FSP Franklin Street Properties Corp

Franklin Street Properties Corp. (the “Company”, “FSP”, “we” or “our”) (NYSE MKT: FSP), a real estate investment trust (REIT), announced its results for the third quarter ended September 30, 2016.

George J. Carter, Chairman and Chief Executive Officer, commented as follows:

“As the fourth quarter begins, we continue to believe that full-year 2016 will mark the bottom of the reductive effects that our ongoing property portfolio transition is having on Funds From Operations (FFO). Our current forecast is for resumed FFO growth in 2017 propelled from our projected realization of increased positive leasing metrics in our more recently acquired urban office properties, many of which contain meaningful value-add square footage; select new investments and redevelopment efforts. We look forward with anticipation to the balance of 2016 and beyond.”

Highlights

• FFO was $26.7 million or $0.26 per share, for the third quarter ended September 30, 2016, and Net Income was $2.5 million, or $0.02 per share for the third quarter ended September 30, 2016.
• We are updating our full year FFO guidance for 2016 to be approximately $1.03 per diluted share and, for the fourth quarter of 2016, we estimate FFO to be approximately $0.24 per diluted share. FFO guidance is being adjusted primarily to reflect the increased shares outstanding from our recent equity offering.
• Adjusted Funds From Operations (AFFO) was $0.18 per share for the third quarter ended September 30, 2016.
• Portfolio was approximately 89.5% leased as of September 30, 2016.
• Expanded our presence in Midtown Atlanta, GA with the acquisition of Pershing Park Plaza for $45.5 million.
• On August 16, 2016, we completed an equity offering issuing 7,043,750 shares of common stock and raising $82.9 million in proceeds, net of offering expenses and underwriter discounts.
• On July 21, 2016, we extended the maturity of our $400 million term loan from September 27, 2017 to September 27, 2021. On July 22, 2016, we entered into a forward interest rate swap that fixed the base LIBOR interest rate for that extension period at 1.12%. Accordingly, based upon our credit rating as of September 30, 2016, the interest rate when the extension commences would be 2.57%.

Leasing Update

• Our directly owned real estate portfolio of 36 properties totaling approximately 9.7 million square feet was approximately 89.5% leased as of September 30, 2016.
• During the quarter, we leased approximately 270,000 square feet, of which approximately 127,000 square feet was with new tenants.
• Executed leases with NCS Pearson for approximately 30,800 square feet at Northwest Point, Elk Grove, IL; Blackboard for approximately 28,700 square feet at River Crossing, Indianapolis, IN; Centene Management Company for approximately 26,600 square feet at Timberlake, Chesterfield, MO and Behringer Harvard for approximately 30,800 square feet at Addison Circle, Addison, TX.

Acquisition and Disposition Update

• Acquired the 160,000 SF Pershing Park Plaza in Midtown Atlanta, GA on August 10, 2016 for $45.5 million.
• Acquired the 325,800 SF Plaza Seven in downtown Minneapolis, MN on June 6, 2016 for $82 million.
• Active potential acquisition pipeline. Currently working on up to approximately $150 million in one or more potential urban/CBD acquisitions within our five core markets.
• Active potential disposition pipeline. Currently working on up to approximately $100 million in one or more potential dispositions.

801 Marquette Avenue, Minneapolis, MN Development Update

• Continuing our efforts to transform the property into a premier asset with a similar experience to warehouse/brick and timber buildings.
• Interior demolition and construction work commenced during the third quarter.
• Expected costs are anticipated to total between $15 and $20 million including all leasing expenses, and should result in about 120,000 RSF.
• Upon completion, expect to attain rents of approximately $15 to $18 weighted average GAAP rent per square foot compared to previously expired rents of about $4.75 net per square foot.
• Anticipate construction completion at the end of first quarter 2017.

Dividend Update

On October 7, 2016, the Company announced that its Board of Directors declared a regular quarterly dividend for the three months ended September 30, 2016 of $0.19 per share of common stock that will be paid on November 10, 2016 to stockholders of record on October 21, 2016.

Non-GAAP Financial Information

A reconciliation of Net Income to FFO and AFFO and our definitions of FFO and AFFO can be found on Supplementary Schedule H.

FFO Guidance

We are updating our full year FFO guidance for 2016 to be approximately $1.03 per diluted share and, for the fourth quarter of 2016, we estimate FFO to be approximately $0.24 per diluted share. This guidance (a) excludes the impact of future acquisitions, developments, dispositions, debt financings or repayments or other capital market transactions; (b) reflects estimates from our ongoing portfolio of properties, other real estate investments and general and administrative expenses; and (c) reflects our current expectations of economic conditions. We will update guidance quarterly in our earnings releases. There can be no assurance that the Company’s actual results will not differ materially from the estimates set forth above.

Real Estate Update

Supplementary schedules provide property information for the Company’s owned real estate portfolio and for two non-consolidated REITs in which the Company holds preferred stock interests as of September 30, 2016. The Company will also be filing an updated supplemental information package that will provide stockholders and the financial community with additional operating and financial data. The Company will file this supplemental information package with the SEC and make it available on its website at www.fspreit.com.

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Today’s news release, along with other news about Franklin Street Properties Corp., is available on the Internet at www.fspreit.com. We routinely post information that may be important to investors in the Investor Relations section of our website. We encourage investors to consult that section of our website regularly for important information about us and, if they are interested in automatically receiving news and information as soon as it is posted, to sign up for E-mail Alerts.

Earnings Call

A conference call is scheduled for October 26, 2016 at 9:00 a.m. (ET) to discuss the third quarter 2016 results. To access the call, please dial 1-877-507-4376. Internationally, the call may be accessed by dialing 1-412-317-6014. To listen via live audio webcast, please visit the Webcasts & Presentations section in the Investor Relations section of the Company's website (www.fspreit.com) at least ten minutes prior to the start of the call and follow the posted directions. The webcast will also be available via replay from the above location starting one hour after the call is finished.

About Franklin Street Properties Corp.

Franklin Street Properties Corp., based in Wakefield, Massachusetts, is focused on investing in institutional-quality office properties in the U.S. FSP’s strategy is to invest in select urban infill and central business district (CBD) properties, with primary emphasis on our top five markets of Atlanta, Dallas, Denver, Houston, and Minneapolis. FSP seeks value-oriented investments with an eye towards long-term growth and appreciation, as well as current income. FSP is a Maryland corporation that operates in a manner intended to qualify as a real estate investment trust (REIT) for federal income tax purposes. To learn more about FSP please visit our website at www.fspreit.com.

Forward-Looking Statements

Statements made in this press release that state FSP’s or management’s intentions, beliefs, expectations, or predictions for the future may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This press release 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, changes in government regulations and regulatory uncertainty, uncertainty about governmental fiscal policy, 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 the “Risk Factors” set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, as the same may be updated from time to time in subsequent filings with the United States Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, acquisitions, dispositions, performance or achievements. We will not update any of the forward-looking statements after the date of this press release to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.

   

Franklin Street Properties Corp.

Earnings Release

Supplementary Information

Table of Contents

    Franklin Street Properties Corp. Financial Results A-C Real Estate Portfolio Summary Information D Portfolio and Other Supplementary Information E Percentage of Leased Space F Largest 20 Tenants – FSP Owned Portfolio G Reconciliation and Definitions of Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) H    

Franklin Street Properties Corp. Financial Results

Supplementary Schedule A

Condensed Consolidated Income (Loss) Statements

(Unaudited)

            For the For the Three Months Ended Nine Months Ended         September 30,   September 30, (in thousands, except per share amounts)       2016   2015   2016   2015   Revenue: Rental $ 61,925 $ 60,386 $ 179,738 $ 178,200 Related party revenue: Management fees and interest income from loans 1,338 1,470 4,108 4,355 Other         17       21       54       62   Total revenue         63,280       61,877       183,900       182,617     Expenses: Real estate operating expenses 16,905 15,951 47,126 45,951 Real estate taxes and insurance 10,218 9,941 29,522 29,458 Depreciation and amortization 23,298 22,911 68,095 68,790 Selling, general and administrative 3,419 3,071 10,443 10,163 Interest         6,767       6,425       19,617       18,977   Total expenses         60,607       58,299       174,803       173,339     Income before interest income, equity in losses of non-consolidated REITs,other, gain (loss) on sale of properties and property held for sale, lessapplicable income tax and taxes 2,673 3,578 9,097 9,278 Interest income — — — 1 Equity in losses of non-consolidated REITs (196 ) (284 ) (568 ) (644 ) Other 621 — (388 ) — Gain (loss) on sale of properties and property held for sale,less applicable income tax         (523 )     1       (1,166 )     11,411     Income before taxes on income 2,575 3,295 6,975 20,046 Taxes on income         117       129       326       444   Net income       $ 2,458     $ 3,166     $ 6,649     $ 19,602     Weighted average number of shares outstanding, basic and diluted         103,709       100,187       101,370       100,187     Net income per share, basic and diluted       $ 0.02     $ 0.03     $ 0.07     $ 0.20      

Franklin Street Properties Corp. Financial Results

Supplementary Schedule B

Condensed Consolidated Balance Sheets

(Unaudited)

        September 30, December 31, (in thousands, except share and par value amounts)       2016   2015 Assets: Real estate assets: Land $ 177,505 $ 170,021 Buildings and improvements 1,713,296 1,637,066 Fixtures and equipment         3,205       2,528   1,894,006 1,809,615 Less accumulated depreciation         326,485       299,991   Real estate assets, net 1,567,521 1,509,624

Acquired real estate leases, less accumulated amortization of $116,206 and $112,844,respectively

102,226 108,046 Investment in non-consolidated REITs 75,761 77,019 Asset held for sale 8,893 — Cash and cash equivalents 13,372 18,163 Restricted cash 48 23 Tenant rent receivables, less allowance for doubtful accounts of $200 and $130, respectively 3,331 2,898

Straight-line rent receivable, less allowance for doubtful accounts of $50 and $50, respectively

50,742 48,502 Prepaid expenses and other assets 6,460 5,484 Related party mortgage loan receivables 79,045 118,641 Other assets: derivative asset — 1,132

Office computers and furniture, net of accumulated depreciation of $1,496 and $1,333,respectively

370 484

Deferred leasing commissions, net of accumulated amortization of $20,853 and $20,002,respectively

        32,676       28,999   Total assets       $ 1,940,445     $ 1,919,015     Liabilities and Stockholders’ Equity: Liabilities: Bank note payable $ 278,000 $ 290,000 Term loans payable, less unamortized financing costs of $4,364 and $2,353, respectively 615,636 617,647 Accounts payable and accrued expenses 53,964 49,489 Accrued compensation 3,238 3,726 Tenant security deposits 4,719 4,829 Other liabilities: derivative liabilities 12,651 8,243

Acquired unfavorable real estate leases, less accumulated amortization of $9,997 and $9,368,respectively

        9,289       9,425   Total liabilities         977,497       983,359     Commitments and contingencies   Stockholders’ Equity: Preferred stock, $.0001 par value, 20,000,000 shares authorized, none issued or outstanding - -

Common stock, $.0001 par value, 180,000,000 shares authorized, 107,231,155 and 100,187,405shares issued and outstanding, respectively

11 10 Additional paid-in capital 1,356,457 1,273,556 Accumulated other comprehensive loss (12,263 ) (7,111 ) Accumulated distributions in excess of accumulated earnings         (381,257 )     (330,799 ) Total stockholders’ equity         962,948       935,656   Total liabilities and stockholders’ equity       $ 1,940,445     $ 1,919,015      

Franklin Street Properties Corp. Financial Results

Supplementary Schedule C

Condensed Consolidated Statements of Cash Flows

(Unaudited)

        For the Nine Months Ended September 30, (in thousands)       2016   2015 Cash flows from operating activities: Net income $ 6,649 $ 19,602 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 69,750 70,340 Amortization of above market lease (104 ) (96 ) Equity in losses of non-consolidated REITs 568 644 Hedge ineffectiveness 388 — Gain (loss) on sale of properties and propertyheld for sale, less applicable income tax 1,166 (11,411 ) Increase (decrease) in allowance for doubtful accounts 70 (125 ) Changes in operating assets and liabilities: Restricted cash (25 ) 708 Tenant rent receivables (503 ) 1,310 Straight-line rents (2,094 ) (1,573 ) Lease acquisition costs (679 ) (463 ) Prepaid expenses and other assets (1,667 ) (997 ) Accounts payable, accrued expenses and other items 1,478 (603 ) Accrued compensation (488 ) (522 ) Tenant security deposits (110 ) 101 Payment of deferred leasing commissions         (9,147 )     (4,254 ) Net cash provided by operating activities         65,252       72,661   Cash flows from investing activities: Property acquisitions (100,302 ) (66,104 ) Acquired real estate leases (18,873 ) (10,604 ) Property improvements, fixtures and equipment (22,097 ) (15,005 ) Distributions in excess of earnings from non-consolidated REITs 691 81 Repayment of related party mortgage loan receivable 39,596 — Proceeds received on sales of real estate assets         20,058       55,659   Net cash used in investing activities         (80,927 )     (35,973 ) Cash flows from financing activities: Distributions to stockholders (57,108 ) (57,107 ) Proceeds from equity offering 83,511 — Offering costs (544 ) — Borrowings under bank note payable 155,000 95,000 Repayments of bank note payable (167,000 ) (63,000 ) Deferred financing costs         (2,975 )     —   Net cash provided by (used in) financing activities         10,884       (25,107 ) Net increase (decrease) in cash and cash equivalents (4,791 ) 11,581 Cash and cash equivalents, beginning of year         18,163       7,519   Cash and cash equivalents, end of period       $ 13,372     $ 19,100      

Franklin Street Properties Corp. Earnings Release

Supplementary Schedule D

Real Estate Portfolio Summary Information

(Unaudited & Approximated)

            Commercial portfolio lease expirations (1) Total % of

Year

Square Feet Portfolio 2016 122,849 1.3 % 2017 749,059 7.7 % 2018 1,169,759 12.1 % 2019 1,319,416 13.6 % 2020 948,806 9.8 % Thereafter (2) 5,373,957       55.5 % 9,683,846       100.0 %  

(1) Percentages are determined based upon total square footage.

(2) Includes 1,016,391 square feet of current vacancies.

            (dollars & square feet in 000's) As of September 30, 2016 # of % of Square % of State Properties Investment Portfolio Feet Portfolio   Texas 9 $ 359,076 23.0% 2,417 25.4% Colorado 5 425,990 27.3% 2,010 21.1% Georgia 5 324,905 20.8% 1,998 19.3% Virginia 4 91,397 5.8% 685 7.2% Minnesota (a) 2 92,089 5.9% 632 6.6% North Carolina 2 54,039 3.5% 322 3.4% Missouri 2 44,996 2.9% 352 3.7% Illinois 2 44,360 2.8% 372 3.9% Maryland 1 49,844 3.2% 325 3.4% Florida 1 40,893 2.6% 213 2.2% Indiana 1 30,700 2.0% 205 2.2% California 1 3,758 0.2% 36 0.4% Washington (b) 1     —   0.0% 117   1.2% Total 36   $ 1,562,047   100.0% 9,684   100.0%  

(a) Excludes approximately $5,474, which is our investment in a property being redeveloped.

(b) Includes asset held for sale of $8,893.

   

Franklin Street Properties Corp. Earnings Release

Supplementary Schedule E

Portfolio and Other Supplementary Information

(Unaudited & Approximated)

Recurring Capital Expenditures

Owned Portfolio

                  Three Months Nine Months Three Months Nine Months Ended Ended Ended Ended 30-Sep-16     30-Sep-16     30-Sep-15     30-Sep-15 Tenant improvements $ 3,325 $ 6,583 $ 1,794 $ 8,150 Deferred leasing costs 2,247 8,826 1,490 3,859 Non-investment capex   2,211   3,701       1,090       3,144 $ 7,783 $ 19,110     $ 4,374     $ 15,153           Square foot & leased percentages September 30, December 31, 2016 2015 Owned portfolio of commercial real estate Number of properties (a) 36 36 Square feet 9,683,846 9,494,953 Leased percentage 89.5 % 91.6 %   Investments in non-consolidated REITs Number of properties 2 2 Square feet 1,396,071 1,396,071 Leased percentage 73.8 % 73.5 %   Single Asset REITs (SARs) managed Number of properties 5 7 Square feet 1,075,135 1,487,026 Leased percentage 89.6 % 77.0 %   Total owned, investments & managed properties Number of properties 43 45 Square feet 12,155,052 12,378,050 Leased percentage 87.7 % 87.8 %

(a) Excludes property in redevelopment in 2016.

 

The following table shows property information for our investments in non-consolidated REITs:

              Square     % Leased     % Interest Single Asset REIT name City State Feet 30-Sep-16 Held FSP 303 East Wacker Drive Corp. Chicago IL 861,000 66.8% 43.7% FSP Grand Boulevard Corp. Kansas City MO 535,071     85.0% 27.0% 1,396,071     73.8%    

Franklin Street Properties Corp. Earnings Release

Supplementary Schedule F

Percentage of Leased Space

(Unaudited & Estimated)

                            Second Third % Leased (1) Quarter % Leased (1) Quarter as of Average % as of Average % Property Name Location Square Feet 30-Jun-16 Leased (2) 30-Sep-16 Leased (2)   1 HILLVIEW CENTER Milpitas, CA 36,288 100.0 % 100.0 % 100.0 % 100.0 % 2 FOREST PARK Charlotte, NC 62,212 100.0 % 100.0 % 100.0 % 100.0 % 3 MEADOW POINT Chantilly, VA 138,537 100.0 % 100.0 % 100.0 % 100.0 % 4 TIMBERLAKE Chesterfield, MO 234,496 96.3 % 96.3 % 100.0 % 98.8 % 5 FEDERAL WAY Federal Way, WA 117,010 61.6 % 61.6 % 61.6 % 61.6 % 6 NORTHWEST POINT Elk Grove Village, IL 176,848 100.0 % 100.0 % 100.0 % 100.0 % 7 TIMBERLAKE EAST Chesterfield, MO 117,036 96.2 % 96.2 % 100.0 % 98.7 % 8 PARK TEN Houston, TX 157,460 65.4 % 63.9 % 65.4 % 65.4 % 9 ADDISON Addison, TX 288,667 97.7 % 95.6 % 94.0 % 97.2 % 10 COLLINS CROSSING Richardson, TX 300,887 100.0 % 100.0 % 100.0 % 100.0 % 11 GREENWOOD PLAZA Englewood, CO 196,236 100.0 % 100.0 % 100.0 % 100.0 % 12 RIVER CROSSING Indianapolis, IN 205,059 91.7 % 91.7 % 96.6 % 93.4 % 13 LIBERTY PLAZA Addison, TX 218,934 81.7 % 81.7 % 81.5 % 81.8 % 14 INNSBROOK Glen Allen, VA 298,456 100.0 % 100.0 % 100.0 % 100.0 % 15 380 INTERLOCKEN Broomfield, CO 240,185 93.2 % 93.2 % 93.2 % 93.2 % 16 BLUE LAGOON Miami, FL 212,619 100.0 % 100.0 % 100.0 % 100.0 % 17 ELDRIDGE GREEN Houston, TX 248,399 100.0 % 100.0 % 100.0 % 100.0 % 18 ONE OVERTON PARK Atlanta, GA 387,267 90.4 % 90.4 % 94.0 % 92.6 % 19 390 INTERLOCKEN Broomfield, CO 241,751 94.6 % 94.2 % 95.2 % 95.2 % 20 EAST BALTIMORE Baltimore, MD 325,445 83.7 % 83.6 % 76.5 % 81.3 % 21 PARK TEN PHASE II Houston, TX 156,746 100.0 % 100.0 % 100.0 % 100.0 % 22 LOUDOUN TECH Dulles, VA 136,658 92.0 % 92.0 % 92.0 % 92.0 % 23 4807 STONECROFT Chantilly, VA 111,469 100.0 % 100.0 % 100.0 % 100.0 % 24 121 SOUTH EIGHTH ST Minneapolis, MN 305,990 56.3 % 56.2 % 56.0 % 56.4 % 25 EMPEROR BOULEVARD Durham, NC 259,531 100.0 % 100.0 % 100.0 % 100.0 % 26 LEGACY TENNYSON CTR Plano, TX 202,600 100.0 % 100.0 % 65.6 % 77.1 % 27 ONE LEGACY Plano, TX 214,110 100.0 % 100.0 % 100.0 % 100.0 % 28 909 DAVIS Evanston, IL 195,080 80.4 % 83.2 % 80.5 % 80.5 % 29 ONE RAVINIA DRIVE Atlanta, GA 386,603 94.8 % 94.8 % 91.8 % 92.6 % 30 TWO RAVINIA Atlanta, GA 442,130 81.3 % 82.4 % 78.1 % 78.1 % 31 WESTCHASE I & II Houston, TX 629,025 84.0 % 84.0 % 84.0 % 84.1 % 32 1999 BROADWAY Denver, CO 676,379 80.0 % 81.0 % 81.5 % 81.3 % 33 999 PEACHTREE Atlanta, GA 621,946 95.3 % 95.3 % 95.7 % 95.7 % 34 1001 17th STREET Denver, CO 655,420 87.6 % 87.6 % 89.0 % 88.1 % 35 PLAZA SEVEN (3) Minneapolis, MN 326,222 96.4 % 96.4 % 95.6 % 95.6 % 36 PERSHING PLAZA (4) Atlanta, GA 160,145     (4 )     (4 )     97.4 %     97.4 % TOTAL WEIGHTED AVERAGE 9,683,846     90.1 %     90.1 %     89.5 %     89.8 %  

(1) % Leased as of month's end includes all leases that expire on the last day of the quarter.(2) Average quarterly percentage is the average of the end of the month leased percentage for each of the 3 months during the quarter.(3) Property was acquired June 6, 2016, averages are for the period held in the Second Quarter.(4) Property was acquired August 10, 2016, averages are for the period held in the Third Quarter.

 

Franklin Street Properties Corp. Earnings Release

Supplementary Schedule G

Largest 20 Tenants – FSP Owned Portfolio

(Unaudited & Estimated)

The following table includes the largest 20 tenants in FSP’s owned portfolio based on total square feet:

 

As of September 30, 2016

      % of Tenant Sq Ft Portfolio 1 Quintiles IMS Healthcare Incorporated 259,531 3.0 % 2 CITGO Petroleum Corporation 248,399 2.9 % 3 Newfield Exploration Company 234,495 2.7 % 4 US Government 223,433 2.6 % 5 Sutherland Asbill Brennan LLP 222,422 2.6 % 6 Burger King Corporation 212,619 2.5 % 7 Centene Management Company, LLC 206,262 2.4 % 8 Citicorp Credit Services, Inc 176,848 2.0 % 9 SunTrust Bank 159,671 1.8 % 10 T-Mobile South, LLC dba T-Mobile 151,792 1.8 % 11 Petrobras America, Inc. 144,813 1.7 % 12 Murphy Exploration & Production Company 144,677 1.7 % 13 Jones Day 140,342 1.6 % 14 Argo Data Resource Corporation 140,246 1.6 % 15 Vail Corp d/b/a Vail Resorts 125,588 1.4 % 16 Federal National Mortgage Association 123,144 1.4 % 17 Kaiser Foundation Health Plan 120,979 1.4 % 18 Giesecke & Devrient America 112,110 1.3 % 19 Houghton Mifflin Harcourt Publishing Company 111,550 1.3 % 20 Northrop Grumman Systems Corp 111,469   1.3 % Total 3,370,390   38.9 %  

Franklin Street Properties Corp. Earnings Release

Supplementary Schedule H

Reconciliation and Definitions of Funds From Operations (“FFO”) and

Adjusted Funds From Operations (“AFFO”)

           

A reconciliation of Net Income to FFO and AFFO is shown below and a definition of FFO and AFFO isprovided on Supplementary Schedule I. Management believes FFO and AFFO are used broadly throughoutthe real estate investment trust (REIT) industry as measurements of performance. The Company has includedthe National Association of Real Estate Investment Trusts (NAREIT) FFO definition as of May 17, 2016 in thetable and notes that other REITs may not define FFO in accordance with the current NAREIT definition or mayinterpret the current NAREIT definition differently. The Company’s computation of FFO and AFFO may notbe comparable to FFO or AFFO reported by other REITs or real estate companies that define FFO or AFFOdifferently.

  Reconciliation of Net Income to FFO and AFFO: Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share amounts) 2016 2015 2016 2015   Net income $ 2,458 $ 3,166 $ 6,649 $ 19,602

Gain (loss) on sale of properties and property heldfor sale, less applicable income tax

523 (1 ) 1,166 (11,411 ) GAAP loss from non-consolidated REITs 196 284 568 644 FFO from non-consolidated REITs 787 645 2,327 2,131 Depreciation & amortization   23,112     22,848     67,991     68,694   NAREIT FFO 27,076 26,942 78,701 79,660 Hedge ineffectiveness (621 ) — 388 — Acquisition costs of new properties   215     12     349     154   Funds From Operations (FFO) $ 26,670   $ 26,954   $ 79,438   $ 79,814     Funds From Operations (FFO) $ 26,670 $ 26,954 $ 79,438 $ 79,814 Reverse FFO from non-consolidated REITs (787 ) (645 ) (2,327 ) (2,131 ) Distributions from non-consolidated REITs 332 27 691 81 Amortization of deferred financing costs 622 516 1,656 1,550 Straight-line rent (119 ) (930 ) (2,094 ) (1,573 ) Tenant improvements (3,325 ) (1,794 ) (6,583 ) (8,150 ) Leasing commissions (2,247 ) (1,490 ) (8,826 ) (3,859 ) Non-investment capex   (2,211 )   (1,090 )   (3,701 )   (3,144 ) Adjusted Funds From Operations (AFFO) $ 18,935   $ 21,548   $ 58,254   $ 62,588     Per Share Data EPS $ 0.02 $ 0.03 $ 0.07 $ 0.20 FFO $ 0.26 $ 0.27 $ 0.78 $ 0.80 AFFO $ 0.18 $ 0.22 $ 0.57 $ 0.62   Weighted average shares (basic and diluted) 103,709   100,187   101,370   100,187  

During the three months ended June 30, 2016 we changed the definition of FFO to exclude hedge ineffectiveness, which does not affect any prior period. Our interest rate swaps effectively fix interest rates on our term loans, however, there is no floor on the variable interest rate of the swaps whereas the current term loans are subject to a zero percent floor. As a result there is a mismatch and the ineffective portion of the derivatives’ changes in fair value are recognized directly into earnings each quarter as hedge ineffectiveness. We believe that FFO excluding hedge ineffectiveness is useful supplemental information regarding our operating performance as it provides a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our operating results.

Funds From Operations (“FFO”)

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, hedge ineffectiveness 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 NAREIT, may define this term in a different manner. We have included the NAREIT FFO as of May 17, 2016 in the 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.

Adjusted Funds From Operations (“AFFO”)

The Company also evaluates performance based on Adjusted Funds From Operations, which we refer to as AFFO. The Company defines AFFO as (1) FFO, (2) excluding our proportionate share of FFO and including distributions received, from non-consolidated REITs, (3) excluding the effect of straight-line rent, (4) plus deferred financing costs and (5) less recurring capital expenditures that are generally for maintenance of properties, which we call non-investment capex or are second generation capital expenditures. Second generation costs include re-tenanting space after a tenant vacates, which include tenant improvements and leasing commissions.

We exclude development/redevelopment activities, capital expenditures planned at acquisition and costs to reposition a property. We also exclude first generation leasing costs, which are generally to fill vacant space in properties we acquire or were planned for at acquisition.

AFFO 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 may define this term in a different manner. We believe that in order to facilitate a clear understanding of the results of the Company, AFFO should be examined in connection with net income and cash flows from operating, investing and financing activities in the consolidated financial statements.

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Franklin Street Properties Corp.Georgia Touma, 877-686-9496