Franklin
Street
Properties
Annual
Report
2013
3/11/14 5:59 PM
Cover Properties (Clockwise From Right):
1999 Broadway, Denver
120 East Baltimore Street, Baltimore
999 Peachtree Street, Atlanta
Towers At Westchase, Houston
Strategy
Franklin Street Properties Corp.
Franklin Street Properties Corp. (the “Company”, “FSP”, “we” or “our”) (NYSE
MKT: FSP) is a real estate investment trust that owns and operates a
portfolio of high-quality office buildings in select major markets in the U.S.
We are focused on long-term value creation, as well as achieving current
income, through investments in select urban infill and central business
district (CBD) commercial properties, with primary emphasis on our top five
core markets of Atlanta, Dallas, Denver, Houston and Minneapolis. As of
December 31, 2013, FSP owned 39 office properties in 13 states, consisting
of approximately 9.7 million rentable square feet. More specifically,
approximately 70% of FSP’s owned portfolio (in square feet) is within our
top five core markets. FSP’s portfolio was approximately 94.1% leased
as of December 31, 2013. The principal revenue sources from our real
estate operations include rental income from tenants who lease our office
space, interest income from secured loans made on office properties and
fee income from asset/property management. In order to create value
for shareholders, the Company seeks to grow revenue through higher
occupancies in its owned portfolio, increasing rents on new and renewal
leases, and by acquiring additional high-quality assets below replacement
cost with some amount of existing vacancy that can be leased up over
time. The Company also continuously reviews and evaluates its real estate
property portfolio for potentially advantageous dispositions.
Based in Wakefield, Massachusetts, FSP is a Maryland corporation. The
Company was originally founded in 1997 and has been publicly-traded
since mid-2005. To learn more about FSP please visit our website at:
www.franklinstreetproperties.com
This Annual Report contains “forward-looking statements” within the meaning of
federal securities laws. For more information, please refer to the discussion in the
first paragraph of Item 7 in the attached Annual Report on Form 10-K for the year
ended December 31, 2013.
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Liberty Plaza, Dallas
Growth Fellow Stockholders
I am pleased to report that our Company’s operating profit
employment and believe we are in the early innings of a cyclically-
performance rose in 2013. Profits as measured by funds from
slower but prolonged broad-based upswing in the economy.
operations, or FFO1, increased by approximately $20.5 million or 25%
from 2012, and on a per share basis, our FFO grew 10.3% from $0.97
To that end, we are pleased with our portfolio’s continued strong
per share in 2012 to $1.07 per share in 2013, which includes the effect
performance and the timing, pace and quality of our additional
of our May common stock offering. Our total growth in FFO per fully-
property acquisitions. In 2013, we executed 912,000 square feet of
diluted share for the three year period of 2011, 2012 and 2013 totaled
new and renewal leases, and ended the year with a portfolio that was
approximately 27.4% and is one of the highest aggregate three year
94.1% leased. In addition, we acquired approximately $558 million
growth rates in the office REIT sector, reflecting the overall growth
of central business district and infill, transit-oriented real estate in
of our portfolio, as well as strong operating improvements we have
Denver, Colorado and Atlanta, Georgia. We further streamlined our
been able to achieve. Coupled with our consistent dividend of $0.76
per share, we continue to believe that this combination of growth
and income is meaningful and attractive to investors.
portfolio by disposing of a two-story office property in Richardson,
Texas. In addition, a single-asset REIT affiliate sold its property in
Plymouth, Minnesota to a third party, resulting in the repayment of
Within the larger economy, 2013 brought a rising stock market as the
our $2.35 million loan.
Dow Jones Industrial Average achieved a new inflation-adjusted 14-
year high. Unemployment has trended lower and GDP continued its
moderate, but positive pace of growth. Finally, the start of the Fed’s
On the capital front, we completed a secondary equity offering in
May and raised $230.7 million. In August we closed on a seven-year,
tapering program in December has been seen as a harbinger of real
$220 million term loan to lock in attractive longer-term interest rates.
improvement in the economy, which bodes well for businesses that
As of year-end 2013, our current debt to total market capitalization
benefit from an improving cycle, such as the office property sector.
was 43.6% and our balance sheet remains extremely flexible, with no
We expect to continue to benefit from improved fundamentals and
property secured debt.
1
FFO is a non-GAAP financial measure currently used in the real estate industry that we believe provides useful information to investors. Please refer to page A-1
of this Annual Report for a definition of FFO and a reconciliation of net income to FFO.
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1
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Looking ahead, we believe FSP is well positioned to continue to
for attractive property acquisitions, and we will continue to pursue
deliver meaningful growth in 2014 for the following reasons:
acquisitions of large, centrally-located assets within our core markets.
First, our portfolio of office properties is concentrated in large in-fill,
In closing, the team at FSP remains focused on creating value for all
centrally-located areas within Atlanta, Dallas, Denver, Houston, and
our shareholders. We are well positioned to outperform in the current
Minneapolis; markets that have specific, strong macro-economic
market and beyond with our newly expanded, well-located portfolio
growth drivers that have the potential to propel occupancies and
of office properties and strong balance sheet.
rents faster than the broader U.S. economy.
Second, we will benefit from a full year of income from our 2013
acquisitions. 2013 was a strong year of acquisitions for FSP, and we
believe that our active leasing efforts at 1001 17th Street in Denver
Thank you for your continued trust, confidence and support.
represent a significant opportunity for us to create additional value.
George J. Carter
As always, we continuously watch the broader real estate markets
Chairman & Chief Executive Officer
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Markets
Markets
Atlanta | Dallas | Denver | Houston | Minneapolis
Approximately 70% (in square feet) of FSP’s owned portfolio is within our top five core markets.
Franklin Street Properties owns and/or manages approximately 14.1 million square feet of office space located in 15 different states (as of December 31, 2013).
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Major Through Sustainability
Through Sustainability
As a single footstep will not make a path on the earth, so a single
thought will not make a pathway in the mind. To make a deep physical
path, we walk again and again. To make a deep mental path, we must
think over and over the kind of thoughts we wish to dominate our lives.
- Henry David Thoreau
As we learn each day about our collective responsibility to our environment, FSP is committed to creating a pathway from our habits and
repeating them to positively impact the environment. We are continuing to analyze FSP’s consumption and footprint as we look much
more closely at our direct and indirect uses of natural resources. FSP continues to review our portfolio as we monitor each property’s
consumption with goals of “taking only what you need” and “reducing what you need”.
The sustainability of our commercial real estate portfolio is an area
One product of FSP’s recent sustainability initiatives has been
of central importance to FSP. The measurement, benchmarking and
the implementation of a Demand Response Program. Participating
analysis of the energy, water and waste consumption at our buildings
provide valuable information that allows us to best target which assets
will benefit most from applying additional sustainability measures
and ultimately have the most positive impact on the environment and
the Company.
FSP’s properties continue to be active participants in both the EPA’s
ENERGY STAR program as well as the U.S. Green Building Council’s
Leadership in Energy and Environmental Design (LEED®) rating
system. A significant percentage of FSP’s owned or asset-managed
buildings have earned the ENERGY STAR label, denoting that their
energy performance is among the top 25% of similar properties.
properties identified short-term energy reduction measures that could
be quickly implemented in the event of a grid emergency. In addition
to helping to prevent local brownouts and reduce the need for future
power generators, participating properties receive regular quarterly
payments. FSP plans to expand participation in this program as grid
operators and utilities open new demand response markets.
During the past year, FSP piloted a virtually real-time energy-
monitoring program at six of our properties. Large amounts of
electricity usage data are being analyzed by an energy analyst with
Through LEED, many of FSP’s properties have been recognized
the goal of finding greater operating efficiencies. The initial results
for superior site and water management, material use and indoor
have been very promising, and FSP is in the process of evaluating the
environmental quality.
program’s viability to roll out further across the portfolio.
As part of FSP’s commitment to sustainability issues, the Company
has formed a Sustainability Committee that is comprised of members
of senior management, as well as a LEED AP. The Sustainability
Committee is dedicated to creating and forming sustainability-related
policies, goals, and practices for the Company and our properties. FSP
Through the employment of modern technologies, participation
in multiple benchmarking programs, as well as the sharing of best
practices, FSP is provided with numerous opportunities for continuing
improvement. Such measures support FSP’s objective of ongoing
aims to achieve both economic and community-based benefits from
enhancement to our portfolio of commercial real estate in order to
such efforts.
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reduce our environmental footprint and maximize investor returns.
3/7/14 5:31 PM
Creating Value 1001 17th Street, Denver
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Creating Value Highlights
Dividends Paid (per share)
as of December 31
as of December 31
$0.76
$0.76
$0.76
Leased Percentage
as of December 31
as of December 31
89%
94%
94%
2011
2012
2013
2011
2012
2013
Funds from Operations (FFO)* (per share)
as of December 31
Total Market Capitalization (TMC)**
as of December 31
$0.89
$0.97
$1.07
$2,123,739
$1,637,709
$1,274,227
2011
2012
2013
2011
2012
2013
Balance Sheet Data – Year Ended December 31
(In thousands, except per share amounts)
Total assets
Total liabilities
Total shareholders’ equity
2011 2012 2013
$ 1,407,348
$ 1,526,068
$ 2,044,034
485,981
921,367
661,319
993,868
864,749
1,050,166
Shares outstanding at year-end
82,937
82,937
100,187
Shareholders’ equity per share
$ 11.11
$ 10.42
$ 10.48
Dividends paid
for the year ended December 31
$ 62,177
$ 63,032
$ 69,588
*
FFO is a non-GAAP financial measure currently used in the real estate industry that we believe provides useful information to investors. Please refer to page A-1
of this Annual Report for a definition of FFO and a reconciliation of net income to FFO.
**
The Company calculates Total Market Capitalization as the sum of the closing share price for the date of the calculation multiplied by the number of shares
outstanding on the date of the calculation, plus the sum of debt outstanding on the date of the calculation.
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3/13/14 5:01 PM
Financial Towers At Westchase, Houston
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7
3/7/14 5:32 PM
999 Peachtree Street, Atlanta
Compelling Opportunities
Focus
on
Key
Markets
3/11/14 6:10 PM
8
40335nar.indd 10
Following is the Annual Report on Form 10-K
for the fiscal year ended December 31, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-32470
FRANKLIN STREET PROPERTIES CORP.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
401 Edgewater Place, Suite 200, Wakefield, Massachusetts
(Address of principal executive offices)
04-3578653
(I.R.S. Employer
Identification No.)
01880
(Zip Code)
Registrant’s telephone number, including area code: (781) 557-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, $.0001 par value per share
Name of each exchange on which registered:
NYSE MKT
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes X No __.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes __ No X.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 __.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Website, 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 __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405
of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company) Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes __ No X.
The aggregate market value of the voting and non-voting common equity held by non-affiliates based on
the closing sale price as reported on NYSE MKT, as of the last business day of the registrant’s most recently
completed second fiscal quarter, June 30, 2013, was approximately $1,189,629,087.
There were 100,187,405 shares of common stock of the registrant outstanding as of February 14, 2014.
Documents incorporated by reference: The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A, promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with
the registrant’s Annual Meeting of Stockholders to be held on May 15, 2014 (the “Proxy Statement”). The
information required in response to Items 10 – 14 of Part III of this Form 10-K, other than that contained in Part I
under the caption, “Directors and Executive Officers of FSP Corp.,” is hereby incorporated by reference to the
Proxy Statement.
TABLE OF CONTENTS
PART I .......................................................................................................................................................................... 1
Item 1. Business. .................................................................................................................................................... 1
Item 1A. Risk Factors. .............................................................................................................................................. 7
Item 1B. Unresolved Staff Comments. ................................................................................................................... 14
Item 2. Properties. ................................................................................................................................................ 15
Item 3. Legal Proceedings .................................................................................................................................... 20
Item 4. Mine Safety Disclosures .......................................................................................................................... 20
PART II ...................................................................................................................................................................... 21
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities .................................................................................................................................. 21
Stock Performance Graph. ....................................................................................................................... 22
Item 6. Selected Financial Data. .......................................................................................................................... 23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. ................................................................ 44
Item 8. Financial Statements and Supplementary Data ........................................................................................ 46
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ................. 46
Item 9A. Controls and Procedures. ......................................................................................................................... 46
Item 9B. Other Information .................................................................................................................................... 47
PART III..................................................................................................................................................................... 48
Item 10. Directors, Executive Officers and Corporate Governance ....................................................................... 48
Item 11. Executive Compensation ......................................................................................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 48
Item 13. Certain Relationships and Related Transactions, and Director Independence ......................................... 48
Item 14. Principal Accounting Fees and Services .................................................................................................. 48
PART IV ..................................................................................................................................................................... 49
Item 15. Exhibits, Financial Statement Schedules ................................................................................................. 49
SIGNATURES ............................................................................................................................................................ 50
PART I
Item 1. Business
History
Our company, Franklin Street Properties Corp., which we refer to as FSP Corp., the Company, we or our, is
a Maryland corporation that operates in a manner intended to qualify as a real estate investment trust, or REIT, for
federal income tax purposes. Our common stock is traded on the NYSE MKT under the symbol “FSP”. FSP Corp.
is the successor to Franklin Street Partners Limited Partnership, or the FSP Partnership, which was originally formed
as a Massachusetts general partnership in January 1997 as the successor to a Massachusetts general partnership that
was formed in 1981. On January 1, 2002, the FSP Partnership converted into FSP Corp., which we refer to as the
conversion. As a result of this conversion, the FSP Partnership ceased to exist and we succeeded to the business of
the FSP Partnership. In the conversion, each unit of both general and limited partnership interests in the FSP
Partnership was converted into one share of our common stock. As a result of the conversion, we hold, directly and
indirectly, 100% of the interest in three former subsidiaries of the FSP Partnership: FSP Investments LLC, FSP
Property Management LLC, and FSP Holdings LLC. We operate some of our business through these subsidiaries.
Our Business
We are a REIT focused on commercial real estate investments primarily in office markets and currently
operate in only one segment: real estate operations. The principal revenue sources for our real estate operations
include rental income from real estate leasing, interest income from secured loans made on office properties and fee
income from asset/property management.
Previously we also operated in an investment banking segment, which was discontinued in December 2011.
Our investment banking segment generated brokerage commissions, loan origination fees, development services and
other fees related to the organization of single-purpose entities that own real estate and the private placement of
equity in those entities. We refer to these entities which are organized as corporations and operated in a manner
intended to qualify as REITs, as Sponsored REITs. 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 is a registered broker/dealer with the Securities and Exchange
Commission and is a member of the Financial Industry Regulatory Authority, or FINRA.
From time-to-time we may acquire real estate or invest in real estate by making secured loans on real estate
or by acquiring our Sponsored REITs, although we have no legal or any other enforceable obligation to acquire or to
offer to acquire any Sponsored REIT. We may also pursue on a selective basis the sale of our properties to take
advantage of the value creation and demand for our properties, or for geographic or property specific reasons.
Real Estate
We own and operate a portfolio of real estate consisting of 39 office properties as of December 31, 2013.
We derive rental revenue from income paid to us by tenants of these properties. See Item 2 of this Annual Report on
Form 10-K for more information about our properties. From time-to-time we dispose of properties generating gains
or losses in an ongoing effort to improve and upgrade our portfolio. We also held preferred stock investments in
two Sponsored REITs as of December 31, 2013, from which we record our share of income or loss under the equity
method of accounting, and from which we receive dividends.
We provide asset management, property management, property accounting, investor and/or development
services to our portfolio and certain of our Sponsored REITs through our subsidiaries FSP Investments LLC and
FSP Property Management LLC. FSP Corp. recognizes revenue from its receipt of fee income from Sponsored
REITs that have not been consolidated or acquired by us. Neither FSP Investments LLC nor FSP Property
Management LLC receives any rental income.
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
anticipate that these loans will be repaid at their maturity or earlier from long-term financings of the underlying
1
properties, cash flows from the underlying properties or some other capital event. We refer to these loans as
Sponsored REIT Loans. We have six Sponsored REIT Loans secured by real estate outstanding as of December 31,
2013, from which we derive interest income.
Investment Objectives
Our investment objectives are to create shareholder value by increasing revenue from rental, dividend and
interest income and net gains from sales of properties and increase the cash available for distribution in the form of
dividends to our stockholders. We expect that we will continue to derive real estate revenue from Sponsored REIT
Loans and fees from asset management, property management and investor services. We may also acquire
additional real properties by direct purchase or by acquisition of Sponsored REITs, though we have no obligation to
acquire or offer to acquire any Sponsored REIT in the future.
From time to time, as market conditions warrant, we may sell properties owned by us. We sold one office
property located in Richardson, Texas on October 29, 2013 at a gain and one office property located in Southfield,
Michigan on December 21, 2012 at a loss. We sold one industrial property located in Savage, Maryland on June
24, 2011, and one office property located in Falls Church, Virginia on January 21, 2011, each at a gain. When we
sell a property, we either distribute some or all of the sale proceeds to our stockholders as a distribution or retain
some or all of such proceeds for investment in real properties or other corporate activities.
We may acquire, and have acquired, real properties in any geographic area of the United States and of any
property type. We own 39 properties that are located in 13 different states. See Item 2 of this Annual Report on
Form 10-K for more information about our properties.
We rely on the following principles in selecting real properties for acquisition by FSP Corp. and managing
them after acquisition:
(cid:120) we seek to buy or develop investment properties at a price which produces value for investors and avoid
overpaying for real estate merely to outbid competitors;
(cid:120) we seek to buy or develop properties in excellent locations with substantial infrastructure in place around
them and avoid investing in locations where the future construction of such infrastructure is speculative;
(cid:120) we seek to buy or develop properties that are well-constructed and designed to appeal to a broad base of
users and avoid properties where quality has been sacrificed for cost savings in construction or which
appeal only to a narrow group of users;
(cid:120) we aggressively manage, maintain and upgrade our properties and refuse to neglect or undercapitalize
management, maintenance and capital improvement programs; and
(cid:120) we believe that we have the ability to hold properties through down cycles because we generally do not
have significant leverage on the Company, which could place the properties at risk of foreclosure. As of
February 14, 2014, none of our 39 properties was subject to mortgage debt.
Competition
With respect to our real estate investments, we face competition in each of the markets where our
properties are located. In order to establish, maintain or increase the rental revenues for a property, it must be
competitive on location, cost and amenities with other buildings of similar use. Some of our competitors may have
significantly more resources than we do and may be able to offer more attractive rental rates or services. On the
other hand, some of our competitors may be smaller or have less fixed overhead costs, less cash or other resources
that make them willing or able to accept lower rents in order to maintain a certain occupancy level. In markets
where there is not currently significant existing property competition, our competitors may decide to enter the
market and build new buildings to compete with our existing projects or those in a development stage. Our
competition is not only with other developers, but also with property users who choose to own their building or a
portion of the building in the form of an office condominium. Competitive conditions are affected by larger market
forces beyond our control, such as general economic conditions, that may increase competition among landlords for
quality tenants, and individual decisions by tenants that are beyond our control.
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Employees
We had 37 employees as of December 31, 2013 and 38 employees as of February 14, 2014.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, and, in
accordance therewith, we file reports and other information with the SEC. The reports and other information we file
can be inspected and copied at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
Such reports and other information may also be obtained from the web site that the SEC maintains at
http://www.sec.gov. Further information about the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
We make available, free of charge through our website http://www.franklinstreetproperties.com our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after we electronically file such material with the SEC.
Reports and other information concerning us may also be obtained electronically through a variety of
databases, including, among others, the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) program at
http://www.sec.gov, Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
We will voluntarily provide paper copies of our filings and code of ethics upon written request received at
the address on the cover of this Annual Report on Form 10-K, free of charge.
3
Directors and Executive Officers of FSP Corp.
The following table sets forth the names, ages and positions of all our directors and executive officers as of
February 14, 2014.
Name
George J. Carter (6)
Barbara J. Fournier (5)
Janet Prier Notopoulos (4)
John N. Burke (1) (2) (3) (5) (7)
Brian N. Hansen (1) (2) (3) (4) (9)
Dennis J. McGillicuddy (1) (4)
Georgia Murray (2) (3) (6) (8) (10)
Barry Silverstein (1) (5)
Jeffery B. Carter
Scott H. Carter
John G. Demeritt
Age
65
58
66
52
42
72
63
80
42
42
53
Position
President, Chief Executive Officer and Director
Executive Vice President, Chief Operating Officer,
Treasurer, Secretary and Director
Executive Vice President and Director
Director
Director
Director
Director
Director
Executive Vice President and Chief Investment Officer
Executive Vice President, General Counsel
and Assistant Secretary
Executive Vice President and Chief Financial Officer
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating and Corporate Governance Committee
(4) Class I Director
(5) Class II Director
(6) Class III Director
(7) Chair of the Audit Committee
(8) Chair of the Compensation Committee
(9) Chair of the Nominating and Corporate Governance Committee
(10) Lead Independent Director
George J. Carter, age 65, is President, Chief Executive Officer and has been a Director of FSP Corp.
since 2002. Mr. Carter is responsible for all aspects of the business of FSP Corp. and its affiliates, with special
emphasis on the evaluation, acquisition and structuring of real estate investments. Prior to the conversion, he was
President of the general partner of the FSP Partnership (the “General Partner”) and was responsible for all aspects of
the business of the FSP Partnership and its affiliates. From 1992 through 1996 he was President of Boston Financial
Securities, Inc. (“Boston Financial”). Prior to joining Boston Financial, Mr. Carter was owner and developer of
Gloucester Dry Dock, a commercial shipyard in Gloucester, Massachusetts. From 1979 to 1988, Mr. Carter served
as Managing Director in charge of marketing at First Winthrop Corporation, a national real estate and investment
banking firm headquartered in Boston, Massachusetts. Prior to that, he held a number of positions in the brokerage
industry including those with Merrill Lynch & Co. and Loeb Rhodes & Co. Mr. Carter is a graduate of the
University of Miami (B.S.). Mr. Carter is a FINRA General Securities Principal (Series 24) and holds a FINRA
Series 7 general securities license and a FINRA Series 79, Investment Banker Registration license.
Barbara J. Fournier, age 58, is Executive Vice President, Chief Operating Officer, Treasurer, Secretary
and has been a Director of FSP Corp. since 2002. Ms. Fournier has as her primary responsibility, together with Mr.
Carter, the management of all operating business affairs of FSP Corp. and its affiliates. Ms. Fournier was the
Principal Financial Officer until March 2005. Prior to the conversion, Ms. Fournier was the Vice President, Chief
Operating Officer, Treasurer and Secretary of the General Partner. From 1993 through 1996, she was Director of
Operations for the private placement division of Boston Financial. Prior to joining Boston Financial, Ms. Fournier
served as Director of Operations for Schuparra Securities Corp. and as the Sales Administrator for Weston Financial
Group. From 1979 through 1986, Ms. Fournier worked at First Winthrop Corporation in administrative and
management capacities; including Office Manager, Securities Operations and Partnership Administration. Ms.
4
Fournier attended Northeastern University and the New York Institute of Finance. Ms. Fournier is a member of the
NYSE MKT Listed Company Council. Ms. Fournier participates in corporate governance-related continuing
education sessions offered by the NYSE affiliate, Corporate Board Member. Ms. Fournier is a FINRA General
Securities Principal (Series 24). She also holds other FINRA supervisory licenses including Series 4 and Series 53,
and a FINRA Series 7 general securities license, a FINRA Series 99, Operations Professional license and a FINRA
Series 79, Investment Banker Registration license.
Janet Prier Notopoulos, age 66, is an Executive Vice President of FSP Corp. and has been a Director of
FSP Corp. and President of FSP Property Management since 2002. Ms. Notopoulos has as her primary
responsibility the oversight of the management of the real estate assets of FSP Corp. and its affiliates. Prior to the
conversion, Ms. Notopoulos was a Vice President of the General Partner. Prior to joining the FSP Partnership in
1997, Ms. Notopoulos was a real estate and marketing consultant for various clients. From 1975 to 1983, she was
Vice President of North Coast Properties, Inc., a Boston real estate investment company. Between 1969 and 1973,
she was a real estate paralegal at Goodwin, Procter & Hoar. Ms. Notopoulos is a graduate of Wellesley College
(B.A.) and the Harvard School of Business Administration (M.B.A).
John N.Burke, age 52, has been a Director of FSP Corp. and Chair of the Audit Committee since June
2004. Mr. Burke is a certified public accountant with approximately 30 years of experience in the practice of public
accounting working with both private and publicly traded companies with extensive experience serving clients in the
real estate industry. Such experience includes analysis and evaluation of financial reporting, accounting systems,
internal controls and audit matters. Mr. Burke has been involved as an advisor on several public offerings, private
equity and debt financings and merger and acquisition transactions. Mr. Burke’s consulting experience includes a
wide range of business planning services. Prior to starting his own firm in 2003, Mr. Burke was a Partner in the
Boston office of BDO USA, LLP. Mr. Burke is a member of the American Institute of Certified Public Accountants
and the Massachusetts Society of CPAs. Mr. Burke earned an M.S. in Taxation and studied undergraduate
accounting and finance at Bentley University.
Brian N. Hansen, age 42, became a Director in November 2012 and Chair of the Nominating and Corporate
Governance Committee in October 2013. Mr. Hansen is President and Chief Operating Officer of Confluence
Investment Management LLC, a St. Louis based Registered Investment Advisor. Prior to founding Confluence in
2007, Mr. Hansen served as a Managing Director in A.G. Edwards’ Financial Institutions & Real Estate Investment
Banking practice. While at A.G. Edwards, Mr. Hansen advised a wide variety of Real Estate Investment Trusts on
numerous capital markets transactions, including public and private offerings of debt and equity securities as well as
the analysis of various merger & acquisition opportunities. Prior to joining A.G. Edwards, Mr. Hansen served as a
Manager in Arthur Andersen LLP's Audit & Business Advisory practice. Mr. Hansen serves on the board of a
number of non-profit entities and the Investment Committee of the Archdiocese of St. Louis. Mr. Hansen earned his
MBA from the Kellogg School of Management at Northwestern University and his Bachelor of Science in
Commerce from DePaul University. Mr. Hansen is a Certified Public Accountant.
Dennis J. McGillicuddy, age 72, has been a Director of FSP Corp. since May 2002. Mr. McGillicuddy
graduated from the University of Florida with a B.A. degree and from the University of Florida Law School with a
J.D. degree. In 1968, Mr. McGillicuddy joined Barry Silverstein in founding Coaxial Communications, a cable
television company. In 1998 and 1999, Coaxial sold its cable systems. Mr. McGillicuddy has served on the boards
of various charitable organizations. He is currently president of the Board of Trustees of Florida Studio Theater, a
professional non-profit theater organization, and he serves as a Co-Chair, together with his wife, of Embracing Our
Differences, an annual month-long art exhibit that promotes the values of diversity and inclusion. Mr. McGillicuddy
also is a member of the Advisory Board to the Center For Mindfulness In Medicine, Health Care & Society,
University of Massachusetts Medical School.
Georgia Murray, age 63, has been a Director of FSP Corp. since April 2005, Chair of the Compensation
Committee since October 2006 and Lead Independent Director since February 2014. Ms. Murray is retired from
Lend Lease Real Estate Investments, Inc., where she served as a Principal from November 1999 until May 2000.
From 1973 through October 1999, Ms. Murray worked at The Boston Financial Group, Inc., serving as Senior Vice
President and a Director at times during her tenure. Boston Financial was an affiliate of the Boston Financial Group,
Inc. She is a past Trustee of the Urban Land Institute and a past President of the Multifamily Housing Institute. Ms.
5
Murray previously served on the Board of Directors of Capital Crossing Bank. She also serves on the boards of
numerous non-profit entities. Ms. Murray is a graduate of Newton College.
Barry Silverstein, age 80, has been a Director of FSP Corp. since May 2002. Mr. Silverstein took his law
degree from Yale University in 1957 and subsequently held positions as attorney/officer/director of various
privately-held manufacturing companies in Chicago, Illinois. In 1964, he moved to Florida to manage his own
portfolio and to teach at the University of Florida Law School. In 1968, Mr. Silverstein became the principal
founder and shareholder in Coaxial Communications, a cable television company. In 1998 and 1999, Coaxial sold
its cable systems. Since January 2001, Mr. Silverstein has been a private investor.
Jeffrey B. Carter, age 42, is Executive Vice President and Chief Investment Officer of FSP Corp. Mr.
Carter was appointed to that position in February 2012. Previously, Mr. Carter served as Senior Vice President and
Director of Acquisitions of FSP Corp. from 2005 to 2012 and as Vice President - Acquisitions from 2003 to 2005.
Mr. Carter is primarily responsible for developing and implementing the Company’s investment strategy, including
coordination of acquisitions and dispositions. Prior to joining FSP Corp., Mr. Carter worked in Trust
Administration for Northern Trust Bank in Miami, Florida. Mr. Carter is a graduate of Arizona State University
(B.A.) and The George Washington University (M.A.). Mr. Carter holds a FINRA Series 7 general securities
license and a FINRA Series 79, Investment Banker Registration license. Mr. Carter’s father, George J. Carter,
serves as President, Chief Executive Officer and a Director of FSP Corp. and Mr. Carter’s brother, Scott H. Carter,
serves as Executive Vice President, General Counsel and Assistant Secretary of FSP Corp.
Scott H. Carter, age 42, is Executive Vice President, General Counsel and Assistant Secretary of FSP
Corp. Mr. Carter has been General Counsel since February 2008. Mr. Carter joined FSP Corp. in October 2005 as
Senior Vice President, In-house Counsel and was appointed to the position of Assistant Secretary in May 2006. Mr.
Carter has as his primary responsibility the management of all of the legal affairs of FSP Corp. and its affiliates.
Prior to joining FSP Corp. in October 2005, Mr. Carter was associated with the law firm of Nixon Peabody LLP,
which he originally joined in 1999. At Nixon Peabody LLP, Mr. Carter concentrated his practice on the areas of real
estate syndication, acquisitions and finance. Mr. Carter received a Bachelor of Business Administration (B.B.A.)
degree in Finance and Marketing and a Juris Doctor (J.D.) degree from the University of Miami. Mr. Carter is
admitted to practice law in the Commonwealth of Massachusetts. Mr. Carter’s father, George J. Carter, serves as
President, Chief Executive Officer and a Director of FSP Corp. and Mr. Carter’s brother, Jeffery B. Carter, serves as
Executive Vice President and Chief Investment Officer of FSP Corp.
John G. Demeritt, age 53, is Executive Vice President and Chief Financial Officer of FSP Corp. and has
been Chief Financial Officer since March 2005. Mr. Demeritt previously served as Senior Vice President, Finance
and Principal Accounting Officer since September 2004. Prior to September 2004, Mr. Demeritt was a Manager
with Caturano & Company, an independent accounting firm (which later merged with McGladrey) where he focused
on Sarbanes Oxley compliance. Previously, from March 2002 to March 2004 he provided consulting services to
public and private companies where he focused on SEC filings, evaluation of business processes and acquisition
integration. During 2001 and 2002 he was Vice President of Financial Planning & Analysis at Cabot Industrial
Trust, a publicly traded real estate investment trust, which was acquired by CalWest in December 2001. From
October 1995 to December 2000 he was Controller and Officer of The Meditrust Companies, a publicly traded real
estate investment trust (formerly known as the The La Quinta Companies, which was then acquired by the
Blackstone Group), where he was involved with a number of merger and financing transactions. Prior to that, from
1986 to 1995 he had financial and accounting responsibilities at three other public companies, and was previously
associated with Laventhol & Horwath, an independent accounting firm from 1983 to 1986. Mr. Demeritt is a
Certified Public Accountant and holds a Bachelor of Science degree from Babson College.
Each of the above executive officers has been a full-time employee of FSP Corp. for the past five fiscal
years.
George J. Carter, Barbara J. Fournier and Janet Notopoulos is each also a director of each of the
following public reporting companies, each of which is a Sponsored REIT: FSP Galleria North Corp.; FSP 50 South
Tenth Street Corp.; and FSP 303 East Wacker Drive Corp. Each of these directors holds office in these companies
from the time of his or her election until the next annual meeting and until a successor is elected and qualified, or
until such director's earlier death, resignation or removal.
6
Item 1A
Risk Factors
The following important factors, among others, could cause actual results to differ materially from those
indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by
management from time-to-time.
Economic conditions in the United States could have a material adverse impact on our earnings and financial
condition.
Because economic conditions in the United States may affect real estate values, occupancy levels and
property income, current and future economic conditions in the United States could have a material adverse impact
on our earnings and financial condition. The economy in the United States is continuing to experience a period of
limited economic growth, including high levels of unemployment and increased credit risk premiums for a number
of market participants. These conditions may continue or worsen in the future. Economic conditions may be
affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow
growth and/or recessionary concerns, changes in currency exchange rates, fiscal policy uncertainty, geopolitical
events, changes in government regulations, regulatory uncertainty, the availability of debt and interest rate
fluctuations. At this time we cannot predict the extent or duration of any negative impact that the current state of the
U.S. economy will have on our earnings and financial condition.
If a Sponsored REIT defaults on a Sponsored REIT Loan, we may be required to keep a balance outstanding
on our unsecured credit facilities or use our cash balance to repay our unsecured credit facilities, which may
reduce cash available for distribution to our stockholders or for other corporate purposes.
From time-to-time, we may draw on our 2012 Credit Facility (as defined in Note 5) or 2013 Term Loan (as
defined in Note 5) to 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. We anticipate that each Sponsored REIT Loan will be repaid at maturity or earlier from
long term financing of the property securing the loan, cash flows from that underlying property or some other capital
event. If a Sponsored REIT defaults on a Sponsored REIT Loan, the Sponsored REIT could be unable to fully repay
the Sponsored REIT Loan and we would have to satisfy our obligation under the 2012 Credit Facility and/or the
2013 Term Loan through other means. If we are required to use cash for this purpose, we would have less cash
available for distribution to our stockholders or for other corporate purposes.
Our operating results and financial condition could be adversely affected if we are unable to refinance the
2012 Credit Facility or 2013 Term Loan.
There can be no assurance that we will be able to refinance the revolving line of credit portion of our 2012
Credit Facility upon its maturity on September 27, 2016 (subject to extension until September 27, 2017), the term
loan portion of our 2012 Credit Facility upon its maturity on September 27, 2017 or the 2013 Term Loan upon its
maturity on August 26, 2020, that any such refinancings would be on terms as favorable as the terms of the 2012
Credit Facility or 2013 Term Loan, or that we will be able to otherwise obtain funds by selling assets or raising
equity to make required payments on the 2012 Credit Facility or the 2013 Term Loan. If we are unable to refinance
the 2012 Credit Facility or 2013 Term Loan at maturity or meet our payment obligations, the amount of our
distributable cash flow and our financial condition would be adversely affected.
Failure to comply with covenants in our 2012 Credit Facility and 2013 Term Loan credit agreements could
adversely affect our financial condition.
Our 2012 Credit Facility and 2013 Term Loan credit agreements contain customary restrictions,
requirements and other limitations on our ability to incur indebtedness, including maximum leverage ratios,
maximum secured leverage ratios, minimum fixed charge coverage ratios, maximum unencumbered leverage ratios
and minimum unsecured debt service coverage ratios, which we must maintain. Our continued ability to borrow
under the 2012 Credit Facility and 2013 Term Loan is subject to compliance with our financial and other covenants.
Failure to comply with such covenants could cause a default under the 2012 Credit Facility or 2013 Term Loan, and
7
we may then be required to repay either or both of them with capital from other sources. Under those
circumstances, other sources of capital may not be available to us, or be available only on unattractive terms.
We may use the 2012 Credit Facility or 2013 Term Loan to purchase properties directly for our real estate
portfolio, to make Sponsored REIT Loans or for other corporate purposes. If we breach covenants in our 2012
Credit Facility or 2013 Term Loan credit agreements, the lenders can declare a default. A default under our 2012
Credit Facility or 2013 Term Loan credit agreements could result in difficulty financing growth in our business and
could also result in a reduction in the cash available for distribution to our stockholders or for other corporate
purposes. A default under our 2012 Credit Facility or 2013 Term Loan credit agreements could materially and
adversely affect our financial condition and results of operations.
An increase in interest rates would increase our interest costs on variable rate debt and could adversely
impact our ability to refinance existing debt or sell assets.
As of December 31, 2013, we had approximately $306.5 million of indebtedness under the revolving line of credit
portion of our 2012 Credit Facility that bears interest at variable rates, and we may incur more of such indebtedness
in the future. Borrowings under the revolving line of credit portion of our 2012 Credit Facility may not exceed $500
million outstanding at any time, although such amount may be increased by up to an additional $250 million through
the exercise of an accordion feature. The term loan portion of our 2012 Credit Facility is for $400 million. On
September 27, 2012, we fixed the base LIBOR rate on the term loan portion of our 2012 Credit Facility at 0.75% for
five years by entering into an interest rate swap agreement. The 2013 Term Loan is for $220 million, although such
amount may be increased by up to an additional $50 million through the exercise of an accordion feature. On
August 26, 2013, we fixed the base LIBOR rate on the 2013 Term Loan at 2.32% for seven years by entering into an
interest rate swap agreement. In the future, if interest rates increase, then so will the interest costs on our unhedged
variable rate debt, which could adversely affect our cash flow, our ability to pay principal and interest on our debt
and our ability to make distributions to stockholders. In addition, rising interest rates could limit our ability to both
incur new debt and to refinance existing debt when it matures. From time to time, we may enter into interest rate
swap agreements and other interest rate hedging contracts, including swaps, caps and floors. While these
agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that the
other parties to the agreements will not perform, we could incur significant costs associated with the settlement of
the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-
effective cash flow hedges. In addition, an increase in interest rates could decrease the amount third parties are
willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in
economic or other conditions
If we are not able to collect sufficient rents from each of our owned real properties, investments in Sponsored
REITs or interest on Sponsored REIT Loans we fund, we may suffer significant operating losses or a
reduction in cash available for future dividends.
A substantial portion of our revenue is generated by the rental income of our real properties and
investments in Sponsored REITs. If our properties do not provide us with a steady rental income or we do not
collect interest income from Sponsored REIT Loans we fund, our revenues will decrease, which may cause us to
incur operating losses in the future and reduce the cash available for distribution to our stockholders.
We may not be able to find properties that meet our criteria for purchase.
Growth in our portfolio of real estate is dependent on the ability of our acquisition executives to find
properties for sale and/or development which meet the applicable investment criteria. To the extent they fail to find
such properties, we would be unable to increase the size of our portfolio of real estate, which could reduce the cash
otherwise available for distribution to our stockholders.
We are dependent on key personnel.
We depend on the efforts of George J. Carter, our President and Chief Executive Officer and a Director;
Barbara J. Fournier, our Chief Operating Officer, Treasurer, Secretary, an Executive Vice President and a Director;
John G. Demeritt, our Chief Financial Officer and an Executive Vice President; Jeffery B. Carter, our Chief
8
Investment Officer and an Executive Vice President; Janet Prier Notopoulos, an Executive Vice President and a
Director; and Scott H. Carter, our General Counsel, Assistant Secretary and an Executive Vice President. If any of
our executive officers were to resign, our operations could be adversely affected. We do not have employment
agreements with any of our executive officers.
Our level of dividends may fluctuate.
Because our real estate occupancy levels and rental rates can fluctuate, there is no predictable recurring
level of revenue from such activities. As a result of this, the amount of cash available for distribution may fluctuate,
which may result in our not being able to maintain or grow dividend levels in the future.
We face risks from tenant defaults or bankruptcies.
If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord
and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our
properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such
tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders.
The real properties held by us may significantly decrease in value.
As of February 14, 2014, we owned 39 properties. Some or all of these properties may decline in value.
To the extent our real properties decline in value, our stockholders could lose some or all of the value of their
investments. The value of our common stock may be adversely affected if the real properties held by us decline in
value since these real properties represent the majority of the tangible assets held by us. Moreover, if we are forced
to sell or lease the real property held by us below its initial purchase price or its carrying costs, respectively, or if we
are forced to lease real property at below market rates because of the condition of the property, our results of
operations would be adversely affected and such negative results of operations may result in lower dividends being
paid to holders of our common stock.
New acquisitions may fail to perform as expected.
We may acquire new properties by direct FSP Corp. purchase, by acquisition of Sponsored REITs or by
acquisition of other entities. We may purchase these properties with cash, by drawing on the revolving line of credit
portion of our 2012 Credit Facility, by assuming existing indebtedness, by entering into new indebtedness, by
issuing shares of our stock or by other means. During the year ended December 31, 2013, we acquired one property
in Georgia and two properties in Colorado. During the year ended December 31, 2012, we acquired one property
located in Georgia and one property located in Texas. During the year ended December 31, 2011, we acquired one
property in North Carolina, one property in Illinois and three properties in Texas. Newly acquired properties may
fail to perform as expected, in which case, our results of operations could be adversely affected.
We face risks in owning, developing and operating real property.
An investment in us is subject to the risks incident to the ownership, development and operation of real
estate-related assets. These risks include the fact that real estate investments are generally illiquid, which may affect
our ability to vary our portfolio in response to changes in economic and other conditions, as well as the risks
normally associated with:
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changes in general and local economic conditions;
the supply or demand for particular types of properties in particular markets;
changes in market rental rates;
the impact of environmental protection laws;
changes in tax, real estate and zoning laws; and
the impact of obligations and restrictions contained in title-related documents.
Certain significant costs, such as real estate taxes, utilities, insurance and maintenance costs, generally are
not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest rate
9
levels, the availability of financing and other factors may affect real estate values and property income.
Furthermore, the supply of commercial space fluctuates with market conditions.
We may encounter significant delays in reletting vacant space, resulting in losses of income.
When leases expire, we may incur expenses and may not be able to re-lease the space on the same terms.
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 locations in which the buildings are located, which in some cases may be below the expiring
rates. Certain leases provide tenants the right to terminate early if they pay a fee. If we are unable to re-lease space
promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to
reduce distributions to our stockholders. This risk is currently heightened because 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. These conditions may continue or worsen in the future. Typical lease terms range from five to ten
years, so up to approximately 20% of our rental revenue from commercial properties could be expected to expire
each year.
We face risks of tenant-type concentration.
As of December 31, 2013, our top twenty tenants leased, based on leased square feet, held approximately
38.4% of the total rentable square feet in our owned portfolio of properties. Approximately 26.0% and 20.02% of
our top twenty tenants as a percentage of the top twenty tenants rentable square feet (or 10.1% and 7.7% of the total
rentable square feet in our portfolio) operated in the energy services industry and the bank and credit services
industry, respectively. An economic downturn in these or any industry in which a high concentration of our tenants
operate or in which 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 results of operations.
We face risks from geographic concentration.
The properties in our portfolio as of December 31, 2013, by aggregate square footage, are distributed
geographically as follows: South – 42.8%, West – 25.0%, Midwest – 17.3% and East – 14.9%. However, within
certain of those regions, we hold a larger concentration of our properties in Greater Denver, Colorado – 20.7%,
Atlanta, Georgia – 14.4%, Dallas, Texas – 13.9% and Houston, Texas – 12.3%. We are likely to face risks to the
extent that any of these areas in which we hold a larger concentration of our properties suffer deteriorating economic
conditions.
We compete with national, regional and local real estate operators and developers, which could adversely
affect our cash flow.
Competition exists in every market in which our properties are currently located and in every market in
which properties we may acquire in the future will be located. We compete with, among others, national, regional
and numerous local real estate operators and developers. Such competition may adversely affect the percentage of
leased space and the rental revenues of our properties, which could adversely affect our cash flow from operations
and our ability to make expected distributions to our stockholders. Some of our competitors may have more
resources than we do or other competitive advantages. Competition may be accelerated by any increase in
availability of funds for investment in real estate. For example, decreases in interest rates tend to increase the
availability of funds and therefore can increase competition. To the extent that our properties continue to operate
profitably, this will likely stimulate new development of competing properties. The extent to which we are affected
by competition will depend in significant part on both local market conditions and national and global economic
conditions.
10
We are subject to possible liability relating to environmental matters, and we cannot assure you that we have
identified all possible liabilities.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real
property may become liable for the costs of removal or remediation of certain hazardous substances released on or
in its property. Such laws may impose liability without regard to whether the owner or operator knew of, or caused,
the release of such hazardous substances. The presence of hazardous substances on a property may adversely affect
the owner’s ability to sell such property or to borrow using such property as collateral, and it may cause the owner
of the property to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of
hazardous substances on a property could result in the owner incurring substantial liabilities as a result of a claim by
a private party for personal injury or a claim by an adjacent property owner for property damage.
In addition, we cannot assure you that:
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future laws, ordinances or regulations will not impose any material environmental liability;
proposed legislation to address climate change will not increase utility and other costs of operating our
properties which, if not offset by rising rental income and/or paid by tenants, would materially and
adversely affect our financial condition and results of operations;
the current environmental conditions of our properties will not be affected by the condition of properties in
the vicinity of such properties (such as the presence of leaking underground storage tanks) or by third
parties unrelated to us;
tenants will not violate their leases by introducing hazardous or toxic substances into our properties that
could expose us to liability under federal or state environmental laws; or
environmental conditions, such as the growth of bacteria and toxic mold in heating and ventilation systems
or on walls, will not occur at our properties and pose a threat to human health.
We are subject to compliance with the Americans With Disabilities Act and fire and safety regulations, any of
which could require us to make significant capital expenditures.
All of our properties are required to comply with the Americans With Disabilities Act (ADA), and the
regulations, rules and orders that may be issued thereunder. The ADA has separate compliance requirements for
“public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to
persons with disabilities. Compliance with ADA requirements might require, among other things, removal of access
barriers and noncompliance could result in the imposition of fines by the U.S. government or an award of damages
to private litigants.
In addition, we are required to operate our properties in compliance with fire and safety regulations,
building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and
become applicable to our properties. Compliance with such requirements may require us to make substantial capital
expenditures, which expenditures would reduce cash otherwise available for distribution to our stockholders.
We face risks associated with our tenants being designated “Prohibited Persons” by the Office of Foreign
Assets Control.
Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United
States Department of the Treasury, or OFAC, maintains a list of persons designated as terrorists or who are
otherwise blocked or banned, which we refer to as Prohibited Persons. OFAC regulations and other laws prohibit
conducting business or engaging in transactions with Prohibited Persons (the “OFAC Requirements”). Our current
leases and certain other agreements require the other party to comply with the OFAC Requirements. If a tenant or
other party with whom we contract is placed on the OFAC list we may be required by the OFAC Requirements to
terminate the lease or other agreement. Any such termination could result in a loss of revenue or a damage claim by
the other party that the termination was wrongful.
Security breaches and other disruptions could compromise our information and expose us to liability, which
could cause our business and reputation to suffer.
11
In the ordinary course of our business, we collect and store sensitive data concerning investors in the
Sponsored REITS, tenants and vendors. Despite our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other
disruptions. Any such breach could compromise our networks and the information stored there could be accessed,
publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal
claims or proceedings and liability under laws that protect the privacy of personal information, and could damage
our reputation.
Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of
our properties.
(cid:3)(cid:3)
We have significant investments in markets that may be the targets of actual or threatened terrorism attacks
in the future. As a result, some tenants in these markets may choose to relocate their businesses to other markets or
to lower-profile office buildings within these markets that may be perceived to be less likely targets of future
terrorist activity. This could result in an overall decrease in the demand for office space in these markets generally
or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease our
properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or
indirectly damage our properties, both physically and financially, or cause losses that materially exceed our
insurance coverage. As a result of the foregoing, our ability to generate revenues and the value of our properties
could decline materially. See also “We may lose capital investment or anticipated profits if an uninsured event
occurs.”
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We may lose capital investment or anticipated profits if an uninsured event occurs.
We carry, or our tenants carry, comprehensive liability, fire and extended coverage with respect to each of
our properties, with policy specification and insured limits customarily carried for similar properties. There are,
however, certain types of losses that may be either uninsurable or not economically insurable. Should an uninsured
material loss occur, we could lose both capital invested in the property and anticipated profits.
Contingent or unknown liabilities acquired in mergers or similar transactions could require us to make
substantial payments.
The properties which we acquired in mergers were acquired subject to liabilities and without any recourse
with respect to liabilities, whether known or unknown. As a result, if liabilities were asserted against us based upon
any of these properties, we might have to pay substantial sums to settle them, which could adversely affect our
results of operations and financial condition and our cash flow and ability to make distributions to our stockholders.
Unknown liabilities with respect to properties acquired might include:
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liabilities for clean-up or remediation of environmental conditions;
claims of tenants, vendors or other persons dealing with the former owners of the properties; and
liabilities incurred in the ordinary course of business.
Our employee retention plan may prevent changes in control.
During February 2006, our Board of Directors approved a change in control plan, which included a form of
retention agreement and discretionary payment plan. Payments under the discretionary plan are capped at 1% of the
market capitalization of FSP Corp. as reduced by the amount paid under the retention plan. The costs associated
with these two components of the plan may have the effect of discouraging a third party from making an acquisition
proposal for us and may thereby inhibit a change in control under circumstances that could otherwise give the
holders of our common stock the opportunity to realize a greater premium over the then-prevailing market prices.
Further issuances of equity securities may be dilutive to current stockholders.
The interests of our existing stockholders could be diluted if additional equity securities are issued to
finance future acquisitions, repay indebtedness or to fund other general corporate purposes. Our ability to execute
12
our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of
credit and other forms of secured and unsecured debt, and equity financing.
The price of our common stock may vary.
The market prices for our common stock may fluctuate with changes in market and economic conditions,
including the market perception of REITs in general, and changes in the financial condition of our securities. Such
fluctuations may depress the market price of our common stock independent of the financial performance of FSP
Corp. The market conditions for REIT stocks generally could affect the market price of our common stock.
We would incur adverse tax consequences if we failed to qualify as a REIT.
The provisions of the tax code governing the taxation of real estate investment trusts are very technical and
complex, and although we expect that we will be organized and will operate in a manner that will enable us to meet
such requirements, no assurance can be given that we will always succeed in doing so. In addition, as a result of our
past acquisition of certain Sponsored REITs by merger, which we refer to as target REITs, we might no longer
qualify as a real estate investment trust. We could lose our ability to so qualify for a variety of reasons relating to
the nature of the assets acquired from the target REITs, the identity of the stockholders of the target REITs who
become our stockholders or the failure of one or more of the target REITs to have previously qualified as a real
estate investment trust. Moreover, you should note that if one or more of the target REITs that we acquired in May
2008, April 2006, April 2005 or June 2003 did not qualify as a REIT immediately prior to the consummation of its
acquisition, we could be disqualified as a REIT as a result of such acquisition.
If in any taxable year we do not qualify as a real estate investment trust, we would be taxed as a corporation
and distributions to our stockholders would not be deductible by us in computing our taxable income. In addition, if
we were to fail to qualify as a real estate investment trust, we could be disqualified from treatment as a real estate
investment trust in the year in which such failure occurred and for the next four taxable years and, consequently, we
would be taxed as a regular corporation during such years. Failure to qualify for even one taxable year could result
in a significant reduction of our cash available for distribution to our stockholders or could require us to incur
indebtedness or liquidate investments in order to generate sufficient funds to pay the resulting federal income tax
liabilities.
Provisions in our organizational documents may prevent changes in control.
Our Articles of Incorporation and Bylaws contain provisions, described below, which may have the effect
of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control
under circumstances that could otherwise give the holders of our common stock the opportunity to realize a
premium over the then-prevailing market prices.
Ownership Limits. In order for us to maintain our qualification as a real estate investment trust, the holders
of our common stock may be limited to owning, either directly or under applicable attribution rules of the Internal
Revenue Code, no more than 9.8% of the lesser of the value or the number of our equity shares, and no holder of
common stock may acquire or transfer shares that would result in our shares of common stock being beneficially
owned by fewer than 100 persons. Such ownership limit may have the effect of preventing an acquisition of control
of us without the approval of our board of directors. Our Articles of Incorporation give our board of directors the
right to refuse to give effect to the acquisition or transfer of shares by a stockholder in violation of these provisions.
Staggered Board. Our board of directors is divided into three classes. The terms of these classes will
expire in 2014, 2015 and 2016, respectively. Directors of each class are elected for a three-year term upon the
expiration of the initial term of each class. The staggered terms for directors may affect our stockholders’ ability to
effect a change in control even if a change in control were in the stockholders’ best interests.
Preferred Stock. Our Articles of Incorporation authorize our board of directors to issue up to 20,000,000
shares of preferred stock, par value $.0001 per share, and to establish the preferences and rights of any such shares
issued. The issuance of preferred stock could have the effect of delaying or preventing a change in control even if a
change in control were in our stockholders’ best interest.
13
Increase of Authorized Stock. Our board of directors, without any vote or consent of the stockholders, may
increase the number of authorized shares of any class or series of stock or the aggregate number of authorized shares
we have authority to issue. The ability to increase the number of authorized shares and issue such shares could have
the effect of delaying or preventing a change in control even if a change in control were in our stockholders’ best
interest.
Amendment of Bylaws. Our board of directors has the sole power to amend our Bylaws. This power could
have the effect of delaying or preventing a change in control even if a change in control were in our stockholders’
best interests.
Stockholder Meetings. Our Bylaws require advance notice for stockholder proposals to be considered at
annual meetings of stockholders and for stockholder nominations for election of directors at special meetings of
stockholders. The advance notice provisions require a proponent to provide us with detailed information about the
proponent and/or nominee. Our Bylaws also provide that stockholders entitled to cast more than 50% of all the
votes entitled to be cast at a meeting must join in a request by stockholders to call a special meeting of stockholders
and that a specific process for the meeting request must be followed. These provisions could have the effect of
delaying or preventing a change in control even if a change in control were in the best interests of our stockholders.
Supermajority Votes Required. Our Articles of Incorporation require the affirmative vote of the holders of
no less than 80% of the shares of capital stock outstanding and entitled to vote in order (i) to amend the provisions
of our Articles of Incorporation relating to the classification of directors, removal of directors, limitation of liability
of officers and directors or indemnification of officers and directors or (ii) to amend our Articles of Incorporation to
impose cumulative voting in the election of directors. These provisions could have the effect of delaying or
preventing a change in control even if a change in control were in our stockholders’ best interest.
Item 1B. Unresolved Staff Comments.
None.
14
Item 2. Properties
Set forth below is information regarding our properties as of December 31, 2013:
Property Location
Office
1515 Mockingbird Lane
Charlotte, NC 28209
678-686 Hillview Drive
Milpitas, CA 95035
600 Forest Point Circle
Charlotte, NC 28273
4820 & 4920 Centennial Blvd.
Colorado Springs, CO 80919
14151 Park Meadow Drive
Chantilly, VA 20151
1370 & 1390 Timberlake
Manor Parkway,
Chesterfield, MO 63017
501 & 505 South 336th Street
Federal Way, WA 98003
50 Northwest Point Rd.
Elk Grove Village, IL 60005
1350 Timberlake Manor
Parkway
Chesterfield, MO 63017
16285 Park Ten Place
Houston, TX 77084
2730-2760 Junction Avenue
408-410 East Plumeria
San Jose, CA 95134
15601 Dallas Parkway
Addison, TX 75001
1500 & 1600 Greenville Ave.
Richardson, TX 75080
Date of
Purchase (1)
Approx.
Square
Feet
Percent
Leased as
of 12/31/13
Approx.
Number
of Tenants
Major Tenants (2)
8/1/97
109,674
82%
61
Primary PhysicianCare
3/9/99
36,288
100%
Headway Technologies, Inc.
1
7/8/99
62,212
100%
American National Red Cross
1
9/28/00
110,405
85%
Comcast of ColoradoX, LLC
3
Walter Kidde Portable Equipment, Inc.
METSO Minerals Industries, Inc.
3/15/01
138,537
93%
American Systems Corporation
5
Omniplex World Services
Booz Allen Hamilton, Inc.
5/24/01
232,766
98%
RGA Reinsurance Company
AMDOCS, Inc.
5
9/14/01
117,010
54%
12
SunGard Availability Services, LP
12/5/01
176,848
100%
Citicorp Credit Services, Inc.
1
3/4/02
116,197
91%
RGA Reinsurance Company
3
AB Mauri Food Inc. d/b/a Fleischmanns
Yeast
6/27/02
157,460
100%
Modec International, Inc.
9
PB Americas, Inc.
BAE Systems Land & Armaments, LP
Bluware, Inc.
8/27/02
145,951
100%
County of Santa Clara
3
Spidercloud Wireless, Inc.
AltiGen Communications, Inc.
9/30/02
293,787
94%
7
Behringer Harvard Holdings, LLC
Noble Royalties, Inc.
Federal National Mortgage Association
3/3/03
298,766
100%
ARGO Data Resource Corp.
4
VCE Company, LLC
Id Software, LLC
15
Property Location
6550 & 6560 Greenwood Plaza
Englewood, CO 80111
3815-3925 River Crossing Pkwy
Indianapolis, IN 46240
5055 & 5057 Keller Springs Rd.
Addison, TX 75001
2740 North Dallas Parkway
Plano, TX 75093
5505 Blue Lagoon Drive
Miami, FL 33126
5600, 5620 & 5640 Cox Road
Glen Allen, VA 23060
1293 Eldridge Parkway
Houston, TX 77077
380 Interlocken Crescent
Broomfield, CO 80021
Date of
Purchase (1)
Approx.
Square
Feet
Percent
Leased as
of 12/31/13
Approx.
Number
of Tenants
Major Tenants (2)
2/24/05
196,236
100%
DIRECTV, Inc.
4
7/6/05
205,059
99%
14
Kaiser Foundation Health Plan
Somerset CPAs, P.C.
Crow Horwath, LLP
The College Network, Inc.
2/24/06
218,934
96%
33
See Footnote 3
12/15/00
117,050
100%
6
Masergy Communications, Inc.
Special Insurance Services, Inc.
NelsonArchitectural Engineers, Inc.
Williston Financial Group
WR Starky Mortgage, LLP
11/6/03
212,619
100%
Burger King Corporation
1
7/16/03
298,456
100%
SunTrust Bank
6
General Electric Company
ChemTreat, Inc.
1/16/04
248,399
100%
CITGO Petroleum Corporation
1
8/15/03
240,184
86%
VMWare, Inc.
9
3625 Cumberland Boulevard
Atlanta, GA 30339
6/27/06
387,267
98%
25
MWH Americas, Inc
Cooley LLP
Sierra Financial Services, Inc.
Corporate Holdings, LLC
Century Business Services, Inc.
Bennett Thrasher PC
Randstad General Partner (US)
390 Interlocken Crescent
12/21/06
241,516
69%
Vail Holdings, Inc.
7
120 East Baltimore St.
Baltimore, MD 21202
16290 Katy Freeway
Houston, TX 77094
6/13/07
325,445
78%
16
SunTrust Bank
State's Attorney for Baltimore City
State Retirement and Pension Systems
of Maryland
9/28/05
156,746
100%
Murphy Exploration and Production
3
Company
16
Property Location
2291 Ball Drive
St Louis, MO 63146
45925 Horseshoe Drive
Sterling, VA 20166
4807 Stonecroft Blvd.
Chantilly, VA 20151
14800 Charlson Road
Eden Praire, MN 55347
121 South Eighth Street and
801 Marquette Ave. S.
Minneapolis, MN 55402
4820 Emperor Boulevard
Durham, NC 27703
5100 & 5160 Tennyson Pkwy
Plano, TX 75024
7500 Dallas Parkway
Plano, TX 75024
909 Davis Street
Evanston, IL 60201
One Ravinia Drive
Atlanta, Georgia
10370 & 10350 Richmond Ave.
Houston, TX 77042
1999 Broadway
Denver, CO
999 Peachtree
Atlanta, GA
1001 17th Street
Denver, CO
Total Office
Date of
Purchase (1)
Approx.
Square
Feet
Percent
Leased as
of 12/31/13
Approx.
Number
of Tenants
Major Tenants (2)
12/11/08
127,778
100%
Monsanto Company
1
12/26/08
135,888
100%
Giesecke & Devrient America, Inc.
1
6/26/09
111,469
100%
Northrop Grumman Systems Corp.
1
6/30/09
153,028
100%
C.H. Robinson Worldwide, Inc.
1
6/29/10
474,991
91%
41
TCF National Bank
3/4/11
259,531
100%
Quintiles Transnational Corp.
1
3/10/11
202,600
100%
Denbury Onshore LLC
1
3/24/11
214,110
100%
ADS Alliance Data Systems, Inc.
6
Americorp., Inc. d/b/a Altair Global
9/30/11
195,245
98%
Houghton Mifflin Harcourt
6
7/31/12
386,603
90%
17
Publishing Company
Northshore University Healthsystem
T-Mobile South LLC
Internap Network Services Corporation
Cedar Technologies
11/1/12
629,025
97%
50
Petrobras America, Inc.
5/22/13
673,839
96%
7/1/13
621,946
94%
33
42
Promontory Financial Group, LLC
United States Government
Sutherland Asbill Brennan LLP
Heery International, Inc.
8/28/13
655,420
89%
WPX Energy. Inc.
17
Newfield Exploration
9,685,285
94%
(1) Date of purchase or merged entity date of purchase.
(2) Major tenants that occupy 10% or more of the space in an individual property.
(3) No tenant occupies more than 10% of the space.
All of the properties listed above are owned, directly or indirectly, by us. None of our properties are subject to any
mortgage loans. We have no material undeveloped or unimproved properties, or proposed programs for material
renovation, improvement or development of any of our properties in 2014. We believe that our properties are
adequately covered by insurance as of December 31, 2013.
17
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Item 3. 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 4. Mine Safety Disclosures
Not applicable.
20
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our common stock is listed on the NYSE MKT under the symbol “FSP”. The following table sets forth
the high and low sales prices on the NYSE MKT for the quarterly periods indicated.
Three Months
Ended
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
Range
High
$
$
$
$
13.77
14.44
15.27
14.80
$
$
$
$
12.88
12.34
10.84
11.14
Low
$
$
$
$
11.70
11.55
12.34
12.55
$
$
$
$
10.42
9.98
9.57
9.43
As of February 7, 2014, there were 10,530 holders of our common stock, including both holders of record
and participants in securities position listings.
On January 10, 2014, our board of directors declared a dividend of $0.19 per share of our common stock
payable to stockholders of record as of January 24, 2014 that was paid on February 14, 2014. Set forth below are
the distributions per share of common stock made by FSP Corp. in each quarter since 2012.
Quarter
Ended
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
Distribution Per Share of
Common Stock of FSP Corp.
$0.19
$0.19
$0.19
$0.19
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
$0.19
$0.19
$0.19
$0.19
While not guaranteed, we expect that cash dividends on our common stock comparable to our most recent
quarterly dividend will continue to be paid in the future. See Part I, Item 1A Risk Factors, “Our level of dividends
may fluctuate.”, for additional information.
21
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the Company’s common stock
between December 31, 2008 and December 31, 2013 with the cumulative total return of (1) the NAREIT Equity
Index, (2) the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”) and (3) the Russell 2000 Total
Return Index over the same period. This graph assumes the investment of $100.00 on December 31, 2008 and
assumes that any distributions are reinvested.
Performance Graph
s
r
a
l
l
o
D
n
i
e
u
l
a
V
275.00
250.00
225.00
200.00
175.00
150.00
125.00
100.00
75.00
50.00
25.00
-
Years
Franklin Street Properties
NAREIT Equity
S&P 500
Russell 2000
2008
2009
2010
2011
2012
2013
FSP
NAREIT Equity
S&P 500
Russell 2000
2008
$
100
100
100
100
2009
$
104
128
126
127
107
164
146
161
2012
$
106
212
172
180
2013
$
109
218
228
250
80
177
149
155
As of December 31,
2011
$
2010
$
Notes to Graph:
The above performance graph and related information shall not be deemed "soliciting material" or to be "filed" with
the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future
filing under the Securities Act, as amended of 1933 or Securities Exchange Act of 1934, each as amended, except to
the extent that we specifically incorporate it by reference into such filing.
22
Item 6. Selected Financial Data
The following selected financial information is derived from the historical consolidated financial
statements of FSP Corp. This information should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Item 7 and with FSP Corp.’s consolidated financial
statements and related notes thereto included in Item 8.
(In thousands, except per share amounts)
2013
Year Ended December 31,
2011
2012
2010
2009
Operating Data:
Total revenue
Income from:
Income from continuing operations
Income from discontinued operations
Net income
Basic and diluted income per share:
Continuing operations
Discontinued operations
Total
Distributions declared per
share outstanding:
Balance Sheet Data:
Total assets
Total liabilities
Total shareholders' equity
$ 213,636
$ 161,580
$ 138,041
$ 115,802
$ 118,635
17,294
2,533
19,827
22,950
(15,317)
7,633
19,357
24,167
43,524
17,729
4,364
22,093
27,085
787
27,872
$ 0.18
0.03
$ 0.21
$ 0.28
(0.19)
$ 0.09
$ 0.24
0.29
$ 0.53
$ 0.22
0.06
$ 0.28
$ 0.37
0.01
$ 0.38
$ 0.76
$ 0.76
$ 0.76
$ 0.76
$ 0.76
2013
2012
As of December 31,
2011
2010
2009
$ 2,044,034
993,868
1,050,166
$ 1,526,068
661,319
864,749
$ 1,407,348
485,981
921,367
$ 1,238,735
317,177
921,558
$ 1,154,850
217,576
937,274
23
Item 7. 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. Historical results and percentage relationships set forth in the consolidated
financial statements, including trends which might appear, should not be taken as necessarily indicative of future
operations. The following discussion and other parts of this Annual Report on Form 10-K may also contain
forward-looking statements based on current judgments and current knowledge of management, which are subject to
certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such
forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking
statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including
without limitation, economic conditions in the United States, disruptions in the debt markets, economic conditions in
the markets in which we own properties, risks of a lessening of demand for the types of real estate owned by us,
uncertainties relating to fiscal policy, changes in government regulations and regulatory uncertainty, geopolitical
events, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs,
additional staffing, insurance increases and real estate tax valuation reassessments. See “Risk Factors” in Item 1A.
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 Annual Report on Form 10-K 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. Our current strategy is to invest in
select urban infill and central business district properties, with primary emphasis on our top five markets of Atlanta,
Dallas, Denver, Houston and Minneapolis. We believe that our top five markets have macro-economic drivers that
have the potential to increase occupancies and rents. We will also monitor San Diego, Silicon Valley, Greater
Boston, Raleigh-Durham, and Greater Washington, DC, as well as other markets, for opportunistic investments.
FSP Corp. seeks value-oriented investments with an eye towards long-term growth and appreciation, as well as
current income.
The main factor that affects our real estate operations is the broad economic market conditions in the
United States. These market conditions affect the occupancy levels and the rent levels on both a national and local
level. We have no influence on broader economic/market conditions. We look to acquire and/or develop quality
properties in good locations in order to lessen the impact of downturns in the market and to take advantage of
upturns when they occur.
Trends and Uncertainties
Economic Conditions
The economy in the United States is continuing to experience a period of limited economic growth,
including relatively high levels of unemployment, which directly affects the demand for office space, our primary
income producing asset. The broad economic market conditions in the United States are affected by numerous
factors, including but not limited to, inflation and employment levels, energy prices, slow economic growth and/or
recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency exchange rates,
geopolitical events, the regulatory environment, the availability of debt and interest rate fluctuations. However, we
believe that unemployment rates have begun to trend lower. We also believe that the Federal Reserve Bank’s
tapering program in December 2013 has been generally received as a harbinger of real improvement in the
economy, which could bode well for our real estate operations. We could benefit from any further improved
economic fundamentals and increasing levels of employment. We believe that the economy could be in the early
stages of a cyclically-slower but prolonged broad-based upswing. However, future economic factors may negatively
affect real estate values, occupancy levels and property income.
Real Estate Operations
Leasing
24
Our real estate portfolio was approximately 94.1% leased as of December 31, 2013 and approximately
94.0% leased as of December 31, 2012. The 0.1% increase in leased space was from leasing accomplished during
2013 and was partially offset by the effect on our overall leased % from an acquisition with a lower amount of
leased space. On August 28, 2013 we acquired a 655,565 square foot office building in Denver, Colorado that was
88.5% leased at the time of acquisition. We believe this property offers an excellent opportunity to increase
occupancy and rental income stream within a vibrant and growing Denver central business district office market,
creating incremental value for the Company. During the year ended December 31, 2013, we leased approximately
912,000 square feet of office space, of which approximately 645,000 square feet were with existing tenants, at a
weighted average term of 7.21 years. On average, tenant improvements for such leases were $18.25 per square foot,
lease commissions were $8.48 per square foot and rent concessions were approximately three months of free rent.
Average GAAP base rents under such leases were $23.33 per square foot, or 8.0% higher than average rents in the
respective properties as applicable compared to the year ended December 31, 2012.
As of December 31, 2013, leases for approximately 5.6% and 9.5% of the square footage in our portfolio
are scheduled to expire during 2014 and 2015, respectively. As 2014 begins, we believe that our property portfolio
is well stabilized, with a balanced lease expiration schedule. We believe that most of our largest property markets
are now experiencing positive trends in both occupancies and rental rates. We believe our property portfolio has
improved our occupancy levels and should allow overall tenant improvement expenditures and leasing costs to
moderate in relation to the level of rental revenues being achieved as we look ahead.
While we cannot generally predict when existing vacancy in our real estate portfolio will be leased or if
existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals
will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are
located, which could be 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 Acquisition and Investment Activity
During 2013:
(cid:120)
on May 22, we acquired an office property with approximately 680,277 rentable square feet of
space for $183.0 million located in the central business district of Denver, Colorado;
on July 1, we acquired an office property with approximately 621,007 rentable square feet for
$157.9 million located in the midtown submarket of Atlanta, Georgia;
on August 28, we acquired an office property with approximately 655,565 rentable square feet of
space for $217.0 million located in the central business district of Denver, Colorado;
on December 6, we received approximately $2.35 million from FSP 505 Waterford Corp. as
repayment in full of a Sponsored REIT Loan; and
funded advances on Sponsored REIT Loans for revolving lines of credit in the aggregate amount
of approximately $8.2 million.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
During 2012, we:
(cid:120)
(cid:120)
(cid:120)
acquired two properties directly into our portfolio with a total of approximately 1,016,000
rentable square feet at an aggregate purchase price of approximately $207.6 million. On July 31,
2012, we acquired an office property with approximately 387,000 square feet for approximately
$52.8 million in Atlanta, Georgia and on November 1, 2012 we acquired an office property with
approximately 629,000 square feet for approximately $154.8 million in Houston, Texas.
funded advances on Sponsored REIT Loans for revolving lines of credit of an aggregate of
approximately $41.6 million including $30 million during March 2012 to FSP 50 South Tenth
Street Corp., and $11.6 million for revolving lines of credit made during the year ended
December 31, 2012;
received repayments on Sponsored REIT Loans of $121.2 million, including $106.2 million on
July 27, 2012 from a first mortgage loan on a property owned by FSP 50 South Tenth Street
25
Corp., and $15.0 million on December 20, 2012 from a secured revolving line of credit with FSP
Phoenix Tower Corp.;
(cid:120) made and funded a Sponsored REIT Loan on July 5, 2012, in the form of a first mortgage loan in
the principal amount of $33 million to a wholly-owned subsidiary of a Sponsored REIT, FSP
Energy Tower I Corp., which owns a property in Houston, Texas.
During 2011, we:
(cid:120) 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 $214.2 million. On March 4,
2011 we acquired a commercial property with approximately 260,000 rentable square feet for
approximately $75.8 million in North Carolina, on March 10, 2011, we acquired a commercial
property with approximately 203,000 rentable square feet for approximately $37.0 million in
Texas, on March 24, 2011, we acquired another commercial property with approximately 214,000
rentable square feet for approximately $53.0 million in Texas, on September 30, 2011 we
acquired a property with approximately 195,000 rentable square feet for approximately $37.1
million in Illinois and on October 6, 2011 we acquired another commercial property with
approximately 122,000 rentable square feet for approximately $11.3 million in Texas; and
funded advances on Sponsored REIT Loans of an aggregate of approximately $82.8 million
including $76.2 million on December 29, 2011, for a first mortgage loan on a property owned by
FSP 50 South Tenth Street Corp., which was repaid in 2012 and $6.6 million for revolving lines
of credit and construction loans made during the year ended December 31, 2011.
(cid:120)
Discontinued Operations and Dispositions
We include properties sold or held for sale and investment banking activities as discontinued operations.
Property Dispositions
We sold an office property located in Richardson, Texas on October 29, 2013 at a $2.2 million gain.
During the three months ended September 30, 2012, we reached a decision to classify our office property
located in Southfield, Michigan as an asset held for sale. In evaluating the Southfield, Michigan property,
management considered various subjective factors, including the time, cost and likelihood of successfully leasing
the property, the effect of the property’s results on its unencumbered asset value, which is part of the leverage ratio
used to calculate interest rates under the 2012 Credit Facility and future capital costs to upgrade and reposition the
multi-tenant property and to lease up the building, recent leasing and economic activity in the local area, and offers
to purchase the property. We concluded that selling the property was the more prudent decision and outweighed the
potential future benefit of continuing to hold the property. The property was expected to sell within one year at a
loss, which was recorded as a provision for loss on a property held for sale of $14.3 million net of applicable income
taxes and was classified as an asset held for sale of $0.7 million at September 30, 2012. We sold the property on
December 21, 2012 for $0.3 million resulting in a total loss of $14.8 million.
We sold an industrial property located in Savage, Maryland on June 24, 2011 at a $2.3 million gain and in
2010 reached an agreement to sell an office property, located in Falls Church, Virginia, which was sold on January
21, 2011 at a $19.6 million gain. The Falls Church, Virginia property was classified as an asset held for sale at
December 31, 2010. Accordingly, properties sold 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 in many markets relative to both liquidity and pricing. However, we also believe that we are
witnessing improving pricing and liquidity in certain markets. 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 potential property dispositions. As an important part of our total return strategy, we intend to be
active in property dispositions when we believe that market conditions warrant such activity and, as a consequence,
we continuously review and evaluate our portfolio of properties for potentially advantageous dispositions.
Investment Banking
26
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 continues to provide investor services to existing Sponsored REITs, which is 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 banking segment had been marginal in its profit
contribution over the prior four years and we believed time and resources would be more productively deployed
elsewhere
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 below. Significant estimates in the consolidated
financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed
assets, impairment considerations and the valuation of the derivative.
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 estimates are consistently applied and produce financial information that fairly presents our results of
operations. Our most critical accounting policies involve our investments in Sponsored REITs and our investments
in real property. These policies affect our:
allocation of purchase prices;
allowance for doubtful accounts;
assessment of the carrying values and impairments of long lived assets;
useful lives of fixed assets and intangibles;
valuation of derivatives;
classification of leases; and
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) Ownership of stock in a Sponsored REIT and related interests.
These policies involve significant judgments made based upon our experience, including judgments about
current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability of our
tenants to perform their obligations to us, current and future economic conditions and competitive factors in the
markets in which our properties are located. Competition, economic conditions and other factors may cause
occupancy declines in the future. In the future we may need to revise our carrying value assessments to incorporate
information which is not now known and such revisions could increase or decrease our depreciation expense related
to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying
values of our assets.
Allocation of Purchase Price
We have historically allocated the purchase prices of properties to land, buildings and improvements. Each
component of purchase price generally has a different useful life. For properties acquired subsequent to June 1,
2001, we allocate the value of real estate acquired among land, buildings, improvements and identified intangible
assets and liabilities, which may consist of the value of above market and below market leases, the value of in-place
leases, and the value of tenant relationships. Purchase price allocations and the determination of the useful lives are
27
based on management’s estimates. Under some circumstances we may rely upon studies commissioned from
independent real estate appraisal firms in determining the purchase price allocations.
Purchase price allocated to land and building and improvements is based on management’s determination of
the relative fair values of these assets assuming the property was vacant. Management determines the fair value of a
property using methods similar to those used by independent appraisers. Purchase price allocated to above or below
market leases is based on the present value (using an interest rate which reflects the risks associated with the leases
acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases including
consideration of potential lease renewals and (ii) our estimate of fair market lease rates for the corresponding leases,
measured over a period equal to the remaining non-cancelable terms of the respective leases. Purchase price allocated
to in-place leases and tenant relationships is determined as the excess of (i) the purchase price paid for a property
after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if
vacant. This aggregate value is allocated between in-place lease values and tenant relationships based on
management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant
relationships has not been separated from in-place lease value because such value and its consequence to
amortization expense is immaterial for acquisitions reflected in our financial statements. Factors considered by us in
performing these analyses include (i) an estimate of carrying costs during the expected lease-up periods, including
real estate taxes, insurance and other operating income and expenses, and (ii) costs to execute similar leases in
current market conditions, such as leasing commissions, legal and other related costs. If future acquisitions result in
our allocating material amounts to the value of tenant relationships, those amounts would be separately allocated and
amortized over the estimated life of the relationships.
Allowance for Bad Debts
We provide an allowance for bad debts based on our estimate of a tenant’s ability to make future rent
payments. The computation of this allowance is based in part on the tenants’ payment history and current credit
status.
Impairment
We periodically evaluate our real estate properties for impairment indicators. These indicators may include
declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of
an asset before the end of its estimated useful life or legislative, economic or market changes that permanently
reduce the value of our investments. If indicators of impairment are present, we evaluate the carrying value of the
property by comparing it to its expected future undiscounted cash flows. If the sum of these expected future cash
flows is less than the carrying value, we reduce the net carrying value of the property to the present value of these
expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate
likely future cash flows. If we misjudge or estimate incorrectly or if future tenant profitability, market or industry
factors differ from our expectations, we may record an impairment charge which is inappropriate or fail to record a
charge when we should have done so, or the amount of such charges may be inaccurate.
Depreciation and Amortization Expense
We compute depreciation expense using the straight-line method over estimated useful lives of up to 39
years for buildings and improvements, and up to 15 years for personal property. Costs incurred in connection with
leasing (primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease
period. The allocated cost of land is not depreciated. The value of above or below-market leases is amortized over
the remaining non-cancelable periods of the respective leases as an adjustment to rental income. The value of in-place
leases, exclusive of the value of above-market and below-market in-place leases, is also amortized over the
remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all
unamortized amounts relating to that lease are written off. Inappropriate allocation of acquisition costs, or incorrect
estimates of useful lives, could result in depreciation and amortization expenses which do not appropriately reflect
the allocation of our capital expenditures over future periods, as is required by generally accepted accounting
principles.
Derivative Instruments
We recognize derivatives on the balance sheet at fair value. Derivatives that do not qualify, or are not
designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated
28
in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the
derivative instrument on the balance sheet as either an asset or liability. To the extent hedges are effective, a
corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within
stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income to the income
statement in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is
recorded in the income statement. Derivative instruments designated in a hedge relationship to mitigate exposure to
changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest
rate risk, are considered fair value hedges. We currently have no fair value hedges outstanding. Fair values of
derivatives are subject to significant variability based on changes in interest rates and counterparty credit risk. To the
extent we enter into fair value hedges in the future, the results of such variability could be a significant increase or
decrease in our derivative assets, derivative liabilities, book equity, and/or earnings.
Lease Classification
Some of our real estate properties are leased on a triple net basis, pursuant to non-cancelable, fixed term,
operating leases. Each time we enter a new lease or materially modify an existing lease we evaluate whether it is
appropriately classified as a capital lease or as an operating lease. The classification of a lease as capital or
operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These
evaluations require us to make estimates of, among other things, the remaining useful life and market value of a
property, discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of
our leases.
Ownership of Stock in a Sponsored REIT and Related Interests
Common stock investments in Sponsored REITs were consolidated while the entity was controlled by the
Company. Following the commencement of syndication the Company exercised influence over, but did not control
these entities and investments are accounted for using the equity method. Once under the equity method of
accounting, our cost basis is adjusted by our share of the Sponsored REITs' earnings, if any, prior to completion of
the syndication. Equity in losses or dividends received from Sponsored REITs generally are recognized as income
once the investment balance is reduced to zero, unless there is an asset held for syndication from the Sponsored
REIT entity. Equity in losses or distributions received in excess of investment is recorded as an adjustment to the
carrying value of the asset held for syndication. In December 2011, we announced that we will no longer sponsor
the syndication of newly-formed Sponsored REITs.
We recognized our share of the operations during the period we consolidated and when the equity method
is appropriate, as opposed to classifying the Sponsored REITs as discontinued operations, because we earned an
ongoing asset and/or property management fee from Sponsored REITs. These ongoing fees, in addition to the
influence that we exercise over the Sponsored REIT, constituted a continuing involvement between the Company
and the Sponsored REIT and precluded treatment as discontinued operations.
We currently hold preferred stock interests in two Sponsored REITs. As a result of our common and
preferred stock interests in these two Sponsored REITs, we exercise influence over, but do not control these entities.
These preferred stock interests are accounted for using the equity method. Under the equity method of accounting
our cost basis is adjusted by our share of the Sponsored REITs' operations and distributions received. We also
agreed to vote our preferred shares (i) with respect to any merger in the same manner that a majority of the other
stockholders of the Sponsored REIT vote for or against the merger and (ii) with respect to any other matter
presented to a vote by the stockholders of these Sponsored REITs in the same proportion as shares voted by other
stockholders of that Sponsored REIT.
We also previously held a preferred stock interest in a third Sponsored REIT known as Phoenix Tower. On
December 20, 2012, the property owned by Phoenix Tower was sold and, thereafter, Phoenix Tower declared and
issued a liquidating distribution for its preferred shareholders, from which the Company was entitled to $4,862,000.
As a result of the sale, the Company recognized its share of the gain of $1,582,000. We received $4,752,000 on
January 4, 2013 and $96,000 on September 30, 2013. In connection with our common stock ownership of Phoenix
Tower, we received $10,000 on September 30, 2013. As of December 31, 2013, we held a beneficial interest in the
Phoenix Tower liquidating trust in the amount of $14,000.
29
Results of Operations
Impact of Real Estate Acquisition and Investment Activity:
The results of operations for each of the acquired properties are included in our operating results as of their
respective purchase dates and the funding and repayment dates for mortgage investments. Increases in rental
revenues, interest income from loans and expenses for the year ended December 31, 2013 compared to the year
ended December 31, 2012, or the year ended December 31, 2012 compared to the year ended December 31, 2011
are primarily a result of the timing of these acquisitions and subsequent contribution of these acquired properties as
well as the affect on interest income from the dates of funding and repayment on our mortgage investments.
Sales of Real Estate:
We sold an office property located in Richardson, Texas on October 29, 2013 at a $2.2 million gain. On
December 21, 2012, we sold an office property located in Southfield, Michigan at a loss. On June 24, 2011, we sold
an industrial property located in Savage, Maryland at a gain. During 2010, we reached an agreement to sell an
office property located in Falls Church, Virginia, which sold on January 21, 2011, at a gain. The operating results
of the properties sold are classified as discontinued operations in our consolidated financial statements for all
periods presented.
The following table shows financial results for the years ended December 31, 2013 and 2012.
(in thousands)
Revenues:
Rental
Related party revenue:
Management fees and interest income from loans
Other
Total revenues
Expenses:
Real estate operating expenses
Real estate taxes and insurance
Depreciation and amortization
Selling, general and administrative
Interest
Total expenses
2013
206,926
$
2012
150,434
$
Change
$ 56,492
6,646
64
213,636
51,100
31,616
78,839
11,911
21,054
194,520
10,947
199
161,580
(4,301)
(135)
52,056
37,440
22,904
54,051
9,916
16,068
140,379
13,660
8,712
24,788
1,995
4,986
54,141
Income before interest income, equity in earnings (losses)
Interest income
Equity in earnings (losses) of non-consolidated REITs
19,116
16
(1,358)
21,201
51
2,033
(2,085)
(35)
(3,391)
Income before taxes on income
Taxes on income
Income from continuing operations
Discontinued operations:
Income from discontinued operations, net of income tax
Gain on sale, less applicable income tax
Total discontinued operations
17,774 23,285 (5,511)
145
335
480
17,294 22,950 (5,656)
375
2,158
866
16,984
2,533 (15,317) 17,850
(491)
(14,826)
Net income
$
19,827
$
7,633
$
12,194
30
Comparison of the year ended December 31, 2013 to the year ended December 31, 2012
Revenues
Total revenues increased by $52.1 million to $213.6 million for the year ended December 31, 2013, as
compared to the year ended December 31, 2012. The increase was primarily a result of:
o An increase in rental revenue of approximately $56.5 million arising primarily from property
acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013, which were
included in the year ended December 31, 2013; and to a lesser extent, leasing, which raised
occupancy approximately 0.1% to 94.1% in the continuing real estate portfolio at December 31,
2013 compared to December 31, 2012.
o The increase was partially offset by a $4.3 million decrease in interest income from loans to
Sponsored REITs, which was primarily a result of repayment of two loans in July and December
2012, respectively. These repayments resulted in lower average loan receivable balances from
which interest income is derived, during the year ended December 31, 2013, as compared to the
year ended December 31, 2012.
Expenses
Total expenses increased by $54.1 million to $194.5 million for the year ended December 31, 2013, as
compared to the year ended December 31, 2012. The increase was primarily a result of:
o An increase in real estate operating expenses and real estate taxes and insurance of approximately
$22.3 million, and depreciation and amortization of $24.8 million, which were primarily from
property acquisitions in July 2012, November 2012, May 2013, July 2013 and August 2013,
which were included in the year ended December 31, 2013.
o An increase to interest expense of approximately $5.0 million to $21.1 million for the year ended
December 31, compared to the same period in 2012. The increase was primarily attributable to a
greater amount of debt outstanding.
o An increase in selling, general and administrative expenses of approximately $2.0 million, which
was primarily the result of increased personnel related expenses of $0.9 milllion, professional fees
of $0.5 million, acquisition costs of $0.3 million and franchise taxes of $0.3 million. We had 37
and 35 employees as of December 31, 2013 and 2012, respectively, at our headquarters in
Wakefield, Massachusetts.
Equity in earnings of non-consolidated REITs
Equity in earnings (losses) from non-consolidated REITs decreased approximately $3.4 million to a loss of
$1.4 million during the year ended December 31, 2013. The decrease was primarily because equity in income from
our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East
Wacker, decreased $1.7 million during the year ended December 31, 2013 compared to the same period in 2012; and
we had a $1.6 million gain included in equity in income in 2012 from our preferred stock investment in FSP Phoenix
Tower Corp, which sold its property on December 20, 2012.
Taxes on income
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas
properties that increased $132,000 and federal income taxes of $13,000 that increased during the year ended
December 31, 2013 compared to the year ended December 31, 2012.
Income from continuing operations
Income from continuing operations for the year ended December 31, 2013 was $17.3 million compared to
$23.0 million for the year ended December 31, 2012, for the reasons described above.
31
Discontinued operations and gain (loss) on sale
Income from discontinued operations increased $17.9 million for the year ended December 31, 2013
compared to the year ended December 31, 2012. On October 29, 2013 we sold an office property located in
Richardson, Texas at a gain of approximately $2.2 million. On December 21, 2012, we sold one office property
located in Southfield, Michigan at a loss of $14.8 million. To a lesser extent, the increase also included an increase
in the income from operations of properties we have sold of $375,000 for the year ended December 31, 2013
compared to a loss from operations of properties sold of $491,000 for the year ended December 31, 2012. These
assets are classified as held for sale on our balance sheet and resulted in a reclassification of real estate income and
expenses of these properties to discontinued operations for all periods presented.
Net income
Net income for the year ended December 31, 2013 was $19.8 million compared to $7.6 million for the year
ended December 31, 2012, for the reasons described above.
The following table shows financial results for the years ended December 31, 2012 and 2011.
(in thousands)
Revenues:
Rental
Related party revenue:
Management fees and interest income from loans
Other
Total revenues
Expenses:
Real estate operating expenses
Real estate taxes and insurance
Depreciation and amortization
Selling, general and administrative
Interest
Total expenses
Income before interest income, equity in earnings (losses)
Interest income
Equity in earnings (losses) of non-consolidated REITs
Income before taxes on income
Taxes on income
Income from continuing operations
Discontinued operations:
Income from discontinued operations, net of income tax
Gain (loss) on sale, less applicable income tax
Total discontinued operations
2012
150,434
$
2011
133,946
$
Change
$ 16,488
10,947
199
161,580
37,440
22,904
54,051
9,916
16,068
140,379
21,201
51
2,033
4,046
49
138,041
6,901
150
23,539
35,074
20,112
47,417
6,855
12,666
122,124
2,366
2,792
6,634
3,061
3,402
18,255
15,917
22
3,685
5,284
29
(1,652)
23,285 19,624 3,661
68
335
267
22,950 19,357 3,593
(491)
(14,826)
(2,719)
(36,765)
(15,317) 24,167 (39,484)
2,228
21,939
Net income
$
7,633
$
43,524
$
(35,891)
Comparison of the year ended December 31, 2012 to the year ended December 31, 2011
Revenues
Total revenues increased by $23.5 million to $161.6 million for the year ended December 31, 2012, as
compared to the year ended December 31, 2011. The increase was primarily a result of:
32
o An increase in rental revenue of approximately $16.5 million arising primarily from the
acquisition of one property in July 2012, another property in November 2012, another property in
October 2011, another property in September 2011 and three properties in March 2011 that were
included in the results for the year ended December 31, 2012, and leasing, which raised occupancy
to 94.0% at December 31, 2012 compared to 88.7% at December 31, 2011.
o A $0.2 million increase in management fee income from Sponsored REITs we managed during the
year ended December 31, 2012, as compared to the year ended December 31, 2011 primarily as a
result of syndications started during 2011.
o A $6.7 million increase in interest income from Sponsored REIT Loans, which was principally a
result of a larger loan receivable balance, from which interest income is derived, and a higher
interest rate charged during the year ended December 31, 2012, as compared to the year ended
December 31, 2011.
Expenses
Total expenses increased by $18.2 million to $140.4 million for the year ended December 31, 2012, as
compared to the year ended December 31, 2011. The increase was primarily a result of:
o An increase in real estate operating expenses and real estate taxes and insurance of approximately
$5.2 million, and depreciation of $6.6 million, which were primarily from the acquisition of one
property in July 2012, another property in November 2012, another property in October 2011,
another property in September 2011 and three properties in March 2011.
o An increase to interest expense of approximately $3.4 million to $16.1 million during the year
ended December 31, 2012 compared to $12.7 million for the same period in 2011. The increase
was attributable to a higher amount of debt outstanding, and to a lesser extent the acceleration of
some amortization of deferred financing costs related to the 2012 Credit Facility.
o An increase in selling, general and administrative expenses of approximately $3.0 million during
the year ended December 31, 2012 compared to the year ended December 31, 2011, which was
primarily the result of a $0.5 million increase in compensation accruals during the year ended
December 31, 2012 compared to the same period in 2011 and a realignment of personnel and
resources in our real estate business following a decision to discontinue our investment banking
activities in December 2011. These increases were partially offset by lower acquisition costs of
$0.3 million related to the acquisition of properties during the year ended December 31, 2012
compared to $0.6 million related to acquisition of properties during the year ended December 31,
2011. We had 35 and 33 employees as of December 31, 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 $1.6 million to $2.0 million
during the year ended December 31, 2012 compared to the same period in 2011. The decrease was primarily due to
a decrease of $1.7 million from syndications that we had in 2011 from investment banking, which was discontinued
in December 2011. We also had a decrease of $1.5 million in equity in income from our preferred stock investment
in Sponsored REIT, FSP 303 East Wacker Drive Corp., which we refer to as East Wacker, during the year ended
December 31, 2012 compared to the same period in 2011. These decreases were partially offset by a $1.6 million
gain included in equity in income from our preferred stock investment in Phoenix Tower, which sold its property on
December 20, 2012.
Taxes on income
Included in income taxes for both periods is the Revised Texas Franchise Tax, which is derived from an
income based measure so it is considered an income tax, which increased during the year ended December 31, 2012
by $68,000 compared to the year ended December 31, 2011.
33
Income from continuing operations
Income from continuing operations for the year ended December 31, 2012 was $23.0 million compared to
$19.4 million for the year ended December 31, 2011, for the reasons described above.
Discontinued operations and gain (loss) on sale
Income from discontinued operations decreased $39.5 million for the year ended December 31, 2012
compared to the year ended December 31, 2011. The decrease is primarily from a loss on the sale of a property of
$14.8 million compared to a gain on sale of properties of $21.9 million during the year ended December 31, 2011.
To a lesser extent, the decrease also included a decrease in the loss from operations of properties we have sold of
$0.3 million to $0.5 million for the year ended December 31, 2012 compared to $0.8 million for the year ended
December 31, 2011. In December 2011, we discontinued the investment banking segment, which is included in
discontinued operations. Income derived from the investment bank was $3.0 million for the year ended December
31, 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 sold one office property located in Southfield,
Michigan on December 21, 2012, at a loss of $14.8 million. We sold one industrial property located in Savage,
Maryland on June 24, 2011, at a gain of $2.3 million and one office property located in Falls Church, Virginia on
January 21, 2011, at a gain of $19.6 million. The operations of those properties are reported as discontinued
operations on our financial statements for the years ended December 31, 2012 and 2011.
Net income
Net income for the year ended December 31, 2012 was $7.6 million compared to $43.5 million for the year
ended December 31, 2011, for the reasons described above.
34
Non-GAAP Financial Measures
Funds From Operations
The Company evaluates performance based on Funds From Operations, which we refer to as FFO, as
management believes that FFO represents the most accurate measure of activity and is the basis for distributions
paid to equity holders. The Company defines FFO as net income (computed in accordance with GAAP), excluding
gains (or losses) from sales of property and acquisition costs of newly acquired properties that are not capitalized,
plus depreciation and amortization, including amortization of acquired above and below market lease intangibles
and impairment charges on properties or investments in non-consolidated REITs, and after adjustments to exclude
equity in income or losses from, and, to include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income (determined in accordance with GAAP), nor
as an indicator of the Company’s financial performance, nor as an alternative to cash flows from operating activities
(determined in accordance with GAAP), nor as a measure of the Company’s liquidity, nor is it necessarily indicative
of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or NAREIT
may define this term in a different manner. We have included the NAREIT FFO definition in our table and note that
other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current
NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO should be
examined in connection with net income and cash flows from operating, investing and financing activities in the
consolidated financial statements
The calculations of FFO are shown in the following table:
(in thousands):
Net income (loss)
(Gain) loss on sale, less applicable income tax
Equity in (earnings) losses of non-consolidated REITs
FFO from non-consolidated REITs
Depreciation and amortization
NAREIT FFO
Acquisition costs of new properties
For the Year Ended December 31,
2011
2012
2013
$ 19,827 $ 7,633 $ 43,524
(2,158) 14,826 (21,939)
(2,033) (4,490)
1,358
2,148
4,124 6,784
79,090 55,518 48,439
80,068 72,318
100,265
568 287 620
Funds From Operations
$ 100,833 $ 80,355 $ 72,938
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:
35
(in thousands)
Region
East
MidWest
South
West
Same Store
Acquisitions
Property NOI from the continuing portfolio
Dispositions and asset held for sale
Property NOI
Same Store
Less Nonrecurring
Items in NOI (a)
Comparative
Same Store
Reconciliation to Net income
Net Income
Add (deduct):
Discontinued operations
Loss provision or (gain) on sale of assets
Management fee income
Depreciation and amortization
Amortization of above/below market leases
Selling, general and administrative
Interest expense
Interest income
Equity in earnings of non-consolidated REITs
Non-property specific items, net
Property NOI from the continuing portfolio
Dispositions and asset held for sale
Property NOI
Net Operating Income (NOI)*
Inc
(Dec)
%
Change
Rentable
Square Feet
or RSF
1,441
1,682
2,508
1,087
6,718
2,967
9,685
Year
Ended
31-Dec-13
20,260
$
19,864
37,563
9,612
87,299
34,801
122,100
839
122,939
$
Year
Ended
31-Dec-12
19,360
$
20,240
35,858
9,937
85,395
$
900
(376)
1,705
(325)
1,904
3,749
89,144
31,052
32,956
703
89,847
$
136
33,092
$
4.6%
-1.9%
4.8%
-3.3%
2.2%
34.7%
37.0%
-0.1%
36.8%
$
87,299
$
85,395
$
1,904
2.2%
998
842
156
-0.1%
$
86,301
$
84,553
$
1,748
2.1%
Year
Ended
31-Dec-13
Year
Ended
31-Dec-12
$
19,827
$
7,633
(375)
(2,158)
(2,493)
78,839
(213)
11,929
21,054
(5,584)
1,358
(84)
491
14,826
(2,120)
54,051
273
9,916
16,068
(9,848)
(2,033)
(113)
$
122,100
$
89,144
839
703
$
122,939
$
89,847
(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.
36
Liquidity and Capital Resources
Cash and cash equivalents were $19.6 million and $21.3 million at December 31, 2013 and December 31,
2012, respectively. The decrease of $1.7 million is attributable to $92.0 million provided by operating activities less
$562.6 million used in investing activities, plus $468.9 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 $92.0 million is primarily attributable to net income of
$19.8 million, less of the $2.2 million from a gain on sale of a property, plus the add backs of $75.2 million of non-
cash activities, a $11.5 million increase in accounts payable and accrued expenses and a $1.5 million increase from
tenant security deposits. These increases were partially offset by a $9.1 million in payments of deferred leasing
commissions, $1.5 million increase in prepaid expenses and other assets, a $2.1 million increase in tenant rents
receivable and a $1.1 million increase in lease acquisition costs.
Investing Activities
Our cash used in investing activities for the year ended December 31, 2013 of $562.6 million is primarily
attributable to $574.0 million in additions to real estate investments and office equipment and an $8.2 million
increase in Sponsored REIT Loans, which was partially offset by $12.3 million of proceeds on the sale of a property,
a $4.9 million distribution received from a preferred stock investment in a Sponsored REIT, which was sold in
December 2012, a $2.3 million repayment of a Sponsored REIT Loan and $0.1 million of distributions in excess of
earnings from non-consolidated REITs.
Financing Activities
Our cash provided by financing activities for the year ended December 31, 2013 of $468.9 million is
primarily attributable to net proceeds from an equity offering of $230.7 million, net borrowings under the 2012
Revolver (as defined below) of $89.7 million and the proceeds of the 2013 Term Loan of $220.0 million. These
increases were partially offset by distributions paid to stockholders of $69.6 million and payment of financing costs
to secure the 2013 Term Loan of $1.9 million.
2013 Term Loan
On August 26, 2013, the Company and certain of its wholly-owned subsidiaries entered into a Credit
Agreement (the “2013 Credit Agreement”) with the lending institutions referenced in the 2013 Credit Agreement
and those lenders from time to time party thereto and Bank of Montreal, as administrative agent, to provide for a
single unsecured term loan borrowing on the closing date in the amount of $220,000,000 (the “2013 Term Loan”).
On August 26, 2013, the Company drew down $220,000,000 under the 2013 Term Loan. The 2013 Term Loan has
a seven year term that matures on August 26, 2020. The 2013 Term Loan includes an accordion feature that allows
for up to $50,000,000 of additional loans subject to receipt of lender commitments and satisfaction of certain
customary conditions.
The 2013 Term Loan bears interest at either (i) a rate equal to LIBOR plus 145 to 220 basis points
depending on our total leverage ratio for the applicable period (LIBOR plus 190 basis points, or 2.06% at December
31, 2013) or (ii) a rate equal to the bank’s base rate plus 45 to 120 basis points depending on our total leverage ratio
for the applicable period (the bank’s base rate plus 90 basis points, or 4.15% at December 31, 2013). The actual
LIBOR rate or base rate is determined based on the Company’s total leverage ratio for the applicable period as
described in the table below:
37
Leverage Ratio
Greater
Than
-
25%
35%
45%
55%
Less Than
or Equal to
25%
35%
45%
55%
and
and
and
and
LIBOR
Margin
145.0 bps
155.0 bps
165.0 bps
190.0 bps
220.0 bps
Base
Rate
Margin
45.0 bps
55.0 bps
65.0 bps
90.0 bps
120.0 bps
Although the interest rate on the 2013 Term Loan is variable, we fixed the base LIBOR interest rate on the
2013 Term Loan by entering into an interest rate swap agreement. On August 26, 2013, we entered into an ISDA
Master Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the 2013 Term Loan at 2.32%
per annum for seven years. Accordingly, based upon our leverage ratio, as of December 31, 2013, the interest rate
on the 2013 Term Loan was 4.22% per annum.
The 2013 Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type,
including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets,
changes in business, certain restricted payments, the requirement to join certain subsidiaries as co-borrowers under
the 2013 Credit Agreement and transactions with affiliates. The 2013 Credit Agreement also contains financial
covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed charge coverage
ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, a
minimum unencumbered debt service coverage ratio, a maximum ratio of certain investments to total assets and a
maximum amount of secured recourse indebtedness. The 2013 Credit Agreement provides for customary events of
default with corresponding grace periods, including failure to pay any principal or interest when due, certain cross
defaults and a change in control of the Company (as defined in the 2013 Credit Agreement). In the event of a default
by the Company, the administrative agent may, and at the request of the requisite number of lenders shall, declare all
obligations under the 2013 Credit Agreement immediately due and payable, terminate the lenders’ commitments to
make loans under the 2013 Credit Agreement, and enforce any and all rights of the lenders or administrative agent
under the 2013 Credit Agreement and related documents. For certain events of default related to bankruptcy,
insolvency, and receivership, the commitments of lenders will be automatically terminated and all outstanding
obligations of the Company will become immediately due and payable. The Company was in compliance with the
2013 Term Loan financial covenants as of December 31, 2013.
We may use the proceeds of the 2013 Term Loan to finance the acquisition of real properties and for other
permitted investments, to finance investments associated with Sponsored REITs, to refinance or retire existing
indebtedness and for working capital and other general business purposes, in each case to the extent permitted under
the 2013 Credit Agreement.
2012 Credit Facility
As of December 31, 2013, the Company had bank notes payable to a group of banks for an unsecured credit
facility comprised of both a revolving line of credit and a term loan (the “2012 Credit Facility”). The revolving line
of credit portion of the 2012 Credit Facility is for borrowings, at the Company’s election, of up to $500,000,000 (the
“2012 Revolver”). The term loan portion of the 2012 Credit Facility is for $400,000,000 (the “2012 Term Loan”).
The 2012 Revolver includes an accordion feature that allows for up to $250,000,000 of additional borrowing
capacity subject to receipt of lender commitments and satisfaction of certain customary conditions.
On September 27, 2012, the Company and certain of its wholly-owned subsidiaries entered into an
Amended and Restated Credit Agreement (as amended, the “2012 Credit Agreement”) with the lending institutions
referenced in the 2012 Credit Agreement and those lenders from time to time party thereto and Bank of America,
N.A., as administrative agent, letter of credit issuer and swing line lender, for the 2012 Credit Facility. On
September 27, 2012, the Company drew down the entire $400,000,000 under the 2012 Term Loan and $82,000,000
under the 2012 Revolver. The Company’s $600,000,000 revolving credit facility (the “2011 Revolver”) that was
38
scheduled to mature on February 22, 2014 was amended and restated in its entirety by the 2012 Credit Agreement
and the $482,000,000 in advances outstanding under the 2011 Revolver were repaid from the proceeds of the 2012
Credit Facility.
The 2012 Term Loan has a five year term that matures on September 27, 2017. Borrowings made pursuant
to the 2012 Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may
not exceed $500,000,000 outstanding at any time. Borrowings made pursuant to the 2012 Revolver may be
borrowed, repaid and reborrowed from time to time for four years until September 27, 2016, the initial maturity date
of the 2012 Revolver. The Company has the right to extend the initial maturity date of the 2012 Revolver by an
additional 12 months, or until September 27, 2017, upon payment of a fee and satisfaction of certain customary
conditions.
The 2012 Credit Facility bears interest at either (i) a rate equal to LIBOR plus 135 to 190 basis points
depending on the Company’s total leverage ratio at the time of the borrowing (LIBOR plus 165 basis points, or
1.82% at December 31, 2013) or (ii) a rate equal to the bank’s base rate plus 35 to 90 basis points depending on our
total leverage ratio at the time of the borrowing (the bank’s base rate plus 65 basis points, or 3.90% at December 31,
2013). The 2012 Credit Facility also obligates the Company to pay an annual facility fee of 20 to 40 basis points
depending on the Company’s total leverage ratio (35 basis points at December 31, 2013). The facility fee is
assessed against the total amount of the 2012 Credit Facility, or $900,000,000. The actual amount of any applicable
facility fee, LIBOR rate or base rate is determined based on the Company’s total leverage ratio as described in the
table below:
Leverage Ratio
Greater
Than
-
25%
35%
45%
55%
Less Than
or Equal to
25%
35%
45%
55%
and
and
and
and
Facility
Fee
20.0 bps
25.0 bps
30.0 bps
35.0 bps
40.0 bps
LIBOR
Margin
135.0 bps
140.0 bps
145.0 bps
165.0 bps
190.0 bps
Base
Rate
Margin
35.0 bps
40.0 bps
45.0 bps
65.0 bps
90.0 bps
For purposes of the 2012 Credit Facility, base rate means, for any day, a fluctuating rate per annum equal to the
highest of: (i) the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 1/2 of 1.00%, and
(iii) the one month LIBOR base rate for such day plus 1.00%.
Although the interest rate on the 2012 Credit Facility is variable, under the 2012 Credit Agreement, the
Company fixed the base LIBOR interest rate on the 2012 Term Loan by entering into an interest rate swap
agreement. On September 27, 2012, the Company entered into an ISDA Master Agreement with Bank of America,
N.A. that fixed the base LIBOR interest rate on the 2012 Term Loan at 0.75% per annum for five years.
Accordingly, based upon the Company’s leverage ratio, as of December 31, 2013, the interest rate on the 2012 Term
Loan was 2.40% per annum. In addition, based upon the Company’s leverage ratio, as of December 31, 2013, there
were borrowings of $306,500,000 outstanding under the 2012 Revolver at a weighted average rate of 1.82% per
annum. The weighted average interest rate on all amounts outstanding on the 2012 Revolver during the year ended
December 31, 2013 was approximately 1.65% per annum.
As of December 31, 2012, there were borrowings of $216,750,000 outstanding under the 2012 Revolver at
a weighted average rate of 2.23% per annum. As of December 31, 2011, there were borrowings of $449,000,000
outstanding under the 2011 Revolver at a weighted average rate of 2.24% per annum.
The 2012 Credit Agreement contains customary affirmative and negative covenants for credit facilities of
this type, including limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition
of assets, changes in business, certain restricted payments, the requirement to join certain subsidiaries as co-
borrowers under the 2012 Credit Agreement and transactions with affiliates. The 2012 Credit Agreement also
contains financial covenants that require the Company to maintain a minimum tangible net worth, a minimum fixed
charge coverage ratio, a maximum secured leverage ratio, a maximum leverage ratio, a maximum unencumbered
leverage ratio, a minimum unencumbered debt service coverage ratio, a maximum ratio of certain investments to
39
total assets and a maximum amount of secured recourse indebtedness. The 2012 Credit Agreement provides for
customary events of default with corresponding grace periods, including failure to pay any principal or interest when
due, certain cross defaults and a change in control of the Company (as defined in the 2012 Credit Agreement). In the
event of a default by the Company, the administrative agent may, and at the request of the requisite number of
lenders shall, declare all obligations under the 2012 Credit Agreement immediately due and payable, terminate the
lenders’ commitments to make loans under the 2012 Credit Agreement, and enforce any and all rights of the lenders
or administrative agent under the 2012 Credit Agreement and related documents. For certain events of default
related to bankruptcy, insolvency, and receivership, the commitments of lenders will be automatically terminated
and all outstanding obligations of the Company will become immediately due and payable. The Company was in
compliance with the 2012 Credit Facility financial covenants as of December 31, 2013.
The Company may use the proceeds of the loans under the 2012 Credit Agreement to finance the
acquisition of real properties and for other permitted investments; to finance investments associated with Sponsored
REITs, to refinance or retire existing indebtedness and for working capital and other general business purposes, in
each case to the extent permitted under the 2012 Credit Agreement.
Equity Securities
On May 15, 2013, we completed an underwritten public offering of 17,250,000 shares of our common
stock (including 2,250,000 shares issued as a result of the full exercise of an overallotment option by the
underwriter) at a price to the public of $14.00 per share. The proceeds from this public offering, net of underwriter
discounts and offering costs, totaled approximately $230.7 million (after payment of offering costs of approximately
$10.8 million).
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 year ended December 31, 2013, we did not
sell any shares of our common stock under our ATM Sales Program. As of December 31, 2013, 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 December 31, 2013, 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 December 31, 2013, we were committed to fund up to
$111.8 million to six Sponsored REITs under such arrangements for the purpose of funding construction costs,
capital expenditures, leasing costs or for other purposes, of which $99.7 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.
40
Related Party Transactions
We intend to draw on the 2012 Credit Facility in the future for a variety of corporate purposes, including
the acquisition of properties that we acquire directly for our portfolio and for Sponsored REIT Loans as described
below.
Loans to Sponsored REITs
Sponsored REIT Loans
From time to time we may make secured loans (“Sponsored REIT Loans”) to Sponsored REITs in the form
of mortgage loans or revolving lines of credit to fund construction costs, capital expenditures, leasing costs and for
other purposes. We anticipate that each Sponsored REIT Loan will be repaid at maturity or earlier from long term
financings of the underlying properties, cash flows from the underlying properties or some other capital event. Each
Sponsored REIT Loan is secured by a mortgage on the underlying property and has a term of approximately two to
three years. Except for the mortgage loan with a revolving line of credit component which bore interest at a fixed
rate and was repaid in July 2012 and a mortgage loan which also 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 revolving line of credit component. In March
2012, a $300,000 fee was collected in connection with a $30 million draw from the revolving line of credit
component. That loan was repaid in full during July 2012 and also included a 0.49% fee collected of $520,000. In
July 2012, the Company received a loan fee of $300,630 at the time of the closing of the mortgage loan and a 0.98%
fee will be collected on all amounts repaid under the loan.
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.
Additional information about our Sponsored REIT Loans outstanding as of December 31, 2013, including
a summary table of our Sponsored REIT Loans, is incorporated herein by reference to Note 4, “Related Party
Transactions and Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in
the Notes to 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 years ended December 31, 2013 and 2012, the rental income exceeded the
expenses for each individual property, with the exception of our property located in Southfield, Michigan.
Our property located in Southfield, Michigan with approximately 215,000 square feet of rentable space was
41.4% leased at December 21, 2012. The property was sold on December 21, 2012. Rental revenue did not cover
ordinary operating expenses for the period ended December 21, 2012. The property generated rental income of
$1,113,000 and had operating expenses of $1,419,000 for the period ended December 21, 2012.
41
Rental Income Commitments
Our commercial real estate operations include the leasing of office buildings subject to leases with terms
greater than one year. The leases thereon expire at various dates through 2025. Approximate future minimum rental
income from non-cancelable operating leases as of December 31, 2013 is:
(in thousands)
2014
2015
2016
2017
2018
Thereafter (2019-2026)
Year ending
December 31,
$ 176,681
165,974
155,794
133,345
117,955
243,743
$ 993,492
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2013.
Contractual
Obligations
2012 Revolver
2012 Term Loan
Total
2014
Payment due by period
(in thousands)
2016
2015
2017
2018
Thereafter
$ 306,500 $ - $ - $ 306,500 $ -
$ - $ -
400,000 -
-
-
400,000 -
-
2013 Term Loan
220,000
220,000
Operating Leases
1,593 417
424
428
324 -
-
Total
$ 928,093 $ 417 $ 424 $ 306,928 $ 400,324 $ - $ 220,000
The operating leases in the table above consist of our lease of corporate office space, which commenced
September 1, 2010 and expires on August 31, 2017 and has one five-year renewal option. The lease includes a base
annual rent and additional rent for our share of taxes and operating costs.
In addition to the amounts in the table above, from time to time, we may provide Sponsored REIT Loans to
our Sponsored REITs. As of December 31, 2013, we were committed to fund Sponsored REIT Loans up to $111.8
million to six Sponsored REITs, of which $99.7 million in the aggregate was drawn and outstanding. Additional
information about our Sponsored REIT Loans outstanding as of December 31, 2013, including a summary table of
our Sponsored REIT Loans, is incorporated herein by reference to Note 4, “Related Party Transactions and
Investments in Non-Consolidated Entities - Management fees and interest income from loans”, in the Notes to
Consolidated Financial Statements included in this report.
42
Off-Balance Sheet Arrangements
Investments in Sponsored REITs
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.
The Sponsored REITs own real estate, purchases of which were financed through the private placement
of equity in those entities, typically through syndication. These Sponsored REITs are operated in a manner intended
to qualify as real estate investment trusts. We earned fees related to the sale of preferred stock in the Sponsored
REITs in these syndications. The Sponsored REITs issued both common stock and preferred stock. The common
stock is owned by FSP Corp. Generally the preferred stock is owned by unaffiliated investors, however, we acquired
an interest in preferred shares of five Sponsored REITs. In addition, directors and officers of FSP Corp., have from
time to time invested in Sponsored REITs. Following consummation of the offerings, the preferred stockholders in
each of the Sponsored REITs were entitled to 100% of the Sponsored REIT’s cash distributions. Subsequent to the
completion of the offering of preferred shares, except for the preferred stock we own, we do not share in any of the
Sponsored REIT’s earnings, or any related dividend, and the common stock ownership interests have virtually no
economic benefit or risk. Prior to the completion of the offering of preferred shares, we shared in Sponsored REIT’s
earnings (and related dividends) to the extent of our ownership interest in the Sponsored REIT.
As a common stockholder, upon completion of the syndication, we have no rights to the Sponsored
REIT’s earnings or any related cash distributions. However, upon liquidation of a Sponsored REIT, we are entitled
to our percentage interest as a common stockholder in any proceeds remaining after the preferred stockholders have
recovered their investment. Our common stock percentage interest in each Sponsored REIT is less than 1%. The
affirmative vote of the holders of a majority of the Sponsored REIT’s preferred stockholders is required for any
actions involving merger, sale of property, amendment to charter or issuance of additional capital stock. In addition,
all of the Sponsored REITs allow the holders of more than 50% of the outstanding preferred shares to remove
(without cause) and replace one or more members of that Sponsored REIT’s board of directors.
Common stock investments in Sponsored REITs are consolidated while the entity is controlled by us.
Following the commencement of syndication we exercise influence over, but do not control these entities and
investments are accounted for using the equity method. Under the equity method of accounting, the cost basis is
increased by its share of the Sponsored REITs' earnings, if any, prior to completion of the syndication. Equity in
losses of Sponsored REITs was not recognized to the extent that the investment balance would become negative and
distributions received are recognized as income once the investment balance is reduced to zero, unless there are
assets held for syndication from the Sponsored REIT entity. Equity in losses or distributions received in excess of
investment is recorded as an adjustment to the carrying value of the asset held for syndication. In December 2011,
the Company discontinued sydicating newly-formed Sponsored REITs and had no Acquisition Loans outstanding at
December 31, 2011.
We have acquired a preferred stock interest in five Sponsored REITs, including one that sold the property
owned by it on December 20, 2012 and made a liquidating distribution to us, one we acquired on May 15, 2008 by
cash merger and another we acquired on April 30, 2006 by merger. As a result of our common stock interest and
our preferred stock interest in the remaining two Sponsored REITs, we exercise influence over, but do not control
these entities. These preferred share investments are accounted for using the equity method. Under the equity
method of accounting our cost basis is adjusted by our share of the Sponsored REITs' operations and distributions
received. We also agreed to vote our preferred shares in any matter presented to a vote by the stockholders of these
Sponsored REITs in the same proportion as shares voted by other stockholders of the Sponsored REITs.
At December 31, 2013, 2012 and 2011, we held a common stock interest in 14, 15 and 16 Sponsored
REITs, respectively, all of which were fully syndicated and in which we no longer share economic benefit or risk.
43
The table below shows our income and expenses from Sponsored REITs. Management fees of $6,000,
for the year ended December 31, 2011 and interest expense related to the Company’s mortgage on property is
eliminated in consolidation.
(in thousands)
Operating Data:
Rental revenues
Operating and maintenance
expenses
Depreciation and amortization
Interest expense
Interest income
Year Ended
December 31,
2011
$
1,482
480
610
197
-
195
$
During the year ended December 31, 2011, we recorded equity in income from two Sponsored REITs
following commencement of the syndication of $1.7 million.
From time to time, we may provide Sponsored REIT Loans to our Sponsored REITs. As of December
31, 2013, we were committed to fund Sponsored REIT Loans up to $111.8 million to six Sponsored REITs, of
which $99.7 million in the aggregate was drawn and outstanding. Additional information about our Sponsored
REIT Loans outstanding as of December 31, 2013, including a summary table of our Sponsored REIT Loans, is
incorporated herein by reference to Note 4, “Related Party Transactions and Investments in Non-Consolidated
Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements
included in this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Rate Risk
We are exposed to changes in interest rates primarily from our floating rate borrowing arrangements.
We use interest rate derivative instruments to manage exposure to interest rate changes. As of December 31, 2013
and December 31, 2012, if market rates on our outstanding borrowings under our 2012 Revolver increased by 10%
at maturity, or approximately 18 and 17 basis points, respectively, over the current variable rate, the increase in
interest expense would decrease future earnings and cash flows by $0.6 million and $0.4 million annually,
respectively. Based upon our leverage ratio, the interest rate on our borrowings on the 2012 Revolver as of
December 31, 2013 was LIBOR plus 165 basis points, or 1.82% per annum. We do not believe that the interest rate
risk represented by borrowings under our 2012 Revolver is material as of December 31, 2013.
Although the interest rates on the 2013 Term Loan and the 2012 Credit Facility are variable, the Company
fixed the base LIBOR interest rates on the 2013 Term Loan and the 2012 Term Loan by entering into interest rate
swap agreements. On August 26, 2013, the Company entered into an ISDA Master Agreement with Bank of
Montreal that fixed the base LIBOR interest rate on the 2013 Term Loan at 2.32% per annum for seven years (the
“2013 Interest Rate Swap”). On September 27, 2012, the Company entered into an ISDA Master Agreement with
Bank of America, N.A. that fixed the base LIBOR interest rate on the 2012 Term Loan at 0.75% per annum for five
years (the “2012 Interest Rate Swap”). Accordingly, based upon the Company’s leverage ratios, as of December 31,
2013, the interest rate on the 2013 Term Loan was 4.22% per annum and the interest rate on the 2012 Term Loan
was 2.40% per annum. The fair value of the 2013 Interest Rate Swap and the 2012 Interest Rate Swap is affected by
changes in market interest rates. We believe that we have mitigated interest rate risk with respect to the 2013 Term
Loan through the 2013 Interest Rate Swap for the seven year term of the 2013 Term Loan. We believe that we have
mitigated interest rate risk with respect to the 2012 Term Loan through the 2012 Interest Rate Swap for the five year
term of the 2012 Term Loan. The 2013 Interest Rate Swap and the 2012 Interest Rate Swap were our only derivative
instruments as of Decembr 31, 2013.
44
The table below lists our derivative instruments, which are hedging variable cash flows related to interest
on our 2013 Term Loan and our 2012 Term Loan as of December 31, 2013 (in thousands):
(in thousands)
Notional
Value
Strike
Rate
Effective
Date
Expiration
Date
Fair
Value
2013 Interest Rate Swap
2012 Interest Rate Swap
$
$
220,000
400,000
2.32%
0.75%
Aug-13
Sep-12
Aug-20
Sep-17
$
$
(2,044)
5,321
Our 2013 Term Loan and our 2012 Term Loan hedging transactions used derivative instruments that
involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk
that unanticipated and significant changes in interest rates will cause a significant loss of basis in either or both of
the contracts. We require our derivatives contracts to be with counterparties that have investment grade ratings. The
counterparty to the 2013 Interest Rate Swap is Bank of Montreal and the counterparty to the 2012 Interest Rate
Swap is Bank of America, N.A., both of which have investment grade ratings. As a result, we do not anticipate that
either counterparty will fail to meet its obligations. However, there can be no assurance that we will be able to
adequately protect against the foregoing risks or that we will ultimately realize an economic benefit that exceeds the
related amounts incurred in connection with engaging in such hedging strategies.
The 2012 Revolver has a term of four years and matures on September 27, 2016. We have the right to
extend the initial maturity date of the 2012 Revolver by an additional 12 months, or until September 27, 2017, upon
payment of a fee and satisfaction of certain customary conditions. The 2012 Revolver includes an accordion feature
that allows for up to $250,000,000 of additional borrowing capacity subject to receipt of lender commitments and
satisfaction of certain customary conditions. Upon maturity, our future income, cash flows and fair values relevant
to financial instruments will be dependent upon the balance then outstanding and prevalent market interest rates.
We borrow from time-to-time under the 2012 Revolver. These borrowings bear interest at either (i) a rate
equal to LIBOR plus 135 to 190 basis points depending on our total leverage ratio at the time of the borrowing
(LIBOR plus 165 basis points, or 1.82% at December 31, 2013) or (ii) a rate equal to the bank’s base rate plus 35 to
90 basis points depending on our total leverage ratio at the time of the borrowing (the bank’s base rate plus 65 basis
points, or 3.90% at December 31, 2013). There were borrowings totaling $306.5 million and $216.8 million on the
2012 Revolver, at a weighted average rate of 1.82% and 1.66% outstanding at December 31, 2013 and December
31, 2012, respectively. We have drawn on the 2012 Revolver, and intend to draw on the 2012 Revolver in the future
for a variety of corporate purposes, including the funding of Sponsored REIT Loans and the acquisition of properties
that we acquire directly for our portfolio. Information about our Sponsored REIT Loans as of December 31, 2013 is
incorporated herein by reference to Note 4, “Related Party Transactions and Investments in Non-Consolidated
Entities - Management fees and interest income from loans”, in the Notes to Consolidated Financial Statements
included in this report.
The following table presents as of December 31, 2013 our contractual variable rate borrowings under our
2012 Revolver, which matures on September 27, 2016, under our 2012 Term Loan, which matures on September 27,
2017 and under our 2013 Term Loan, which matures on August 26, 2020. Under the 2012 Revolver, we have the
right to extend the initial maturity date by an additional 12 months, or until September 27, 2017, upon payment of a
fee and satisfaction of certain customary conditions.
Total
2014
Payment due by period
(in thousands)
2016
2015
2017
2018
Thereafter
2012 Revolver
$ 306,500
$ - $ - $ 306,500 $ - $ -
$ -
2012 Term Loan
400,000
2013 Term Loan
220,000
400,000
-
-
220,000
Total
$ 926,500
$ - $ - $ 306,500 $ 400,000 $ -
$ 220,000
45
Item 8.
Financial Statements and Supplementary Data
The information required by this item is included in the financial pages following the Exhibit index herein
and incorporated herein by reference. Reference is made to the Index to Consolidated Financial Statements in Item
15 of Part IV.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure 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 December 31, 2013. 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 December 31,
2013, 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.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officer and effected by the Company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
(cid:120)
(cid:120)
(cid:120)
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the Company are being made only in accordance with authorizations of management and directors of the
Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
46
The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2013. In making this assessment, the Company’s management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework, 1992 framework.
Based on our assessment, management concluded that, as of December 31, 2013, the Company’s internal
control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited our financial
statements included elsewhere in this annual report on Form 10-K, has issued an attestation report on our internal
control over financial reporting as of December 31, 2013. Please see page F-3.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended December 31,
2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
47
PART III
Certain information required by Part III of this Form 10-K will be contained in our definitive proxy
statement pursuant to Regulation 14A (the “Proxy Statement”) which we plan to file not later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The response to this item is contained under the caption “Directors and Executive Officers of FSP Corp.” in
Part I hereof and in the Proxy Statement under the captions “CORPORATE GOVERNANCE PRINCIPLES AND
BOARD MATTERS,” “PROPOSAL 1: ELECTION OF DIRECTORS” and “SECTION 16(A) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE” and is incorporated herein by reference.
Our board of directors has adopted a code of business conduct and ethics that applies to all of our executive
officers, directors and employees. The code was approved by the audit committee of our board of directors and by
the full board of directors. We have posted a current copy of our code under “Corporate Governance” in the
“Investor Relations” section of our website at http://www.franklinstreetproperties.com. To the extent permitted by
applicable rules of the NYSE MKT, we intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of the code of business conduct and ethics with respect to
our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions, by posting such information on our website.
Item 11. Executive Compensation
The response to this item is contained in the Proxy Statement under the captions “EXECUTIVE
COMPENSATION” and “COMPENSATION OF DIRECTORS” and is incorporated herein by reference.
The “Compensation Committee Report” contained in the Proxy Statement under the caption “EXECUTIVE
COMPENSATION” shall not be deemed “soliciting material” or “filed” with the SEC or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in
any filing under the Securities Act of 1933, as amended or the Exchange Act, except to the extent we specifically
request that such information be treated as soliciting material or specifically incorporate such information by
reference into a document filed under the Securities Act or the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The response to this item is contained in the Proxy Statement under the captions “BENEFICIAL
OWNERSHIP OF VOTING STOCK” and “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY
COMPENSATION PLANS” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The response to this item is contained in the Proxy Statement under the captions “PROPOSAL 1:
ELECTION OF DIRECTORS” and “TRANSACTIONS WITH RELATED PERSONS” and is incorporated herein
by reference.
Item 14. Principal Accounting Fees and Services
The response to this item is contained in the Proxy Statement under the caption “PROPOSAL 2:
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” and
is incorporated herein by reference.
48
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)
1.
The following documents are filed as part of this report:
Financial Statements:
The Financial Statements listed in the accompanying Index to Consolidated Financial Statements
are filed as part of this Annual Report on Form 10-K.
2.
Financial Statement Schedules:
The Financial Statement Schedules listed on the accompanying Index to Consolidated Financial
Statements are filed as part of this Annual Report on Form 10-K.
3.
Exhibits:
The Exhibits listed in the Exhibit Index are filed as part of this Annual Report on Form 10-K.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf as of February 18, 2014 by the undersigned, thereunto duly
authorized.
FRANKLIN STREET PROPERTIES CORP.
By: /s/ George J. Carter
George J. Carter
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ George J. Carter
George J. Carter
/s/ Barbara J. Fournier
Barbara J. Fournier
/s/ John G. Demeritt
John G. Demeritt
/s/ Janet P. Notopoulos
Janet P. Notopoulos
/s/ John Burke
John Burke
/s/ Brian N. Hansen
Brian N. Hansen
/s/ Dennis J. McGillicuddy
Dennis J. McGillicuddy
/s/ Georgia Murray
Georgia Murray
/s/ Barry Silverstein
Barry Silverstein
President, Chief Executive Officer and
Director (Principal Executive Officer)
February 18, 2014
Executive Vice President, Chief Operating
Officer, Treasurer, Secretary and Director
February 18, 2014
Executive Vice President and Chief
Financial Officer
(Principal Financial
Officer and Principal Accounting Officer)
February 18, 2014
Director, Executive Vice President
Director
Director
Director
Director
Director
February 18, 2014
February 18, 2014
February 18, 2014
February 18, 2014
February 18, 2014
February 18, 2014
50
EXHIBIT INDEX
Exhibit No.
Description
3.1 (1)
3.2 (2)
Articles of Incorporation.
Amended and Restated By-laws.
10.1+ (3)
2002 Stock Incentive Plan of FSP Corp.
10.2 (4)
Credit Agreement, dated August 26, 2013, among FSP Corp. and the other parties thereto.
10.3 (4)
10.4 (4)
10.5 (5)
10.6 (5)
ISDA Master Agreement, dated August 26, 2013, between FSP Corp. and Bank of Montreal,
together with the schedule relating thereto.
First Amendment to Amended and Restated Credit Agreement, dated August 23, 2013, among
FSP Corp. and the other parties thereto.
Amended and Restated Credit Agreement, dated September 27, 2012, among FSP Corp. and
the other parties thereto.
ISDA Master Agreement, dated September 27, 2012, between FSP Corp. and Bank of
America, N.A., together with the schedule relating thereto.
10.7+ (6)
Form of Retention Agreement.
10.8+ (7)
Change in Control Discretionary Plan.
10.9 (8)
10.10 (9)
21.1*
23.1*
31.1*
31.2*
32.1*
32.2*
101**
Baird On Demand Offering Sales Agreement between FSP Corp. and Robert W. Baird & Co.
Incorporated dated May 6, 2010.
Amendment No.1 to Baird On Demand Offering Sales Agreement between FSP Corp. and
Robert W. Baird & Co. Incorporated dated April 27, 2012.
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP.
Certification of FSP Corp.’s President and Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification of FSP Corp.’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
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.
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.
The following materials from FSP Corp.’s Annual Report on Form 10-K for the year ended
December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the
Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii)
the
Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Other
Comprehensive Income; and (v) the Notes to Consolidated Financial Statements.
51
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
+
*
**
Incorporated by reference to FSP Corp.’s Form 8-A, filed April 5, 2005 (File No. 001-32470).
Incorporated by reference to FSP Corp.’s Current Report on Form 8-K, filed on February 15, 2013 (File
No. 001-32470).
Incorporated by reference to FSP Corp.’s Annual Report on Form 10-K, filed on March 29, 2002 (File
No. 0-32615).
Incorporated by reference to FSP Corp.’s Current Report on Form 8-K, filed on August 27, 2013 File
No. 001-32470).
Incorporated by reference to FSP Corp.’s Current Report on Form 8-K, filed on September 27, 2012 File
No. 001-32470).
Incorporated by reference to FSP Corp.’s Annual Report on Form 10-K, filed on February 24, 2006 (File
No. 001-32470).
Incorporated by reference to FSP Corp.’s Current Report on Form 8-K, filed on February 8, 2006 (File
No. 001-32470).
Incorporated by reference to FSP Corp.’s Current Report on Form 8-K, filed on May 7, 2010 (File No.
001-32470).
Incorporated by reference to Exhibit 1.2 to FSP Corp.’s Current Report on Form 8-K, filed on April 27,
2012 File No. 001-32470).
Management contract or compensatory plan or arrangement filed as an Exhibit to this Form 10-K pursuant
to Item 15(b) of Form 10-K.
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.
52
Franklin Street Properties Corp.
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31,
2013 and 2012
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2013
Consolidated Statements of Other Comprehensive Income for each of the three years in the
period ended December 31, 2013
Consolidated Statements of Stockholders’ Equity for each of the three years in the
period ended December 31, 2013
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2013
Notes to the Consolidated Financial Statements
Financial Statement Schedules – Schedule II and III
F-2
F-4
F-6
F-7
F-8
F-9
F-11
F-33
All other schedules for which a provision is made in the applicable accounting resolutions of the Securities and
Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Franklin Street Properties Corp.:
We have audited the accompanying consolidated balance sheets of Franklin Street Properties Corp. as of December 31, 2013
and 2012, and the related consolidated statements of income, other comprehensive income, stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedules
listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Franklin Street Properties Corp. at December 31, 2013 and 2012, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Franklin Street Properties Corp.’s internal control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 framework) and our report dated February 18, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 18, 2014
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Franklin Street Properties Corp.:
We have audited Franklin Street Properties Corp.’s internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (1992 framework) (the COSO criteria). Franklin Street Properties Corp.’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in Item 9A of Franklin Street Properties Corp.’s Annual Report on Form 10-K under the heading
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Franklin Street Properties Corp. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
2013 consolidated financial statements of Franklin Street Properties Corp. and our report dated February 18, 2014 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 18, 2014
F-3
Franklin Street Properties Corp.
Consolidated Balance Sheets
(in thousands)
Assets:
Real estate assets:
Land
Buildings and improvements
Fixtures and equipment
Less accumulated depreciation
Real estate assets, net
Acquired real estate leases, less accumulated amortization of $69,848 and
$39,203, respectively
Investment in non-consolidated REITs
Asset held for sale
Cash and cash equivalents
Restricted cash
Tenant rent receivables, less allowance for doubtful accounts
of $50 and $1,300, respectively
Straight-line rent receivable, less allowance for doubtful accounts
of $135 and $135, respectively
Prepaid expenses and other assets
Other assets: derivative asset
Related party mortgage loan receivable
Office computers and furniture, net of accumulated
depreciation of $747 and $584, respectively
Deferred leasing commissions, net of accumulated amortization
of $15,031 and $11,812, respectively
December 31,
2013
2012
$ 185,479 $ 141,545
1,603,941 1,172,928
1,170 904
1,790,590 1,315,377
222,252 180,589
1,568,338 1,134,788
183,454 108,203
80,494 81,960
-
10,575
19,623 21,267
643 575
5,102 1,749
42,261 35,374
10,506 13,761
5,321 -
93,896
99,746
709 544
27,837 23,376
Total assets
$ 2,044,034 $ 1,526,068
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Franklin Street Properties Corp.
Consolidated Balance Sheets
(in thousands, except share and par value amounts)
December 31,
2013
2012
Liabilities and Stockholders’ Equity:
Liabilities:
Bank note payable
Term loans payable
Accounts payable and accrued expenses
Accrued compensation
Tenant security deposits
Other liabilities: derivative liability
Acquired unfavorable real estate leases, less accumulated amortization
of $6,926 and $4,618, respectively
$ 306,500 $ 216,750
620,000 400,000
44,137 31,122
2,985 2,540
4,027 2,489
2,044 1,219
14,175
7,199
Total liabilities
993,868 661,319
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $.0001 par value, 20,000,000 shares
authorized, none issued or outstanding
-
-
Common stock, $.0001 par value, 180,000,000 shares authorized,
100,187,405 and 82,937,405 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Earnings (distributions) in excess of accumulated earnings/distributions
10 8
1,273,556 1,042,876
3,277 (1,219)
(226,677) (176,916)
Total stockholders’ equity
1,050,166 864,749
Total liabilities and stockholders’ equity
$ 2,044,034 $ 1,526,068
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Franklin Street Properties Corp.
Consolidated Statements of Income
(in thousands, except per share amounts)
Revenues:
Rental
Related party revenue:
Management fees and interest income from loans
Other
Total revenues
Expenses:
Real estate operating expenses
Real estate taxes and insurance
Depreciation and amortization
Selling, general and administrative
Interest
Total expenses
Income before interest income, equity in earnings
of non-consolidated REITs and taxes on income
Interest income
Equity in earnings of non-consolidated REITs
Income before taxes on income
Taxes on income
Income from continuing operations
Discontinued operations:
Income (loss) from discontinued operations, net of income tax
Gain (loss) on sale, less applicable income tax
Total discontinued operations
Net income
Weighted average number of shares outstanding,
basic and diluted
Earnings per share, basic and diluted, attributable to:
Continuing operations
Discontinued operations
Net income per share, basic and diluted
For the Year Ended
December 31,
2012
2011
2013
$ 206,926
$ 150,434
$ 133,946
6,646
64
213,636
10,947
199
161,580
4,046
49
138,041
51,100
31,616
78,839
11,911
21,054
194,520
37,440
22,904
54,051
9,916
16,068
140,379
35,074
20,112
47,417
6,855
12,666
122,124
21,201
19,116
16
51
(1,358) 2,033
15,917
22
3,685
17,774
480
23,285
335
19,624
267
17,294
22,950
19,357
375
2,158
2,533
(491) 2,228
(14,826) 21,939
(15,317) 24,167
$ 19,827 $ 7,633 $ 43,524
93,855
82,937
81,857
$ 0.18
$ 0.28
$ 0.24
(0.19) 0.29
0.03
$ 0.21 $ 0.09 $ 0.53
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Franklin Street Properties Corp.
Consolidated Statements of Other Comprehensive Income
(in thousands)
Net income
For the
Year Ended
December 31,
2012
2013
2011
$
19,827
$
7,633
$
43,524
Other comprehensive income (loss):
Unrealized gain (loss) on derivative financial instruments
Amortized gain on derivative financial instruments
Total other comprehensive income (loss)
4,496
-
4,496
(1,219)
-
(1,219)
94
983
1,077
Comprehensive income
$
24,323
$
6,414
$
44,601
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Franklin Street Properties Corp.
Consolidated Statements of Stockholders’ Equity
Earnings
(distributions)
Accumulated in excess of
Common Stock
Shares
Amount
Additional
Paid-In
Capital
other
comprehensive
loss
accumulated
earnings/
distributions
Total
Stockholders'
Equity
(in thousands)
Balance, December 31, 2010
Comprehensive income
Shares issued for:
Equity offering
Distributions
Balance, December 31, 2011
Comprehensive income
Distributions
Balance, December 31, 2012
Comprehensive income
Shares issued for:
Equity offering
Distributions
Balance, December 31, 2013
81,437
-
1,500
-
82,937
-
-
82,937
-
17,250
-
100,187
-
-
-
-
-
-
8
8
2
8
1,025,491
-
17,385
-
1,042,876
-
-
1,042,876
-
230,680
-
(1,077)
1,077
-
-
-
(1,219)
-
(1,219)
4,496
(102,864)
43,524
-
(62,177)
(121,517)
7,633
(63,032)
(176,916)
19,827
921,558
44,601
17,385
(62,177)
921,367
6,414
(63,032)
864,749
24,323
-
$
10
$
1,273,556
$
-
-
3,277
-
(69,588)
(226,677)
$
230,682
(69,588)
1,050,166
$
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense
Amortization of above market lease
Gain (loss) on sale, less applicable income tax
Equity in earnings of non-consolidated REITs
Distributions from non-consolidated REITs
Increase (decrease) in bad debt reserve
Changes in operating assets and liabilities:
Restricted cash
Tenant rent receivables
Straight-line rents
Lease acquisition costs
Prepaid expenses and other assets
Accounts payable, accrued expenses and other items
Accrued compensation
Tenant security deposits
Payment of deferred leasing commissions
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of real estate assets, office computers and
furniture
Acquired real estate leases
Investment in non-consolidated REITs
Distributions in excess of earnings from non-consolidated REITs
Investment in related party mortgage loan receivable
Repayment of related party mortgage receivable
Changes in deposits on real estate assets
Investment in assets held for syndication
Proceeds received on sales of real estate assets
Net cash used in investing activities
Cash flows from financing activities:
Distributions to stockholders
Proceeds from equity offering
Offering costs
Borrowings under bank note payable
Repayments of bank note payable
Borrowing (repayment) of term loan payable
Deferred financing costs
Swap termination payment
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
For the Year Ended December 31,
2013
2011
2012
$ 19,827 $ 7,633 $ 43,524
81,267 57,500
(365) 71
(2,158) 14,826
1,358 (2,033)
- 705
(1,250) 65
50,261
(47)
(21,939)
(3,086)
3,474
(365)
(73)
(68) (82)
827
(2,103) (354)
(9,878)
(5,782) (4,464)
-
(1,146) (2,520)
1,611
(1,547) (328)
4,213
11,137 3,717
419
445 318
78
1,538 481
(9,125) (5,179)
(8,058)
92,028 70,356 60,961
(473,922) (183,868) (174,020)
(62,230)
(100,143) (37,302)
(10)
4,858 (1)
1,582
108 2,105
(82,832)
(8,200) (74,580)
-
2,350 121,200
200
- -
2,230
- -
12,301 157
96,790
(562,648) (172,289) (218,290)
(62,177)
(69,588) (63,032)
18,001
241,500 -
(706)
(10,818) -
449,000
160,000 294,750
(209,968)
(70,250) (527,000)
(74,850)
220,000 400,000
(5,388)
(1,868) (5,331)
- -
(983)
468,976 99,387 112,929
(44,400)
(1,644) (2,546)
21,267 23,813
68,213
$ 19,623 $ 21,267 $ 23,813
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for:
Interest
Taxes on income
Non-cash investing and financing activities:
Accrued costs for purchase of real estate assets
For the Year Ended December 31,
2012
2013
2011
$ 19,556
$ 515
$ 13,969 $ 9,688
$ 265 $ 225
$ 3,570
$ 1,692 $ 733
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
1. 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 14 corporations organized to operate as real estate
investment trusts ("REIT") and a non-controlling preferred stock interest in two of those REITs. Collectively, the 14 REITs are
referred to as the “Sponsored REITs”.
As of December 31, 2013, the Company owned and operated a portfolio of real estate consisting of 39 properties, managed 14
Sponsored REITs and held six promissory notes secured by mortgages on real estate owned by Sponsored REITs, including
one mortgage loan, one construction loan and four 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.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts of the Company and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Estimates and Assumptions
The Company prepares its financial statements and related notes in conformity with accounting principles generally accepted in
the United States of America (“GAAP”). These principles require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates in the consolidated financial statements include the allowance for doubtful accounts,
purchase price allocations, useful lives of fixed assets and the valuation of the derivative.
Investments in non-consolidated REITs
The Company has a non-controlling common stock interest in 14 Sponsored REITs and a non-controlling preferred stock
interest in two Sponsored REITs. In December 2011, the Company announced that it will no longer sponsor the syndication of
newly-formed Sponsored REITs, though it has the capability to sponsor the syndication of any additional shares of preferred
stock in existing Sponsored REITs.
Common stock investments in Sponsored REITs were consolidated while the entity was controlled by the Company.
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. Under the equity method of accounting, the Company's cost basis is
adjusted by its share of the Sponsored REITs' earnings, if any, prior to completion of the syndication. Equity in losses of
Sponsored REITs is not recognized to the extent that the investment balance would become negative. Distributions received
are recognized as income once the investment balance is reduced to zero, unless there is a loan receivable from the Sponsored
REIT entity. Equity in losses or distributions received in excess of common stock investment were recorded as an adjustment
to the carrying value of the assets held for syndication.
Subsequent to the completion of the syndication of preferred shares, the Company does not share in any of the Sponsored
REITs’ earnings, or any related distributions, as a result of its common stock ownership.
F-11
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
On September 22, 2006, the Company purchased 48 preferred shares (approximately 4.6%) of a Sponsored REIT, FSP Phoenix
Tower Corp. (“Phoenix Tower”), for $4,116,000. The Company agreed to vote its shares in any matter presented to a vote by
the stockholders of Phoenix Tower in the same proportion as shares voted by other stockholders of Phoenix Tower. The
investment in Phoenix Tower was accounted for under the equity method. On December 20, 2012, the property owned by
Phoenix Tower was sold at a gain. The Company’s share of the gain was $1.6 million and is included in equity in earnings
from non-consolidated REITs on the consolidated statements of income.
On December 27, 2007, the Company purchased 965.75 preferred shares (approximately 43.7%) of a Sponsored REIT, FSP
303 East Wacker Drive Corp. (“East Wacker”), for $82,813,000. The Company agreed to vote its shares in any matter
presented to a vote by the stockholders of East Wacker in the same proportion as shares voted by other stockholders of East
Wacker. The investment in East Wacker is accounted for under the equity method.
On May 29, 2009, the Company purchased 175.5 preferred shares (approximately 27.0%) of a Sponsored REIT, FSP Grand
Boulevard Corp. (“Grand Boulevard”), for $15,049,000. The Company agreed to vote its shares in any matter presented to a
vote by the stockholders of Grand Boulevard in the same proportion as shares voted by other stockholders of Grand Boulevard.
The investment in Grand Boulevard is accounted for under the equity method.
Real Estate and Depreciation
Real estate assets are stated at the lower of cost, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical capital items include new roofs, site
improvements, various exterior building improvements and major interior renovations. Costs incurred in connection with
leasing (primarily tenant improvements and leasing commissions) are capitalized and amortized over the lease period. Routine
replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred. Funding
for repairs and maintenance items typically is provided by cash flows from operating activities. Depreciation is computed
using the straight-line method over the assets' estimated useful lives as follows:
Category
Commercial buildings
Building improvements
Fixtures and equipment
Years
39
15-39
3-7
The Company reviews its properties to determine if their carrying amounts will be recovered from future operating cash flows
if certain indicators of impairment are identified at those properties. The evaluation of anticipated cash flows is highly
subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could
differ materially from actual results in future periods. Since cash flows are considered on an undiscounted basis in the analysis
that the Company conducts to determine whether an asset has been impaired, the Company’s strategy of holding properties
over the long term directly decreases the likelihood of recording an impairment loss. If the Company’s strategy changes or
market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized. If the Company determines
that impairment has occurred, the affected assets must be reduced to their fair value.
Acquired Real Estate Leases and Amortization
The Company recorded the value of acquired real estate leases as a result of three acquisitions in 2013, two acquisitions in
2012 and five acquisitions in 2011. Acquired real estate leases represent costs associated with acquiring an in-place lease (i.e.,
the market cost to execute a similar lease, including leasing commission, legal, vacancy and other related costs) and the value
relating to leases with rents above the market rate. Amortization is computed using the straight-line method over the term of
the leases, which range from 1 month to 281 months. Amortization expense was approximately $32,230,000, $19,174,000, and
$13,697,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
Amortization related to costs associated with acquiring an in-place lease is included in depreciation and amortization on the
consolidated statements of income. Amortization related to leases with rents above the market rate is offset against the rental
revenue in the consolidated statements of income. The estimated annual amortization expense for the five years and thereafter
succeeding December 31, 2013 is as follows:
F-12
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Acquired Real Estate Leases and Amortization (continued)
(in thousands)
2014
2015
2016
2017
2018
2019 and thereafter
December 31,
$ 42,243
36,876
30,807
24,524
19,369
29,635
Acquired Unfavorable Real Estate Leases and Amortization
The Company recorded the value of acquired unfavorable leases as a result of three acquisitions in 2013, two acquisitions in
2012 and five acquisitions in 2011. Acquired unfavorable real estate leases represent the value relating to leases with rents
below the market rate. Amortization is computed using the straight-line method over the term of the leases, which range from
2 months to 281 months. Amortization expense was approximately $3,073,000, $1,548,000 and $1,301,000 for the years
ended December 31, 2013, 2012 and 2011, respectively.
Amortization related to leases with rents below the market rate is included with rental revenue in the consolidated statements of
income. The estimated annual amortization for the five years and thereafter succeeding December 31, 2013 is as follows:
(in thousands)
2014
2015
2016
2017
2018
2019 and thereafter
$ 3,267
2,948
2,387
1,816
1,397
2,360
Discontinued Operations
The Company reports as discontinued operations, the income and expenses associated with a disposal group (i) that qualifies as
a component of an entity, (ii) for which cash flows will be eliminated from the ongoing operations of the entity, and (iii) in
which the Company will not have significant continuing involvement.
The Company accounts for sale of properties and assets held for sale as discontinued operations. Classification as held for sale
typically occurs upon the execution of a purchase and sale agreement and belief by management that the sale or disposition is
probable of occurrence within one year. Upon determining that a property is held for sale, the Company discontinues
depreciating the property and reflects the property in its consolidated balance sheets at the lower of its carrying amount or fair
value less the cost to sell. The Company presents property held for sale on its consolidated balance sheets as “Asset held for
sale”, on a comparative basis. The Company reports the results of operations of its properties sold or held for sale in its
consolidated statements of income as discontinued operations if no significant continuing involvement exists after the sale or
disposition.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash
equivalents.
Restricted Cash
Restricted cash consists of tenant security deposits, which are required by law in some states or by contractual agreement to be
kept in a segregated account, and escrows arising from property sales. Tenant security deposits are refunded when tenants
vacate, provided that the tenant has not damaged the property.
F-13
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Cash held in escrow is paid when the related issue is resolved. Restricted cash also may include funds segregated for specific
tenant improvements per lease agreements.
Tenant Rent Receivables
Tenant rent receivables are expected to be collected within one year. The Company provides an allowance for doubtful
accounts based on its estimate of a tenant’s ability to make future rent payments. The computation of this allowance is based
in part on the tenants’ payment history and current credit status. The Company charged off $1,237,000 in receivables and
decreased its allowance by $13,000 during 2013; charged off $20,000 in receivables and increased its allowance by $85,000
during 2012; and charged off $399,000 in receivables and increased its allowance by $34,000 during 2011, based on such
analysis.
Related Party Mortgage Loan Receivable
Management monitors and evaluates the secured loans compared to the expected performance, cash flow and value of the
underlying real estate and has not experienced a loss on these loans to date.
Concentration of Credit Risks
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments,
derivatives and accounts receivable. The Company maintains its cash balances principally in two banks which the Company
believes to be creditworthy. The Company periodically assesses the financial condition of the banks and believes that the risk
of loss is minimal. Cash balances held with various financial institutions frequently exceed the insurance limit of $250,000
provided by the Federal Deposit Insurance Corporation. The derivatives that we have are from two interest rate swap
agreements that are discussed in Note 6. The Company performs ongoing credit evaluations of our tenants and require certain
tenants to provide security deposits or letters of credit. Though these security deposits and letters of credit are insufficient to
meet the total value of a tenant’s lease obligation, they are a measure of good faith and a source of funds to offset the economic
costs associated with lost rent and the costs associated with re-tenanting the space. The Company has no single tenant which
accounts for more than 10% of its annualized rent.
Financial Instruments
The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses,
accounts payable and accrued expenses, accrued compensation, tenant security deposits approximate their fair values based on
their short-term maturity and the bank note and term loans payable approximate their fair values as they bear interest at
variable interest rates.
Straight-line Rent Receivable
Certain leases provide for fixed rent increases over the term of the lease. Rental revenue is recognized on a straight-line basis
over the related lease term; however, billings by the Company are based on the lease agreements. Straight-line rent receivable,
which is the cumulative revenue recognized in excess of amounts billed by the Company, is $42,261,000 and $35,441,000 at
December 31, 2013 and 2012, respectively. The Company provides an allowance for doubtful accounts based on its estimate
of a tenant’s ability to make future rent payments. The computation of this allowance is based in part on the tenants’ payment
history and current credit status. The Company charged off $48,000 in receivables and increased its allowance by $48,000
during 2013, charged off $28,000 in receivables and increased its allowance by $28,000 during 2012 and charged off $567,000
in receivables and increased its allowance by $2,000 during 2011, based on such analysis.
Deferred Leasing Commissions
Deferred leasing commissions represent direct and incremental external leasing costs incurred in the leasing of commercial
space. These costs are capitalized and are amortized on a straight-line basis over the terms of the related lease agreements.
Amortization expense was approximately $4,683,000, $4,173,000 and $3,806,000 for the years ended December 31, 2013,
2012 and 2011, respectively.
F-14
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Deferred Leasing Commissions (continued)
The estimated annual amortization for the five years and thereafter following December 31, 2013 is as follows:
(in thousands)
2014
2015
2016
2017
2018
2019 and thereafter
$ 5,240
4,669
4,193
3,312
2,945
7,476
Common Share Repurchases
The Company recognizes the gross cost of the common shares it repurchases as a reduction in stockholders’ equity using the
treasury stock method. Maryland law does not recognize a separate treasury stock account but provides that shares
repurchased are classified as authorized but unissued shares. Accordingly, the Company reduces common stock for the par
value and the excess of the purchase price over the par value is a reduction to additional paid-in capital.
Revenue Recognition
Rental revenue includes income from leases, certain reimbursable expenses, straight-line rent adjustments and other income
associated with renting the property. A summary of rental revenue is shown in the following table:
(in thousands)
Income from leases
Reimbursable expenses
Straight-line rent adjustment
Amortization of favorable and
unfavorable leases
Year Ended
December 31,
2012
116,494
29,847
4,366
$
$
2011
98,080
26,006
9,863
$
2013
159,472
41,486
5,755
213
206,926
$
(273)
150,434
$
(3)
133,946
$
Rental Revenue - The Company has retained substantially all of the risks and benefits of ownership of the Company's
commercial properties and accounts for its leases as operating leases. Rental income from leases, which includes rent
concessions (including free rent and tenant improvement allowances) and scheduled increases in rental rates during the lease
term, is recognized on a straight-line basis. The Company does not have any significant percentage rent arrangements with its
commercial property tenants. Reimbursable expenses are included in rental income in the period earned.
Related Party and Other Revenue - Property and asset management fees and other income are recognized when the related
services are performed and the earnings process is complete.
Segment Reporting
ASC 280 Segment Reporting (“ASC 280”) establishes standards for the way public entities report information about operating
segments in the financial statements. The Company is a REIT focused on real estate investments primarily in the office market
and currently operates in only one segment: real estate operations. In December 2011, the Company discontinued the activities
of its investment banking segment, which are included in discontinued operations for all periods presented.
F-15
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Income Taxes
Taxes on income for the years ended December 31, 2013, 2012 and 2011 represent taxes incurred by FSP Protective TRS
Corp, which is a taxable REIT subsidiary and the State of Texas franchise tax applicable to FSP Corp., which is classified as an
income tax for reporting purposes. Taxes on income incurred by FSP Investments, which is a taxable REIT subsidiary, are
classified in discontinued operations.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of 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 December 31, 2013,
2012, and 2011. The denominator used for calculating basic and diluted net income per share was 93,855,000, 82,937,000, and
81,857,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
Derivative Instruments
The Company recognizes derivatives on the consolidated balance sheet at fair value. Derivatives that do not qualify, or are not
designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge
relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on
the consolidated balance sheet as either an asset or liability. To the extent hedges are effective, a corresponding amount,
adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity. Amounts are
then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged
forecasted transaction affects earnings. Ineffectiveness, if any, is recorded in the income statement. The Company periodically
reviews the effectiveness of each hedging transaction, which involves estimating future cash flows, at least quarterly.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability,
or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The Company
currently has no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes
in interest rates and counterparty credit risk. The results of such variability could be a significant increase or decrease in our
derivative assets, derivative liabilities, book equity, and/or earnings.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. There is also an established fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value. Financial assets and liabilities recorded on the consolidated balance sheets at fair value
are categorized based on the inputs to the valuation techniques as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well
as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are
observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically
based on an entity’s own assumptions, as there is little, if any, related market activity or information. In instances where the
determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the
fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to
the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to the asset or liability including credit risk, which
was not significant to the overall value. These inputs were considered and applied to the Company’s derivative, and Level 2
inputs were used to value the interest rate swap.
F-16
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Subsequent Events
In preparing these consolidated financial statements the Company evaluated events that occurred through the date of issuance
of these financial statements for potential recognition or disclosure.
Reclassifications
Certain amounts in the 2012 and 2011 financial statements have been reclassified to conform to 2013 presentation. The
reclassifications were related primarily to a property sold, which is presented as discontinued operations for all periods
presented. Reclassifications of discontinued operations changed rental revenues, operating and maintenance expenses, general
& administrative expenses and depreciation and amortization and the related assets. There was no change to net income for
any period presented as a result of these reclassifications.
Recent Accounting Standards
In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires entities to report
the effect of significant reclassifications out of accumulated other comprehensive income on the respective line
items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles
(GAAP) to be reclassified in its entirety to net income. This update was effective for interim and annual reporting periods
beginning after December 15, 2012. The adoption of this update did not have a material impact on the disclosures in, or
presentation of, our consolidated financial statements.
3. Significant Acquisitions
During the year ended December 31, 2013, the Company acquired three properties with an aggregate of approximately
1,951,000 rentable square feet at an aggregate purchase price of approximately $558 million before deductions of closing costs
and adjustments of approximately $3 million. One property is located in Atlanta, Georgia and two properties are located in
Denver, Colorado. The Company expensed acquisition costs of approximately $568,000 related to these acquisitions for the
year ended December 31, 2013.
The purchase price of the properties were allocated to real estate investments and leases, including lease origination costs.
Lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar
lease, including leasing commission, legal, vacancy, and other related costs). The value assigned to buildings approximates
their replacement cost; the value assigned to land approximates its appraised value; and the value assigned to leases
approximates their fair value. Other assets and liabilities are recorded at their historical costs, which approximates fair value.
The following table summarizes the estimated fair value of the assets acquired at the date of acquisition:
$
$
454,447
110,039
(9,897)
554,589
(in thousands)
Real estate assets
Value of acquired real estate leases
Acquired unfavorable leases
Total
F-17
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
3. Significant Acquisitions (continued)
The Company assessed the fair value of the acquired real estate leases based on estimated cash flow projections that utilize
appropriate discount rates and available market information. Such inputs are Level 3 in the fair value hierarchy.
Pro forma operating results for the Company and the acquisition are shown in the following table. The results assume that the
properties were acquired on January 1, 2012. The results are not necessarily indicative of what the Company’s actual results of
operations would have been for the periods indicated, nor do they purport to represent the results of operations of any future
periods.
(unaudited)
(in thousands except per share amounts)
For the Year Ended
December 31,
2013
2012
Revenue
Income from continuing operations
Net income
$
$
$
241,346
12,527
15,060
$
$
$
211,289
10,668
(4,649)
Weighted average shares outstanding
93,855
82,937
Income from continuing operations per share
$
0.13
$
0.13
Net income per share
$
0.16
$
(0.06)
During the year ended December 31, 2013, the Company recognized approximately $29.7 million of revenues and $3.8 million
of net income from operations of these acquisitions.
4. Related Party Transactions and Investments in Non-Consolidated Entities
Investment in Sponsored REITs
At December 31, 2013, the Company held an interest in 14 Sponsored REITs, all of which were fully syndicated. At
December 31, 2012, the Company held an interest in 15 Sponsored REITs, all of which were fully syndicated. At December
31, 2011, the Company held an interest in 16 Sponsored REITs, all of which were fully syndicated. The Company holds a non-
controlling preferred stock investment in two of these Sponsored REITs, FSP 303 East Wacker Drive Corp. (“East Wacker”) and
FSP Grand Boulevard Corp. (“Grand Boulevard”), from which it continues to derive economic benefits and risks.
In December 2013, the property owned by FSP 505 Waterford Corp. (“505 Waterford”), a Sponsored REIT, was sold and,
thereafter, 505 Waterford declared and issued a liquidating distribution for its preferred shareholders. The Company held a
mortgage loan secured by the property owned by 505 Waterford in the principal amount of $2,350,000, which was repaid from the
proceeds of the sale.
In September 2006, the Company purchased 48 preferred shares or 4.6% of the outstanding preferred shares of one of its
Sponsored REITs, FSP Phoenix Tower Corp (“Phoenix Tower”). On December 20, 2012, the property owned by Phoenix
Tower was sold and, thereafter, Phoenix Tower declared and issued a liquidating distribution for its preferred shareholders,
from which the Company was entitled to $4,862,000. The Company received $4,752,000 on January 4, 2013 and $96,000 on
September 30, 2013. In connection with its common stock ownership of Phoenix Tower, the Company received $10,000 on
September 30, 2013. As of December 31, 2013, the Company held a beneficial interest in the Phoenix Tower liquidating trust
in the amount of approximately $14,000, which is included in other assets in the accompanying consolidated balance sheet.
The table below shows the Company’s income and expenses from Sponsored REITs syndicated in 2011. There were no
syndications of Sponsored REITs in 2013 or 2012. Management fees of $6,000 for the year ended December 31, 2011, and
interest expense related to the Company’s mortgages on properties owned by this entity of $197,000 for the year ended
December 31, 2011, are eliminated in consolidation.
F-18
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
4. Related Party Transactions and Investments in Non-Consolidated Entities (continued)
(in thousands)
Operating Data:
Rental revenues
Operating and maintenance
expenses
Depreciation and amortization
Interest expense
Interest income
Year Ended
December 31,
2011
$
1,482
480
610
197
-
195
$
Equity in earnings (losses) of investment in non-consolidated REITs:
The following table includes equity in earnings (losses) of investments in non-consolidated REITs:
(in thousands)
Year Ended December 31,
2012
2011
2013
Equity in earnings of Sponsored REITs
Equity in earnings (losses) of Phoenix Tower
Equity in earnings (losses) of East Wacker
Equity in earnings (losses) of Grand Boulevard
-
$
-
(1,021)
(337)
(1,358)
$
-
$
1,618
670
(255)
2,033
$
$
$
1,696
(14)
2,137
(134)
3,685
Equity in earnings of investments in Sponsored REITs is derived from the Company’s share of income following the
commencement of syndication of Sponsored REITs. Following the commencement of syndication the Company exercises
influence over, but does not control these entities, and investments are accounted for using the equity method.
Equity in earnings (losses) of Phoenix Tower were 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 acquisition fees of
$300,000 that were excluded). On December 20, 2012, the property owned by Phoenix Tower was sold at a gain, which is
included in equity in earnings of non-consolidated REITs on the consolidated statements of income.
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 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).
F-19
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
4. Related Party Transactions and Investments in Non-Consolidated Entities (continued)
The following table includes distributions received from non-consolidated REITs:
(in thousands)
Distributions from Sponsored REITs
Distributions from Phoenix Tower
Distributions from East Wacker
Distributions from Grand Boulevard
Year Ended December 31,
2012
2011
2013
-
$
-
-
107
107
$
-
$
173
2,489
148
2,810
$
$
$
1,337
130
3,319
270
5,056
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 in the future of Sponsored REITs. However, 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 2013 includes the operations of the 15 Sponsored REITs the Company held an interest in during
the year and the 14 Sponsored REITS the Company held an interest in as of December 31, 2013. On December 6, 2013, the
property owned by 505 Waterford was sold. On December 20, 2012, the property owned by Phoenix Tower was sold. The
operating data below for 2012 includes operations of the 15 Sponsored REITs the Company held an interest in as of December
31, 2012. The operating data below for 2011 includes operations of the 16 Sponsored REITs the Company held an interest in
as of December 31, 2011.
Summarized financial information for the Sponsored REITs is as follows:
(in thousands)
Balance Sheet Data (unaudited):
Real estate, net
Other assets
Total liabilities
Shareholders' equity
December 31,
2013
December 31,
2012
$ 642,105
187,494
(321,099)
$ 508,500
$ 659,655
156,785
(316,311)
$ 500,129
(in thousands)
2013
For the Year Ended
December 31,
2012
2011
Operating Data (unaudited):
Rental revenues
Other revenues
Operating and maintenance expenses
Selling, general and administrative
Depreciation and amortization
Interest expense
Gain on sale, less applicable income tax
Net income
$ 93,608
68
(48,718)
-
(31,450)
(13,752)
5,851
$ 5,607
$ 109,676
115
(56,621)
-
(35,143)
(17,357)
36,610
$ 37,280
$ 111,417
90
(55,672)
(604)
(33,909)
(17,180)
-
$ 4,142
F-20
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
4. Related Party Transactions and Investments in Non-Consolidated Entities (continued)
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 $1,078,000, $1,149,000 and
$958,000 for the years ended December 31, 2013, 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. 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 bore interest at a fixed rate and was repaid in July 2012
and a mortgage loan which bears interest at a fixed rate, advances under each Sponsored REIT Loan bear interest at a rate equal
to the 30-day LIBOR rate plus an agreed upon amount of basis points and most advances also require a 50 basis point draw fee.
In December 2011, the Company 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 collected in connection with a $30 million draw from
the revolving line of credit component. That loan was repaid in full during July 2012 and also included a 0.49% fee collected
of $520,000. In July 2012, the Company received a loan fee of $301,000 at the time of the closing of the mortgage loan with a
fixed interest rate and a 0.98% fee will be collected 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 its 2011 Revolver or previous
revolving lines of credit. 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 December 31, 2013 and 2012.
The following is a summary of the Sponsored REIT Loans outstanding as of December 31, 2013:
(dollars in thousands)
Sponsored REIT
Secured revolving lines of credit
FSP Highland Place I Corp.
FSP Satellite Place Corp.
FSP 1441 Main Street Corp.
FSP Galleria North Corp.
Secured construction loan
FSP 385 Interlocken
Development Corp.
Mortgage loan secured by property
FSP Energy Tower I Corp. (3)
Location
Maturity
Date
Maximum Amount
Amount Drawn at
of Loan
Interest Draw
31-Dec-13 Rate (1) Fee (2) 31-Dec-13
Interest
Rate at
Centennial, CO 31-Dec-14
31-Mar-14
Duluth, GA
31-Mar-14
Columbia, SC
30-Jan-15
Dallas, TX
$
5,500
5,500
10,800
15,000
$
1,825
5,500
9,000
12,880
L+4.4% 0.5%
L+4.4% 0.5%
L+4.4% 0.5%
L+5.0% 0.5%
4.57%
4.57%
4.57%
5.17%
Broomfield, CO 30-Apr-14
42,000
37,541
L+4.4% n/a
4.57%
Houston, TX
5-Jul-14
33,000
33,000
6.41%
n/a
6.41%
$
111,800
$
99,746
(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) The loan has a secured fixed mortgage amount of $33,000,000. A loan fee of $300,630 was paid at the time
of closing and funding of the loan on July 5, 2012. The borrower is required to pay the Company an exit
fee in the amount of 0.982% of the principal repayment amount.
F-21
4. Related Party Transactions and Investments in Non-Consolidated Entities (continued)
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
The Company recognized interest income and fees from the Sponsored REIT Loans of approximately $5,568,000, $9,798,000,
and $3,087,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
5. Bank note payable and term note payable
2013 Term Loan
On August 26, 2013, the Company and certain of its wholly-owned subsidiaries entered into a Credit Agreement (the “2013
Credit Agreement”) with the lending institutions referenced in the 2013 Credit Agreement and Bank of Montreal, as
administrative agent, to provide for a single unsecured term loan borrowing on the closing date in the amount of $220,000,000
(the “2013 Term Loan”). On August 26, 2013, the Company drew down $220,000,000 under the 2013 Term Loan. The 2013
Term Loan has a seven year term that matures on August 26, 2020. The 2013 Term Loan includes an accordion feature that
allows for up to $50,000,000 of additional loans subject to receipt of lender commitments and satisfaction of certain customary
conditions.
The 2013 Term Loan bears interest at either (i) a rate equal to LIBOR plus 145 to 220 basis points depending on the
Company’s total leverage ratio for the applicable period (LIBOR plus 190 basis points, or 2.06% at December 31, 2013) or (ii)
a rate equal to the bank’s base rate plus 45 to 120 basis points depending on our total leverage ratio for the applicable period
(the bank’s base rate plus 90 basis points, or 4.15% at December 31, 2013). The actual LIBOR rate or base rate is determined
based on the Company’s total leverage ratio for the applicable period as described in the table below:
Leverage Ratio
Greater
Than
-
25%
35%
45%
55%
Less Than
or Equal to
25%
35%
45%
55%
and
and
and
and
LIBOR
Margin
145.0 bps
155.0 bps
165.0 bps
190.0 bps
220.0 bps
Base
Rate
Margin
45.0 bps
55.0 bps
65.0 bps
90.0 bps
120.0 bps
Although the interest rate on the 2013 Term Loan is variable, the Company fixed the base LIBOR interest rate on the 2013
Term Loan by entering into an interest rate swap agreement. On August 26, 2013, the Company entered into an ISDA Master
Agreement with Bank of Montreal that fixed the base LIBOR interest rate on the 2013 Term Loan at 2.32% per annum for
seven years. Accordingly, based upon the Company’s leverage ratio, as of December 31, 2013, the interest rate on the 2013
Term Loan was 4.22% per annum.
The 2013 Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including
limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in
business, certain restricted payments, the requirement to join certain subsidiaries as co-borrowers under the 2013 Credit
Agreement and transactions with affiliates. The 2013 Credit Agreement also contains financial covenants that require the
Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage
ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, a minimum unencumbered debt service coverage
ratio, a maximum ratio of certain investments to total assets and a maximum amount of secured recourse indebtedness. The
2013 Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any
principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the 2013 Credit
Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number
of lenders shall, declare all obligations under the 2013 Credit Agreement immediately due and payable, terminate the lenders’
commitments to make loans under the 2013 Credit Agreement, and enforce any and all rights of the lenders or administrative
agent under the 2013 Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency,
and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company
will become immediately due and payable. The Company was in compliance with the 2013 Term Loan financial covenants as
of December 31, 2013.
F-22
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
5. Bank note payable and term note payable (continued)
The Company may use the proceeds of the 2013 Term Loan to finance the acquisition of real properties and for other permitted
investments, to finance investments associated with Sponsored REITs, to refinance or retire existing indebtedness and for
working capital and other general business purposes, in each case to the extent permitted under the 2013 Credit Agreement.
2012 Credit Facility
As of December 31, 2013, the Company had bank notes payable to a group of banks for an unsecured credit facility comprised
of both a revolving line of credit and a term loan (the “2012 Credit Facility”). The revolving line of credit portion of the 2012
Credit Facility is for borrowings, at the Company’s election, of up to $500,000,000 (the “2012 Revolver”). The term loan
portion of the 2012 Credit Facility is for $400,000,000 (the “2012 Term Loan”). The 2012 Revolver includes an accordion
feature that allows for up to $250,000,000 of additional borrowing capacity subject to receipt of lender commitments and
satisfaction of certain customary conditions.
On September 27, 2012, the Company and certain of its wholly-owned subsidiaries entered into an Amended and Restated
Credit Agreement (as amended, the “2012 Credit Agreement”) with the lending institutions referenced in the 2012 Credit
Agreement and those lenders from time to time party thereto and Bank of America, N.A., as administrative agent, letter of
credit issuer and swing line lender, for the 2012 Credit Facility. On September 27, 2012, the Company drew down the entire
$400,000,000 under the 2012 Term Loan and $82,000,000 under the 2012 Revolver. The Company’s $600,000,000 revolving
credit facility (the “2011 Revolver”) that was scheduled to mature on February 22, 2014 was amended and restated in its
entirety by the 2012 Credit Agreement and the $482,000,000 in advances outstanding under the 2011 Revolver were repaid
from the proceeds of the 2012 Credit Facility.
The 2012 Term Loan has a five year term that matures on September 27, 2017. Borrowings made pursuant to the 2012
Revolver may be revolving loans, swing line loans or letters of credit, the combined sum of which may not exceed
$500,000,000 outstanding at any time. Borrowings made pursuant to the 2012 Revolver may be borrowed, repaid and
reborrowed from time to time for four years until September 27, 2016, the initial maturity date of the 2012 Revolver. The
Company has the right to extend the initial maturity date of the 2012 Revolver by an additional 12 months, or until September
27, 2017, upon payment of a fee and satisfaction of certain customary conditions.
The 2012 Credit Facility bears interest at either (i) a rate equal to LIBOR plus 135 to 190 basis points depending on the
Company’s total leverage ratio at the time of the borrowing (LIBOR plus 165 basis points, or 1.82% at December 31, 2013) or
(ii) a rate equal to the bank’s base rate plus 35 to 90 basis points depending on our total leverage ratio at the time of the
borrowing (the bank’s base rate plus 65 basis points, or 3.90% at December 31, 2013). The 2012 Credit Facility also obligates
the Company to pay an annual facility fee of 20 to 40 basis points depending on the Company’s total leverage ratio (35 basis
points at December 31, 2013). The facility fee is assessed against the total amount of the 2012 Credit Facility, or
$900,000,000. The actual amount of any applicable facility fee, LIBOR rate or base rate is determined based on the Company’s
total leverage ratio as described in the table below:
Leverage Ratio
Greater
Than
-
25%
35%
45%
55%
Less Than
or Equal to
25%
35%
45%
55%
and
and
and
and
Facility
Fee
20.0 bps
25.0 bps
30.0 bps
35.0 bps
40.0 bps
LIBOR
Margin
135.0 bps
140.0 bps
145.0 bps
165.0 bps
190.0 bps
Base
Rate
Margin
35.0 bps
40.0 bps
45.0 bps
65.0 bps
90.0 bps
For purposes of the 2012 Credit Facility, base rate means, for any day, a fluctuating rate per annum equal to the highest of: (i)
the bank’s prime rate for such day, (ii) the Federal Funds Rate for such day, plus 1/2 of 1.00%, and (iii) the one month LIBOR
base rate for such day plus 1.00%.
F-23
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
5. Bank note payable and term note payable (continued)
Although the interest rate on the 2012 Credit Facility is variable, under the 2012 Credit Agreement, the Company fixed the
base LIBOR interest rate on the 2012 Term Loan by entering into an interest rate swap agreement. On September 27, 2012, the
Company entered into an ISDA Master Agreement with Bank of America, N.A. that fixed the base LIBOR interest rate on the
2012 Term Loan at 0.75% per annum for five years. Accordingly, based upon the Company’s leverage ratio, as of December
31, 2013, the interest rate on the 2012 Term Loan was 2.40% per annum. In addition, based upon the Company’s leverage
ratio, as of December 31, 2013, there were borrowings of $306,500,000 outstanding under the 2012 Revolver at a weighted
average rate of 1.82% per annum. The weighted average interest rate on all amounts outstanding on the 2012 Revolver during
the year ended December 31, 2013 was approximately 1.65% per annum.
As of December 31, 2012, there were borrowings of $216,750,000 outstanding under the 2012 Revolver at a weighted average
rate of 2.23% per annum. As of December 31, 2011, there were borrowings of $449,000,000 outstanding under the 2011
Revolver at a weighted average rate of 2.24% per annum.
The 2012 Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including
limitations with respect to indebtedness, liens, investments, mergers and acquisitions, disposition of assets, changes in
business, certain restricted payments, the requirement to join certain subsidiaries as co-borrowers under the 2012 Credit
Agreement and transactions with affiliates. The 2012 Credit Agreement also contains financial covenants that require the
Company to maintain a minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum secured leverage
ratio, a maximum leverage ratio, a maximum unencumbered leverage ratio, a minimum unencumbered debt service coverage
ratio, a maximum ratio of certain investments to total assets and a maximum amount of secured recourse indebtedness. The
2012 Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay any
principal or interest when due, certain cross defaults and a change in control of the Company (as defined in the 2012 Credit
Agreement). In the event of a default by the Company, the administrative agent may, and at the request of the requisite number
of lenders shall, declare all obligations under the 2012 Credit Agreement immediately due and payable, terminate the lenders’
commitments to make loans under the 2012 Credit Agreement, and enforce any and all rights of the lenders or administrative
agent under the 2012 Credit Agreement and related documents. For certain events of default related to bankruptcy, insolvency,
and receivership, the commitments of lenders will be automatically terminated and all outstanding obligations of the Company
will become immediately due and payable. The Company was in compliance with the 2012 Credit Facility financial covenants
as of December 31, 2013.
The Company may use the proceeds of the loans under the 2012 Credit Agreement to finance the acquisition of real properties
and for other permitted investments; to finance investments associated with Sponsored REITs, to refinance or retire existing
indebtedness and for working capital and other general business purposes, in each case to the extent permitted under the 2012
Credit Agreement.
6. Financial Instruments: Derivatives and Hedging
On August 26, 2013, the Company fixed the interest rate for seven years on the 2013 Term Loan with an interest rate swap
agreement (the “2013 Interest Rate Swap”) and on September 27, 2012, the Company fixed the interest rate for five years on
the 2012 Term Loan with an interest rate swap agreement (the “2012 Interest Rate Swap”). The variable rates that were fixed
under the 2013 Interest Rate Swap and the 2012 Interest Rate Swap are described in Note 5.
The 2013 Interest Rate Swap and the 2012 Interest Rate Swap qualify as cash flow hedges and have been recognized on the
consolidated balance sheet at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in
the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings, which may increase
or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates and other
variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.
F-24
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
6. Financial Instruments: Derivatives and Hedging
The following table summarizes the notional and fair value of our derivative financial instruments at December 31, 2013. The
notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent
exposure to credit, interest rate or market risks.
(in thousands)
Notional
Value
Strike
Rate
Effective
Date
Expiration
Date
Fair
Value
2013 Interest Rate Swap
2012 Interest Rate Swap
$
$
220,000
400,000
2.32%
0.75%
Aug-13
Sep-12
Aug-20
Sep-17
$
$
(2,044)
5,321
On December 31, 2013, the 2013 Interest Rate Swap was reported as a liability at its fair value of approximately $2.0 million
and the 2012 Interest Rate Swap was reported as an asset at its fair value of approximately $5.3 million. These are included in
other liabilities: derivative liability and other assets: derivative asset on the consolidated balance sheet at December 31, 2013,
respectively. Offsetting adjustments are reported as unrealized gains or losses on derivative financial instruments in
accumulated other comprehensive income of $4.5 million. During the year ended December 31, 2013, $3.9 million was
reclassified out of other comprehensive income and into interest expense.
Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified into earnings
as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. We
estimate that approximately $1.1 million of the current balance held in accumulated other comprehensive income will be
reclassified into earnings within the next 12 months.
We are hedging the exposure to variability in future cash flows for forecasted transactions in addition to anticipated future
interest payments on existing debt.
The fair value of the Company’s derivative instruments are determined using the net discounted cash flows of the expected
cash flows of the derivative based on the market based interest rate curve and are adjusted to reflect credit or nonperformance
risk. The risk is estimated by the Company using credit spreads and risk premiums that are observable in the market. These
financial instruments were classified within Level 2 of the fair value hierarchy and were classified as an asset or liability on the
consolidated balance sheet.
Previously 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 to protect the Company from
future interest rate increases on that term loan.
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 that 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 year ended December 31, 2011 was $983,000. The effective portion of the loss on
outstanding derivative recognized in other comprehensive income for the year ended December 31, 2011 was $983,000.
F-25
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
7. Stockholders’ Equity
Equity Offerings
On May 15, 2013, the Company completed an underwritten public offering of 17,250,000 shares of its common stock
(including 2,250,000 shares issued as a result of the full exercise of an overallotment option by the underwriter) at a price to the
public of $14.00 per share. The proceeds from this public offering, net of underwriter discounts and offering costs, totaled
approximately $230.7 million (after payment of offering costs of approximately $10.8 million).
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 year ended December 31, 2013 and 2012, the Company did not sell any shares under the
ATM Sales Program. During the year ended December 31, 2011, the Company sold 1,500,000 shares of its common stock
under the ATM Sales Program at an average price of $12.00 per share, for which approximately $360,000 was payable to the
placement/sales agent and $256,000 was incurred for offering related expenses, raising net proceeds of approximately $17.4
million. As of December 31, 2013, 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.
Equity-Based Compensation
On May 20, 2002, the stockholders of the Company approved the 2002 Stock Incentive Plan (the "Plan"). The Plan is an
equity-based incentive compensation plan, and provides for the grants of up to a maximum of 2,000,000 shares of the
Company's common stock ("Awards"). All of the Company's employees, officers, directors, consultants and advisors are
eligible to be granted awards. Awards under the Plan are made at the discretion of the Company's Board of Directors, and have
no vesting requirements. Upon granting an Award, the Company will recognize compensation cost equal to the fair value of
the Company's common stock, as determined by the Company's Board of Directors, on the date of the grant.
The Company has not issued any shares under the Plan since 2005, and there are currently 1,944,428 shares available for grant
under the Plan.
8. Federal Income Tax Reporting
General
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As a
REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively
subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply
with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type
of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the
Company’s taxable income that must be distributed annually.
F-26
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting (continued)
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 newly-formed 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.
The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which
did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest
and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company’s
effective tax rate was not affected by the adoption. The Company and one or more of its subsidiaries files income tax returns
in the U.S federal jurisdiction and various state jurisdictions. The statute of limitations for the Company’s income tax returns
is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2010
and thereafter.
Net operating losses
Section 382 of the Code restricts a corporation's ability to use net operating losses (“NOLs") to offset future taxable income
following certain "ownership changes." Such ownership changes occurred with past mergers and accordingly a portion of the
NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited.
To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried
forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the
Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of
any tax benefits from such NOLs is not assured. The gross amount of NOLs available to the Company was $13,041,000, as of
December 31, 2013, 2012 and 2011.
Income Tax Expense
The income tax expense reflected in the consolidated statements of income relates primarily to a franchise tax on our Texas
properties. FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties and the tax
expense associated with these activities are reported in the table as Other Taxes in the table below:
(Dollars in thousands)
Revised Texas franchise tax
Other Taxes
Taxes on income
For the years ended December 31,
2011
2012
2013
$
$
462
18
480
$
$
330
5
335
$
$
253
14
267
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.
F-27
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting (continued)
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. The Company recorded a provision in income taxes on its income statement of $462,000, $330,000 and
$253,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
At December 31, 2013, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s
consolidated balance sheets by $160,599,000 and at December 31, 2012 the net tax basis is more than the Company’s
consolidated balance sheets by $61,255,000.
Reconciliation Between GAAP Net Income and Taxable Income
The following reconciles book net income to taxable income for the years ended December 31, 2013, 2012 and 2011.
(in thousands)
Net income per books
Adjustments to book income:
Book depreciation and amortization
Tax depreciation and amortization
Tax basis more than book basis on assets sold
Straight line rent adjustment, net
Deferred rent, net
Non-taxable distributions
Other, net
Taxable income
Less: Capital gains recognized
Taxable income subject to distribution requirement
For the year ended December 31,
2012
2013
2011
$
19,827
$
7,633
$
43,524
79,090
(44,552)
(735)
(6,748)
(818)
(107)
1,263
47,220
-
47,220
$
55,518
(34,047)
265
(5,203)
1,224
(1,114)
1,899
26,175
(1,514)
24,661
$
48,439
(31,409)
(1,281)
(9,783)
1,290
(767)
2,728
52,741
(21,951)
30,790
$
F-28
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting (continued)
Tax Components
The following summarizes the tax components of the Company’s common distributions paid per share for the years ended
December 31, 2013, 2012 and 2011:
Ordinary income
Capital gain (1)
Return of capital
2013
2012
2011
Per Share
0.53
$
-
0.23
%
69.58%
0.00%
30.42%
Per Share
0.31
$
0.02
0.43
%
40.61%
2.40%
56.99%
Per Share
0.38
$
0.27
0.11
%
50.79%
35.17%
14.04%
Total
$
0.76
100%
$
0.76
100%
$
0.76
100%
(1) For 2013, 2012 and 2011, 0%, 2.4% and 29.78%, respectively, of the total distributions are taxed as capital gains, and,
0%, 0% and 5.39%, respectively, are taxed as an Unrecaptured Section 1250 gain.
9. Commitments
The Company's commercial real estate operations include the leasing of office buildings and industrial properties subject to
leases with terms greater than one year. The leases expire at various dates through 2026. The following is a schedule of
approximate future minimum rental income on non-cancelable operating leases as of December 31, 2013:
(in thousands)
2014
2015
2016
2017
2018
Thereafter (2019-2026)
Year ending
December 31,
$ 176,681
165,974
155,794
133,345
117,955
243,743
$ 993,492
The Company leases its corporate office space under an operating lease that commenced September 1, 2010 for a seven year
term and has a five-year extension option. The lease includes a base annual rent and additional rent for the Company's share of
taxes and operating costs and expires in 2017. Future minimum lease payments are as follows:
(in thousands)
2014
2015
2016
2017
Thereafter
Year ending
December 31,
$ 417
424
428
324
-
$ 1,593
Rent expense was approximately $412,000, $403,000 and $400,000 for the years ended December 31, 2013, 2012 and 2011,
respectively, and is included in selling, general and administration expenses in the consolidated statements of income.
F-29
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
9. Commitments (continued)
The Company has entered into the Sponsored REIT Loans described in Note 4, which provide for up to $111.8 million in
borrowings of which $99.7 million have been drawn and are outstanding as of December 31, 2013. The Company anticipates
that any advances made will be repaid at their maturity or earlier from long term financing of the underlying properties, cash
flows of the underlying properties or some other capital events.
10. Retirement Plan
In 2006, the Company established a 401(k) plan to cover eligible employees, which permitted deferral of up to $17,000 per
year (indexed for inflation) into the 401(k) plan, subject to certain limitations imposed by the Internal Revenue Code. An
employee’s elective deferrals are immediately vested upon contribution to the 401(k) plan. The Company matches employee
contributions to the 401(k) plan dollar for dollar up to 3% of each employee’s annual compensation up to $200,000. In
addition, we may elect to make an annual discretionary profit-sharing contribution. The Company’s total contribution under
the 401(k) plan amounted to $120,000, $109,000 and $131,000 for the years ended December 31, 2013, 2012 and 2011,
respectively.
11. Discontinued Operations
The Company accounts for sale of properties and assets held for sale as discontinued operations. In December 2011, the
Company also discontinued the activities of the investment banking segment.
Dispositions of Property
The Company sold an office property located in Richardson, Texas on October 29, 2013 at a $2.2 million gain.
During the three months ended September 30, 2012, the Company reached a decision to classify its office property located in
Southfield, Michigan as an asset held for sale. In evaluating the Southfield, Michigan property, management considered
various subjective factors, including the time, cost and likelihood of successfully leasing the property, the effect of the
property’s results on its unencumbered asset value, which is part of the leverage ratio used to calculate interest rates in the 2012
Credit Facility and future capital costs to upgrade and reposition the multi-tenant property and to lease up the building, recent
leasing and economic activity in the local area, and offers to purchase the property. The Company concluded that selling the
property was the more prudent decision and outweighed the potential future benefit of continuing to hold the property. The
property was expected to sell within one year at a loss, which was recorded as a provision for loss on a property held for sale of
$14.3 million net of applicable income taxes and was classified as an asset held for sale of $0.7 million at September 30, 2012.
The Company estimated the fair value of the property, less estimated costs to sell using the offers to purchase the property
made by third parties (Level 3 inputs, as there is no active market). The Company sold the property on December 21, 2012 for
$0.3 million resulting in a total loss of $14.8 million.
The Company sold an industrial property located in Savage, Maryland on June 24, 2011 at a $2.3 million gain and in 2010
reached an agreement to sell a commercial property, located in Falls Church, Virginia, which was sold on January 21, 2011 at a
$19.6 million gain.
All property dispositions have been classified as discontinued for all periods presented.
F-30
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
11. Discontinued Operations (continued)
There was no asset held for sale at December 31, 2013. The asset held for sale at December 31, 2012 is summarized below:
(in thousands)
Land
Building
Less accumulated depreciation
Straight-line rent receivable
Deferred leasing comissions, net of accumulated
amortization of $859
Acquired unfavorable leases, net of accumulated
amortization of $252
December 31,
2012
$
2,791
5,216
8,007
167
7,840
67
3,779
(1,111)
10,575
$
The Company reports the results of operations of its properties classified 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 were 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. Selling, general and administrative expenses include
$378,000 of severance costs and professional fees related to discontinuing investment banking activities. There were no assets
of the investment banking segment included in the consolidated balance sheet at December 31, 2013, 2012 and 2011.
The operating results for discontinued operations are summarized below.
(in thousands)
Rental revenue
Related party revenue:
Syndication fees
Transaction fees
Other income
Rental operating expenses
Real estate taxes and insurance
Selling, general and administrative
Commissions
Depreciation and amortization
Income tax benefit
Interest income
Net income (loss) from discontinued operations
For the Year Ended
December 31,
2012
$
2,334
2011
$
2,134
2013
$
991
-
-
-
-
-
-
-
(616)
-
-
375
$
-
-
-
(1,089)
(340)
-
-
(1,396)
-
-
(491)
$
4,670
4,454
42
(1,616)
(377)
(3,488)
(2,535)
(1,070)
-
14
2,228
$
F-31
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
12. Subsequent Events
On January 10, 2014, the Board of Directors of the Company declared a cash distribution of $0.19 per share of common stock
payable on February 14, 2014 to stockholders of record on January 24, 2014.
On January 23, 2014, the Company made a $0.6 million advance pursuant to a Sponsored REIT Loan to a wholly-owned
subsidiary of FSP Galleria North Corp.
13. Selected Unaudited Quarterly Information
Certain amounts in the 2013 and 2012 unaudited quarterly information have been reclassified to present properties sold as
discontinued operations for all periods presented. Selected unaudited quarterly information is shown in the following table:
2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share data)
Revenue
$ 44,495
$ 47,671
$ 58,446
$ 63,024
Income from continuing operations
Income from discontinued operations
Net income
$ 4,303
$ 98
$ 4,401
$ 4,643
$ 98
$ 4,741
$ 3,996
$ 98
$ 4,094
$ 4,352
$ 2,239
$ 6,591
Basic and diluted net income per share
$ 0.05
$ 0.05
$ 0.04
$ 0.07
Weighted average number of shares outstanding
82,937
91,847
100,187
100,187
2012
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share data)
Revenue
$ 38,648
$ 38,349
$ 41,468
$ 43,115
Income from continuing operations
Income from discontinued operations
Net income
$ 5,960
$ (222)
$ 5,738
$ 5,606
$ (172)
$ 5,434
$ 5,471
$ (14,469)
$ (8,998)
$ 5,913
$ (454)
$ 5,459
Basic and diluted net income per share
$ 0.07
$ 0.07
$ (0.11)
$ 0.07
Weighted average number of shares outstanding
82,937
82,937
82,937
82,937
F-32
Franklin Street Properties Corp.
Valuation and qualifying accounts:
Schedule II
(in thousands)
Classification
Additions
(Decreases)
charged to
costs and
expenses
Balance at
beginning
of year
Deductions
Other
Balance
at end
of year
Allowance for doubtful accounts
2011
2012
2013
Straight-line rent allowance
for doubtful accounts
2011
2012
2013
$
1,600
1,235
1,300
$
34
85
(13)
$
(399)
(20)
(1,237)
$
-
-
-
$
1,235
1,300
50
$
700
135
135
2
$
28
48
$
(567)
(28)
(48)
-
$
-
-
$
135
135
135
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The following table summarizes the changes in the Company's real estate investments and
accumulated depreciation:
(in thousands)
Real estate investments, at cost:
Balance, beginning of year
Acquisitions
Improvements
Assets held for sale
Dispositions
Balance -Real Estate
Assets held for sale
Balance, end of year
2013
December 31,
2012
2011
$ 1,323,384
$ 1,158,808
$ 1,053,678
454,445
167,812
151,897
21,296
16,784
20,768
- (8,007) (27,324)
(8,007) (20,020) (68,063)
1,131,484
1,315,377
1,790,590
- 8,007
$ 1,323,384
$ 1,790,590
27,324
$ 1,158,808
Accumulated depreciation:
Balance, beginning of year
Depreciation
Assets held for sale
Dispositions
Balance - Accumulated Depreciation
$ 125,741
$ 152,587
$ 180,756
41,763
29,729
33,563
- (167) (4,354)
(267) (5,394) (2,883)
148,233
180,589
222,252
Assets held for sale
Balance, end of year
- 167
$ 180,756
$ 222,252
4,354
$ 152,587
F-35
Subsidiaries of Franklin Street Properties Corp.
Exhibit 21.1
Name
Jurisdiction of Organization
FSP 801 Marquette Avenue LLC
FSP 1001 17th Street LLC
FSP 121 South Eighth Street LLC
FSP 1410 East Renner Road LLC
FSP 1999 Broadway LLC
FSP 380 Interlocken Corp.
FSP 390 Interlocken LLC
FSP 4807 Stonecroft Boulevard LLC
FSP 4820 Emperor Boulevard LLC
FSP 505 Waterford LLC
FSP 909 Davis Street LLC
FSP 999 Peachtree Street LLC
FSP Addison Circle Corp.
FSP Addison Circle Limited Partnership
FSP Addison Circle LLC
FSP Blue Lagoon Drive Corp.
FSP Blue Lagoon Drive LLC
FSP Collins Crossing Corp.
FSP Collins Crossing Limited Partnership
FSP Collins Crossing LLC
FSP Dulles Virginia LLC
FSP East Baltimore Street LLC
FSP Eden Bluff Corporate Center I LLC
FSP Eldridge Green Corp.
FSP Eldridge Green Limited Partnership
FSP Eldridge Green LLC
FSP Emperor Boulevard Limited Partnership
FSP Forest Park IV LLC
FSP Forest Park IV NC Limited Partnership
FSP Greenwood Plaza Corp.
FSP Hillview Center Limited Partnership
FSP Holdings LLC
FSP Innsbrook Corp.
FSP Investments LLC
FSP Lakeside Crossing I LLC
FSP Legacy Tennyson Center LLC
FSP Liberty Plaza Limited Partnership
FSP Montague Business Center Corp.
FSP Northwest Point LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Texas
Delaware
Delaware
Delaware
Delaware
Texas
Delaware
Delaware
Delaware
Delaware
Delaware
Texas
Delaware
Delaware
Delaware
North Carolina
Delaware
Massachusetts
Delaware
Delaware
Massachusetts
Delaware
Delaware
Texas
Delaware
Delaware
Subsidiaries of Franklin Street Properties Corp.
Exhibit 21.1
Name
Jurisdiction of Organization
FSP One Legacy Circle LLC
FSP One Overton Park LLC
FSP One Ravinia Drive LLC
FSP Park Seneca Limited Partnership
FSP Park Ten Development Corp.
FSP Park Ten Development LLC
FSP Park Ten Limited Partnership
FSP Park Ten LLC
FSP Park Ten Phase II Limited Partnership
FSP Property Management LLC
FSP Protective TRS Corp.
FSP PT Houston LLC
FSP REIT Protective Trust
FSP River Crossing LLC
FSP Westchase LLC
FSP Willow Bend Office Center Corp.
FSP Willow Bend Office Center Limited Partnership
FSP Willow Bend Office Center LLC
Delaware
Delaware
Delaware
Massachusetts
Delaware
Delaware
Texas
Delaware
Texas
Massachusetts
Massachusetts
Delaware
Massachusetts
Delaware
Delaware
Delaware
Texas
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-91680 and Form S-3
No. 333-181009) of Franklin Street Properties Corp., of our reports dated February 18, 2014, with respect to the
consolidated financial statements and schedules of Franklin Street Properties Corp. and the effectiveness of internal
control over financial reporting of Franklin Street Properties Corp., included in this Annual Report (Form 10-K) for
the year ended December 31, 2013.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 18, 2014
Exhibit 31.1
I, George J. Carter, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Franklin Street Properties Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 18, 2014
/s/ George J. Carter
George J. Carter
President and Chief Executive Officer
1.
2.
3.
4.
Exhibit 31.2
I, John G. Demeritt, certify that:
CERTIFICATIONS
I have reviewed this Annual Report on Form 10-K of Franklin Street Properties Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 18, 2014
/s/ John G. Demeritt
John G. Demeritt
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report on Form 10-K of Franklin Street Properties Corp. (the “Company”) for the
period ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned, George J. Carter, President and Chief Executive Officer of the Company, hereby
certifies, pursuant to 18 U.S.C. Section 1350, that, to his knowledge:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operation of the Company.
Date: February 18, 2014
/s/ George J. Carter
George J. Carter
President and Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the annual report on Form 10-K of Franklin Street Properties Corp. (the “Company”) for the
period ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned, John G. Demeritt, Chief Financial Officer of the Company, hereby certifies, pursuant to
18 U.S.C. Section 1350, that, to his knowledge:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operation of the Company.
Date: February 18, 2014
/s/ John G. Demeritt
John G. Demeritt
Chief Financial Officer
This page intentionally left blank.
Non-GAAP Financial Measures
The Company evaluates performance based on Funds From Operations, which we refer to as
FFO, as management believes that FFO represents the most accurate measure of activity and is the basis
for distributions paid to equity holders. The Company defines FFO as net income (computed in
accordance with GAAP), excluding gains (or losses) from sales of property and acquisition costs of newly
acquired properties that are not capitalized, plus depreciation and amortization, including amortization of
acquired above and below market lease intangibles and impairment charges on properties or investments
in non-consolidated REITs, and after adjustments to exclude equity in income or losses from, and, to
include the proportionate share of FFO from, non-consolidated REITs.
FFO should not be considered as an alternative to net income (determined in accordance with
GAAP), nor as an indicator of the Company’s financial performance, nor as an alternative to cash flows
from operating activities (determined in accordance with GAAP), nor as a measure of the Company’s
liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company’s needs.
Other real estate companies and the National Association of Real Estate Investment Trusts, or
NAREIT may define this term in a different manner. We have included the NAREIT FFO definition in
our table and note that other REITs may not define FFO in accordance with the current NAREIT
definition or may interpret the current NAREIT definition differently than we do.
We believe that in order to facilitate a clear understanding of the results of the Company, FFO
should be examined in connection with net income and cash flows from operating, investing and
financing activities in the consolidated financial statements.
The calculations of FFO are shown in the following table:
(in thousands):
Net income
(Gain) loss on sale, less applicable income tax
Equity in (earnings) losses of non-consolidated REITs
FFO from non-consolidated REITs
Depreciation and amortization
NAREIT FFO
Acquisition costs of new properties
For the Year Ended December 31,
2011
2012
2013
$ 19,827 $ 7,633 $ 43,524
(2,158) 14,826 (21,939)
(2,033) (4,490)
1,358
2,148
4,124 6,784
79,090 55,518 48,439
80,068 72,318
100,265
568 287 620
Funds From Operations
$ 100,833 $ 80,355 $ 72,938
A-1
tegy
Corporate Headquarters
Corporate Headquarters
Franklin Street Properties Corp.
401 Edgewater Place
Wakefield, MA 01880
Telephone: 800.950.6288
www.franklinstreetproperties.com
Stock Listing
Franklin Street Properties Corp.’s
Common Stock trades on the
NYSE MKT under the symbol “FSP”
Transfer Agent
American Stock Transfer
and Trust Company
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
Telephone: 800.937.5449
www.amstock.com
Outside Counsel
Wilmer Cutler Pickering
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Telephone: 617.526.6000
Independent Registered
Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
Telephone: 617.266.2000
Investor Relations Contact
Franklin Street Properties Corp.
401 Edgewater Place
Wakefield, MA 01880
Telephone: 877.686.9496
investorrelations@franklinstreetproperties.com
Intergrated Corporate Relations (“ICR”)
685 Third Avenue, 2nd Floor
New York, NY 10017
Telephone: 646.277.1200
Annual Meeting
Information
Thursday, May 15, 2014
11:00 a.m. local time
Sheraton Colonial Boston North
Hotel and Conference Center
1 Audubon Road
Wakefield, MA 01880
Board of Directors
George J. Carter*
Chairman and Chief Executive Officer
Barbara J. Fournier*
Chief Operating Officer
Janet P. Notopoulos*
President, FSP Property Management LLC
John N. Burke, CPA
Chair of the Audit Committee
Member of the Compensation and Nominating
and Corporate Governance Committees
Former Partner, BDO USA, LLP
Brian N. Hansen
Chair of the Nominating and
Corporate Governance Committee
Member of the Audit and
Compensation Committees
President and Chief Operating Officer
Confluence Investment Management LLC
Dennis J. McGillicuddy
Member of the Audit Committee
Investor
Georgia Murray
Lead Independent Director
Chair of the Compensation Committee
Member of the Nominating and
Corporate Governance Committee
Retired Executive
Lend Lease Real Estate Investments, Inc.
Barry Silverstein
Member of the Audit Committee
Investor
*Each is also an Executive Officer
of the Company
Executive Officers
Jeffrey B. Carter
Chief Investment Officer
Scott H. Carter
General Counsel
John G. Demeritt
Chief Financial Officer
303 East Wacker Drive, Chicago
3/11/14 5:59 PM
th 401 Edgewater Place
Wakefield, MA 01880
P 800.950.6288 F 781.246.2807
www.franklinstreetproperties.com
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