Executive Summary / Key Takeaways

• Franklin Street Properties (FSP) is undergoing a significant strategic transformation, shifting from a broad office portfolio to a focused, debt-reduction-driven model through selective asset dispositions. This strategy has already resulted in approximately $1.1 billion in property sales since late 2020, leading to a nearly 75% reduction in corporate indebtedness.
• Despite a challenging office market characterized by macroeconomic uncertainties and constrained liquidity, FSP is observing nascent signs of stabilization and increased tenant activity, particularly in its Sunbelt and Mountain West markets. The company anticipates positive net absorption in 2025, albeit with a "choppy quarter-by-quarter ride" for leasing.
• A critical near-term challenge is the April 1, 2026, maturity of approximately $248.90 million in outstanding debt. While management is actively pursuing refinancing or asset sales, the lack of closed transactions has led to a "going concern" qualification in its financial statements.
• FSP's Board of Directors initiated a review of strategic alternatives in May 2025, including a potential sale of the company or additional asset sales, underscoring a commitment to maximizing shareholder value amidst market pressures.
• The company's stock trades at a significant discount to its average disposition value per square foot, suggesting potential for value realization if the disposition strategy and strategic review are successful.

A REIT's Evolution: Refocusing Amidst Market Shifts

Franklin Street Properties Corp. (FSP) operates as a real estate investment trust (REIT) with a historical focus on infill and central business district (CBD) office properties across the U.S. Sunbelt and Mountain West regions, alongside select opportunistic markets. The company's overarching strategy has long aimed for long-term growth, appreciation, and current income. However, FSP has been in a period of significant strategic evolution since late 2020, marked by a deliberate shift towards selective property dispositions to substantially reduce corporate indebtedness. This strategic pivot is not merely a response to market conditions but a proactive effort to unlock intrinsic value for shareholders, who management believes are currently undervalued in the public markets.

The office real estate sector, FSP's primary domain, has faced considerable headwinds, including the lingering long-term impact of the COVID-19 pandemic, evolving work-from-home policies, geopolitical events, and a volatile interest rate environment. The Federal Reserve's adjustments to the federal funds rate, most recently a 25-basis-point decrease on September 17, 2025, to a range of 4% to 4.25%, directly influence FSP's unhedged variable rate debt and the broader investment landscape. Despite these challenges, FSP's management has observed encouraging signs of stabilization and a stronger "return-to-office" trend in many cities, particularly within its target markets. National office transaction volumes, while still below historical averages, rose by 22% in 2024 and accelerated by 31% year-over-year in the first quarter of 2025, indicating a potential bottoming of the market in 2024.

Competitive Landscape and Strategic Positioning

FSP operates within a competitive office REIT sector, facing both direct and indirect rivals. Direct competitors include larger, more diversified office REITs such as Boston Properties (BXP), SL Green Realty (SLG), and Vornado Realty Trust (VNO). These companies often possess greater scale, broader geographic footprints, and established tenant networks, particularly in gateway cities.

FSP's competitive advantage lies in its regional expertise and opportunistic investment approach within its focused Sunbelt and Mountain West markets. While larger peers like BXP might command stronger brand recognition and access to capital for large-scale developments, FSP's strategy allows for potentially lower entry costs and higher upside in growth areas by targeting undervalued assets. For instance, FSP's emphasis on value-oriented investments and its REIT structure provide tangible benefits through tax efficiency, potentially leading to superior margins and stronger cash flow generation for reinvestment. Its regional focus also enables faster adaptation to local market dynamics, a potential differentiator against the broader urban focus of a company like SLG.

However, FSP's regional concentration also presents a competitive disadvantage, increasing its revenue vulnerability during local economic downturns. This contrasts with more diversified portfolios, such as Vornado's mixed-use developments, which offer greater stability. FSP's financial performance, particularly in terms of profitability and growth rates, has historically lagged behind some of its larger, more established competitors who benefit from economies of scale and premium property portfolios. The current market, characterized by constrained liquidity and a preference for smaller, high-quality, well-leased assets, further highlights the challenges FSP faces in executing its disposition strategy against rivals with deeper capital access.

Indirect competitors, including industrial REITs, co-working spaces, and companies developing their own corporate campuses, also pose a threat. These alternatives can draw tenants away from traditional office REITs by offering more flexible or tech-integrated solutions, potentially eroding FSP's market share and pressuring revenue and occupancy rates.

Operational Details and Financial Performance

FSP's operational focus revolves around its real estate rental operations and strategic property dispositions. As of September 30, 2025, the company owned and operated a portfolio of 14 properties, totaling approximately 4.80 million square feet, primarily located in Dallas, Denver, Houston, and Minneapolis.

Recent financial performance reflects the ongoing disposition strategy and challenging market conditions:

• Revenues: Total revenues for the three months ended September 30, 2025, decreased by $2.40 million to $27.30 million compared to the same period in 2024. For the nine months ended September 30, 2025, total revenues declined by $10.60 million to $81.10 million year-over-year. These decreases were primarily due to the sale of three properties in 2024 and other rental income losses from lease expirations.
• Expenses: Total expenses decreased by $2 million to $35.90 million for the three months ended September 30, 2025, and by $9.90 million to $106.50 million for the nine months ended September 30, 2025. This reduction was largely attributable to lower real estate operating expenses, real estate taxes and insurance, and depreciation and amortization following property dispositions.
• Net Loss: FSP reported a net loss of $8.30 million for the three months ended September 30, 2025, an improvement from a $15.60 million net loss in the prior-year period. The net loss for the nine months ended September 30, 2025, was $37.60 million, compared to $44.20 million in the same period of 2024.

• Funds From Operations (FFO): FFO, a key REIT performance metric, was approximately $2.3 million ($0.02 per share) for the third quarter of 2025 and $7.6 million ($0.07 per share) for the nine months ended September 30, 2025.
• Occupancy and Leasing: Leased occupancy for the directly owned portfolio stood at 68.9% as of September 30, 2025, a decrease from 70.3% at the end of 2024. Economic occupancy also saw a slight decline to 67.7% at the end of Q1 2025 from 68.6% at the end of 2024. During the nine months ended September 30, 2025, FSP leased approximately 274,000 square feet, with 219,000 square feet from existing tenants. Average GAAP base rents for new leases increased by 6% to $31.81 per square foot compared to 2024. Leasing activity in Q1 2025 was "weak and somewhat disappointing" for new leases, with 60,000 square feet finalized, entirely from renewals and expansions. However, management noted an "upward trend of tenants in the market witnessed during the second half of 2024 has continued into the first quarter of 2025."

Liquidity, Capital Structure, and Strategic Outlook

FSP faces a significant liquidity event with approximately $248.90 million in aggregate outstanding indebtedness maturing on April 1, 2026. This near-term maturity has led management to conclude that there is "substantial doubt about the Company’s ability to continue as a going concern for at least one year" from the filing date of the 10-Q, as no refinancing or asset sales have closed, making such outcomes not within the company's control for accounting purposes. Management, however, believes it is "more likely than not" that they will successfully extend or refinance this debt or effect asset sales.

Cash and cash equivalents decreased by $11.10 million to $31.575 million as of September 30, 2025, from $42.68 million at December 31, 2024, due to cash used in operating, investing, and financing activities. Interest rates on FSP's term loans and senior notes permanently increased by 100 basis points to 9% per annum effective April 1, 2025, because the aggregate principal amount outstanding exceeded $200 million as of March 31, 2025. Approximately 50.60% of FSP's total debt was unhedged variable rate debt as of September 30, 2025, exposing it to further interest rate fluctuations.

The disposition strategy remains central to FSP's capital management. Since late 2020, the company has completed approximately $1.1 billion in property sales, contributing to a nearly 75% reduction in corporate indebtedness. These sales have averaged approximately $211 per square foot, significantly higher than the implied value of less than $100 per square foot in FSP's publicly traded shares. Proceeds from dispositions are mandatorily allocated to debt repayment: 25.56% to the BMO Term Loan, 20% to the BofA Term Loan, 44.44% to the Senior Notes, with the remaining 10% retained by the company. FSP is currently marketing several properties totaling approximately 1 million square feet for potential disposition.

In May 2025, FSP's Board of Directors initiated a review of strategic alternatives to maximize shareholder value, encompassing a potential sale of the company, further asset sales, or refinancing existing indebtedness. This strategic review underscores the urgency and breadth of options being considered to address the upcoming debt maturities and unlock value.

For the remainder of 2025, FSP has suspended its guidance for Net Income (Loss), FFO, and property dispositions due to economic conditions and uncertainties. However, management remains optimistic about leasing, anticipating a "choppy quarter-by-quarter ride" but expecting full-year progress and positive net absorption, barring significant surprises or dispositions. Approximately half of FSP's operating properties are considered stabilized with leased occupancy of 75% or more, while the remainder are "value add" properties with less than 75% occupancy.

Risks and Challenges

The primary risk for FSP is the substantial doubt about its ability to continue as a going concern due to the April 1, 2026, debt maturities. Failure to extend or refinance this debt, or to effect sufficient asset sales, could lead to events of default and materially adverse effects on the company's financial condition.

Broader macroeconomic conditions, including geopolitical events, inflation, and interest rates, continue to adversely affect demand for office space. The long-term impact of the COVID-19 pandemic, particularly evolving work-from-home policies, poses ongoing uncertainty for tenant businesses, leasing efforts, occupancy, and rent collection. Increased interest rates could further impact FSP's unhedged variable rate debt, reduce asset values, and limit future financing capabilities. Additionally, the "wait-and-watch position" adopted by many small and mid-sized tenant prospects due to market volatility and tariff headlines could delay new leasing activity.

Conclusion

Franklin Street Properties is at a pivotal juncture, actively transforming its portfolio and capital structure in a challenging office real estate market. The company's strategic focus on selective asset dispositions has been instrumental in significantly reducing its corporate indebtedness, a critical step towards enhancing financial flexibility. While the "going concern" qualification highlights the urgency of addressing upcoming debt maturities, management's proactive pursuit of refinancing and a comprehensive strategic review signals a determined effort to unlock shareholder value.

The investment thesis for FSP hinges on the successful execution of its disposition strategy and the outcome of its strategic alternatives review. Despite a "choppy" leasing environment, particularly for new tenants, FSP's regional expertise in Sunbelt and Mountain West markets, coupled with signs of market stabilization and increasing return-to-office trends, offers a glimmer of optimism for operational improvements. Investors should closely monitor the company's progress on debt resolution, the results of the strategic review, and the continued evolution of office market dynamics, especially in its core geographies, as these factors will dictate FSP's ability to realize the perceived intrinsic value of its real estate assets.