Q3 2021 Franklin Street Properties Corp Earnings Call

Good day.

Welcome to the Franklin Street properties third quarter 2021 earnings Conference call.

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I'd now like to turn the conference over to Scott Carter General Counsel. Please go ahead Sir.

Good morning, and welcome to the Franklin Street properties third quarter 2021 earnings Conference call. Joining me. This morning are George Carter, Our Chief Executive Officer, John Demeritt, Our Chief Financial Officer, Jeff Carter, Our President and Chief Investment Officer, and John Donahue President of <unk>.

<unk> property management also joining me. This morning are Toby Daley and well, Brian both 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 may constitute forward looking statements for purposes of the Safe Harbor.

Provisions under the private Securities Litigation Reform Act of 1995 actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the risk factors section of our annual report on Form 10-K for the year end.

At December 31, 2020, which is on file with the SEC. In addition, these forward looking statements represent the company's expectations only as of today November nine 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 at times. During this call we may refer to funds from operation.

All reconciliations of F F O 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 <unk> Dot Com now I will turn the call over to John Demeritt.

John.

Thank you Scott and good morning, everyone.

I'm going to give a very brief overview of our third quarter results.

And afterward, I'll pass the call to George for his comments.

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 <unk> of $14 8 million or <unk> 14 per share for the third quarter of 'twenty one.

During Q3, we completed the sale of three properties at a net gain of $8 6 million and used the proceeds to repay $90 million of our 2023 debt maturity.

In October we sold another property at a gain of about $86 8 million and used $215 million of the proceeds to repay $50 million against the drawn balance of our revolver and $200 million against our 2023 debt maturity.

As of today, we have $475 million of debt outstanding down from $1 billion outstanding in a year ago.

At quarter end between cash on hand, and availability on our line, we had total liquidity of about $609 7 million.

And as a reminder, all of our debt is unsecured.

Although our revolver matures in 2022, we can extend that maturity per year.

And with that I'll turn the call over to George George.

Yes.

Thank you John and again welcome to Franklin Street properties third quarter 2021 earnings call.

Significant activity at FSP occurring since the end of the second quarter 2021.

Includes the sale of 99 nine Peachtree on October 22021.

For $223 9 million.

And a new lease of approximately 100000 square feet with a new tenant at our Midtown Atlanta property Pershing Park. This lease substantially back fills the vacancy left by the recent departure of Jones day.

As of October 22021.

We have sold a total of eight properties in 2021 for aggregate gross proceeds of approximately $563 million.

Between September.

At September 32020 in October 2005, 2021.

We have reduced our total indebtedness.

By approximately 53%.

From approximately $1 billion to.

<unk> $475 million.

Demand for our real estate assets has come from a diverse pool of potential buyers.

Aggregate pricing on the properties sold has reinforced our strong conviction that.

We are unlocking embedded value for our shareholders that is not currently reflected in the price of our stock.

Consequently, we have increased the top end of our 2021 disposition guidance.

From a previous range of approximately $350 million to $450 million.

To a new range of approximately $563 million to $600 million.

I think it is important to emphasize that our criteria for selecting potential properties for disposition is asset specific.

We consider a variety of factors, but primarily it's our view of our specific properties short to intermediate term upside potential and value objectives.

Weighted against a longer term hold scenario of estimated future capital costs and a total potential net return analysis that could be achieved over that longer ownership period.

We believe that the pricing achieved on our dispositions to date in 2021.

Is generally indicative of the pricing that could currently be achieved on our continuing portfolio of real estate assets.

We.

Renew to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets and.

And so long as that price to value disparity remains as wide as we see it.

It is our intention to continue our strategy of <unk>.

Seeking to increase shareholder value through the sale of select properties.

We believe that the net value of our continuing real estate portfolio of assets.

Net of outstanding liabilities would exceed $10 per share of FSP common stock.

Based on our market valuation estimates and using pricing levels. We have achieved to date on our dispositions as a benchmark applied across our continuing real estate portfolio.

We intend to use the proceeds from any future dispositions for continued debt reduction repurchases of our stock and.

And special dividends required to meet requirements and other general corporate purposes.

With those comments I will turn the call over to John Donahue President of our property management.

John.

Thank you George good morning, everyone.

The FSP portfolio was approximately 78, 8% leased at the end of the third quarter as compared to 78, 5% leased at the end of the second quarter.

The increase is attributable to 172000 square feet of new leasing achieved primarily in Atlanta, and secondarily in Dallas and Houston.

During the third quarter FSP finalized the lease for an anchor tenant at Pershing Park, which will occupy approximately 100000 square feet back filling the majority of the space vacated by Jones day in the second quarter.

FSP is currently tracking over 600000 square feet of potential new tenant prospects.

And approximately 100000 square feet of renewals.

Approximately 400000 square feet of the new tenant prospects.

Have shortlisted FSP assets identified an FSP building as their top choice or signed a letter of intent.

We continue to be encouraged by meaningful growth in leasing activity and fsp's healthy pipeline with prospective tenants.

During the first nine months of calendar 2021.

SP has finalized over 890000 square feet of total leasing, including new deals and renewals.

For the final quarter of 2021, FSP has approximately 72000 square feet of tenants expiring, which is less than 1% of the portfolio.

Due to the limited rollover exposure, coupled with improving demand for space and Fsp's assets. We believe that our portfolio is well positioned to make meaningful progress regarding net absorption over the next three to four months.

Thank you I will now turn it over to Jeff Carter.

Thank you John good morning, everyone.

We here at Franklin Street properties hope that everyone remains safe and healthy.

Building on our comments from last quarter FSP is continuing to see strong demand for well located and high quality office properties from a diverse group of buyers and importantly, we are achieving pricing that is exceeding our expectations.

More specifically and since our last quarterly call. We sold properties totaling approximately 326 million that include river crossing in Indianapolis for $35 million $50000 Timberlake corporate center in greater St. Louis for $67 million and at 90 99 Peachtree in Atlanta.

For approximately $224 million.

In aggregate our property sales for the year now total approximately $563 million and have exceeded our original disposition guidance.

FSP also has two additional properties meadow point in stone crop both in northern Virginia under purchase and sale agreement and subject to normal closing conditions, we expect to complete their respective sales during the fourth quarter.

Given the compelling demand and pricing being experienced FSP increased the top end of our disposition guidance range to approximately $600 million.

As mentioned, our closed and pending sales have achieved pricing in excess of our own market valuations and a affirmed to us our belief that such dispositions are indeed, capturing embedded value for FSP shareholders to date during 'twenty, one our dispositions have sold it.

In aggregate weighted average in place cap rate of approximately five 8% with the pending sales of mental point and stone crossed included the weighted average in place cap rate will adjust to approximately five 4% and at a weighted average occupancy of about 84%.

The primary objective of our disposition work has been to materially reduce corporate indebtedness at FSP and positioning the company for stronger future returns and opportunities to our shareholders.

Over the long term FSP remains committed to high quality properties located in dynamic markets, including the U S Sunbelt and mountain West where we have owned and invested for many years. Accordingly property sales made during 2021 that occur within the U S. Sunbelt should not be viewed as a statement about our.

Our commitment to such market, but instead is an asset specific decision intended to capture embedded value for our shareholders.

And with that we thank you for listening to our earnings conference call today and now at this time, we'd like to open up the call for any questions Rocco.

Yes, Sir thank you.

Ask a question. Please press Star then one on your Touchtone phone.

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Once again, ladies and gentlemen that Starwood I'm wondering if you have a question.

Today's first question comes from Craig Kucera with B Riley Securities. Please go ahead.

Yeah, Hey, good morning, guys.

John do you have a sense of what the special dividend might be at this point based on the sales completed year to date and what it might be if those other sales that are scheduled to occur.

Would be.

This is John we don't have an amount that we can divulge right now.

A lot of calculations involved was coming coming up with that and the bottleneck that decision once we have more information.

Okay.

George This is more a question for you.

Given where the stock is trading on an implied cap rate basis.

We would agree that your assets are undervalued from an NAV perspective, but is the board considering strategic alternatives at this point.

Hi, Craig.

So so.

Short answer to your question is yes.

Board is considering.

All avenues and always does.

Consider all avenues to try to create.

The best value for shareholders, including strategic alternatives.

To.

Take one step back.

Greg to make sure of that because I don't think nessus.

Necessarily.

Made this as clear over the last few earnings calls.

I probably should have.

Our strategy, which starts at.

At the top.

Trying to create.

The best value for our shareholders.

Revolves around our belief.

At our core.

We have great properties in great locations.

Many of those properties have tremendous potential.

For leasing appreciation et cetera.

Once.

The COVID-19 pandemic truly mems markets truly reopening.

As as as the pandemic came upon us it became clear to us.

The best way to position the.

The company.

Four.

Whatever path.

Was the best path for the shareholders.

Would be too.

Realize some of the true power of that.

We believe the market does not recognize.

<unk>.

Pricing our stock by disposing of some assets that we believe.

Do not have from our perspective, a lot of nearer term or intermediate term.

Cancel.

To add that value for our shareholders and those other properties that we have to be disposing up and to keep those properties that really have that potential.

Post Covid, we believe.

Can create that value.

And as we dispose of these properties. This year. The primary objective was is and continues to be.

To reduce indebtedness, reducing indebtedness to the level that we have.

Done.

We may still do with some further dispositions.

Is to give us the maximum flexibility coming.

Coming out of post COVID-19 coming coming into <unk>.

Our best properties in our best markets that we believe has the best near to intermediate term potential to add that value and that is really that has really been the objective.

And as we come out of.

Covid.

And has the opportunity that we believes in front of us with a fortress balance sheet that we have.

We made from dispositions.

All paths, Craig all paths, including strategic paths.

Are constantly looked at and viewed as the best path to take.

For our shareholders.

Got it so it doesn't sound like you have engaged with a third party in that sense.

I guess what would it take if you guys are looking at your portfolio and saying, we think our portfolio's worth more than $10 and yes I am.

Quite frankly, perennially you guys traded at a fairly steep discount to net asset value I guess, what would it take for you guys to maybe think it made sense to accelerate that process given the amount of success at a lot of other small cap rates have had and entering into strategic alternatives and really getting our shareholders a much better value relative to their NAV.

Hi.

Craig.

We are constantly currently.

Along with all of the other paths.

Looking down strategic paths, we are as we speak.

Looking down strategic paths as well as all the other paths.

And so what it takes us.

Getting a value for our shareholders that we believe is the best value for them.

That can be gotten versus all the other paths and that is currently going on as we speak again all paths.

Okay. Thank you.

Hello, Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to George Hager for any final remarks.

Thank you everyone for tuning into the call and move I know, we'll be speaking to some new.

NAREIT virtual thank you again, we will look forward to talking to you next quarter.

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