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Franklin Street P r o p e r t i e s 2011 Annual Report Corporate Information Cover Property: Union Centre, West Chester, ohio Franklin Street Properties Corp. Corporate Headquarters Investor Relations
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Franklin Street P r o p e r t i e s 2011 Annual Report Corporate Information Cover Property: Union Centre, West Chester, ohio Franklin Street Properties Corp. Corporate Headquarters Investor Relations Contact Board of Directors Franklin Street Properties Corp. 401 Edgewater Place Wakefield, MA Telephone: George J. Carter* Chairman and Chief Executive Officer since mid To learn more about Franklin Street Properties Corp. 401 Edgewater Place Wakefield, MA Telephone: Fax: FSP please visit its website at: Annual Meeting Information Stock Listing Janet P. Notopoulos* President, FSP Property Management LLC Thursday, May 17, 2012, 11:00 a.m. local time Sheraton Colonial Boston North Hotel and Conference Center 1 Audubon Road Wakefield, MA John N. Burke, CPA Chair of the Audit Committee Member of the Compensation Committee Former Partner, BDO USA, LLP Based in Wakefield, Massachusetts, FSP is a Maryland corporation. The Company was originally founded in 1997 and has been publicly-traded Franklin Street Properties Corp. s common stock trades on the NYSE Amex under the symbol FSP Transfer Agent American Stock Transfer and Trust Company Operations Center th Ave. Brooklyn, NY Telephone: Outside Counsel Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, MA Telephone: one on e Legacy Circle Plano, texas texas Independent Registered Public Accounting Firm Executive Officers Jeffrey B. Carter Chief Investment Officer Scott H. Carter General Counsel John G. Demeritt Chief Financial Officer Barbara J. Fournier* Chief Operating Officer Dennis J. McGillicuddy Member of the Audit and Compensation Committees Investor Georgia Murray Chair of the Compensation Committee Member of the Audit Committee Retired Executive, Lend Lease Real Estate Investments, Inc. Barry Silverstein Member of the Audit and Compensation Committees Investor *Each is also an Executive Officer of the Company Ernst & Young LLP 200 Clarendon Street Boston, MA Telephone: emperor Boulevard Durham, North Carolina 29941cvr.indd 2 3/13/12 6:39 PM Our Company s total profit performance rose in the first notable rise since the financial crisis and subsequent recession began in Profits as measured by funds from operations, or FFO 1, Fellow Stockholders increased in dollar amount by approximately $4.3 million or about 6.4% over On a fully-diluted pershare basis, FFO increased by about 3.8% from $0.84 per share in 2010 to $0.87 per share in Profits as measured by FFO plus gains on property sales, or GOS, increased on a fully-diluted per-share basis by about 36% from $0.84 per share in 2010 to $1.14 per share in We maintained our $0.76 per share dividend during 2011, a level we established in early In the past, we repeatedly referred to 2010 as our hump year and commented that we anticipated that 2011 would be the first year of profit increases since the economic downturn in 2008; and so it proved to be. The one caveat to the 2011 forecast of a turn up in profits was that the economy would not sidetrack us by experiencing another significant downturn or double-dip. In fact, the U.S. economy did experience a mid-year stall that clearly slowed down FSP, as well as many other owners of commercial real estate. However, lately many metrics are looking better for the general economy, and a true double-dip appears to have been averted, at least for the time being. For FSP and most other suburban office owners, we believe that the possibility of significant future rental growth in our existing portfolio and, more generally, in most suburban office assets will be directly tied to U.S. employment growth. At the end of the fourth quarter of 2011, the suburban office vacancy rate in the U.S. stood at a disappointing 19.6%, while FSP s vacancy rate stood at 11.3%. We believe that the fundamental de-levering of a U.S. economy that generated much of its previous growth with too much debt capital has not yet been accomplished. We also believe that broad-based, sustainable and meaningful U.S. employment growth has been much slower to get started since the technical end of our country s recent recession, when compared to other past cyclical recoveries. Profit growth in FFO for Franklin Street Properties in 2012 is likely to be affected primarily by two factors: (1) occupancy levels in the existing portfolio and (2) additional real estate investments that are accretive to FSP s cost of capital. We believe that longer-term profit growth and broad-based office value appreciation are not likely to occur until rental rate growth and net operating income have sustainable, demand-driven advances generated by higher employment and the corresponding need for more office space. During 2012, FSP will continue to focus on increasing occupancy in its existing portfolio of office buildings. We experienced a high level of tenant lease roll-over and vacancy in 2009 and 2010 within a relentlessly weakening overall office leasing market. Occupancy in the FSP portfolio dropped from approximately 93% to a low point of approximately 82% during that timeframe. Along with generally stabilizing rental markets during 2011, we succeeded in raising overall occupancy in our portfolio to 88.7% as of year-end In addition, we have only 4.1%, 6.3% and 6.0% of tenant lease expirations scheduled for 2012, 2013 and 2014, respectively. We have as our objective to move overall occupancy levels to the 90+% 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 range during Properties in our portfolio have always been very well maintained, with little or no deferred maintenance or needed capital expenditures. In addition, we have been consistently successful in our efforts to green our buildings with Energy Star and LEED environmental design designations. As a consequence, our properties are very competitive within their respective markets, and we are optimistic about achieving profit growth in 2012 through occupancy gains. FSP ended 2011 with a strong balance sheet, having approximately 35% debt to total market capitalization, $921 million of stockholders equity and $175 million of liquidity between availability under our $600 million unsecured revolving line of credit and cash. In 2011, we 909 Davis Street Evanston, Illinois 2 replaced our $250 million unsecured revolving line of credit and $75 million term loan with a $600 million unsecured revolving line of credit that we believe will allow us to take advantage of real estate investing opportunities that could substantially enhance our potential for future profit growth. During 2011, we acquired five office properties for a total acquisition price of approximately $213 million. We also sold one office property and one industrial property for a total disposition price of approximately $97.5 million. In addition, our first mortgage loan portfolio grew substantially at the end of 2011 with our loan of up to $106.2 million to fund a two-year bridge loan on a central business district (CBD) office/retail property located in Minneapolis, Minnesota, that is owned by a single-asset REIT affiliate of FSP. As 2012 begins, a number of commercial property investments are under consideration. Additional property investments in 2012 should be profit accretive, particularly when comparing our relatively low cost of debt capital to returns potentially available from other office property investment alternatives in the market. Additional new property acquisitions during 2012 remain a primary strategic objective. Finally, I would like all stockholders to know that the dedicated team of professionals who work at FSP are focused on and optimistic about the Company s opportunity for profit growth over the coming years. Working our way through tenant leaseroll, increased vacancies and falling rental rates over the last four years has been challenging. However, as we start 2012, we believe that most office markets where our properties are located have stabilized, both in terms of occupancy and rental rates. FSP s profits for the full year of 2011 reflected that reality by changing trajectory to the upside: the first positive directional change since the beginning of the financial crisis and subsequent broad economic downturn. Suburban office properties, our primary commercial real estate asset class, have been especially hard hit over the last four years. However, we are finally seeing a light at the end of that tunnel. Even though the economic cycle appears to be turning up at a very slow pace, I am confident that our Company can grow its profits from the solid foundation we have built over the last few years while continuing to provide stockholders with meaningful current dividend income. Thank you for your continued trust, confidence and support. George J. Carter Chairman & Chief Executive Officer 3 Financial Highlights Balance Sheet Data Year Ended December 31 (In thousands, except per share amounts) Total assets $1,025,433 $1,154,850 $1,238,735 $1,408,661 Total liabilities 176, , , ,294 Total shareholders equity 848, , , ,367 Shares outstanding at year-end 70,481 79,681 81,437 82,937 Shareholders equity per share $12.05 $11.76 $11.32 $11.11 Dividends paid for the year ended December 31 $70,481 $55,313 $60,586 $62,177 *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. Dividends Paid (per share) as of December 31 Funds from Operations (FFO)* (per share) as of December 31 Leased Percentage as of December 31 $ 1.00 $ 0.76 $ 0.76 $ 0.76 $0.98 $0.98 $0.84 $ % 84% 86% 89% 5160 Tennyson Parkway Plano, Texas Seattle/Tacoma, WA Minneapolis, MN Indianapolis, IN Detroit, MI FSP Metro Areas EAST MIDWEST WEST Denver, CO Colorado Springs, CO San Francisco, CA Chicago, IL St. Louis, MO Kansas City, MO Dallas, TX Cincinnati, OH Baltimore, MD Washington DC (Northern Virginia Properties) Richmond, VA Raleigh-Durham, NC Charlotte, NC Columbia, SC Atlanta, GA Houston, TX Miami, FL Franklin Street Properties owns and/or manages approximately 12.4 million square feet of office space located in 16 different states (as of December 31, 2011). 5 Interlocken office park Broomfield, colorado Sustainability Efforts 6 Phoenix Tower Houston, Texas As an owner of commercial real estate, a sector which has a significant effect on the health of both individuals and the overall environment, Franklin Street Properties carefully considers the environmental aspects of its investments. FSP believes that its emphasis on sustainability makes its buildings more attractive to firms looking to lease office space and to investors wanting to invest in real estate. Sustainability permits FSP to make a meaningful impact on the environment while at the same time creating shareholder value. Sustainability is an important component of FSP s asset management process. Sustainable practices, such as waste diversion and minimizing the use of chemicals, have been incorporated into the dayto-day operations management across our portfolio of holdings, benefiting both our tenants and FSP s bottom line. For example, property capital investments, such as building system upgrades and replacements, are analyzed from both financial and environmental angles. Sustainability is also incorporated into the leasing process, through property marketing efforts that communicate sustainability achievements and green language in leases. Energy efficiency is a particular area of emphasis. Approximately a third of the buildings that are directly owned or asset-managed by FSP have been awarded the U.S. Environmental Protection Agency and the U.S. Department of Energy s ENERGY STAR label, signifying that their energy performance is among the top 25% of similar properties. Many properties have earned the ENERGY STAR label multiple times, including one property that holds the global record for number of consecutive ENERGY STAR labels awarded. Approximately 25% of FSP s directly-owned or asset-managed buildings have earned the U.S. Green Building Council s Leadership in Energy and Environmental Design (LEED ) designation. LEED is an internationally recognized rating system that provides third party verification about a building s site maintenance, water and energy efficiency, materials and resources utilization and indoor environmental quality. FSP s properties have earned LEED certification under the rating systems for Existing Buildings: Operations & Maintenance, Core and Shell and New Construction. FSP is proud to contribute to the overall enhancement of the environment, to ensure its buildings are more comfortable to tenants and to produce better results for its shareholders as a result of its sustainability efforts. 7 5100 Tennyson Parkway Plano, Texas Strategy FSP s investment strategy is to make direct investments in real estate assets. We believe that real estate, in general, and suburban office real estate, in particular, is a cyclical asset class. We try to minimize the risk of investing in that cyclical asset class by maintaining a low to moderate level of debt at the corporate level and, historically, by not having permanent secured debt at the property level. 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 December 31, 2011, none of our 36 properties was subject to secured mortgage debt. In addition to maintaining modest leverage, we believe that we can lower investment risk while enhancing current income and long-term appreciation potential through geographical diversification by owning a portfolio of properties in varied markets that have sound long-term economic growth potential. FSP selects acquisitions based upon market and/or property specific criteria and actively manages the properties to maximize current income and long-term appreciation in value. Attempting to invest more heavily in properties near the perceived bottom of market cycles and likewise disposing of properties near the perceived top of market cycles is a natural consequence of our flexible lower leverage model. Proceeds from property sales are redeployed into other specific real estate assets, used for other corporate purposes and/or paid out to shareholders as special dividends. 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, FOLLOWING IS THE COMPANY S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C 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, 2011 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 FRANKLIN STREET PROPERTIES CORP. (Exact name of registrant as specified in its charter) Maryland (I.R.S. Employer Identification No.) (State or other jurisdiction of incorporation or organization) 401 Edgewater Place, Suite 200, Wakefield, Massachusetts (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code: (781) 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 Amex 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 FORM 10-K, Continued 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 ( 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 ( of this chapter) is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated 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 Non-accelerated filer 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 Amex, as of the last business day of the registrant s most recently completed second fiscal quarter, June 30, 2011, was approximately $918,106,020. There were 82,937,405 shares of common stock of the registrant outstanding as of February 17, 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 18, 2012 (the Proxy Statement ). The information required in response to Items 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 Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market For Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Performance Graph Item 6. Selected Financial Data Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 46 Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits, Financial Statement
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