A Few Reasons Stifel Is Bearish On Franklin Street Properties

Franklin Street Properties Corp. FSP,a small-cap office real estate investment trust that focuses on high growth and mid sized markets, reported its fourth quarter results on Tuesday and prompted Stifel to downgrade the stock.

The Analyst

Stifel's John Guinee downgraded Franklin Street Properties' stock from Hold to Sell with a price target lowered from $10 to $7.

The Thesis

Despite a more than 10 percent decline in the REIT's stock on Wednesday, a downgrade to Sell is warranted, Guinee said in a note.

• A dividend cut is not only "likely" but may be "required" by the company's lenders;
• The company realized "significant value erosion" throughout 2017, which is expected to continue in 2018;
• Lease economics continue to indicate value erosion at current levels; and
• Re-leasing costs are moving higher in nearly every office market across the U.S.

Expanding on the potential for a dividend cut, Guinee said that since he began coverage of Franklin Street in 2009, the company's FFO/share ranged from 84 cents to $1.12 and averaged 99 cents per share. The dividend payout remained consistent at 76 cents per share but in 2009 the share price was $13.21 and the leverage was 14 percent. As such, the combination of increased leverage and late cycle fundamentals are now "difficult to overcome" and a more appropriate dividend payout today would be 50 cents per share.

Price Action

Shares of Franklin Street Properties hit a new 52-week low of $8.05 Thursday and closed at $8.53.

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