UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
| [ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2010 |
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________. |
Commission File Number: 000-53165
FSP 303 East Wacker Drive Corp.
(Exact name of registrant as specified in its charter)
Delaware | 20-8061759 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
401 Edgewater Place
Wakefield, MA 01880
(Address of principal executive offices)(Zip Code)
(781) 557-1300
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| YES [X] | NO [_] |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| YES [_] | NO [_] |
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 [X] | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| YES [_] | NO [X] |
The number of shares of common stock outstanding was 1 and the number of shares of preferred stock outstanding was 2,210, each as of October 29, 2010.
FSP 303 East Wacker Drive Corp.
Form 10-Q
Quarterly Report
September 30, 2010
Table of Contents
| Page | |||
| Part I. | Financial Information | ||
| Item 1. | Financial Statements | ||
| Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 | 2 | ||
| Consolidated Statements of Operations for the three and nine months | 3 | ||
| ended September 30, 2010 and 2009 | |||
| Consolidated Statements of Cash Flows for the nine months | 4 | ||
| ended September 30, 2010 and 2009 | |||
| Notes to Consolidated Financial Statements | 5-7 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8-12 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 13 | |
| Item 4. | Controls and Procedures | 13 | |
| Part II. | Other Information | ||
| Item 1. | Legal Proceedings | 14 | |
| Item 1A. | Risk Factors | 14 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 14 | |
| Item 3. | Defaults Upon Senior Securities | 14 | |
| Item 4. | Removed and Reserved | 14 | |
| Item 5. | Other Information | 14 | |
| Item 6. | Exhibits | 14 | |
| Signatures | 15 | ||
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
| September 30, | December 31, | |||||||
| (in thousands, except share and par value amounts) | 2010 | 2009 | ||||||
| Assets: | ||||||||
| Real estate investments, at cost: | ||||||||
| Land | $ | 26,200 | $ | 26,200 | ||||
| Building and improvements | 133,233 | 132,794 | ||||||
| Furniture and Equipment | 161 | 161 | ||||||
| 159,594 | 159,155 | |||||||
| Less accumulated depreciation | 13,472 | 10,599 | ||||||
| Real estate investments, net | 146,123 | 148,556 | ||||||
| Acquired real estate leases, net of accumulated amortization of $4,535 and $4,360, respectively | 3,737 | 4,837 | ||||||
| Acquired favorable real estate leases, net of accumulated amortization of $2,481 and $2,755, respectively | 2,711 | 3,287 | ||||||
| Cash and cash equivalents | 21,247 | 21,004 | ||||||
| Tenant rent receivable, less allowance for doubtful accounts of $84 and $0, respectively | 142 | 187 | ||||||
| Step rent receivable, less allowance for doubtful accounts of $181 and $0, respectively | 2,348 | 2,334 | ||||||
| Deferred leasing costs, net of accumulated amortization of $400 and $241, respectively | 1,530 | 875 | ||||||
| Prepaid expenses and other assets | 144 | 153 | ||||||
| Total assets | $ | 177,982 | $ | 181,233 | ||||
| Liabilities and Stockholders’ Equity: | ||||||||
| Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 9,740 | $ | 8,349 | ||||
| Tenant security deposits | 344 | 352 | ||||||
| Acquired unfavorable real estate leases, net of accumulated amortization of $66 and $255, respectively | 99 | 282 | ||||||
| Total liabilities | 10,183 | 8,983 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred Stock, $.01 par value, 2,210 shares authorized, issued and outstanding, aggregate | ||||||||
| liquidation preference $221,000 at September 30, 2010 and December 31, 2009 | - | - | ||||||
| Common Stock, $.01 par value, 1 share authorized, issued and outstanding | - | - | ||||||
| Additional paid-in capital | 197,162 | 197,162 | ||||||
| Retained deficit and distributions in excess of earnings | (29,363 | ) | (24,912 | ) | ||||
| Total Stockholders’ Equity | 167,799 | 172,250 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 177,982 | $ | 181,233 | ||||
See accompanying notes to consolidated financial statements. | ||||||||
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| FSP 303 East Wacker Drive Corp |
| Consolidated Statements of Operations |
| (Unaudited) |
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| (in thousands, except share and per share amounts) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Revenues: | ||||||||||||||||
| Rental | $ | 4,397 | $ | 5,494 | $ | 14,744 | $ | 16,771 | ||||||||
| Total revenue | 4,397 | 5,494 | 14,744 | 16,771 | ||||||||||||
| Expenses: | ||||||||||||||||
| Rental operating expenses | 1,457 | 1,508 | 4,603 | 4,667 | ||||||||||||
| Real estate taxes and insurance | 802 | 1,797 | 4,029 | 4,732 | ||||||||||||
| Depreciation and amortization | 1,339 | 1,350 | 4,152 | 4,173 | ||||||||||||
| Total expenses | 3,598 | 4,655 | 12,784 | 13,572 | ||||||||||||
| Income before interest income | 799 | 839 | 1,960 | 3,199 | ||||||||||||
| Interest income | 12 | 18 | 47 | 94 | ||||||||||||
| Net income attributable to preferred stockholders | $ | 811 | $ | 857 | $ | 2,007 | $ | 3,293 | ||||||||
| Weighted average number of preferred shares outstanding, | ||||||||||||||||
| basic and diluted | 2,210 | 2,210 | 2,210 | 2,210 | ||||||||||||
| Net income per preferred share, basic and diluted | $ | 367 | $ | 388 | $ | 908 | $ | 1,490 | ||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||
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For the Nine Months Ended Septmeber 30, | ||||||||
| (in thousands) | 2010 | 2009 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 2,007 | $ | 3,293 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 4,152 | 4,173 | ||||||
| Amortization of favorable real estate leases | 576 | 878 | ||||||
| Amortization of unfavorable real estate leases | (183 | ) | (70 | ) | ||||
| Increase in bad debt reserve | 84 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Tenant rent receivable | (39 | ) | (27 | ) | ||||
| Step rent receivable, net | (14 | ) | (158 | ) | ||||
| Prepaid expenses and other assets | 9 | (18 | ) | |||||
| Accounts payable and accrued expenses | 1,207 | 531 | ||||||
| Tenant security deposits | (8 | ) | (251 | ) | ||||
| Payment of deferred leasing costs | (835 | ) | (213 | ) | ||||
| Net cash provided by operating activities | 6,956 | 8,138 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of real estate assets | (255 | ) | (1,190 | ) | ||||
| Net cash used for investing activities | (255 | ) | (1,190 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Distributions to stockholders | (6,458 | ) | (8,427 | ) | ||||
| Net cash used for financing activities | (6,458 | ) | (8,427 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 243 | (1,479 | ) | |||||
| Cash and cash equivalents, beginning of period | 21,004 | 23,878 | ||||||
| Cash and cash equivalents, end of period | $ | 21,247 | $ | 22,399 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Disclosure of non-cash investing activities: | ||||||||
| Accrued costs for purchase of real estate assets | $ | 514 | $ | 380 | ||||
| See accompanying notes to consolidated financial statements. | ||||||||
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FSP 303 East Wacker Drive Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Basis of Presentation, Real Estate and Depreciation, Financial Instruments, and Recent Accounting Pronouncement
Organization
FSP 303 East Wacker Drive Corp. (the “Company”) was organized on December 13, 2006 as a corporation under the laws of the State of Delaware to purchase, own, and operate a twenty-eight story multi-tenant office tower containing approximately 859,187 rentable square feet of office and retail space and a 294-stall underground parking garage located in downtown Chicago, Illinois (the “Property”). The Company acquired the Property and commenced operations on January 5, 2007. Franklin Street Properties Corp. (“Franklin Street”) (NYSE Amex: FSP) holds the sole share of the Company’s common stock, $.01 par value per share (the “Common Stock”). Between February 2007 and December 2007, FSP Investments LLC (member, FINRA and SIPC), a wholly-ow ned subsidiary of Franklin Street, completed the sale on a best efforts basis of 2,210 shares of preferred stock, $.01 par value per share (the “Preferred Stock”) in the Company. FSP Investments LLC sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933.
All references to the Company refer to FSP 303 East Wacker Drive Corp. and its consolidated subsidiary, collectively, unless the context otherwise requires.
Basis of Presentation
The unaudited consolidated financial statements of the Company include all the accounts of the Company and its wholly owned subsidiary. These financial statements should be read in conjunction with the Company's financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission (“SEC”).
The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial information and in conjunction with the rules and regulations of the SEC. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2 010 or for any other period.
Real Estate and Depreciation
Real estate assets are stated at the lower of cost or fair value, as appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical capital items include new roofs, site improvements, various exterior building improvements and major interior renovations. Funding for capital improvements typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred. Funding for repairs and maintenance items typically is provided by cash flows from operating activities.
Depreciation is computed using the straight-line method over the assets’ estimated useful lives as follows:
Category | Years | |
| Building - Commercial | 39 | |
| Building Improvements | 15-39 | |
| Furniture and Fixtures | 5-7 |
The Company reviews the Property to determine if the carrying amount will be recovered from future cash flows if certain indicators of impairment are identified at the Property. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. When indicators of impairment are present and the sum of the undiscounted future cash flows is less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the asset’s current carrying value and its fair value based on discounting its estimated future cash flows. At September 30, 2010 and December 31, 2009, no impairment charges wer e recorded.
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FSP 303 East Wacker Drive Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Basis of Presentation, Real Estate and Depreciation, Financial Instruments, and Recent Accounting Pronouncement (continued)
Financial Instruments
The Company estimates that the carrying value of cash and cash equivalents approximate their fair values based on their short-term maturity and prevailing interest rates.
Recent Accounting Pronouncement
In May 2009, the Financial Accounting Standards Board issued a pronouncement which sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This pronouncement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This disclosure should alert all users of financials statements that an entity has not evaluated subsequent even ts after that date in the set of financial statements being presented. The Company is adhering to the requirements of this pronouncement, which was effective for financial periods ending after June 15, 2009.
2. Income Taxes
The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company generally is entitled to a tax deduction for dividends paid to its stockholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of stockholders it can have and the concentration of their ownership, and the amount of the Company’s income that must be distributed annually.
Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company files income tax returns in the U.S. federal jurisdiction and the State of Illinois jurisdiction. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2007 and thereafter.
3. Related Party Transactions
The Company has in the past engaged in and currently engages in transactions with a related party, Franklin Street, and its subsidiaries FSP Investments LLC and FSP Property Management LLC (collectively “FSP”). The Company expects to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of its stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (.5%) of the gross revenues of the Property. The asset mana gement agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice. For the nine months ended September 30, 2010 and 2009 management fees paid were $77,000 and $82,000, respectively.
On December 27, 2007, Franklin Street purchased 965.75 shares of the Preferred Stock (or approximately 43.7%) of the Company for consideration totaling $82,813,000. Prior to purchasing any shares of the Preferred Stock, Franklin Street agreed to vote any shares held by it on any matter presented to the holders of the Preferred Stock in a manner that approximates as closely as possible the votes cast in favor of and opposed to such matter by the holders of the Preferred Stock other than Franklin Street and its affiliates. For purposes of determining how Franklin Street votes its shares of the Preferred Stock, abstentions and non-votes by stockholders other than Franklin Street are not considered. Franklin Street is entitled to distributions that are declared on the Preferred Stock.
Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of the Preferred Stock in December 2007, Franklin Street has not been entitled to share in our earnings or any dividend related to the Common Stock of the Company.
6
FSP 303 East Wacker Drive Corp.
Notes to Consolidated Financial Statements
(Unaudited)
4. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares of Preferred Stock outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at September 30, 2010 and 2009.
5. Segment Reporting
The Company operates in one industry segment, which is real estate ownership of commercial property. The Company owned and operated the Property for all periods presented.
6. Cash Distributions
The Company’s board of directors declared and paid cash distributions as follows:
| Quarter Paid | Distributions Per Preferred Share | Total Distributions | ||||||
| First quarter of 2010 | $ | 1,011 | $ | 2,234,310 | ||||
| Second quarter of 2010 | $ | 997 | $ | 2,203,370 | ||||
| Third quarter of 2010 | $ | 914 | $ | 2,019,940 | ||||
| First quarter of 2009 | $ | 1,400 | $ | 3,094,000 | ||||
| Second quarter of 2009 | $ | 1,400 | $ | 3,094,000 | ||||
| Third quarter of 2009 | $ | 1,013 | $ | 2,238,730 | ||||
7. Subsequent Event
The Company’s board of directors declared a cash distribution of $914 per preferred share on October 26, 2010 to the holders of record of the Company’s Preferred Stock on November 9, 2010, payable on November 29, 2010.
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K, for the year ended December 31, 2009. 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 Quarterly Report on Form 10-Q may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cau tioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation the current disruptions in the credit markets, changes in economic conditions in the market where we own the Property and in the global markets, risks of a lessening of demand for the type of real estate owned by us, changes in government regulations, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform them to actual results or to changes in our expec tations that occur after such date, other than as required by law.
Overview
FSP 303 East Wacker Drive Corp., which we refer to as the Company, is a Delaware corporation formed to purchase, own, and operate a twenty-eight story multi-tenant office tower containing approximately 859,187 rentable square feet of office and retail space and a 294-stall underground parking garage located in downtown Chicago, Illinois, which we refer to as the Property.
Franklin Street Properties Corp., which we refer to as Franklin Street, is the sole holder of our one share of common stock, $.01 par value per share, which we refer to as the Common Stock, that is issued and outstanding. Between February 2007 and December 2007, FSP Investments LLC (member FINRA and SIPC), a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 2,210 shares of our preferred stock, $.01 par value per share, which we refer to as the Preferred Stock. FSP Investments LLC sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933. Since the completion of the placement of the Preferred Stock in December 2007, Franklin Street has not bee n entitled to share in any earnings or dividend related to the Common Stock.
We operate in one business segment, which is real estate operations, and own a single property. Our real estate operations involve real estate rental operations, leasing services and property management services. The main factor that affects our real estate operations is the broad economic market conditions in the United States and, more specifically, the economic conditions in Chicago, Illinois, the relevant submarket. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on national or local market conditions.
Trends and Uncertainties
Economic Conditions
The economy in the United States is continuing to experience significant disruptions, including high levels of unemployment, the failure and near failure of a number of large financial institutions, reduced liquidity and increased credit risk premiums for a number of market participants. Economic conditions may be affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, recessionary concerns, changes in currency exchange rates, the availability of debt and interest rate fluctuations. The current disruptions in the U.S. economy have affected real estate values, occupancy levels and property income levels and may continue or worsen in the future. We believe that the current disruptions in the U.S. economy have negatively impac ted our ability to lease vacant space at the Property. At this time, we cannot predict the extent or duration of that this negative impact will have on our business and, more specifically, on our efforts to lease vacant space and to obtain the Permanent Mortgage Loan (as defined below).
Permanent Mortgage Loan
Management believes that the Property has the potential for increased occupancy and rental rates in the future and, assuming that such increases occur, management believes that the holders of the Preferred Stock could benefit, in the form of a return of capital that produces a positive total return on their original investment, from either our obtaining some level of
8
permanent mortgage debt financing, which we refer to as the Permanent Mortgage Loan, or the sale of the Property or a merger transaction at such time. Management believes that the Permanent Mortgage Loan, if obtained in an amount and on terms considered favorable relative to the current and anticipated future performance of the Property, could benefit the holders of the Preferred Stock by providing them with a return of a portion of their original capital investment in the Company and by decreasing the amount of their remaining capital investment in the Company. Assuming that the value of the Property appreciates over time and that the Property is ultimately sold for such appreciated value, management believes that the Permanent Mortgage Loan could provide the holders of the Preferred S tock with a leveraged rate of return on their remaining capital investment in the Company that could be enhanced over the rate of return without the Permanent Mortgage Loan. However, there can be no assurance that the Property will appreciate in value over time or that the Company will be able to obtain the Permanent Mortgage Loan on terms considered favorable relative to the current and anticipated future performance of the Property, especially in light of the current economic conditions described above. Subject to any contrary REIT requirements (or any Property-specific current or anticipated future capital needs requirements in the case of the Permanent Mortgage Loan only), any proceeds from the closing of the Permanent Mortgage Loan, the sale of the Property or a merger transaction would be distributed to the holders of the Preferred Stock and the Common Stock in accordance with our charter.
The Company has the right, in its sole and absolute discretion and without the consent of any holder of shares of the Preferred Stock, to obtain the Permanent Mortgage Loan. Although the Company has no obligation to obtain the Permanent Mortgage Loan, if the Company decides to obtain the Permanent Mortgage Loan, the Company will have the right, in its sole and absolute discretion and without the consent of any holder of shares of our Preferred Stock, to negotiate all of the terms and conditions of the Permanent Mortgage Loan and any refinancing thereof including, without limitation, the timing of the closing and funding, the identity of the lender, the principal amount, the interest rate, the maturity and the security. As of September 30, 2010, the Company has neither sought nor obtained the Permanent Mortgage Loan.
Real Estate Operations
The Property was approximately 76% leased as of September 30, 2010 to a diverse group of tenants with staggered lease expirations, a 1% increase from the prior quarter. Management believes that any tenant that leases 10% or more of the Property’s rentable space is material. The largest tenant is KPMG LLP, or KPMG, which leases 259,090 square feet (approximately 30%) of the Property’s rentable space through August 2012. AECOM USA, Inc., or AECOM USA, leases 104,086 square feet (approximately 12%) of the Property’s rentable space through September 2014. KPMG is one of the largest accounting firms in the world and AECOM USA is a wholly-owned subsidiary of AECOM Technology Corporation, a provider of professional, technical and management support serv ices (NYSE: ACM), which has guaranteed AECOM USA’s obligations under the lease. No other tenant leases 10% or more of the Property’s rentable space. On February 16, 2009, KPMG notified the Company that it will be relocating to a different property location following the expiration of its lease on August 31, 2012. Management has been planning for this vacancy since it received notice and, with a little less than two years remaining on KPMG’s lease, will continue to aggressively work with its local leasing team to find a replacement tenant (or tenants). As of September 30, 2010, 31 tenants were leasing space at the Property.
It is difficult for management to predict what will happen to occupancy and rents at the Property because the need for space and the price tenants are willing to pay are tied to both the local economy and to the larger trends in the national economy, such as job growth, interest rates, the availability of credit and corporate earnings, which in turn are tied to even larger macroeconomic and political factors, such as recessionary concerns, volatility in energy pricing and the risk of terrorism. In addition to the difficulty of predicting macroeconomic factors, it is difficult to predict how our local market or tenants (existing and potential) will suffer or benefit from changes in the larger economy. In addition, because the Property is i n a single geographical market, these macroeconomic trends may have a different effect on the Property and on its tenants (existing and potential), some of which may operate on a national level. Although we cannot predict how long it will take to lease vacant space at the Property or what the terms and conditions of any new leases will be, we expect to sign new leases at current market rates which may be below the expiring rates.
For the three months ended September 30, 2010, we believe that vacancy rates remained essentially unchanged and that rental rates stabilized for buildings in Chicago’s East Loop office market. These trends may continue or worsen in the future. Recently, we have seen increased interest in leasing space at the Property. In fact, for the three months ended September 30, 2010, we executed new leases, renewals and expansions at the Property that totaled over 12,000 rentable square feet. However, there is still a significant amount of space that remains to be leased and continuing turmoil in the global financial markets will likely prolong the time it takes to lease the vacant space at the Property.
Management believes that the position of the Property within the East Loop office market will continue to be strong and management is optimistic that the existing vacant space will ultimately be leased to new tenants. In order to further improve the Property’s position in Chicago’s office market, management has been implementing cost effective enhancements to the Property. Management has been meeting with architects and considering the benefits of aesthetic upgrades to the lobby and has made other first impression improvements. With a goal of improving the amenities available to tenants at the Property, management directed the completion of a new fitness center at the Property. Located on the second floor and commanding a unique view of Navy Pier and Lake M ichigan, management believes that the new fitness center has been very well received by existing tenants and could help to attract new tenants to the Property. In addition, the Company had previously added a restaurant and lounge area to the concourse level.
9
Given the current economic downturn, the potential for any of our tenants to default on its lease or to seek the protection of bankruptcy laws has increased. 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 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. Bankruptcy or a material adverse change in the financial condition of a material tenant would likely have a material adverse effect on our results of operations.
In light of the amount of vacant space that needs to be leased at the Property and the potential for significant tenant improvement allowances and leasing commissions, it is possible that we may need additional funds in the future. One source of such funds could be a future reduction in the amount of our dividend distributions in order to build up a reserve that could be utilized to fund significant tenant improvement allowances and leasing commissions. In addition, the Company may, without the consent of any holder of shares of our Preferred Stock, obtain a revolving line of credit of up to $66,800,000 on commercially reasonable terms to be used for capital improvements or to pay operating expenses of the Property, if needed. As of September 30, 2010, the Company had neither sought nor obtained a line of credit.
Critical Accounting Policies
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations and that require significant management estimates and judgments are discussed in Item 7, “Management’s Di scussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2009.
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.
No change to our critical accounting policies has occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2009.
Results of Operations
As of September 30, 2010, the Property was approximately 76% leased to a diverse group of tenants with staggered lease expirations.
Comparison of the three months ended September 30, 2010 to the three months ended September 30, 2009
Revenue
Total revenue decreased $1.1 million to $4.4 million for the three months ended September 30, 2010, as compared to $5.5 million for the three months ended September 30, 2009. This decrease was primarily due to a decrease in recoverable expenses of $0.8 million and a decrease in termination fees of $0.3 million.
Expenses
Total expenses decreased by approximately $1.1 million to $3.6 million for the three months ended September 30, 2010, as compared to $4.7 million for the three months ended September 30, 2009. The decrease is predominantly due to a decrease in real estate taxes of $1.0 million and a decrease in operating expenses of $0.1 million.
Comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009
Revenue
Total revenue decreased $2.1 million to $14.7 million for the nine months ended September 30, 2010, as compared to $16.8 million for the nine months ended September 30, 2009. This decrease was primarily due to a decrease in revenue from base rents of $0.8 million and a decrease in recovery of expenses of $1.0 million as a result of a decrease in leasing and occupancy and a decrease in termination fees of $0.7 million, which was offset by an increase in amortization of favorable real estate leases of $0.4 million.
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Expenses
Total expenses decreased by approximately $0.8 million to $12.8 million for the nine months ended September 30, 2010 as compared to $13.6 million for the nine months ended September 30, 2009. The increase is primarily attributable to a decrease in real estate taxes of $0.7 million and a decrease in operating expenses of $0.1 million.
Liquidity and Capital Resources
Cash and cash equivalents were $21.2 million at September 30, 2010 and $21.0 million at December 31, 2009. The $0.2 million increase for the nine months ended September 30, 2010 is primarily attributable to $7.0 million provided by operating activities, which was offset by $0.3 million used for investing activities and $6.5 million used for financing activities.
Management believes that the existing cash and cash anticipated to be generated internally by operations will be sufficient to meet working capital requirements, distributions and anticipated capital expenditures for at least the next 12 months.
Operating Activities
The cash provided by operating activities of $7.0 million for the nine months ended September 30, 2010 was primarily attributable to a net income of approximately $2.0 million and the add-back of $4.6 million of non-cash activities and an increase of $1.2 million in accounts payable and accrued expense. These increases were partially offset by payments of deferred leasing costs of $0.8 million.
Investing Activities
The cash used for investing activities of approximately $0.2 million for the nine months ended September 30, 2010 was attributable to the purchase of real estate assets.
Financing Activities
Cash used for financing activities of $6.5 million for the nine months ended September 30, 2010 was attributable to distributions to stockholders.
Sources and Uses of Funds
The Company’s principal demands on liquidity are cash for operations and distributions to equity holders. As of September 30, 2010, we had approximately $9.7 million in accrued liabilities. In the near term, liquidity is generated by cash from operations.
Contingencies
We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
We have in the past engaged in and currently engage in transactions with a related party, Franklin Street, and its subsidiaries FSP Investments LLC and FSP Property Management LLC, which we collectively refer to as FSP. We expect to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of our stockholders. FSP Property Management LLC currently provides us with asset management and financial reporting services. The asset management agreement between us and FSP Property Management LLC requires us to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (.5%) of the gross revenues of the Property. The asset management agreement between us and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice. For the nine months ended September 30, 2010 and 2009, management fees paid were $77,000 and $82,000, respectively.
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On December 27, 2007, Franklin Street purchased 965.75 shares of the Preferred Stock (or approximately 43.7%), of the Company for consideration totaling $82,813,000. Prior to purchasing any shares of the Preferred Stock, Franklin Street agreed to vote any shares held by it on any matter presented to the holders of the Preferred Stock in a manner that approximates as closely as possible the votes cast in favor of and opposed to such matter by the holders of the Preferred Stock other than Franklin Street and its affiliates. For purposes of determining how Franklin Street votes its shares of the Preferred Stock, abstentions and non-votes by stockholders other than Franklin Street are not considered. Franklin Street is entitled to distributions that are declared on the Preferred Stock.
Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of the Preferred Stock in December 2007, Franklin Street has not been entitled to share in our earnings or any dividend related to the Common Stock of the Company.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be d isclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2010, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position, cash flows or results of operations.
Item 1A. Risk Factors.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Removed and Reserved.
Item 5. Other Information.
None.
Item 6. Exhibits.
See Exhibit Index attached hereto, which is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FSP 303 EAST WACKER DRIVE CORP. | |||
Date | Signature | Title | |
Date: November 12, 2010 | /s/ George J. Carter George J. Carter | President (Principal Executive Officer) | |
Date: November 12, 2010 | /s/ Barbara J. Fournier Barbara J. Fournier | Chief Operating Officer (Principal Financial Officer) | |
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EXHIBIT INDEX
| Exhibit No. | Description |
| 31.1 | Certification of FSP 303 East Wacker Drive Corp.'s principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of FSP 303 East Wacker Drive Corp.'s principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of FSP 303 East Wacker Drive Corp.'s principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of FSP 303 East Wacker Drive Corp.'s principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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