Franklin Street Properties Corp. — 2022 Form 10-K
Business and reporting period: The filing reports the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter results report. Franklin Street Properties is a REIT focused primarily on U.S. office properties. At year-end it owned 21 properties totaling approximately 6.24 million square feet, managed one Sponsored REIT, and held one mortgage loan to a Sponsored REIT.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $165.6 million | $209.4 million |
| Rental revenue | $163.7 million | $207.6 million |
| Net income | $1.1 million | $92.7 million |
| Net income per share, diluted | $0.01 | $0.87 |
| Funds From Operations (FFO, non-GAAP) | $41.3 million | $58.5 million |
| Property Net Operating Income (NOI, non-GAAP) | $74.6 million | $104.1 million |
| Cash provided by operating activities | $15.2 million | $36.4 million |
Margins and occupancy: Same-store NOI declined 11.2% to $64.4 million after excluding specified nonrecurring items. The owned portfolio was reported as 75.6% leased at December 31, 2022, down from 78.4% a year earlier; vacancy was approximately 1.524 million square feet. During 2022, the company leased approximately 435,000 square feet, at average GAAP base rent of $33.27 per square foot.
Cash, liquidity and debt: Cash, cash equivalents and restricted cash totaled $6.6 million at year-end, down from $40.8 million. Operating cash flow was $15.2 million; investing activities provided $74.0 million, largely from property sales, while financing activities used $123.4 million. Year-end debt principal was approximately $413 million: $48 million under the BofA Revolver, $165 million under the BMO Term Loan and $200 million of senior notes. The owned properties were not subject to mortgage debt. Management said cash, operating cash generation, property dispositions and revolver availability were expected to cover working capital and anticipated capital expenditures for at least 12 months.
Post-year-end financing: On February 10, 2023, the company repaid $40 million of the BMO Term Loan using a revolver draw, leaving $125 million under the term loan and $105 million drawn on the revolver. Amendments extended both facilities’ stated maturities to October 1, 2024, set their margins at 300 basis points over SOFR, and reduced revolver capacity from $237.5 million to $150 million, with further reductions scheduled in 2023 and 2024. A further $25 million BMO repayment is required on or before April 1, 2024. The company also received approximately $4.3 million after terminating its remaining BMO interest-rate swaps.
Changes versus prior year
- Revenue fell $43.7 million, primarily because of property sales in 2021 and 2022 and lease expirations. Expenses declined $40.7 million, mainly due to the smaller portfolio and lower interest expense.
- Net income fell $91.6 million. Property-sale gains were $27.9 million in 2022 versus $113.1 million in 2021; the 2022 result also included a $4.2 million mortgage-loan credit-loss provision.
- FFO decreased $17.1 million, and property NOI decreased $29.5 million. Dispositions reduced the income-producing portfolio; management cautioned that its sale-and-leasing strategy may reduce revenue, FFO and capital expenditures in the near term.
- Cash distributions paid to stockholders were $54.0 million in 2022. The board adopted a variable quarterly dividend policy in July 2022, replacing the prior regular quarterly policy.
Outlook, risks and unusual items
- Disposition strategy: 2022 property sales generated $130.3 million in gross proceeds and gains of $27.9 million; the company said proceeds were intended primarily for debt repayment. It continued to pursue selective sales and lease vacant space. A January 2023 agreement contemplated a sale of an Illinois property, subject to customary closing conditions.
- Sponsored REIT loan: The $24 million principal loan, bearing 7.51% at year-end and due June 30, 2023, was classified as a troubled debt restructuring. The company recorded a $4.2 million allowance, leaving a $19.8 million net receivable; accrued interest and exit fees were also outstanding. Repayment timing and amount depend on property cash flow or a sale, and are uncertain.
- Office market and leasing: Management cited work-from-home practices, COVID-19 effects, economic uncertainty, inflation and higher interest rates as pressures on office demand and leasing. Lease expirations represent 9.2% of annualized rent in 2023 and 20.3% in 2024. The portfolio is concentrated in Denver, Dallas, Houston and Minneapolis, with energy-market exposure in several of those locations.
- Debt and distributions: Variable-rate borrowing costs, refinancing risk, covenant compliance and the below-investment-grade Moody’s Ba1 rating are material considerations. Credit agreements restrict quarterly dividends above $0.01 per share, subject to exceptions for REIT taxable-income and distribution requirements. The board discontinued its $50 million share repurchase authorization in February 2023.
- Other risks and controls: Risks include tenant defaults, property-value declines, environmental and regulatory costs, climate-related physical effects, and the ability to retain REIT status. The filing reports no material adverse effect expected from ordinary-course legal matters. Management and the independent auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Current property occupancy, leasing progress, tenant retention and upcoming 2023–2024 lease expirations.
- The collateral value, expected sale or operating cash flows, and repayment prospects for the Sponsored REIT loan and related accrued amounts.
- Compliance with debt covenants, available revolver capacity, interest-rate exposure and refinancing plans for maturities beginning in 2024.
- How property dispositions affect recurring revenue, FFO, NOI and the company’s ability to fund dividends and capital spending.
- The board’s variable-dividend decisions and the effect of credit-agreement restrictions and REIT distribution requirements.
FFO and NOI are non-GAAP measures and should be considered alongside GAAP earnings and cash flows; the filing notes these measures may not be comparable with similarly named measures at other REITs.