Franklin Street Properties Corp. (NYSE American: FSP) — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019. The filing also reports selected fourth-quarter results; it is an annual filing, not a standalone quarterly report.
Business context
FSP is a REIT focused primarily on U.S. office properties, with one reportable segment: real estate operations. Its strategy emphasizes infill and central business district offices in the Sunbelt and Mountain West, alongside selected opportunistic markets. At year-end, it owned 35 office properties: 32 operating and three in redevelopment. About 78% of the owned portfolio’s square footage was in Atlanta, Dallas, Denver, Houston and Minneapolis.
Financial and operating performance
| Metric | FY2019 / Dec. 31, 2019 | FY2018 / Dec. 31, 2018 |
|---|---|---|
| Total revenue | $269.1 million | $268.9 million |
| Net income | $6.5 million; $0.06 per share | $13.1 million; $0.12 per share |
| Funds from operations (FFO; non-GAAP) | $97.5 million | $102.5 million |
| Property NOI | $142.5 million | $144.3 million |
| Cash from operating activities | $81.9 million | $80.2 million |
| Cash used in investing activities | $19.6 million | Cash provided: $25.6 million |
| Cash used in financing activities | $63.7 million | $104.5 million |
| Cash and cash equivalents | $9.8 million | $11.2 million |
| Total assets / liabilities / equity | $1,842.7 million / $1,056.3 million / $786.4 million | $1,898.1 million / $1,060.5 million / $837.6 million |
| Distributions declared per share | $0.36 | $0.46 |
Rental revenue rose $1.8 million to $265.5 million, while related-party management fees and loan interest declined $1.5 million to $3.5 million, mainly following repayment of a $51 million Sponsored REIT loan. Expenses were nearly flat overall: higher property costs, taxes and G&A were largely offset by lower depreciation and interest expense. The 2018 comparison included $6.8 million of equity income from non-consolidated REITs, which were liquidated in 2018; this contributed to the year-over-year decline in net income.
Comparative same-store NOI increased 2.1% to $134.4 million after excluding specified nonrecurring items. Total property NOI decreased 1.3%; the filing attributes the difference in part to non-operating, development or redevelopment properties and nonrecurring items. FFO is a non-GAAP measure and should not be treated as cash flow or liquidity.
For fourth-quarter 2019, revenue was $69.0 million and net income was $3.6 million ($0.03 per share), compared with $66.6 million and $1.4 million ($0.01 per share), respectively, in fourth-quarter 2018.
Debt and liquidity
At December 31, 2019, debt principal totaled approximately $970 million: $400 million BAML term loan, $220 million BMO term loan, $150 million JPM term loan and $200 million senior notes. There were no borrowings on the $600 million BAML revolving facility at year-end. The debt is unsecured; the company reported no mortgage debt on its properties. Cash was $9.8 million, and operating cash flow was $81.9 million. Management said cash, internally generated funds and existing financing should cover working capital and anticipated capital expenditures for at least 12 months. The company reported compliance with its debt covenants.
Nearer maturities include the $150 million JPM loan and $55 million BMO tranche A in November 2021; the BAML revolver initially matures in January 2022, with two six-month extension options. The $400 million BAML term loan matures in January 2023. Interest-rate swaps hedge major portions of term debt, but some exposure remains to variable rates. Moody’s rating was Baa3, which the filing describes as investment grade.
Material changes, outlook and risks
- Operating-property leased occupancy fell to 87.6% from 89.0% at year-end 2018, as lease expirations and terminations exceeded leasing. Vacancy increased to approximately 1.175 million square feet from 1.046 million.
- During 2019, FSP leased approximately 1.417 million square feet, including 883,000 square feet to existing tenants. Average GAAP base rent on those leases was $31.78 per square foot, 10.9% above average rents in the relevant properties, with tenant improvements averaging $34.44 per square foot and commissions $13.51 per square foot.
- Management expected positive leasing activity during 2020 and described most major property markets as steady or improving. This is commentary, not quantified earnings or FFO guidance. Management also noted that portfolio repositioning may pressure near-term results.
- Redevelopment and lease-up remain important execution items. Blue Lagoon was 73.1% leased under a new 16-year lease, with completion anticipated by year-end 2020; Forest Park completion was anticipated by June 2020. 801 Marquette was 37.0% leased at year-end and remained unstabilized. Estimated total redevelopment and lease-up investment across the three properties was $72.1 million, of which $32.5 million had been incurred.
- Major risks include office-market and tenant demand, concentrated exposure to several metropolitan areas and energy-influenced markets, lease expirations and tenant defaults, refinancing and covenant risks, interest rates and the transition away from LIBOR, and the performance of the $21 million Sponsored REIT mortgage loan. The loan matures in December 2020; management recorded no loss allowance. The auditor identified its measurement as a critical audit matter, as well as impairment assessments for real estate assets.
- FSP declared a $0.09-per-share cash distribution in January 2020, payable in February. Future distributions are not guaranteed and depend substantially on rental income and interest costs.
Ernst & Young LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Important facts for investors to verify
- Leasing, occupancy and renewal performance, including the timing and cost of backfilling the 2020–2022 lease expirations.
- Actual spending, completion dates and lease-up progress for Blue Lagoon, Forest Park and 801 Marquette.
- Repayment or refinancing of the $21 million Sponsored REIT loan due December 2020 and the debt maturities beginning in 2021.
- Available liquidity, covenant headroom and the impact of interest-rate or LIBOR-transition changes on financing costs.
- Whether operating cash flow and property performance support the current distribution level, given lower declared distributions and FFO year over year.