Q3 2020 Franklin Street Properties Corp Earnings Call
Good day and welcome to the Franklin Street properties Corp. third quarter 2020 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star keep all the time.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Scott Carter General Counsel. Please go ahead.
Good morning, and welcome to the Franklin Street properties third quarter 2020 earnings 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 spreads.
About best P. property management also joining me. This morning are Toby Daley and well, Brian both executive Vice Presidents about Mindspeed property management. Please.
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.
As 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 2019.
As updated for the coal, but 19 pandemic in the risk factor section of our quarterly report on form 10-Q for the quarter ended September Thirtyth 2020, both.
Both of which are on file with the FCC.
In addition, these forward looking statements represent the companys expectations only as of today November four 2020, while the company may elect to update these forward looking statements. It specifically disclaims any obligation to do so any forward looking statements should not be relied upon.
Fun 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 were asked about ball reconciliations of basketball and other non-GAAP financial measures to GAAP net income are contained in Yesterdays press release, which is available on the Investor Relations section of our website that W.
W.W. Dot FSP Ari I 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 third quarter 2020 earnings call.
I would like to start my portion of this earnings call by making a few brief comments about FSP current operating environment in the COVID-19 pandemic.
Our home office located in the Greater Boston, Massachusetts Metro area has remained fully open and available to all of our employees as a work environment during the quarter.
However, working from home policies are still in place for any employee who desires to work remotely.
We have continued to average about 30% of our workforce physically present in the home office.
All of US continue to appreciate the exceptional efforts and dedication by all FSP employees over the last seven months during these difficult times and at our 35 office properties around the country.
That have been 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 for your continued great job.
All of these efforts are for our customers are valued tenants each one of them grappling with their own challenges responses and business realities, resulting from the COVID-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 building.
For the full third quarter of 2020, we collected approximately 98% of contracted rent and as of October 31st we have collected approximately 98% of October rats how.
However at this time, we are not able to predict whether and to what extent are level of rental receipts may change in future months. Consequently, we are continuing suspension of net income and funds from operation FFO guidance and will not be providing additional guidance until such time as we have a better.
Standing of.
The duration of the COVID-19 pandemic and its impact on our business and the businesses of our tenants.
Those opening comments, let me turn the call over to our CFO John de Mary.
John.
Thank you George and good morning, everyone.
I'm going to have a brief overview of our third quarter results.
The word I'll pass the call to John Donahue, our president of the asset management team because comments.
As a reminder, our comments today will refer to our earnings release supplemental package and 10-Q, which as Scott mentioned can be found on our website.
We reported funds from operations or AFFO of 20.4 million or 19 cents per share for the third quarter of 2020.
During the third quarter, we worked with tenants that were impacted by the pandemic.
As part of that we determine whether leases collectible or not.
If we determine because it's no longer collectible re write off receivables and do not report current rents unless they are paid in cash.
So part of this losses receivable write offs, which is more of a one time event.
Part of the losses current rents that we we stop reporting.
During Q3, we had write offs and loss of only $108000 and on a year to date basis. The total of 631.
Going forward the amount of lost rent from tenants that we wrote off would be reduced by any cash rents that we receive from them.
We also reached agreements with a number of tenants on run deferrals using lease amendments modifications another tenant agreements.
Total rents deferred by us during Q3 were only $27000.
Year to date basis, it's about $1.5 million at this point, which is below six tenths of 1% annualized revenue.
Where these agreements generally result in us being repaid there is no significant gap or FFO impact from.
We are working with other tenants that are having issues and we'll provide updates periodically periodically like we have here.
Turning to our balance sheet at September Thirtyth 2020, we had 1 billion of unsecured debt outstanding and had 30 million drawn under our line of credit which is the same amount weve had drawn at the end of June in March this year.
Our total debt of $1 billion at the end of September was also the same that we had at the end of June in March of this year. So even with all the activity we've had our debt totaled up level remain the same.
From a liquidity standpoint, we have $570 million available on our line of credit as we look ahead.
As a reminder, all our ddos unsecured we have no debt maturities until November Thirtyth 2021.
92% of our debt is at fixed rates.
With our debt stack more turned out and our rates mostly fixed.
We we have aligned our capital structure, but the more long term value add properties that we have our portfolio.
With that I'll turn the call over to John John.
Thank you John good morning, everyone.
At the end of the third quarter, the FSP portfolio, including redevelopment properties was 84.3% leased which is an increase from 83.3% leased at the end of the second quarter Yeah.
And represents a total portfolio high point for calendar 2020.
Rent collections during the second quarter and third quarter have averaged approximately 98.4%.
And recollections for October or approximately 98% thus far.
FSP is asset management team and our property management teams continue to work with tenants seeking many different forms and levels of release.
There have been fewer formal requests during the past few months and certainly not as significant as the number witnessed in the second quarter.
That said there appears to be growing dialogue with a select number of tenants about potential needs for extended relief due to economic uncertainty.
We may not fully understand the impact of the pandemic on annualized rents and cash flow until later in the fourth quarter were perhaps next year.
During the third quarter FSP leased approximately 282000 square feet, which included 181000 square feet of net absorption with new tenants.
Total leasing finalized year to date for all three quarters was approximately 606000 square feet of which approximately 347000 square feet was with new tenants.
We are pleased to report that the asset known as either one Mark cat is approximately 92% leased.
Our Midwest portfolio, consisting of approximately 1.7 million square feet is now 95% leased.
We have approximately 240000 square feet of potential net absorption over the next three to six months, including 180000 square feet of new prospects.
If we are able to finalize deals with the majority of the potential prospects dim barring any surprises, we expect leased occupancy and economic occupancy to both trend upward over the next several quarters.
Thank you I will now turn it over to Jeff Carter.
Thank you John good morning, everyone.
We here at Franklin Street properties Hope, everyone remains safe and healthy during these trying times yeah.
FSP maintains its focus on owning high quality properties in amenity rich locations within the U.S. Sun belt.
West as well as several opportunistic markets.
Although difficult to look past the current pandemic ripping the nation in World FSP continues with our conviction that the long term prospects for job and population growth, but then the sunbelt and mountain west regions right.
We remain some possesses positive long term potential for upside performance.
Given the COVID-19 pandemic I wish to briefly discuss what we're seeing around the country within the investment marketplace.
Not unexpectedly and largely due to uncertainties stemming from COVID-19, the third quarter continued to see reduced office sales volume on a national level.
Despite such reduced sales volume investment capital remains selectively available for high quality and well performing assets risk.
Risk off properties and compelling locations are still garnering attention while the pendulum has largely swung away from value add properties that possess significant leasing uncertainties.
Financing conditions appear to be slowly improving.
But pricing disconnects can still be a factor between buyers and sellers in some cases with buyers hoping for more distressed pricing opportunities that are often presenting.
On the disposition and asset recycling front.
SP continues to monitor our portfolio for potential opportunistic dispositions our criteria for potential dispositions focus is first and foremost on achieving value maximization at the asset level.
With any potential property disposition in the future FSP would ultimately look to redeploy such proceeds into their highest and best use which at this time would likely initially include debt pay down and looking out further potential new property investments will keep the market up to date as appropriate.
On the acquisition front FSP continues to track all suitable investment opportunities within our markets.
We will continue our efforts to identify high quality properties that possess the ability to credibly add value over the short to intermediate term.
And with that I. Thank you for listening to earnings conference call today and now at this time, we'd like to open up the call to any questions. Thank you operator.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you are used to me speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
The first question today comes from Dave Rodgers of Baird. Please go ahead.
Yeah. Good morning, everyone. John Donahue, maybe start with you on some of the leasing you guys signed a number of leases during the quarter, which was a positive trend for you I'm wondering if you could talk a little bit more about the actual GAAP and cash occupancy commencements for.
The locks.
In Minneapolis, as well as Forest Park, and then just confirm the Pulte is on track for the fourth quarter move in.
Sure Dan Good morning.
So.
Starting with.
The luxe.
Were expecting that leads to commence early.
Early in the third quarter.
Next year.
And that that would be a relatively.
Short free rent period, so cash rents I don't have that information handy, but.
Recalling that that would probably be near the end of the year or early the following year, but the the FFO would commence early third quarter.
And then so.
Similarly, the lease that we executed in Charlotte would have the same timeframe very similar.
Time commencement for the DSS FFO.
And last but not least the commencement.
Commencement of Dublin are in in the fourth quarter or the first quarter is largely dependent upon substantial completion of construction.
Which we believe at some point when it will occur at some point in December and then we hope to welcome Lin Arctic will begin shortly thereafter, we don't have an exact date, yet but lease commencement and what we'll let you know as soon as we know more.
Yes, Thanks for correcting me I have the tenant wrong, so apologize for that the leasing pipeline that you mentioned the 240000 square feet can you can you talk about those discussions I mean, when those pre co bid that have come back are these tenants that are looking to expand footprint. So they can put more people in office more distance.
Hey, maybe some comp some conversation around that would be helpful. Just from a broader office context, and then any comment on where that might that might happen would be helpful as well.
Sure Dave the.
The activity that we're seeing now is.
Split.
As far as number of tenants go.
In regards to pre code bid origination versus post cobot origination so the number of prospects.
Is almost split evenly down the middle there.
There is for our company a weighting toward square footage of companies that we've been in dialogue for longer than the cobot period. So we hope to finalize those deals because we've been working on for a long time.
Our activity rate now is in Virginia, and in Texas, and then Denver, and Atlanta and in that order as far as materiality and waiting and we feel really really good about a good batting average, but getting those.
Sales done over the next three four or five months or so.
Thank you for that and maybe last question and I'll toss it to Jeff or George.
Throwing the Chantilly asset don't cropped into redevelopment, maybe that dovetails, Jeff with your comments that the market for value add isn't as strong.
But I guess as you think about kind of putting more assets into redevelopment you know what type of returns do you expect to get if any sounds like leasing is picking up and then I guess, maybe dovetailing that also with the Jones day space would we expect that to move into redevelopment as well or is there more you can do there.
I can answer the question about the Redevelopments.
David in regards to.
The redevelopment so as you know the one Marquette building was was moved out as Weve reached lease lease stabilization and.
We are.
Now, adding the still crop building into the redevelopment the anticipated investment there has moved up a little bit due to multiple factors. One is that we're investing more for the multi tenancy and because of that.
Even though the lack of demand we feel like we need to step up the game a little bit there and invest more we do have some prospects for the building. We don't we don't know exactly how much space those processes prospects will take it might take a little longer as well because of the co bid.
In the future.
It's a complete guess at this point in time, but the.
Pershing Park Plaza building is already at double a building.
Exceptional lobby.
High quality building and location I don't see that as a repositioning even though it's a large vacancy.
We're already seeing some activity and interest in portions of the building. So my my guess at this point is that that would not be added to the redevelopment category, but stay tuned.
Okay. Thanks, John.
The next question today comes from Rob Stevenson of Janney. Please go ahead.
Good morning, just a follow up on Daves question John.
John is that kind of demand concentrated in certain markets is it more broad across the portfolio, how would you sort of characterize.
Where the demand is perhaps first space these days.
Hey, good morning, Rob John Donahue again.
So.
I would say that we have.
Superior demand in the suburbs than we do in the urban locations.
As far as where in the country. It is.
Probably highest in Virginia.
And then Dallas.
And then moving to the other markets excuse me.
Houston.
However, probably trailing.
Okay, and then how are you guys thinking about the sort of trade off between tenants wanting some shorter term leases given all the uncertainty versus the costs on the tenant improvement at least commission side et cetera, and the trade off back and forth.
You know or do you guys you know agnostic it it's certain sliding levels for you guys pushing for longer term leases at this point in time is you know a 24 month or lease.
Just too good to pass up given vacancy how are you guys thinking about all that.
So, it's it's difficult or challenging to give you a broad brush cancer. Because every every deal is different I would say that we.
We are we're focused mostly on retaining our attendance and listening to them on what they.
We'd like to do.
We're not yet seeing Rob any real significant downward pressure in rents.
The national stats are showing the asking rents are actually rising.
Primarily due to new deliveries, but.
But there is downward pressure on effective rents.
If you think of IR ours and returns in regards to rising concessions and effective rates going down.
You would maybe assume debt you're better off with the short term as his deal but.
Right now tenants are uncertain, if theyre going to need less space for new space because of code. So kicking the can down the road for 612 months.
Getting into 2000 2022 is.
It's prudent for some of those companies as far as what we'd like to see it.
All things being equal we would love to have a streamlined exposure over the next 10 years, so equal expirations in every year to mitigate our risk, but really we don't have that luxury. So we're just working with the tenants as they come up for new demand for for those that are actually truly engaged and want to stay.
Like a deal in the near term.
So the large share of those groups are looking for long term big Ti deals.
The other side of that coin would be tenants looking for really short term high end space in upgrading their image and their occupancy and maybe.
A discount whether it be a sublease space or a direct space.
With a very flexible term that flexible options. So hopefully that helps you out but it really is deal specific yeah. Thank you and then last one for me George how is the board thinking about the sustainability of the common dividend or they just viewing this as a covert driven.
And that you can still grow into it fairly easily on lease up is.
Some of that money better spent on redevelop and re tenanting costs can you provide some insight into the discussions there.
Yes, Rob.
To talk with you.
So no.
I say this every time I ask.
It's important to say is that the dividend is.
Reviewed thoroughly by the board every quarter and the decision is made.
About the dividend every quarter and that decision can be anything.
At any quarter end and we do we do look at many many.
Many many factors the the value add proposition.
On the leasing proposition and T.I.s leasing commissions large capex that goes out to.
Achieve this value add proposition that we believe is inherent.
In our portfolio and which will stabilize.
The portfolio at higher economic occupancy.
Higher cash flows et cetera, and more leveled out.
Ongoing ti and leasing commissions definitely definitely has been delayed.
In terms of our plans and opportunities by code and so as we look.
As a board to the dividend each quarter, we consider.
The original objective, which we had planned for which we were on track for until call. It and then try to analyze what Colgate is doing currently what we will do next quarter or the quarter after and again, it's it's it's some give and take between.
Economic occupancy is ti and leasing commissions.
For slower leasing and then the faster leasing that we were experiencing pre code. So it ebbs and flows and we try to look at it.
From a.
A longer term perspective, our liquidity is fine.
And we do believe that we will achieve.
Economic occupancy and stability that will not only cause.
Cover longer term future dividends, but allow us to raise them in the future, but between now and then it is quarter to quarter, all factors considered including including taxable income and dividend requirements under re roles.
Against that taxable income so everything is in the in the beaker and goes quarter to quarter.
Okay. Thanks, guys appreciate it.
As a reminder, if you have a question. Please press Star then one the next question comes from Frank Lydia.
Capital markets. Please go ahead.
Hi, Good morning, everyone. I know you briefly talked about pulling forward several T.I. projects and how we should expect some elevated capex in the near term can.
Can you provide an update on how these projects are going and should we continue to expect elevated level of capex.
Good morning, Frank It's John Donahue, Yes.
I can talk a little bit about where the the market conditions are currently and how they are trending.
Give you a general idea of what we had expected over the over the short term.
We are seeing.
A.
A concentration of of companies that want a longer term commitment and so inherent in a longer term commitment.
That would give you higher costs higher concessions the.
The trade off is when you're you're doing leases with great credit then youre enhancing the value of the portfolio and pushing out your your rollover risk.
So that is what we're seeing for.
Healthy number of our larger prospects now.
Now there are because of coded and what we've seen over the last six to seven months. There are quite a few of prospects, especially on the smaller size that was ultimate flexibility and that is shorter term and so those those costs will be much lower sales there will be cheaper and faster.
For paybacks.
What should we expect over the near term as far as is a blended portfolio or weighted average is I would say we will see more of the same over the next 12 to 24 months one thing to note, though is that we have seen.
A large percentage of our tenants deferred their usage of their tea.
They are in a period of replay, adding trying to figure out their future uses of space and they are doing a lot of that work themselves and haven't request anti reimbursements. So could there be a little bit of volatility or sporadic. We're one quarter is very light and then that one quarter is larger.
Absolutely, but I don't think we're going to see a significant difference over the next 12 to 24 months than what you've been seeing the last few quarters.
Okay. Thanks, and then just wanted to clarify on the 240000 square feet of net absorption no.
Last quarter, you mentioned, an active 500000 pipeline and with the leases signed in third quarter I understand this comes down but.
But are there any prospects. In addition to the 240 that you have this active pipeline category.
Yes, Rick Thanks for clarifying that we certainly do have other prospects above that number we try each quarter on the earnings call to give you a sense of what we believe are high probability deals deals that were either in leases and amendments short.
Listed in our asset management team believes that we have a very very good chance of finalizing in the near term. So thats, what the 240000 square feet represents and in addition to that we do have prospects in our markets.
But because of coated those deals are in a category that we deem to be.
Not not quite as high profitability beat maybe a moderate profitability or we haven't been shortlisted to one one or two buildings will maybe three or four building. So.
I can't give you an exact number of that right now but that that number is.
You know.
Little bit impacted by code.
Okay, and then is any of the 240000 related to the redevelopment leasing.
Short answer is yes, we do have prospects for our redevelopment.
And we we believe that we have a good chance of getting another deal done for the redevelopment here over the next 30 60 days, so hopefully we'll make an announcement.
And you'll be the first to know.
Okay, great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to George Carter for any closing remarks.
Yes. Thank you everyone for attending the earnings call look forward to the next one for the fourth quarter I Hope you all stay safe.
Have a happy holiday season and again.
As John said, we will announce.
Leasing and leasing activity that is meaningful as it occurs hopefully we will get some of that during the fourth quarter. Thanks again.
[laughter] concluded. Thank you for attending today's presentation you may now disconnect.