Q2 2023 Franklin Street Properties Corp Earnings Call

Good morning, and welcome to the Franklin Street Properties Corp, second quarter, 2023 results conference call.

All participants are in a listen only mode. After the speaker's presentation, we will conduct a question and answer session to.

To ask a question you will need to press star followed by the number one on your telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Scott Carter General Counsel. Thank you. Please go ahead Sir.

Good morning, and welcome to the Franklin Street properties second quarter 2023 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 President of <unk>.

SP 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 provision 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 ended December 31, 2022 as amended by our quarterly reports on Form 10-Q, all of which are on file with the us each day.

In addition, these forward looking statements represent the company's expectations only as of today August <unk> 2023, while.

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 operations or wrap up all reconciliations.

<unk> 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 at Www Dot <unk> Dot com.

I'll turn the call over to John Demeritt John .

Thank you Scott and good morning, everyone.

I'm going to give a brief overview of our second quarter results afterward, I'll pass the call to George for his thoughts.

As a reminder, our comments today will refer to our earnings release supplemental package and 10-Q.

Which can be found on our website.

We reported funds from operations or <unk> of about $7 1 million or <unk> <unk> per share for the second quarter.

GAAP net loss of about $8 4 million or <unk> for the second quarter of 'twenty three.

On a year to date basis.

We reported <unk> of about $15 5 million or <unk> 15 per share for the six months ended June 30, 'twenty, three and a GAAP net loss of about 6 million or <unk> <unk> per share for the same period.

As of June 30, 'twenty, three we will remain with $400 million of total debt outstanding which is the same level. We reported at the end of March.

With that I'll turn the call over to George George.

Thank you John and again welcome to Franklin Street properties second quarter 2023 earnings call.

As the third quarter of 2023 begins.

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

We will continue to seek to unlock that value for shareholders.

Through select property dispositions and aggressive efforts to lease vacant space in our portfolio.

And just viewing one of many metrics that could be considered relevant.

Fsp's potential value proposition.

Data price per square foot.

It is meaningful to note that since our disposition program began.

In December of 2020, we.

We have sold approximately $852 million of profit.

Representing about 385 million square feet.

Which equates to an approximately $220 per square foot average price.

As of the end of the second quarter 2023, our public market stock price.

Implied a price per square foot on our remaining approximately $6 1 million square foot property portfolio.

We have about $91 per square foot.

We intend to continue to use proceeds from further property dispositions primarily for continued debt reduction.

Since the beginning of our recent disposition program.

We have repaid approximately 60% of our debt.

Which we believe has reduced risk to all FSP stakeholders and is currently challenged office property market while increasing.

The quality and longer term potential of their continued investment.

Now for more color on our leasing activity I will turn the call over to John Donahue President of FSP property management.

John .

Okay.

Thank you George good morning, everyone.

The FSP directly bond portfolio was approximately 75, 7% leased at the end of the second quarter.

Compared to 73, 9% leased at the end of the first quarter and 75, 6% leased as of year end 2022.

The increase was primarily attributable to leasing completed during the second quarter and offset by lease expirations. During the first six months of the year and by one property disposition in the first quarter.

Economic occupancy of the directly owned portfolio was approximately 72, 1% at the end of the second quarter compared to 71, 5% at the end of the first quarter.

The increase was due to lease commencement succeeding tenant departures during the second quarter.

FSP finalized approximately 445000 square feet of total leasing during the first half of 2023, which included approximately 269000 square feet of renewals and expansions along with 176000 square feet of new tenant leases.

<unk>.

During the second quarter, we executed a new lease with the Commonwealth of Virginia at our <unk> property Glen Allen, Virginia.

The lease is for approximately 100000 square feet with a term of approximately 10 five years.

We expect that lease to commence in December 2023.

Also during the second quarter, we finalized a lease amendment with Kaiser Foundation Health plan, an existing tenant at our Greenwood Plaza property in Englewood, Colorado.

The lease amendment extends the term applicable the kaisers entire premises.

Of approximately 121000 square feet by five years with the new exploration date of May 2020.

We are currently tracking a healthy pipeline of over 500000 square feet of perspective tenants for new leases, including approximately 300000 square feet of prospects that have identified FSP assets on their respective shortlists.

Despite a slight summer slowdown over the past several months, which is typical for this calendar year FSP continues to witness an incrementally positive trend and overall leasing activity.

Including tours and request for proposals for FSP assets.

The modest pickup in activity has been most evident.

SSP suburban markets in Dallas, Houston and Denver.

Lease expirations for the remainder of calendar 2023, total approximately 177000 square feet, which represents less than 3% of ssp's directly owned portfolio.

FSP continues to work with existing tenants that are engaged for potential renewals and expansions that total in excess of 200000 square feet.

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

Thank you John good morning, everyone.

We'll be discussing the current investment sales market place for office properties generally as well as our own efforts to potentially sell select properties more specifically.

At a macro level and as has been widely reported the market for office property sales and financings as well as with other property types remains challenged and in particular with respect to large office properties and to our bulk office portfolios.

Unexpectedly deep value buyers are out looking for distressed opportunities, but so our buyers who have an eye towards the longer term value and growth proposition of the office asset class and finding these groups is a key focus at FSP.

The current lack of liquidity and resulting constrained blending environment when combined with rising interest rates are primarily responsible for the currently and historically difficult conditions and have reduced the ability of real estate investors to reliably procure needed debt and equity capital.

To facilitate the closing of property purchases.

With respect to our own work on potential select property dispositions, we continue to see real interest from perspective buyers investors continue to seek high quality and well located office properties. However, their R&D fewer buyers than in the past and from our own observations watching the current marketplace.

We see that many buyers are entering proposed transactions with the genuine intention and belief of closing however in some cases as they work through their respective debt and equity procurement processes, they find greater challenges than anticipated due to the previously mentioned liquidity constraints.

Can result in longer Timeframes to consummate transactions, where even deals falling out of contract entirely.

That all said FSP is making progress on our own efforts to sell select properties more specifically, we expect to close on the sale of Forest Park. Our sole single story building located in Charlotte North Carolina for approximately $9 2 million in gross proceeds during the currently.

Underway third quarter.

In addition to Forest Park FSP disclosed in our just released quarterly results that we have entered into purchase and sale agreements with three different and unrelated purchasers for the potential disposition of three additional properties that would total approximately $156 million in aggregate gross proceeds.

Above and beyond the sale of Forest Park.

As reported these transactions remain subject to customary closing conditions, including the successful completion of their respective due diligence inspection periods. If successful. These transactions are expected to close during the fourth quarter of 2023.

In aggregate the four potential pending dispositions currently in process, including Forest Park totaled $165 2 million in gross proceeds and have an average sales price per square foot equal to approximately $250 a foot.

All proceeds are intended to be used primarily for the repayment of debt.

And for competitive reasons that we believe to be in the interest of our shareholders. In this current market environment, we will not share specific potential property disposition information until appropriate.

We look forward to keeping the market informed and with that 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 Julien.

Jill.

As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.

Our first question will come from Stephen Domanski from Janney Montgomery Scott. Please go ahead. Your line is open.

Thank you in terms of dispositions you showed northwest point for $29 million last quarter and you currently or planning to transact on another 165 million. So in total that's approximately around $200 million of dispositions for this year. So given your size could you potentially sell any more of this year well hidden.

Into recap intriguing or special dividend.

This is Jeff Carter, Thanks for the question.

I'll start with <unk>.

My comment.

Given the challenges that exist within this current market environment, we're not providing forward guidance on potential dispositions. However, what I will say is that we are committed to substantially repaying our debt through select asset sales and that we do currently have a few more assets within various phases.

A perspective of their respective price discovery processes, and we will keep the market informed with further updates as appropriate.

Thank you Jeff for clarifying it and again I understand that in terms of providing guidance on the dispositions.

Just out of curiosity.

Wanted to see if.

It's regarding the purchase and sales agreements how material would any non refundable deposit base.

I appreciate the question I would not comment on purchase and sale agreements that are in place low right now.

Got it thanks guys.

Thank you.

Thank you.

Our next question comes from Craig Sarah from B Riley Securities. Please go ahead. Your line is open.

Yes, good morning, guys.

Congrats on getting the lease done at ends Brook, I think that asset has had some vacancy vacancy issues for over four years.

You mentioned the leases commencing in December is there a free rent period when.

When that occurs or is that when they actually start paying rent.

Hey, Craig It's John Donahue Youre correct. There is a free rent period that will.

Go into calendar 2024 so.

The straight line FASB 13 rent should commence in December as we get them in on time.

Okay great.

And as far as the extension at Kaiser, which was a nice win.

What did you have to give to Kaiser in exchange for that the five year lease extension was that a ti package with that any adjustment to rent just some color there would be helpful.

Yes, absolutely Craig.

That was an exception to the norm.

Pretty pretty rare situation, where the tenant exercised an option.

And that was an asset deal no free rent.

The rent was negotiated and it is a pickup from the expiring rent, but could be considered slightly below market.

If there was any concession at all you can say that.

Rent is slightly below market, but it was a.

A huge win.

NAR basis as well.

The Great news there is that Kaiser is planning to grow at the property.

We don't know exactly.

The timing of that but we are at.

Have them as a tenant and keep them for the future.

Great changing gears you extended the monument circle loan until the end of this quarter.

Kind of what is the what is the game plan there given that your <unk> way through through third quarter.

Hi, Craig it's George.

<unk> is.

As it has been we are actively.

Searching for <unk>.

Existing tenancy.

Our tenants.

Jake.

Occupancy and have some prospects.

And we are actively searching for.

Potential buyers of the property at the same time in some of the prospects are.

Both in other words, some are potential tenant owners and.

And so we're active on that property in the marketplace.

Going down both paths again, so those paths are crossing a lot as we.

Do.

Do that.

Downtown Indianapolis, where this property is.

<unk> had its issues over the last few years, but seems to have stabilized now and so we're cautiously optimistic going forward on on getting <unk> sold or some combination thereof for mining reserve.

Got it and just one more for me just given your commentary on.

The liquidity of the buyers and their access to debt and equity.

<unk>.

<unk> been working on getting these assets sold for some time.

Could you give any color or sense of.

How financially qualified this these three buyers are they are they need to go down the path of raising debt and equity capital or did they come to you already with sort of that.

Proof of.

Sources of capital as you as you worked with them.

Greg This is Jeff I appreciate the question.

The buyer profile, we've seen on many of our deals bear it varies from property to property. So it's hard to generalize, but I will say that as part of our price discovery processes.

Through buyer interviews.

We try to really work through who has the equity and who has access to the debt capital and that remains the case on these transactions as well.

No.

Nothing is done until it's done, but we run a rigorous process and have in these instances.

<unk> market, but we think we've got.

Good chance of success and we will keep the market posted.

Okay. That's helpful. Thanks, guys.

Welcome.

We have no further questions I would like to turn the call back over to George Carter for closing remarks.

Thank you everyone for turning into the tuning into the call and we look forward to talking to you next quarter.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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