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, 2012.

 

OR

 

[   ]

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
or organization)

 

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

 

 

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

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q, Continued

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES

o

 

 

NO

x

 

The number of shares of common stock outstanding as of July 27, 2012 was 82,937,405.

 



 

Franklin Street Properties Corp.

Form 10-Q

 

Quarterly Report

June 30, 2012

 

Table of Contents

 

Part I.

Financial Information

Page

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

4

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011

5

 

 

 

 

 

 

Condensed Consolidated Statements of Other Comprehensive Income for the three and six months ended June 30, 2012 and 2011

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8-15

 

 

 

 

 

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

31

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

 

 

Item 1A.

Risk Factors

32

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

 

 

Item 5.

Other Information

32

 

 

 

 

 

Item 6.

Exhibits

32

 

 

 

 

Signatures

 

33

 



 

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)

 

2012

 

2011

 

Assets:

 

 

 

 

 

Real estate assets:

 

 

 

 

 

Land

 

$

137,503

 

$

137,503

 

Buildings and improvements

 

1,027,321

 

1,020,449

 

Fixtures and equipment

 

896

 

856

 

 

 

1,165,720

 

1,158,808

 

Less accumulated depreciation

 

168,375

 

152,587

 

Real estate assets, net

 

997,345

 

1,006,221

 

Acquired real estate leases, less accumulated amortization of $32,337 and $31,189, respectively

 

82,769

 

91,613

 

Investment in non-consolidated REITs

 

86,658

 

87,598

 

Cash and cash equivalents

 

22,620

 

23,813

 

Restricted cash

 

533

 

493

 

Tenant rent receivables, less allowance for doubtful accounts of $1,300 and $1,235, respectively

 

1,403

 

1,460

 

Straight-line rent receivable, less allowance for doubtful accounts of $135 and $135, respectively

 

33,142

 

28,545

 

Prepaid expenses

 

2,605

 

1,223

 

Related party mortgage loan receivables

 

177,536

 

140,516

 

Other assets

 

3,184

 

4,070

 

Office computers and furniture, net of accumulated depreciation of $500 and $428, respectively

 

456

 

468

 

Deferred leasing commissions, net of accumulated amortization of $10,706 and $9,220, respectively

 

22,112

 

22,641

 

Total assets

 

$

1,430,363

 

$

1,408,661

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

Liabilities:

 

 

 

 

 

Bank note payable

 

$

494,000

 

$

449,000

 

Accounts payable and accrued expenses

 

25,408

 

26,446

 

Accrued compensation

 

944

 

2,222

 

Tenant security deposits

 

2,113

 

2,008

 

Acquired unfavorable real estate leases, less accumulated amortization of $4,203 and $3,759, respectively

 

6,875

 

7,618

 

Total liabilities

 

529,340

 

487,294

 

 

 

 

 

 

 

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, 82,937,405 and 82,937,405 shares issued and outstanding, respectively

 

8

 

8

 

Additional paid-in capital

 

1,042,876

 

1,042,876

 

Accumulated distributions in excess of accumulated earnings

 

(141,861)

 

(121,517)

 

Total stockholders’ equity

 

901,023

 

921,367

 

Total liabilities and stockholders’ equity

 

$

1,430,363

 

$

1,408,661

 

 

 

 

 

 

 

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

 

4



 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

For the
Three Months Ended
June 30,

 

For the
Six Months Ended
June 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Rental

 

$

35,830

 

$

33,606

 

$

72,498

 

$

64,705

 

Related party revenue:

 

 

 

 

 

 

 

 

 

Management fees and interest income from loans

 

3,045

 

1,150

 

5,661

 

1,958

 

Other

 

39

 

7

 

73

 

13

 

Total revenue

 

38,914

 

34,763

 

78,232

 

66,676

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate operating expenses

 

8,828

 

8,765

 

17,905

 

17,495

 

Real estate taxes and insurance

 

5,576

 

5,228

 

11,389

 

9,987

 

Depreciation and amortization

 

13,224

 

12,029

 

26,480

 

22,774

 

Selling, general and administrative

 

2,236

 

1,602

 

4,313

 

3,247

 

Interest

 

4,037

 

3,578

 

7,714

 

5,986

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

33,901

 

31,202

 

67,801

 

59,489

 

 

 

 

 

 

 

 

 

 

 

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

 

5,013

 

3,561

 

10,431

 

7,187

 

Interest income

 

4

 

5

 

12

 

16

 

Equity in earnings of non-consolidated REITs

 

494

 

1,166

 

885

 

2,134

 

 

 

 

 

 

 

 

 

 

 

Income before taxes on income

 

5,511

 

4,732

 

11,328

 

9,337

 

Taxes on income

 

77

 

68

 

156

 

118

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

5,434

 

4,664

 

11,172

 

9,219

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of income tax

 

-

 

3,371

 

-

 

3,990

 

Gain on sale of property less applicable income tax

 

-

 

2,346

 

-

 

21,939

 

Total discontinued operations

 

-

 

5,717

 

-

 

25,929

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,434

 

$

10,381

 

$

11,172

 

$

35,148

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic and diluted

 

82,937

 

81,437

 

82,937

 

81,437

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted, attributable to:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.07

 

$

0.06

 

$

0.13

 

$

0.11

 

Discontinued operations

 

-

 

0.07

 

-

 

0.32

 

Net income per share, basic and diluted

 

$

0.07

 

$

0.13

 

$

0.13

 

$

0.43

 

 

 

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

 

5



 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Other Comprehensive Income

(Unaudited)

 

 

 

For the
Three Months Ended
June 30,

 

For the
Six Months Ended
June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,434

 

$

10,381

 

$

11,172

 

$

35,148

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized gain on derivative financial instruments

 

-

 

-

 

-

 

94

 

Amortized gain on derivative financial instruments

 

-

 

381

 

-

 

536

 

Total other comprehensive income

 

-

 

381

 

-

 

630

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

5,434

 

$

10,762

 

$

11,172

 

$

35,778

 

 

 

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

 

6



 

Franklin Street Properties Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the
Six Months Ended
June 30,

 

(in thousands)

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

11,172

 

$

35,148

 

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

 

 

 

 

 

 

Depreciation and amortization expense

 

 

27,495

 

23,670

 

Amortization of above market lease

 

 

20

 

(62)

 

Gain on sale of real estate assets

 

 

-

 

(21,939)

 

Equity in earnings of non-consolidated REITs

 

 

(885)

 

(2,844)

 

Distributions from non-consolidated REITs

 

 

993

 

2,318

 

Increase (decrease) in bad debt reserve

 

 

65

 

(365)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

(40)

 

(39)

 

Tenant rent receivables, net

 

 

(8)

 

441

 

Straight-line rents, net

 

 

(2,571)

 

(5,176)

 

Lease acquisition costs

 

 

(2,026)

 

(55)

 

Prepaid expenses and other assets, net

 

 

(1,512)

 

914

 

Accounts payable and accrued expenses

 

 

(1,395)

 

(726)

 

Accrued compensation

 

 

(1,278)

 

(733)

 

Tenant security deposits

 

 

105

 

546

 

Payment of deferred leasing commissions

 

 

(1,513)

 

(5,386)

 

Net cash provided by operating activities

 

 

28,622

 

25,712

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of real estate assets, office computers and furniture

 

 

(7,112)

 

(127,999)

 

Acquired real estate leases

 

 

-

 

(45,032)

 

Investments in non-consolidated REITs

 

 

(1)

 

(10)

 

Distributions in excess of earnings from non-consolidated REITs

 

 

834

 

664

 

Investment in related party mortgage loan receivable

 

 

(37,020)

 

(4,232)

 

Changes in deposits on real estate assets

 

 

-

 

200

 

Investment in assets held for syndication, net

 

 

-

 

(8,200)

 

Proceeds received on sales of real estate assets

 

 

-

 

96,790

 

Net cash used in investing activities

 

 

(43,299)

 

(87,819)

 

Cash flows from financing activities:

 

 

 

 

 

 

Distributions to stockholders

 

 

(31,516)

 

(30,946)

 

Proceeds from equity offering, net

 

 

-

 

(90)

 

Borrowings under bank note payable

 

 

45,000

 

345,000

 

Repayment of bank note payable

 

 

-

 

(209,968)

 

Repayment of term loan payable

 

 

-

 

(74,850)

 

Deferred financing costs

 

 

-

 

(5,389)

 

Swap termination payment

 

 

-

 

(982)

 

Net cash provided by financing activities

 

 

13,484

 

22,775

 

Net decrease in cash and cash equivalents

 

 

(1,193)

 

(39,332)

 

Cash and cash equivalents, beginning of period

 

 

23,813

 

68,213

 

Cash and cash equivalents, end of period

 

 

$

22,620

 

$

28,881

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Accrued costs for purchase of real estate assets

 

 

$

1,090

 

$

657

 

 

 

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

 

7



 

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 Investments LLC is a registered broker/dealer with the Securities and Exchange Commission and is a member of the Financial Industry Regulatory Authority, or FINRA.  FSP Property Management LLC provides asset management and property management services.  The Company also has a non- controlling common stock interest in 16 corporations organized to operate as real estate investment trusts (“REITs”) and a non-controlling preferred stock interest in three of those REITs.  Collectively, the 16 REITs are referred to as the “Sponsored REITs”.

 

As of June 30, 2012, the Company owned and operated a portfolio of real estate consisting of 36 properties, managed 16 Sponsored REITs and held eight promissory notes secured by mortgages on real estate owned by Sponsored REITs, including one mortgage loan with a revolving line of credit component, one construction loan and six 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.

 

Previously the Company, through FSP Investments LLC, structured real estate investments and offered broker/dealer services that included the organization of Sponsored REITs, the acquisition and development of real estate on behalf of Sponsored REITs and the raising of capital to equitize the Sponsored REITs through sale of preferred stock in private placements.  On December 15, 2011, the Company announced that it would no longer sponsor the syndication of shares of preferred stock in newly-formed Sponsored REITs.

 

Properties

 

The following table summarizes the Company’s investment in real estate assets, excluding assets held for sale:

 

 

 

 

As of June 30,

 

 

 

 

2012

 

 

 

2011

 

Commercial real estate:

 

 

 

 

 

 

 

 

Number of properties

 

 

36

 

 

 

34

 

Rentable square feet

 

 

7,052,592

 

 

 

6,747,815

 

 

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, 2011, 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, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012 or for any other period.

 

Reclassifications

 

Certain amounts from the 2011 income statement and cash flows have been reclassified to conform to the 2012 presentation.  The reclassifications were related primarily to properties sold and the Company’s investment banking segment, which are presented as discontinued operations for all periods presented. Reclassifications of discontinued operations changed rental revenues, operating and maintenance expenses, depreciation and amortization, commission expenses, selling, general and administrative expenses, income taxes

 

8



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

Financial Instruments

 

and the related assets, and reclassifications of distributions from non-consolidated REITs changed a portion of the distributions from operating to investing cash flows. There was no change to net income for any period presented as a result of these reclassifications.

 

The Company estimates that the carrying values of cash and cash equivalents, restricted cash, mortgage loan receivables and the bank note payable approximate their fair values based on their short-term maturity and prevailing interest rates.

 

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

 

Investment in Sponsored REITs:

 

At June 30, 2012, the Company held an interest in 16 Sponsored REITs, all of which were fully syndicated, and the Company no longer derives economic benefits or risks from the common stock interest that is retained in them.  One entity was not fully syndicated at June 30, 2011, which was FSP Union Centre Corp.  The Company holds a non-controlling preferred stock investment in three of these Sponsored REITs, FSP Phoenix Tower Corp. (“Phoenix Tower”), 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.

 

Equity in earnings of investment in non-consolidated REITs:

 

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

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2012

 

 

2011

 

 

 

 

 

 

 

 

Equity in earnings of Sponsored REITs

 

  $

-

 

 

  $

948

 

Equity in earnings (loss) of Phoenix Tower

 

25

 

 

(11

)

Equity in earnings of East Wacker

 

968

 

 

1,186

 

Equity in earnings (loss) of Grand Boulevard

 

(108

)

 

11

 

 

 

  $

885

 

 

  $

2,134

 

 

Equity in earnings of investments in Sponsored REITs is derived from the Company’s share of income (loss) following the commencement of syndication of Sponsored REITs.  Following the commencement of syndication the Company exercises influence over, but does not control these entities, and investments are accounted for using the equity method.

 

Equity in earnings (loss) of Phoenix Tower is derived from the Company’s preferred stock investment in the entity.  In September 2006, the Company purchased 48 preferred shares or 4.6% of the outstanding preferred shares of Phoenix Tower for $4,116,000 (which represented $4,800,000 at the offering price net of commissions of $384,000 and fees of $300,000 that were excluded).

 

Equity in earnings 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 earnings (loss) 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 declared of $1,827,000 and $2,982,000 from non-consolidated REITs during the six months ended June 30, 2012 and 2011, respectively.

 

9



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

Non-consolidated REITs:

 

The Company has in the past acquired by merger entities similar to the Sponsored REITs.  The Company’s business model for growth includes the potential acquisition, by merger or otherwise, of Sponsored REITs.  The Company has no legal or any other enforceable obligation to acquire or to offer to acquire any Sponsored REIT.  In addition, any offer (and the related terms and conditions) that might be made in the future to acquire any Sponsored REIT would require the approval of the boards of directors of the Company and the Sponsored REIT and the approval of the shareholders of the Sponsored REIT.

 

The operating data below for 2012 and 2011 includes operations of the 16 Sponsored REITs the Company held an interest in as of June 30, 2012 and 2011, respectively.

 

At June 30, 2012, December 31, 2011 and June 30, 2011, the Company had ownership interests in 16 Sponsored REITs.  Summarized financial information for these Sponsored REITs is as follows:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2012

 

 

2011

 

 

 

 

 

 

 

 

Balance Sheet Data (unaudited):

 

 

 

 

 

 

Real estate, net

 

  $

744,948

 

 

  $

755,825

 

Other assets

 

167,825

 

 

135,658

 

Total liabilities

 

(326,960

)

 

(293,326

)

Shareholders’ equity

 

  $

585,813

 

 

  $

598,157

 

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Operating Data (unaudited):

 

 

 

 

 

Rental revenues

 

$

 55,833

 

$

 

54,495

 

Other revenues

 

70

 

33

 

Operating and maintenance expenses

 

(28,032)

 

(26,935

)

Selling, general and administrative

 

-

 

(789

)

Depreciation and amortization

 

(17,838)

 

(16,426

)

Interest expense

 

(8,635)

 

(9,234

)

Net income

 

$

 1,398

 

$

 

1,144

 

 

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 $534,000 and $464,000 for the six months ended June 30, 2012 and 2011, 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.  Since December 2007, the Company has provided Sponsored REIT Loans in the form of revolving lines of credit to six Sponsored REITs, or to wholly-owned subsidiaries of those Sponsored REITs, a construction loan to one wholly-owned subsidiary of another Sponsored REIT and a mortgage loan with a revolving line of credit component to one wholly-owned subsidiary of another Sponsored REIT. 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 two to three years.  Except for the mortgage loan with a revolving line of credit component 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.  In December 2011, the Company received a loan fee of $762,000 at the time of the closing of the mortgage loan with a

 

10



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

revolving line of credit component.  In March 2012, a $300,000 fee was paid in connection with a $30 million draw from the revolving line of credit component, and a 0.49% fee will be paid on all amounts repaid under the loan.

 

Prior to terminating the activities of its investment banking segment in December 2011, the Company typically made an acquisition loan (“Acquisition Loans”) to each newly-formed Sponsored REIT which was secured by a mortgage on the borrower’s real estate.  These loans enabled Sponsored REITs to acquire their respective properties prior to the consummation of the offerings of their equity interests.  The Company anticipated that each Acquisition Loan would be repaid at maturity, or earlier, from the proceeds of the Sponsored REIT’s equity offering.  Each Acquisition Loan had an original term of two years and bore interest at approximately the same rate paid by FSP Corp. for borrowings under the Revolver or New Revolver.  The Company made one Acquisition Loan for the syndication of FSP Union Centre Corp. during 2011, which was repaid on October 20, 2011.  There were no Acquisition Loans outstanding at June 30, 2012 or December 31, 2011.

 

The following is a summary of the Sponsored REIT Loans outstanding as of June 30, 2012:

 

(dollars in thousands)

 

 

 

 

 

Maximum

 

Amount

 

 

 

 

 

Interest

 

 

 

 

 

Maturity

 

Amount

 

Drawn at

 

Interest

 

Draw

 

Rate at

 

Sponsored REIT

 

Location

 

Date

 

of Loan

 

30-Jun-12

 

Rate (1)

 

Fee (2)

 

30-Jun-12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP Highland Place I Corp. (3)

 

Centennial, CO

 

31-Dec-12

 

$

5,500

 

$

1,125

 

L+4.4%

 

0.5%

 

4.64%

 

FSP Satellite Place Corp. (4)

 

Duluth, GA

 

31-Mar-13

 

5,500

 

5,500

 

L+4.4%

 

0.5%

 

4.64%

 

FSP 1441 Main Street Corp.(4) (a)

 

Columbia, SC

 

31-Mar-13

 

10,800

 

7,500

 

L+4.4%

 

0.5%

 

4.64%

 

FSP 505 Waterford Corp. (4)

 

Plymouth, MN

 

30-Nov-12

 

7,000

 

2,350

 

L+4.4%

 

0.5%

 

4.64%

 

FSP Phoenix Tower Corp. (4) (b)

 

Houston, TX

 

30-Nov-12

 

15,000

 

15,000

 

L+4.4%

 

0.5%

 

4.64%

 

FSP Galleria North Corp. (e)

 

Dallas, TX

 

30-Jan-15

 

15,000

 

2,320

 

L+5.0%

 

0.5%

 

5.24%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured construction loan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP 385 Interlocken

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Development Corp. (4) (c) (d)

 

Broomfield, CO

 

30-Apr-13

 

42,000

 

37,541

 

L+4.4%

 

n/a

 

4.64%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan secured by property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FSP 50 South Tenth Street Corp. (5)

 

Minneapolis, MN

 

31-Dec-13

 

106,200

 

106,200

 

6.51%

 

1.0%

 

6.51%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

207,000

 

$

177,536

 

 

 

 

 

 

 

 

(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.

(3) Effective January 1, 2011 and February 1, 2011, the interest rate was 30-day LIBOR plus 3% and effective March 1, 2011 became LIBOR plus 4.4% until maturity. Effective January 31, 2011, any future draws will require a draw fee in an amount equal to 0.5%.

(4) Effective January 1, 2011 through March 30, 2011, the interest rate was 30-day LIBOR plus 3%.

 

(a) The borrower is FSP 1441 Main Street LLC, a wholly-owned subsidiary.

(b) The borrower is FSP Phoenix Tower Limited Partnership, a wholly-owned subsidiary.

(c) The borrower is FSP 385 Interlocken LLC, a wholly-owned subsidiary.

(d) The borrower paid a commitment fee of $210,000 at loan origination in March 2009.

(e) The borrower is FSP Galleria North Limited Partnership, a wholly-owned subsidiary.

 

(5) The loan has a secured fixed mortgage amount of $76,200,000 and a $30,000,000 secured revolving line of credit component. A loan fee of $762,000 was paid related to the fixed mortgage component and a $300,000 fee was paid upon a $30 million draw from the secured revolving line of credit component in March 2012. A 0.49% fee will be paid on all amounts repaid under the loan.

 

11



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

The Company recognized interest income and fees from the Acquisition Loan and Sponsored REIT Loans of approximately $5,102,000 and $1,494,000 for the six months ended June 30, 2012 and 2011, respectively.

 

3.     Bank note payable and term note payable

 

As of June 30, 2012, the Company had a bank note payable, which is an unsecured revolving line of credit (the “New Revolver”), for advances up to $600 million with a group of banks.  The New Revolver matures on February 22, 2014 with a one-year extension available at the Company’s election and payment of a fee.

 

On February 22, 2011, the Company entered into the New Revolver for advances up to $500 million with a group of banks.  On May 19, 2011, the Company increased availability under the New Revolver by $100 million to $600 million by fully exercising an accordion feature.

 

The New Revolver requires compliance with various financial covenants, including minimum tangible net worth, maximum leverage ratios, maximum secured leverage ratios, minimum fixed charge leverage ratios, maximum unencumbered leverage ratios, minimum unsecured debt service coverage, dividend and distribution requirements, investment requirements and maximum secured recourse indebtedness values.  The Company was in compliance with the New Revolver financial covenants as of June 30, 2012.

 

The Company intends to draw on the New Revolver in the future for a variety of corporate purposes, including the funding of interim mortgage loans to Sponsored REITs and the acquisition of properties that it acquires directly for its portfolio.  The Company typically causes mortgage loans to Sponsored REITs to be secured by a first mortgage against the real property owned by the Sponsored REIT.  The Company may make secured 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 which would be repaid from long term financing of the property, cash flows from the property or a capital event.

 

As of December 31, 2010, the Company had a bank note payable, which was an unsecured revolving line of credit (the “Revolver”), for advances up to $250 million that was scheduled to mature on August 11, 2011, and a term note payable, which was an unsecured term loan (the “Term Loan”), of $75 million that was scheduled to mature on October 15, 2011 and had two one-year extensions available at the Company’s election.  The Revolver and the Term Loan were with a group of banks.

 

The Revolver and Term Loan included restrictions on property liens and required compliance with various financial covenants. Financial covenants included the maintenance of at least $1,500,000 in operating cash accounts, a minimum unencumbered cash and liquid investments balance and tangible net worth; limitations on permitted secured debt and compliance with various debt and operating income ratios, as defined in the loan agreement. The Company was in compliance with the Revolver and Term Loan financial covenants as of December 31, 2010.

 

Proceeds from the New Revolver were used to repay and terminate the Revolver and the Term Loan on February 22, 2011.  Borrowings under the New Revolver bear interest at either the bank’s base rate plus 85 to 200 basis points depending upon a leverage ratio at the time of borrowing (the bank’s base rate plus 110 basis points, or 4.35% at June 30, 2012) or a rate equal to LIBOR plus 185 to 300 basis points depending upon a leverage ratio at the time of borrowing (LIBOR plus 210 basis points, or 2.35% at June 30, 2012).  The loan terms include a facility fee at an annual rate of 30 to 50 basis points depending upon a leverage ratio (40 basis points at June 30, 2012), which is applied to the total amount of the New Revolver.  There were borrowings of $494,000,000 outstanding at a weighted average rate of 2.34% as of June 30, 2012.  The weighted average interest rate on amounts outstanding during the six months ended June 30, 2012 on the New Revolver was approximately 2.28%.

 

There were borrowings of $449,000,000 outstanding at a weighted average rate of 2.24% as of December 31, 2011.  The weighted average interest rate on amounts outstanding during the year ended December 31, 2011 on the New Revolver and the Revolver was approximately 1.95%.

 

The Term Loan had an interest rate option equal to LIBOR (subject to a 2% floor) plus 200 basis points and a requirement that the Company fix the interest rate for the initial three-year term of the Term Loan pursuant to an interest rate swap agreement which the Company did at an interest rate of 5.84% per annum pursuant to an interest rate swap agreement.  The Company repaid and terminated the Term Loan and related interest rate swap from the proceeds of the New Revolver on February 22, 2011.

 

12



 

Franklin Street Properties Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4.     Financial Instruments: Derivatives and Hedging

 

The Company’s hedging activity was limited to an interest rate swap.  The purpose of the interest rate swap, which was terminated on February 22, 2011, was to fix the interest rate for the term of the loan and protect the Company from future interest rate increases on the Term Loan that is described in Note 3.

 

The fair value of the Company’s derivative instrument was determined using the net discounted cash flows of the expected cash flows of the derivative based on the market based interest rate curve. This financial instrument was classified within Level 2 of the fair value hierarchy and was classified as a liability on the condensed consolidated balance sheets.

 

The interest rate swap represented a cash flow hedge and was recorded at fair value and classified as a liability.  Changes in the recorded fair value of the interest rate swap were recorded to other comprehensive income. On February 22, 2011, the Company used approximately $983,000 to terminate the interest rate swap agreement applicable to the Term Loan.  The payment to terminate the interest rate swap liability was amortized into interest expense through October 15, 2011.

 

The interest amortization for the Company’s terminated interest rate swap reclassified from Accumulated Other Comprehensive Income into interest expense for the six months ended June 30, 2011 was $536,000 and for the year ended December 31, 2011 was $983,000.  The effective portion of the loss on outstanding derivative recognized in Other Comprehensive Income for the six months ended June 30, 2011 was $536,000 and for the year ended December 31, 2011 was $983,000.

 

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, 2012 and 2011, respectively.

 

6.     Stockholders’ Equity

 

As of June 30, 2012, the Company had 82,937,405 shares of common stock outstanding.

 

Equity Offerings

 

On May 6, 2010, the Company entered into an on demand offering sales agreement whereby the Company may offer and sell up to an aggregate gross sales price of $75 million of its common stock from time to time (the “ATM Sales Program”).  The on demand offering sales agreement for the ATM Sales Program was amended on April 27, 2012 in connection with the Company’s filing of a new Registration Statement on Form S-3.  Sales of shares of the Company’s common stock depend upon market conditions and other factors determined by the Company and may be deemed to be “at the market offerings” as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on the NYSE MKT or sales made to or through a market maker other than on an exchange, as well as in negotiated transactions, if and to the extent agreed by the Company in writing.  The Company has no obligation to sell any shares of its common stock, and may at any time suspend solicitation and offers. During the six months ended June 30, 2012, the Company did not sell any shares under the ATM Sales Program.  As of June 30, 2012, the Company was authorized to offer and sell a remainder of approximately $34.3 million of its shares of common stock under the ATM Sales Program.

 

The Company declared and paid dividends as follows (in thousands, except per share amounts):

Quarter Paid

 

Dividends Per
Share

 

 

Total
Dividends

 

 

 

 

 

 

 

 

First quarter of 2012

 

  $

0.19

 

 

  $

15,758

 

Second quarter of 2012

 

  $

0.19

 

 

  $

15,758

 

 

 

 

 

 

 

 

First quarter of 2011

 

  $

0.19

 

 

  $

15,473

 

Second quarter of 2011

 

  $

0.19

 

 

  $

15,473

 

 

13



 

Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

7.        Income Taxes

 

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company generally is entitled to a tax deduction for 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.

 

FSP Investments operated in the Company’s investment banking segment and in December 2011 announced it would no longer sponsor the syndication of Sponsored REITs, which were a significant amount of FSP Investments activities.  Revenues, expenses, and income tax benefits, net of valuation allowances, have been reclassified to discontinued operations for these activities.

 

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.

 

Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future.  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 2008 and thereafter.

 

In May 2006, the state of Texas enacted a new business tax (the “Revised Texas Franchise Tax”) that replaced its existing franchise tax which the Company became subject.  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 in income taxes on its income statement of $156,000 and $118,000 for the six months ended June 30, 2012 and 2011, respectively.

 

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 expense associated with these activities are reported as Other Taxes in the table below:

 

 

 

For the

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2012

 

 

2011

 

 

 

 

 

 

 

 

Revised Texas franchise tax

 

  $

154

 

 

  $

115

 

Other Taxes

 

2

 

 

3

 

Income tax expense

 

  $

156

 

 

  $

118

 

 

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.

 

14



 

Franklin Street Properties Corp.

Notes to the Consolidated Financial Statements

(Unaudited)

 

8.      Discontinued Operations

 

In December 2011, the Company discontinued the activities of the investment banking segment.  The Company also classifies properties sold or held for sale as discontinued operations.

 

The Company sold an industrial property located in Savage, Maryland on June 24, 2011 and in 2010 reached an agreement to sell a commercial property, located in Falls Church, Virginia, which was sold on January 21, 2011.  Both properties were sold at gains and have been classified as discontinued for all periods presented.

 

The Company reports the results of operations of its properties either sold or held for sale as discontinued operations in its consolidated statements of income, which includes rental income, rental operating expenses, real estate taxes and insurance, depreciation and amortization.  In addition, in December 2011, the Company announced it would no longer sponsor the syndication of newly-formed Sponsored REITs and cash flows related to this activity will be eliminated from ongoing operations.  Accordingly, the Company reported the investment banking activities as discontinued operations in its consolidated statements of income, which includes syndication and transaction fee revenues, selling, general and administrative expenses, commission expenses, depreciation and amortization, interest income and income tax benefits.  There were no assets of the investment banking segment included in the consolidated balance sheets at June 30, 2012 and December 31, 2011, respectively.

 

The operating results for discontinued operations are summarized below. There were no amounts in discontinued operations for the six months ended June 30, 2012.

 

 

 

For the

 

For the

 

 

 

Three Months

 

Six Months

 

 

 

Ended

 

Ended

 

(in thousands)

 

June 30,

 

June 30,

 

 

 

2011

 

2011

 

Rental revenue

 

  $

159

 

  $

689

 

Related party revenue:

 

 

 

 

 

Syndication fees

 

2,973

 

3,490

 

Transaction fees

 

2,685

 

3,376

 

Rental operating expenses

 

(3

)

(5

)

Real estate taxes and insurance

 

(23

)

(56

)

Selling, general and administrative

 

(794

)

(1,518

)

Commissions

 

(1,556

)

(1,843

)

Depreciation and amortization

 

(74

)

(148

)

Interest income

 

4

 

5

 

Net income from discontinued operations

 

  $

3,371

 

  $

3,990

 

 

9.     Subsequent Events

 

On July 13, 2012, the Board of Directors of the Company declared a cash distribution of $0.19 per share of common stock payable on August 16, 2012 to stockholders of record on July 27, 2012.

 

On July 5, 2012, the Company made and funded a Sponsored REIT Loan in the form of a first mortgage loan in the principal amount of $33,000,000 to an entity that is a wholly-owned subsidiary of a Sponsored REIT, FSP Energy Tower I Corp.

 

On July 26, 2012, the Company made a $1.0 million advance pursuant to a Sponsored REIT Loan with a wholly-owned subsidiary of FSP Galleria North Corp.

 

On July 27, 2012, the Company’s Sponsored REIT Loan to FSP 50 South Tenth Street Corp. was repaid in its entirety and proceeds of $106,200,000 were received, together with an exit fee of $520,380.

 

On July 31, 2012, the Company acquired an office property with approximately 387,000 square feet for approximately $52.8 million in Atlanta, Georgia.

 

15



 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011.  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, changes in government regulations and regulatory uncertainty, 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 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, operate 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.

 

The main factor that affects our real estate operations is the broad economic market conditions in the United States.  These market conditions affect the occupancy levels and the rent levels on both a national and local level.  We have no influence on the national market conditions.  We look to acquire 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, 2011.

 

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, 2011.

 

Trends and Uncertainties

 

Economic Conditions

 

The economy in the United States is continuing to experience a period of limited economic growth, including high levels of unemployment, the failure and near failure of a number of financial institutions and increased credit risk premiums for a number of market participants.  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 growth and/or recessionary concerns, uncertainty about government fiscal policy, changes in currency exchange rates, geopolitical events, the regulatory environment and the availability of debt and interest rate fluctuations.  We believe that recent economic conditions in the United States have negatively affected our business by, among other factors, contributing to a decline in occupancy in our real estate portfolio in 2009 and 2010.  Although occupancy levels in our real estate portfolio improved in 2011 and the first half of 2012, future economic factors may negatively affect real estate values, occupancy levels and property income.  At this time, we cannot predict the extent or duration of any negative impact that the current state of the United States economy will have on our business.

 

16



 

Real Estate Operations

 

Leasing

 

Our real estate portfolio was approximately 90.0% leased as of June 30, 2012 and approximately 88.7% leased as of December 31, 2011.  During the six months ended June 30, 2012, we leased 383,181 square feet of office space, of which approximately 294,779 square feet were with existing tenants, at a weighted average term of 4.5 years.  On average, tenant improvements for such leases were $7.80 per square foot, lease commissions were $3.16 per square foot and rent concessions were approximately two months of free rent.  GAAP base rents under such leases were $22.72 per square foot, or 1.4% higher than average rents in the respective properties as applicable compared to the prior period.

 

As of June 30, 2012, approximately 2.2% of the square footage in our portfolio is scheduled to expire during the remainder of 2012, and approximately 6.4% is scheduled to expire during 2013.  We continue to make slow but steady leasing progress.  Our property portfolio has relatively modest lease expirations over the next two and a half years and, along with our improving occupancy levels, should allow overall tenant improvement expenditures and leasing costs to moderate in relation to the level of rental revenues being achieved.

 

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 in many cases may be below the expiring rates.  Also, even as the economy recovers, 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 Acquisitions and Investments

 

During the six months ended June 30, 2012 we did not make any property acquisitions.  We did make one additional real estate investment in the first quarter of 2012 for a total capital contribution of $30 million.  The investment was made as an additional funding amount to our original $76.2 million two-year bridge loan on a CBD office/retail property located in Minneapolis, Minnesota.  The total loan provided to this property was $106.2 million and was secured by a first mortgage.  On July 27, 2012 this loan was repaid in its entirety and we received an exit fee in the amount of $0.5 million.  The property is owned by FSP 50 South Tenth Street Corp., which is one of our Sponsored REITs.  On July 5, 2012, we made and funded a Sponsored REIT Loan in the form of a first mortgage loan in the principal amount of $33.0 million to an entity that is a wholly-owned by a subsidiary of a Sponsored REIT, FSP Energy Tower I Corp.  During 2011, we acquired five properties directly into our portfolio with an aggregate of approximately 994,000 rentable square feet at an aggregate purchase price of approximately $214 million.  The results of operations for each of the acquired properties are included in our operating results as of their respective purchase dates.  Increases in revenues and expenses for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011 are primarily a result of the timing of these property acquisitions and subsequent contribution of these acquired properties as well as our mortgage investments.  On July 31, 2012, we acquired an office property with approximately 387,000 square feet for approximately $52.8 million in Atlanta, Georgia.  Additional real estate investments are a major objective and we anticipate additional activity this year.

 

Discontinued Operations and Property Dispositions

 

We include investment banking activities and properties sold or held for sale as discontinued operations.

 

Investment Banking

 

Previously we operated in the investment banking segment, and in December 2011, we discontinued those activities.  The investment banking segment involved the structuring of real estate investments and broker/dealer services that included the organization of Sponsored REITs, the acquisition and development of real estate on behalf of Sponsored REITs and the raising of capital to equitize the Sponsored REITs through sale of preferred stock in private placements.  On December 15, 2011, we announced that our broker/dealer subsidiary, FSP Investments LLC, would no longer sponsor the syndication of shares of preferred stock in newly-formed Sponsored REITs.

 

FSP Investments LLC will, however, continue to provide investor services to existing Sponsored REITs, which are not a significant activity, and has the capability to sponsor the syndication of any additional shares of preferred stock in existing Sponsored REITs.  Our decision to no longer sponsor the syndication of shares of preferred stock in newly-formed Sponsored REITs was made after judging the potential for meaningful future profit contribution to our earnings from such syndications to be limited.  Our investment

 

17



 

banking segment had been marginal in its profit contribution over the last four years and we believed time and resources would be more productively deployed elsewhere.

 

Property Dispositions

 

We sold an industrial property located in Savage, Maryland on June 24, 2011 and in 2010 reached an agreement to sell an office property, located in Falls Church, Virginia, which was sold on January 21, 2011.  Both properties were sold at gains and were classified as discontinued for all periods presented.

 

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 remains challenged relative to both liquidity and pricing.  However, we also believe that we are witnessing improving pricing and liquidity in certain markets, extending a trend that we believe began in the second half of 2009.  We believe that both improving office property fundamentals as well as plentiful and attractive financing availability will likely be required to broadly improve the marketplace for 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 continue to consider some of our properties for possible disposition.

 

The following table shows results for the three months ended June 30, 2012 and 2011:

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Revenue:

 

2012

 

2011

 

Change

 

Rental

 

  $

35,830

 

$

33,606

 

$

2,224

 

Related party revenue:

 

 

 

 

 

 

 

Management fees and interest income from loans

 

3,045

 

1,150

 

1,895

 

Other

 

39

 

7

 

32

 

Total revenue

 

38,914

 

34,763

 

4,151

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

8,828

 

8,765

 

63

 

Real estate taxes and insurance

 

5,576

 

5,228

 

348

 

Depreciation and amortization

 

13,224

 

12,029

 

1,195

 

Selling, general and administrative

 

2,236

 

1,602

 

634

 

Interest

 

4,037

 

3,578

 

459

 

Total expenses

 

33,901

 

31,202

 

2,699

 

 

 

 

 

 

 

 

 

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

 

5,013

 

3,561

 

1,452

 

Interest income

 

4

 

5

 

(1

)

Equity in earnings of non-consolidated REITs

 

494

 

1,166

 

(672

)

 

 

 

 

 

 

 

 

Income before taxes on income

 

5,511

 

4,732

 

779

 

Taxes on income

 

77

 

68

 

9

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

5,434

 

4,664

 

770

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Income from discontinued operations, net of income tax

 

-    

 

3,371

 

(3,371

)

Gain on sale of property less applicable income tax

 

-    

 

2,346

 

(2,346

)

Total discontinued operations

 

-    

 

5,717

 

(5,717

)

 

 

 

 

 

 

 

 

Net income

 

  $

5,434

 

$

10,381

 

$

(4,947

)

 

18



 

Comparison of the three months ended June 30, 2012 to the three months ended June 30, 2011

 

Revenues

 

Total revenues increased by $4.1 million to $38.9 million for the quarter ended June 30, 2012, as compared to $34.8 million for the quarter ended June 30, 2011.  The increase was primarily a result of:

 

o                 An increase in rental revenue of approximately $2.2 million arising primarily from the acquisition of a property acquired in September 2011 and another property acquired in October 2011, which were included in the full quarter ended June 30, 2012; and to a lesser extent, leasing, which raised occupancy to 90% at June 30, 2012 compared to 87% at June 30, 2011.

 

o                 A $1.9 million increase in interest income from loans to Sponsored REITs, which was primarily a result of a larger loan receivable balance and a higher interest rate charged during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011.

 

Expenses

 

Total expenses increased by $2.7 million to $33.9 million for the quarter ended June 30, 2012, as compared to $31.2 million for the quarter ended June 30, 2011.  The increase was primarily a result of:

 

o                 An increase in real estate operating expenses and real estate taxes and insurance of approximately $0.4 million, and depreciation and amortization of $1.2 million, which were primarily from the acquisition of a property acquired in September 2011 and another property acquired in October 2011, which was included in the full quarter ended June 30, 2012.

 

o                 An increase to interest expense of approximately $0.5 million to $4.0 million during the three months ended June 30, 2012 compared to the same period in 2011.  The increase was attributable to a higher amount of debt outstanding for the second quarter of 2012 compared to the second quarter of 2011.

 

o                 An increase in selling, general and administrative expenses of $0.6 million, which was primarily the result of a realignment of personnel and resources in our real estate business following a decision to discontinue our investment banking activities in December 2011.  We had 34 and 44 employees as of June 30, 2012 and 2011, respectively, at our headquarters in Wakefield, Massachusetts.

 

Equity in earnings of non-consolidated REITs

 

Equity in earnings from non-consolidated REITs decreased approximately $0.7 million to $0.5 million during the three months ended June 30, 2012 compared to $1.2 million for the same period in 2011.  The decrease was primarily because we had no syndications in process during the three months ended June 30, 2012 from which equity in income of syndications is derived compared to two syndications in process during the second quarter of 2011.

 

Taxes on income

 

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $9,000 for the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

 

Income from continuing operations

 

Income from continuing operations for the three months ended June 30, 2012 was $5.4 million compared to $4.7 million for the three months ended June 30, 2011, for the reasons described above.

 

Discontinued operations and gain on sale of property

 

Income from discontinued operations was $5.7 million for the three months ended June 30, 2011.  We did not have income from discontinued operations for the three months ended June 30, 2012.  Income from discontinued operations is comprised of revenues and expenses related to the syndication of newly-formed Sponsored REITs, which was discontinued in December 2011, and the operations of properties we have sold.  Each is discussed separately below.

 

19



 

In December 2011, we discontinued the investment banking segment, which is included in discontinued operations.  Income derived from the investment bank was $3.3 million for the three months ended June 30, 2011.

 

The sale of properties from our portfolio results in a reclassification of real estate income from those properties for all periods presented to discontinued operations.  We did not sell any properties during the three months ended June 30, 2012.  On June 24, 2011, we sold an industrial property in Savage, Maryland at a $2.3 million gain. Income from discontinued operations of the property was approximately $0.1 million for the three months ended June 30, 2011.

 

Net income

 

Net income for the three months ended June 30, 2012 was $5.4 million compared to $10.4 million for the three months ended June 30, 2011, for the reasons described above.

 

20



 

The following table shows results for the six months ended June 30, 2012 and 2011:

 

(in thousands)

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

Revenue:

 

2012

 

2011

 

Change

 

Rental

 

$

72,498

 

$

64,705

 

$

7,793

 

Related party revenue:

 

 

 

 

 

 

 

Management fees and interest income from loans

 

5,661

 

1,958

 

3,703

 

Other

 

73

 

13

 

60

 

Total revenue

 

78,232

 

66,676

 

11,556

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Real estate operating expenses

 

17,905

 

17,495

 

410

 

Real estate taxes and insurance

 

11,389

 

9,987

 

1,402

 

Depreciation and amortization

 

26,480

 

22,774

 

3,706

 

Selling, general and administrative

 

4,313

 

3,247

 

1,066

 

Interest

 

7,714

 

5,986

 

1,728

 

Total expenses

 

67,801

 

59,489

 

8,312

 

 

 

 

 

 

 

 

 

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

 

10,431

 

7,187

 

3,244

 

Interest income

 

12

 

16

 

(4

)

Equity in earnings of non-consolidated REITs

 

885

 

2,134

 

(1,249

)

 

 

 

 

 

 

 

 

Income before taxes on income

 

11,328

 

9,337

 

1,991

 

Taxes on income

 

156

 

118

 

38

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

11,172

 

9,219

 

1,953

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

Income from discontinued operations, net of income tax

 

-

 

3,990

 

(3,990

)

Gain on sale of property less applicable income tax

 

-

 

21,939

 

(21,939

)

Total discontinued operations

 

-

 

25,929

 

(25,929

)

 

 

 

 

 

 

 

 

Net income

 

$

11,172

 

$

35,148

 

$

(23,976

)

 

Comparison of the six months ended June 30, 2012 to the six months ended June 30, 2011

 

Revenues

 

Total revenues increased by $11.6 million to $78.2 million for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011.  The increase was primarily a result of:

 

o                 An increase in rental revenue of approximately $7.8 million arising primarily from the acquisition of three properties in March 2011, a property in September 2011 and another property acquired in October 2011, which were included in the six months ended June 30, 2012, as compared to a partial period for the three properties acquired in March 2011 that were included in the six months ended June 30, 2011; and to a lesser extent, leasing, which raised occupancy to 90%  at June 30, 2012 compared to 87% at June 30, 2011.

 

o                 A $3.7 million increase in interest income from loans to Sponsored REITs, which was primarily a result of a larger loan receivable balance and a higher interest rate charged during the six months ended June 30, 2012, as compared to the six months ended June 30, 2011.

 

21



 

Expenses

 

Total expenses increased by approximately $8.30 million to $67.8 million for the six months ended June 30, 2012, as compared to $59.5 million for the six months ended June 30, 2011.  The increase was primarily a result of:

 

o                 An increase in real estate operating expenses and real estate taxes and insurance of approximately $1.8 million, and depreciation and amortization of $3.7 million, which were primarily from the acquisition of three properties in March 2011, a property in September 2011 and another property acquired in October 2011, which were included in the six months ended June 30, 2012, as compared to a partial period for the three properties acquired in March 2011 that were included in the six months ended June 30, 2011.

 

o                 An increase to interest expense of approximately $1.7 million to $7.7 million during the six months ended June 30, 2012 compared to $6.0 million for the same period in 2011.  The increase was attributable to a higher amount of debt outstanding and an increase in interest rate associated with our New Revolver that we entered into on February 22, 2011 compared to lower interest rates on our Revolver and Term Loan, which were repaid on February 22, 2011.

 

o                 An increase in selling, general and administrative expenses of $1.1 million, which was primarily the result of a realignment of personnel and resources in our real estate business following a decision to discontinue our investment banking activities in December 2011, and was partially offset by higher acquisition costs of $0.3 million related to the acquisition of properties during the six months ended June 30, 2011.  We had 34 and 44 employees as of June 30, 2012 and 2011, respectively, at our headquarters in Wakefield, Massachusetts.

 

Equity in earnings of non-consolidated REITs

 

Equity in earnings from non-consolidated REITs decreased approximately $1.2 million to $0.9 million during the six months ended June 30, 2012 compared to $2.1 million for the same period in 2011.  The decrease was primarily because we had no syndications in process during the six months ended June 30, 2012 from which equity in income of syndications is derived compared to two syndications in process during the first six months of 2011.

 

Taxes on income

 

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas properties that increased $38,000 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

 

Income from continuing operations

 

Income from continuing operations for the six months ended June 30, 2012 was $11.2 million compared to $9.2 million for the six months ended June 30, 2011, for the reasons described above.

 

Discontinued operations and gain on sale of property

 

Income from discontinued operations was $25.9 million for the six months ended June 30, 2011.  We did not have income from discontinued operations for the six months ended June 30, 2012.  Income from discontinued operations is comprised of revenues and expenses related to the syndication of newly-formed Sponsored REITs, which was discontinued in December 2011, and the operations of properties we have sold.  Each is discussed separately below.

 

In December 2011, we discontinued the investment banking segment, which is included in discontinued operations.  Income derived from the investment bank was $3.4 million for the six months ended June 30, 2011.

 

The sale of properties from our portfolio results in a reclassification of real estate income from those properties for all periods presented to discontinued operations.  We did not sell any properties during the six months ended June 30, 2012 and income derived from sold properties was $0.6 million for the six months ended June 30, 2011.  We sold one industrial property located in Savage, Maryland on June 24, 2011 at a $2.3 million gain and one office property located in Falls Church, Virginia on January 21, 2011, at a $19.6 million gain.

 

Net income

 

Net income for the six months ended June 30, 2012 was $11.2 million compared to $35.1 million for the six months ended June 30, 2011, for the reasons described above.

 

22



 

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, and after adjustments to exclude non-cash income (or losses) from non-consolidated or Sponsored REITs, plus distributions received from non-consolidated or Sponsored 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):

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,434

 

$

10,381

 

$

11,172

 

$

35,148

 

Gain on sale of properties

 

-

 

(2,346)

 

-

 

(21,939)

 

Equity in earnings of non-consolidated REITs

 

(494)

 

(1,166)

 

(885)

 

(2,938)

 

Distribution from non-consolidated REITs

 

898

 

1,215

 

1,827

 

2,982

 

Depreciation and amortization

 

13,203

 

12,047

 

26,498

 

22,859

 

NAREIT FFO

 

19,041

 

20,131

 

38,612

 

36,112

 

Acquisition costs of new properties

 

-

 

9

 

-

 

278

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations

 

$

19,041

 

$

20,140

 

$

38,612

 

$

36,390

 

 

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 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:

 

23



 

Net Operating Income (NOI)*

 

(in thousands)

 

 

Rentable

 

 

 

 

 

Six Months

 

 

 

 

 

 

Six Months

 

 

 

 

 

 

Square Feet

 

Three Months Ended:

 

Ended

 

 

Three Months Ended:

 

Ended

 

Inc

 

%

 

Region

or RSF

 

31-Mar-12

 

30-Jun-12

 

30-Jun-12

 

 

31-Mar-11

 

30-Jun-11

 

30-Jun-11

 

(Dec)

 

Change

 

East

1,181

 

$

3,479

 

$

3,094

 

$

6,573

 

 

$

3,019

 

$

2,735

 

$

5,754

 

$

819

 

14.2

%

MidWest

1,699

 

4,034

 

3,983

 

8,017

 

 

4,438

 

4,012

 

8,450

 

(433

)

-5.1

%

South

2,089

 

6,901

 

6,725

 

13,626

 

 

5,886

 

6,756

 

12,642

 

984

 

7.8

%

West

1,089

 

2,278

 

2,443

 

4,721

 

 

1,718

 

2,293

 

4,011

 

710

 

17.7

%

Same Store

6,058

 

16,692

 

16,245

 

32,937

 

 

15,061

 

15,796

 

30,857

 

2,080

 

6.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

994

 

4,901

 

4,868

 

9,769

 

 

807

 

3,513

 

4,320

 

5,449

 

-

 

Dispositions

-

 

 

 

 

 

495

 

133

 

628

 

(628

)

-

 

Property NOI

7,052

 

$

21,593

 

$

21,113

 

$

42,706

 

 

$

16,363

 

$

19,442

 

$

35,805

 

$

6,901

 

6.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store

 

 

$

16,692

 

$

16,245

 

$

32,937

 

 

$

15,061

 

$

15,796

 

$

30,857

 

$

2,080

 

6.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Items in NOI (a)

 

 

599

 

20

 

619

 

 

1

 

-

 

1

 

618

 

2.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store

 

 

$

16,093

 

$

16,225

 

$

32,318

 

 

$

15,060

 

$

15,796

 

$

30,856

 

$

1,462

 

4.7

%

 

Reconciliation to Net income

 

 

 

 

 

 

 

Six Months

 

 

 

 

 

 

Six Months

 

 

 

Three Months Ended:

 

Ended

 

 

Three Months Ended:

 

Ended

 

 

 

31-Mar-12

 

30-Jun-12

 

30-Jun-12

 

 

31-Mar-11

 

30-Jun-11

 

30-Jun-11

 

Net income

 

$

5,738

 

$

5,434

 

$

11,172

 

 

$

24,767

 

$

10,381

 

$

35,148

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

-

 

-

 

-

 

 

(160

)

(3,274

)

(3,434

)

Gain on sale of assets

 

-

 

-

 

-

 

 

(19,593

)

(2,346

)

(21,939

)

Management fee income

 

(488

)

(479

)

(967

)

 

(364

)

(428

)

(792

)

Depreciation and amortization

 

13,256

 

13,224

 

26,480

 

 

10,781

 

12,065

 

22,846

 

Amortization of above/below market leases

 

40

 

(20

)

20

 

 

(39

)

(23

)

(62

)

Selling, general and administrative

 

2,077

 

2,236

 

4,313

 

 

1,644

 

1,602

 

3,246

 

Interest expense

 

3,677

 

4,037

 

7,714

 

 

2,408

 

3,578

 

5,986

 

Interest income

 

(2,340

)

(2,774

)

(5,114

)

 

(600

)

(910

)

(1,510

)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

nonconsolidated REITs

 

(391

)

(494

)

(885

)

 

(968

)

(1,166

)

(2,134

)

Non-property specific items, net

 

24

 

(51

)

(27

)

 

(1,513

)

(37

)

(1,550

)

Property NOI

 

$

21,593

 

$

21,113

 

$

42,706

 

 

$

16,363

 

$

19,442

 

$

35,805

 

 

(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



 

The information presented below provides the weighted average GAAP rent per square foot for the year ending December 31, 2011 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 which we have provided Sponsored REIT Loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupied

 

 

Weighted

 

 

 

 

 

 

 

Year Built

 

 

 

 

 

Weighted

 

 

Percentage as of

 

 

Average GAAP

 

 

 

 

 

 

 

or

 

 

Net Rentable

 

 

Occupied

 

 

December 31,

 

 

Rent per Occupied

 

Property Name

 

City

 

State

 

Renovated

 

 

Square Feet

 

 

Sq. Ft.

 

 

2011(a)

 

 

Square Feet (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Park Seneca

 

Charlotte

 

NC

 

1969

 

 

109,550

 

 

87,300

 

 

79.7%

 

 

$

15.58

 

Forest Park

 

Charlotte

 

NC

 

1999

 

 

62,212

 

 

48,239

 

 

77.5%

 

 

15.53

 

Meadow Point

 

Chantilly

 

VA

 

1999

 

 

138,537

 

 

137,817

 

 

99.5%

 

 

26.23

 

Innsbrook

 

Glen Allen

 

VA

 

1999

 

 

298,456

 

 

149,944

 

 

50.2%

 

 

20.82

 

East Baltimore

 

Baltimore

 

MD

 

1989

 

 

325,445

 

 

204,445

 

 

62.8%

 

 

27.43

 

Loudoun Tech Center

 

Dulles

 

VA

 

1999

 

 

135,888

 

 

135,888

 

 

100.0%

 

 

15.58

 

Stonecroft

 

Chantilly

 

VA

 

2008

 

 

111,469

 

 

111,469

 

 

100.0%

 

 

37.40

 

Emperor Boulevard

 

Durham

 

NC

 

2009

 

 

259,531

 

 

259,531

 

 

100.0%

 

 

34.58

 

East total

 

 

 

 

 

 

 

 

1,441,088

 

 

1,134,633

 

 

78.7%

 

 

26.19

 

Southfield Centre

 

Southfield

 

MI

 

1977

 

 

214,697

 

 

97,215

 

 

45.3%

 

 

11.83

 

Northwest Point

 

Elk Grove Village

 

IL

 

1999

 

 

176,848

 

 

176,848

 

 

100.0%

 

 

19.38

 

909 Davis Street

 

Evanston

 

IL

 

2002

 

 

195,245

 

 

185,131

 

 

94.8%

 

 

33.84

 

River Crossing

 

Indianapolis

 

IN

 

1998

 

 

205,059

 

 

191,833

 

 

93.6%

 

 

23.75

 

Timberlake

 

Chesterfield

 

MO

 

1999

 

 

232,766

 

 

227,296

 

 

97.7%

 

 

21.33

 

Timberlake East

 

Chesterfield

 

MO

 

2000

 

 

116,197

 

 

109,365

 

 

94.1%

 

 

23.74

 

Lakeside Crossing

 

St. Louis

 

MO

 

2008

 

 

127,778

 

 

127,778

 

 

100.0%

 

 

23.68

 

Eden Bluff

 

Eden Praire

 

MN

 

2006

 

 

153,028

 

 

153,028

 

 

100.0%

 

 

27.21

 

121 South 8th Street

 

Minneapolis

 

MN

 

1974

 

 

472,616

 

 

419,021

 

 

88.7%

 

 

15.64

 

Midwest total

 

 

 

 

 

 

 

 

1,894,234

 

 

1,687,515

 

 

89.1%

 

 

21.68

 

Blue Lagoon Drive

 

Miami

 

FL

 

2002

 

 

212,619

 

 

212,619

 

 

100.0%

 

 

22.03

 

One Overton Place

 

Atlanta

 

GA

 

2002

 

 

387,267

 

 

352,916

 

 

91.1%

 

 

21.19

 

Willow Bend Office Center

 

Plano

 

TX

 

1999

 

 

116,622

 

 

74,801

 

 

64.1%

 

 

20.23

 

Park Ten

 

Houston

 

TX

 

1999

 

 

155,715

 

 

108,533

 

 

69.7%

 

 

28.67

 

 

25



 

The following table is continued from the previous page and provides the weighted average GAAP rent per square foot for the year ending December 31, 2011 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 which we have provided Sponsored REIT Loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupied

 

 

Weighted

 

 

 

 

 

 

 

Year Built

 

 

 

 

 

Weighted

 

 

Percentage as of

 

 

Average GAAP

 

 

 

 

 

 

 

or

 

 

Net Rentable

 

 

Occupied

 

 

December 31,

 

 

Rent per Occupied

 

Property Name

 

City

 

State

 

Renovated

 

 

Square Feet

 

 

Sq. Ft.

 

 

2011(a)

 

 

Square Feet (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Addison Circle

 

Addison

 

TX

 

1999

 

 

293,787

 

 

281,507

 

 

95.8%

 

 

25.16

 

Collins Crossing

 

Richardson

 

TX

 

1999

 

 

298,766

 

 

217,830

 

 

72.9%

 

 

24.37

 

Eldridge Green

 

Houston

 

TX

 

1999

 

 

248,399

 

 

248,399

 

 

100.0%

 

 

27.20

 

Park Ten Phase II

 

Houston

 

TX

 

2006

 

 

156,746

 

 

156,746

 

 

100.0%

 

 

28.75

 

Liberty Plaza

 

Addison

 

TX

 

1985

 

 

218,934

 

 

156,516

 

 

71.5%

 

 

20.91

 

Denbury Park

 

Plano

 

TX

 

1999/2008

 

 

202,600

 

 

202,600

 

 

100.0%

 

 

17.03

 

One Legacy Circle

 

Plano

 

TX

 

2008

 

 

214,110

 

 

198,608

 

 

92.8%

 

 

33.10

 

East Renner Road

 

Richardson

 

TX

 

1999

 

 

122,300

 

 

122,300

 

 

100.0%

 

 

10.00

 

South Total

 

 

 

 

 

 

 

 

2,627,865

 

 

2,333,376

 

 

88.8%

 

 

23.56

 

Centennial Technology Center

 

Colorado Springs

 

CO

 

1999

 

 

110,405

 

 

73,817

 

 

66.9%

 

 

16.39

 

380 Interlocken

 

Broomfield

 

CO

 

2000

 

 

240,184

 

 

204,349

 

 

85.1%

 

 

27.64

 

Greenwood Plaza

 

Englewood

 

CO

 

2000

 

 

197,527

 

 

92,383

 

 

46.8%

 

 

18.68

 

390 Interlocken

 

Broomfield

 

CO

 

2002

 

 

241,516

 

 

215,456

 

 

89.2%

 

 

29.24

 

Hillview Center

 

Milpitas

 

CA

 

1984

 

 

36,288

 

 

36,288

 

 

100.0%

 

 

14.19

 

Federal Way

 

Federal Way

 

WA

 

1982

 

 

117,010

 

 

43,773

 

 

37.4%

 

 

18.94

 

Montague Business Center

 

San Jose

 

CA

 

1982

 

 

145,951

 

 

145,951

 

 

100.0%

 

 

15.45

 

West Total

 

 

 

 

 

 

 

 

1,088,881

 

 

812,018

 

 

74.6%

 

 

22.76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

 

 

 

 

 

 

 

7,052,068

 

 

5,967,542

 

 

84.6%

 

 

$

23.42

 

 

(a) Based on weighted occupied square feet for the year ended December 31, 2011, including month-to-month tenants, divided by the Property’s net rentable square footage.

(b) Represents GAAP rental revenue for year ended December 2011 per weighted occupied square foot.

 

26



 

Liquidity and Capital Resources

 

Cash and cash equivalents were $22.6 million and $23.8 million at June 30, 2012 and December 31, 2011, respectively. This decrease of $1.2 million is attributable to $28.6 million provided by operating activities less $43.3 million used by investing activities, plus $13.5 million provided by 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 $28.6 million is primarily attributable to net income of $11.2 million, plus the add-back of $24.1 million of non-cash activities and $1.0 million of distributions from non-consolidated REITs.  These increases were partially offset by a $2.7 million decrease in accounts payable and accrued liabilities, a $2.0 million increase in lease acquisition costs, $1.5 million in payments of leasing commissions and a $1.5 million increase in prepaid expenses.

 

Investing Activities

 

Our cash used for investing activities for the six months ended June 30, 2012 of $43.3 million is primarily attributable to an increase in secured loans made to Sponsored REITs of $37.0 million, additions to real estate investments and office equipment of approximately $7.1 million less distributions from non-consolidated REITs of $0.8 million.

 

Financing Activities

 

Our cash provided by financing activities for the six months ended June 30, 2012 of $13.5 million is primarily attributable to borrowings of $45.0 million on our New Revolver, which was partially offset by distributions paid to stockholders of $31.5 million.

 

New Revolver, Revolver and Term Loan

 

We had a bank note payable, which was an unsecured revolving line of credit for advances of up to $250 million that was repaid on February 22, 2011.  We refer to this revolving line of credit as the Revolver.  We also had a term note payable, which was an unsecured term loan of approximately $75 million that was also repaid on February 22, 2011.  We refer to this unsecured term loan as the Term Loan.  The Revolver and the Term Loan were with a group of banks.

 

The Revolver and Term Loan included restrictions on property liens and required compliance with various financial covenants. Financial covenants included the maintenance of at least $1.5 million in operating cash accounts, a minimum unencumbered cash and liquid investments balance and tangible net worth, limitations on permitted secured debt and compliance with various debt and operating income ratios, as defined in the loan agreement. We were in compliance with the Revolver and Term Loan financial covenants as of December 31, 2010.

 

On February 22, 2011, we entered into a new unsecured revolving line of credit, which we refer to as the New Revolver, for advances of up to $500 million with a group of banks.  On May 19, 2011, we increased availability under the New Revolver by $100 million to $600 million by fully exercising an accordion feature.  The New Revolver matures on February 22, 2014 with a one-year extension available at our election and payment of a fee.

 

Proceeds from the New Revolver were used to repay and terminate the Revolver and Term Loan on February 22, 2011.  Borrowings under the New Revolver bear interest at either the bank’s base rate plus 85 to 200 basis points depending upon a leverage ratio at the time of borrowing (the bank’s base rate plus 110 basis points, or 4.35% at June 30, 2012) or a rate equal to LIBOR plus 185 to 300 basis points depending upon a leverage ratio at the time of borrowing (LIBOR plus 210 basis points, or 2.35% at June 30, 2012).  The loan terms include a facility fee at an annual rate of 30 to 50 basis points depending upon a leverage ratio (40 basis points at June 30, 2012), which is applied to the total amount of the New Revolver.  There were borrowings of $494,000,000 outstanding at a weighted average rate of 2.34% as of June 30, 2012.  The weighted average interest rate on amounts outstanding during the six months ended June 30, 2012 on the New Revolver was approximately 2.28%.

 

27



 

There were borrowings of $449,000,000 outstanding at a weighted average rate of 2.24% as of December 31, 2011.  The weighted average interest rate on amounts outstanding during the year ended December 31, 2011 on the New Revolver and the Revolver was approximately 1.95%.

 

The New Revolver requires compliance with various financial covenants, including minimum tangible net worth, maximum leverage ratios, maximum secured leverage ratios, minimum fixed charge leverage ratios, maximum unencumbered leverage ratios, minimum unsecured debt service coverage, dividend and distribution requirements, investment requirements and maximum secured recourse indebtedness values.  We were in compliance with the New Revolver financial covenants as of June 30, 2012.

 

The Term Loan had an interest rate option equal to LIBOR (subject to a 2% floor) plus 200 basis points and a requirement that we fix the interest rate for the initial three-year term of the Term Loan pursuant to an interest rate swap agreement which we did at an interest rate of 5.84% per annum pursuant to an interest rate swap agreement.  We repaid and terminated the Term Loan and related interest rate swap from the proceeds of the New Revolver on February 22, 2011.

 

We intend to draw on the New Revolver in the future for a variety of corporate purposes, including the funding of mortgage loans to Sponsored REITs and the acquisition of properties that we acquire directly for our portfolio.  We typically cause mortgage loans to Sponsored REITs to be secured by a first mortgage against the real property owned by the Sponsored REIT.  We may make loans to Sponsored REITs in the form of mortgage loans or secured revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for other purposes, which would be repaid from long term financing of the property, cash flows from the property or a capital event.

 

Equity Securities

 

On May 6, 2010, we entered into an on demand offering sales agreement that allows us to offer and sell up to an aggregate gross sales price of $75 million of our common stock from time to time, which we refer to as our ATM Sales Program.  The on demand offering sales agreement for the ATM Sales Program was amended on April 27, 2012 in connection with our filing of a new Registration Statement on Form S-3.  Sales of shares of our common stock depend upon market conditions and other factors determined by us and are deemed to be “at the market offerings” as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on the NYSE MKT or sales made to or through a market maker other than on an exchange, as well as in negotiated transactions, if and to the extent agreed by us in writing.  We have no obligation to sell any shares of our common stock, and may at any time suspend solicitation and offers.  During the six months ended June 30, 2012, we did not sell any shares of our common stock under our ATM Sales Program.  As of June 30, 2012, we were authorized to offer and sell a remainder of approximately $34.3 million of our shares of common stock under the ATM Sales Program.

 

As of June 30, 2012, we had an automatic shelf registration statement on Form S-3 on file with the Securities and Exchange Commission relating to the offer and sale, from time to time, of an indeterminate amount of our common stock.  From time to time, we expect to issue additional shares of our common stock under our automatic shelf registration statement 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, 2012, we were committed to fund up to $207 million to eight Sponsored REITs under such arrangements for the purpose of funding construction costs, capital expenditures, leasing costs or for other purposes, of which $177.5 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

 

In March 2011, we commenced the syndication of FSP Union Centre Corp., which was fully subscribed on December 29, 2011.  In November 2010, we commenced the syndication of FSP Monument Circle Corp., which was fully subscribed on March 1, 2011.

 

28



 

We intend to draw on the New Revolver in the future for a variety of corporate purposes, including the acquisition of properties that we acquire directly for our portfolio and for loans to Sponsored REITs described below.

 

Loans to Sponsored REITs

 

Sponsored REIT Loans

 

From time to time we may make secured 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 refer to these loans as Sponsored REIT Loans.  Since December 2007, we have provided Sponsored REIT Loans in the form of revolving lines of credit to six Sponsored REITs, or to wholly-owned subsidiaries of those Sponsored REITs, a construction loan to one wholly-owned subsidiary of another Sponsored REIT, and a mortgage loan with a revolving line of credit component to one wholly-owned subsidiary of another Sponsored REIT.  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 two to three years.  Except for the mortgage loan with a revolving line of credit component 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.  In December 2011, we received a loan fee of $762,000 at the time of the closing of the mortgage loan with a revolving line of credit component, in March 2012 a $300,000 fee was paid in connection with a $30 million draw from the revolving line of credit component, and a 0.49% fee will be paid on all amounts repaid under the loan.  On July 27, 2012, this Sponsored REIT Loan was repaid in its entirety and proceeds of $106,200,000 were received, together with an exit fee of $520,380.

 

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.  On July 5, 2012, we made and funded a Sponsored REIT Loan in the form of a first mortgage loan in the principal amount of $33.0 million to an entity that is a wholly-owned by a subsidiary of a Sponsored REIT, FSP Energy Tower I Corp. On July 26, 2012, we made a $1.0 million advance pursuant to a Sponsored REIT Loan with a wholly-owned subsidiary of FSP Galleria North Corp.  As of July 31, 2012, we were committed to fund Sponsored REIT Loans up to $133.8 million to eight Sponsored REITs, of which $105.3 million was drawn and outstanding.

 

Acquisition Loans

 

Prior to terminating the activities of our investment banking segment in December 2011, we typically made an acquisition loan to each Sponsored REIT which was secured by a mortgage on the borrower’s real estate.  These loans enabled Sponsored REITs to acquire their respective properties prior to the consummation of the offerings of their equity interests.  We refer to these loans as Acquisition Loans.  We anticipated that each Acquisition Loan would be repaid at maturity or earlier from the proceeds of the Sponsored REIT’s equity offering.  Each Acquisition Loan had an original term of two years and bore interest at approximately the same rate paid by FSP Corp. for borrowings under the New Revolver or Revolver, as applicable.    We made one Acquisition Loan for the syndication of FSP Union Centre Corp. during 2011, which was repaid on October 20, 2011.  There were no Acquisition Loans outstanding at June 30, 2012 or December 31, 2011.  Acquisition Loans are classified as assets held for syndication.

 

Additional information about our Sponsored REIT Loans outstanding as of June 30, 2012, 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.

 

Other Considerations

 

We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties.  For the three and six months ended June 30, 2012 and 2011, respectively, the rental income exceeded the expenses for each individual property, with the exception of our properties located in Southfield, Michigan and Englewood, Colorado.

 

Our property located in Southfield, Michigan with approximately 215,000 square feet of rentable space was 39.6% and 39.2% leased at June 30, 2012 and 2011, respectively.  A lease with a significant tenant that leased approximately 138,000 square feet expired in 2009.  That tenant subsequently entered into a new lease for approximately 41,000 square feet on April 30, 2011.  A

 

29



 

lease with a different tenant that leased approximately 17,000 square feet also expired on September 15, 2009.  Rental revenue did not cover ordinary operating expenses for the three and six months ended June 30, 2012 and 2011, respectively.  The property generated rental income of $259,000 and $624,000 for the three and six months ended June 30, 2012, respectively; and had operating expenses of $278,000 and $740,000 for the three and six months ended June 30, 2012, respectively.    The property generated rental income of $276,000 and $609,000 for the three and six months ended June 30, 2011, respectively; and had operating expenses of $481,000 and $974,000 for the three and six months ended June 30, 2011, respectively.

 

Our property located in Englewood, Colorado with approximately 198,000 square feet of rentable space was 48.9% leased and had rental revenue that covered ordinary operating expenses for the six months ended June 30, 2012 and for the three months ended June 30, 2011.  The property was 60.1% leased at June 30, 2011.  A single tenant lease, for 100% of the rentable space, expired on April 30, 2010, and since then we have signed leases with various tenants.  Rental revenue did not cover ordinary operating expenses for the three months ended June 30, 2012.  The property generated rental income of $509,000 and had operating expenses of $537,000 for the three months ended June 30, 2012.  Rental revenue did not cover ordinary operating expenses for the six months ended June 30, 2011.  The property generated rental income of $768,000 and had operating expenses of $976,000 for the six months ended June 30, 2011.

 

30



 

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

 

For quantitative and qualitative disclosures about market risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated by reference.  Our exposure to market risk has not changed materially since December 31, 2011.

 

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, 2012.  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, 2012, 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, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

31



 

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, 2011, except (i) for the update set forth below and (ii) 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 update below and 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, 2011, which could materially affect our business, financial condition or future results. The risks described below and in our Annual Report on Form 10-K for the year ended December 31, 2011 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.

 

As of June 30, 2012, approximately 22% of our tenants operated in the bank and credit services industry.  An economic downturn in this or any industry that we have a high concentration of or a significant number of our tenants currently or may in the future operate, could negatively impact the financial condition of such tenants and cause them to fail to make timely rental payments or default on lease obligations, fail to renew their leases or renew their leases on terms less favorable to us, become bankrupt or insolvent, or otherwise become unable to satisfy their obligations to us, which could adversely affect our financial condition and result of operations.

 

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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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: August 1, 2012

 

/s/ George J. Carter

 

Chief Executive Officer and Director

 

 

George J. Carter

 

(Principal Executive Officer)

 

 

 

 

 

Date: August 1, 2012

 

/s/ John G. Demeritt

 

Chief Financial Officer

 

 

John G. Demeritt

 

(Principal Financial Officer)

 

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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, 2012, 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.

 

 

 

 

 

 

 

(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 December 21, 2010 (File No. 001-32470).

 

 

 

*

 

Filed herewith.

 

 

 

**

 

XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these Sections.

 

34