What happened
Shares of real estate investment trust (REIT) Franklin Street Properties (FSP -1.23%) rose as much as 27% at one point during the week, according to data from S&P Global Market Intelligence. By the start of trading on Friday Nov. 12, the stock was holding on to virtually all of that impressive gain, sitting with a week-to-date increase of 26.5%. The big story was the REIT's earnings release on Nov. 8, but it requires a little bit of effort to sort through what's going on
So what
The first headline in Franklin Street Properties' earnings release speaks volumes here: "Strong Execution on our 2021 Strategy to Reduce Debt and Lease Space." That text was actually italicized and bolded, with headlines for the quarterly net income of $0.04 per share and funds from operations (FFO) of $0.14 following far less prominently, with just italicized text. Obviously, management wants investors to focus on its debt reduction and leasing efforts.
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The news release goes on to explain that debt was trimmed by 53% between Sept. 30 and Oct. 25, which is technically after the end of the third quarter. To put some numbers on this, during the third quarter, the REIT repaid $90 million of debt, with a subsequent reduction of $215 million on Oct. 25.
But where did this cash come from? Well, Franklin Street Properties has been selling office buildings, jettisoning eight properties in the year through Oct. 22 for net proceeds of $563 million. Nearly $224 million of that figure came with the sale of assets in Atlanta on Oct. 22. Much of the cash from these sales has been put toward debt reduction.
The REIT's heavy debt load has been a concern among investors, so this move is clearly a solid choice. But while it strengthens the company's balance sheet and reduces interest expenses, it also pulls revenue-producing properties out of the portfolio. So it's a mixed positive, to some degree.
The quarterly update then goes on to report on some leasing deals. But the real story is further down, when management explains that it believes the intrinsic value of its stock is $10 per share, based on the assets it owns. Even after the big weekly gain, the stock was still only trading at around $6.15 per share at the open of trading on Nov. 12. As such, despite the fact that the company believes its portfolio is well located in the Sunbelt region, it plans to keep selling assets.
Now what
In some ways, it appears that Franklin Street Properties is self liquidating its portfolio because the stock is undervalued. In fact, it noted that it would pay a special dividend to investors because of the asset sales it has made so far this year.
If the REIT is going down this path, it's also possible that it would also be willing to consider an outright sale of the company. In the end, this is a value play, but one that probably tips into the special-situations category.
Most long-term investors, and particularly those in search of reliable dividends, should probably watch this admittedly interesting story from the sidelines.
