Franklin Street Properties Corp. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Franklin Street Properties is a REIT focused primarily on U.S. office properties and reports one segment: real estate operations.
Business context and portfolio
At year-end, the company owned 24 office properties totaling approximately 6.9 million rentable square feet. The portfolio was 78.4% leased, down from 85.0% at December 31, 2020. About 86.3% of owned space was in Atlanta, Dallas, Denver, Houston and Minneapolis; Denver alone represented 38.0% of portfolio square footage.
Financial results and key metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $209.4 million | $245.8 million |
| Rental revenue | $207.6 million | $244.2 million |
| Net income | $92.7 million | $32.6 million |
| Net income per diluted share | $0.87 | $0.30 |
| Funds From Operations (FFO, company-defined) | $58.5 million | $79.4 million |
| Property NOI | $104.1 million | $126.6 million |
| Cash provided by operating activities | $36.4 million | $68.4 million |
Net income rose primarily because of $113.1 million in net gains on property sales, compared with $41.9 million in 2020. Excluding the sales gains, underlying performance weakened: FFO fell 26.3%, property NOI fell 17.8%, and same-store NOI fell 7.1% (comparative same-store NOI, excluding specified nonrecurring items, declined 6.1%). FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Cash, cash equivalents and restricted cash totaled $40.8 million at year-end, including $34.3 million of cash and cash equivalents and $6.4 million of restricted cash. Investing activities provided $505.5 million, largely from property sales, while financing activities used $505.2 million, principally for debt repayment. Capital expenditures and property improvements were approximately $64.8 million.
Year-end debt principal was approximately $475 million: $110 million under the BofA Term Loan, $165 million under the BMO Term Loan, and $200 million of senior notes. The balance sheet reports $473.6 million of these borrowings net of unamortized financing costs. This compares with approximately $920 million of debt principal at year-end 2020. The company reported compliance with applicable financial covenants at December 31, 2021. No owned properties were subject to mortgage debt.
Material changes and capital allocation
- The company sold 10 office properties in 2021 for approximately $602.7 million in aggregate gross proceeds and recorded $113.1 million in net gains. Proceeds were used principally to repay debt; approximately $508 million of debt was repaid during the year.
- Rental revenue declined $36.6 million year over year, mainly due to dispositions, a tenant bankruptcy and lease expirations. Real estate operating costs, taxes and insurance, depreciation and interest expense also declined, largely reflecting the smaller portfolio and debt reduction.
- The company repurchased approximately 3.40 million shares for $18.2 million, at an average cost of about $5.37 per share, under a $50 million authorization. Approximately $31.8 million remained authorized at year-end.
- Cash distributions paid during 2021 were $38.5 million. The company also declared a $0.32-per-share special distribution in December 2021, paid January 12, 2022; a further $0.09-per-share distribution was declared in January 2022.
Outlook, risks and unusual items
- Management expects 2022 property dispositions to generate approximately $250 million to $350 million in gross proceeds. It expects proceeds to support debt repayment, share repurchases, any special distributions required for REIT purposes and other corporate uses. Management cautioned that dispositions are likely to reduce revenue, FFO and capital expenditures in the short term.
- Management said cash, internally generated funds and the new revolving credit facility should cover working capital needs and anticipated capital expenditures for at least the next 12 months. The new BofA Revolver, entered into after year-end, had $237.5 million of capacity; $35 million was drawn and $202.5 million was available as of February 14, 2022.
- Moody’s downgraded the company’s senior unsecured debt to Ba1 from Baa3 in June 2021. Management estimated the downgrade would add approximately $2.4 million to annual interest costs based on year-end borrowings. Variable-rate exposure, refinancing needs and debt covenant requirements remain relevant risks. The BofA Term Loan matures in January 2023; BMO Term Loan Tranche B in January 2024; Series A Notes in December 2024; and Series B Notes in December 2027.
- The COVID-19 pandemic and remote-work trends continued to create uncertainty around office demand, leasing, occupancy, tenant credit and rent collections. Management reported that all properties remained open during 2021; some tenants sought concessions. Annualized rent from leases scheduled to expire in 2022 represented 10.5% of total annualized rent.
- A $24 million related-party mortgage loan to FSP Monument Circle LLC was amended in October 2021: maturity was extended to June 30, 2023, an additional $3 million was advanced, and principal and interest payments were deferred to maturity. The loan was treated as a troubled debt restructuring. The company recorded no loan-loss allowance; its maximum exposure, including accrued interest and an exit fee receivable, was approximately $24.5 million.
- The company recorded a $0.9 million loss on extinguishment of debt. The auditor identified measurement of the related-party mortgage loan and impairment assessment of real estate as critical audit matters; no property impairment losses were recorded in 2021.
Most important facts for investors to verify
- Whether the planned 2022 dispositions achieve the stated $250 million–$350 million proceeds target and how proceeds are allocated among debt reduction, repurchases and distributions.
- Whether leasing and occupancy stabilize after the decline to 78.4%, especially in concentrated markets and properties with material vacancies or upcoming expirations.
- The sustainability of recurring cash generation and distributions, considering lower FFO, NOI and operating cash flow, and the expected effect of further sales.
- The repayment and collateral value of the $24 million Sponsored REIT loan, including the deferred-payment terms and absence of a recorded loss allowance.
- Debt refinancing, variable-rate costs and covenant headroom, particularly ahead of the January 2023 BofA Term Loan maturity and following the Ba1 credit rating downgrade.