Q2 2020 Franklin Street Properties Corp Earnings Call
Good morning, welcome to Franklin Street Properties Corporation second quarter 2020 results Conference call.
All participants will be in listen only mode. So do you need assistance leasing know what conference specialist by pressing the star Keith followed by soon.
After todays presentation, there will be an opportunity to ask questions. Please know that this event is being recorded I would now like to turn the conference over to Scott Karger General Counsel. Please go ahead.
Good morning, and welcome to the Franklin Street properties second quarter 2020 earnings call. Joining me. This morning, our George Carter, Our Chief Executive Officer, John The Merit, our Chief Financial Officer, Jeff Carter, Our President and Chief Investment Officer, and John Donna.
Do president about post P. 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 and the risk factor section of our annual report on form 10-K for the year I did decemberthirty one 2019.
As updated for the Colbert 19 pandemic and the risk factor section of our quarterly report on form 10-Q for the quarter ended June Thirtyth 2020.
Both of which are on file with the FCC.
In addition, these forward looking statements represent the company's expectations only as of today.
Just a 2020 well the company may elect to update these forward looking statement. It specifically disclaims any obligation to do so any forward looking statements 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.
Well, we may refer to funds from operations were at Buffalo Reconciliations of basketball and other non-GAAP financial measures to GAAP net income are contained in yesterday's press release, which is available on the Investor Relations section of our website at Www Dot F. S. P. R E <unk>.
T Dot com now I'll turn the call over to George Carter George.
Thank you Scott Good morning, everyone and welcome to Franklin Street properties second quarter 2020 earnings call.
My written comments about the company's second quarter of 2020 are in the last nights earnings press release.
I won't repeat them now, but I do encourage you to read them.
I would like to start this earnings call by making a few brief comments about FSP is currently operating environment in the Cobot 19 pandemic and then turn the call over to other Franklin Street team members.
First our home office located in the Greater Boston, Massachusetts Metro area is now fully open and available to all of our employees as a work environment.
However, working from home policies are still in place for any employee who desire is to work remotely.
Recently, we have been averaging about 50% of our workforce physically present in the home office.
All of US have come to appreciate the exceptional effort and dedication by all FSP employees over the last several months during these difficult times.
And at our 35 office properties around the country.
That happened kept fully open throughout the pandemic.
To our people on site.
Operating those properties managers maintenance engineer security personnel cleaning crews vendors and so many others.
Thank you great job.
All of these efforts are for our customers our tenants each one of them grappling with their own challenges responses and business realities, resulting from the corporate 19 pandemic.
They have been understanding.
Collaborative and appreciative of the unique situation, we all find ourselves there.
They along with FSP remain committed to the health and safety of all employees vendors and visitors at each one of our office buildings.
Recap thank them enough.
Now I would like to turn the call over to John to Merit, Our Chief Financial Officer John.
Thank you George and good morning, everyone.
I'm going to give a brief overview of our second quarter results.
Afterward, I'll pass the call the John Donahue, our president of the asset management team for his comments.
As a reminder, our comments today, we'll refer to our earnings release supplemental package, the 10-Q, which as Scott mentioned can be found on our web site.
We reported funds from operations are up about 20.2 million or 19 cents per share for the second quarter.
During the second quarter, you work with tenants that were impacted by the pandemic.
As part of that we determine whether leases collectible or not.
If we determine is no longer collectible we work, we write off receivables and do not reported current rents unless they're paid in cash.
So part of a losses the receivable write off itself, which is a onetime charge and part of the loss is the last conference that we don't report.
During Q2, we didn't write offs and lost run in the aggregate of 600000.
Approximately 400000 out where receivable write offs, so there's a onetime charge.
The remaining 200000 is grant that we would have charge these tenants linked quarter and walk as we look ahead.
Going forward that amount of lost revenue would be reduced by any cash rents. We received from the tenants we wrote off.
We also reached agreements with the number of tenants on rent deferrals using lease amendments modification and other tenant agreements.
The total of brands deferred buyouts or about 1.4 million at this point.
Which is below six tenths of 1% of our annualized revenue.
Where are these agreements generally result, and us being repaid there is no significant gap or AFFO impact problem.
We are working with other tenants that are having issues I will provide updates periodically like we have here.
Turning to our balance sheet at June 30, we had 1 billion of unsecured debt outstanding and we have 30 million drawn under our line of credit.
Which is the same amount we had drawn at the end of March.
Our total debt of 1 billion at the end of June was also the same amount of data that we had at the end of March so.
Even with all the activity we had in Q2, our total debt levels remain the same.
From a liquidity standpoint, we have $570 million available on our line of credit because we look ahead.
As a reminder.
All of our debt is unsecured and.
We have no debt maturities until November thirtyth of 21.
About 92% of our does it fixed rates.
With our death care more turned out and our rates mostly fixed.
Do you believe we've aligned our capital structure with more long term value add properties that we haven't our portfolio.
With that I'll turn the call over to John John.
Thank you John good morning, everyone.
At the end of the second quarter, the FSP operating portfolio, excluding redevelopment properties was 84.5% leased.
Compared to 87.6% leased at the end of calendar 2019.
The decrease of approximately 3% was primarily due to the anticipated tenant departures in Virginia, and Texas that totaled approximately 200000 square feet.
After a relatively strong leasing results over the past eight consecutive quarters. The second quarter of 2020 was full of uncertainty as the pandemic essentially shut down the economy and appeared to close the window of opportunity that FSP had forecasted to occur.
We're in the first half of calendar 2020.
Although many prospective tenants hit the pause button prior to June.
I am pleased to report that we have over 500000 square feet of active tenant prospects that represent potential net absorption.
As the window of opportunity now appears to be open again.
Approximately 200000 square feet of the active prospects have selected FSP buildings and are either currently in leases were extremely close to finalizing letters of intent.
We look forward with cautious optimism that the second half of calendar 2020 will bring favorable leasing momentum and results.
The amount of scheduled lease commencements for FSP is portfolio and the second half of 2020 are expected to exceed the number of lease expirations and departures.
There are approximately 324000 square feet of schedule, Commencements and approximately 176000 square feet of maturities.
Therefore, barring any surprises the economic occupancy for the portfolio is expected to rise or the final six months of the year.
If the economy trends in a positive direction and if we are able to time, we finalized leases for a high percentage of the active prospects than the percentage of leased occupancy for our portfolio should also rise by a meaningful amount prior to year at.
Rent collections during the second quarter were approximately 98% and recollections for July or approximately 97% thus far.
FSP is asset management and property management teams have done an outstanding job of proactively engaging the tenants seeking many different levels of relief.
Although the pace of requests have slowed significantly since early in the second quarter. We don't know the full impact of the pandemic on annualized rents ordinary near term cash flow.
Thank you and with that I'll turn it over to Jeff Carter.
Thank you John good morning.
We here at Franklin Street properties Hope, everyone remains healthy and save during these turbulent times.
FSP remains focused on owning high quality office properties in amenity rich locations within the U.S. Sunbelt mountain West as well as several opportunistic markets. Despite all of the current difficulties stemming from the pandemic long term job growth population growth cost of living.
And quality of life information for the Sun belt and mountain West regions continue to demonstrate positive potential for future upside performance, where our largest markets reside.
By focusing on delivering excellent service at all of our locations. We continue to believe that our portfolio is well positioned to generate the conditions for future value creation.
Given the cobot 19 pandemic I wish to briefly discuss what we're seeing around the country within the investment marketplace.
Unexpectedly due to uncertainties stemming from the pandemic the second quarter. So a steep decline in office sales volume.
And although there is some chatter that more properties will be coming to market as the year progresses consensus is that aggregate volume will remain well below normalized levels.
Three covert 19 value add properties were a primary target of investors due to their potential upside at a much wider level of risk tolerance. Conversely, what we're seeing today as far more targeting of well leased fewer moving pieces high quality properties due to a greater risk off focus.
And desire for safety yield.
Dry investment powder appears to be plentiful, but two factors seem to have mitigated its deployment and assets. The first relates to securing financing with more challenging underwriting assumptions being utilized and the second relates to a disconnect between owners pricing expectations and buyers desire to us.
More distressed price levels.
Specifically on the disposition, an asset recycling front and although difficult to gauge with any precision given the greatly reduced national investment sales market FSP, we'll monitor portfolio for potential opportunistic dispositions our criteria for potential dispositions as focused first and.
Foremost on achieving value maximization at the asset level as well as consideration for the redeployment of any such sale proceeds which would likely initially include debt paydown and looking out further potential new property investments.
Broadly speaking, though we currently view are directly owned portfolio as possessing the upside potential that we're striving to capture and we will keep the market up to date as appropriate should circumstances warrant.
Specifically on the acquisition front FSP continues to track all suitable investment opportunities within our markets and we will continue our efforts to identify high quality properties the possess the ability to add value over the short to intermediate term.
And with that I. Thank you for listening to our earnings conference call today and at this time, we'd like to open up the call for any questions.
Later.
We will begin the question answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the key to withdraw your question. Please press Star then one.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Rob Stevenson from Jamie.
Go ahead.
Good morning, guys can you characterize the discussions you've been having with ER with your tenants with lease expirations over the next 18 months what percentage are looking to do short term renewals given the uncertainty and how receptive are you guys to those type of discussions and whether or not it's you know premium rents to do that et cetera.
Hi, Rob It's John Donahue.
The short answer to your question is yes, we are receptive to a wide range of.
Length of terms that are tenants are discussing a I would say that.
Most of the tenants that are expiring within the next 12 months are.
In engaged in discussions of what they want to do and then beyond 12 months it drops off pretty precipitously. Although there are several large tenants that have begun begun discussions and as you would expect they are requesting.
Multiple proposals and those range from short term two or three year proposals mid bid link term of five years, and 10 years or longer. So there. They are looking at a wide range of options.
For tenants, there expiring well inside at 12 months and most of those tenants are probably under 50000 square feet and maybe a heaviest waiting below 20000 square feet. Those tenants are being cautious and conservative in replanting, whether they're going to need more space.
Because of new office requirements, social distancing, whatever or if they're going to contract due to work from home. So we don't have a good sense yet of how all of that trends out over the long term, but we are certainly entertaining one year kick the can down.
The road.
Extensions for tenants that want it and were also a comedy and then accommodating those tenants that watts expansion options and maybe looking a little long term I hope that helps you. Yeah. That's very helpful. And then you know in terms of ongoing discussions you're having with new tenants maybe how many of these.
Would you say are have basically taken any type of a co bid and working from home sort of factors into play in terms of how many you know meeting much less space, but also you know needing much greater spacing and how the common areas it could.
Figured main are basically these you know the new tenants still operating you know they would have you know in January or February or has the new sort of reality said it in terms of their or their demands and what they need from a from a space standpoint.
There's a lot there Rob.
So I'll I'll start with the smaller tenant universe.
And in many of our suburban markets. They are looking at occupancy occupancy is probably within the next six to eight months and they're looking at buildings currently with only 10% to 20% physical occupancy is because many people are not back to work yet and so they're getting a good.
Good sense of what landlords are doing with reduced occupancy is and they are planning probably more for the short term than a long term in regards to what the office environment is going to be like.
I will say, though that many of those tenants are trying to lock in.
Expansions and asking landlords to keep a additional space off the market. So that they can grow over the next year or two and for the larger tenants that are looking well into 2021 back half of 2021, they are re planning and looking at more space.
In our portfolio I can't speak in terms of trends of of the entire market, but for our portfolio. We're hearing more cases of them wanting options to grow as they.
Figure out what their space needs are going to be.
Okay.
How meaningful for you guys, it's been a hit to parking revenues.
I don't have that number handy, but I do know that we did have a hit on three properties in particular and the second quarter. John you have that number heading.
I think it's around 300000 quarter this sort of trends in parking lot of the parking we have is contractual so it's part of the ramp but the transient number as I recall is about 300000 quarter.
Okay, and then last one from me with the leases you've already signed how significant should we be thinking about tenant improvement leasing commissions capex that you will still need to fund and I'll hit the.
FFO in the back half of this year.
That is really hard to say Rob.
The lions share of capital expenditures that we're incurring.
Currently our from leasing that we did last year or even before that.
And then we also have a certain percentage of capex for our improvements and common areas.
As we had in our in our release, we've had the ability because of lower tenant.
Populations to to move forward on some some projects that might have been otherwise deferred.
I would say that in terms of the.
Cost of new leasing you're going to continue to see an average cost in between five to $6 per square foot per year as you've been seeing the last two years and I believe that most of that the lion's share that will be.
You know a lag effect that will be more than six months out that will probably be in the majority in 2021.
And so to summarize I think what you'll see in the back half of calendar 2020 are going to be a t. guys and.
Other other capital projects that had already started over the last year.
Okay, because if I look you know you're sort of six month number between on not the in the supplement between 10 improvement leasing commissions and non investment capex.
Is call it $40 million for the six month, so just trying to get a handle whether or not you know the $40 million is likely to be.
Higher or lower or about the same as we think about the next six months.
Well, we hope it's a lot higher because that means we've done a lot of leasing.
Okay.
The number that is the biggest variable for the next six months will be commissions.
And commissions for large deals in particular, but I think the trend that you've seen the last few quarters will be roughly the general rule and last we can get a nice surgeon leasing here over the next three months or so.
Okay. Appreciate it guys. Thanks.
Yeah.
Our next question is from frankly from BMO.
Go ahead.
Hi, Good morning, I've, a follow up question on your half a million leasing pipeline.
How did the pipeline changed versus the 300000, you mentioned on the last call I wasn't sure that new category was added this quarter in terms of.
Well you guys categories as early discussions stage or whether you actually things.
Incremental demand stemming from the pandemic.
Hi, Frank It's John Donahue.
Yes, the numbers are fluctuating over the last six months or so.
I believe at year end, we had announced that we had approximately 400000 square feet of of active prospects and that number decreased a bit at the end of the first quarter. We tried to be careful to distinguish between what our tenants that are in leases.
Meaning that they not have only selected an FSP building, but we're actually.
In the lease process of get getting that that lease finalized.
And also careful to destroying distinguish us from those that might be just in the earlier process and have shortlisted our properties. So.
The 500000 square feet represents those tenants that are.
All of those.
The tenants that are in leases near final Ela wise and also prospects that of Shortlisted us typically down to a shortlist of three buildings or two buildings and we believe that they are very warm or hot prospects.
My remarks, you probably heard me say that about 200000 square feet of the 500000 square feet have selected FSP buildings and are either in leases now or extremely close to a final Ela LOI.
Okay. Thanks, and then can you remind us of some of the larger known move outs that will occur in the remainder 2020 and into 2021. Thanks.
Sure Frank so.
I'm happy to say that we are not expecting any more large outs in calendar 2020.
And for the first quarter of 2021.
We're not expecting any large move outs as well we do on our top 20 list of tenants. We are expecting the IRS to finally downsize at some point in the first quarter of 2021, but they have been slow too.
Well, there both build out and I wouldn't be surprised if that gets postponed again and then as of now the largest move out over the next 12 months is expected to be Jones day in Atlanta, which is scheduled for may of 2021.
Okay, great. Thank you.
Our next.
Can you just you.
Again.
Good question. Please press Star then one.
The next question if summit Selman from Baird.
Hey, guys.
Hey, guys.
Just quick quick question on they vacant building on from first quarter and foreign currency racing demand from government contractors or inferred from users by the building as opposed to the company, putting some capital into it.
Hi, Thank John Donahue here.
We.
I have had.
The lions share of interest in leasing and.
Inquiries to potentially purchase the building our sporadic and opportunistic.
Most often those kind of offers are.
Not very.
The appealing so.
I won't get into that here on this call, but suffice it to say that we do have a number of.
Potential prospects for further building that we call stone Croft to backfill Northrop Grumman and we are working with those prospects and they are.
Related to government work not necessarily government contract, but.
Companies that you would be familiar with that are working with the government.
Okay, Great and then I guess this is already kind of been touched on but just wanted to clarify. So further ran that exploration and 2021, what's the status. There are you expecting a renewal then see it out but when you were talking about known move outs. So just wanted to check that one.
I believe you're asking if there's a rent roll down expected in 2021 or an increase is that what you're asking.
So there is a on your exploration schedule. It says that there's a rents that there's a 98000 square foot exploration and 2021 I just asking are you expecting a renewal there and if so like you talk about that a little bit.
Hi.
I believe you might be looking at the GSK is that the U.S. government is that we're looking at.
Randstad.
On the top tenant list.
Randy the general partners.
Okay. Thank you, yes, thats 12 months out and so.
We are in discussions with randstad to renew and like many tenants of that size. They are trying to determine what their future space needs. Our if theyre going to need less space. We're more space. So although discussions are continuing they are engaged we don't know exactly what their.
Space needs are going to be.
Okay, and then I have my last questions on the balance Yeah, 200 million maturing or late 21, what is your ability to refinance that early unlike at what rate could you finance that.
Yes, John John to write off volumes.
We have a terrific bank were 12 banks that we work with.
And.
Two of the sensitive.
The Bank group are represented in that maturity.
And I, we had good relationship with the expressed a lot of interest in wanting to do with us.
With us so I don't anticipate having an issue with that as far as rates right now.
Currently.
Spreads have widened as a result look endemic and preferred that from a number of banks we deal with.
So the spreads would certainly be much higher right now.
But we're hoping and their opening that things will settle down time, we actually started.
Having discussions with about replacing that that so.
We'll be talking with them at the end of this year, beginning next year and we'll see what the interest rate markets and spreads look like at that time.
So that's where I can answer to that point.
Great that's all for being thanks.
This concludes our question and answer session.
I would like to turn the conference back over to George Carter for closing remarks.
Thank you everyone for attending the recall and I Hope you all stay safe, we look forward to talking to you.
Next quarter and if that.
And again I think I think as John Donahue said I.
I think to window is starting to open again.
We all are watching these flare ups around the country and where this whole pandemic goes over the next quarter to.
As well as vaccine.
Promises that do look promising on a number of fronts, but we are we are active again on leasing and we're very optimistic about the next six months on look very much forward to talking to you next quarter. Thank you again stay safe.
That's helpful. I'll conclude that thank you for attending today's presentation you may now disconnect.