Franklin Street Properties - 10-Q quarterly report FY

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.  The Company also has a non-controlling common stock interest in twelve corporations organized to operate as real estate investment trusts ("REITs") and a non-controlling preferred stock interest in two of those REITs.

The Company operates in two business segments: real estate operations and investment banking/investment services. FSP Investments LLC provides real estate investment and broker/dealer services. FSP Investments LLC's services include: (i) the organization of REIT entities (the "Sponsored REITs"), which are syndicated through private placements; (ii) sourcing of the acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale of preferred stock in the Sponsored REITs.  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 for the Sponsored REITs.

On May 15, 2008, the Company acquired one of its Sponsored REITs, FSP Park Ten Development Corp. (“Park Ten Development”) by merging a wholly-owned subsidiary of the Company with and into Park Ten Development for a total purchase price of approximately $35.4 million.  The holders of preferred stock in Park Ten Development received cash consideration of approximately $127,290 per share.  The merger was accounted for as a purchase and the acquired assets and liabilities were recorded at their fair value.

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

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, 2007, 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 (“GAAP”) in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included.  Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any other period.

Certain amounts from the 2007 income statement have been reclassified to conform to the 2008 presentation.  The reclassification primarily reflected a state tax on gross receipts as an income tax, which is further described in the income tax footnote.  The reclassification changed the amount of real estate taxes and insurance and income taxes presented on the Company’s 2007 income statement.  There was no change to net income as a result of this reclassification.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The adoption of this standard did not have a material impact on the Company’s financial position, operations or cash flow.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of this standard did not have a material impact the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS No. 141(R) will have on our financial position, results of operations or cash flows.

 

During the six months ended June 30, 2008, the Company has sold on a best efforts basis, through private placements, preferred stock in the following Sponsored REITs:

Investment in Sponsored REITs:

At June 30, 2008, the Company held an interest in twelve Sponsored REITs.  Ten were fully syndicated and the Company no longer derives economic benefits or risks from the common stock interest that is retained in them.  The Company holds a non-controlling preferred stock investment in two of these Sponsored REITs, FSP Phoenix Tower Corp. (“Phoenix Tower”) and FSP 303 East Wacker Drive Corp. (“East Wacker”), from which it continues to derive economic benefits and risks.  The remaining entities that were not fully syndicated at June 30, 2008 are Grand Boulevard and 385 Interlocken.  Grand Boulevard has a carrying value of approximately $14.0 million and $26.3 million on the accompanying condensed consolidated balance sheets as of June 30, 2008 and December 31, 2007, respectively and is classified as an asset held for syndication.

 

Equity in earnings (losses) of investment in non-consolidated Sponsored REITs:

The following table includes equity in earnings (losses) of investments in non-consolidated Sponsored REITs:

Equity in earnings (losses) of investments in Sponsored REITs is derived from the Company’s share of income or losses 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 (losses) of Park Ten Development was derived from the Company’s preferred stock investment in the entity.  In September 2005, the Company acquired 8.5 preferred shares or 3.05% of the authorized preferred shares of Park Ten Development via a non-monetary exchange of land valued at $850,000.  The Company acquired Park Ten Development by merger on May 15, 2008, which merger was accounted for as a purchase, and the acquired assets and liabilities were recorded at their fair value.

Equity in earnings 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).

The Company recorded distributions declared of $2,277,000 and $723,000 from Sponsored REITs during the six months ended June 30, 2008 and 2007, respectively.

Non-consolidated Sponsored REITs:

The Company has in the past acquired by merger entities similar to the Sponsored REITs.  On March 19, 2008, the Company entered into an agreement and plan of merger to acquire Park Ten Development by merger for a total purchase price of approximately $35.4 million. Upon completion of the acquisition on May 15, 2008, the holders of preferred stock in Park Ten Development received cash consideration of approximately $127,290 per share. The acquisition was effected by merging a wholly-owned subsidiary of the Company with and into Park Ten Development.  Consummation of the acquisition required the approval of Park Ten Development's stockholders.  The Company’s business model for growth includes the potential acquisition by merger in the future 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 2008 includes operations of the twelve Sponsored REITs the Company held an interest in as of June 30, 2008, and Park Ten Development from January through May 14, 2008.  The Company acquired Park Ten Development by merger on May 15, 2008.  The operating data for 2007 includes operations of the eleven Sponsored REITs the Company held an interest in as of June 30, 2007.

At June 30, 2008, December 31, 2007 and June 30, 2007, the Company had ownership interests in twelve, twelve and eleven Sponsored REITs, respectively.  Summarized financial information for these Sponsored REITs is as follows:

 

 

 

 

The Company provides syndication and real estate acquisition advisory services for Sponsored REITs.  Syndication and transaction fees from non-consolidated entities amounted to approximately $6,768,000 and $13,245,000 for the six months ended June 30, 2008 and 2007, respectively.

 

 

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 $473,000 and $477,000 for the six months ended June 30, 2008 and 2007, respectively.  The Company typically makes interim mortgage loans to Sponsored REITs that enable Sponsored REITs to acquire their respective properties prior to the consummation of the offerings of their equity interests.  The interim mortgage loans are subsequently repaid out of offering proceeds.

In December 2007, the Company entered into a secured promissory note for a revolving line of credit (the “Revolver”) for up to $5.5 million with a Sponsored REIT, FSP Highland Place I Corp., that owns an office building in Englewood, Colorado, of which $1.0 million was drawn in March 2008 and remained outstanding as of June 30, 2008.  The balance of this loan is classified in other assets.  Advances under the Revolver bear interest at a rate equal to the 30 day LIBOR rate plus 200 basis points.  The Revolver was made for the purpose of funding capital expenditures and other costs of leasing.  The Company anticipates that any advances made under the Revolver will be repaid at its maturity on December 31, 2010 or earlier from long-term financing of the property, cash flows from the property or a capital event.

The Company recognized interest income from interim mortgage loans and advances on the Revolver of approximately $510,000 and $3,202,000 for the six months ended June 30, 2008 and 2007, respectively.

The Company has a revolving line of credit agreement (the "Loan Agreement") with a group of banks providing for borrowings at the Company’s election of up to $250,000,000, which matures on August 11, 2011.  Borrowings under the line of credit bear interest at either the bank's prime rate (5.00% at June 30, 2008) or a rate equal to LIBOR plus 100 basis points (3.46% at June 30, 2008). There were borrowings of $109,995,000 and $84,750,000 at the LIBOR plus 100 basis point rate at a weighted average rate of 3.47% and 6.20% outstanding under the line of credit at June 30, 2008 and December 31, 2007, respectively.  The weighted average interest rate on amounts outstanding during the six months ended June 30, 2008 and 2007 was approximately 4.15% and 6.57%, respectively; and for the year ended December 31, 2007 was approximately 6.51%.

The Loan Agreement includes restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the maintenance of at least $1,500,000 in operating cash accounts, a minimum 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 Loan Agreement's financial covenants as of June 30, 2008 and December 31, 2007.

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, 2008 and 2007.

The Company operates in two business segments: real estate operations (including real estate leasing, interest income on interim acquisition and other financings and asset/property management) including discontinued operations and investment banking/investment services (including real estate acquisition, development services and broker/dealer services).  The Company has identified these segments because this information is the basis upon which management makes decisions regarding resource allocation and performance assessment.  The accounting policies of the reportable segments are the same as those described in the “Significant Accounting Policies” in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2007.   The Company’s operations are located entirely in the United States of America.

The Company evaluates the performance of its reportable segments based on Funds From Operations (“FFO”) as management believes that FFO represents the most accurate measure of the reportable segment’s 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, plus depreciation and amortization, 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), as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.  Other real estate companies may define this term in a different manner.  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 calculation of FFO by business segment is shown in the following table:

The following table is a summary of other financial information by business segment:

8.      Cash Dividends

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

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 20% of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets.   FSP Investments LLC and FSP Protective TRS Corp, which are subsidiaries of the Company, are TRSs and operate as taxable corporations under the Code and have accounted for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes.

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

The Company follows the provisions of Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which has not resulted in recording a liability or recognition of any accrued interest or penalties.  Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future.  The Company’s effective tax rate was not affected by the adoption of FIN 48.  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 2004 and thereafter.

The income tax expense reflected in the condensed consolidated statements of income related to the TRS was a tax benefit of $158,000 for the six months ended June 30, 2008 and tax expense of $613,000 for the six months ended June 30, 2007.  The expense differs from the amounts computed by applying the Federal statutory rate of 34% to income before income taxes as follows:

No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRS.

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 to.  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 and is accounted for in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes.  The Company recorded a provision in income taxes on its income statement of $117,000 and $108,000 for the six months ended June 30, 2008 and 2007, respectively.

The Company declared a cash distribution of $0.19 per share on July 21, 2008 to stockholders of record on July 31, 2008 payable on August 20, 2008.

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, 2007.  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 disruptions in the debt market,  changes in economic conditions in the markets in which we own properties, changes in the demand by investors for investment in Sponsored REITs, risks of a lessening of demand for the types of real estate owned by us, changes in government regulations, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments.  See the factors set forth below under the caption, Item 1A. “Risk Factors”.  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.

FSP Corp. or the Company, operates in two business segments: real estate operations and investment banking/investment services. The real estate operations segment involves real estate rental operations, leasing, secured financing of real estate for interim acquisition or other property financing, and services provided for asset management, property management, property acquisitions, dispositions and development.  The investment banking/investment services segment involves the structuring of real estate investments and broker/dealer services that include 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.

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.

Our investment banking/investment services customers are primarily institutions and high net-worth individuals.  To the extent that the broad capital markets affect these investors our business is also affected.  These investors have many investment choices.  We must continually search for real estate at a price and at a competitive risk/reward rate of return that meets our customer’s risk/reward profile for providing a stream of income and as a long-term hedge against inflation.

Due to the transactional nature of significant portions of our business, our quarterly financial metrics have historically been quite variable.  We do not manage our business to quarterly targets but rather manage our business to longer-term targets.  Consequently, we consider annual financial results to be much more meaningful for performance and trend measurements.

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, 2007.

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, 2007.

Because interest rate levels and the availability of financing may affect real estate values, occupancy levels, property income and the propensity and the ability of investors to invest in Sponsored REITs, debt market conditions have affected, and likely will continue to affect, our business. The debt market is currently experiencing unprecedented disruptions, including reduced liquidity and increased credit risk premiums for certain market participants.  These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future.  At this time, we cannot predict the extent or duration of any negative impact that the current debt market conditions will have on our business.

On July 21, 2008, we announced that our board of directors declared a regular quarterly dividend for the three months ended June 30, 2008 of $0.19 per share of common stock, representing a reduction of $0.12 per share of common stock from the $0.31 per share of common stock regular quarterly dividend that we had paid since becoming a publicly-traded company in June 2005.  Our July 21, 2008 announcement noted that we had experienced a significant slowing of activity in, and lower profit contribution from, two transactional components of our business, investment banking/investment services and property dispositions, since the onset of the current debt market disruption.   Our July 21, 2008 announcement also noted that, while our ongoing/recurring real estate operations continued to show solid performance, our board of directors believed that it was prudent to better align our regular quarterly dividends with the results of our current real estate operations only, without taking into account the results of our less predictable transactional operations.  The reduction of our regular quarterly dividend reflects our uncertainty about the ultimate duration and severity of the current debt market conditions and the associated turmoil in the capital markets and their impact on our transactional businesses.

Our real estate portfolio was approximately 93% leased as of June 30, 2008, which occupancy level is generally consistent with our occupancy levels over the past two quarterly periods. Although we ended 2007 with strong leasing activity in most of our markets, we have not seen a similar level of activity so far in 2008.  In fact, leasing activity has slowed in most of our markets.  Notable exceptions include our markets with strong energy drivers, including Houston and parts of Denver.  Approximately 3% of our portfolio’s total square footage is projected to expire over the remainder of 2008.

At this time we cannot predict whether the conditions in the credit markets will have a negative impact on the financial strength of our existing tenants, but we have taken that risk into account in reviewing our reserve for bad debts.

While we cannot predict when existing vacancy 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 current market rates for the locations in which the buildings are located, which in some cases may be below the expiring rates.

Unlike our real estate business, which provides a rental revenue stream that is ongoing and recurring in nature, our investment banking/investment services business is transactional in nature.  Equity raised for Sponsored REIT syndications for the three and six months ended June 30, 2008 was $49.9 million and $52.5 million, respectively compared to $60.1 million and $109.2 million for the three and six months ended June 30, 2007, respectively.  The resulting total decrease in equity raised was $10.2 million and $56.7 million comparing the three and six months ended June 30, 2008 to the same periods in 2007, respectively.  The slowdown in our investment banking business actually began in the third quarter of 2007 and, at this point, it remains unclear when or if a higher volume of equity investment will return.  Business in this area, while always uncertain, continues to be adversely affected by the current turmoil in the financial, debt and real estate markets.  Investors who have historically participated in our private placement real estate offerings continue to express uncertainty about investing in this environment.

In addition to difficulties in raising equity from potential real estate investors in this market, our property acquisition executives are now grappling with greater uncertainty surrounding the valuation levels for prime commercial investment real estate.  We believe that the current turmoil in the debt markets, as well as perceptions about the future U.S. economy and interest rates, are producing a larger than normal divergence in the perception of value and future relative investment performance of commercial properties.  While we generally believe that such an environment has the potential to produce some exceptional property acquisition opportunities, caution, perspective and disciplined underwriting standards can significantly impact the timing of any future acquisitions.  Consequently, our ability to provide a regular stream of real estate investment product necessary to grow our overall investment banking/investment services business continues to remain uncertain as the second half of 2008 begins.  We also continue to rely solely on our in-house investment executives to access interested investors who have capital they can afford to place in an illiquid position for an indefinite period of time (i.e., invest in a Sponsored REIT).  We continue to evaluate whether our in-house sales force is capable, either through our existing client base or through new clients, of raising sufficient investment capital in Sponsored REITs to achieve future performance objectives.

During the year ended December 31, 2007, the Company disposed of five office properties.  The five office properties are located in Greenville, South Carolina; Alpharetta, Georgia; San Diego, California; Westford, Massachusetts and Austin, Texas.  The operating results for these real estate assets have been reflected as discontinued operations in the financial statements for the three and six months ended June 30, 2007.

We continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time.  However, because of the current uncertainty surrounding the valuation levels for real estate and the current uncertainty in the capital and debt markets previously discussed, we do not expect the level of disposition activity to be as significant as the prior three years.

The following table shows results for the three months ended June 30, 2008 and 2007:

 

Comparison of the three months ended June 30, 2008 to the three months ended June 30, 2007:

 

 

 

This increase was partially offset by:

 

These increases were partially offset by:

The following table shows results for the six months ended June 30, 2008 and 2007:

 

Comparison of the six months ended June 30, 2008 to the six months ended June 30, 2007:

 

 

 

This increase was partially offset by:

 

These increases were partially offset by:

Cash and cash equivalents were $34.4 million and $47.0 million at June 30, 2008 and December 31, 2007, respectively. This decrease of $12.6 million is attributable to $32.2 million provided by operating activities, less $26.3 million used for investing activities, less $18.5 million used by financing activities.  Management believes that existing cash, cash anticipated to be generated by operations and our line of credit will be sufficient to meet working capital requirements and anticipated capital expenditures and improvements 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 and from fees and commissions from the sale of shares in newly formed Sponsored REITs.  We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses.  Our ability to maintain or increase our level of dividends to stockholders, however, depends in significant part upon the level of interest on the part of investors in purchasing shares of Sponsored REITs and the level of rental income from our real properties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We were not a party to any derivative financial instruments at or during the three and six months ended June 30, 2008.

Market risk is the exposure to loss resulting from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. Our line of credit matures in August 2011 and has a variable rate of interest.  Upon maturity, our future income, cash flows and fair values relevant to financial instruments will be dependent upon the balance then outstanding and prevalent market interest rates.

We borrow from time-to-time on our line of credit.  These borrowings bear interest at the bank’s base rate (5.0% at June 30, 2008) or at 30 day LIBOR plus 100 basis points (3.46% at June 30, 2008), as elected by us when requesting funds as defined.  Generally the borrowings are for 30 day LIBOR plus 100 basis points.  As of June 30, 2008 and December 31, 2007, we had two borrowings totaling $109,995,000 and $84,750,000 in the aggregate at the 30 day LIBOR plus 100 basis point rate, representing a weighted average rate of 3.47% and 6.20%, outstanding under the line of credit, respectively.  We have drawn on this line of credit, and intend to draw on this line of credit 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 we acquire directly for our portfolio.  Generally interim mortgage loans bear interest at the same variable rate payable by us under our line of credit.  We also may draw on this line of credit to fund advances we may make under a $5.5 million revolving credit facility (which we refer to as the Revolver) that we provided to a Sponsored REIT, FSP Highland Place I Corp., that owns an office building in Englewood, Colorado in December 2007, of which, $1.0 million was drawn in March 2008 and remained outstanding as of June 30, 2008.  Advances under the Revolver bear interest at a rate equal to the 30-day LIBOR rate plus 200 basis points.  We anticipate that any advances made under the Revolver will be repaid at its maturity on December 31, 2010 or earlier from long-term financing of the property, cash flows from the property or a capital event.  We therefore believe that we have mitigated our interest rate risk with respect to our borrowings for both interim mortgage and Revolver loans.  Historically we have satisfied obligations arising from interim or other financing of acquisitions through cash or sale of properties in our portfolio.  We believe that we can mitigate interest rate risk with respect to borrowings for interim or other financing of acquisitions as well.

The following table presents as of June 30, 2008 our contractual variable rate borrowings under the line of credit, which matures August 11, 2011:

If market rates of our line of credit borrowings at maturity increased by 10%, or approximately 34.7 basis points, over the current variable rate, the increase in interest expense would decrease future earnings and cash flows by approximately $0.4 million annually.  We do not believe that the interest rate risk represented by our variable rate borrowings is material as of June 30, 2008.

 

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, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, 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 SEC'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, 2008, 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.

 

No change in our internal control over financial reporting occurred during the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 any such matters will not have a material adverse effect on our financial position, cash flows or results of operations.

 

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, 2007, except to the extent previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Trends and Uncertainties in Part I, “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations”).   In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in the Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K 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.

 

The following table provides information about purchases by Franklin Street Properties Corp. during the quarter ended June 30, 2008 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

(1)  Our Articles of Incorporation provide that we will use our best efforts to redeem shares of our common stock from stockholders who request such redemption.  Any FSP Corp. stockholder wishing to have shares redeemed must make such a request no later than July 1 of any year for a redemption that would be effective the following January 1.  This obligation is subject to significant conditions.  However, as our common stock is currently listed for trading on the American Stock Exchange, we are no longer obligated to, and do not intend to, effect any such redemption.

(2)  On October 28, 2005, FSP Corp. announced that the Board of Directors of FSP Corp. had authorized the repurchase of up to $35 million of the Company’s common stock from time to time in the open market or in privately negotiated transactions. On September 10, 2007, FSP Corp. announced that the Board of Directors of FSP Corp. had authorized certain modifications to this common stock repurchase plan. The Board of Directors increased the repurchase authorization to up to $50 million of the Company’s common stock (inclusive of all repurchases previously made under the plan).  The repurchase authorization expires at the earlier of (i) November 1, 2009 or (ii) a determination by the Board of Directors of FSP Corp. to discontinue repurchases.

None.

On May 16, 2008, the Company held its 2008 Annual Meeting of Stockholders (the “2008 Annual Meeting”). The 2008 Annual Meeting was called for the following purposes: (1) to elect two Class III directors to serve until the 2011 annual meeting and (2) to transact such other business as may properly come before the meeting or any adjournment thereof.

The following table sets forth the names of the directors elected at the 2008 Annual Meeting for new three-year terms and the number of votes cast for and withheld from each director:

The names of each of the other directors whose terms of office continued after the 2008 Annual Meeting are as follows: John N. Burke, Barbara J. Fournier, Barry Silverstein, Dennis J. McGillicuddy and Janet Prier Notopoulos.

None.

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

 

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.

 

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* Filed herewith