Franklin Street Properties Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Franklin Street Properties is an office-focused REIT. At quarter-end it owned and consolidated 20 properties totaling approximately 6.2 million rentable square feet, including Monument Circle, consolidated effective January 1, 2023.
Financial performance and position
| Metric | Q3 / September 30, 2023 | Comparable period / change |
|---|---|---|
| Total revenue | $36.9 million | Down $3.9 million from Q3 2022 ($40.8 million) |
| Net income (loss) | $(45.7) million; $(0.44) per share | Q3 2022 net income $17.2 million; $0.17 per share |
| Nine-month revenue | $110.9 million | Down $13.5 million from 2022 |
| Nine-month net income (loss) | $(51.7) million; $(0.50) per share | 2022 net income $4.0 million; $0.04 per share |
| Funds from Operations (FFO) | $7.5 million for Q3; $23.0 million for nine months | Q3 2022: $9.0 million; nine months 2022: $30.9 million |
| Operating cash flow | $11.5 million for nine months | $9.4 million in the 2022 period |
| Cash and cash equivalents | $13.0 million at September 30 | $6.6 million at December 31, 2022; includes $2.4 million held by Monument Circle unavailable for company operations |
| Total assets / stockholders’ equity | $1.152 billion / $711.3 million | At December 31, 2022: $1.242 billion / $768.7 million |
| Debt | $394.2 million carrying value; approximately $395 million principal | Includes $80 million revolver, $115 million BMO term loan, and $200 million senior notes principal |
Q3 expenses were $42.8 million, including $6.2 million of interest expense. Nine-month interest expense was $18.1 million, up $1.0 million year over year as higher borrowing rates more than offset lower debt balances. Same-store property NOI increased 6.3% to $50.1 million for the first nine months, while total property NOI declined 9.7% to $50.9 million, reflecting dispositions and other portfolio changes.
Material changes versus prior periods
- Revenue fell primarily because of property sales and lease expirations; Q3 leased occupancy for owned and consolidated properties was 72.4%, versus 75.9% a year earlier. The company reported owned properties alone at 74.8% leased at September 30.
- Q3 included a $39.7 million net loss on property sales and impairment, principally impairments on properties held for sale in Miami and Atlanta. Those impairments drove the reported quarterly and nine-month losses. Q3 2022 included a $24.1 million gain on sale.
- Operating and property tax expenses and depreciation declined, largely due to dispositions. For the first nine months, property dispositions also contributed to lower rental revenue and lower total NOI.
- Monument Circle was consolidated from January 1, 2023, producing a $0.4 million consolidation gain and bringing its property and operations onto the company’s financial statements. It was only 4.1% leased at quarter-end.
- Quarterly distributions were $0.01 per share in each of the first three quarters of 2023, compared with $0.09 per share in the first two quarters of 2022 and a $0.32-per-share special distribution paid in January 2022.
Liquidity, outlook, risks, and unusual items
- Near-term maturities: The BofA Revolver and BMO Term Loan mature October 1, 2024. Their combined outstanding balance was approximately $195 million at September 30 and $205 million at November 7, 2023. Both facilities carried an 8.43% stated rate at quarter-end; the company had terminated its BMO interest-rate swaps in February and had no derivatives at September 30.
- Funding plan and uncertainty: Management is negotiating extensions or refinancing and plans to use property-sale proceeds mainly to repay debt. As of November 7, cash was approximately $73.5 million. The company expected about $96.5 million of net proceeds from two scheduled sales, which together with cash would cover approximately $170 million of the roughly $205 million maturing in October 2024. Management said its plans were probable and alleviated substantial doubt about going concern, but warned that refinancing or asset sales may not be completed on acceptable terms or in time; failure to repay or refinance could trigger defaults and materially harm financial condition.
- Subsequent property sale: On October 26, the company sold its Plano, Texas property for $48.0 million, reporting a gain of approximately $10.6 million. At quarter-end, two other properties in Miami and Atlanta were under sale agreements with expected aggregate sale prices of approximately $108 million and recorded aggregate impairments of approximately $39.7 million. The filing also described another prospective disposition with expected net proceeds of approximately $43.6 million.
- Debt and covenants: The company reported compliance with financial covenants at September 30. Credit agreements restrict quarterly dividends above $0.01 per share, subject to REIT-related exceptions. Moody’s downgraded senior unsecured debt to B3 in June 2023; management anticipated about $1.0 million of additional annual interest expense on the senior notes based on borrowings at October 26.
- Operating risks: Management cited weak office-space demand, work-from-home effects, inflation, higher interest rates, geopolitical and economic uncertainty, tenant defaults, leasing costs, and possible difficulty refinancing. Approximately 49.4% of total debt was unhedged variable-rate debt at September 30. Management expects dispositions and leasing vacant space to support shareholder value, while acknowledging revenue, FFO, and capital expenditures may decline in the short term. No numerical earnings or FFO guidance was provided.
- The filing states that the BMO loan requires an additional repayment by April 1, 2024, but gives differing amounts in separate sections ($15 million in the debt note and $25 million in MD&A).
Investor verification priorities
- Track completion and net proceeds of announced property sales, and compare proceeds with debt repayments and the stated refinancing plan.
- Confirm refinancing or extension progress for the $205 million of BofA and BMO borrowings due October 1, 2024, and assess the subsequent $116 million Series A Notes maturity in December 2024.
- Reconcile the filing’s conflicting BMO scheduled repayment amounts ($15 million versus $25 million) and monitor covenant and going-concern disclosures.
- Monitor occupancy, leasing costs, rent concessions, Monument Circle’s vacancy, and the effect of further office-market weakness on rental cash flow and property valuations.
- Assess the sustainability of the $0.01-per-share quarterly distribution given operating cash flow, debt service, asset sales, and REIT distribution requirements.