Good morning. Thank you for attending today's Franklin Street Properties Corporation Q2 2022 Earnings Call. My name is Megan and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Scott Carter, General Counsel. Scott, please go ahead.

Good morning and welcome to the Franklin Street Properties second quarter 2022 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, 2021, as updated in our quarterly reports on Form 10-Q, which are on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today, August 3, 2022. 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 on the Investor Relations section of our website at www.fspreit.com. Now I'll turn the call over to John Demeritt. John?

Thank you, Scott. And good morning, everyone. I'm going to give you a very brief overview of our second quarter results. Afterward, I'll pass the call to George for his comments. As a reminder, our comments today will refer to our earnings release, supplemental package and 10-Q, which, as Scott mentioned, can be found on our website. We reported funds from operations, or FFO, of about $10.3 million or $0.10 per share for the second quarter of 2022 and we reported a GAAP net loss of about $9.1 million or $0.09 per share for the second quarter of 2022. At June 30, 2022, we had $530 million of debt outstanding, and our debt service coverage ratio for the quarter was 2.81 times. As of June 30, 2022, we had liquidity of about $187.2 million between availability on our revolver and cash on hand. As a reminder, all of our debt remains unsecured. With that, I'll turn the call over to George. George?

Thank you, John. And, again, welcome to Franklin Street Properties second quarter 2022 earnings call. As the third quarter of 2022 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. Our primary objectives for 2022 remain twofold. Number one, we'll seek to increase shareholder value through the potential sale of select properties, where we believe that short to intermediate-term valuation potential has been reached. And number two, strive to increase occupancy in our continuing portfolio of real estate. We believe that FSP's two largest markets of Denver, Colorado, and Dallas, Texas, in particular, have very powerful value-add leasing potential that can be realized in the near future. We believe that these are dynamic growing population employment markets and that our properties there have been extremely well maintained and upgraded to position them for maximum competitiveness. We intend to use proceeds from any potential future property dispositions, primarily for debt reduction, repurchases of our common stock, dividends under our variable quarterly dividend policy, and other general corporate purposes. At this time, we are updating our property disposition guidance for full year 2022 to be in the range of approximately $200 million to $300 million in aggregate gross proceeds compared to our previously estimated range of $250 million to $350 million. The reduction of $50 million in the estimated disposition range from first quarter 2022 to second quarter 2022 primarily reflects the current growing uncertainty that broader capital markets have placed around the transactional nature of commercial office property sales. We are finding that available, liquid, efficient, and predictable equity and debt markets, at least for the office asset class, have been generally disrupted by broader economic forces. We are not sellers of property at any price. We have target price ranges for each potential disposition that we believe will deliver FSP shareholders meaningful value inherent to that specific property. We will continue to update our disposition guidance quarterly in our earnings releases. Now I would like to turn the call over to John Donahue, President of FSP Property Management Corp. John?

Thank you, George. Good morning, everyone. The FSP portfolio was approximately 76.3% leased at the end of the second quarter compared to 77.3% leased at the end of the first quarter. The decrease is attributable to lease maturities primarily in Denver. FSP finalized approximately 145,000 square feet of total leasing during the second quarter of 2022, including approximately 68,000 square feet of new leases. Overall demand across the nation for office space cooled and trailed off during the second quarter. However, in regards to active space requirements of tenants in the market, FSP has witnessed a slow and steady improvement during this calendar year, particularly in Texas and Denver, for small to midsize requirements. In addition, we are currently tracking approximately 600,000 square feet of new prospective tenants, including approximately 400,000 square feet of prospects that have identified FSP assets on their respective shortlists. We remain optimistic that a growing number of prospective tenants will make occupancy decisions during the third quarter. Lease expirations for the remainder of calendar 2022 total approximately 127,000 square feet, representing 1.8% of FSP's portfolio. The pipeline of prospective tenants, combined with minimal lease expirations, provides FSP with an ideal opportunity to increase occupancy in the second half of 2022. Thank you. I will now turn it over to Jeff Carter.

Thank you, John. Good morning, everyone. We here at Franklin Street Properties hope that everyone remains safe and healthy. FSP continues to focus on unlocking value for our shareholders that we believe is not being accurately reflected in our public share price. As George Carter referenced, one key way in which we have worked to capture such prospective value is through the private market sale of select properties that we believe have met their short to intermediate-term potential. Importantly, we are not sellers at any price. We will consider sales when we hit targeted pricing ranges. To date, FSP has and will continue to utilize sales proceeds principally to reduce indebtedness and also potentially to buy back shares, if deemed appropriate. As a reminder, FSP materially reduced our corporate indebtedness during 2021 by approximately 50% via roughly $603 million in property sales. Similarly, our objectives for 2022 have been to continue working to realize embedded property value for our shareholders through select private market property sales. In recent months, however, the marketplace has witnessed increasing investor concerns over the potential of recession as well as inflation, rising interest rates, continuing COVID infections, and the ongoing war in Ukraine, all of which have led to growing turbulence and uncertainty. Such risks also have included disruptions in the ability of many firms to finance commercial real estate purchases in an orderly manner through the procurement of both debt and equity capital. With this in mind, a more challenged dynamic for disposition certainly exists today than what was experienced during the previous calendar year. Notwithstanding this more uncertain environment, FSP continues in our pursuit of select disposition possibilities, and we'll appropriately assess whether results received fall within our targeted pricing ranges. Given current market conditions, FSP has adjusted our expected disposition guidance to between $200 million and $300 million in aggregate gross sales proceeds for the year from the prior $250 million to $350 million, with sales anticipated to occur in the third and fourth quarters of this year. For competitive reasons in the marketplace, we will not share specifics on any potential sale until and unless appropriate. Currently, on the ground in the marketplace, we are still seeing a number of investors who are interested in looking at high-quality properties. These potential buyers are typically underwriting a return to a more normalized economy in office use settings. Negatively, though, many lenders and equity sources are scrutinizing opportunities much more stringently and are quite selective in their commitments, typically seeking to work with familiar groups. 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. Megan?

Our first question comes from the line of David Rodgers with Baird.

It's Nick on for Dave. I guess maybe starting with John, kind of talking about the leasing pipeline of $600,000 with the $400,000 of shortlisted candidates. I guess what is like the timeline for them on potential decision-making on their lease-up? And then, as we're looking at expiration through 2023, do we have any visibility on kind of retention on that number? We'll start with that.

Nick, John Donahue. In regards to your first question on timing, I wish I could give you a very accurate specific answer, but it's been quite frustrating dealing with deferred decisions. We have the largest number of prospects in Texas, but we have the largest number of square feet for Richmond. We have a few large prospects for the Innsbrook property. And then in both Dallas and Houston, we have the largest number of prospects. And we've been working with the lion's share of these prospects for many months, in some cases, nearly a year or so. We're led to believe that many of these groups are getting closer and closer to making decisions. We've definitely been impacted by the larger macroeconomic issues and the summer slowdown. But as I said earlier, we do remain optimistic that they're getting closer to making decisions, finalizing their space plans, and hopefully, we'll show the results of that in the second half of the third quarter and into the fourth quarter. In regards to the second question on retention, we don't have any known departures in our top 20 tenants over the next year or so. We do believe that many tenants in the 10,000 to 20,000 square foot size range or even a little bit larger will be looking at slight downsizes, but nothing significant. We do have a number of tenants in the 5,000 to 10,000 square feet range that are looking at expanding. So, hopefully, a net-net positive for us. But again, we don't have any significant tenants with known departures over the next 12 to 18 months. So, hopefully, we'll have some good news to share in the near future.

Maybe a question for Jeff. The updated disposition guidance, while adding two more properties with potential candidates for sale, is that more a function that you guys just view that those are like stabilized assets? And the disposition guide lower strictly for just lack of capital seeking office properties right now? Or maybe just elaborate a little bit more on that.

First, I'd say we're not sellers at any price, as George referenced. We're sellers if we meet our targeted pricing ranges. Second, we are very bullish on the Sunbelt and the Mountain West, including Atlanta, and have been for many years. As to Pershing Park specifically, Midtown Atlanta is widely recognized as a very desirable and compelling investment market at this time, and our value-add efforts at that property in terms of both releasing and repositioning the asset have resulted in an opportunity to check whether those value objectives and targets in terms of pricing can be met today. And if they're not, then we are happy to continue to own such a strong property location and tenancy. As for Blue Lagoon, similarly, Miami has been also a very strong investment market. And so, here again, our efforts that we undertook to add value through our leasing and repositioning work have yielded a fully leased—nearly fully leased trophy quality property. And as a result, we believe that it is indeed appropriate for us to assess whether our targeted valuation ranges are achievable today. And if they're not, we would be, again, more than pleased to continue to own such a high-quality property location and tenancy.

Maybe last one for George. What's like the board's patience with the continued multiyear stock performance versus like strategic alternatives? Has there been any special committee to form to discuss strategic alternatives?

The board's plan, along with management's plan, is to execute what we have put forth for 2022, which is a continuation of what we did in 2021. We believe that at the end of 2022, if we achieve our objectives in 2022, we're going to have a wonderful balance sheet, along with a wonderful value-add opportunity, especially in Dallas and Denver. It positions the company so well to execute the best opportunity that we can find for our shareholders as we move into 2023 and beyond. As I've said before, everything is on the table in terms of finding and executing that best opportunity. Everything. The board is very active on all fronts. More detail than that right now would be inappropriate. What is appropriate is to execute the 2022 plan. If we can execute, like we think we can, we will be in a great position to go forward in any manner that is in the best interest of the shareholders. The board is very active in every avenue that you can imagine on that front.

Our next question comes from the line of Craig Kucera with B. Riley Securities.

First one for me, are all of the updated disposition candidates currently being marketed? Or are you looking to maybe bring on a few later this year, maybe Pershing Park in Atlanta and Blue Lagoon?

Craig, this is Jeff Carter. They are all potential disposition candidates. Pershing Park has not officially hit the market. We intend for it to hit the market shortly, and so we put that out there.

And the same goes for Blue Lagoon as well?

Blue Lagoon has been in the market.

Just one more for me. George, I know at one point last year, you guys publicly stated your estimate of NAV. I think it was above $10. You've had some asset sales, of course, since then. But I'd be curious sort of what the board's or your personal view of NAV per share is today, if possible.

Craig, we're in that range for sure today, as we were last year. Again, we've been using proceeds primarily to pay down debt. So, when you do our calculation of NAV, the equity, we believe we are still in that range. Now having said that, the two big factors that affect whatever estimate of NAV you come up with are obviously current broader market conditions, which, as Jeff and I have said, have been more challenged this year than, for example, last year. And maybe that's on the downside of that number. On the upside of that number is the tremendous value-add opportunity. We think that we are going to execute in Dallas and Denver over the near term. And that will increase the range of that number. So the answer to your question is I think we're in that ballpark. There are ups and downs that will affect that broader market as well as property and specific issues.

There are currently no additional questions registered. So I will pass the conference over to George Carter for additional remarks.

Just thank everyone for tuning into our earnings call, and we look forward to talking to you next quarter. Thank you.

That concludes the Franklin Street Properties Corporation Q2 2022 earnings call. Thank you for your participation. You may now disconnect your line.