Investing.com -- Moody’s Ratings announced a downgrade of the corporate family rating (CFR) and senior unsecured rating for Franklin Street Properties Corp . (NYSE: FSP ) to Caa1 from B3 on February 27, 2025. The speculative grade liquidity rating (SGL) remained at SGL-4. Moody’s revised FSP’s outlook from negative to stable.

The downgrade is a reflection of the Real Estate Investment Trust’s (REIT) decreased size, which Moody’s believes will increase earnings volatility. This volatility is expected to intensify as FSP plans to sell more assets to meet its debt obligations due in April 2026.

The Caa1 CFR assigned to FSP is indicative of the REIT’s small size and weak business profile. As of the end of 2024, FSP’s gross assets totaled $1.3 billion. Its portfolio lease rate was at 68%, a slight decrease from 70% at the end of 2023. Moody’s noted that FSP is dependent on asset sales to meet basic liquidity needs over the next year and a half, especially given the lukewarm market interest for non-prime quality office properties.

Despite the downgrade, Moody’s acknowledged the company’s low leverage for its rating category. It is expected that net debt/EBITDA will remain below 7.5x in 2025. FSP’s fully unencumbered portfolio could potentially allow it to raise secured debt to meet operational needs and maturities.

FSP has been executing a plan to reduce debt through asset sales in a challenging refinancing environment for lower-quality office properties. Consequently, the REIT’s portfolio has shrunk to 15 properties, increasing concentration risk and potential earnings volatility. Moody’s pointed out that the operating environment for office space in FSP’s markets remains difficult and expects the REIT’s occupancy to continue to decline as it continues to sell assets.

The SGL-4 rating is a reflection of the lack of a revolving credit facility and the REIT’s maturity schedule. All outstanding debt, approximately $250 million as of the end of 2024, is due on April 1, 2026. At the end of 2024, FSP had $42.7 million in cash. Moody’s cautioned that a slowdown in asset sales or a worsening operating environment could increase the risk of default.

The stable outlook is based on Moody’s expectations that leverage will remain moderate and that FSP’s operating environment will not significantly deteriorate in the coming year. This should allow the REIT to proceed with planned asset sales and apply the proceeds to debt repayment.

Moody’s stated that a ratings upgrade could occur if FSP were to improve its liquidity profile, with long-dated maturity and cash sources that would allow it to invest in its portfolio. An upgrade would also likely reflect an improvement in FSP’s operating performance, leading to growth in occupancy and Net Operating Income (NOI). Conversely, a ratings downgrade could occur if FSP’s operating performance or liquidity were to deteriorate further, raising concerns over the ability of the REIT to address its April 2026 debt maturities.

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