Franklin Street Properties Corp. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Franklin Street Properties is an office-focused REIT operating in one segment, real estate operations, with 34 properties (32 operating and two in redevelopment) across 10 states.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $245.8 million | $269.1 million | Down $23.2 million (8.6%) |
| Net income | $32.6 million | $6.5 million | Up $26.1 million |
| Basic and diluted EPS | $0.30 | $0.06 | Up $0.24 |
| Funds from Operations (FFO, company-defined) | $79.4 million | $97.5 million | Down $18.1 million (18.6%) |
| Operating cash flow | $68.4 million | $81.9 million | Down $13.5 million |
| Cash, cash equivalents and restricted cash at year-end | $4.2 million | $9.8 million | Down $5.6 million |
| Total assets / liabilities / shareholders’ equity at year-end | $1,793.2 million / $1,025.1 million / $768.1 million | $1,842.7 million / $1,056.3 million / $786.4 million | Assets and equity decreased |
- Net income benefited from a $41.9 million gain on the December 2020 sale of a Durham, North Carolina property for approximately $89.7 million. The company reported no property sales in 2019.
- Rental revenue fell $21.3 million, primarily reflecting lease expirations and a $3.1 million receivable write-off following a tenant parent’s Chapter 11 filing. Interest income and management fees also declined.
- Property NOI was $126.6 million, down 11.1%; comparative same-store NOI, excluding specified nonrecurring items, declined 5.7% to $119.3 million.
- Cash flows: operating activities provided $68.4 million; investing activities provided $11.0 million, including sale proceeds and approximately $77.9 million of property improvements and equipment investment; financing activities used $85.1 million, including $38.6 million of distributions and a $50 million JPM Term Loan repayment.
- Operating properties were 85.0% leased at year-end, versus 87.6% a year earlier. The full owned portfolio was 79.2% occupied, including redevelopment assets.
Debt, liquidity and distributions
- Year-end debt principal was approximately $923.5 million: $400 million BAML Term Loan, $220 million BMO Term Loan, $100 million JPM Term Loan, $200 million senior notes and $3.5 million drawn on the BAML revolver. Properties were not subject to mortgage debt.
- Management said cash, internally generated cash and available financing were expected to cover working capital, anticipated capital expenditures and maturing debt for at least 12 months. Revolver availability was $596.5 million at year-end. Cash and restricted cash totaled only $4.2 million.
- Near-term maturities are significant: the $100 million JPM Term Loan and $55 million BMO Tranche A mature in November 2021; the $3.5 million revolver balance initially matures in January 2022. Extension options apply to the JPM loan and revolver, subject to conditions.
- Most term debt was interest-rate hedged at year-end. Moody’s rating was Baa3, described as investment grade; management reported compliance with debt covenants. The BAML Term Loan swap expires in September 2021.
- Distributions declared were $0.36 per share in 2020, unchanged from 2019. The board declared a further $0.09 per share payable in February 2021. Future distributions are not assured.
Outlook, commentary and risks
- In 2021, the company adopted a plan to sell selected properties where management believes valuation objectives have been met, targeting gross proceeds of $350 million to $450 million, primarily for debt repayment. Timing and sale prices are uncertain.
- COVID-19, remote-work arrangements and economic weakness could reduce office-space demand, occupancy and rents, increase concessions and leasing costs, and impair tenant payment or renewal capacity. The company collected approximately 98% of December 2020 rent due; all properties remained open at year-end and as of February 5, 2021.
- Management cited geographic concentration in Greater Denver (27.1% of portfolio square footage), Atlanta (20.4%), Dallas (12.7%) and Houston (12.3%), including exposure to energy-sector conditions. Lease expirations, tenant defaults, refinancing access, interest rates, LIBOR replacement and covenant compliance are additional risks.
- The $21 million Sponsored REIT mortgage loan was amended in December 2020 as a troubled debt restructuring: maturity extended two years and interest increased to 7.51%. It is reported as fully collateralized; the company recorded no loan-loss allowance. The auditor identified loan valuation and real estate impairment assessment as critical audit matters.
- Fourth-quarter revenue was $59.8 million and net income was $37.4 million ($0.35 per share), following net losses in each of the first three 2020 quarters. The fourth-quarter result included the property-sale gain; annual net income was $32.6 million.
Most important facts for investors to verify
- Whether planned 2021 property sales achieve the $350–$450 million gross-proceeds target and how much debt is repaid.
- Refinancing or extension plans for the JPM and BMO maturities in November 2021, and the revolver’s maturity and extension conditions.
- Trends in occupancy, rent collections, concessions, lease renewals and tenant credit quality, especially in concentrated markets.
- Whether recurring property cash flow and FFO remain adequate to support distributions, given lower leasing and NOI metrics.
- Performance and collateral value of the restructured $21 million Sponsored REIT loan, as well as the terms of any future amendments.