Franklin Street Properties Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020. The company is a REIT focused on office properties, primarily in the U.S. Sunbelt and Mountain West. At quarter-end it owned 33 operating properties and one redevelopment property.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $59.0 million | $63.0 million |
| Net loss | $6.5 million; $0.06 per share | $1.1 million; $0.01 per share |
| Funds From Operations (FFO) | $18.0 million | $21.3 million |
| Property NOI | $29.8 million | $32.9 million |
| Cash from operating activities | $1.6 million | $7.2 million |
| Cash, cash equivalents and restricted cash | $4.1 million | $4.2 million at December 31, 2020 |
| Total assets | $1.789 billion | $1.793 billion at December 31, 2020 |
| Total liabilities | $1.034 billion | $1.025 billion at December 31, 2020 |
Rental revenue was $58.6 million. Total expenses were $65.4 million, including $24.4 million of depreciation and amortization and $8.6 million of interest expense. The filing does not present a conventional operating margin measure. NOI was down 9.5% overall; comparative same-store NOI declined 7.8%.
Quarter-end debt carrying value was approximately $944.4 million; scheduled principal outstanding was $947.5 million. The debt schedule shows $155 million due in 2021, including the $100 million JPMorgan term loan and $55 million BMO tranche A, both maturing November 30, 2021. The company had $27.5 million drawn on its $600 million BAML revolver, leaving reported availability of $572.5 million. It reported compliance with financial covenants across its credit facilities and senior notes.
Quarterly investing activities used $16.0 million, principally for property improvements, fixtures and equipment. Financing activities provided $14.3 million, including $24.0 million of net revolver borrowings, partly offset by $9.7 million of shareholder distributions. The quarterly distribution was $0.09 per share.
Changes versus the comparable period
- Revenue fell $3.9 million, primarily because of a property sale, a tenant bankruptcy in December 2020, and lease expirations and terminations; new lease commencements partly offset the decline.
- Leased occupancy in operating properties was 81.9% at March 31, 2021, versus 85.4% a year earlier and 85.0% at December 31, 2020. Vacancy increased to approximately 1.725 million square feet from 1.397 million at year-end.
- Expenses rose $1.4 million. Higher depreciation and amortization and general and administrative costs more than offset lower real estate operating costs and interest expense.
- FFO decreased about 15.4% year over year. Net loss widened by $5.4 million.
- Other comprehensive income included a $3.6 million unrealized gain on derivative instruments, compared with an $18.4 million loss in Q1 2020; this reduced comprehensive loss to $2.8 million.
Outlook, commentary and risks
- Management’s 2021 disposition strategy targets aggregate gross proceeds of $350 million to $450 million, primarily to repay debt. Management cautioned that dispositions are likely to reduce revenue and FFO in the short term, with debt repayment potentially lowering interest expense.
- A purchase agreement for three Atlanta office properties—One and Two Ravinia Drive and One Overton Park—provides for approximately $219.5 million. Closing was expected around May 17, 2021, subject to customary conditions and possible extensions; completion was not assured.
- Management said cash, expected operating cash flow and available financing should cover working capital and anticipated capital expenditures for at least 12 months. Management expected to exercise extension options on the JPM loan and BAML revolver or seek refinancing or extensions.
- The COVID-19 pandemic and related office-market uncertainty may affect tenant demand, leasing, occupancy, rent collection, concessions, property values and access or cost of financing. The company reported collecting more than 99% of March 2021 rental receipts due as of March 31, while noting that future concessions or nonpayment remained possible. All properties remained open through April 30.
- During Q1, the company leased approximately 377,000 square feet, largely to existing tenants, at an average 9.3-year term. New leases averaged $28.46 per square foot in GAAP base rent, 1.7% below average rents in the relevant properties; leases included about nine months of free rent on average.
- Stonecroft redevelopment and lease-up costs were estimated at $18.5 million in total, with $2.3 million incurred by March 31; completion was anticipated by July 31, 2021. The company’s $21 million secured Sponsored REIT mortgage loan was classified as a troubled debt restructuring after a 2020 amendment extended maturity to December 2022 and raised the fixed rate to 7.51%. It was not reported impaired.
- Interest-rate swaps had an aggregate fair-value liability of $13.7 million. About $7.1 million in accumulated other comprehensive loss was expected to be reclassified into earnings over the next 12 months. The company noted counterparty and other hedging risks.
Important facts for investors to verify
- Whether the Atlanta property sale closed, at what net proceeds, and how proceeds were applied to debt.
- Progress on refinancing, extending or repaying the $155 million scheduled to mature in 2021, and continued covenant compliance.
- Whether occupancy, leasing and same-store NOI stabilize or continue to weaken, particularly given the portfolio’s office-market and regional concentration.
- Actual cash generation, capital spending, redevelopment costs and dividend coverage; Q1 operating cash flow was $1.6 million versus $9.7 million of distributions.
- Tenant collection, concession and default trends, and the performance and repayment prospects of the $21 million Sponsored REIT loan.