Q1 2024 Franklin Street Properties Corp Earnings Call
Operator: Good day, and welcome to the Franklin St Properties Corp first quarter 2024 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star 1 again.
Good day and welcome to the Franklin Street Properties Corp, first quarter 2024 results conference call.
Operator: All lines have been placed on mute to prevent any background noise.
Operator: After the Speakers' remarks, there will be a question and answer session.
Speaker Change: I'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press star one again.
Operator: For operational assistance throughout the call, please press star zero, and, finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Scott Carter, General Counsel, to begin the conference. Scott, over to you.
Operator: For all of her assistance throughout the call. Please press star Zero, and finally, I would like to advise all participants that this call is being recorded thank you.
Operator: I'd now like to welcome Scott Carter General Counsel to begin the conference Scott over to you.
Scott H. Carter: Good morning. Welcome to the Franklin Street Properties First Quarter 2024 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 FSP Property Management. Also joining me this morning are Toby Daly and Will Friend, both Executive Vice Presidents of FSP Property Management.
Scott H. Carter: Good morning, welcome to the Franklin Street properties first quarter 2024 earnings call. Joining me. This morning are George Carter, Our Chief Executive Officer, Jonathan Lieberman, our chief.
Scott H. Carter: <unk> Financial Officer, Jeff Carter, our President and Chief Investment Officer, and John Donahue President of FSP property management also joining me. This morning are Toby Daley and will Brian.
Scott H. Carter: Jackie to Vice President of FSP property management. Please note that various remarks that we may make about future expectations plans and prospects for the company.
Scott H. Carter: 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 ended December 31, 2023, as amended by our quarterly reports on Form 10-Q, all of which are on file with the SEC.
Scott H. Carter: 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.
Scott H. Carter: <unk> of our annual report on Form 10-K for the year ended December 31, 2020 as amended by our quarterly reports on Form 10-Q, all of which are on file with the us.
Scott H. Carter: In addition, these forward-looking statements represent the company's expectations only as of today, May 1, 2024. 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 FFO. Reconciliations of FFO and other non-GAAP financial measures to GAAP net income are contained in yesterday's press release, which is available in the Investor Relations section of our website at www.fspreit.com. Now, I'll turn the call over to John DeMera. John?
Scott H. Carter: In addition, these forward looking statements represent the company's expectations only as of today may.
Scott H. Carter: One 2024, 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.
John G. Demeritt: At times during this call we may refer to funds from operations reconciliations of <unk> 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.
John G. Demeritt: S B R E dot.
John G. Demeritt: Dot Com now I will turn the call over to John John.
John G. Demeritt: Thank you, Scott, and good morning, everyone. I spoke at length during our call on February 27th, and I'm going to give a very brief overview of our first quarter results today. Afterward, I'll pass the call to George for his thoughts.
John G. Demeritt: Thank you Scott and good morning, everyone.
John G. Demeritt: I had spoken at length during our call on February 27.
John G. Demeritt: I'm going to give a very brief overview of our first quarter results today.
John G. Demeritt: Afterward, I will pass the call to George for his thoughts.
John G. Demeritt: As a reminder, our comments today will refer to our earnings release, the supplemental package, and the 10-Q, which, as Scott mentioned, can be found on our website. We reported funds from operations, or FFO, of about $4.2 million, or $0.04 per share, for the first quarter of 2004. We also reported a net loss of about $7.6 million, or $0.07 per share, for the first quarter of 2024. With that, I'll turn the call over to George.
John G. Demeritt: As a reminder, our comments today will refer to our earnings release, the supplemental package and 10-Q, which as Scott mentioned can be found on our website.
George: We reported funds from operation or <unk> of about $4 2 million or four cents per share for the first quarter of 'twenty four.
George: We also reported a GAAP net loss of about $7 6 million or seven.
George: Per share for the first quarter of 'twenty four.
George: With that I'll turn the call over to George George.
George John Carter: Thank you, John. And again, welcome to Franklin Street Properties' first quarter 2024 earnings call. I will let stand for readers my written comments on the first page of our earnings press release, but as a part of my verbal comments today, I will focus on last quarter's 2023 year-end earnings call. I said then that with the meaningful progress we have made deleveraging our balance sheet over the last couple of years and the strong value growth potential that we believe is embedded in our existing property portfolio.
George: Thank you John and again welcome to Franklin Street properties first quarter 2024 earnings call.
George John Carter: Yes.
George John Carter: I will let Stan for readers my written comments on the first page of our earnings press release.
George John Carter: But as a part of my verbal comments today I will focus on last quarter's 2023 year end earnings call. I said, then that with the meaningful progress we have made deleveraging our balance sheet over the last couple of years.
George John Carter: And a strong value growth potential that we believe is embedded in our existing property portfolio.
George John Carter: We will continue, along with our property disposition and leasing, to search for the best opportunities and time to generate potential new sources and paths of increasing shareholder value. The macro update, at least so far in early 2024, is at number one continued FSP property disposition is as difficult or more so than in the past two years. There is a lot of office property debt coming due, i.e., maturing during 2024 and 2025.
George John Carter: We will continue along with our property disposition and leasing efforts to search for the best opportunities and times to generate potential new sources and paths of increasing shareholder value.
George John Carter: The macro update at least so far in early 2024.
George John Carter: Is that number one continued FSP property dispositions.
George John Carter: As difficult or more so than in the past two years.
George John Carter: There is a lot of office property debt coming due.
George John Carter: I E maturing during 2024 and 2025.
George John Carter: And there appears to us to be many more distressed owner-sellers, and or lenders who have been handed back the keys on properties that are trying to sell, in some cases, at fire sale prices. That puts increased competitive pressure on the already thin disposition market, which is trying to attract the limited amount of investment capital currently available. So, at least at the start of 2024.
George John Carter: And there appears to be.
George John Carter: Many more distressed owner sellers and to our lenders who have been handed back the keys on properties that are trying to sell in some cases at fire sale prices.
George John Carter: That puts increased competitive pressure in the already assumed disposition market.
George John Carter: It is trying to attract the limited amount of investment capital currently available.
George John Carter: So at least at the start of 2024 capital markets, both equity and debt.
George John Carter: Capital Markets, both equity and debt, have limited liquidity, are expensive and difficult to access for traditional investors looking to acquire office property assets. Number two, post COVID back to office employee attendance continues to make some progress. But the numbers vary quite a bit from industry to industry, market to market, and property to property. The office leasing market is generally still a long way from its pre COVID occupancy situation, and the ongoing consistent need for long-term space planning requirements by the Corporate Decision We are finding that both investor and tenant viewpoint, on the future of the office asset class, range from just traditional cyclicality to longer-term fundamental secular change, and most recently new heightened uncertainty about inflation, and the Federal Reserve's timing and direction of future interest rate moves, has taken a much bigger part of center stage thought and consideration.
George John Carter: <unk> limited liquidity are expensive and difficult to access for traditional investors looking to acquire office property assets.
George John Carter: Number two post Covid back to office employee attendance continues to make some progress.
George John Carter: But the numbers vary quite a bit from industry to industry market to market and property to property.
George John Carter: The office leasing market is generally still a long way from its pre COVID-19 occupancy situation.
George John Carter: And the ongoing consistent need for long term space planning requirements with a corporate decision makers.
George John Carter: We are finding that both investor and tenant viewpoints.
George John Carter: On the future of the office asset class.
George John Carter: Range from just traditional cyclicality.
George John Carter: Two longer term fundamental secular change.
George John Carter: And most recently new heightened uncertainty about inflation.
George John Carter: The federal reserve's timing and direction of future interest rate moves.
George John Carter: Has taken a much bigger part of center stage thought and consideration.
George John Carter: All of this on the ground reality that we are is part of the mix as we go into the second quarter of 2020 and certainly is a factor in our search for the best opportunities and timing to generate additional new potential sources and paths of increasing shareholder value, having conveyed some of the challenges we are seeing in the early part of this year. I do believe that FSP is, in fact, in a very good position to take advantage of what opportunities are available to create increased shareholder value.
George John Carter: All of this on the ground reality that we are seeing is.
George John Carter: As part of the mix as we go into the second quarter of 2024.
George John Carter: And certainly is a factor in our search for the best opportunities and timing to generate additional new potential sources and paths of increasing shareholder value.
George John Carter: Having conveyed some of the challenges we are seeing in the early part of this year.
George John Carter: Do believe that FSP is in fact in a very good position.
George John Carter: The advantage of what opportunities are available to create increased shareholder value.
George John Carter: We continue to work on further property dispositions, leasing, and exploring potential new sources of paths to give our shareholders the best possible risk-reward value return going forward, a value that we strongly believe is intrinsic to and embedded in FSP and its properties. We will update shareholders and the markets on our progress as soon as specific events and situations unfold. Now for more color on our leasing activity, I will turn the call over to John Donahue, President of FSP Property Management Corp.
George John Carter: We continue to work and make real progress on further property dispositions leasing and exploring potential new sources of paths to give our shareholders. The best possible risk reward value return going forward.
John F. Donahue: Our value that we strongly believe is intrinsic to an embedded and FSP and its properties.
John F. Donahue: We will update shareholders and the markets on our progress as soon as specific events and situations unfolds.
George John Carter: Now for more color on our leasing activity I will turn the call over to John Donahue.
John F. Donahue: Of FSP property Management Corp, John.
George John Carter: Yes.
John F. Donahue: Thank you, George. Good morning, everyone.
John F. Donahue: Thank you George good morning, everyone.
John F. Donahue: The FSP directly owned portfolio was approximately 73.3% leased at the end of the first quarter, compared to 74.0% leased at the end of 2023. The decrease in lease occupancy was primarily attributable to one property disposition in the first quarter. Economic occupancy of the directly owned portfolio was approximately 71.3% at the end of the first quarter, compared to 70.1% at the end of the fourth quarter. The increase was due to new lease commencements partially offset by the impact of the sold property during the quarter.
John F. Donahue: The FSP directly owned portfolio was approximately 73, 3% leased at the end of the first quarter compared to 74.0% leased at the end of 2023.
John F. Donahue: The decrease in leased occupancy was primarily attributable to one property disposition in the first quarter.
John F. Donahue: Economic occupancy of the directly owned portfolio was approximately 71, 3% at the end of the first quarter compared to 71% at the end of the fourth quarter.
John F. Donahue: The increase was due to new lease commencements, partially offset by the impact of the sold property during the quarter.
John F. Donahue: FSP finalized approximately 197,000 square feet of total leasing during the first quarter of 2020, which included approximately 136,000 square feet of renewals and expansion, along with 61,000 square feet of new tenant leases. FSB is currently tracking over 700,000 square feet of prospective new tenants, including approximately 350,000 square feet of prospects that have identified FSB assets on their respective short lists. FSP's assets in suburban Houston and downtown Denver have witnessed an increase in overall new tenant activity during the past five to six months.
John F. Donahue: FSP finalized approximately 197000 square feet of total leasing during the first quarter of 2024, which.
John F. Donahue: Which included approximately 136000 square feet of renewals and expansions.
John F. Donahue: Along with 61000 square feet of new tenant leases.
John F. Donahue: FSP is currently tracking over 700000 square feet of prospective new tenants, including approximately 350000 square feet of prospects that have identified FSP assets on their respective shortlists.
John F. Donahue: Fsp's assets in suburban Houston, and downtown Denver have witnessed an increase in overall new tenant activity during the past five to six months.
John F. Donahue: Scheduled lease expirations for the remainder of 2024.
John F. Donahue: Scheduled lease expirations for the remainder of 2024 total approximately 307,000 square feet. The 307,000 square feet represents approximately 5.8% of FSP's directly owned portfolio. For comparison purposes, FSP executed approximately 478,000 square feet of renewals and expansion during calendar 2023. FSP is currently engaged with existing tenants regarding potential renewals that total approximately 450,000 square feet. The new tenant pipeline combined with potential renewal activity provides FSP with an ideal opportunity to increase lease occupancy over the next few quarters, barring any surprises or the impact of potential disposition. Thank you. I will now turn it over to Jeff Carter.
John F. Donahue: Total approximately 307000 square feet.
Jeffrey B. Carter: The 307000 square feet represents approximately five 8% of fsp's directly owned portfolio.
Jeffrey B. Carter: For comparison purposes, FSP executed approximately 478000 square feet of renewals and expansions during calendar 2023.
Jeffrey B. Carter: FSP is currently engaged with existing tenants regarding potential renewals that total approximately 450000 square feet.
Jeffrey B. Carter: The new tenant pipeline combined with potential renewal activity provides FSP with an ideal opportunity to increase leased occupancy over the next few quarters barring any surprises or the impact of potential dispositions.
John F. Donahue: Thank you I will now turn it over to Jeff Carter.
Jeffrey B. Carter: Thank you, John, and good morning, everyone. I will be discussing our disposition activity completed during the first quarter of 2024 and also providing some insights as we look further ahead in the year. I will also talk about current market conditions for office dispositions as FSP continues its work to selectively sell properties when it makes sense to do so, with the objective of using the majority of any net proceeds received to further reduce our indebtedness. As previously reported, on January 26, FSP sold Collins Crossing in Greater Dallas, Texas, for approximately $35 million.
Jeffrey B. Carter: Thank you John and good morning, everyone.
Jeffrey B. Carter: I will be discussing our disposition activity completed during the first quarter of 2024 and also provide some insights as we look further ahead in the year.
Jeffrey B. Carter: I will also talk about current market conditions for office dispositions as FSP continues our work to selectively sell properties. When it makes sense to do so the objective of using the majority of any net proceeds received to further reduce our indebtedness.
Jeffrey B. Carter: As previously reported on January 26, FSP sold Collins crossing and greater Dallas, Texas for approximately $35 million.
Jeffrey B. Carter: We are currently working on several further potential dispositions, which have so far resulted in FSP having selected a buyer for one such property. Efforts are currently underway to finalize a purchase and sale agreement for this prospective transaction, which, if successful, would likely be completed during the summer months. With respect to current conditions, the market for office property sales remains challenged, with currently available data showing an approximate 56% decline in completed office property sales activity or volume year over year.
Jeffrey B. Carter: We are currently working on several further potential dispositions, which have so far resulted in FSP, having selected a buyer for one such property.
Jeffrey B. Carter: <unk> are currently underway to finalize the purchase and sale agreement for this prospective transaction, which if successful would likely be completed during the summer months.
Jeffrey B. Carter: With respect to current conditions the market for office property sales remains challenged with currently available data showing an approximate 56% decline in completed office property sales activity or volume year over year.
Jeffrey B. Carter: As George referenced in his comments, buyers are facing a very difficult environment accessing the necessary debt and equity capital to fund property purchases, which has become more scarce and costly, and we are monitoring any changes to the present capital markets closely. We see four primary factors that have influenced our disposition efforts to date.
Jeffrey B. Carter: As George referenced in his comments buyers are facing a very difficult environment accessing the necessary debt and equity equity capital to fund property purchases, which has become more scarce and costly and we are monitoring any changes to the present capital markets closely.
Jeffrey B. Carter: We see four primary factors that have influenced our disposition efforts to date.
Jeffrey B. Carter: First, that prospective buyers and their capital sources currently favor stabilized properties from a leased perspective at about 75% leased or better. Second, and relatedly, that buyers and their potential capital sources are focused on WALT, or Weighted Average Lease Term. A high in-place lease percentage by itself is not necessarily appealing to buyers and their capital sources if there are also a significant amount of potential lease expirations that are approaching rapidly with doubts about renewal probabilities.
Jeffrey B. Carter: First that prospective buyers and their capital sources currently favors stabilized properties from a lease perspective at about 75% leased or better.
Jeffrey B. Carter: Second and Relatedly, the buyers and their potential capital sources are focused on Walt or weighted average lease term.
Jeffrey B. Carter: Hi in place lease percentage by itself is not necessarily appealing to buyers and their capital sources. If there are also a significant amount of potential lease explorations that are approaching rapidly rapidly with doubts about renewal probabilities.
Jeffrey B. Carter: Third, the perceived creditworthiness of in-place tenants is a significant consideration for potential buyers and their capital sources, who are seeking certainty. And fourth, smaller dollar-sized properties have a higher probability of success than larger deals within this capital-constricted environment.
Jeffrey B. Carter: Third the perceived creditworthiness of in place tenants is a significant consideration for potential buyers and their capital sources, we are seeking certainty.
Jeffrey B. Carter: And fourth smaller dollar sized properties have a higher probability of success than larger deals within this capital constricted environment.
Jeffrey B. Carter: While there are fewer buyers, including a number of buyers who are seeking deeply discounted or distressed pricing, there also remain buyers who do see the longer-term value and growth proposition of office assets, and FSP will continue to work diligently to find just such groups as we have over the past several years. Given the current competitive investment sales environment, we continue to believe that the interest of our shareholders remains best served by not highlighting prospective disposition information beyond what is in our current filings until appropriate.
Jeffrey B. Carter: While there are fewer buyers, including a number of buyers who are seeking deeply discounted or distressed pricing. They're also remained buyers who do see the longer term value and growth proposition of office assets and FSP will continue to work diligently to find just such groups as we have over the past several years.
Jeffrey B. Carter: Yeah.
Jeffrey B. Carter: Given the current competitive investment sales environment, we continue to believe that the interest of our shareholders remain best served by not highlighting perspective disposition information beyond what is in our current filings until appropriate.
Jeffrey B. Carter: To be clear, our objective is to maximize achieved values for our shareholders, and we strongly believe that, in this present investment climate, being cautious with details that have even the possibility of harming potential sales efforts is most beneficial to that objective. FSP continues to see interest, albeit more competitive interest, from qualified buyers, and we remain optimistic that we will continue to make progress on prospective select dispositions and corresponding debt reduction.
Jeffrey B. Carter: To be clear our objective is to maximize achieved values for our shareholders and we strongly believe that in this present investment climate that being cautious with details that have even the possibility of partnering potential sales efforts is most beneficial to that objective.
Jeffrey B. Carter: FSP continues to see interest, albeit more competitive interest from qualified buyers and we remain optimistic that we will continue to make progress on prospective select dispositions and corresponding debt reduction.
Jeffrey B. Carter: We look forward to keeping the market informed as and when appropriate, 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. Gavin
Jeffrey B. Carter: We look forward to keeping the market informed as and when appropriate.
Speaker Change: 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 Kevin.
Operator: If you wish to ask a question, please press star followed by 1 on your telephone and wait for your name to be announced. And your first question comes from the line of Steve Dumanski from Janey. Your line is open. Thank you.
Speaker Change: If you wish to ask a question. Please press star followed by one on your telephone and wait for an HP announced.
Steven Dumanski: And your first question comes from the line of Steve Domanski from Janney. Your line is open.
Steven Dumanski: Thank you.
Steven Dumanski: I noticed that there has been a pickup in renewal leasing this quarter. Do you expect this leasing velocity to go forward?
Steven Dumanski: I noticed that there's been a pickup in renewal leasing this quarter do you expect this leasing velocity to go forward.
John F. Donahue: Good morning, Steve. It's John Donahue.
Steven Dumanski: Good morning, Steve, It's John Donahue, well, we certainly hope so we're engaged with a large number of tenants that have near term expirations and over the next 18 to 24 months as well.
John F. Donahue: Well, we certainly hope so. We're engaged with a large number of tenants that have near-term expirations and over the next 18 to 24 months as well. So, it's great news that they're engaged, and we are, in some cases, looking at the smaller tenants potentially growing, maybe relocating. We're also looking at some of the larger tenants that might be looking to downsize, perhaps a little bit early, in exchange for an extension of their term. So, it is more engaged. We're finding more tenants in total numbers that are engaged at this time, so it's quite encouraging.
John F. Donahue: So it's great news that they are engaged and we are in some cases looking at the smaller tenants potentially growing.
John F. Donahue: Be relocating we're also looking at some of the larger tenants that might be looking to downsize.
John F. Donahue: Perhaps a little bit early and in exchange to an extension of their term. So it is more engaged.
John F. Donahue: Finding more tenants in total numbers that are engaged at this time, so it's quite encouraging.
John F. Donahue: Thank you, John. That's very helpful.
Speaker Change: Thank you John that's very helpful and just to add to that another question. Just in terms of is there a certain range in square feet for your properties that have received.
Steven Dumanski: And just to add to that, another question, and just in terms of, is there a certain range in square feet for your properties that receives greater demand or interest? I would just like a general picture of tenants who are predominantly looking to size down or maybe maintain this certain space.
John F. Donahue: Later demand or interest I was just like a general picture of tenants were predominant looking to size down or maybe maintain this.
Steven Dumanski: Certain space.
John F. Donahue: Well, the shortest answer is it depends. I would say that looking in the rear view mirror over the last four years, it certainly has been predominantly smaller needs that we have been finding demand for, with So that would be 5,000 to 10,000 square feet or so. That really has been the most significant portion of the demand. But over the last 6 to 12 months, we've been noticing some of the larger tenants coming to the table and appearing to be more serious.
Steven Dumanski: Well.
Steven Dumanski: The shortest answer is it depends.
John F. Donahue: I would say that looking in the rearview mirror over the last four years. It certainly has been.
John F. Donahue: Predominantly smaller needs that we have been.
John F. Donahue: Finding the demand.
John F. Donahue: With.
John F. Donahue: So that would be 5000 to 10000 square feet or so.
John F. Donahue: That really has been.
John F. Donahue: Sure.
John F. Donahue: The most significant portion of the demand.
John F. Donahue: But over the last six to 12 months, we have been noticing some of the larger tenants come to the table and appear to be more serious and so I would say that the number of prospects or existing tenants above a full floor, let's say over 25000 square feet or so.
John F. Donahue: And so I would say that the number of prospects or existing tenants above a full floor, let's say over 25,000 square feet or so, we're seeing that rising right now. Are they looking to downsize? In many cases they are. But we just had a recent example in Richmond where a tenant almost doubled their size, and they were existing about 40,000 square feet or so. So it just depends.
John F. Donahue: So we're seeing that rising right now are they looking to downsize in many cases they are.
John F. Donahue: But we just had a recent example in Richmond, where attended almost doubled their size.
John F. Donahue: And they were existing about 40000 square feet or so so it just depends our experience in the suburbs has been.
John F. Donahue: Our experience in the suburbs has been that many of these smaller tenants are, in fact, looking to grow. Some of the larger tenants might be looking to downsize slightly. And then in the urban markets, I would say it's more often that the tenants are looking to shed a floor or a portion of a floor.
John F. Donahue: Many of these smaller tenants artifact looking to grow some of the larger tenants might be looking to downsize slightly and then in the urban markets I would say, it's more often that the tenants are looking to shed a floor or a portion of our floor.
Steven Dumanski: Thank you and congratulations on that opportunity in Richmond. And in terms of tenant improvement... Has there been more of a paradigm shift where tenants can now demand a higher amount on a per-square-foot basis when leasing space? Also, where do we see tenant improvements and leasing commissions currently trending when you speak to both potential new and current tenants? And is there a variance?
Speaker Change: Thank you and congratulations on that opportunity in Richmond and in terms of tenant improvements.
Steven Dumanski: Has there been more of a paradigm shift where tenants can now demand a higher amount on a per square foot basis. One leasing space also where do you see Canada aforementioned leasing Commission is currently trending when you speak to both potential new and current tenants and is there a variance.
Steven Dumanski: Okay.
John F. Donahue: So I would say that in terms of trends on tenant improvement allowances, they're really very similar to what we've experienced over the last five to ten years. The majority of tenants want a turnkey solution, and so whatever it costs, depending on the quality of the space they're looking at, that's what you're going to have to address. Now, with supply chain issues and inflation, the cost of everything from labor to materials has risen.
Steven Dumanski: So I would say that in terms of trend.
John F. Donahue: Tenant improvement allowances.
John F. Donahue: They are really very similar to what we've experienced over the last five to 10 years.
John F. Donahue: The majority of tenants want a turnkey and so whatever it costs, depending on the quality of the space. They are looking at that Thats, what youre going to have to solve for.
John F. Donahue: Now with the.
John F. Donahue: Supply chain issues and inflation the cost of everything from labor to materials has risen.
John F. Donahue: So if you look at the overall dollars, of course, you're going to see higher costs today than you did five years ago. But really, when you look at what, you know, without, with removing inflation, it's really quite comparable.
John F. Donahue: So if you look at the overall dollars of course, youre going to see higher cost today than you did five years ago.
John F. Donahue: But really when you when you look at what without removing inflation, it's really quite comparable.
John F. Donahue: But tenants have the upper hand right now, and we'll expect them to continue to expect a full turnkey. For us, the average term length in our recent experience, you know, we're looking at average term lengths between six and seven years. Many renewals are three years to five years, especially for those smaller tenants. And so the cost of leasing, the TIs, and commissions, haven't really risen that much. They've been fairly static. You can find all that information in our Supplement on page 20.
Speaker Change: But tenants have the upper hand, right now and we will expect them to continue to expect our full turnkey.
John F. Donahue: For us the <unk>.
John F. Donahue: Average term length.
John F. Donahue: Sure.
John F. Donahue: Near our recent experience we were looking at that average term length between six and seven years. Many renewals are three years to five years, especially for those smaller tenants.
John F. Donahue: So the cost of leasing the tis and commissions haven't really risen that much they've been fairly static.
John F. Donahue: You can find all that information in our supplemental on page 20, and Youll see going back to calendar 'twenty two.
John F. Donahue: And you'll see, going back to calendar 22, or if you look at previous years, going back as far as 2021, we're looking at costs between $5 to $6 per square foot per year on transactions, and that hasn't really changed a whole lot.
John F. Donahue: If you look at previous years.
John F. Donahue: Going back as far as 2021.
John F. Donahue: We're looking at cost between five to $6 per square foot per year on transaction and that hasn't really changed a whole lot.
Speaker Change: Got it thank you.
Steven Dumanski: I would just like to hear your thoughts on coworking spaces and whether they would be beneficial or not for your portfolio.
John F. Donahue: I'd like to hear your thoughts on co working spaces, and whether they would be beneficial or national portfolio.
John F. Donahue: Well, we certainly believe that flexible office space and or co-working have a place in a portfolio. The size of the space and, you know, the location of the property really dictates what you're dealing with. In the past, we have used different operators for co-working and flexible offices, typically for 10 to 15,000 square feet or so. In rare cases, a full floor, 20 to 25,000 square feet. In my personal opinion, I think co-working is a fantastic addition and amenity to a property that is well above 500,000 square feet with easy access to public transportation and maybe provides a satellite office as well for large corporations.
Speaker Change: Well, we certainly believe that flexible office and to our co working has a place in our portfolio.
John F. Donahue: The size of the space and door.
John F. Donahue: The location of the property really dictates what youre dealing with we in the past have used <unk>.
John F. Donahue: Arent operators for co working and flexible office typically for 10 to 15000 square theater. So in rare cases, a full floor, 20% to 25000 square feet.
John F. Donahue: In my personal opinion, I think co working is a fantastic.
John F. Donahue: The condition amenity to our property debt as well.
John F. Donahue: Well above 500000 square feet with easy access to public transportation.
John F. Donahue: We provide a satellite office as well for large corporations.
John F. Donahue: We still have a very small number of co-working flexible ops in our portfolio, but nothing really significant, nothing with multiple floors. But yes, I think it'll definitely be part of many owners' portfolios for years to come.
John F. Donahue: We still have a very small.
John F. Donahue: Use of Coke.
John F. Donahue: Co working flexible offs in our portfolio.
John F. Donahue: But nothing really significant nothing with multiple floors, but yes, I think it will definitely be part of many owners portfolios for years to come.
Steven Dumanski: That's very beneficial to hear. Thank you.
Speaker Change: That's very good news, especially here. Thank you.
Steven Dumanski: Are there certain geographical markets, whether it's in terms of leasing or potential position opportunities that are perhaps not as strong as others? Any cities or metros?
Speaker Change: Are there certain geographical markets, whether it's in terms of leasing potential transmission opportunities that are perhaps not as strong as others.
Speaker Change: Any cities or metros.
John F. Donahue: I'll let Jeff Carter address the disposition side of that. But I think you probably have heard us say in prior quarters that, over the last four years, we've been seeing stronger demand in the suburbs and, again, we've seen stronger demand in the Sunbelt. I think that the rest of the country has been catching up, we're seeing better activity in our markets, in the urban areas, but they're still lagging. Denver CBD has recently been headed in the right direction, very encouraging signs. Minneapolis is still a little bit behind that, but we're really encouraged by what we're seeing in the energy markets of West Houston as well as Jeff on dispositions.
Steven Dumanski: I'll, let Jeff Carter addressed the disposition side of that.
John F. Donahue: Sure.
Jeffrey B. Carter: Thank you probably have heard us say in prior quarters that.
John F. Donahue: Over the last four years, we've been seeing stronger demand in the suburbs.
John F. Donahue: Again, we have seen stronger demand in the sunbelt.
John F. Donahue: I think that the rest of the country has been catching up we're seeing better activity in our markets in the urban areas, but there is still lagging Denver CBD. Most recently has been hesitant headed in the right direction very encouraging signs Minneapolis is still a little bit behind that.
John F. Donahue: But we're really encouraged by what we're seeing in the <unk>.
John F. Donahue: Energy markets of West Houston as well.
Jeffrey B. Carter: Hi Steve, this is Jeff Carter. On the disposition side, I would say that dispositions start at the asset level with the particular story of that asset, and then it splinters into location and market. In general, I would say a similar statement as John indicated that, on balance, we've seen more activity and interest in the Sunbelt markets than we have in the Midwest. Now that has, there were times when we were seeing more in the Midwest, right now, it's been more in the Sun Belt, but a lot of it is really driven by the story of the asset in question and what its appeal is in the market for liquidity on a disposition. And that story just varies from asset to asset.
Jeffrey B. Carter: Jeff on dispositions.
Steven Dumanski: Thank you, Jeff and John. And lastly, thank you all for just being very patient and thorough. I know that your team has been diligent in sourcing these disposition opportunities. So when you speak to potential buyers, are there any parties that are potentially looking to redevelop or convert office to multifamily?
Jeffrey B. Carter: On the.
Steven Dumanski: Hi, Steve This is Jeff garnered on the disposition side I would say that dispositions started the asset level with the particular story of that asset and then they can it splinters into location and market in general I would say a similar statement as John.
Steven Dumanski: Indicated that.
Steven Dumanski: On balance we've seen more activity and interest in the sunbelt.
Steven Dumanski: Markets than we have in the Midwest.
Steven Dumanski: That has as there was times when we were seeing more in the Midwest right now it's been more in the sunbelt, but a lot of it is really driven by the story of the asset in question and what its appeal is in the market for liquidity on a disposition.
Steven Dumanski: And that story just varies from asset to asset.
Steven Dumanski: Thank you, Jeff and John and lastly, thank you for asking we're just being very patient and thorough I know that your team has been diligent on sourcing these disposition opportunities. So when you speak to potential buyers are there any parties that are potentially looking to redevelop our convert office to multifamily.
Jeffrey B. Carter: This is Jeff Carter again. Steve, I appreciate the question.
Steven Dumanski: This is Jeff Carter again, Steve I appreciate the question.
Jeffrey B. Carter: Not head.
Jeffrey B. Carter: Buyers, specifically talking about redevelopment.
Jeffrey B. Carter: Our property that they were looking at acquiring from us specifically for some sort of a conversion.
Jeffrey B. Carter: I have not had buyers specifically talking about redeveloping a property that they were looking at acquiring from us, specifically for some sort of conversion. That has not been a part of the disposition program that I've seen, although I read about it around the country. It seems more prominent in downtown central business districts than in suburban properties that we've mostly sold.
Speaker Change: So that has not been a part of the <unk>.
Jeffrey B. Carter: Disposition program that I've seen although I read about it around the country.
Jeffrey B. Carter: It seems more prominent in downtown central business districts than suburban properties that we've mostly sold.
Steven Dumanski: Great, thank you. It was beneficial to hear your experience with that. I really appreciate it.
Speaker Change: Great. Thank you.
Steven Dumanski: Beneficial to hear how your experience from that I really appreciate it.
Steven Dumanski: Welcome.
George John Carter: There are no further questions at this time, so I'd like to hand it back to George Carter for closing remarks.
Speaker Change: There are no further questions at this time, so not to hand back to George Carter for closing remarks.
George John Carter: Thank you, Gavin. And thank you to everyone for tuning into our earnings call. We look forward to our annual shareholder meeting that's coming up in a couple of weeks, and we look forward to the next quarterly earnings call. Thank you again.
George John Carter: Thank you Gavin and thank you for everyone for tuning into our earnings call. We look forward to our annual shareholder meeting Thats coming up in a couple of weeks and we look forward to the next quarterly earnings call. Thank you again.
Operator: That does conclude our conference for today. Thank you for participating, and I will disconnect.
Speaker Change: That does conclude our conference for today. Thank you for participating you may now disconnect.
Operator: Yes.
Operator: [music].