Franklin Street Properties Corp.

Good day and welcome to the Franklin Street Properties third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to Scott Carter, General Counsel. Please go ahead, sir.

Good morning, and welcome to the Franklin Street Properties Third Quarter 2021 Earnings Conference Call. Joining me this morning are George Carter, our Chief Executive Officer. John DeMeritt, our Chief Financial Officer, Jeff Carter, our President and Chief Investment Officer, and John Donahue, President of FSP Property Management. Also joining me this morning are Toby Daly and Will Friend, both Executive Vice Presidents of FSP Property Management. Please note that various remarks that we may make about future expectations, plans, and prospects for the company may constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our annual report on Form 10-K for the year ended December 31, 2020, which is on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today, November 9, 2021. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statement should not be relied upon as representing the company's estimates or views as of any date subsequent to today. At times during this call, we may refer to funds from operations or FFO, reconciliations of FFO and other non-GAAP financial measures to GAAP net income are contained in yesterday's press release, which is available in the investor relations section of our website at www.fspreit.com. Now I'll turn the call over to John DeMeritt. John?

John DeMeritt Thank you, Scott, and good morning, everyone. I'm going to give a very brief overview of our third quarter results. And afterward, I'll pass the call to George for his comments. And as a reminder, our comments today will refer to our earnings release supplemental package in 10Q, which as Scott mentioned, can be found on our website. We reported funds from operations or FFO of $14.8 million or 14 cents per share for the third quarter of 21. During Q3, we completed the sale of three properties at a net gain of 8.6 million and used the proceeds to repay $90 million of our 2023 debt maturity. In October, we sold another property at a gain of about $86.8 million and used $215 million of the proceeds to repay $15 million against the drawn balance of our revolver and $200 million against our 2023 debt maturity. As of today, we have $475 million of debt outstanding down from $1 billion outstanding a year ago. At quarter end, between cash on hand and availability on our line, we had total liquidity of about $609.7 million. And as a reminder, all of our debt is unsecured. Although our revolver matures in 2022, we can extend that maturity for a year. And with that, I'll turn the call over to George. George?

Thank you, John. And again, welcome to Franklin Street Properties' third quarter 2021 earnings call. Significant activity at FSP occurring since the end of the second quarter 2021 includes the sale of 999 Peachtree on October 22nd, 2021 for $223.9 million and a new lease of approximately 100,000 square feet with a new tenant at our Midtown Atlanta property, Persian Park. This lease substantially backfills the vacancy left by the recent departure of Jones Day. As of October 22nd, 2021, we have sold a total of eight properties in 2021 for aggregate gross proceeds of approximately 563 million. Between September 30th, 2020 and October 25th, 2021, we have reduced our total indebtedness by approximately 53 percent from approximately $1 billion to approximately $475 million. Demand for our real estate assets has come from a diverse pool of potential buyers. Aggregate pricing on the properties sold has reinforced our strong conviction that we are unlocking embedded value for our shareholders that is not currently reflected in the price of our stock. Consequently, we have increased the top end of our 2021 disposition guidance from a previous range of approximately 350 to 450 million to a new range of approximately 563 million to 600 million. I think it is important to emphasize that our criteria for selecting potential properties for disposition is asset-specific. We consider a variety of factors, but primarily it's our view of a specific property's short- to intermediate-term upside potential and value objectives weighted against a longer-term hold scenario of estimated future capital costs and a total potential net return analysis that could be achieved over that longer ownership period. We believe that the pricing achieved on our dispositions to date in 2021 is generally indicative of the pricing that could currently be achieved on our continuing portfolio of real estate assets. We continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets. And so long as that price to value disparity remains as wide as we see it, it is our intention to continue our strategy of seeking to increase shareholder value through the sale of select properties. We believe that the net value of our continuing real estate portfolio of assets net of outstanding liabilities would exceed $10 per share of FSP common stock based on our market valuation estimates and using pricing levels we have achieved to date on our dispositions as a benchmark applied across our continuing real estate portfolio. We intend to use the proceeds from any future dispositions for continued debt reduction, repurchases of our stock, and special dividends required to meet REIT requirements and other general corporate purposes. With those comments, I will turn the call over to John Donahue, President of our Property Management. John?

John Donahue Thank you, George. Good morning, everyone. The FSP portfolio was approximately 78.8 percent leased at the end of the third quarter as compared to 78.5% leased at the end of the second quarter. The increase is attributable to 172,000 square feet of new leasing achieved primarily in Atlanta and secondarily in Dallas and Houston. During the third quarter, FSP finalized a lease for an anchor tenant at Pershing Park, which will occupy approximately 100,000 square feet, backfilling the majority of the space vacated by Jones Day in the second quarter. FSP is currently tracking over 600,000 square feet of potential new tenant prospects and approximately 100,000 square feet of renewals. Approximately 400,000 square feet of the new tenant prospects have shortlisted FSP assets, identified an FSP building as their top choice, or signed a letter of intent. We continue to be encouraged by meaningful growth in leasing activity and FSP's healthy pipeline of prospective tenants. During the first nine months of calendar 2021, FSP has finalized over 890,000 square feet of total leasing, including new deals and renewals. For the final quarter of 2021, FSP has approximately 72,000 square feet of tenants expiring, which is less than 1% of the portfolio. Due to the limited rollover exposure coupled with improving demand for space in FSP's assets, we believe that our portfolio is well positioned to make meaningful progress regarding net absorption over the next three to four months. Thank you. I will now turn it over to Jeff Carter.

Thank you, John. Good morning, everyone. We here at Franklin Street Properties hope that everyone remains safe and healthy. Building on our comments from last quarter, FSP is continuing to see strong demand for well-located and high-quality office properties from a diverse group of buyers. And importantly, we are achieving pricing that is exceeding our expectations. More specifically, and since our last quarterly call, We sold properties totaling approximately $326 million that include River Crossing in Indianapolis for $35,050,000, Timberlake Corporate Center in Greater St. Louis for $67 million, and at 999 Peachtree in Atlanta for approximately $224 million. In aggregate, our property sales for the year now total approximately $563 million and have exceeded our original disposition guidance. FSP also has two additional properties, Meadow Point and Stonecroft, both in northern Virginia under the purchase and sale agreement. And subject to normal closing conditions, we expect to complete their respective sales during the fourth quarter. Given the compelling demand and pricing being experienced, FSP increased the top end of our disposition guidance range to approximately $600 million. As mentioned, our closed and pending sales have achieved pricing in excess of our own market valuations and have affirmed to us our belief that such dispositions are indeed capturing embedded value for FSP shareholders. To date, during 21, our dispositions have sold at an aggregate weighted average in place cap rate of approximately 5.8%. With the pending sales of Metal Point and Stonecroft included, the weighted average in place cap rate will adjust to approximately 5.4% and that a weighted average occupancy of about 84%. The primary objective of our disposition work has been to materially reduce corporate indebtedness at FSB and position the company for stronger future returns and opportunities to our shareholders. Over the longterm, FSP remains committed to high-quality properties located in dynamic markets, including the U.S. Sunbelt and Mountain West, where we have owned and invested for many years. Accordingly, property sales made during 2021 that occur within the U.S. Sunbelt should not be viewed as a statement about our commitment to such market, but instead as an asset-specific decision intended to capture embedded value for our shareholders. And with that, We thank you for listening to our earnings conference call today. And now at this time, we'd like to open up the call for any questions. Rocco?

Yes, sir. Thank you. If you'd like to ask a question, please press star then one on your touchdown phone. If you would like to remove yourself from queue, please press star then two. Once again, ladies and gentlemen, that's star then one if you have a question. Today's first question comes from Craig Cucero with V-Rally Securities. Please go ahead.

Yeah, hey, good morning, guys. John, do you have a sense of what the special dividend might be at this point based on the sales completed year-to-date and what it might be if those other sales that are scheduled to occur would be?

Yes, this is John. We don't have an amount that we can divulge right now. There's a lot of calculations involved with coming up with that, and the board will make that decision once we have more information. Okay.

George, this is more a question for you. You know, just given where the stock is trading on an implied cap rate basis, you know, we would agree that your assets are undervalued from an NAB perspective, but is the Board considering strategic alternatives at this point?

Hi, Craig. So, the short answer to your question is yes. The board is considering all avenues and always does consider all avenues to try to create the best value for shareholders, including strategic alternatives. To take one step back, though, Craig, and to make sure that – because I don't think I've necessarily – made this as clear over the last few earnings calls as I probably should have. Our strategy, which starts at the top of trying to create the best value for our shareholders, revolves around our belief that at our core, we have great properties in great locations and that many of those properties have tremendous potential for leasing, appreciation, et cetera. Once the COVID pandemic truly ends, markets truly reopen. As the pandemic came upon us, it became clear to us that the best way to position the company for whatever path was the best path for the shareholders would be to realize some of the true power that we believe the market does not recognize in pricing our stock by disposing of some assets that we believe do not have, from our perspective, a lot of nearer term or intermediate term potential to add that value for our shareholders. And those are the properties that we have been disposing of. And to keep those properties that really have that potential post-COVID and that we believe can create that value. And as we dispose of these properties this year, the primary objective was, is, and continues to be to reduce indebtedness. Reducing indebtedness to the level that we have done and may still do with some further dispositions is to give us the maximum flexibility coming out of post-COVID, coming into our best properties in our best markets that we believe have the best near-intermediate-term potential to add that value. And that has really been the objective. And as we come out of COVID and have the opportunity that we believe is in front of us with a fortress balance sheet that we have completely remade from dispositions, all paths, Craig, all paths, including strategic paths, are constantly looked at and viewed as the best path to take for our shareholders.

Got it. So it doesn't sound like you have engaged with a third party in that sense. I guess what would it take if you guys, you know, are looking at your portfolio and saying, you know, we think our portfolio is worth more than $10 and, you know, quite frankly, parentally you guys have traded at a fairly steep discount to your net asset value. I guess what would it take for you guys to maybe think it made sense to accelerate that process given the you know, the amount of success that a lot of other small cap REITs have had in entering into strategic alternatives and really getting their shareholders a much better value relative to their NAV?

You know, Craig, we are constantly, currently, along with all the other paths, looking down strategic paths. We are, as we speak, looking down strategic paths, as well as all the other paths. And so what it takes is getting a value for our shareholders that we believe is the best value for them that can be gotten versus all the other paths. And that is currently going on as we speak. Again, all paths.

Okay, thank you.

And then, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to George Carter for any final remarks.

Thank you, everyone, for turning into the call, and I'll be speaking to some of you on the NAIRIC virtual. Thank you again. We'll look forward to talking to you next quarter.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.