FSP - Franklin Street Properties: Q3 Results In - Still Bullish

2023-11-14 03:10:12 ET

Summary

• Franklin Street Properties reports further property sales in their Q3 release.
• Despite the decline in leased space, FSP still reports positive funds from operations and continues to pay quarterly dividends.
• FSP's ongoing efforts to sell properties and unlock shareholder value indicate that the stock is still undervalued.

Franklin Street Properties ( FSP ) is a REIT focused on office properties in the U.S. that is currently trading much lower than its book value. The company has recently reported its Q3 earnings. After our last article on FSP, the stock continued to move closer to its book value, although it's still far away from trading at it.

In our last article, we thoroughly examined FSP's history and tried to study some reasons as to why the stock is trading at the current levels. If you haven't read our last article, please do so here . In this article, we will focus on the company's Q3 earnings.

Q3 Earnings in numbers

For the three months ending September 30, the company has reported a slight decrease in rental revenue, primarily attributed to lower total leased area. The reported revenue was ~$37m compared to ~$40m for Q3 2022. The company also reported much lower net income compared to last year, standing at a negative ~$46m, largely due to a booked loss on sale of properties.

Despite the decline in leased space and after the property sales, the company is still reporting positive funds from operations at ~$7.5m. The company also announced the continuation of its quarterly dividend payments of $0.01 per share.

A positive sign in this release is that the company is still booking decent FFO even after drastically reducing its real estate footprint through its many sales in recent years. The company continues to operate as expected, trying to maximise its leased space while selling properties to pay off debt. In their release, FSP also provided further information on their property sales.

Property Sales

On August 9, 2023, the company has completed the sale of Forest Park in Charlotte, North Carolina for ~$9.2m in gross proceeds. The company has communicated the expectations to close on this sale in their Q2 result back in August. As expected, based on the company's repeated communication, the proceeds of the sale were used for debt repayments.

On October 26, 2023, the company has completed the sale of One Legacy in Plano, Texas for ~$48m in gross proceeds. The company intends to use the proceeds "primarily for the repayment of debt".

The company again confirms the purchase and sale agreements with three different purchasers for three of their properties for total gross proceeds of ~$153m. FSP expected these transactions to close in Q4 of 2023, again here stated goal is to use "proceeds primarily for repayment of debt".

The company's CEO repeated their plan regarding property sales just like in their last release

We will seek to increase shareholder value by continuing to (...) pursue the sale of select properties.

The property sales are a positive sign, showing that management is committed to their goal of driving shareholder value through sales of their properties.

Updated Valuation

Following our valuation in our last article, we can update our assumptions based on the most recent sales and further information shared by the company in the Q3 release. First, we can update our previous estimation of price per square feet of all of FSP's real estate holding.

By updating our spreadsheet calculating the average price of previous property sales, we can include the latest closed sales in our calculation. Up until now, FSP has sold 17 properties across the U.S. since December 2020 at an average sale price per square feet of $220.37.

After the recent dispositions, the company's real estate holdings now total a square footage of 5,992,350. Applying the average price per square feet we just calculated, we can come up with an updated, but still very rough, value of ~$1.32b for FSP's remaining real estate holdings.

As of November 7, the company also reports cash and cash equivalents on their balance sheet of ~$73,500,000. Assuming the other values on the Q3 balance sheet are the same, we can estimate the net value of the company's assets to be still above ~$1b.

Risks

We want to reiterate the risks mentioned in our last Article on FSP. Namely, the two main risks are:

1. A strong decline in commercial real estate prices going forward, significantly impacting the company's net asset value
2. The inability of management to "close the gap" between the company's net asset value and the price of the common stock

The relatively low price the company received for their Forest Park property further confirms that risk number 1 is not to be underestimated. We are closely following further developments in the commercial real estate industry and what prices FSP will be able to sell their other properties at.

The absence of any cost-cutting measures might also confirm that risk number 2 is not to be underestimated. In theory, the company should be able to reduce their workforce now, since they have sold a lot of properties in the last couple of years and thus should need less manpower to manage them. However, so far the company has not conducted thorough cost-cutting measures.

Conclusion & What to look out for

Based on the ongoing efforts of the company to sell properties and unlock shareholder value, we believe the points brought up in our last analysis are still valid. We welcome the positive updates regarding successful property sales.

Based on our estimations, the stock is still trading at undervalued levels, even though it has already risen almost 20% since our last article. We reiterate our buy rating of the stock.

We are still looking out mainly for updates on the planned property sales and potential updates on the company successfully renting out more of their owned space. We are continuing to look out for any comments on possible share repurchases.

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