Franklin Street Properties Corp. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; filed February 26, 2024. FSP is a REIT focused primarily on U.S. office properties, reporting one segment: real estate operations. The filing is annual, not a standalone fourth-quarter report.
Financial and operating results
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $145.7 million | $165.6 million | Down $19.9 million |
| Rental revenue | $145.4 million | $163.7 million | Down $18.3 million |
| Net income (loss) | $(48.1) million | $1.1 million | Down $49.2 million |
| Net income (loss) per share | $(0.47) | $0.01 | — |
| Funds From Operations (FFO), company-defined | $30.0 million | $41.3 million | Down $11.4 million |
| Property NOI | $66.0 million | $74.6 million | Down $8.6 million |
| Cash from operating activities | $17.9 million | $15.2 million | Up $2.6 million |
| Capital expenditures and equipment investment | $31.6 million | $54.9 million | Down $23.3 million |
Net loss reflects, in particular, $23.4 million of net losses on property sales and impairments of assets held for sale. 2023 included a $10.6 million gain on the Plano sale and an $18.9 million loss on the Miami sale; impairments were recorded for properties being marketed for sale. Lower rental income and higher interest expense also weighed on results. Comparative same-store NOI increased 1.6% to $56.8 million, excluding specified nonrecurring items and other excluded properties.
Interest expense rose to $24.3 million from $22.8 million. Rental revenue fell mainly because of property sales and lease expirations, partly offset by new leases. Total expenses declined to $171.0 million from $187.9 million, chiefly reflecting lower operating costs, taxes and depreciation following dispositions.
Portfolio, cash and debt
- At year-end, FSP reported 17 owned properties and consolidated Monument Circle, for 18 owned and consolidated properties totaling approximately 5.78 million square feet. The consolidated portfolio was 71.5% leased; owned properties alone were 74.0% leased, versus 75.6% at year-end 2022. Vacancy in owned properties was approximately 1.65 million square feet.
- FSP leased approximately 706,000 square feet during 2023. Average GAAP base rents on those leases were $29.71 per square foot, 7.4% above the average rents in the respective properties in 2022. Tenant improvements averaged $22.42 per square foot, commissions $10.56, and concessions approximately six months of free rent.
- Cash, cash equivalents and restricted cash totaled $127.9 million, compared with $6.6 million a year earlier. Cash flow from investing activities was $113.6 million, including $142.2 million of property-sale proceeds; financing activities used $10.3 million. Some cash was restricted or unavailable for corporate use, including $2.2 million held by Monument Circle.
- Year-end debt principal was approximately $405 million: $90 million under the BofA facility, $115 million under the BMO term loan and $200 million of Series A and B Notes. Approximately 50.6% of total debt was unhedged variable-rate debt. The BofA and BMO rates were each 8.47% at December 31, 2023; the notes carried rates of 4.49% and 4.76% before subsequent amendments.
- After year-end, amendments effective February 21, 2024 extended the BofA, BMO and both note maturities to April 1, 2026 and repaid approximately $102 million of debt. Remaining balances were approximately $67.3 million BofA, $86.0 million BMO and $149.6 million notes. The amendments raised note rates to 8.00%, imposed SOFR/base-rate floors, required guarantees and subsidiary-equity pledges, and direct most future disposition proceeds to debt repayment. A further 100-basis-point rate increase may apply if specified debt exceeds $200 million on March 31, 2025.
- FSP reported compliance with its debt financial covenants at December 31, 2023. The loan and note documents restrict quarterly dividends above $0.01 per share, subject to exceptions for REIT distribution and tax requirements. The board declared a $0.01-per-share distribution payable February 15, 2024.
Material changes, outlook and risks
- Four properties were sold during 2023 for aggregate gross proceeds of approximately $154.5 million. Disposition proceeds are intended primarily for debt repayment; management cautioned that ongoing sales may reduce revenue, FFO and capital expenditures in the short term.
- FSP continued to prioritize selective property sales and leasing vacant space, stating that it believes its share price does not reflect underlying real estate value. Management expected existing vacancy to remain actively marketed, but said economic conditions, geopolitical events and pandemic-related changes could delay or limit leasing. No numerical earnings or occupancy guidance was provided.
- Monument Circle, consolidated from January 1, 2023, was only 4.1% leased at year-end and generated rental income below operating expenses. Its $24 million secured loan had been extended to September 30, 2024; repayment depends on property cash flow or sale, with timing uncertain.
- A property sale agreement for an Atlanta property was terminated by the buyer. The property remained held for sale at year-end; FSP said it expected a sale within 12 months. The Richardson property, also classified as held for sale, sold January 26, 2024 for $35 million, consistent with a previously recorded $2.1 million impairment.
- Key risks include weak office demand and work-from-home trends, tenant defaults or lease nonrenewals, concentrated exposure to Denver, Houston and Dallas, rising variable-rate borrowing costs, refinancing and covenant compliance, and uncertainty around asset sale prices. Moody’s downgraded the company’s rating from Ba1 to Ba3 and then B3 in 2023; the company said the notes’ rates were no longer rating-based after the February 2024 amendment.
- Management cited continuing uncertainty about the long-term effects of COVID-19 and broader economic, interest-rate and geopolitical conditions. It could not estimate the full future impact. The company reported no material adverse legal proceedings and stated that disclosure controls and internal control over financial reporting were effective; the auditor gave unqualified opinions on the financial statements and internal controls.
Investor verification points
- Review the February 2024 debt amendments, repayment allocation, April 2026 maturities, interest costs, collateral requirements and the March 2025 debt threshold.
- Track leasing, occupancy and renewal activity, including the large vacancy at Monument Circle and the 2024–2026 lease expirations.
- Confirm the disposition status and proceeds for the Atlanta held-for-sale property, and how sale proceeds are applied to debt.
- Assess recurring operating cash flow against capital spending, debt service and distributions; 2023 operating cash flow was $17.9 million while capital expenditures and equipment investment were $31.6 million.
- Consider the distinction between GAAP net loss, company-defined FFO and NOI; these non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.