Q1 2021 Franklin Street Properties Corp Earnings Call
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Two of the Franklin Street properties Corp, first quarter, 2020, One earnings conference call on.
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I'd now like to turn the conference over to Scott Carter General Counsel. Please go ahead.
Good morning, and welcome to the Franklin Street properties first quarter of 2021 earnings call. Joining me. This morning are George Carter, Our Chief Executive Officer, John Tomorrow, Our Chief Financial Officer, Jeff Carter, Our President and Chief Investment Officer, and John Donahue.
The <unk> of FSP property management also joining me. This morning are Toby Daley and will friend, both the executive Vice President of FSP property management. Please note that various remarks that we may make about future expectations.
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 the result of various important factors <unk>.
Moving 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 may five 2021.
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 as representing the company's estimates or views as of any date subsequent to today the tie.
During this call we may revert of funds from operations, where at the reconciliations of <unk> and other non-GAAP financial measures. The GAAP net income markets as of Yesterdays press release, which is available on the Investor Relations section of our website at Www Dot F. S. P.
T R E T Dot com now I will turn the call over to John The Merit John.
Thank you Scott and good morning, everyone I'm going to give a very brief overview of our first quarter results.
The afterward, I'll pass the call to of George for his comments.
And as a reminder of 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 of wrap up all of $18 million of <unk> 17 per share for the first quarter of 2021.
Turning to our balance sheet at March 31, 'twenty. One you had a total of 947 5 billion of unsecured debt outstanding.
Excluding the 27 $5 million drawn on our line of credit.
At quarter end between cash on hand and available the availability on our line.
We had total liquidity of about $577 million.
As a reminder, all of our debt is unsecured and we have no debt maturities until November 30 was 21.
One of $155 million of term loans will come due.
Our debt is at fixed rates other than the $27 $5 million debt sits on our line of credit which is on floating rate.
With that I'll turn the call over to the GA GA.
Thank you John and again welcome the Franklin Street properties first quarter of 2021 earnings call.
As the vaccinations against COVID-19 continued to steadily rise from the U S.
So two of our we've seen a slow but steady increase in existing office tenants personnel returning to work at our properties.
And corporate decision makers more actively considering there are future location on office space needs.
Trying to determine the ultimate strength timing and longevity of the post pandemic U S and global economic reopening is of significant challenge for companies trying to make intelligent leasing decisions today.
But real on the ground very early activity surrounding the potential new leasing prospects at Fsp's portfolio of properties has not been this robust since before the start of the COVID-19 pandemic.
As 2021 progresses.
Assuming continued successful vaccination efforts against the virus.
FSP is optimistic on it.
Of its two major objectives for 2021 day.
This leasing progress will achieve positive results.
Our other primary objective for 2021 is.
Is debt reduction.
From a debt reduction perspective, we are actively working on the potential sale of select properties that we believe have set their near term value of objectives, and where we believe such value.
Not be fully reflected in our share price.
We are reaffirming our previously announced 2021 disposition guidance to be in the range of $350 million to $450 million in aggregate gross proceeds.
Disposition proceeds are intended to be used primarily for debt reduction.
If successful in our property disposition efforts during 2021 and.
And along with our previously achieved sales of our Emperor Boulevard property in the fourth quarter of last year.
<unk> is projecting it will reduce its total indebtedness by approximately 35% to 50% by the end of the year.
And while losing some of the current positive <unk> spread.
Cash generated between rental Constance and debt constant from the property disposition debt pay down plan.
We believe shareholders should maintain NAV per share.
Less risk to the NAV.
The lower debt levels of capitalizing of the remaining property portfolio, while the company gains more overall flexibility and it's on.
Ongoing real estate investing activities.
We also believe that along with meaningful dividends that may be distributed during 2021.
The remaining lower leveraged property portfolio moving into a post COVID-19 2022.
Has a significant value add proposition associated debt.
If achieved could meaningfully enhance shareholder NAV values further 2021 loans.
At this time due primarily to the uncertainty surrounding the timing and the amount of proceeds.
On property dispositions, we are continuing suspension of net income of <unk> guidance.
FSP remains committed to of Sunbelt and mountain West office focus that emphasizes markets of properties with compelling long term population and employment growth potential.
Turning to look forward from 2021 with the anticipation and the.
Now I will turn the call over to John Donahue, President of FSP property Management Company John.
Thank you George good morning, everyone.
At the end of the first quarter, the FSP portfolio, including redevelopment was approximately 81% leased the.
The average leased occupancy of the portfolio for calendar 2020 was approximately 83, 6%.
Rent collections were greater than 99, 5% for the first quarter of 2021.
The physical occupancy of the majority of of office buildings continues to increase with the suburban assets, leading the way, particularly in the sunbelt markets. The.
A typical occupancy and FSP suburban office buildings, now exceeds 20% with some buildings approaching 40%.
Urban buildings at Fsp's markets have not exceeded 20% occupancy on average yet.
However, we expect that the change during the summer months as the new school year of rides in the fall.
The number of announcements for large companies that are inviting employees back to the offices by July had been increasing during the past months.
These are all positive signs and we expect this trend to continue.
We are extremely encouraged by meaningful growth in Fsp's pipeline of prospective tenants. During the last two months FSP has witnessed a significant increase in property tours submitted rfps and counterproposals.
<unk> is currently tracking approximately 800000 square feet of new prospective tenants that of Shortlisted FSP assets.
Per to approximately 300000 square feet last quarter.
FSP has been engaged with existing tenants and the sub tenants for approximately 250000 square feet of renewals and expansions.
Barring any surprises the potential for aggregate net absorption over the next six to 12 months is approximately 600000 square feet.
These figures are the highest we have witnessed since the first quarter of 2020.
During the past six months FSP has finalized renewals and expansions with tenants exceeding 870000 square feet.
As a result, we have reduced the near term rollover exposure of expiring leases through 2023 to approximately 18% of the total portfolio.
This equates to roughly 6% of annual lease expirations from 2021 through 2023.
Coupled with improving demand in Fsp's office markets. The foundation of appears to be set for FSP to make meaningful progress regarding net absorption and higher leased occupancy.
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.
I wanted to discuss Fsp's disposition goals for 2021, and I were in progress work to achieve these objectives.
And then shifting gears to provide some insight as to what we are seeing on the ground at this early stage of our price discovery work in the marketplace.
First though FSP is reaffirming our guidance of between 350 and $450 million of select dispositions for calendar year 2021.
The objective of our disposition plan once again is primarily to pay down debt.
In order to gain greater financial flexibility and to position for stronger value and returns for our shareholders. The key.
Key determinant for any dispositions will be an assessment of whether the property has met its respective near term value objectives.
Which we also believe has the potential to capture embedded value for our shareholders that may not be accurately reflected within our current share price.
We also would like to reemphasize the FSP remains committed to our Sunbelt and mountain West strategic market focus where we continue to believe long term business and population growth has the potential to exceed the national average.
Looking at potential dispositions for 2021 at this time FSP is working on the following properties River crossing and Indianapolis Timberlake Corporate center in greater St. Louis Meadow point in Northern Virginia, Innsbruck, Corporate center and greater Richmond.
The Tech center in Northern Virginia.
Wanted to Rebidding of drive and one over to the park on greater Atlanta.
For both competitive purposes, and reasons of confidentiality, we will not be discussing specific property pricing of our targets.
Cap rates are related information at this time. However, we do anticipate that if we are successful with our efforts under way that FSP would satisfy our disposition guidance for 2021.
Lastly, we wanted to share what we are seeing at least in an aggregate sense within the investment marketplace. At this early stage of a price discovery process work, especially since the volume of off of sales nationally has declined over recent quarters due to the pandemic.
As the FSP endeavor associated professionals work on price discovery, we have experienced solid initial interest feedback has generally fallen within the three basic views with respect to investment in office properties. One of you is from a segment of investors who have a generally positive view of office at this time.
Of this group of investors are by and large bullish on the reopening of the economy and the potential power the the vaccine rollout across the nation and globe can have on office assets.
Generally these investors while selective are looking at both multi tenant and single tenant profile assets and high quality buildings and some also appear to be selectively underwriting value add upside potential.
A second view comes from investors, who are also interested in office investment, but with a bit less conviction and are accordingly, more focused on fully stabilized properties with compelling weighted average lease terms and high quality.
We are currently seeing interest from both of these two profiled groups the confidentiality agreements as well as from property tours.
And largely coming from an array of mostly private investors.
And we recognize and appreciate that interest is only the interest it is not defined pricing, yet and certainly not actual closing numbers, but it is at least the gauge of potential activity. At this early stage of our price discovery process work and so it should be viewed within that context of.
Third segment of investors also exists or yet to be convinced of economic stabilization from the pandemic and so are reluctant to commit to investment at this time.
These three views are all being seen in our disposition work and show us that there is indeed, the market to be made for price discovery and over the coming months, we will continue to keep the market posted as we learn more about true pricing and actual demand.
And with that we 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 Andrea.
We will now begin the question and answer session.
I asked the question you May Press Star then one on your telephone keypad.
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At this time of a pause momentarily to assemble our roster.
And all of our first question will come from Frank Lee of BMO. Please go ahead.
Good morning, everyone I appreciate the commentary on the asset sales, but can you talk a bit more about the composition of the buyer pool that we're looking at your assets and these more local buyers.
I was looking to enter a specific market or even any foreign capital and have you seen any recent pick up in competition there.
Good morning, Frank.
Question I appreciate it.
Yeah.
We have seen a real mix of investors prospective investors at the assets that are in price discovery day.
The range from both local and national investors, primarily private.
Haven't seen a lot of international investors yet but.
Keep the market posted on that as I update next quarter.
The the interest has been the primarily from private investors and it's been a diverse mix of of of.
The local and national.
Okay, Great and then.
Regarding the the lease amendments with take of this quarter are you able to disclose the impact to net effect of brands and are there any other tenants that youre currently working with on similar lease amendments with.
Good morning, Frank It's John Donahue.
Ill hand, it over to Toby Daley shortly.
To share what he can with citgo, although we signed a non disclosure agreement so thats somewhat limited.
We are currently working with about 250000 square feet of existing tenants that includes the potential expansion space.
Very few of those tenants are in our top 20 list in fact, the majority of those tenants range from 5000 square feet of 20000 square feet. So I would say the answer to your second question is no not really but we're very encouraged by tenants getting out six months of 12.
Months early to talk about their renewals whether or not they can.
The space plan early to see what their space utilization is going to be density.
It does not appear to be getting.
Going good increasing density appears to be going the other way. So I think that's why we're hearing about so many potential expansions of Toby if youre, if youre with us if you could share what you cannot citgo.
Okay.
Hi, Frank Toby Daley here.
There isn't a whole lot I can share because of the.
The fact that we're under a strict confidentiality on the terms and conditions at this lease extension with shake out.
Can't tell you that the lease was extended out from February of 'twenty two through March of two.
2033, so that's that's an 11 excuse me of 10 year 13 month.
<unk>.
And.
It should go.
Shop, the market for about a year and.
We were pleased we were able to.
Keep them on as the tenant and.
Unfortunately, Frank that's really all I can share I can point to.
On page 16 of the supplemental where you can see the.
The GAAP rent.
Eldridge.
And can you can compare that to the supplemental from Q4 of 2020.
To get a handle on on how rents are impacted but unfortunately, I can't discuss more than that with you.
Okay, great. Thank you.
The next question comes from Rob Stevenson of Janney. Please go ahead.
Good morning, guys, just a follow up on that I mean, the the 250000 square feet for Citgo. That's in the 377 of leasing activity for the quarter.
That is correct Rob.
And I.
I guess put of differently not to talk to the Cisco released but to the other call. It 100.
25000 of space was there any deals in that extra 125000 square feet of space that had outsized tenant improvements of free rent on.
Our other cost to you guys.
Rob the the short answer is no.
<unk>.
Point, you to the page 21 of the supplemental where you can look at how the concessions have been.
Quite quite different in Q1, 'twenty one versus the prior two years and in fact, if you go back quite different than the last three years the.
Tis and commissions on all deals including Cisco.
We're about $3 11 per square foot per year and Q1.
And that is dramatically down if you look at calendar 'twenty 2019 of 2018, those averaged about $5.50 per square foot per year. So those numbers are down 40% or so.
Then free rent.
You layer that in within those other concessions.
Still down.
The first quarter 'twenty, one will be about $5 37 per square foot per year.
And then if you look at last year. Its about 692. So total concessions are down despite the fact that the average length of term is up so I think that dovetails with the fact that we had mostly of renewals in the quarter.
We'll watch that over the coming months as we hopefully we will have a much more on the new leasing front.
Okay, Great that's exactly what I was looking for thank you.
Then my other question.
Is on the the.
The potential disposition properties that you guys listed of talked about earlier on the call is your intention to sell all of these assets if pricing meet your expectation is this a pull that you're basically putting out there and then you'll pick which ones you know price the best out of this and pull back the others how.
Are you guys sort of thinking about that.
But Rob this is Jeff. Thanks for the question important question the.
We all of these properties that are in the prospective disposition list that we put out if we hit our target pricing and value objectives would likely be sold.
Okay.
And then I guess concurrently mean.
I mean, obviously the <unk> you've talked about in detail of the past that the proceeds will be used for.
Debt reduction, but are you concurrently also exploring selective acquisition opportunities should you guys wind up selling all of these properties and having a.
On the full level of proceeds available to you or are you evaluating that at this point of time are you guys basically going to wait on that.
Rob This is Jeff again, we our primary objective as we've indicated is debt reduction and that's where you'll see them.
Our greatest efforts on and focus on the primary use of these proceeds ultimately we're continuing to look at investments in our Sunbelt and mountain West markets and those investments could also be an existing properties and we're continuing to watch the market, but our primary objective at this stage is on debt reduction.
Okay. Thanks, guys I appreciate the time.
Once again, if you would like to ask a question. Please press Star then one.
And our next question will come from Dave Rodgers of Baird. Please go ahead.
Hey, good morning, everybody George maybe from a high level perspective, I wanted to start with you on obviously the the reason to sell the assets as the pay off the debt, but from a strategic perspective, I'm curious about selling as we talked last quarter, maybe a lack of the commitment in the future to Minneapolis, which is a core market selling down quite a bit in Atlanta, So how do you.
Balance selling what you'd think of as achieve fair value with also selling your strategic assets that you guys have laid out is kind of of five market strategy. How do you balance that and how do you kind of backfill that overtime.
Okay.
Okay.
David It's it's not there's not a.
The single answer.
Or sort of lane, you can run down to to get their arms around that.
It is property by property and market by market and it really revolves far more on Wow.
We believe our ability is to effect the.
Value.
Near term on any property.
Against what the.
That property in that market is.
<unk> is telling us.
He is a level of interest.
And so so some properties.
All of our greater St. Louis property the <unk>.
<unk> <unk>.
<unk> is of major tenant.
Now on that market for example.
Because that's the longer term lease.
So net lease fully occupied property.
Okay.
And that market that that property is.
Highly highly highly sought and we have.
<unk> been told by outside professionals, who refuse to really evaluate the whole portfolio of course, not just the properties that are listening.
That debt that market.
That particular market that particular property would be very interesting to potential.
Acquirers now for example.
Take Innsbruck, which Scott, which has some vacancy in the enrichment.
You would be.
We're told.
We are seeing evidence of that there is interest in the Richmond market.
And particularly the Submarket that Brian there from value add players.
And so you.
Take a look at each property.
And see what value you can get from that property. It is sold to day whatever market. It's the on whatever properties.
Versus what FSP believes it can do with the property over the near term.
And properties that we have.
Shown in the earnings release that we are trying to initiate price discovery on our properties that basically means.
Those kinds of criteria rather than our <unk>.
Five strategic markets as you would call them in our non strategic so sales are really not the person that's really how we're looking at.
Thank you George for that Jeff I wanted to talk about the asset sales of little bit further and I realize you don't want to talk about too many specific assets noticed in the the 10-Q, though you didnt have any assets as held for sale in the bucket, but you had a march 5th 8-K out there about the asset sales in Atlanta for the over 10 in the tumor of.
Any assets.
Those were set to close I think this week can you give us a little color on that did that fall through is that still happening. It just didnt kind of line up and I guess since you had already put out some public information can you update us on that.
Good morning, Dave Yes, absolutely for.
For purposes of confidentiality there are <unk> that.
That are specific to the Atlanta transaction.
That we are under confidentiality regarding the deal so I cannot discuss too much about it but we did file an updated 8-K on April 20th if you haven't seen it I would encourage you to look at it is still accurate today.
And.
In the updated 8-K from April 20th of amongst other things.
We're contemplating closing on or about may 17th for that transaction, which is also subject to a mutual day 30, 30 day extension right for either party, but that filing is still up to date from April 20th of and I'd encourage you to take a look at it.
If you haven't seen it.
Just looked at it now so thank you for the update I think I missed that one of the seen the earlier ones. The thanks for the update so I.
I guess about halfway there maybe.
I wanted to shift on the leasing front you added the 500000 square feet or so of perspective tenants. John Donahue can you give us a little bit of a better sense of of where that's coming from and maybe what what vacancies that would look to fill line.
About Midtown Atlanta, how you think about blue lagoon and in Minneapolis on some of the work that you've done recently and some of the larger vacancies can you provide us an update on that.
Yes.
Hi, Dave Good morning, So yes, we are.
Seeing activity in our largest markets so the.
The larger per.
<unk> of prospects by square foot would certainly be consistent with our markets as you go down the list from largest to smallest.
The prospects that have.
Narrow their search to several buildings and Shortlisted our assets are.
In the in the largest markets as I said with the highest rent so Denver.
It has been the one market that has surged recently with the most significant improvement in demand.
Between the <unk>.
Year end and today, representing maybe 40% to 50% of our high probability prospects.
That is followed by Atlanta and Dallas.
And those have been active but increasingly more active as time goes by.
And then followed by Virginia, Houston and Miami.
So.
Most of the prospects that we've been tracking for quite a while has fully negotiated leases and we're just waiting on them to to execute those so we're very optimistic hopefully we will get some of these tenants to execute soon.
Alright, Thank you everyone.
This concludes our question and the answer session I would like to turn the conference back over to George Carter for any closing remarks.
Thank you everyone for taking the time to listen to our earnings call on participate from questions. We appreciate it and we look forward to talking to you next quarter. Thanks.
Thanks again.
The conference has now concluded thank you for attending today's presentation.
Now all disconnect.