Franklin Street Properties Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Franklin Street Properties is a REIT focused on office properties, principally in the Sunbelt and Mountain West. At quarter-end it owned or consolidated 17 properties totaling 5.48 million rentable square feet.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Rental revenue | $31.2 million | $37.8 million; down $6.5 million (17.3%) |
| Net income (loss) | $(7.6) million; $(0.07) per share | $2.4 million; $0.02 per share |
| Property NOI | $13.9 million | $17.7 million; down 21.6% |
| Comparative same-store NOI | $13.6 million | $12.8 million; up 6.2% |
| FFO, as defined by the Company | $4.2 million | $8.4 million |
| Cash used in operating activities | $7.1 million | $1.1 million |
| Cash provided by investing activities | $25.6 million | $19.7 million |
| Cash used in financing activities | $108.6 million | $12.2 million |
- Rental revenue fell primarily because of property sales in 2023 and 2024 and lease expirations, partly offset by new leases. Lower real estate costs and depreciation reflected the smaller portfolio; interest expense rose $1.0 million to $6.8 million as higher borrowing rates outweighed reduced debt.
- The prior-year comparison included an $8.4 million gain on a property sale and a $0.4 million gain on consolidation of the Sponsored REIT; Q1 2024 included neither. Q1 2024 also included $1.0 million of interest income on disposition proceeds.
- Cash, cash equivalents and restricted cash were $37.8 million at March 31, down $90.1 million from year-end. This included $3.6 million of restricted cash; $2.1 million held by Monument Circle was unavailable for the Company’s operating purposes. Total assets were $1.039 billion, total liabilities $335.1 million and stockholders’ equity $703.9 million.
- Debt principal was approximately $302.9 million: $86.0 million BMO term loan, $67.3 million BofA term loan and $149.6 million senior notes. The balance sheet reports debt carrying amounts net of financing costs. All three facilities mature April 1, 2026.
Material changes, outlook and risks
- Debt amendments: On February 21, 2024, the Company amended its BMO and BofA facilities and senior notes, extended or aligned maturities to April 2026, and repaid approximately $102 million of principal. BofA borrowings were converted from revolving borrowings to a term loan. Senior-note rates rose to 8.00% from 4.49% and 4.76%; BMO and BofA rates were each 8.44% at quarter-end. The amendments require subsidiary guarantees and pledged equity interests, allocate most future net disposition and equity-issuance proceeds to mandatory debt repayments, and restrict quarterly dividends above $0.01 per share, subject to stated REIT-related exceptions. The Company reported covenant compliance at March 31.
- Minimum fixed-charge and unsecured-interest coverage covenant thresholds were reduced from 1.50x and 1.75x to 1.25x. If combined specified debt remains above $200 million at March 31, 2025, applicable spreads or note rates increase by 1 percentage point.
- Approximately 50.6% of total debt was unhedged variable-rate debt at March 31. Management described interest-rate exposure and office-market weakness as risks to cash flow, refinancing, property values and distributions. A modeled 84-basis-point rate increase would reduce future earnings and cash flow by approximately $0.6 million on BofA debt and $0.7 million on BMO debt.
- Owned properties were 73.3% leased at March 31, down from 74.0% at year-end; the Company reported 1.405 million square feet of vacancy. It leased approximately 197,000 square feet during the quarter, at a weighted average term of 6.8 years. Management noted that economic conditions, work-from-home patterns and geopolitical uncertainty may delay leasing. It expects 5.6% of owned and consolidated space to expire in 2024 and 8.0% in 2025.
- Management believes available cash and internally generated cash, including property dispositions, will cover working capital and anticipated capital expenditures for at least 12 months. The Company expects to continue selective property sales and use proceeds primarily to repay debt; it cautioned that revenue, FFO and capital expenditures may decline in the short term. No quantitative earnings or FFO guidance was provided.
- An Atlanta property remained classified as held for sale at $38.9 million after a prior buyer terminated its transaction; management expected a sale within 12 months. The Company sold a Richardson, Texas property for $35.0 million in January; the related $2.1 million impairment had been recorded in 2023.
- The Sponsored REIT Loan maturity was extended to September 30, 2024, and management expects repayment from property operations or sale, but timing and amount are uncertain. The filing text does not provide a clear outstanding loan balance. Monument Circle was only 4.1% leased and reported $71,000 rental income against $289,000 operating expenses for the quarter.
- The Company declared and paid a $0.01-per-share quarterly distribution. A further $0.01 distribution, declared April 5, was payable May 9, 2024. Management cited ordinary-course legal claims but did not expect their resolution to materially affect financial position or results. No defaults upon senior securities were reported.
Important facts for investors to verify
- Debt repayment and refinancing plans ahead of the April 2026 maturities, including whether disposition proceeds and available liquidity will be sufficient.
- Compliance with debt covenants and completion of required subsidiary guarantees and collateral pledges; monitor the March 31, 2025 debt threshold that could trigger higher rates.
- Leasing, renewals and occupancy trends, especially in the largest markets and at Monument Circle; reconcile the filing’s different occupancy measures when comparing portfolio performance.
- Progress and expected proceeds from the Atlanta property sale, and the current balance and repayment prospects of the Sponsored REIT Loan.
- Cash available for operations and distributions, distinguishing unrestricted company cash from restricted cash and funds held by Monument Circle.
- Reconcile reported rental revenue of $31.2 million with the lease note’s disclosed lease income of $31.4 million.