Franklin Street Properties (FSP) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The company reported a significant net loss of $51.7 million, driven by property sale losses and impairments Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,151,773 | $1,241,666 | | Real estate assets, net | $921,581 | $1,103,248 | | Assets held for sale | $132,659 | $— | | Cash and cash equivalents | $13,043 | $6,632 | | Total Liabilities | $440,447 | $472,930 | | Bank note payable | $80,000 | $48,000 | | Term loans payable, net | $114,610 | $164,750 | | Total Stockholders' Equity | $711,326 | $768,736 | Consolidated Statements of Operations Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Total Revenues | $110,936 | $124,404 | | Total Expenses | $130,612 | $142,401 | | Gain (loss) on sale of properties, net | $(32,085) | $24,077 | | Net Income (Loss) | $(51,685) | $3,978 | | Net Income (Loss) per Share | $(0.50) | $0.04 | Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Category | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,545 | $9,354 | | Net cash provided by investing activities | $14,086 | $63,972 | | Net cash used in financing activities | $(19,220) | $(105,360) | | Net increase (decrease) in cash | $6,411 | $(32,034) | Note 1: Organization, Properties, and Basis of Presentation The company's portfolio shrank to 20 properties, and management's plans alleviate going concern doubts - As of September 30, 2023, the company's portfolio consisted of 20 properties with 6.2 million rentable square feet, a decrease from 22 properties and 6.4 million square feet a year prior[25] - Effective January 1, 2023, the company consolidated the Sponsored REIT (Monument Circle) as a Variable Interest Entity (VIE), recognizing a gain of approximately $0.4 million[37][39][41] - Management has concluded that its plans to dispose of assets and extend/refinance debt are probable of being achieved, alleviating substantial doubt about the company's ability to continue as a going concern[30][49] Note 2: Related Party Transactions The consolidation of the Sponsored REIT eliminated a related-party interest income stream in 2023 - Interest income and fees from the Sponsored REIT Loan were approximately $1.37 million for the nine months ended September 30, 2022, but $0 for the same period in 2023 due to consolidation[59] - The maturity of the Sponsored REIT Loan was extended multiple times, most recently to September 30, 2024[60] Allowance for Credit Losses Roll-Forward (in thousands) | | For the Nine Months Ended Sep 30, 2023 | For the Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Beginning allowance | $(4,237) | $— | | Additional increases | — | $(1,857) | | Reductions | 4,237 | — | | Ending allowance | $— | $(1,857) | Note 3: Debt Structure and Covenants Key credit facilities were amended, extending maturities to 2024 and increasing interest rates - On Feb 10, 2023, the BMO Term Loan maturity was extended to Oct 1, 2024, and the interest rate was changed to 300 basis points over SOFR[65] - On Feb 10, 2023, the BofA Revolver maturity was also extended to Oct 1, 2024, with borrowing capacity reduced to $150 million and the interest rate increased to 300 basis points over SOFR[72] - The company has $200 million in senior unsecured notes, consisting of $116 million Series A Notes due Dec 20, 2024, and $84 million Series B Notes due Dec 20, 2027[89][93] - Both the BMO and BofA credit agreements restrict quarterly dividends to $0.01 per share, though exceptions are permitted to maintain REIT status[70][77] Note 4: Derivatives and Hedging The company terminated all interest rate swaps in February 2023 and currently holds no derivatives - On February 8, 2023, the company terminated its interest rate swaps and received aggregate proceeds of approximately $4.3 million[95] - As of September 30, 2023, the company had no outstanding derivative instruments[95] - The company estimates that approximately $1.4 million will be reclassified from AOCI into earnings as a reduction to interest expense within the next 12 months[100] Note 6: Stockholders' Equity The quarterly dividend remains at $0.01 per share and the stock repurchase program was discontinued Dividends Per Share Comparison | Period | Dividend Per Share | | :--- | :--- | | Q1 2022 | $0.09 | | Q2 2022 | $0.09 | | Q3 2022 | $0.01 | | Q1 2023 | $0.01 | | Q2 2023 | $0.01 | | Q3 2023 | $0.01 | - The company's stock repurchase program was discontinued on February 10, 2023, with no shares repurchased in the first nine months of 2023[110] Note 9: Property Dispositions and Assets Held for Sale The company is actively selling properties to reduce debt, recording a $39.7 million impairment in Q3 - In 2023, the company sold an office property in Elk Grove, IL for $29.1M (gain of $8.4M) and a property in Charlotte, NC for $9.2M (loss of $0.8M)[128] - During Q3 2023, the company entered agreements to sell properties in Miami, FL and Atlanta, GA, resulting in a recorded impairment of $39.7 million[129][130] - As of September 30, 2023, three properties were classified as assets held for sale, totaling $132.6 million on the balance sheet[130][131] - Subsequent to the quarter end, the company sold an office building in Plano, Texas, for $48.0 million, realizing a gain of approximately $10.6 million[133] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management focuses on asset sales to manage liquidity and address significant 2024 debt maturities Overview and Strategy The company's strategy is to sell select properties to repay debt and enhance shareholder value - The company's current strategy is to invest in infill and central business district office properties in the U.S. sunbelt and mountain west regions[136] - A key strategic goal is to increase shareholder value by selling select properties and using the proceeds primarily for debt repayment[139] - The company's credit rating was downgraded by Moody's twice in 2023, expected to increase annual interest costs by approximately $1.0 million[144] Trends and Uncertainties The company faces material uncertainty from work-from-home trends and adverse economic conditions - The long-term impact of the COVID-19 pandemic, including work-from-home policies, continues to present material uncertainty and risk[145] - Economic conditions, including inflation and rising interest rates, are contributing to recessionary concerns and adversely affecting demand for office space[146][148] - As of September 30, 2023, approximately 49.4% of the company's total debt was unhedged variable rate debt, exposing it to rising interest costs[148] - Owned properties were 74.8% leased as of September 30, 2023, a decrease from 75.6% at year-end 2022[149][151] Results of Operations A significant impairment charge drove a Q3 net loss of $45.7 million despite lower operating expenses Comparison of Three Months Ended September 30 (in thousands) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $36,903 | $40,836 | $(3,933) | | Total Expenses | $42,794 | $46,810 | $(4,016) | | Gain (loss) on sale/impairment | $(39,671) | $24,077 | $(63,748) | | Net Income (Loss) | $(45,671) | $17,246 | $(62,917) | Comparison of Nine Months Ended September 30 (in thousands) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $110,936 | $124,404 | $(13,468) | | Total Expenses | $130,612 | $142,401 | $(11,789) | | Gain (loss) on sale/impairment | $(32,085) | $24,077 | $(56,162) | | Net Income (Loss) | $(51,685) | $3,978 | $(55,663) | Non-GAAP Financial Measures (FFO & NOI) Funds From Operations decreased to $23.0 million, while Same Store NOI increased by 6.4% Funds From Operations (FFO) Reconciliation (in thousands) | | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net income (loss) | $(51,685) | $3,978 | | (Gain) loss on sale/impairment | 32,085 | (24,077) | | Depreciation and amortization | 42,742 | 48,916 | | Other adjustments | (394) | 1,857 | | NAREIT FFO | $22,748 | $30,674 | | Lease Acquisition costs | 278 | 206 | | Funds From Operations | $23,026 | $30,880 | - For the nine months ended September 30, 2023, Same Store NOI increased 6.4% year-over-year to $48.1 million from $45.2 million[198] Liquidity and Capital Resources The company faces significant liquidity challenges with $195 million in debt maturing in October 2024 - As of September 30, 2023, the company had approximately $195 million in debt maturing on October 1, 2024, under its BofA Revolver and BMO Term Loan[204] - The company plans to use proceeds from property dispositions to repay debt, with pending sales expected to generate over $140 million[205][206] - Management is actively engaged in discussions with lenders to extend and/or refinance the BofA Revolver and BMO Term Loan before their October 2024 maturity[207] - The company also has $116 million in Series A Notes maturing on December 20, 2024, which will be a focus for future liquidity planning[209][216] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk from its unhedged floating-rate debt - The company terminated all its interest rate swaps on February 8, 2023, leaving its variable-rate debt unhedged[258] - A hypothetical 10% increase in market interest rates would increase annual interest expense by approximately $1.7 million[257][258] Debt Maturities as of September 30, 2023 (in thousands) | Debt Instrument | Total | Due in 2024 | Due in 2027 | | :--- | :--- | :--- | :--- | | BofA Revolver | $80,000 | $80,000 | $— | | BMO Term Loan | $115,000 | $115,000 | $— | | Series A Notes | $116,000 | $116,000 | $— | | Series B Notes | $84,000 | $— | $84,000 | | Total | $395,000 | $311,000 | $84,000 | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023 - Based on an evaluation as of September 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[264] - No material changes to the company's internal control over financial reporting occurred during the third quarter of 2023[265] Part II. Other Information Legal Proceedings Ongoing legal proceedings are not expected to have a material adverse effect on the company - The company states that any ongoing legal proceedings are not expected to have a material adverse effect on its financial condition or results[267] Risk Factors A new risk factor highlights substantial doubt about the company's ability to continue as a going concern - A new risk factor has been identified regarding substantial doubt about the company's ability to continue as a going concern due to the October 1, 2024 debt maturities[269] - Failure to extend, refinance, or repay the ~$205 million in debt maturing in October 2024 could lead to events of default[271] - A 'going concern' qualification in the year-end 2023 audited financial statements would violate debt covenants, triggering an event of default and accelerating all debt obligations[273][274] Unregistered Sales of Equity Securities and Use of Proceeds The company made no equity repurchases in Q3 2023 as the program was previously discontinued - No repurchases of equity securities were made during the third quarter of 2023[276] Other Items (Defaults, Mine Safety, Other Information) The company reported no defaults, mine safety issues, or new insider trading plan adoptions - The company reported 'None' for Item 3 (Defaults Upon Senior Securities) and Item 4 (Mine Safety Disclosures)[277][278] - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the quarter[279] Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and data files