FRANKLIN STREET PROPERTIES
ANNUAL REPORT 2014
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, by making property investments in select urban infill and central
business district (CBD) locations where we possess extensive first-hand knowledge and experience. Additionally, we seek to
invest in markets that exhibit what FSP believes are long-term, domestic and global macroeconomic drivers that have the
potential to result in above-average employment growth within those markets. Cities attracting attention from FSP must
also demonstrate a track record of committed investment into infill and CBD infrastructure and a diversified local economy.
Primary emphasis has been placed on our top five core markets of Atlanta, Dallas, Denver, Houston and Minneapolis. As
of December 31, 2014, FSP owned 38 office properties in 13 states, consisting of approximately 9.6 million rentable square
feet. Approximately 70% of FSP’s owned portfolio (in square feet) is within these top five core markets. FSP’s portfolio was
approximately 92.8% leased as of December 31, 2014.
The principal revenue sources from our real estate operations include rental income from tenants who lease our office space,
new property development or redevelopment of select locations already owned by us, interest income from secured first
mortgage loans made on some of our sponsored office properties and fee income from asset/property management services.
In order to create value for stockholders, the Company primarily seeks to grow revenue through higher occupancies and
rental rate levels in its directly-owned portfolio, acquire additional high-quality assets below replacement cost with attractive
future leasing opportunities and engage in select new development of properties. The Company also continuously reviews
and evaluates its real estate property portfolio for potentially advantageous dispositions that may realize investment returns
through gains on sale.
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, 2014.
Fellow Stockholders
I am pleased to report that our Company’s total revenues rose by $36 million or 16.9% to $249.7 million in 2014. Profits as
measured by funds from operations, or FFO1, increased by approximately $11.6 million or 11.5% from 2013, and on a per share
basis, FFO grew 4.7% from $1.07 per share in 2013 to $1.12 per share in 2014. Our total growth in FFO per fully-diluted share
for the four-year period of 2011 to 2014 has totaled approximately 33.3%, reflecting the overall growth in the size and number
of properties in our portfolio, as well as the strong operating results we have been able to achieve. Along with our $0.76 per
share dividend, we continue to believe this combination of growth and income is meaningful and attractive to investors.
During 2014, the broader U.S. economy continued to make choppy but positive strides toward higher GDP growth and lower
unemployment. As a consequence, national office property statistics also continued to show overall improvement in rental
rate and occupancy metrics. Our directly-owned portfolio of 38 office properties, totaling approximately 9.6 million square
feet, finished 2014 posting 2.2% “same-store” full-year growth and a 92.8% overall leased rate as of December 31, 2014. We
believe the most likely outlook for the U.S. economy is one of steady modest growth for the foreseeable future with continued
low interest rates prevailing during 2015. The broader U.S. economy in 2015 could be meaningfully affected by economic risks
in other large countries, relative global currency values and important geopolitical events. Uncertainty to any U.S. economic
forecast is heightened by these interconnected global forces.
During 2014, we focused on integrating the large amount of new property acquisitions we made in 2013; but as we look
ahead, we believe that in 2015 and 2016 we will resume our asset growth through additional property acquisitions as well as
through new property development. Capital for this growth plan will come from property operations, including rental cash
flow and targeted non-core property dispositions. Broader capital market availabilities also present the potential for growth
capital. These opportunities for resumed growth in our property portfolio over the next two years are primarily presenting
themselves within our five core geographic markets of Atlanta, Dallas, Denver, Houston and Minneapolis. However, limited
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.
1
special situations surrounding the redevelopment potential of other properties we currently own are also presenting
themselves and may be pursued as well. Also, the recent drop in oil/energy prices may, if maintained at current levels for
an extended period of time, provide better pricing for additional property acquisition opportunities within energy-driven
markets. Regardless of some of these near-term risks, FSP has a very positive long-term view of the global energy business
as a macro driver of jobs and growth in key U.S. office markets.
In closing, the team at FSP remains focused on creating value and growth for all our stockholders from efforts within our
existing portfolio of office properties, as well as through the acquisition and development of new real estate assets. As 2015
begins, I am confident that our Company is well positioned to provide stockholders with future share price growth and
meaningful current dividend income.
Thank you for your continued trust, confidence and support.
George J. Carter
Chairman & Chief Executive Officer
2
Atlanta | Dallas | Denver | Houston | Minneapolis
Approximately 70% (in square feet) of FSP’s owned portfolio is within our top five core markets.
FSP owns and/or manages approximately 12.9 million square feet of office space located in 15 different states (as of December 31, 2014).
Development of Assets
FSP has engaged in two successful ground-up developments over the past ten years, and anticipates that select development
will continue as a featured component of our real estate investment activities. Of chief importance to FSP in any potential
future development will be a long-standing familiarity/expertise in the particular location being considered. Therefore,
potential development would most likely occur in one of our five core markets and within locations in those markets that
we have owned and observed the dynamics for future growth first-hand.
For example, in 2014 FSP announced its intention to develop the location of its four-story building located at 801 Marquette
Avenue South in the CBD of Minneapolis. The approximately 170,000 square foot brick building, originally constructed in
1923 and currently 100% leased to TCF Bank through December 31, 2015, is located on the corner of Marquette Avenue
Before
after
121 South 8th Street, Minneapolis, MN
3
Minneapolis possesses a broadly diversified economy and benefits greatly from its strategic central Midwest position within the ever-growing global
demand chain of food production, processing and transportation. Minneapolis is also strong in retail, industrial and medical and financial services.
and 8th Street. FSP has owned this property and the adjoining 17-story 305,000 square foot tower located at 121 South 8th
Street since July of 2010. FSP believes that the 801 Marquette Avenue South location is one of downtown Minneapolis’ best
remaining development sites. Both properties were originally purchased by FSP with the specific intention:
1. To improve, update and continue to operate the approximately 305,000 square foot existing 17-story multi-tenant office
tower for a long-term hold.
Actions Taken: FSP’s updates to this property have been substantially completed and have included a complete
elevator modernization, a brand new skyway level lobby and elevator lobby, a brand new conference center, parking
ramp updates, and an ongoing restroom upgrade program. The results have been well received by our tenants and
the marketplace.
2. To rebuild and/or completely redevelop the low-rise building upon the end of the TCF Bank lease into a more efficient
office property that could command higher rents per square foot than the existing four-story structure.
Actions Taken: FSP has assembled a seasoned development team that includes Perkins & Will as architects, CB Richard
Ellis as leasing agents, and Ryan Properties as builders. Currently, FSP is very active in development planning and feasibility
work. Construction of a new Minneapolis CBD project could not begin until early 2016 and only then if market conditions
are favorable and substantial pre-leasing of the project has been completed. Importantly, FSP is already working on
space planning with potential office tenants, hotel users and residential firms, analyzing prospective designs that range
from a new approximately 170,000 square foot office building up to an approximately 600,000 square foot mixed-use
tower that would include office, hotel and/or residential. We believe that a final plan will be publicly announced during
the course of 2015.
4
Denver’s Mountain West location offers a diversified economy that shows continued strength in transportation, technology, energy and natural resources.
Denver has a highly-educated workforce and has maintained strong population growth.
FSP Financial Highlights
Total Revenue
as of December 31
(in thousands)
$138,041
$161,580
$249,683
$213,636
Total Market Capitalization (TMC)*
as of December 31
(in thousands)
$2,123,739
$2,117,299
$1,637,709
$1,274,227
2011
2012
2013
2014
2011
2012
2013
2014
Funds from Operations (FFO)**
as of December 31
(per share)
Dividends Paid
as of December 31
(per share)
$1.07
$1.12
$0.76
$0.76
$0.76
$0.76
$0.97
$0.89
2011
2012
2013
2014
2011
2012
2013
2014
*
**
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.
Includes Non-GAAP Financial Measures which are defined and reconciled to net income and can be found on Page A-1, which is the last page of this
Annual Report.
5
5
Houston possesses a diversified economy that is the global leader in energy. Houston is well-positioned with its significant deep water port, Gulf Coast
Sunbelt location, strong international trade/export business and healthcare industries. Houston has a highly-educated workforce and has maintained
strong population growth.
FSP Financial Highlights
Balance Sheet Data – Year Ended December 31
(In thousands, except per share amounts)
2011 2012 2013 2014
Total assets
$ 1,407,348
$ 1,526,068
$ 2,044,034 $ 1,936,390
Total liabilities
485,981
661,319 993,868 956,743
Total shareholders’ equity
921,367
864,749
1,050,166 979,647
Shares outstanding at year-end
82,937
82,937 100,187 100,187
Shareholders’ equity per share $ 11.11
$ 10.42
$ 10.48 $ 9.78
Dividends paid
for the year ended December 31 $ 62,177
$ 63,032
$ 69,588 $ 76,142
6
Atlanta is regarded as the economic capital of the Southeastern United States with housing as one of its strong macroeconomic drivers. Atlanta’s Sunbelt
location has attracted strong population and employment growth. Atlanta possesses a highly-diversified economy and educated workforce.
Pathway To Value Through Sustainability
During 2014, FSP continued to place a high priority on sustainability initiatives to support our objectives of reducing
our environmental footprint and maximizing investor returns. Central to these efforts is the ongoing measurement,
benchmarking and analysis of the energy, water and waste consumption of our buildings as well as the continuing review
and refinement of FSP’s environmental goals, policies, and procedures.
In the past year, FSP participated for the first time in the Global Real Estate Sustainability Benchmark (GRESB) survey. This
benchmark assesses the sustainability of real estate portfolios around the world, taking into account data-driven performance
indicators as well as broader environmental, social and governance issues. FSP is pleased to participate with a global group
of sustainability-focused peers and is actively utilizing the survey insights to further enhance our environmental programs.
Energy efficiency continues to be an area of focus for FSP, with our properties being active participants in the EPA’s ENERGY
STAR program. As of year-end 2014, approximately 60% of our square footage, either directly owned or asset-managed by
FSP, had earned the ENERGY STAR label, denoting that its energy performance is among the top 25% of similar properties.
FSP earned special recognition from the EPA in 2014 as a premier member of Certification Nation, further demonstrating FSP’s
commitment to the ENERGY STAR program.
7
Dallas’ Central and Sunbelt location is a significant gateway hub for NAFTA commerce between Canada, the United States and Mexico. It possesses a
diversified economy that is strong in professional services, transportation, technology and energy. Dallas is also home to many corporate headquarters.
During the year, FSP expanded and added to our energy efficiency programs. Successful programs, such as the active third-party
monitoring of near real-time energy data, have been expanded. FSP also continued our participation in local demand response
programs, whereby participating properties implemented short-term energy reduction measures during grid emergencies,
helping the environment and also earning regular quarterly payments. Additionally, FSP began to test the effectiveness of a
peak demand predictive tool, which aims to provide insight into the demand charges on our utility bills and to predict when new
peak demand charges may be established. FSP proactively investigates new energy efficiency tools as they come to the market
to determine their usefulness in minimizing our consumption and costs.
An additional tool that FSP uses to measure and track our overall sustainability efforts is the U.S. Green Building Council’s
Leadership in Energy and Environmental Design (LEED®) rating system. Approximately half of the square footage either directly
owned or asset-managed by FSP has been awarded LEED certification under one of the various LEED rating systems, recognizing
these buildings’ environmental performance in areas such as energy, water and waste management and indoor environmental
quality. Furthermore, FSP properties are among the first to utilize the new LEED Dynamic Plaque™ for LEED recertifications, with
the aim of regular building benchmarking information and enhanced occupant sustainability engagement.
FSP believes that our ongoing progress in the area of sustainability creates a healthier environment for our tenants and our
properties’ communities. Simultaneously, through lower operating costs and increased property desirability, FSP is also
enhancing investor return.
8
Following is the Annual Report on Form 10-K
for the fiscal year ended December 31, 2014
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, 2014
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. [ ]
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, 2014, was approximately $1,133,357,746.
There were 100,187,405 shares of common stock of the registrant outstanding as of February 10, 2015.
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 14, 2015 (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. ................................................................ 45
Item 8.
Financial Statements and Supplementary Data ........................................................................................ 47
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ................. 47
Item 9A. Controls and Procedures. ......................................................................................................................... 47
Item 9B. Other Information .................................................................................................................................... 48
PART III..................................................................................................................................................................... 49
Item 10. Directors, Executive Officers and Corporate Governance ....................................................................... 49
Item 11. Executive Compensation ......................................................................................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 49
Item 13. Certain Relationships and Related Transactions, and Director Independence ......................................... 49
Item 14. Principal Accounting Fees and Services .................................................................................................. 49
PART IV ..................................................................................................................................................................... 50
Item 15. Exhibits, Financial Statement Schedules ................................................................................................. 50
SIGNATURES ............................................................................................................................................................ 51
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,
property dispositions and fee income from asset/property management 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. We seek value-oriented investments with an eye towards long-term growth
and appreciation, as well as current income.
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. On July 15, 2014, FSP Investments LLC withdrew its registration as a broker/dealer with
FINRA.
From time-to-time we may acquire real estate or invest in real estate by making secured loans on real
estate. 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 38 office properties as of December 31, 2014.
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, 2014, 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
1
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
properties, cash flows from the underlying properties or some other capital event. We refer to these loans as
Sponsored REIT Loans. We had five Sponsored REIT Loans secured by real estate outstanding as of December 31,
2014, from which we derive interest income.
Investment Objectives
Our investment objectives are to create shareholder value by increasing revenue from rental, dividend,
interest and fee 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.
From time to time, as market conditions warrant, we may sell properties owned by us. In January 2015, we
reached an agreement to sell an office property located in Plano, Texas, which is expected to close in February 2015
at a gain. We sold one office property located in Colorado Springs, Colorado on December 3, 2014 at a gain, 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. 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 38 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 10, 2015, none of our 38 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
2
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.
Employees
We had 39 employees as of December 31, 2014 and 40 employees as of February 10, 2015.
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 10, 2015.
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
66
59
67
53
43
73
64
81
43
43
54
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 66, 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.).
Barbara J. Fournier, age 59, 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.
Fournier attended Northeastern University and the New York Institute of Finance. Ms. Fournier is a member of the
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NYSE MKT Listed Company Council. Ms. Fournier participates in corporate governance-related continuing
education sessions offered by the NYSE affiliate, Corporate Board Member.
Janet Prier Notopoulos, age 67, 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 53, has been a Director of FSP Corp. and Chair of the Audit Committee since June
2004. Mr. Burke is a certified public accountant with over 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 and REIT industry. His 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 accounting, tax and business planning services. Prior to starting his own accounting and
consulting 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 at Bentley University.
Brian N. Hansen, age 43, has been a Director of FSP Corp. since 2012 and Chair of the Nominating and
Corporate Governance Committee since 2013. Since 2007, Mr. Hansen has served as 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 73, 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 64, 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.
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.
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Barry Silverstein, age 81, has been a Director of FSP Corp. since May 2002. Mr. Silverstein received 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 43, 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.), The George Washington University (M.A.) and Cornell University (M.B.A.). 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 43, is Executive Vice President, General Counsel and Assistant Secretary of FSP
Corp. Mr. Carter has served as 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 54, 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 FSP 303 East
Wacker Drive Corp., which is a public reporting company and a Sponsored REIT. Each of these directors holds
office 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
slow economic growth, with slowly declining unemployment from recent high levels 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 and tax policy
uncertainty, geopolitical events, changes in government regulations, regulatory uncertainty, the availability of credit
and interest rates. Future economic factors may negatively affect real estate values, occupancy levels and property
income.
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 the BAML Credit Facility (as defined in Note 4 to the Consolidated
Financial Statements) or the BMO Term Loan (as defined in Note 4 to the Consolidated Financial Statements) 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 BAML Credit Facility and/or the BMO
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
BAML Credit Facility or the BMO Term Loan.
There can be no assurance that we will be able to refinance the revolving line of credit portion of the
BAML Credit Facility upon its maturity on October 29, 2018 (subject to extension until October 29, 2019), the term
loan portion of the BAML Credit Facility upon its maturity on September 27, 2017 or the BMO Term Loan upon its
maturity on August 26, 2020, that any such refinancings would be on terms as favorable as the terms of the BAML
Credit Facility or the BMO Term Loan, or that we will be able to otherwise obtain funds by selling assets or raising
equity to make required payments on the BAML Credit Facility or the BMO Term Loan. If we are unable to
refinance the BAML Credit Facility or the BMO 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 the BAML Credit Facility and the BMO Term Loan credit agreements
could adversely affect our financial condition.
The BAML Credit Facility and the BMO Term Loan credit agreements contain 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 have subsidiaries provide a guaranty in the event that they incur recourse indebtedness and
transactions with affiliates. The BAML Credit Facility and the BMO Term Loan credit agreements also contain
financial covenants that require us to maintain a minimum tangible net worth, a maximum leverage ratio, a
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maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio,
minimum unsecured interest coverage and a maximum ratio of certain investments to total assets. Our continued
ability to borrow under the BAML Credit Facility and the BMO Term Loan is subject to compliance with our
financial and other covenants. Failure to comply with such covenants could cause a default under the BAML Credit
Facility or the BMO Term Loan, and 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 BAML Credit Facility or the BMO 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
indebtedness and for working capital and other general business purposes, in each case to the extent permitted under
the respective credit agreements. If we breach covenants in the BAML Credit Facility or the BMO Term Loan
credit agreements, the lenders can declare a default. A default under the BAML Credit Facility or the BMO 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
the BAML Credit Facility or the BMO 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, 2014, we had approximately $268 million of indebtedness under the revolving line of
credit portion of our BAML Credit Facility that bears interest at variable rates based on our credit rating, and we
may incur more of such indebtedness in the future. Borrowings under the revolving line of credit portion of our
BAML 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 BAML Credit Facility is for $400 million. On September 27, 2012, we fixed the base LIBOR rate on the term
loan portion of our BAML Credit Facility at 0.75% for five years by entering into an interest rate swap agreement.
The BMO 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
BMO 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
Downgrades in our credit ratings could increase our borrowing costs or reduce our access to funding sources
in the credit and capital markets.
We are currently assigned a corporate credit rating from Moody’s Investors Service, Inc. (“Moody’s”)
based on its evaluation of our creditworthiness. Although our corporate credit rating from Moody’s is currently
investment grade, there can be no assurance that we will not be downgraded or that our rating will remain
investment grade. If our credit rating is downgraded or other negative action is taken, we could be required, among
other things, to pay additional interest and fees on outstanding borrowings under the BAML Credit Facility and the
BMO Term Loan.
Credit rating reductions by one or more rating agencies could also adversely affect our access to funding
sources, the cost and other terms of obtaining funding as well as our overall financial condition, operating results
and cash flow.
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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
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.
On July 25, 2014, Ms. Fournier informed us that she will retire from FSP Corp. and resign her positions as
our Executive Vice President, Chief Operating Officer, Treasurer and Secretary. We believe that other executives
will perform Ms. Fournier’s duties and that there will be no disruptions to our operations, but there can be no
assurance that this will be the case.
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 10, 2015, we owned 38 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.
9
New acquisitions may fail to perform as expected.
We may acquire new properties by purchasing with cash, by drawing on the revolving line of credit portion
of our BAML Credit Facility, by assuming existing indebtedness, by entering into new indebtedness, by issuing debt
securities, by issuing shares of our stock or by other means. During the year ended December 31, 2014, we did not
acquire any properties. During the year ended December 31, 2013, we acquired one property located in Georgia and
two properties located in Colorado. During the year ended December 31, 2012, we acquired one property located in
Georgia and one property located 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
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. 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, 2014, our top twenty tenants leased, based on leased square feet, approximately 38.7%
of the total rentable square feet in our owned portfolio of properties. Approximately 26.3% and 20.1% of our top
twenty tenants as a percentage of the top twenty tenants rentable square feet (or 10.2% and 7.8% 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.
10
We face risks from geographic concentration.
The properties in our portfolio as of December 31, 2014, by aggregate square footage, are distributed
geographically as follows: South – 43.3%, West – 24.1%, Midwest – 17.6% and East – 15.0%. However, within
certain of those regions, we hold a larger concentration of our properties in Greater Denver, Colorado – 21.0%,
Atlanta, Georgia – 14.6%, Dallas, Texas – 14.1% and Houston, Texas – 12.4%. 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.
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
11
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.
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.
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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.”
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.
12
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
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
13
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 2015, 2016 and 2017, respectively. Directors of each class are elected for a three-year term upon the
expiration of the initial term of each class. The staggered terms for directors may affect our stockholders’ ability to
effect a change in control even if a change in control were in the stockholders’ best interests.
Preferred Stock. Our Articles of Incorporation authorize our board of directors to issue up to 20,000,000
shares of preferred stock, par value $.0001 per share, and to establish the preferences and rights of any such shares
issued. The issuance of preferred stock could have the effect of delaying or preventing a change in control even if a
change in control were in our stockholders’ best interest.
Increase of Authorized Stock. Our board of directors, without any vote or consent of the stockholders, may
increase the number of authorized shares of any class or series of stock or the aggregate number of authorized shares
we have authority to issue. The ability to increase the number of authorized shares and issue such shares could have
the effect of delaying or preventing a change in control even if a change in control were in our stockholders’ best
interest.
Amendment of Bylaws. Our board of directors has the sole power to amend our Bylaws. This power could
have the effect of delaying or preventing a change in control even if a change in control were in our stockholders’
best interests.
Stockholder Meetings. Our Bylaws require advance notice for stockholder proposals to be considered at
annual meetings of stockholders and for stockholder nominations for election of directors at special meetings of
stockholders. 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, 2014:
Property Location
Office
1515 Mockingbird Lane
Charlotte, NC 28209
678-686 Hillview Drive
Milpitas, CA 95035
600 Forest Point Circle
Charlotte, NC 28273
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 12/31/14
Approx.
Number
of Tenants
Major Tenants (2)
8/1/97
109,674
92%
70
Healthgram Inc.
3/9/99
36,288
100%
Headway Technologies, Inc.
1
7/8/99
62,212
100%
American National Red Cross
1
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
57%
13
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
63%
Bluware, Inc.
7
Subsea Solutions LLC
BAE Systems Land & Armaments, LP
8/27/02
145,951
81%
County of Santa Clara
2
Spidercloud Wireless, Inc.
9/30/02
293,926
90%
8
Federal National Mortgage Association
Behringer Harvard Holdings, LLC
Compass Production Partners, LP
3/3/03
300,472
100%
ARGO Data Resource Corp.
5
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 12/31/14
Approx.
Number
of Tenants
Major Tenants (2)
2/24/05
196,236
100%
DIRECTV, Inc.
4
7/6/05
205,059
100%
15
Kaiser Foundation Health Plan
Somerset CPAs, P.C.
Crowe Horwath, LLP
The College Network, Inc.
2/24/06
218,934
91%
31
See Footnote 3
12/15/00
117,050
100%
Masergy Communications, Inc.
6
NelsonArchitectural Engineers, Inc.
Williston Financial Group
Special Insurance Services
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
240,185
96%
VMWare, Inc.
9
3625 Cumberland Boulevard
Atlanta, GA 30339
6/27/06
387,267
86%
24
MWH Americas, Inc
Cooley LLP
Sierra Financial Services, Inc.
Century Business Services, Inc.
Bennett Thrasher PC
Randstad General Partner (US)
Gas South LLC
390 Interlocken Crescent
12/21/06
241,516
72%
Vail Holdings, Inc.
8
120 East Baltimore St.
Baltimore, MD 21202
16290 Katy Freeway
Houston, TX 77094
6/13/07
325,445
82%
17
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 12/31/14
Approx.
Number
of Tenants
Major Tenants (2)
12/11/08
127,778
100%
Monsanto Company
1
12/26/08
136,658
92%
Giesecke & Devrient America, Inc.
2
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
475,012
91%
42
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
95%
17
Publishing Company
Northshore University Healthsystem
T-Mobile South LLC
Internap Network Services Corporation
Cedar Technologies
11/1/12
629,025
98%
49
Petrobras America, Inc.
5/22/13
676,379
89%
7/1/13
621,946
98%
29
40
Promontory Financial Group, LLC
United States Government
Sutherland Asbill Brennan LLP
Heery International, Inc.
8/28/13
655,420
85%
WPX Energy. Inc.
16
Newfield Exploration
9,580,057
93%
(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 2015. We believe that our properties are
adequately covered by insurance as of December 31, 2014.
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, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
High
$
$
$
$
12.76
12.76
12.95
13.18
$
$
$
$
13.77
14.44
15.27
14.80
Range
Low
$
$
$
$
$
$
$
$
11.19
11.14
11.04
11.69
11.70
11.55
12.34
12.55
As of February 10, 2015, there were 9,312 holders of our common stock, including both holders of record
and participants in securities position listings.
On January 9, 2015, our board of directors declared a dividend of $0.19 per share of our common stock
payable to stockholders of record as of January 23, 2015 that was paid on February 12, 2015. Set forth below are
the distributions per share of common stock made by FSP Corp. in each quarter since 2013.
Quarter
Ended
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Distribution Per Share of
Common Stock of FSP Corp.
$0.19
$0.19
$0.19
$0.19
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
$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, 2009 and December 31, 2014 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, 2009 and
assumes that any distributions are reinvested.
FSP
NAREIT Equity
S&P 500
Russell 2000
2009
$
100
100
100
100
2010
$
103
128
115
127
As of December 31,
2012
$
2011
$
76
139
117
122
2013
$
104
171
180
196
$
2014
114
218
205
206
102
166
136
141
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)
2014
Year Ended December 31,
2012
2013
2011
2010
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
$ 249,683
$ 213,636
$ 161,580
$ 138,041
$ 115,802
13,148
-
13,148
17,294
2,533
19,827
22,950
(15,317)
7,633
19,357
24,167
43,524
17,729
4,364
22,093
$ 0.13
$ 0.18
- 0.03
$ 0.21
$ 0.13
$ 0.28
(0.19)
$ 0.09
$ 0.24
0.29
$ 0.53
$ 0.22
0.06
$ 0.28
$ 0.76
$ 0.76
$ 0.76
$ 0.76
$ 0.76
2014
2013
As of December 31,
2012
2011
2010
$ 1,936,390
956,743
979,647
$ 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
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 or the Company, operates in the real estate operations segment. The real estate operations
segment involves real estate rental operations, leasing, secured financing of real estate and services provided for
asset management, property management, property acquisitions, dispositions and development. Our current strategy
is to invest in select urban infill and central business district properties, with primary emphasis on our top five
markets of Atlanta, Dallas, Denver, Houston and Minneapolis. We believe that our top five markets have macro-
economic drivers that have the potential to increase occupancies and rents. We will also monitor San Diego, Silicon
Valley, Greater Boston, Raleigh-Durham, and Greater Washington, DC, as well as other markets, for opportunistic
investments. FSP Corp. seeks value-oriented investments with an eye towards long-term growth and appreciation,
as well as current income.
The main factor that affects our real estate operations is the broad economic market conditions in the
United States. These market conditions affect the occupancy levels and the rent levels on both a national and local
level. We have no influence on broader economic/market conditions. We look to acquire and/or develop quality
properties in good locations in order to lessen the impact of downturns in the market and to take advantage of
upturns when they occur.
Trends and Uncertainties
Economic Conditions
The economy in the United States is continuing to experience a period of slow economic growth, with
slowly declining unemployment from recent high levels, which directly affects the demand for office space, our
primary income producing asset. The broad economic market conditions in the United States are affected by
numerous factors, including but not limited to, inflation and employment levels, energy prices, slow economic
growth and/or recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency
exchange rates, geopolitical events, the regulatory environment, the availability of credit and interest rates. In
addition, the Federal Reserve Bank’s current reduction in its quantitative easing program (or QE), has been
generally received as a harbinger of real improvement, 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 is in the early stages of a cyclically-slower but prolonged broad-based upswing. However, future
economic factors may negatively affect real estate values, occupancy levels and property income.
24
Real Estate Operations
Leasing
Our real estate portfolio was approximately 92.8% leased as of December 31, 2014 and approximately
94.1% leased as of December 31, 2013. The 1.3% decrease in leased space was a result of lease expirations and
terminations during 2014 that were not leased at December 31, 2014. As of December 31, 2014 we had 689,000
square feet of vacancy in our portfolio compared to 571,000 at December 31, 2013. During the year ended
December 31, 2014, we leased approximately 784,000 square feet of office space, of which approximately 635,000
square feet were with existing tenants, at a weighted average term of 6.25 years. On average, tenant improvements
for such leases were $16.40 per square foot, lease commissions were $7.66 per square foot and rent concessions
were approximately three months of free rent. Average GAAP base rents under such leases were $26.89 per square
foot, or 11.8% higher than average rents in the respective properties as applicable compared to the year ended
December 31, 2013.
As of December 31, 2014, leases for approximately 7.4% and 10.0% of the square footage in our portfolio
are scheduled to expire during 2015 and 2016, respectively. As the first quarter of 2015 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 generally steady or improving rental conditions.
While we cannot generally predict when existing vacancy in our real estate portfolio will be leased or if
existing tenants with expiring leases will renew their leases or what the terms and conditions of the lease renewals
will be, we expect to renew or sign new leases at then-current market rates for locations in which the buildings are
located, which could be above or below the expiring rates. Also, even as the economy 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 2014:
(cid:120) we funded advances on Sponsored REIT Loans for revolving lines of credit in the aggregate
(cid:120)
(cid:120)
amount of approximately $11.2 million;
on June 19, we received approximately $13.9 million from FSP Galleria North Corp. as repayment
in full of a Sponsored REIT Loan; and
on December 23, we received approximately $3.4 million from FSP Highland Place I Corp. as
repayment in full of a Sponsored REIT Loan.
Additional potential real estate investment opportunities are actively being explored and we would
anticipate further real estate investments in the future.
During 2013:
(cid:120)
(cid:120)
(cid:120)
(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
(cid:120) we funded advances on Sponsored REIT Loans for revolving lines of credit in the aggregate
amount of approximately $8.2 million.
25
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
Corp., and $15.0 million on December 20, 2012 from a secured revolving line of credit with FSP
Phoenix Tower Corp.; and
(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.
Dispositions and Discontinued Operations
During 2014, the Company early adopted Accounting Standards Update (“ASU”) No. 2014-08, Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 clarifies that
discontinued operations presentation applies only to disposals representing a strategic shift that has (or will have) a
major effect on an entity’s operations and financial results (e.g., a disposal of a major geographical area, a major line
of business, a major equity method investment or other major parts of an entity). This ASU standard establishes
criteria to evaluate whether transactions should be classified as discontinued operations and requires additional
disclosure for discontinued operations and new disclosures for individually material disposal transactions that do not
meet the definition of a discontinued operation. This standard was applied prospectively during 2014. For periods
prior to 2014, the Company reported as discontinued operations, the income and expenses associated with a disposal
group (i) that qualified as a component of an entity, (ii) for which cash flows were eliminated from the ongoing
operations of the entity, and (iii) in which the Company will not have significant continuing involvement.
Comparability between 2014 and prior years is affected as a result of the adoption of the new standard. The rental
revenues, operating and maintenance expenses and depreciation and amortization for a property sold in 2014 are
included in income from continuing operations. For 2013 and 2012 properties sold were presented as discontinued
operations, which required reclassifications of rental revenues, operating and maintenance expenses and
depreciation and amortization to income or loss from discontinued operations.
Property Dispositions
The Company reached an agreement to sell an office property in Plano, Texas, which is expected to close
in February 2015. The sales price is approximately $20.8 million and the property has a carrying value of
approximately $19.2 million at December 31, 2014. The disposal of the property does not represent a strategic shift
that has a major effect on the Company's operations and financial results. Accordingly, the property remains
classified within continuing operations for all periods presented.
The Company sold an office property containing approximately 110,000 rentable square feet located in
Colorado Springs, Colorado on December 3, 2014 at a $0.9 million gain. The disposal of the property does not
represent a strategic shift that has a major effect on the Company's operations and financial results. Accordingly, the
property remains classified within continuing operations for all periods presented.
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 was part of the leverage
ratio used to calculate interest rates under the Original BAML Credit Agreement (as defined below) and future
capital costs to upgrade and reposition the multi-tenant property and to lease up the building, recent leasing and
26
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 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 is
improving in many markets relative to both liquidity and pricing. We believe that both improving office property
fundamentals as well as attractive financing availability will likely be required to continue to be an improvement in
the marketplace for potential property dispositions. As an important part of our total return strategy, we intend to be
active in property dispositions when we believe that market conditions warrant such activity and, as a consequence,
we continuously review and evaluate our portfolio of properties for potentially advantageous dispositions.
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 valuation of derivatives.
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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
allocation of purchase price;
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
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 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
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.
27
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. 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 Doubtful Accounts
We provide an allowance for doubtful accounts 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.
28
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
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
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, FSP Phoenix Tower Corp.,
which we refer to 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
we were entitled to $4,862,000. As a result of the sale, we recognized our share of the gain of $1,582,000. We
received $4,752,000 on January 4, 2013 and $96,000 on September 30, 2013. As of December 31, 2014, we held a
beneficial interest in the Phoenix Tower liquidating trust in the amount of approximately $18,000 in connection with
its preferred shares ownership.
The equity investments in Sponsored REITS are reviewed for impairment each reporting period. The
Company records impairment charges when events or circumstances indicate a decline in the fair value below the
carrying value of the investment has occurred and such decline is other-than-temporary. The ultimate realization of
the equity investments in Sponsored REITS is dependent on a number of factors, including the performance of each
investment and market conditions. An impairment charge is recorded if its determined that a decline in the value
below the carrying value of an equity investment in a Sponsored REIT is other than temporary.
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, 2014 compared to the year
ended December 31, 2013, or the year ended December 31, 2013 compared to the year ended December 31, 2012
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 Colorado Springs, Colorado on December 3, 2014 at a $0.9 million
gain and 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 $14.8 million loss. The
operating results of properties sold before 2014 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, 2014 and 2013.
(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 of non-consolidated REITs
Gain on sale of property, less applicable income tax
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 of property, less applicable income tax
Total discontinued operations
2014
243,341
$
2013
206,926
$
Change
$ 36,415
6,241
101
249,683
62,032
36,857
95,915
12,983
27,433
235,220
14,463
3
(1,760)
940
6,646
64
213,636
(405)
37
36,047
51,100
31,616
78,839
11,911
21,054
194,520
10,932
5,241
17,076
1,072
6,379
40,700
19,116
16
(1,358)
-
(4,653)
(13)
(402)
940
13,646 17,774 (4,128)
18
498
480
13,148 17,294 (4,146)
-
-
(375)
(2,158)
- 2,533 (2,533)
375
2,158
Net income
$
13,148
$
19,827
$
(6,679)
30
Comparison of the year ended December 31, 2014 to the year ended December 31, 2013
Revenues
Total revenues increased by $36.0 million to $249.7 million for the year ended December 31, 2014, as
compared to the year ended December 31, 2013. The increase was primarily a result of:
o An increase in rental revenue of approximately $36.4 million arising primarily from property
acquisitions in May 2013, July 2013 and August 2013, which were included in the year ended
December 31, 2014; and was partially offset by lower leased space of approximately 1.3% in the
real estate portfolio at December 31, 2014 compared to December 31, 2013.
o The increase in revenues was partially offset by a decrease of approximately $0.4 million in
interest income from Sponsored REIT Loans that was principally the result of a $13.9 million
repayment loan received in June 2014 and to a lesser extent the result of a $3.4 million repayment
received in December 2014.
Expenses
Total expenses increased by $40.7 million to $235.2 million for the year ended December 31, 2014, as
compared to the year ended December 31, 2013. The increase was primarily a result of:
o An increase in real estate operating expenses and real estate taxes and insurance of approximately
$16.1 million, and depreciation and amortization of $17.1 million, which were primarily from
property acquisitions in May 2013, July 2013 and August 2013 and were included in the year
ended December 31, 2014.
o An increase to interest expense of approximately $6.4 million to $27.4 million during the year
ended December 31, 2014 compared to the same period in 2013. The increase was primarily
attributable the BMO Term Loan for the full year of 2014 that we originally entered into in August
of 2013.
o An increase in selling, general and administrative expenses of approximately $1.1 million, which
was primarily the result of increased personnel related expenses and professional fees. We had 39
and 37 employees as of December 31, 2014 and 2013, respectively, at our headquarters in
Wakefield, Massachusetts.
Equity in losses of non-consolidated REITs
Equity in losses from non-consolidated REITs increased approximately $0.4 million to a loss of $1.8
million during the year ended December 31, 2014 compared to the same period in 2013. The increase was primarily
because equity in loss from our preferred stock investment in a Sponsored REIT, FSP 303 East Wacker Drive Corp.,
increased $0.5 million and was partially offset by a decrease in loss from our preferred stock investment in a
Sponsored REIT, FSP Grand Boulevard Corp., of $0.1 million during the during the year ended December 31, 2014
compared to the same period in 2013.
Gain on sale of property, less applicable income tax
On December 3, 2014, we sold an office property located in Colorado Springs, Colorado at a gain of
approximately $0.9 million. Gains or losses on sales of real estate prior to 2014 are reported in discontinued
operations.
Taxes on income
Included in income taxes is the Revised Texas Franchise Tax, which is a tax on revenues from Texas
properties that increased $12,000 and federal income taxes that increased $6,000 for the year ended December 31,
2014, compared to the year ended December 31, 2013.
31
Income from continuing operations
Income from continuing operations for the year ended December 31, 2014 was $13.1 million compared to
$17.3 million for the year ended December 31, 2013, for the reasons described above.
Discontinued operations and gain (loss) on sale
Income from discontinued operations decreased $2.5 million for the year ended December 31, 2014
compared to the year ended December 31, 2013. On October 29, 2013 we sold an office property located in
Richardson, Texas at a gain of approximately $2.2 million, which resulted in a reclassification of real estate income
and expenses of this property to discontinued operations for 2013.
Net income
Net income for the year ended December 31, 2014 was $13.1 million compared to $19.8 million for the
year ended December 31, 2013, for the reasons described above.
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 (loss) on sale or properties, less applicable income tax
Total discontinued operations
17,774 23,285 (5,511)
145
480
335
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
32
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, an increase in the occupancy
rate of 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, 2013 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 compared to the same period in 2012. 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.
33
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 sold for $375,000 for the year ended December 31, 2013 compared
to a loss from operations of properties sold for $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.
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,
2012
2013
2014
$ 13,148 $ 19,827 $ 7,633
(940) (2,158) 14,826
1,358 (2,033)
1,760
1,930
2,148 4,124
96,550 79,090 55,518
100,265 80,068
112,448
14 568 287
Funds From Operations
$ 112,462 $ 100,833 $ 80,355
Net Operating Income (NOI)
The Company provides property performance based on Net Operating Income, which we refer to as NOI.
Management believes that investors are interested in this information. NOI is a non-GAAP financial measure that
the Company defines as net income (the most directly comparable GAAP financial measure) plus selling, general
and administrative expenses, depreciation and amortization, including amortization of acquired above and below
market lease intangibles and impairment charges, interest expense, less equity in earnings of nonconsolidated
REITs, interest income, management fee income, gains or losses on the sale of assets and excludes non-property
specific income and expenses. The information presented includes footnotes and the data is shown by region with
properties owned in both periods, which we call Same Store. The Comparative Same Store results include
properties held for the periods presented and exclude significant nonrecurring income such as bankruptcy
settlements and lease termination fees. NOI, as defined by the Company, may not be comparable to NOI reported
by other REITs that define NOI differently. NOI should not be considered an alternative to net income as an
indication of our performance or to cash flows as a measure of the Company's liquidity or its ability to make
distributions. The calculations of NOI are shown in the following table:
35
(in thousands)
Region
East
MidWest
South
West
Same Store
Acquisitions
Property NOI from the portfolio
Property NOI on assets sold
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
Property NOI classified in discontinued operations
Property NOI
Net Operating Income (NOI)*
Rentable
Year
Ended
$
Square Feet 31-Dec-14
18,973
20,213
55,352
9,719
104,257
1,442
1,682
3,525
977
7,626
Year
Ended
31-Dec-13
20,260
$
19,865
53,132
8,589
101,846
$
Inc
(Dec)
(1,287)
348
2,220
1,130
2,411
1,954
9,580
37,797
142,054
999
143,053
$
19,232
121,078
18,565
20,976
1,862
122,940
$
(863)
20,113
$
%
Change
-6.4%
1.8%
4.2%
13.2%
2.4%
14.9%
17.3%
-0.8%
16.4%
$
104,257
$
101,846
$
2,411
2.4%
1,223
998
225
-0.2%
$
103,034
$
100,848
$
2,186
2.2%
Year
Ended
31-Dec-14
Year
Ended
31-Dec-13
$
13,148
$
19,827
-
(940)
(2,596)
95,915
635
12,983
27,433
(5,298)
1,760
13
(375)
(2,158)
(2,538)
78,840
(215)
11,929
21,054
(5,584)
1,358
(38)
143,053
122,100
-
840
$
143,053
$
122,940
(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 $7.5 million and $19.6 million at December 31, 2014 and December 31,
2013, respectively. The decrease of $12.1 million is attributable to $103.2 million provided by operating activities
plus $1.8 million from investing activities, less $117.1 million used in financing activities. Management believes
that existing cash, cash anticipated to be generated internally by operations and our existing debt financing will be
sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.
Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate
generating funds from continuing real estate operations. We believe that we have adequate funds to cover unusual
expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase
our level of dividends to stockholders, however, depends in significant part upon the level of rental income from our
real properties.
Operating Activities
The cash provided by our operating activities of $103.2 million is primarily attributable to net income of
$13.1 million, less $0.9 million from a gain on sale of a property, plus the add backs of $95.8 million of non-cash
activities, a $1.0 million increase in accounts payable and accrued expenses, a $0.7 million decrease in prepaid
expenses and other assets, a $0.2 million increase from tenant security deposits and a $0.1 million decrease in tenant
rent receivables. These increases were partially offset by a $6.3 million in payments of deferred leasing
commissions, a $0.4 million increase in lease acquisition costs and a $0.1 million increase in restricted cash.
Investing Activities
Our cash from investing activities for the year ended December 31, 2014 of $1.8 million is primarily
attributable to $17.3 million in repayments of Sponsored REIT loans, $14.2 million of proceeds on the sale of a
property and $0.1 million of distributions in excess of earnings from non-consolidated REITs, which were partially
offset by $18.6 million in additions to real estate investments and office equipment and an $11.2 million increase in
Sponsored REIT Loans.
Financing Activities
Our cash used by financing activities for the year ended December 31, 2014 of $117.1 million is primarily
attributable to distributions paid to stockholders of $76.1 million, repayments of borrowings on the BAML Revolver
(as defined below) of $53.5 million and financing costs of $2.5 million, which were partially offset by borrowings
under the BAML Revolver of $15.0 million.
BMO Term Loan
On October 29, 2014, the Company entered into an Amended and Restated Credit Agreement (the “BMO
Credit Agreement”) with the lending institutions referenced in the BMO Credit Agreement and Bank of Montreal, as
administrative agent (in such capacity, the “BMO Administrative Agent”), that continued a single, unsecured term
loan borrowing in the amount of $220 million (the “BMO Term Loan”). The BMO Term Loan was previously
evidenced by a Credit Agreement dated August 26, 2013 by and among the Company, certain of the Company’s
wholly-owned subsidiaries, the BMO Administrative Agent and those lenders from time to time a party thereto (the
“Original BMO Credit Agreement”). The purpose of the BMO Credit Agreement was to amend and restate the
Original BMO Credit Agreement in its entirety to provide, among other things, for the Company to become the sole
borrower and for changes to certain financial covenants. On August 26, 2013, the Company drew down the entire
$220 million under the BMO Term Loan, which remains fully advanced and outstanding under the BMO Credit
Agreement. The BMO Term Loan continues to have a seven year term that matures on August 26, 2020. The BMO
Credit Agreement also continues to include an accordion feature that allows up to $50 million of additional loans,
subject to receipt of lender commitments and satisfaction of certain customary conditions.
The BMO Term Loan bears interest at either (i) a number of basis points over LIBOR depending on the
Company’s credit rating (165 basis points over LIBOR at December 31, 2014) or (ii) a number of basis points over
the base rate depending on the Company’s credit rating (65 basis points over the base rate at December 31, 2014).
37
The actual margin over LIBOR rate or base rate is determined based on the Company’s credit rating pursuant to the
following grid:
LEVEL
I
II
III
IV
V
CREDIT
RATING
LIBOR RATE
MARGIN
A-/A3 (or higher)
BBB+/Baa1
BBB/Baa2
BBB-/Baa3