Franklin Street Properties Corp. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Franklin Street Properties is a REIT focused on U.S. office properties, primarily in the Sunbelt and Mountain West. At quarter-end, it owned 22 properties totaling 6.43 million rentable square feet; approximately 83% of the portfolio was in Dallas, Denver, Houston and Minneapolis.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $40.8 million | $50.8 million | $124.4 million | $166.0 million |
| Net income | $17.2 million | $4.5 million | $4.0 million | $14.1 million |
| FFO (non-GAAP) | $9.0 million | $14.8 million | $30.9 million | $47.5 million |
- Q3 earnings included a $24.1 million gain on property sales; excluding that gain, reported net income was substantially lower. For the first nine months, lower rental revenue and a $1.9 million loan-loss reserve contributed to the decline in net income.
- Nine-month net cash from operating activities was $9.4 million, down from $27.0 million. Investing activities provided $64.0 million, including $102.0 million of property-sale proceeds, offset by $38.0 million of property improvements and equipment. Financing activities used $105.4 million, principally for debt repayment and distributions.
- Cash, cash equivalents and restricted cash were $8.7 million at September 30, 2022, versus $40.8 million at December 31, 2021. Total assets were $1.262 billion and stockholders’ equity was $772.6 million.
- Debt principal was approximately $430 million: $65 million drawn on the BofA revolver, $165 million under the BMO term loan, and $200 million of senior notes. The company repaid its remaining $110 million BofA term loan in September. Scheduled maturities include $346 million in 2024 and $84 million in 2027. The BMO loan’s effective rate was 4.04%; the revolver rate was 5.11% at quarter-end. About 15% of total debt was unhedged variable-rate debt.
- Portfolio occupancy was 75.9% at September 30, down from 78.4% at December 31, 2021 and 80.0% a year earlier. Same-store NOI for the first nine months fell 8.6% year over year; comparative same-store NOI after the company’s stated nonrecurring-item adjustment fell 11.6%.
Material changes and notable items
- Rental revenue declined $10.0 million in Q3 and $41.7 million in the first nine months, primarily reflecting property sales and lease expirations. The company sold two Broomfield, Colorado properties for $102.5 million in August, recording a $24.1 million net gain.
- Lower expenses partly offset lost revenue: nine-month interest expense decreased $9.4 million, mainly because of lower debt outstanding, while higher interest rates partly offset the reduction.
- The company recorded a $1.9 million allowance for credit losses on its $24 million secured Sponsored REIT mortgage loan. Its carrying value, net of allowance, was $22.1 million. The loan bears 7.51% interest and matures June 30, 2023; repayment is expected from property operations or sale.
- The quarterly distribution policy became variable in July. The Q3 distribution was reduced to $0.01 per share from $0.09 per share in each of the first two quarters. The board declared another $0.01 per share payable in November.
- The filing gives inconsistent revolver availability: one passage reports $172.5 million available as of October 28, while another reports $162.5 million. The stated $237.5 million facility less $65 million drawn implies $172.5 million before any other adjustments.
Outlook, risks and contingencies
- Management estimated 2022 property dispositions would generate $102.5 million to $200 million in gross proceeds; $102.5 million had been realized by September 30. Proceeds could support debt repayment, share repurchases, distributions and general corporate purposes. Management said dispositions may reduce revenue, FFO and capital expenditures in the short term.
- Management believed available cash, operating cash flows, revolver availability and anticipated property-sale proceeds would meet working-capital needs, debt repayment and expected capital expenditures for at least 12 months. This is management’s assessment, not a guarantee.
- Management cited elevated uncertainty from rising interest rates and inflation, recession concerns, geopolitical events, COVID-19 and work-from-home patterns. These could pressure office demand, occupancy, rents, property values, refinancing and distributions. Leasing activity may be delayed; tenant defaults, rent concessions and higher leasing costs remain risks.
- The company was in compliance with the financial covenants on its BMO loan, BofA revolver and senior notes at quarter-end. It reported no material change in contractual obligations or off-balance-sheet arrangements and no legal proceedings expected to have a material adverse effect.
- The filing states disclosure controls were effective as of September 30, 2022, and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the two disclosed figures for revolver availability and confirm current borrowing capacity and liquidity.
- Track leasing, occupancy, renewals and tenant concessions, especially in the company’s concentrated office markets.
- Assess the value and repayment prospects of the Sponsored REIT loan before its June 2023 maturity, including the assumptions underlying the credit-loss allowance.
- Monitor debt refinancing needs and interest-rate exposure ahead of the 2024 maturities, along with covenant headroom.
- Evaluate whether property-sale proceeds and the variable dividend policy can support distributions while rental revenue and FFO are declining.