Good day, and welcome to the Franklin Street Properties Corporation Third Quarter 2020 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Scott Carter, General Counsel. Please go ahead.

Good morning, and welcome to the Franklin Street Properties Third Quarter 2020 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 Daley and Will Friend, both Executive Vice Presidents 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 ended December 31, 2019, as updated for the COVID-19 pandemic in the Risk Factors section of our quarterly report on Form 10-Q for the quarter ended September 30, 2020, both of which are on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today, November 4, 2020. 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 George Carter. George?

Thank you, Scott. Good morning, everyone, and welcome to Franklin Street Properties Third Quarter 2020 Earnings Call. I would like to start my portion of this earnings call by making a few brief comments about FSP's current operating environment in the COVID-19 pandemic. Our home office located in the Greater Boston, Massachusetts metro area has remained fully open and available to all of our employees as a work environment during the quarter. However, working from home policies are still in place for any employee who desires to work remotely. We have continued to average about 30% of our workforce physically present in the home office. All of us continue to appreciate the exceptional efforts and dedication by all FSP employees over the last 7 months during these difficult times and at our 35 office properties around the country that have been kept fully open throughout the pandemic. To our people on site, operating those properties—managers, maintenance engineers, security personnel, cleaning crews, vendors, and so many others—thank you for your continued great job. All of these efforts are for our customers, our valued tenants, each one of them grappling with their own challenges and responses, and business realities resulting from the COVID-19 pandemic. They have been understanding, collaborative, and appreciative of the unique situation we all find ourselves in. They, along with FSP, remain committed to the health and safety of all employees, vendors, and visitors at each one of our office buildings. For the full third quarter of 2020, we collected approximately 98% of contracted rent. And as of October 31, we have collected approximately 98% of October rents. However, at this time, we are not able to predict whether and to what extent our level of rental receipts may change in future months. Consequently, we are continuing the suspension of net income and funds from operation (FFO) guidance and will not be providing additional guidance until such time as we have a better understanding of the duration of the COVID-19 pandemic and its impact on our business and the businesses of our tenants. With those opening comments, let me turn the call over to our CFO, John Demeritt. John?

Thank you, George, and good morning, everyone. I'm going to have a brief overview of our third quarter results. Afterward, I'll pass the call to John Donahue, our President of the asset management team 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 FFO of $20.4 million or $0.19 per share for the third quarter of 2020. During the third quarter, we worked with tenants that were impacted by the pandemic. As part of that, we determine whether a lease is collectible or not. If we determine it is no longer collectible, we write off receivables and do not report current rents unless they're paid in cash. So part of this loss is receivable write-offs, which is more of a one-time event. And part of the loss is current rents that we stopped reporting. During Q3, we had write-offs and lost rent of only $108,000, and on a year-to-date basis, the total is $631,000. Going forward, the amount of lost rent from tenants that we wrote off would be reduced by any cash rents that we receive from them. We also reached agreements with a number of tenants on rent deferrals using lease amendments, modifications, and other tenant agreements. Total rents deferred by us during Q3 were only $27,000. On a year-to-date basis, it's about $1.5 million at this point, which is below 0.1% of annualized revenue. Where these agreements generally result in us being repaid, there is no significant GAAP or FFO impact from them. We are working with other tenants that are having issues, and we'll provide updates periodically like we have here. Turning to our balance sheet. At September 30, 2020, we had $1 billion of unsecured debt outstanding and had $30 million drawn on our line of credit, which is the same amount we've had drawn at the end of June and March this year. Our total debt of $1 billion at the end of September was also the same that we had at the end of June and March of this year. So even with all the activity we've had, our debt to total debt level remained the same. From a liquidity standpoint, we have $570 million available on our line of credit as we look ahead. As a reminder, all our debt is unsecured. We have no debt maturities until November 30, 2021, and about 92% of our debt is at fixed rates. With our debt stack more termed out and our rates mostly fixed, we believe we have aligned our capital structure with the more long-term value-add properties that we have in our portfolio. With that, I'll turn the call over to John. John?

Thank you, John. Good morning, everyone. At the end of the third quarter, the FSP portfolio, including redevelopment properties, was 84.3% leased, which is an increase from 83.3% leased at the end of the second quarter and represents a total portfolio high point for calendar 2020. Rent collections during the second quarter and third quarter have averaged approximately 98.4%, and rent collections for October are approximately 98% thus far. FSP's asset management team and our property management teams continue to work with tenants seeking many different forms and levels of relief. There have been fewer formal requests during the past few months and certainly not as significant as the number witnessed in the second quarter. That said, there appears to be growing dialogue with a select number of tenants about potential needs for extended relief due to economic uncertainty. We may not fully understand the impact of the pandemic on annualized rents and cash flow until later in the fourth quarter or perhaps next year. During the third quarter, FSP leased approximately 282,000 square feet, which included 181,000 square feet of net absorption with new tenants. Total leasing finalized year-to-date for all 3 quarters was approximately 606,000 square feet, of which approximately 347,000 square feet was with new tenants. We are pleased to report that the asset known as 801 Marquette is approximately 92% leased, and our Midwest portfolio, consisting of approximately 1.7 million square feet, is now 95% leased. We have approximately 240,000 square feet of potential net absorption over the next 3 to 6 months, including 180,000 square feet of new prospects. We are able to finalize deals with the majority of the potential prospects, and barring any surprises, we expect leased occupancy and economic occupancy to both trend upward over the next several quarters. Thank you. I will now turn it over to Jeff Carter.

Thank you, John. Good morning, everyone. We here at Franklin Street Properties hope everyone remains safe and healthy during these trying times. FSP maintains its focus on owning high-quality properties in amenity-rich locations within the U.S. Sunbelt, Mountain West as well as several opportunistic markets. Although it is difficult to look past the current pandemic gripping the nation and world, FSP continues with our conviction that the long-term prospects for job and population growth within the Sunbelt and Mountain West regions remain strong and possess positive long-term potential for upside performance. Given the COVID-19 pandemic, I wish to briefly discuss what we are seeing around the country within the investment marketplace. Not unexpectedly, and largely due to uncertainties stemming from COVID-19, the third quarter continued to see reduced office sales volume on a national level. Despite such reduced sales volume, investment capital remains selectively available for high-quality and well-performing assets. Risk-off properties in compelling locations are still garnering attention, while the pendulum has largely swung away from value-add properties that possess significant leasing uncertainties. Financing conditions appear to be slowly improving, but pricing disconnects can still be a factor between buyers and sellers, in some cases, with buyers hoping for more distressed pricing opportunities than are often presenting. On the disposition and asset-recycling front, FSP continues to monitor our portfolio for potential opportunistic dispositions. Our criteria for potential dispositions focuses first and foremost on achieving value maximization at the asset level. With any potential property disposition in the future, FSP would ultimately look to redeploy such proceeds into their highest and best use, which at this time would likely initially include debt pay down and looking out further at potential new property investments. We'll keep the market up to date as appropriate. On the acquisition front, FSP continues to track all suitable investment opportunities within our markets. We will continue our efforts to identify high-quality properties that possess the ability to credibly add value over the short to intermediate term. Thank you for listening to our earnings conference call today. And now at this time, we'd like to open up the call to any questions.

The first question today comes from Dave Rodgers of Baird.

Yes. Good morning, everyone. John Donahue, maybe start with you on some of the leasing. You guys signed a number of leases during the quarter, which was a positive trend for you. I'm wondering if you could talk a little bit more about the actual GAAP and cash occupancy commencements for Deluxe in Minneapolis as well as Forest Park and then just confirm that Pulte is on track for the fourth quarter move-in.

Sure, Dave. So starting with Deluxe, we're expecting that lease to commence early in the third quarter of next year. And that would be a relatively short free rent period. So cash rents, I don't have that information handy, but I'm recalling that that would probably be near the end of the year or early the following year. But the FFO would commence in early third quarter. And then similarly, the lease that we executed in Charlotte would have the same time frame, very similar time commencement for the FFO. And last but not least, the commencement of Lennar in the fourth quarter or the first quarter is largely dependent upon substantial completion of construction, which we believe will occur in December. We don't have an exact date yet for lease commencement, and we'll let you know as soon as we know more.

Yes. Thanks for correcting me. I had the tenant wrong, so I apologize for that. The leasing pipeline that you mentioned, the 240,000 square feet. Can you talk about those discussions? Were those pre-COVID that have come back? Are these tenants that are looking to expand their footprint so they can put more people in the office while ensuring more distance? Maybe some conversation around that would be helpful just from a broader office context. And then any comments on where that might happen would be helpful as well.

Sure, Dave. The activity that we're seeing now is split as far as the number of tenants go, in regards to pre-COVID origination versus post-COVID origination. The number of prospects is almost split evenly down the middle. There is, for our company, a weighting towards square footage of companies that we've been in dialogue with for longer than the COVID period. So we hope to finalize those deals because we've been working on them for a long time. Our activity right now is in Virginia, in Texas, and then Denver and Atlanta in that order as far as materiality and weighting. And we feel really good about a good batting average of getting those deals done over the next 3, 4, 5 months or so.

And maybe the last question for me, and I'll pass it to Jeff or to George, regarding the Chantilly asset, Stonecroft, being put into redevelopment. Maybe that ties into your comments, Jeff, about the market for value-add not being as strong. But I guess as you think about putting more assets into redevelopment, what type of returns do you expect to get, if any? It sounds like leasing is picking up. And then I guess maybe dovetailing that also with the Jones Day space, would we expect that to move into redevelopment as well, or is there more you can do there?

I can answer the question about the redevelopments. David, in regards to the redevelopments, as you know, the 801 Marquette building was moved out as we've reached lease stabilization. And we are now adding the Stonecroft building into the redevelopment. The anticipated investment there has moved up a little bit due to multiple factors. One is that we're investing more for the multi-tenancy. And because of COVID, the lack of demand, we feel like we need to step up the game a little bit there and invest more. We do have some prospects for the building. We don't know exactly how much space those prospects will take, and it might take a little longer as well because of COVID. In the future, it's a complete guess at this point in time, but the Pershing Park Plaza building is already an exceptionally high-quality building and location. I don't see that as a repositioning. Even though it's a large vacancy, we're already seeing some activity and interest in portions of the building. So my guess at this point is that that would not be added to the redevelopment category, but stay tuned.

The next question today comes from Rob Stevenson of Janney.

Just a follow-up on Dave's question. John, is that tenant demand concentrated in certain markets? Is it more broad across the portfolio? How would you sort of characterize where the demand is for space these days?

Rob, it's John Donahue again. So I would say that we have superior demand in the suburbs compared to the urban locations. As far as where in the country, it is probably highest in Virginia and then Dallas, and then moving into Houston and Denver, which are probably trailing.

Okay. And then how are you guys thinking about the sort of trade-off between tenants wanting shorter-term leases, given all the uncertainty versus the costs on the tenant improvement and lease commission side, et cetera, and the trade-off back and forth? Are you guys agnostic at certain sliding levels? Are you guys pushing for longer-term leases at this point in time? Is a 24-month lease just too good to pass up, given vacancy? How are you guys thinking about all that?

So it's difficult or challenging to give you a broad-brush answer because every deal is different. I would say that we are focused mostly on retaining our tenants and listening to them on what they would like to do. We're not yet seeing any real significant downward pressure in rents. The national stats are showing that asking rents are actually rising, primarily due to new deliveries, but there is downward pressure on effective rents. So if you think of IRRs and returns in regards to rising concessions and effective rates going down, you might assume that you're better off with the short-term deal. But right now, tenants are uncertain if they're going to need less space or new space because of COVID. So kicking the can down the road for 6, 12 months, getting into 2022, seems prudent for some of those companies. As far as what we'd like to see, all things being equal, we would love to have a streamlined exposure over the next 10 years of equal expirations in every year to mitigate our risk. But really, we don't have that luxury. So we're just working with the tenants as they come. For new demand from those that are genuinely engaged and want to strike a deal in the near term, a large share of those groups are looking for long-term, big TI deals. The other side of that coin would be tenants looking for really short-term, high-end space and upgrading their image and their occupancy at maybe a discount, whether it be a sublease space or a direct space with flexible terms and options. Hopefully, that helps you out, but it really is deal-specific.

Yes. And then the last one for me, George. How is the Board thinking about the sustainability of the common dividend? Are they just viewing this as a COVID driven event and that you could still grow into it fairly easily on lease-up? Is some of that money better spent on redeveloping and re-tenanting costs? Can you provide some insight into the discussions there?

Yes, Rob, nice to talk with you. I say this every time I'm asked, and it's important to say that the dividend is reviewed thoroughly by the Board every quarter, and the decision about the dividend is made every quarter, and that decision can be anything at any quarter. We do look at many factors—the value-add proposition, the leasing proposition, the TIs, leasing commissions, large CapEx that goes out to achieve this value-add proposition that we believe is inherent in our portfolio, which will stabilize the portfolio at higher economic occupancies, higher cash flows, etc., and smooth out ongoing TIs and leasing commissions is definitely delayed in terms of our plans and opportunities by COVID. As we look as a board to the dividend each quarter, we consider the original objective, which we had planned for and were on track for until COVID, and then try to analyze what COVID is doing currently and what it will do next quarter and the quarter after. Again, it's some give and take between economic occupancies, TIs, and leasing commissions for slower leasing and then the faster leasing that we were experiencing pre-COVID. It ebbs and flows, and we try to look at it from a longer-term perspective; our liquidity is fine. We do believe that we will achieve economic occupancy and stability that will not only cover longer-term future dividends but allow us to raise them in the future. But between now and then, it is quarter-to-quarter, all factors considered, including taxable income and dividend requirements under REIT rules against that taxable income. So everything is in the beaker, and it goes quarter-to-quarter.

The next question comes from Frank Lee of BMO Capital Markets.

You previously talked about pulling forward several TI projects and that we should expect some elevated CapEx in the near term. Can you provide an update on how these projects are going? And should we continue to expect an elevated level of CapEx?

Frank, it's John Donahue. I can talk a little bit about where the market conditions are currently and how they're trending, and give you a general idea of what we'd expect over the short term. We are seeing a concentration of companies that want a longer-term commitment. And so inherent in a longer-term commitment, that would give you higher cost, higher concessions. The trade-off is when you're doing leases with great credit, then you are enhancing the value of the portfolio and pushing out your rollover risk. So that is what we're seeing for a healthy number of our larger prospects. Now there are—because of COVID and what we've seen over the last 6 to 7 months, there are quite a few prospects, especially on the smaller sides, that want ultimate flexibility. And that is shorter term, and so those costs will be much lower. They'll be cheaper and faster paybacks. What should we expect over the near term as far as a blended portfolio or weighted averages? I would say we'll see more of the same over the next 12 to 24 months. One thing to note though is that we have seen a large percentage of our tenants defer their usage of their TI. They are in a period of re-planning, trying to figure out their future uses of space, and they are doing a lot of that work themselves and haven't requested TI reimbursements. So could there be some volatility where one quarter is very light and then one quarter is larger? Absolutely. But I don't think we're going to see a significant difference over the next 12 to 24 months than what you've been seeing in the last few quarters.

And then just wanted to clarify on the 240,000 square feet of net absorption. Last quarter, you mentioned an active 500,000 pipeline, and with the leases signed in the third quarter, I understand this comes down. But are there any prospects in addition to the 240,000 square feet that you have in this active pipeline category?

Yes, Frank, thanks for clarifying that. We certainly do have other prospects above that number. We try each quarter on the earnings call to give you a sense of what we believe are high probability deals—deals that are either in leases, in amendments, shortlisted, and our asset management team believes that we have a very good chance of finalizing in the near term. So that's what the 240,000 square feet represents. In addition to that, we do have prospects in our markets. But because of COVID, those deals are in a category that we deem to be not quite as high probability, maybe a moderate probability or we haven't been shortlisted to 1 or 2 buildings, but maybe 3 or 4 buildings. So I can't give you an exact number of that right now, but that number is a little bit impacted by COVID.

Okay. And then is any of the $240,000 related to redevelopment leasing?

Short answer is yes. We do have prospects for our redevelopment, and we believe that we have a good chance of getting another deal done for the redevelopment here over the next 30 to 60 days. So hopefully, we'll make an announcement, and you'll be the first to know.

This concludes our question-and-answer session. I would like to turn the conference back over to George Carter for any closing remarks.

Thank you, everyone, for attending the earnings call. We look forward to the next one for the fourth quarter and hope you all stay safe. Have a happy holiday season. And again, as John said, we will announce leasing and leasing activity that is meaningful as it occurs. Hopefully, we will get some of that during the fourth quarter. Thanks again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.