Franklin Street Properties Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 3, 2020. The company is a REIT focused primarily on U.S. office properties, operating in one reportable segment. At quarter-end it owned 32 operating properties and three redevelopment properties, and managed two sponsored REITs.
Financial performance and position
- Q3 revenue: $62.2 million, down $6.3 million (9.2%) from $68.5 million a year earlier. Rental revenue fell $6.3 million, primarily reflecting lease expirations; operating-property leased occupancy was 85.6% versus 89.7% a year earlier.
- Q3 earnings: Net loss of $1.7 million, or $0.02 per share, versus net income of $2.4 million, or $0.02 per share, in Q3 2019. Expenses declined $2.2 million to $63.9 million, but not enough to offset lower revenue.
- Nine-month results: Revenue was $186.0 million, down 7.0%; net loss was $4.8 million versus net income of $2.8 million in 2019. Rental revenue declined $12.2 million and related-party management-fee and loan-interest revenue declined $1.9 million.
- REIT operating measures: Nine-month FFO was $61.9 million versus $70.8 million in 2019. Same-store NOI, excluding specified nonrecurring items, was $96.3 million, down 3.1%; the filing reports a 5.9% decline in operating-property NOI before that adjustment.
- Cash flow and capital spending: Nine-month operating cash flow was $56.0 million, compared with $60.1 million. Investing used $62.0 million, primarily for property improvements and equipment; financing provided $1.0 million. Cash declined to $4.8 million from $9.8 million at year-end 2019. Distributions paid totaled $29.0 million.
- Debt and liquidity: Debt had approximately $996 million of carrying value at September 30, comprising a $30 million revolver draw, $766.9 million of term loans and $199.1 million of senior notes; stated principal totaled $1.0 billion. The $600 million BAML revolver had $570 million available. Management said cash, operating cash generation and available financing should cover working capital and anticipated capital expenditures for at least 12 months. The company reported compliance with debt financial covenants.
- Other balance-sheet items: Total assets were $1.84 billion, total liabilities $1.10 billion and stockholders’ equity $737.5 million. Interest expense was $27.0 million for the first nine months, down from $27.8 million.
Material changes and operating developments
- Operating-property leased occupancy declined to 85.6% from 87.6% at December 31, 2019; vacancy increased to approximately 1.376 million square feet from 1.175 million. Lease expirations and terminations exceeded new leasing during the first nine months.
- The company leased approximately 606,000 square feet during the period. New leases had a 7.8-year weighted-average term; reported average GAAP base rents were 11.8% above rents in the respective properties, with tenant improvements averaging $33.80 per square foot and concessions averaging about six months of free rent.
- 801 Marquette was reclassified as operating after a 71,000-square-foot, 16-year lease brought it to 91.8% leased. Forest Park was 78.4% leased at quarter-end following new leases; Stonecroft redevelopment began in August, and Blue Lagoon redevelopment was expected to finish by year-end.
- Cash distributions remained $0.09 per share per quarter. The board declared another $0.09-per-share distribution payable November 12, 2020.
Outlook, risks and unusual items
- COVID-19 and the economic downturn create material uncertainty around leasing, occupancy, rent collection, concessions, property values, operating costs and access to capital. The company could not estimate the pandemic’s future financial impact. All properties remained open as of November 3, and approximately 98% of October rent due had been collected as of October 31.
- Management warned that reduced leasing demand or tenant payment difficulties could pressure rents, occupancy, dividends and debt-covenant capacity. Energy-price weakness may particularly affect markets including Dallas, Denver and Houston, where the company has significant exposure.
- No earnings or FFO guidance was provided. The company anticipated that COVID-19 could limit or delay leasing in Q4 2020 and possibly later periods.
- Redevelopment commitments include expected total costs of $18.5 million for Stonecroft, with $1.4 million incurred by quarter-end, and $39.9 million for Blue Lagoon, with $16.5 million incurred. Completion timing and lease-up remain execution risks.
- Interest-rate swaps had aggregate fair-value liabilities of $20.2 million. Nine-month unrealized derivative losses recorded in OCI were $15.5 million; approximately $10.3 million of accumulated losses were expected to be reclassified into earnings within 12 months. Legal matters in the ordinary course were not expected by management to have a material adverse effect.
Key facts for investors to verify
- Subsequent rent collections, concession requests, lease defaults and occupancy trends, particularly against the 85.6% operating-property occupancy rate.
- Availability and terms of the $570 million revolver capacity, upcoming debt maturities beginning in 2021, covenant headroom and refinancing access.
- Whether operating cash flow can sustain capital spending and the $0.09 quarterly distribution as cash balances remain low.
- Redevelopment budgets, completion dates and tenant occupancy progress at Stonecroft, Blue Lagoon and Forest Park.
- How much of the reported earnings and FFO decline persists, and the continuing effect of derivative valuation changes and interest expense.