Franklin Street Properties Corp. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. Franklin Street Properties is a REIT focused on U.S. office real estate, primarily in Sunbelt and Mountain West markets. At quarter-end it owned 32 operating properties and three redevelopment properties, and managed two Sponsored REITs.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $63.0 million | $64.7 million |
| Net loss | $1.1 million; $0.01 per share | $1.2 million; $0.01 per share |
| Operating cash flow | $7.2 million | $9.5 million |
| Investing cash flow | $(20.1) million | $(17.1) million |
| Funds From Operations (FFO), non-GAAP | $21.3 million | $22.1 million |
| Property NOI, non-GAAP | $32.9 million | $33.0 million |
| Cash and restricted cash | $17.3 million | $9.8 million at Dec. 31, 2019 |
| Total assets | $1.85 billion | $1.84 billion at Dec. 31, 2019 |
Rental revenue was $62.6 million. Total expenses were $64.0 million, including $9.1 million of interest expense and $22.3 million of depreciation and amortization. The filing does not report a conventional operating-margin measure. Comparative same-store NOI declined 0.8% to $32.9 million.
At March 31, debt had a carrying value of approximately $995.2 million: $30 million drawn on the revolver, $766.1 million of term loans, and $199.1 million of senior notes. Contractual principal outstanding was $1.0 billion. The $600 million BAML revolver had $570 million available at quarter-end. Management reported compliance with debt covenants. The company paid a $0.09-per-share quarterly distribution, totaling $9.7 million.
Changes versus the prior comparable period
- Revenue decreased $1.7 million, mainly from lower rental revenue ($0.8 million) and lower Sponsored REIT loan interest income and fees ($0.9 million), including following repayment of about $51 million of loans in June 2019.
- Total expenses fell $2.0 million, reflecting lower property costs, depreciation and amortization, and interest expense. Net loss improved by $0.1 million.
- FFO decreased $0.8 million; property NOI was nearly flat, while same-store NOI declined 0.8%.
- Operating-property occupancy was 85.4%, down from 88.5% at March 31, 2019 and 87.6% at December 31, 2019. The decline from year-end reflected expirations and terminations exceeding new leasing.
- Cash increased $7.5 million from year-end, supported by net revolver borrowings. Property improvements and equipment used $20.1 million of investing cash flow.
- Unrealized swap losses reduced other comprehensive income by $18.4 million; derivative liabilities rose to $23.0 million from $7.7 million at year-end. This noncash mark-to-market movement drove most of the quarter’s comprehensive loss.
Outlook, risks, and unusual items
- COVID-19: Management could not estimate the pandemic’s financial impact. It warned of potential rent concessions and nonpayment, weaker leasing and occupancy, higher operating or capital costs, lower property values, and reduced access to or higher costs of financing. All properties remained open through April 30; approximately 98% of April rent due had been collected as of April 28. Some tenants had requested concessions.
- Liquidity outlook: Management believed cash, internally generated cash, and available financing would cover working capital and anticipated capital expenditures for at least 12 months. Cash was approximately $43.0 million and revolver availability approximately $545 million on April 28. Dividends depend significantly on rental income; no earnings or dividend guidance was provided.
- Leasing and redevelopment: Q1 leasing totaled approximately 280,000 square feet, at a weighted average 6.3-year term. Management expected COVID-19 to limit or delay leasing. It anticipated completing Blue Lagoon redevelopment by year-end 2020 and Forest Park by June 30, 2020; remaining costs and timing remain relevant execution risks.
- Debt and hedging: Significant maturities include $205 million in 2021, $400 million in 2023, and $281 million in 2024. Most term debt interest exposure was hedged, but the company remained exposed to variable-rate borrowings and swap fair-value changes. About $10.4 million of accumulated swap losses was expected to be reclassified to earnings over the next 12 months.
- The board declared a $0.09-per-share distribution on April 3, payable May 7, 2020. The company reported no material legal proceedings and no defaults; management stated that controls were effective.
Important facts for investors to verify
- Subsequent rent collections, concession requests, delinquencies, and occupancy trends, especially in energy-sensitive markets.
- Revolver usage and availability, refinancing plans for upcoming maturities, covenant headroom, and continued covenant compliance.
- Whether operating cash flow can support redevelopment spending and distributions without sustained additional borrowing.
- Progress, leasing, remaining costs, and completion timing for Blue Lagoon, Forest Park, and 801 Marquette.
- The duration and earnings impact of accumulated swap losses, alongside the risks and terms of future rate hedging.