Franklin Street Properties Corp. — Q2 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2021. FSP is an office-focused REIT; at quarter-end it owned 29 operating properties and one redevelopment property. Approximately 79.5% of its operating properties were leased, compared with 85.0% at December 31, 2020.
Financial highlights
| Metric | Q2 2021 | Six months 2021 | Comparable 2020 |
|---|---|---|---|
| Total revenue | $56.1 million | $115.2 million | $60.8 million / $123.8 million |
| Net income (loss) | $16.1 million | $9.7 million | $(2.1) million / $(3.1) million |
| FFO | $14.7 million | $32.7 million | $20.2 million / $41.5 million |
| Operating cash flow | Not separately presented | $6.1 million | $25.6 million |
- Q2 revenue fell 7.7%; six-month revenue fell 6.9%. Rental revenue drove the decline, reflecting property sales, a tenant bankruptcy and lease expirations, partly offset by new leases.
- Reported profit includes a net $20.6 million gain on property sales. Without that item, the reported profit comparison is materially different; the filing’s FFO measure excludes the gain.
- Six-month FFO decreased 21.1%. Same-store NOI declined 7.2% year over year; property NOI, including dispositions and redevelopment properties, declined 11.2%.
- Q2 total expenses were $60.4 million, including $10.1 million interest expense. Six-month interest expense was $18.7 million, up $0.6 million; management attributed the increase primarily to $1.9 million of swap termination costs, partly offset by lower debt.
- At June 30, cash, cash equivalents and restricted cash totaled $24.2 million, including $19.0 million unrestricted cash. Six-month operating cash flow was $6.1 million; investing activities provided $191.8 million, mainly from property sales, and financing activities used $177.8 million.
- Debt principal outstanding was approximately $765 million: $400 million BAML term loan, $165 million BMO term loan and $200 million senior notes; the revolver had no balance. The balance-sheet carrying value of term loans and notes was approximately $762.4 million. Term-loan repayments reduced debt during the period.
- Total assets were $1.60 billion and stockholders’ equity was $766.7 million at June 30, 2021. The company reported compliance with the financial covenants of its BMO facility, BAML facility and senior notes.
Changes, outlook and risks
- FSP sold three Atlanta office properties for approximately $219.5 million and a Dulles, Virginia property for approximately $17.25 million. It used proceeds principally to repay debt, including $100 million of JPM term debt and $55 million of BMO term debt. The sales generated a reported net gain of $20.6 million.
- Management targeted $350 million to $450 million of gross property-sale proceeds during 2021. It said dispositions and debt repayment could reduce revenue and FFO in the near term, while potentially lowering interest expense. Agreements announced after quarter-end covered two Chantilly properties for about $40 million and two Chesterfield properties for about $67 million; closings remained conditional.
- Moody’s downgraded FSP’s senior unsecured debt to Ba1 from Baa3 on June 15. Management estimated additional interest costs of about $1.6 million for the balance of 2021 and $3.3 million over a full year, based on June 30 borrowings.
- Management believed cash, internally generated funds and available financing would cover working capital and anticipated capital expenditures for at least 12 months. The $600 million BAML revolver was undrawn at quarter-end and initially matured January 2022, with extension options subject to conditions.
- COVID-19 continued to pose uncertainty for tenant activity, leasing, occupancy, rent collections, property values and access to capital. FSP collected more than 99% of rental receipts due in the first half of 2021, but warned that future concessions, nonpayment and leasing delays remained possible.
- The company leased approximately 563,000 square feet in the first half, with an average term of 8.3 years; average GAAP base rent was 0.8% above rents in the relevant properties for 2020. Management cautioned that pandemic conditions could delay leasing.
- The quarterly distribution was $0.09 per share; the board declared another $0.09 distribution payable in August. A $50 million share repurchase authorization was announced, with no repurchases through June 30.
Most important facts to verify
- Whether pending property sales close on the expected terms and timing, and how proceeds are applied to debt or other uses.
- Whether occupancy and same-store NOI stabilize or continue to weaken, given operating-property leased occupancy of 79.5% and increased vacancy.
- The effect of the credit downgrade, refinancing needs and upcoming maturities, especially the BAML revolver in 2022 and BAML term loan in 2023.
- Whether operating cash generation and rental collections support capital spending and distributions as dispositions reduce the portfolio.
- The quality and comparability of reported earnings: Q2 profit benefited from property-sale gains, while FFO and operating cash flow were lower year over year.