Intrinsic value of Franklin Street Properties - FSP

Previous Close

$10.28

  Intrinsic Value

$2.24

stock screener

  Rating & Target

str. sell

-78%

  Value-price divergence*

+25%

Previous close

$10.28

 
Intrinsic value

$2.24

 
Up/down potential

-78%

 
Rating

str. sell

 
Value-price divergence*

+25%

Our model is not good at valuating stocks of financial companies, such as FSP.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of FSP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.46
  11.50
  10.85
  10.27
  9.74
  9.26
  8.84
  8.45
  8.11
  7.80
  7.52
  7.27
  7.04
  6.84
  6.65
  6.49
  6.34
  6.20
  6.08
  5.98
  5.88
  5.79
  5.71
  5.64
  5.58
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
Revenue, $m
  250
  279
  309
  341
  374
  409
  445
  482
  521
  562
  604
  648
  694
  741
  791
  842
  895
  951
  1,009
  1,069
  1,132
  1,197
  1,266
  1,337
  1,411
  1,489
  1,571
  1,656
  1,745
  1,838
  1,936
Variable operating expenses, $m
 
  264
  293
  323
  354
  387
  422
  457
  494
  533
  573
  614
  658
  703
  749
  798
  849
  901
  956
  1,013
  1,073
  1,135
  1,200
  1,267
  1,338
  1,412
  1,489
  1,570
  1,654
  1,743
  1,835
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  239
  264
  293
  323
  354
  387
  422
  457
  494
  533
  573
  614
  658
  703
  749
  798
  849
  901
  956
  1,013
  1,073
  1,135
  1,200
  1,267
  1,338
  1,412
  1,489
  1,570
  1,654
  1,743
  1,835
Operating income, $m
  11
  14
  16
  18
  19
  21
  23
  25
  27
  29
  31
  34
  36
  39
  41
  44
  47
  49
  52
  56
  59
  62
  66
  70
  73
  77
  82
  86
  91
  96
  101
EBITDA, $m
  106
  120
  133
  147
  161
  176
  192
  208
  225
  243
  261
  280
  299
  320
  341
  363
  386
  410
  435
  461
  488
  517
  546
  577
  609
  643
  678
  715
  753
  793
  836
Interest expense (income), $m
  24
  37
  41
  46
  51
  56
  62
  67
  73
  80
  86
  93
  100
  107
  114
  122
  130
  139
  147
  157
  166
  176
  186
  197
  209
  220
  233
  245
  259
  273
  288
Earnings before tax, $m
  9
  -22
  -25
  -28
  -32
  -35
  -39
  -42
  -46
  -50
  -55
  -59
  -64
  -68
  -73
  -78
  -84
  -89
  -95
  -101
  -107
  -114
  -121
  -128
  -135
  -143
  -151
  -159
  -168
  -177
  -187
Tax expense, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  8
  -22
  -25
  -28
  -32
  -35
  -39
  -42
  -46
  -50
  -55
  -59
  -64
  -68
  -73
  -78
  -84
  -89
  -95
  -101
  -107
  -114
  -121
  -128
  -135
  -143
  -151
  -159
  -168
  -177
  -187

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  9
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  2,088
  2,323
  2,575
  2,839
  3,116
  3,404
  3,705
  4,019
  4,344
  4,683
  5,035
  5,401
  5,781
  6,177
  6,588
  7,015
  7,460
  7,922
  8,404
  8,907
  9,430
  9,976
  10,546
  11,141
  11,762
  12,411
  13,089
  13,799
  14,541
  15,317
  16,130
Adjusted assets (=assets-cash), $m
  2,079
  2,323
  2,575
  2,839
  3,116
  3,404
  3,705
  4,019
  4,344
  4,683
  5,035
  5,401
  5,781
  6,177
  6,588
  7,015
  7,460
  7,922
  8,404
  8,907
  9,430
  9,976
  10,546
  11,141
  11,762
  12,411
  13,089
  13,799
  14,541
  15,317
  16,130
Revenue / Adjusted assets
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
  0.120
Average production assets, $m
  1,690
  1,884
  2,088
  2,303
  2,527
  2,761
  3,005
  3,259
  3,523
  3,798
  4,083
  4,380
  4,689
  5,009
  5,342
  5,689
  6,049
  6,425
  6,816
  7,223
  7,647
  8,090
  8,552
  9,035
  9,538
  10,065
  10,615
  11,190
  11,792
  12,422
  13,081
Working capital, $m
  0
  -10
  -11
  -12
  -13
  -15
  -16
  -17
  -19
  -20
  -22
  -23
  -25
  -27
  -28
  -30
  -32
  -34
  -36
  -38
  -41
  -43
  -46
  -48
  -51
  -54
  -57
  -60
  -63
  -66
  -70
Total debt, $m
  1,045
  1,178
  1,315
  1,458
  1,608
  1,764
  1,927
  2,097
  2,274
  2,457
  2,648
  2,846
  3,053
  3,267
  3,489
  3,721
  3,962
  4,213
  4,474
  4,746
  5,030
  5,326
  5,635
  5,957
  6,294
  6,646
  7,013
  7,398
  7,800
  8,221
  8,662
Total liabilities, $m
  1,126
  1,259
  1,396
  1,539
  1,689
  1,845
  2,008
  2,178
  2,355
  2,538
  2,729
  2,927
  3,134
  3,348
  3,570
  3,802
  4,043
  4,294
  4,555
  4,827
  5,111
  5,407
  5,716
  6,038
  6,375
  6,727
  7,094
  7,479
  7,881
  8,302
  8,743
Total equity, $m
  962
  1,064
  1,179
  1,300
  1,427
  1,559
  1,697
  1,841
  1,990
  2,145
  2,306
  2,474
  2,648
  2,829
  3,017
  3,213
  3,416
  3,628
  3,849
  4,079
  4,319
  4,569
  4,830
  5,102
  5,387
  5,684
  5,995
  6,320
  6,660
  7,015
  7,388
Total liabilities and equity, $m
  2,088
  2,323
  2,575
  2,839
  3,116
  3,404
  3,705
  4,019
  4,345
  4,683
  5,035
  5,401
  5,782
  6,177
  6,587
  7,015
  7,459
  7,922
  8,404
  8,906
  9,430
  9,976
  10,546
  11,140
  11,762
  12,411
  13,089
  13,799
  14,541
  15,317
  16,131
Debt-to-equity ratio
  1.086
  1.110
  1.110
  1.120
  1.130
  1.130
  1.140
  1.140
  1.140
  1.150
  1.150
  1.150
  1.150
  1.150
  1.160
  1.160
  1.160
  1.160
  1.160
  1.160
  1.160
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
Adjusted equity ratio
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458
  0.458

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  8
  -22
  -25
  -28
  -32
  -35
  -39
  -42
  -46
  -50
  -55
  -59
  -64
  -68
  -73
  -78
  -84
  -89
  -95
  -101
  -107
  -114
  -121
  -128
  -135
  -143
  -151
  -159
  -168
  -177
  -187
Depreciation, amort., depletion, $m
  95
  106
  117
  129
  142
  155
  169
  183
  198
  213
  229
  246
  263
  281
  300
  320
  340
  361
  383
  406
  430
  455
  480
  508
  536
  565
  596
  629
  662
  698
  735
Funds from operations, $m
  83
  84
  92
  101
  110
  120
  130
  141
  152
  163
  175
  187
  200
  213
  227
  241
  256
  272
  288
  305
  322
  341
  360
  380
  401
  423
  445
  469
  494
  520
  548
Change in working capital, $m
  -11
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
Cash from operations, $m
  94
  85
  93
  102
  112
  121
  131
  142
  153
  164
  176
  189
  201
  215
  229
  243
  258
  274
  290
  307
  325
  343
  362
  382
  403
  425
  448
  472
  497
  524
  551
Maintenance CAPEX, $m
  0
  -95
  -106
  -117
  -129
  -142
  -155
  -169
  -183
  -198
  -213
  -229
  -246
  -263
  -281
  -300
  -320
  -340
  -361
  -383
  -406
  -430
  -455
  -480
  -508
  -536
  -565
  -596
  -629
  -662
  -698
New CAPEX, $m
  -310
  -194
  -204
  -214
  -224
  -234
  -244
  -254
  -264
  -275
  -286
  -297
  -308
  -320
  -333
  -347
  -361
  -375
  -391
  -407
  -425
  -443
  -462
  -482
  -504
  -526
  -550
  -575
  -602
  -630
  -659
Cash from investing activities, $m
  -245
  -289
  -310
  -331
  -353
  -376
  -399
  -423
  -447
  -473
  -499
  -526
  -554
  -583
  -614
  -647
  -681
  -715
  -752
  -790
  -831
  -873
  -917
  -962
  -1,012
  -1,062
  -1,115
  -1,171
  -1,231
  -1,292
  -1,357
Free cash flow, $m
  -151
  -204
  -217
  -229
  -242
  -255
  -268
  -281
  -294
  -308
  -323
  -337
  -353
  -369
  -386
  -404
  -422
  -441
  -462
  -483
  -506
  -529
  -554
  -580
  -608
  -637
  -667
  -699
  -733
  -768
  -806
Issuance/(repayment) of debt, $m
  140
  133
  137
  143
  150
  156
  163
  170
  177
  184
  191
  198
  206
  214
  223
  232
  241
  251
  261
  272
  284
  296
  309
  322
  337
  352
  368
  385
  402
  421
  441
Issuance/(repurchase) of shares, $m
  84
  133
  141
  149
  158
  167
  176
  186
  196
  206
  216
  227
  238
  249
  261
  274
  287
  301
  316
  331
  347
  364
  382
  400
  420
  440
  462
  484
  508
  533
  559
Cash from financing (excl. dividends), $m  
  219
  266
  278
  292
  308
  323
  339
  356
  373
  390
  407
  425
  444
  463
  484
  506
  528
  552
  577
  603
  631
  660
  691
  722
  757
  792
  830
  869
  910
  954
  1,000
Total cash flow (excl. dividends), $m
  68
  62
  60
  63
  66
  69
  72
  75
  78
  81
  84
  87
  91
  94
  98
  102
  106
  111
  115
  120
  125
  130
  136
  142
  148
  155
  162
  169
  177
  186
  194
Retained Cash Flow (-), $m
  -26
  -133
  -141
  -149
  -158
  -167
  -176
  -186
  -196
  -206
  -216
  -227
  -238
  -249
  -261
  -274
  -287
  -301
  -316
  -331
  -347
  -364
  -382
  -400
  -420
  -440
  -462
  -484
  -508
  -533
  -559
Prev. year cash balance distribution, $m
 
  9
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -62
  -80
  -86
  -92
  -98
  -105
  -111
  -118
  -125
  -132
  -139
  -147
  -155
  -163
  -172
  -181
  -191
  -201
  -211
  -222
  -233
  -245
  -258
  -271
  -285
  -300
  -315
  -331
  -348
  -365
Discount rate, %
 
  9.00
  9.45
  9.92
  10.42
  10.94
  11.49
  12.06
  12.66
  13.30
  13.96
  14.66
  15.39
  16.16
  16.97
  17.82
  18.71
  19.65
  20.63
  21.66
  22.74
  23.88
  25.07
  26.33
  27.64
  29.03
  30.48
  32.00
  33.60
  35.28
  37.05
PV of cash for distribution, $m
 
  -57
  -67
  -65
  -62
  -58
  -54
  -50
  -45
  -41
  -36
  -31
  -26
  -22
  -18
  -15
  -12
  -9
  -7
  -5
  -4
  -3
  -2
  -1
  -1
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  89.1
  79.9
  72.0
  65.1
  59.0
  53.7
  49.1
  44.9
  41.2
  37.9
  34.9
  32.2
  29.7
  27.5
  25.5
  23.7
  22.0
  20.4
  19.0
  17.7
  16.5
  15.3
  14.3
  13.4
  12.5
  11.6
  10.9
  10.2
  9.5
  8.9

Franklin Street Properties Corp. is a real estate investment trust (REIT). The Company is focused on commercial real estate investments primarily in office markets. The Company operates through the real estate operations segment. The Company's investment objectives are to create shareholder value by increasing revenue from rental, dividend, interest and fee income and net gains from sales of properties, and increase the cash available for distribution in the form of dividends to its stockholders. As of December 31, 2016, the Company owned and operated a portfolio of real estate consisting of 36 office properties, which were located in 12 states. It provides asset management, property management, property accounting, and investor and development services to its portfolio and certain of its Sponsored REITs through its subsidiaries. It focuses on investing in select urban infill and central business district properties with focus on Atlanta, Dallas, Denver, Houston and Minneapolis.

FINANCIAL RATIOS  of  Franklin Street Properties (FSP)

Valuation Ratios
P/E Ratio 137.8
Price to Sales 4.4
Price to Book 1.1
Price to Tangible Book
Price to Cash Flow 11.7
Price to Free Cash Flow -5.1
Growth Rates
Sales Growth Rate 2.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 213.1%
Cap. Spend. - 3 Yr. Gr. Rate -11.6%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 108.6%
Total Debt to Equity 108.6%
Interest Coverage 1
Management Effectiveness
Return On Assets 1.5%
Ret/ On Assets - 3 Yr. Avg. 2.1%
Return On Total Capital 0.4%
Ret/ On T. Cap. - 3 Yr. Avg. 1%
Return On Equity 0.8%
Return On Equity - 3 Yr. Avg. 1.9%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 74%
Gross Margin - 3 Yr. Avg. 74.6%
EBITDA Margin 51.2%
EBITDA Margin - 3 Yr. Avg. 56.1%
Operating Margin 4.4%
Oper. Margin - 3 Yr. Avg. 5.2%
Pre-Tax Margin 3.6%
Pre-Tax Margin - 3 Yr. Avg. 7.8%
Net Profit Margin 3.2%
Net Profit Margin - 3 Yr. Avg. 7.6%
Effective Tax Rate 11.1%
Eff/ Tax Rate - 3 Yr. Avg. 6.1%
Payout Ratio 962.5%

FSP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FSP stock intrinsic value calculation we used $250 million for the last fiscal year's total revenue generated by Franklin Street Properties. The default revenue input number comes from 2016 income statement of Franklin Street Properties. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our FSP stock valuation model: a) initial revenue growth rate of 11.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9%, whose default value for FSP is calculated based on our internal credit rating of Franklin Street Properties, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Franklin Street Properties.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of FSP stock the variable cost ratio is equal to 94.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for FSP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Franklin Street Properties.

Corporate tax rate of 27% is the nominal tax rate for Franklin Street Properties. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the FSP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for FSP are equal to 675.8%.

Life of production assets of 17.8 years is the average useful life of capital assets used in Franklin Street Properties operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for FSP is equal to -3.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $962 million for Franklin Street Properties - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 107.287 million for Franklin Street Properties is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Franklin Street Properties at the current share price and the inputted number of shares is $1.1 billion.

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COMPANY NEWS

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Financial statements of FSP
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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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