Franklin Street Properties Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Franklin Street Properties is a REIT focused on office properties, primarily in the Sunbelt and Mountain West. At quarter-end it owned 24 operating properties totaling approximately 6.9 million rentable square feet.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $41.3 million | $56.1 million | $83.6 million | $115.2 million |
| Net income (loss) | ($9.1 million) | $16.1 million | ($13.3 million) | $9.7 million |
| Net income (loss) per share, diluted | ($0.09) | $0.15 | ($0.13) | $0.09 |
| Funds From Operations (FFO) | $10.3 million | $14.7 million | $21.8 million | $32.7 million |
- Six-month operating cash flow was negative $10.2 million, compared with positive $6.1 million in 2021. Investing activities used $21.5 million; financing activities used $4.3 million.
- Cash, cash equivalents and restricted cash were $4.7 million at June 30, down from $40.8 million at year-end 2021. Management reported $182.5 million of revolver availability as of July 28, 2022.
- Debt carrying value totaled approximately $528.9 million: a $55 million bank revolver, $274.5 million in term loans and $199.4 million in senior notes. Principal debt was approximately $530 million. Major maturities include the $110 million BofA term loan in January 2023 and the $55 million revolver in January 2024. The company reported compliance with debt covenants.
- Six-month same-store NOI was $37.3 million, down 10.8% from $41.9 million. Total property NOI was $38.7 million, compared with $57.8 million.
Material changes versus the prior comparable period
- Revenue fell 26% in Q2 and 27% in the first half, mainly reflecting sales of properties and lease expirations. The portfolio had 24 properties versus 29 a year earlier; leased occupancy was 76.3% at June 30, versus 78.4% at December 31, 2021 and 79.5% at June 30, 2021.
- Expenses also declined as the portfolio contracted and debt was reduced. First-half interest expense decreased $7.6 million year over year, partly offset by higher rates.
- Despite lower expenses, earnings turned to losses. The 2021 comparisons included $20.6 million of net property-sale gains; 2022 included a $1.14 million loan-loss reserve on a related-party mortgage receivable.
- The company repurchased 846,739 shares for $4.8 million in Q1 2022 and none in Q2. It paid a $0.32-per-share special distribution in January and regular $0.09-per-share distributions for each of Q1 and Q2.
Outlook, commentary and risks
- Management estimated 2022 property-sale gross proceeds of $200 million to $300 million, subject to market and other conditions. No properties were sold in the first half. A sale agreement for two Broomfield, Colorado properties was reinstated in July, with closing expected in Q3 subject to customary conditions.
- Management said dispositions may reduce revenue, FFO and capital expenditures in the short term. Intended uses of proceeds include debt repayment, share repurchases, distributions and other corporate purposes.
- On July 5, 2022, the company replaced its regular quarterly dividend policy with a variable policy based on factors including estimated taxable income and REIT distribution requirements. It declared a $0.01-per-share distribution payable in August. Management did not provide a clear earnings or FFO forecast.
- Management believed cash, operating cash generation, revolver availability and property-sale proceeds would be sufficient for working capital, debt repayment and anticipated capital expenditures for at least 12 months. That assessment depends in part on operating performance and completing dispositions.
- Risks include weaker office demand, work-from-home effects, COVID-19 uncertainty, inflation, energy costs and rising interest rates. Management cited recession concerns and said current economic conditions were adversely affecting office-space demand. A Moody’s downgrade to Ba1 in 2021 was expected to add approximately $2.2 million to interest costs over the next 12 months, based on June 30 borrowings and rates.
- The $24 million Sponsored REIT mortgage loan matures June 30, 2023 and bears 7.51% interest. The company recorded a $1.14 million allowance after deterioration in market conditions and changes to valuation assumptions; repayment is expected through property operations or sale.
Investor verification priorities
- Track occupancy, leasing, tenant retention and same-store NOI, particularly in the company’s concentrated office markets.
- Verify execution, timing and proceeds of the planned 2022 dispositions, including the Broomfield sale, and how proceeds are allocated.
- Assess refinancing plans for the January 2023 BofA term-loan maturity and January 2024 revolver maturity, alongside floating-rate exposure and covenant headroom.
- Monitor the Sponsored REIT loan collateral value, allowance assumptions and repayment or sale progress before its June 2023 maturity.
- Evaluate the new variable dividend policy against cash generation, debt requirements and REIT distribution obligations; first-half operating cash flow was negative.