Franklin Street Properties (FSP): Dividend Resilience in a Rate-Hike World

Franklin Street Properties Corp. (FSP) has carved out a niche as a contrarian bet in the commercial real estate sector, offering a steady dividend yield of 2.3% despite macroeconomic headwinds. While its payout is modest by historical standards, the company's ability to maintain dividends amid rising interest rates and declining occupancy rates positions it as an intriguing—if speculative—option for income-seeking investors. Here's why FSP merits attention, and when to consider it for a defensive income portfolio.

Dividend History: Stability Amid Cuts

FSP's dividend trajectory since 2020 underscores its cautious approach to capital allocation. After paying $0.09 per share quarterly from 2020 to mid-2022, the dividend was slashed to $0.01 in October 2022—a move tied to market volatility and debt reduction efforts. Crucially, the reduced dividend has held steady ever since, yielding a consistent 2.3% at its current $1.71 share price.

The dividend's sustainability hinges on Funds From Operations (FFO). As of Q1 2025, FFO per share was $0.03, offering a coverage ratio of 1.1x—a narrow margin but evidence of resilience. While this ratio leaves little room for error, FSP's focus on deleveraging and asset sales has reduced total debt by 75% since 2020, from $1.0 billion to $250 million. This deleverage has stabilized the balance sheet, even as occupancy pressures mount.

Occupancy & Rent: A Fragile Balance

Occupancy rates have been a mixed story. FSP's portfolio of 14 properties, totaling 4.8 million square feet, saw occupancy dip to 69.2% in Q1 2025 from 70.3% in late 2024, driven by lease expirations and sales of non-core assets. Troublingly, key properties like Greenwood Plaza (65% occupancy) and Monument Circle (4.1% occupancy) highlight execution risks in secondary markets.

On the positive side, FSP's leasing pipeline remains robust, with 800,000 square feet of prospective demand. New leases in Q1 2025 achieved a 3.4% rent growth YoY to $29.64 per square foot, though overall portfolio rents slipped to $31.21 per occupied square foot. While modest, this growth aligns with management's focus on high-potential markets like the Sunbelt and Mountain West, where demand for office space remains stronger.

Why FSP Might Outperform Defensively

In a rising-rate environment, FSP's strengths lie in its debt discipline and dividend consistency. With interest rates peaking and stabilizing, the company's reduced leverage (debt/EBITDA of 3.2x) offers a buffer against future rate hikes. Additionally, its strategy of selling non-core assets—$1.1 billion raised since 2020—has minimized exposure to over-leveraged balance sheets, a common pitfall in the sector.

Critically, FSP's dividend has withstood the worst of the rate cycle. While the yield is low compared to historical norms, it remains intact despite occupancy declines and a challenging office market. For income investors willing to accept minimal yield in exchange for stability, this could be a compelling trade-off.

Risks to Consider

• Occupancy Declines: A 5.1% annual lease expiration volume in 2025 raises renewal risks, especially in underperforming markets.
• Asset Sales Impact: Further disposals could erode rental income, squeezing FFO if not reinvested wisely.
• Hybrid Work Models: Persistent shifts to remote work continue to dampen office demand, though FSP's focus on suburban and secondary markets may mitigate this risk.

Investment Thesis

FSP is not a high-yield play but a test of patience. Its 2.3% dividend offers little margin of safety, yet its ability to stabilize payouts through a rate cycle suggests management's focus on capital preservation. For a defensive income portfolio, FSP could serve as a “lower beta” holding in the REIT space, particularly if office demand stabilizes in 2025.

When to Buy

Investors should wait for Q2 2025 FFO results before committing. A positive update on occupancy stabilization above 70% or progress on asset sales could validate the dividend's durability. The stock's deep discount to NAV (implied by its $1.71 price vs. $5.25 NAV estimate) suggests further downside is limited, making it a speculative long-term hold rather than a core income pick.

In sum, FSP's dividend resilience is a testament to its disciplined strategy—but its appeal hinges on investors' tolerance for low yields and uneven execution. For those seeking a defensive REIT with a “bottom” already priced in, it's worth monitoring.

Final Take: Hold for the long term, but prioritize higher-yielding alternatives until occupancy trends improve.