Franklin Street Properties Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Franklin Street Properties is a REIT focused on office real estate, principally in U.S. Sunbelt and Mountain West markets. At quarter-end it owned 24 operating properties totaling 6.9 million rentable square feet, down from 33 properties and 9.5 million square feet a year earlier.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $42.3 million | $59.0 million |
| Net loss | $4.2 million; $0.04 per share | $6.5 million; $0.06 per share |
| Property NOI | $19.6 million | $29.8 million |
| Funds From Operations (FFO) | $11.6 million | $18.0 million |
| Cash from operating activities | $(9.8) million | $1.6 million |
| Capital improvements and equipment | $10.0 million | $16.0 million |
Rental revenue declined $16.8 million, primarily due to sales of ten properties over the prior twelve months and lease expirations. Total expenses fell $19.1 million, including lower property costs, depreciation and interest, largely reflecting the smaller portfolio and reduced debt. Same-store NOI decreased 7.3% to $19.6 million. Period-end portfolio occupancy was 77.3%, down from 81.9% at March 31, 2021; management also reported a 1.1 percentage-point decline from year-end 2021.
Cash, cash equivalents and restricted cash were $11.0 million at March 31, 2022, versus $40.8 million at year-end. Total assets were $1.34 billion and stockholders’ equity was $769.9 million. Debt carrying amounts totaled approximately $513.8 million: $40 million on the new revolver, $274.4 million in term loans and $199.4 million in senior notes. Principal debt in the maturity schedule totaled $515 million. The company reported covenant compliance across its facilities.
Changes, liquidity and capital allocation
- Revenue, property NOI and FFO fell materially year over year as the company disposed of properties and occupancy and rental income weakened.
- Operating cash flow was negative, and cash decreased $29.8 million in the quarter. Financing cash outflow included $42.6 million of distributions (including a $33.3 million special dividend declared in December and paid in January), $4.8 million of share repurchases and $2.6 million of financing costs; net revolver borrowings partly offset these uses.
- In January 2022 the company replaced its former revolver with a new $237.5 million Bank of America facility, of which $40 million was drawn at quarter-end. Management reported $197.5 million available on April 28 and expects cash, operating cash generation and revolver availability to cover working capital and anticipated capital expenditures for at least 12 months.
- The company repurchased 846,739 shares for $4.8 million during Q1 at an average $5.72 per share. The remaining authorization was approximately $26.9 million at March 31.
- Quarterly distributions were $0.09 per share. A further $0.09 per share distribution was declared April 1, payable May 5, 2022.
Outlook, risks and notable items
- Management anticipates 2022 property dispositions generating approximately $250 million to $350 million in gross proceeds. Proceeds may be used for debt repayment, share repurchases, required special distributions and general corporate purposes. Management cautioned that further dispositions could reduce revenue, FFO and capital expenditures in the short term.
- Management believes the stock price does not reflect the value of the underlying real estate and intends to pursue selected sales and improve occupancy. Q1 leasing totaled approximately 131,000 square feet; new leases averaged 8.6 years, with average GAAP base rents 2.4% above the applicable properties’ prior average rents.
- Key risks include office-space demand and tenant occupancy, COVID-19 and work-from-home effects, inflation and energy costs, rising interest rates, geopolitical uncertainty and the ability to refinance debt or maintain distributions. Management estimated a June 2021 credit-rating downgrade could add approximately $2.2 million to interest costs over the next 12 months, based on March 31 borrowings and rates.
- The remaining BMO term loan is hedged through January 2024; other variable-rate exposure remains. The filing reports a $5.0 million Q1 unrealized derivative gain in other comprehensive income and a derivative liability of $0.2 million at quarter-end.
- The company’s $24 million mortgage loan to Sponsored REIT FSP Monument Circle LLC matures June 30, 2023, carries a 7.51% fixed rate and had no reported impairment. Management expects repayment at maturity or earlier from refinancing, property cash flows or another capital event.
- Management identified no material legal proceedings or changes in contractual obligations. Disclosure controls were judged effective as of March 31, 2022.
Investor verification priorities
- Track occupancy, lease expirations, leasing costs and rent collection, particularly in weaker properties and markets.
- Verify completion, timing and net proceeds of the projected $250–$350 million of 2022 dispositions and how proceeds are allocated.
- Monitor operating cash flow, liquidity after distributions and repurchases, and the company’s ability to fund property improvements.
- Review debt maturities, refinancing plans, floating-rate exposure, credit-rating effects and continued covenant compliance.
- Assess repayment prospects and collateral value for the $24 million Sponsored REIT loan.