Franklin Street Properties Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is a REIT focused primarily on office properties, operating in one real estate segment. At quarter-end it owned 26 operating properties and one redevelopment property, with approximately 7.7 million rentable square feet.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $50.8 million | $62.2 million | $166.0 million | $186.0 million |
| Net income (loss) | $4.5 million | ($1.7 million) | $14.1 million | ($4.8 million) |
| Net income (loss) per share | $0.04 | ($0.02) | $0.13 | ($0.04) |
| Funds from Operations (FFO, non-GAAP) | $14.8 million | $20.4 million | $47.5 million | $61.9 million |
| Operating cash flow | — | $27.0 million | $56.0 million |
Q3 net income included $8.6 million of net property-sale gains; nine-month net income included $29.3 million of gains. FFO, which excludes property-sale gains, fell about 28% year over year for both the quarter and nine-month period. Nine-month same-store property NOI (non-GAAP) decreased 9.3% to $69.4 million.
Rental revenue declined 18.6% in Q3 and 10.9% year to date. Management attributed the decrease mainly to dispositions, a tenant bankruptcy, lease expirations and lower occupancy, partly offset by rent from new leases. Q3 total expenses fell 13.7%; nine-month expenses fell 5.1%, primarily due to lower property costs and depreciation following sales. Interest expense was $7.9 million in Q3 and $26.6 million year to date.
At September 30, total assets were $1.51 billion, total liabilities $751.5 million and stockholders’ equity $755.1 million. Cash, cash equivalents and restricted cash totaled $9.7 million. Debt principal was approximately $675 million: $310 million BAML term loan, $165 million BMO term loan and $200 million senior notes; the BAML revolver had no balance drawn and $600 million capacity. Management reported compliance with debt covenants. The company paid $29.0 million in distributions during the first nine months and repurchased $8.2 million of stock.
Material changes and business developments
- Leasing of operating properties was 80.0% at September 30, down from 85.0% at December 31, 2020. The portfolio had approximately 1.536 million square feet vacant. The company leased about 892,000 square feet during the first nine months, at an average GAAP base rent 2.0% above average rents in the respective properties.
- Disposition proceeds were principally used to reduce debt. During the first nine months, the company sold seven properties for aggregate gross proceeds of approximately $339 million and reported $29.3 million in net gains across property sales.
- Debt repayments included the remaining $100 million JPM term loan, a $55 million BMO tranche and $90 million of the BAML term loan. Debt carrying values fell from $920.0 million at year-end 2020 to $672.9 million at September 30, 2021.
- Moody’s downgraded the company’s senior unsecured debt to Ba1 from Baa3 in June. Management estimated approximately $0.8 million of additional interest expense for the remainder of 2021 and $3.2 million over a full year, based on September debt balances.
Outlook, risks and unusual items
Management expected 2021 property dispositions to generate gross proceeds of approximately $563 million to $600 million. As of October 25, dispositions had generated approximately $563 million, with about $508 million of debt repaid. The company said sales may reduce revenue, FFO and capital expenditures in the near term; proceeds could fund debt repayment, stock repurchases, required special distributions or general corporate purposes. Management believed available cash, operating cash flow and financing availability would cover working capital and anticipated capital expenditures for at least 12 months. No earnings or FFO guidance was provided.
COVID-19 and office-market uncertainty remain material risks, including tenant rent concessions or nonpayment, weaker leasing and occupancy, lower rents, tenant defaults, property-value declines and refinancing or borrowing-cost pressures. Management said all properties remained open during the first nine months, but could not estimate the pandemic’s future financial impact. Other risks include interest-rate exposure, energy-price effects in certain markets, debt-market access and lease-up needs. The company had one $21 million secured loan to a Sponsored REIT, due December 2022 at quarter-end; it reported no impairment.
Subsequent events: the company agreed to sell two Chantilly, Virginia properties for approximately $40 million, subject to customary closing conditions. It sold 999 Peachtree on October 22 for approximately $223.9 million, reporting a gain of approximately $86.8 million, and used proceeds to repay $215 million of BAML debt. On October 29, it amended the Sponsored REIT loan, extended maturity to June 30, 2023, advanced another $3 million and deferred principal and interest payments to maturity. The company declared a $0.09-per-share distribution payable November 11.
Key investor verification points
- Confirm the effect of continued asset sales on recurring rental revenue, FFO, same-store NOI and portfolio occupancy, apart from one-time disposition gains.
- Review debt maturities, refinancing plans and the effect of the Ba1 rating on borrowing costs, especially the BAML revolver’s scheduled maturity and extension options.
- Track leasing, tenant renewals, rent collection and concessions amid office-market and COVID-19 uncertainty.
- Verify completion and final economics of the Chantilly sale and the use of proceeds from 999 Peachtree; distinguish post-quarter events from September 30 balances.
- Assess the amended $24 million Sponsored REIT loan’s repayment prospects, collateral value and deferred payment terms.
- Evaluate whether operating cash generation supports distributions and repurchases as dispositions reduce the asset and revenue base.