Franklin Street Properties (US:FSP)2022-10-31 16:00Part I. Financial Information Item 1. Financial Statements The company's financial position and performance reflect impacts from property dispositions, with decreased assets and liabilities, and varied net income results across quarterly and nine-month periods Consolidated Balance Sheets Total assets and liabilities decreased to $1.26 billion and $489.5 million respectively, driven by property sales and subsequent debt repayment Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Real estate assets, net | $1,118,983 | $1,190,970 | | Total assets | $1,262,070 | $1,364,173 | | Term loans payable, net | $164,692 | $274,286 | | Total liabilities | $489,509 | $580,970 | | Total stockholders' equity | $772,561 | $783,203 | Consolidated Statements of Operations Property sales led to lower Q3 revenue but a higher net income due to gains, while nine-month revenue and net income both declined year-over-year Quarterly Operating Results (in thousands, except per share) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Total Revenues | $40,836 | $50,802 | | Total Expenses | $46,810 | $55,112 | | Gain on sale of properties, net | $24,077 | $8,632 | | Net Income | $17,246 | $4,456 | | Net Income per Share | $0.17 | $0.04 | Nine-Month Operating Results (in thousands, except per share) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Total Revenues | $124,404 | $165,986 | | Total Expenses | $142,401 | $180,943 | | Gain on sale of properties, net | $24,077 | $29,258 | | Net Income | $3,978 | $14,145 | | Net Income per Share | $0.04 | $0.13 | Consolidated Statements of Cash Flows Cash from operations decreased, while investing activities provided cash from property sales, and financing activities used cash for debt and dividend payments Cash Flow Summary (in thousands) | Activity | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,354 | $26,961 | | Net cash provided by investing activities | $63,972 | $264,349 | | Net cash used in financing activities | ($105,360) | ($285,729) | | Net (decrease) increase in cash | ($32,034) | $5,581 | Notes to Consolidated Financial Statements Notes detail a smaller property portfolio, significant debt restructuring, a new credit loss provision, and a reduced quarterly dividend - As of September 30, 2022, the company owned 22 operating properties, down from 26 properties as of September 30, 2021, due to its disposition strategy2426 - The company recorded a $1.9 million provision for credit losses during the first nine months of 2022 related to a $24 million loan to a Sponsored REIT, FSP Monument Circle LLC, due to deterioration in the real estate market3945 - On September 6, 2022, the company prepaid the remaining $110 million balance of the BofA Term Loan; as of September 30, 2022, $65.0 million was drawn on the new BofA Revolver5669 - On August 31, 2022, the company sold two office properties in Colorado for $102.5 million, realizing a net gain of approximately $24.1 million105 - The quarterly dividend was reduced from $0.09 per share in Q2 2022 to $0.01 per share in Q3 2022; a subsequent dividend of $0.01 per share was declared on October 7, 202285107 Management's Discussion and Analysis of Financial Condition and Results of Operations Management focuses on a strategy of selective asset sales and debt repayment amid challenges from rising interest rates and declining office occupancy - The company's current strategy is to invest in office properties in the U.S. sunbelt and mountain west regions and to sell select properties where valuation potential has been reached109112 - Anticipated property dispositions in 2022 are expected to generate gross proceeds between $102.5 million and $200 million, which will be used for debt repayment, stock repurchases, and dividends112131 - The company adopted a variable quarterly dividend policy in July 2022, replacing its previous regular quarterly dividend policy117 - The portfolio's leased percentage decreased from 78.4% at year-end 2021 to 75.9% as of September 30, 2022124 Results of Operations Property dispositions drove a year-over-year decline in rental revenue, though Q3 net income was boosted by a significant gain on sale Comparison of Three Months Ended September 30 (in thousands) | Account | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Rental Revenue | $40,366 | $50,326 | $(9,960) | | Total Expenses | $46,810 | $55,112 | $(8,302) | | Gain on sale of properties, net | $24,077 | $8,632 | $15,445 | | Net Income | $17,246 | $4,456 | $12,790 | Comparison of Nine Months Ended September 30 (in thousands) | Account | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Rental Revenue | $122,994 | $164,671 | $(41,677) | | Total Expenses | $142,401 | $180,943 | $(38,542) | | Impairment and loan loss reserve | $(1,857) | $— | $(1,857) | | Net Income | $3,978 | $14,145 | $(10,167) | Non-GAAP Financial Measures Funds From Operations (FFO) and Same Store Net Operating Income (NOI) both declined, reflecting lower operating income from a smaller property portfolio Funds From Operations (FFO) (in thousands) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | | | | Net Income | $17,246 | $4,456 | | FFO | $9,041 | $14,797 | | Nine Months Ended Sep 30 | | | | Net Income | $3,978 | $14,145 | | FFO | $30,880 | $47,524 | - Comparative Same Store NOI decreased by 11.6% for the nine months ended September 30, 2022, compared to the same period in 2021, falling from $57.0 million to $50.4 million167 Liquidity and Capital Resources Cash reserves decreased significantly, but management believes liquidity is sufficient for the next year, supported by a new revolving credit facility - Cash, cash equivalents, and restricted cash decreased from $40.7 million at year-end 2021 to $8.7 million at September 30, 2022173 - The company has a $165 million BMO Term Loan maturing in January 2024 and $200 million in Senior Notes maturing in 2024 and 2027183203 - In January 2022, the company entered into a new BofA Revolver with a capacity of $237.5 million, of which $65.0 million was outstanding as of September 30, 2022189 - The company's stock repurchase program, authorized for up to $50 million, had no activity during the second and third quarters of 202289206 Quantitative and Qualitative Disclosures About Market Risk The primary market risk stems from interest rate changes on its floating-rate debt, though this is partially mitigated by an interest rate swap - The company is exposed to interest rate risk on $65.0 million of floating-rate debt under the BofA Revolver216217 - The BMO Term Loan's variable rate is hedged by an interest rate swap, fixing the effective interest rate at 4.04% per annum as of September 30, 2022218 Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the third quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022226 - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2022227 Part II. Other Information Legal Proceedings The company reports no current legal proceedings that are expected to have a material adverse effect on its financial condition or operations - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business230 Risk Factors The company highlights significant risks from rising interest rates and adverse economic conditions, which could increase debt costs and reduce office demand - Rising interest rates pose a significant risk, as they increase interest costs on unhedged variable rate debt (BofA Revolver) and could adversely affect cash flow and the ability to refinance233235 - Uncertain economic conditions in the U.S., including recessionary concerns, inflation, and the ongoing effects of the COVID-19 pandemic, are negatively impacting the demand for office space and could materially harm the company's earnings236 Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the company's $50 million stock repurchase authorization during the third quarter of 2022 - No shares of common stock were repurchased during the third quarter of 2022237 Defaults Upon Senior Securities None reported Mine Safety Disclosures None reported Other Information None reported Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and iXBRL data files