the funding of Sponsored REIT Loans and the acquisition of properties that we acquire directly for our portfolio.  Information about our Sponsored REIT Loans as of June 30, 2015 is incorporated herein by

 

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Table of Contents

 

reference to Part I, Item 1, Note 2, “Related Party Transactions and Investments in Non-consolidated Entities, Management fees and interest income from loans”, in the Notes to Condensed Consolidated Financial Statements included in this report.

 

The following table presents as of June 30, 2015, our contractual variable rate borrowings under our BAML Revolver, which matures on October 29, 2018, under our BAML Term Loan, which matures on September 27, 2017 and under our BMO Term Loan, which matures on August 26, 2020.  Under the BAML Revolver, we have the right to extend the initial maturity date by an additional 12 months, or until October 29, 2019, upon payment of a fee and satisfaction of certain customary conditions.

 

 

 

Payment due by period

 

 

 

(in thousands)

 

 

 

Total

 

2015

 

2016

 

2017

 

2018

 

2019

 

Thereafter

 

BAML Revolver

 

$

300,000

 

$

 

$

 

$

 

$

300,000

 

$

 

$

 

BAML Term Loan

 

400,000

 

 

 

 

 

400,000

 

 

 

 

 

BMO Term Loan

 

220,000

 

 

 

 

 

 

 

 

 

 

220,000

 

Total

 

$

920,000

 

$

 

$

 

$

400,000

 

$

300,000

 

$

 

$

220,000

 

 

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Table of Contents

 

Item 4.                     Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2015.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of June 30, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

No change in our internal control over financial reporting occurred during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

PART II - OTHER INFORMATION

 

Item 1.                     Legal Proceedings

 

From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of our 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, cash flows or results of operations.

 

Item 1A.  Risk Factors

 

There were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014, except to the extent previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors.  In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2014 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2.                     Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.                     Defaults Upon Senior Securities

 

None.

 

Item 4.                     Mine Safety Disclosures

 

None.

 

Item 5.                     Other Information

 

None.

 

Item 6.                     Exhibits

 

The Exhibits listed in the Exhibit Index are filed as part of this Quarterly Report on Form 10-Q and are incorporated herein by reference.

 

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Table of Contents

 

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

 

 

 

 

 

Date: July 28, 2015

 

/s/ George J. Carter

 

Chief Executive Officer and Director

 

 

George J. Carter

 

(Principal Executive Officer)

 

 

 

 

 

Date: July 28, 2015

 

/s/ John G. Demeritt

 

Chief Financial Officer

 

 

John G. Demeritt

 

(Principal Financial Officer)

 

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Table of Contents

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

3.1 (1)

 

Articles of Incorporation.

 

 

 

3.2 (2)

 

Amended and Restated By-laws.

 

 

 

31.1*

 

Certification of FSP Corp.’s President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of FSP Corp.’s Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

 

 

 

32.1*

 

Certification of FSP Corp.’s President and Chief Executive Officer 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 FSP Corp.’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101*

 

The following materials from FSP Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Income; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Condensed Consolidated Statements of Other Comprehensive Income; and (v) the Notes to Condensed Consolidated Financial Statements.

 


Footnotes

 

Description

 

 

 

(1)

 

Incorporated by reference to FSP Corp.’s Form 8-A, filed on April 5, 2005 (File No. 001-32470).

 

 

 

(2)

 

Incorporated by reference to FSP Corp.’s Current Report on Form 8-K, filed on February 15, 2013 (File No. 001-32470).

 

 

 

*

 

Filed herewith.

 

36