96 Office REITs are in a battle for their lives, and their investors are faced with a conundrum in picking the winners in an increasingly Darwinistic space. The headwinds are clear; a Fed funds rate at a more than two-decade high and rising office vacancies as work-from-home becomes a perpetual feature of the post-pandemic world of work. Rolling layoffs have also afflicted US corporates as they come to terms with more expensive debt and the specter of a recession. These three factors have aggregated to form the perfect storm of headwinds for office REITs like Franklin Street Properties (NYSE:FSP). The $260 million REIT is the owner of Class B office properties across six states but with a concentration on Texas and Denver, Colorado. FSP is not an income play, the REIT last paid out a peppercorn $0.01 per share dividend, left unchanged sequentially and $0.04 annualized for a 1.7% forward dividend yield. Critically, the quarterly distribution was dipping even before the pandemic ushered in a brutal zeitgeist for office REITs. A dividend high of $0.31 per share in 2008 first dipped to $0.09 per share in 2018 and now sits at its lowest-ever level since FSP went public. The REIT represents a play on a possible reversion to a higher pre-pandemic valuation mean. CME FedWatch Tool While the anticipation of interest rate cuts may alleviate some pressure, FSP faces stark financial realities. Its book value per share, currently at $6.88, underscores a substantial gap compared to its market cap, suggesting a potential 180% upside if the discount is closed. However, amid a national office vacancy rate of 19.8%, office sales are transacting at discounts, complicating FSP’s path to recovery. Financially, FSP reported a third-quarter revenue of $36.9 million, with a net loss of $45.68 million driven by expenses exceeding revenue and significant losses on property sales. With $311 million in debt maturing this year and only 74.8% portfolio occupancy, FSP faces mounting pressure to address its debt obligations and operational challenges. Franklin Street Properties Fiscal 2023 Third Quarter Form 10-Q Despite trading at a low FFO multiple, FSP’s balance sheet health remains concerning, with limited cash reserves against impending debt maturities. The absence of dividends further exacerbates investor uncertainty, prompting a cautious outlook on FSP’s future performance. Franklin Street Properties Fiscal 2023 Third Quarter Form 10-Q Franklin Street Properties Fiscal 2023 Third Quarter Supplemental In light of these challenges, FSP’s strategy to pursue asset disposals to manage debt may offer short-term relief but poses long-term risks. While the REIT’s debt maturities may not pose an existential threat, the potential for further downside remains. Consequently, FSP is rated as a sell, reflecting the uncertainties surrounding its ability to navigate the evolving landscape of the office REIT sector. You Might Be Interested In 5 Best REIT Alternatives for Passive Real Estate Income Saudi Arabia announces housing projects worth $17.3bn at real estate event Harnessing the Power of a Housing ENBD REIT’s Property Portfolio Value Increases to $375 Million in Q1, Reflecting Strong Growth Boston Properties Reveals Significant Asset Sale, Potential Upside Persists Dave Ramsey explains house buying in 2023 and why now is the time
