FRANKLIN STREET PROPERTIES CORP quarterly report, Q2 FY2020

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Franklin Street Properties Corp. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company is a REIT focused on office properties, with 32 operating properties, three redevelopment properties and approximately 9.5 million rentable square feet in its operating portfolio.

Financial performance and position

  • Q2 revenue: $60.8 million, down $6.0 million (9.0%) year over year. Rental revenue fell $5.1 million, primarily due to lease expirations; related-party management fees and loan interest declined $0.9 million.
  • Q2 earnings: Net loss of $2.1 million, versus net income of $1.6 million a year earlier; loss per share was $0.02 versus earnings per share of $0.02.
  • First-half results: Revenue was $123.8 million, down $7.7 million (5.9%); net loss was $3.1 million versus net income of $0.4 million. Interest expense decreased to $18.0 million from $18.7 million.
  • Property results: First-half same-store NOI was $65.0 million, down 4.6%; comparative same-store NOI, excluding specified nonrecurring items, was $64.1 million, down 4.8%. FFO was $20.2 million in Q2 versus $23.8 million, and $41.5 million for the first half versus $45.9 million.
  • Cash flow: First-half operating cash flow was $25.6 million. Investing used $43.2 million, mainly for property improvements and equipment; financing provided $10.7 million, including net revolver borrowing, partly offset by $19.3 million of distributions. Cash declined $6.9 million to $2.9 million.
  • Debt and liquidity: Debt principal totaled approximately $1.0 billion, including $30 million drawn on the BAML revolver, $770 million in term loans and $200 million in senior notes. The $600 million revolver had $570 million available at quarter-end. 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 its debt covenants.
  • Distributions and equity: The company paid $0.09 per share in each of Q1 and Q2. Stockholders’ equity was $746.0 million, down from $786.4 million at year-end 2019.

Material changes and operating trends

  • Operating-property leased occupancy was 84.5% at June 30, down from 87.6% at December 31, 2019; vacancy increased to approximately 1.476 million square feet from 1.175 million. Lease expirations and terminations exceeded new leasing in the first half.
  • The company leased approximately 324,000 square feet in the first half. New and renewed leases had a weighted average term of 6.1 years and average GAAP base rent of $31.28 per square foot, 10.3% above the comparable properties’ prior rents.
  • First-half property improvements and equipment spending was $43.2 million. Blue Lagoon redevelopment was expected to finish by year-end 2020; Forest Park redevelopment was completed in Q2. The company expected total redevelopment and lease-up costs of $29.6 million at 801 Marquette, $39.6 million at Blue Lagoon and $5.7 million at Forest Park.
  • Interest-rate swap fair-value losses contributed to a first-half $18.3 million loss in other comprehensive income. Derivative liabilities were $23.0 million at June 30.

Outlook, risks and contingencies

  • Management said COVID-19 creates material uncertainty for leasing, occupancy, rent collections, tenant concessions, asset values, operating costs, capital access and refinancing. It could also affect dividends and debt-covenant compliance. The company stated it could not estimate the pandemic’s future financial impact.
  • All properties remained open as of August 4, 2020. The company reported collecting approximately 97% of rental receipts due in July as of July 31, while noting that further concession requests and nonpayment remained possible. Management expected pandemic-related measures could delay or limit leasing activity.
  • Approximately 78% of the owned portfolio was in Atlanta, Dallas, Denver, Houston and Minneapolis; management identified energy-market weakness as a risk to occupancy and rents in energy-influenced markets including Dallas, Denver and Houston.
  • Debt maturities include $205 million in 2021, $30 million in 2022, $400 million in 2023, $281 million in 2024 and $84 million thereafter. The company hedged a substantial portion of its floating-rate term debt, but remains exposed to interest-rate, derivative-counterparty and refinancing risks.
  • One $21 million mortgage loan to a Sponsored REIT, bearing 7.19%, matured December 6, 2020. Management assessed expected credit loss as immaterial and expected repayment from refinancing, property cash flows or another capital event.
  • The company reported no material change in contractual obligations or off-balance-sheet arrangements and stated that ordinary-course legal matters were not expected to have a material adverse effect. In July, the board amended the bylaws to establish exclusive forums for certain litigation.

Important facts for investors to verify

  1. Whether occupancy and leasing trends stabilize, and whether the reported 97% July rent collection rate persists; monitor concessions, delinquency and tenant defaults.
  2. Cash needs and project costs against the $570 million revolver availability, including redevelopment spending and the company’s low quarter-end cash balance.
  3. Refinancing plans and covenant headroom ahead of the $205 million of 2021 maturities and subsequent debt maturities.
  4. Repayment of the $21 million Sponsored REIT mortgage at maturity and any change in the company’s credit-loss assessment.
  5. The sustainability of the $0.09 quarterly distribution relative to operating cash generation and FFO; FFO is a non-GAAP measure and is not equivalent to cash available for distributions.
  6. The occupancy measures differ across disclosures: MD&A reports 84.5% leased for operating properties, while the property table reports 82.3% weighted occupied. Confirm the definitions and basis before comparing.