Franklin Street Properties Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
FSP is a REIT focused on U.S. office properties, principally in the Sunbelt and Mountain West. At quarter-end, it reported 21 owned and consolidated properties totaling approximately 6.26 million rentable square feet, versus 24 properties and 6.92 million square feet a year earlier. The portfolio includes 20 owned properties and Monument Circle, consolidated effective January 1, 2023.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $37.8 million | $42.3 million |
| Net income (loss) | $2.4 million | ($4.2 million) |
| Diluted EPS | $0.02 | ($0.04) |
| FFO, company-defined | $8.4 million | $11.6 million |
| Comparative same-store NOI | $15.8 million | $16.6 million |
| Cash used in operating activities | $1.1 million | $9.8 million |
- Revenue fell $4.5 million, mainly due to property sales and lease expirations, and the absence of loan interest and management-fee revenue after Monument Circle was consolidated.
- Net income included an $8.4 million gain on the Elk Grove property sale and a $0.4 million gain on consolidation. Excluding these items, reported profit does not represent recurring operating performance.
- Total expenses decreased $2.4 million, but interest expense rose $0.4 million to $5.8 million. Comparative same-store NOI declined 4.9%; company-defined FFO fell about 27%.
- Cash, cash equivalents and restricted cash totaled $13.1 million at March 31, up from $6.6 million at year-end. Investing activities provided $19.7 million, including $28.1 million of property-sale proceeds; financing activities used $12.2 million.
- At quarter-end, debt carrying amounts totaled approximately $398.9 million: $75 million on the BofA revolver, $124.4 million on the BMO term loan and $199.5 million in senior notes. Stockholders’ equity was $769.3 million.
Material changes and capital structure
- FSP sold an Elk Grove, Illinois office property on March 10 for $29.1 million, recording an approximately $8.4 million gain; proceeds were principally directed to debt repayment.
- On February 10, FSP amended its BMO term loan and BofA revolver. Both facilities now mature October 1, 2024, and the floating-rate margin changed to 300 basis points over SOFR. The BMO loan had $125 million outstanding at quarter-end, with another $25 million required to be repaid by April 1, 2024.
- The BofA revolver commitment was reduced to $150 million, with further scheduled reductions to $125 million in October 2023 and $100 million in April 2024. $75 million was drawn at March 31 and April 27, 2023; the filing reports $75 million available as of April 27.
- The BMO term loan and revolver each bore a 7.92% rate at March 31. FSP terminated its interest-rate swaps in February, receiving approximately $4.3 million; it had no derivatives at quarter-end. About $3.5 million of accumulated hedge gains was expected to be reclassified into earnings over the next 12 months.
- Debt due in 2024 totaled $316 million, including the revolver, BMO term loan and Series A notes; $84 million of Series B notes mature in 2027. Moody’s downgraded FSP’s senior unsecured debt to Ba3 from Ba1 on April 12. Management estimated the downgrade would add approximately $1.0 million of annual interest cost on the senior notes, based on then-current borrowings.
Outlook, risks and contingencies
- Management said cash, expected operating cash flow, property dispositions and revolver availability should cover working capital and anticipated capital expenditures for at least 12 months. This is management’s assessment, not earnings guidance; no numerical earnings or FFO forecast was provided.
- FSP continues to pursue selective property sales and lease-up, using sale proceeds primarily to reduce debt. Management cautioned that revenue, FFO and capital expenditures may decline in the short term as this strategy continues. It described owned properties as stabilized but said economic conditions could delay or limit leasing.
- Owned properties were reported 73.9% leased at March 31, down from 75.6% at December 31; the consolidated portfolio was reported 71.5% leased, with Monument Circle only 4.1% leased. The filing also presents 70.1% occupied in its property schedule, using a stated weighted-occupancy measure.
- Approximately 50% of debt was unhedged variable-rate debt at March 31. Management cited rising rates, office demand and work-from-home trends, inflation, recession concerns, refinancing access, tenant defaults, property values, construction costs and geopolitical conditions as risks.
- Credit agreements restrict quarterly distributions above $0.01 per share, subject to exceptions for REIT tax requirements. FSP paid $0.01 per share for Q1 and declared another $0.01 distribution payable May 11, 2023.
- Management reported compliance with applicable financial covenants at March 31. It said ordinary-course legal matters were not expected to materially affect financial position or results. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Reconcile occupancy measures: 71.5% leased in the narrative versus 70.1% occupied in the property schedule, and confirm the definitions and portfolio scope.
- Track lease-up, rent collections and operating performance, particularly at Monument Circle, and assess whether leasing assumptions support management’s liquidity outlook.
- Review upcoming debt maturities, required BMO amortization, scheduled revolver commitment reductions, borrowing availability and covenant headroom.
- Assess the effect of unhedged rates and the Ba3 rating downgrade on interest costs, refinancing options and distributions.
- Separate recurring operating results from gains on property sales and consolidation; also note that operating cash flow remained negative despite positive net income.