Franklin Street Properties Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Franklin Street Properties is a REIT focused on U.S. office properties, primarily in the Sunbelt and Mountain West. At quarter-end, it owned and consolidated 21 properties totaling 6.27 million rentable square feet; this includes Monument Circle, consolidated effective January 1, 2023.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $36.3 million | $41.3 million | $74.0 million | $83.6 million |
| Net loss | $8.4 million | $9.1 million | $6.0 million | $13.3 million |
| FFO, company-defined | $7.1 million | $10.3 million | $15.5 million | $21.8 million |
| Property NOI | $16.6 million | $19.1 million | $34.3 million | $38.7 million |
| Operating cash flow | Not shown separately for Q2 | $0.5 million | $(10.2) million |
Q2 revenue declined about 12% year over year, mainly reflecting property sales and lease expirations, partly offset by new leases. Expenses fell by $5.4 million, largely due to dispositions and lower depreciation, but interest expense increased $0.4 million. Six-month net loss improved mainly because of the $8.4 million Elk Grove property-sale gain; six-month FFO and NOI were lower year over year. FFO and NOI are non-GAAP measures and should be considered alongside GAAP results.
At June 30, total assets were $1.199 billion, total liabilities $440.2 million, and stockholders’ equity $759.1 million. Debt had a carrying value of about $399.1 million: $75 million drawn on the revolver, $124.5 million in term loans, and $199.6 million in senior notes. Cash, cash equivalents and restricted cash totaled $6.7 million; $2.6 million held by Monument Circle was unavailable for the Company’s operating use. The Company reported $70 million of revolver availability as of July 27.
Portfolio, liquidity and financing
- Owned properties were 75.7% leased at June 30, up slightly from 75.6% at year-end 2022. The consolidated portfolio was reported as 73.3% leased; Monument Circle was only 4.1% leased. The filing also presents a 69.9% weighted occupied percentage for the six-month property table, using a different measurement basis.
- The Company leased approximately 445,000 square feet in its owned properties during the first half, at a weighted average term of 6.6 years. Reported average GAAP base rents on those leases were 7.2% above average rents in the respective properties for 2022.
- Interest expense for the first half rose $0.9 million year over year. The BMO term loan and BofA revolver each carried an 8.26% rate at June 30. The Company terminated its BMO loan interest-rate swaps in February, leaving about 50% of total debt as unhedged variable-rate debt.
- The BMO term loan and BofA revolver mature October 1, 2024; $25 million of the BMO loan must be repaid by April 1, 2024. The $116 million Series A notes mature December 2024 and the $84 million Series B notes mature December 2027.
- Management said cash, operating cash generation, dispositions and revolver availability should cover working capital and anticipated capital expenditures for at least 12 months. That assessment depends in part on successful property sales and continued access to financing.
Material changes, outlook and risks
- Moody’s downgraded the Company’s senior unsecured debt from Ba1 to Ba3 in April 2023, then to B3 in June. Management estimated this would add approximately $1.0 million in annual interest costs on the senior notes, based on debt outstanding as of July 27.
- The February credit amendments extended the BMO and BofA facilities to October 2024 but raised borrowing costs and reduced the revolver commitment from $237.5 million to $150 million. Availability is scheduled to step down to $125 million in October 2023 and $100 million in April 2024. The Company reported compliance with applicable financial covenants at June 30.
- The Company sold the Elk Grove property in March for $29.1 million, recognizing an $8.4 million gain. A Charlotte property was classified as held for sale in Q2, with expected gross proceeds of $9.2 million and a recorded $0.8 million impairment; closing was expected in Q3.
- After quarter-end, the Company signed agreements for potential sales of three properties for approximately $156 million in aggregate gross proceeds. Closings were expected in Q4, subject to customary conditions, with proceeds intended primarily for debt repayment.
- Management’s strategy is to sell select properties where it believes valuation potential has been reached and lease vacant space. It cautioned that revenue, FFO and capital expenditures may decline in the short term. No formal earnings or FFO guidance was provided.
- The quarterly distribution was $0.01 per share in Q1 and Q2 2023, versus $0.09 per share in each comparable 2022 quarter. Credit agreements generally restrict quarterly distributions above $0.01 per share, subject to exceptions for REIT tax and distribution requirements. A further $0.01 distribution was declared in July.
- Risks highlighted include weak office-space demand, work-from-home patterns and uncertain tenant occupancy, economic and geopolitical uncertainty, inflation and higher interest rates, refinancing and debt-maturity risk, tenant defaults, and potential delays or failure of planned property sales. Management noted leasing activity but said these conditions could limit or delay leasing.
- Monument Circle’s consolidation contributed a $0.4 million gain in Q1; its low occupancy and operating costs are a drag. The Company recorded no Q2 adjustment to the prior loan-loss allowance after consolidation.
Most important facts for investors to verify
- Whether the announced $156 million of property sales close on schedule and generate proceeds sufficient to reduce debt.
- Liquidity and refinancing plans for the October 2024 revolver and term-loan maturities, including the scheduled $25 million repayment.
- Actual borrowing costs and interest-rate exposure following swap termination, and any further credit-rating changes.
- Leasing, occupancy and rent trends—especially at Monument Circle—and the effect of vacancies and expirations on cash flow and NOI.
- Whether operating cash generation supports distributions and capital needs, given the $0.01-per-share distribution and lender restrictions.
- That reported cash includes funds unavailable for general operations, and that FFO and NOI are non-GAAP measures with company-specific definitions.