Q2 2021 Franklin Street Properties Corp Earnings Call
Good morning, and welcome to the Franklin Street Properties Corporation second quarter 2021 earnings Conference call.
All participants will be in a listen only mode.
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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 second quarter of 2021 earnings call. Joining me. This morning are George Carter, Our Chief Executive Officer, Jonathan and Merit, Our Chief Financial Officer, Jeff Carter, Our President and Chief Investment Officer, and John Donahue President.
Of SP property management also joining me. This morning are Toby Daley and World brand, both the executive Vice President of FSP property management. Please note that various remarks that we may make about future expectations plans and prospects for the company.
And they 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 factors section.
Of our annual report on form 10-K for the year ended December 31, 2020, which is on file with the SEC and in addition, these forward looking statements represent the company's expectations only as of today August 4.2021, while the company may elect to update these forward looking.
<unk>, specifically disclaims any obligation to do so any forward looking statements should not be relied upon as representing of the company's estimates or views as of any date subsequent to today and the times. During this call. We may refer to funds from operations or outside of BOE reconciliations of <unk> and other non-GAAP financial measure.
The GAAP net income are contained in yesterday's press release, which is available on the Investor Relations section of our website at Www Dot and <unk> 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 second quarter results.
Afterwards, I will pass the call the George for his comments.
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 or <unk>, $14.7 million or <unk> 14 per share for the second quarter of 'twenty 1.
During Q2, we completed the sale of 4 properties and use the proceeds.
And to repay our 2021 debt maturities and the drawn balance on our revolver.
We incurred about $2 million and costs to complete the debt repayment, which was primarily of payment to break interest rate swaps on the debt we repaid.
The amount paid is roughly equal to what we would have paid on the swaps true through their maturity on November 30 of 'twenty 1.
So these expenses were accelerated into Q2 and lowered our approach of <unk> per share by about <unk> <unk> per share.
Turning to our balance sheet at June 30, 'twenty, 1 we had a total of $765 million of unsecured debt outstanding and no amounts drawn on our revolver.
At quarter end between cash on hand, and availability and online we had total liquidity of about $624.2 million.
As a reminder.
All of our debt is unsecured and we have no remaining debt maturities this year.
Although our revolver matures and early 'twenty, 2 we can extend that maturity for a year.
Our debt is at fixed rates other than the revolver, which is out of floating rig on amounts drawn.
With that I'll turn the call over to George George.
Thank you John.
And again welcome to Franklin Street properties second quarter of 2021 earnings call.
I would like to begin my comments today by thanking FSP investors, our tenant customers associate and professionals property personnel FSP employees and our directors for their continued support and extraordinary work effort. During these turbulent times.
As the U S and the entire world continue and the battle to overcome COVID-19 through vaccination efforts and public health measures.
<unk> continues to see hopeful signs of recovery within our markets and at our properties.
And we remain grateful to all individuals on the front lines of this critical health care work.
While uncertainties such as the Delta bearing persist there is legitimate reason to be optimistic about the normalizing of life and as a result and measure the return to office occupancy.
To this and our pipeline of potential new leases continues to strengthen.
John Donahue will further discuss what we are seeing his remarks they had.
We believe that 2021 has the potential to be a significant year for FSP.
As we work to material.
<unk> corporate indebtedness through select property dispositions.
During this past quarter FSP saw its total outstanding debt declined by approximately 19% from $947 million to 765.
During the second quarter.
Paid approximately $155 million of term loan indebtedness and all of the approximately $47.5 million that had been drawn and undrawn revolving line of credit.
As of June 30 of 2021 are full of $600 million revolving line of credit was available for us and we had approximately $24 million of cash on our balance sheet.
This in progress and balance sheet reset is intended to reduce risk while at the same time increase our flexibility to consider well suited opportunities to enhance value for our shareholders.
During 2021 to date FSP has sold 4 properties, reflecting total gross proceeds of approximately $237 million.
These completed dispositions and unlocked embedded value for our shareholders that we believe may not be accurately reflected and our share price.
And planned for upcoming sales shouldn't do the St.
We believe the 4 completed dispositions during 2021.
And had a positive impact on the value of shareholder equity directly reducing indebtedness risk.
Since September 30 of 2020, we have repaid approximately $235 million.
For approximately 23, 5% of <unk>.
<unk> was approximately 1 billion and debt at that time.
Currently we believe that 1 of our best.
Potential future investments is our own stock and so we may use a portion of proceeds from asset sales for the repurchase of up to $50 million of our outstanding common shares as market conditions warrant.
<unk> to our previously announced stock repurchase plan.
Yes.
And 2021 progresses, we are continuing with our current suspension of net income and the <unk> guidance, primarily due to uncertainty surrounding the timing and amount of proceeds from further and property dispositions.
We are reaffirming our 2021 disposition guidance range of between $350 million to $450 million and we will continue to keep the market informed as we move through the remainder of the year.
Lastly, FSP remains committed to and Sunbelt and mountain West office focus, which emphasizes markets and properties with compelling long term population and employment growth potential.
We continue to look forward to 2021.
Anticipation and opportunities.
Now I will turn the call over to John Donahue, President of FSP property management company to discuss the portfolio and leasing prospects John.
Thank you George good morning, everyone.
The FSP portfolio, including redevelopment was approximately 78, 5% leased at the end of the second quarter as compared to 81% leased at the end of the first quarter.
The decrease was primarily due to multiple dispositions and secondarily due to lease expirations and known departures.
Rent collections were greater than 99, 5% for the first half of 2021.
We continue to witness the return of additional tenants employees and higher office space utilization across the FSP portfolio, particularly in the sunbelt markets and and suburban assets.
More companies have announced plans for inviting employees back to the respective offices, including those in the urban and infill locations.
Many of our tenants have made similar announcements with the prevalent expectation being the offices will be back to of post pandemic normal as the new school year of arrives in the fall.
The new normal might include some form of full time, and the office part time, and the office and or a hybrid approach.
These are all positive signs and we expect this trend to continue.
The list of potential tenant prospects continues to grow with the increasing anticipation and optimism and regards to improving leased occupancies in the months ahead.
We continue to be encouraged by meaningful growth and fsp's pipeline of prospective tenants.
Although the typical summer season prior to the pandemic brought with it slower demand.
<unk> has witnessed more activity this summer, including property tours and submitted Rfps and Counterproposals.
<unk> is currently tracking approximately 850000 square feet of new prospective tenants that of Shortlisted FSP assets.
Barring any surprises the potential for portfolio of net absorption over the next 9 months is approximately 500000 square feet.
During the first half of calendar 2021, FSP has finalized over 560000 square feet of total leasing, including new deals and renewals.
For the second half of 2021.
<unk> has approximately 139000 square feet of tenants expiring or 1.7% of the portfolio.
Due to the limited rollover exposure, coupled with improving demand for space and Fsp's assets.
We believe that our portfolio is well positioned to make meaningful progress regarding net absorption and higher leased occupancy occupancy by the end of the year.
Thank you I'll now turn it over to Jeff Carter.
Thank you John Good morning, everyone. We here at Franklin Street properties Hope that everyone is continuing to remain safe and healthy.
This morning, I will discuss fsp's efforts to achieve our disposition goals for 2021, and then I will endeavor to provide some color as to what we are seeing on the ground sort of price discovery work and the marketplace.
With that and mine FSP is reaffirming our existing disposition guidance of between 350 and $450 million and select dispositions for calendar year 2021 the.
Objective of our disposition plan is primarily to pay down debt in order to gain greater financial flexibility reduce risk and to position the company for stronger returns to our shareholders.
And importantly, we believe that our completed dispositions to date as well as the sales that we are currently working on are capturing embedded value for our shareholders that may not be accurately reflected within our share price.
Assuming success at the conclusion of our disposition process FSP will have fundamentally reset our balance sheet and be positioned to pivot towards the best suited opportunities to enhance value and returns to our shareholders.
Specific to the just completed second quarter FSP sold properties for gross proceeds of approximately 237 million, which reflects about 68% of the bottom end of our $350 million target range and about 53% of the top end of our 5% of 450.
The target range.
And our dispositions for the quarter were comprised of loud and Tech Center, and Northern Virginia, which sold on June 29 for gross proceeds of approximately $17.2.5 million and.
And as previously announced 1 and 2 <unk> and drive as well as 1 over to the park, which sold on May 27, 2 of single purchaser for a combined purchase price of $219.5 million.
Due to confidentiality, we are unable to discuss specific transaction metrics. However, with regard to the sales completed thus far we believe with conviction that the pricing achieved has captured embedded value for our shareholders.
In terms of what is in our pipeline currently we are working with the specific buyers or or or in price discovery on the following properties River crossing and Indianapolis Timberlake Corporate center and greater St. Louis both metal point, and stone crop and Northern Virginia, and <unk> Corporate Center in Richmond, Virginia.
And we will keep the market apprised as we move forward.
Lastly, we wanted to share once again, what we are seeing at least and in aggregate sense within the investment marketplace.
We continue to experience generally positive interest and the properties that we have sought price discovery on.
The majority of interest we have seen has come from private investors and the operators who are bullish on the long term reopening narrative within the U S.
Pricing has been largely in line with our own internal expectations such that we are seeing values that if closed would realize value for our shareholders that may not be accurately reflected within our share price and.
Interest has been and both single tenant and multi tenant properties and we are witnessing demand for both stabilized as well as value add assets and.
We continue to see 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.
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 Danielle.
We will now begin the question and answer session to ask the question you May Press Star then 1 on the telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
So with draw your question. Please press Star then 2.
The first question comes from Rob Stevenson of Janney. Please go ahead.
Okay.
Good morning, guys can you talk about where tenant tenant utilization is and the portfolio today and where that is versus.
At the end of the first quarter and year end 2020.
Hey, good morning, Rob It's John Donahue.
So the utilization across the portfolio of varies we're in 12 and broader markets or metropolitan and strategic areas.
Approximately 20, submarkets, so it varies pretty widely.
We're we're hearing and witnessing that.
The Texas, Dallas and Houston.
Above 50% so.
That is trending even higher versus the first quarter and we're hearing that.
Dallas is approaching.
That 60% range.
We're hearing that Atlanta is trailing that just slightly.
We're hearing that.
Miami.
And as trailing slightly.
The urban markets with public transportation are behind but we're hearing that people are starting to get back somewhere in that 20% to 30% range and Denver.
Chicago and Minneapolis in particular are probably a little bit behind the sunbelt markets and and Virginia is probably somewhere in between and that $30 to 40% range depending on the submarket. So hopefully that gives you a sense of it.
Okay, and while I have you how should we be thinking about.
New leasing and the impact on 2021 earnings and other words, if you sign a new lease for vacant space today. When you do the build out the factor and the free rent is it really just kind of be a 'twenty 'twenty 2 <unk> impact or is there enough time to actually start getting sort of effective rent.
After all of the sort of free stuff in 2020.
1.
I would answer that question, Rob by saying that the larger of the deal. We certainly believe that that the majority of those will be in the first quarter and second quarter of 'twenty 2.
We have been working on a large number of smaller deals between 5000 square feet and 15000 square feet or so that we are very close to and we do have a chance of those having more.
The impact on earnings in the fourth quarter of this year and 2021. So as we've explained on the prior calls many of these tenants that are making decisions now.
Urgent needs and they have to make a decision they are up against it they've kicked the can down the road and now now it's time to move renew and get it done and they don't have much tie and less so we will see.
Some of the absorption and the net absorption that we're expecting occur and the fourth quarter and and I would say weighted average on square feet, we will see a larger amount of square feet and Q1 and Q2 of next year.
Okay.
And then.
Sitting here, Jeff sitting here halfway through the third quarter.
For any acquisitions likely to close over the next 7 weeks and the third quarter or is this more likely if you guys to execute on these additional deals that the timing is more likely to be some time in the fourth quarter are drifting into 2022.
You said the acquisitions I think you meant dispositions yes. Please.
Okay on.
On the on the disposition side.
You can see and our disclosures.
The disclosures and the 10-Q on page 19 that.
And the purchase and sale of agreement for the Northern Virginia property, if things move the way that the.
And are expected to move that the closing would be expected to take place on that at around <unk> around September 9th and the Timberlake would be around September 16th.
Okay very helpful. And then just last 1 for me I know.
And that you guys arent talking about.
Pricing on the deals that you've announced or that are under contract, but when you take a look at what you've sold.
Year to date and what your what's your marketing is there anything fundamentally different about the operating expenses of those assets versus the portfolio as a whole in other words using the whatever youre of Scott whatever I would ascribe to the.
NOI margin for the existing portfolio of whatever its doing and.
Anything thats dramatically different either to the plus or the minus side on the dispositions that would skew things.
I will I'll start with that and maybe John wants to add but just although we are bound by confidentiality as I mentioned on the disposition side just from a sort of straight look if you look.
And it all for property sales that we've completed so far in aggregate the average in place of cap rate on NOI is roughly about 5% on those on those transactions and John I'm not sure. If you if you had anything on the expense side.
Sure Rob I would.
Look at the dispositions.
As a whole.
As having.
The slightly lower net rents or net NOI.
Versus the remaining portfolio at this time.
So I would look I would consider the.
And in the supplemental youll find the in place gross rents.
And you will also find the leasing activity on what we've done for per gross GAAP rents and as those have inched up for the.
The majority of the portfolio I would say that the net rents have as well.
And so the assets that remain in the portfolio.
On a weighted per square foot basis should be seeing a slight of higher slightly higher NOI or net rent if you will.
Okay very helpful guys. Thank you.
As a reminder, if you have a question please press star 1.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Yes, good morning, everybody, Jeff I was wondering if you could talk a little bit more about the asset sales that you discussed not necessarily the ones that you've completed but you talked about good demand for both single tenant multi tenant buildings as well as both core and value add I guess from a value add perspective, how actively are you shop, those assets and and.
What's your thought process around taking more vacancy to market as opposed to to some of the more occupied buildings you've been selling.
Good morning, David.
We are the we are seeing good interest and both value add and stabilized assets and it depends on the asset and the market of course, and so for US the benchmark is really going to continue to be.
Looking at assets, where we can achieve valuations and pricing that on a near term to short term basis.
It makes sense and is captured the value that we think gets full value for those assets for us and the returns that we need there.
So for example.
We were marketing and giving you and.
An example, we were marketing our meadow point property, and Northern Virginia, and Chantilly, and we have that stone cross property and that same submarket.
We're not marketing that property directly because we we have intent to have intended to re leased and stabilized the property its a great property.
And we received interest from the group were under contract with as well as interest from other groups that were interested and not only looking at the stabilized asset, but the value add play as well and so we're judging these things as they come in but really the benchmark for us is making sure we capture the value of.
Of that we see as.
The full value and the best value for us and the short to near term.
The most likely and anticipate that you'd continue to sell some of the higher occupied assets, where you and achieved most of the value of accepting of these kind of 1 off situations. I mean is that a fair way to think about it as we look forward.
I think I think that.
I think that that's generally fair I think if you look at what we've done so far.
Dave it's about 83% leased and aggregate for what we've sold so far and I think that youll see a spread of that again, continuing so they're not fully leased assets and every instance, theres a mix and so if we sell obviously if we blend.
Loan growth with Meadow point, it's a different it's a different type of leased occupancy range. So so far we've sold about 83% and.
We've got things in play that are.
Roughly and that type of range to and aggregate.
That's helpful. I appreciate that Jeff John Donahue, and maybe a couple of things Directv showed up on the exploration schedule I think maybe that's due to some of the asset sales.
Can you talk about whether they will stay or leave at the end of the year and then <unk>.
Just remind me on the vintage of your signed a portion of that sub tenancy I think on a direct lease and that was in the south but can you talk a little bit about the remaining portion of that space, I think which still expires and if you still have and negotiations there as well.
Sure Dave.
And regards to explorations.
We have just 1.7 per cent of the portfolio of remaining this year and so we're.
We're expecting a few tenants to depart.
And maybe.
Get a few renewals as well so that could be a mixed bag and there are no significant tenants above 50000 square feet that we're aware of at this moment with a known departure and over the next 6 months.
So we're feeling pretty good about our.
Probability of success, there and regards to event is on.
And the supplemental Youll see that we still have that listed as 234000 square feet expiring net.
Next year.
And we have executed 1 direct deal with the subtenant there for approximately 68000 square feet. So that's been mitigated down to approximately $1.70.
170000 square feet and then we.
We are in dialog with the couple of other sub tenants that could be another couple of floors. As we discussed last quarter and those are progressing and then we do have a growing pipeline as well for new prospects.
So things are looking very good and Denver, right now and the momentum is headed and the right direction.
Thanks, John and I appreciate that George maybe finish with you a bigger picture question and take.
Take it how you will but I guess have you and the board had any strategic alternative discussions about kind of how to go forward. Clearly there is a strategy that we're going to lease and sell and thats going to be part of the near term strategy, but as you look forward stocks down 80% youre facing of second dividend cut you've kind of abandon the strategy you are talking about stock buyback EBITDA is.
Run rates down, 30% or so I guess as you look at all of that.
What point do you guys have to say hey, this isn't work on the stocks below $5, we need to do something a little bit better here are we getting to that point of we need to kind of either rubber hitting the road or are moving the road and the different direction.
So all of strategic.
Alternatives.
All of them.
Our.
Our discuss all the time and thought.
What about all the time.
And of looked into.
And by the board and.
<unk>.
Many of our outside professionals.
The.
The change this year, which I think is significant.
And it gives the change really sort of started in the fourth quarter last year.
Disposition of our per Boulevard.
Was too and track.
Yes.
The value.
From properties and again, we don't believe.
Ah reflected and the lower share price that we currently have.
Our clients.
And while well.
And.
Post office REIT side, I would say, our trading and some discount to NAV and depending on.
We are and where they are we believe we believe our discount is.
Pretty significant.
I want to.
Take advantage of that.
And.
This disposition and <unk>.
Balance sheet reset, which we think is.
And change.
And if you look at the.
The vacancy.
The remaining portfolio.
Analyze those properties and those markets and we do.
We think we have a tremendous opportunity to lease.
At least that vacant space.
On top of of a reset balance sheet and improved dramatically.
Our rental income.
And so that is that is the plan for this year. That's the plan, we're trying to articulate to the marketplace and our execution.
And all other strategic.
Options and opportunities and avenues are always being considered and always explored and.
Got it.
So.
Always.
And we look for and decline.
The best opportunities lay in front of us whatever direction and that takes us.
And I appreciate the color thanks George.
Yes.
This concludes our question and answer session I would like to turn the conference back over to George Carter for closing remarks.
Thank you all for listening to our earnings call and I look forward to talking to the wall next quarter. Thank you.
Yes.
This concludes.
Our conference call. Thank you for attending today's presentation you may now disconnect.