Q3 2024 Franklin Street Properties Corp Earnings Call

Good morning, My name is Adrienne and I will be your conference operator today at this time I would like to welcome everyone to the Franklin Street Properties Corp, third quarter results Conference call Today's conference is being recorded.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.

If you would like to withdraw your question. Please press star one again.

Speaker Change: At this time I'd like to turn the conference over to Scott Carter General Counsel. Please go ahead.

Scott Carter: Good morning, and welcome to the Franklin Street properties third 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.

Scott Carter: <unk> of FSP property management also joining me. This morning are Toby Daley and will friend, both executive Vice President of FSP property hedge Ben Please.

Scott 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.

Scott Carter: We're 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.

Scott Carter: All of which are on file with D. S. E. Z. In addition, these forward looking statements represent the company's expectations only as of today October 30th 2024, while the company may elect to update these forward looking statements. It specifically disclaims any obligation to do so any forward looking.

Scott Carter: 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 F. F O reconciliations of F. F O and other non-GAAP financial measures to GAAP net income are contained in yesterday's press.

Speaker Change: This release, which is available on the Investor Relations section of our website at Www Dot F. S. P. R. E T Dot com now I will turn the call over to John Demeritt John.

John DeMeritt: Thank you Scott and good morning, everyone I'm going to have a brief overview of our third quarter results.

Afterward, I'll pass the call to George for his thoughts.

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

John DeMeritt: Which as Scott mentioned can be found on our website.

John DeMeritt: We reported funds from operations or <unk> of about $2 $7 million or <unk> <unk> per share for the third quarter.

John DeMeritt: We also reported a GAAP net loss of about $15 6 million or 15 cents a share for the third quarter.

John DeMeritt: Last Wednesday, we sold another property, which Jeff will discuss in more detail.

John DeMeritt: We used $27 4 million of those proceeds from that sale to repay a portion of our debt last Friday October 25th.

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

George: Thank you John and again welcome to Franklin Street properties third quarter 2024 earnings call.

George: We continue to work hard on our two businesses.

George: Our first business is property dispositions were over the last few years.

George: Using the majority of proceeds from dispositions to continue to pay down debt.

George: As reported on our current balance sheet.

George: Through the nine months this year ending September 30, we have further reduced total liabilities by about $140 million from approximately $456 million as of December 31, 2023 to approximately $316 million.

George: Okay.

George: <unk> sale of Pershing Park in Atlanta.

George: Will further reduce our debt for the fourth quarter.

George: Okay.

George: Second business rental operations is now concentrated in four markets, Denver, Minneapolis, Houston and Dallas.

George: And we are very encouraged about recently, increasing leasing prospects at our properties there.

Speaker Change: For more color on our rental operations and leasing I will now turn the call over to John Donahue President of our property management Company John.

John Donahue: Thank you George good morning, everyone.

John Donahue: The FSP directly volume portfolio was approximately 74% leased at the end of the third quarter compared to 72, 3% leased at the end of the second quarter.

John Donahue: 74% leased at the end of calendar 2023.

John Donahue: The decrease in leased occupancy during 2024.

John Donahue: Been attributable to multiple property dispositions and lease expirations.

John Donahue: Economic occupancy of the directly owned portfolio was approximately 68, 7% at the end of the third quarter compared to 71% at the end of the calendar 2023.

John Donahue: The decrease was primarily due to multiple property dispositions during the year.

John Donahue: FSP finalized approximately 364000 square feet of total leasing during the first three quarters of 2024, which included approximately 92000 square feet of total leasing during the third quarter.

John Donahue: Approximately 242000 square feet of renewals and expansions have been finalized during the first nine months of 2024.

John Donahue: With 122000 square feet of new tenant leases.

John Donahue: Leasing activity has been healthier since the summer slowdown and our pipeline of leasing prospects has grown over the past several months across most of our markets.

John Donahue: FSP is currently tracking approximately 700000 square feet.

John Donahue: Aspect of new tenants, including approximately 400000 square feet of prospects that have identified FSP assets on their respective shortlists.

John Donahue: In addition, FSP has been working with approximately 500000 square feet of potential renewals and expansion.

John Donahue: During the month of October alone FSP has already finalized approximately 120000 square feet of total leasing.

John Donahue: Scheduled lease expirations for the remainder of 2020 for total of approximately 77000 square feet, which represents approximately one 5% of fsp's directly with portfolio.

John Donahue: The new tenant pipeline combined with relatively low total of remaining lease expirations in the fourth quarter of 2024.

John Donahue: It provides <unk> with an opportunity for positive net absorption over the next several months barring any surprises for the impact of potential dispositions.

Speaker Change: I will now turn it over to Jeff Carter.

Thank you John and good morning, everyone I will be discussing our disposition activity since.

Jeff Carter: Since the second quarter of 2024 and provide our observations about current market conditions for office dispositions as FSP continues with our work to selectively sell properties. When it makes sense to do so with the goal of further reducing indebtedness and unlocking value.

Jeff Carter: During the quarter and as previously disclosed on July 8th FSP sold our low rise office property known as <unk> Corporate Center, and Greater Richmond, Virginia.

Jeff Carter: Gross proceeds of $31 million.

Jeff Carter: Additionally, and subsequent to the end of the third quarter on October 23rd FSP sold our Pershing Park Plaza property in Atlanta, Georgia for gross proceeds of $34 million.

The sales of Innsbruck, and Pershing Park Plaza spine with our first quarter disposition.

Jeff Carter: <unk> processing greater Dallas for $35 million brings.

Jeff Carter: <unk> brings our total gross property sales for the year to date to $100 million.

Jeff Carter: Since late 2020, when our program of select dispositions began.

Jeff Carter: <unk> has completed the sale of approximately $1 billion 77 billion property sales.

Jeff Carter: These dispositions reflect an average of approximately $211 per square foot.

Jeff Carter: As compared with an implied value and our publicly traded shares of less than $100 per square foot.

Jeff Carter: Yes.

Jeff Carter: While every property sold will result in different pricing metrics based on their specific attributes of quality location tenancy and rental rates never.

Jeff Carter: Nevertheless, we believe that aggregated sales data is useful for illustrative purposes.

Jeff Carter: With respect to the market for office dispositions liquidity conditions in terms of available debt and equity capital for potential buyers remains historically constrained within the office segment, which is made office transactions highly challenging to complete.

Jeff Carter: To this point current data for the past 12 months.

Jeff Carter: Indicates an approximate 54% decline in office sales volume versus the historic average 12 month norm.

Jeff Carter: As a potential positive however, recent anecdotal information indicates a rise and optimism for improvements.

2025, given the recent 50 basis point rate.

Jeff Carter: And the potential for additional cuts of which the cadence and magnitude are yet to be known if at all.

Jeff Carter: Additionally, recent announcements regarding return to office from some large employers, including Amazon and buoyed sentiment.

Jeff Carter: As previously described where deals are transacting within Fsp's markets. They continue to highlight compelling factors that includes strong locations high quality stabilized occupancies strong place weighted average lease term or Walt and smaller dollar amounts.

Jeff Carter: <unk> versus larger dollar size deals.

These smaller dollar sized office sales have dominated the majority of the already reduced office sales volume seen within most of Fsp's markets over recent years and highlights the significant decline buying from more traditional institutional money.

Jeff Carter: Instead larger more traditional institutional investors with access to greater amounts of potential debt and equity capital have largely remains on the sidelines within our markets, which has constrained the dollar size and volume of office sales.

Jeff Carter: FSP will be watching carefully weeks and months ahead.

Jeff Carter: Such conditions begin to evolve as some speculated for 2025.

Jeff Carter: Given this highly challenged and competitive investment sales environment. We continue to believe that the interest of our shareholders remain best served by not highlighting perspective desk disposition information beyond what is in our current filings until appropriate.

Jeff Carter: To be clear.

Jeff Carter: Once again, though our objective is to maximize achieved disposition values for our shareholders.

Jeff Carter: <unk> continues to generate interest from buyers, but it remains challenging to find buyers with access to the necessary capital to close.

Jeff Carter: We remain committed to continuing to work with our associated professionals to try and source such credible and capable buyers in order to make continued progress on further debt reduction.

Jeff 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 Roger.

Roger: Thank you we will now begin the question and answer session. If you have dialed in I would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press Star one again.

Speaker Change: We'll take our first question from Stephen Domanski at Janney.

Stephen Domanski: Thank you if you could please provide some background on the decision process for the Pershing Park Plaza disposition I would greatly appreciate it in terms of if you were gentlemen, we're actively planning to exit the Atlanta market or do the opportunity present itself.

Stephen Domanski: Thank you for the question this is Jeff Carter.

Stephen Domanski: Had been working on that transaction.

Stephen Domanski: As I have indicated in the past we continuously look at the portfolio for opportunities, where we think we can maximize value.

Stephen Domanski: Given the short and intermediate term outlooks.

Stephen Domanski: This was an asset that we've worked on previously and was.

Stephen Domanski: Having the right conditions with strong Walton place and a smaller dollar size deal that seems to attract more potential buyers and the conditions warranted that we were able to source a credible buyer for this property.

In terms of exiting the Atlanta, while it was our last property in Atlanta, we are.

Stephen Domanski: Very much strongly supportive and long term bullish on the sunbelt markets in general including Atlanta.

Stephen Domanski: No.

It will remain to be seen in the future whether we reinvest.

Stephen Domanski: Reinvestment, we would look again within the sunbelt markets should those opportunities in the future present themselves.

Speaker Change: Alright, Thank you, Jeff that's very helpful.

So can you gentlemen, provide a general update on monument circle.

Speaker Change: I guess more any information rather on your plans for the property going forward would just be very beneficial.

Speaker Change: Okay.

Speaker Change: Yes, David It's John Donahue.

John Donahue: So we.

John Donahue: We continue to look at all opportunities with monument circle, including elite.

John Donahue: This.

John Donahue: We will be the anchor lease.

John Donahue: As well as a potential disposition.

John Donahue: We have been.

John Donahue: Working with both city and state.

John Donahue: Officials in trying to increase that move along some of the interest there are developers that are active.

John Donahue: And there are multiple properties along the circles that are available so.

John Donahue: Nothing new to report this quarter, although we do continue to have.

John Donahue: A handful of groups that have expressed interest and hopefully we can move that along.

Speaker Change: Thank you John and then lastly in terms of renewing leases how have talks with your tenants progressed.

Speaker Change: Any insight on where you see ti's trending going forward at this part of the cycle that would greatly appreciate it.

Speaker Change: Hey, Steve and John Donahue again.

John Donahue: So we have been.

John Donahue: Generally seeing an uptick and.

John Donahue: Early renewal dialogues with the tenants getting out in front of the renewals, which is encouraging instead of waiting to the last six to 12 months we've been.

John Donahue: Working with tenants 12 to 24 months early and also I think the average size of renewals has started to increase a little bit which is different than the the pandemic era.

So.

John Donahue: In terms of.

John Donahue: Ti is in overall costs.

John Donahue: They have ticked up a little bit.

John Donahue: But I would say that when it comes to renewals and expansions our average cost per square foot per year.

John Donahue: Continues to be about $4 to $5 per square foot per year on renewals and new deals have trended up a little bit to between seven and $8 per square foot per year. So the total overall cost depending on the <unk>.

John Donahue: Percentage of renewals versus percentage of new deals. Our total costs are in the vicinity of $6 per square foot per year, right now and that really hasnt moved dramatically over the last two to three years, if we see a higher percentage of new deals you will see that creep up a little bit.

Speaker Change: Got it thank you John and thanks again.

John: Youre welcome.

Speaker Change: And that concludes our Q&A session I will now turn the conference back over to George Carter for closing remarks.

George Carter: Thank you all for tuning into the earnings call I would say in closing that.

George Carter: We have finally seen office dynamics generally around the country, starting to improve and certainly in our markets.

George Carter: I think the interest rate.

Drop and hope for continued.

George Carter: Reductions are making some difference and certainly there is a stronger back to office by employers for their employees and I think that is making a difference. So we are optimistic about the coming quarters and look forward to speaking to you next quarter. Thank you.

Speaker Change: And that concludes today's conference call. Thank you for joining you may all disconnect.

Speaker Change: [music].

Yes.