Good morning, and welcome to the Franklin Street Properties Corp. Second Quarter 2023 Results Conference Call. All participants are in a listen-only mode. After the speakers’ presentation we will conduct a question-and-answer session. Please follow the operator's instructions. As a reminder, this conference call is being recorded. I would now like to turn the call over to Scott Carter, General Counsel. Thank you. Please go ahead, sir.

Good morning, and welcome to the Franklin Street Properties second quarter 2023 earnings call. Joining me this morning are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; Jeff Carter, our President and Chief Investment Officer; and John Donahue, President of 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, 2022, as amended by our quarterly reports on Form 10-Q, all of which are on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today, August 2, 2023. 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 a brief overview of our second quarter results. Afterward, I'll pass the call to George for his thoughts. As a reminder, our comments today will refer to our earnings release, supplemental package and 10-Q, which can be found on our website. We reported funds from operations or FFO, of about $7.1 million or $0.07 per share for the second quarter, a GAAP net loss of about $8.4 million or $0.08 for the second quarter of 2023. On a year-to-date basis, we reported FFO of about $15.5 million or $0.15 per share for the six months ended June 30, 2023, and a GAAP net loss of about $6 million or $0.06 per share for the same period. As of June 30, 2023, we remain with $400 million of total debt outstanding, which is the same level we reported at the end of March. With that, I'll turn the call over to George. George?

Thank you, John. And again, welcome to Franklin Street Properties second quarter 2023 earnings call. As the third quarter of 2023 begins, we continue to believe that the current price of our common stock does not accurately reflect the value of our underlying real estate assets. We will continue to seek to unlock that value for shareholders through select property dispositions and aggressive efforts to lease vacant space in our portfolio. Viewing one of many metrics that could be considered relevant to FSP’s potential value proposition, that of price per square foot, it is significant to note that since our disposition program began in December of 2020, we have sold approximately $852 million of property, representing about 3.85 million square feet, which equates to an approximately $220 per square foot average price. As of the end of the second quarter 2023, our public market stock price implied a price per square foot on our remaining approximately 6.1 million square foot property portfolio of about $91 per square foot. We intend to continue to use proceeds from further property dispositions primarily for continued debt reduction. Since the beginning of our recent disposition program, we have repaid approximately 60% of our debt, which we believe has reduced risk to all FSP stakeholders in this currently challenged office property market while increasing the quality and longer-term potential of their continued investment. Now for more insight on our leasing activity, I will turn the call over to John Donahue, President of FSP Property Management Board. John?

Thank you, George. Good morning, everyone. The FSP directly owned portfolio was approximately 75.7% leased at the end of the second quarter, compared to 73.9% leased at the end of the first quarter and 75.6% leased as of year-end 2022. The increase was primarily attributable to leasing completed during the second quarter and offset by lease expirations during the first six months of the year and by one property disposition in the first quarter. Economic occupancy in the directly owned portfolio was approximately 72.1% at the end of the second quarter, compared to 71.5% at the end of the first quarter. The increase was due to lease commencements exceeding tenant departures during the second quarter. FSP finalized approximately 445,000 square feet of total leasing during the first half of 2023, which included approximately 269,000 square feet of renewals and expansions along with 176,000 square feet of new tenant leases. During the second quarter, we executed a new lease with the Commonwealth of Virginia at our Innsbrook property in Glen Allen, Virginia. The lease is approximately 100,000 square feet with a term of approximately 10.5 years. We expect that lease to commence in December 2023. Also during the second quarter, we finalized a lease amendment with Kaiser Foundation Health Plan, an existing tenant at our Greenwood Plaza property in Englewood, Colorado. The lease amendment extends the term applicable to Kaiser's entire premises of approximately 121,000 square feet by five years with the new expiration date of May 2029. We are currently tracking a healthy pipeline of over 500,000 square feet of prospective tenants for new leases, including approximately 300,000 square feet of prospects that have identified FSP assets on their respective short lists. Despite a slight summer slowdown over the past several months, which is typical for this time of year, FSP continues to witness an incrementally positive trend in overall leasing activity, including tours and requests for proposals for FSP's assets. The modest pickup in activity has been most evident in FSP's suburban markets in Dallas, Houston and in Denver. These expirations for the remainder of calendar 2023 total approximately 177,000 square feet, which represents less than 3% of FSP’s directly owned portfolio. FSP continues to work with existing tenants that are engaged for potential renewals and expansions that total in excess of 200,000 square feet. Thank you. I will now turn it over to Jeff Carter.

Thank you, John. Good morning, everyone. I will be discussing the current investment sales marketplace for office properties generally, as well as our own efforts to potentially sell select properties more specifically. At a macro level and as has been widely reported, the market for office property sales and financings, as well as with other property types, remains challenged. In particular, with respect to large office properties and/or bulk office portfolios. Not unexpectedly, deep value buyers are out looking for distressed opportunities, but so are buyers who have an eye towards the longer-term value and growth proposition of the office asset class, and finding these groups is a key focus at FSP. The current lack of liquidity and resulting constrained lending environment, combined with rising interest rates, are primarily responsible for the currently and historically difficult conditions and reduce the ability of real estate investors to reliably procure needed debt and equity capital to facilitate the closing of property purchases. With respect to our own work on potential select property dispositions, we continue to see real interest from prospective buyers. Investors continue to seek high-quality and well-located office properties. However, there are indeed fewer buyers than in the past. From our own observations, watching the current marketplace, we see that many buyers are entering proposed transactions with the genuine intention and belief of closing. However, in some cases, as they work through their respective debt and equity procurement processes, they find greater challenges than they anticipated due to the previously mentioned liquidity constraints, which can result in longer timeframes to consummate transactions or even deals falling out of contract entirely. That said, FSP is making progress on our efforts to sell select properties. More specifically, we expect to close on the sale of Forest Park, our sole single-story building located in Charlotte, North Carolina, for approximately $9.2 million in gross proceeds during the currently underway third quarter. In addition to Forest Park, FSP disclosed in our just released quarterly results that we have entered into purchase and sale agreements with three different and unrelated purchasers for the potential disposition of three additional properties that would total approximately $156 million in aggregate gross proceeds in addition to the sale of Forest Park. As reported, these transactions remain subject to customary closing conditions, including the successful completion of their respective due diligence inspection periods. If successful, these transactions are expected to close during the fourth quarter of 2023. In aggregate, the four potential pending dispositions currently in process, including Forest Park, total $165.2 million in gross proceeds and have an average sales price per square foot equal to approximately $250 per foot. All proceeds are intended to be used primarily for the repayment of debt. And for competitive reasons that we believe to be in the interest of our shareholders in this current market environment, we will not share specific potential property disposition information until it is appropriate. We look forward to keeping the market informed. And with that, thank you for listening to our earnings conference call today. And now at this time, we'd like to open up the call for any questions. Julian?

Thank you. Please follow the operator's instructions. Our first question will come from Steven Dumanski from Janney Montgomery Scott. Please go ahead. Your line is open.

Thank you. In terms of dispositions, you sold Northwest Point for $29 million last quarter, and you currently are planning to transact on another $165 million. So in total, that's approximately around $200 million of dispositions for this year. So given your size, could you potentially sell any more this year without hitting into a recap and triggering a special dividend?

This is Jeff Carter. Thanks for the question. I'll start with my comment that given the challenges that exist within this current market environment, we're not providing forward guidance on potential dispositions. However, what I will say is that we are committed to substantially repaying our debt through select asset sales and that we do currently have a few more assets within various phases of their respective price discovery processes, and we'll keep the market informed with further updates as appropriate.

I understand that we're not giving guidance on the dispositions. Just out of curiosity, I wanted to know how significant a non-refundable deposit would be regarding the purchase and sales agreements.

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

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

Yes, good morning, guys. Congrats on getting the lease done at Innsbrook. I think that asset has had some vacancy issues for over four years. You mentioned the lease is commencing in December. Is there a free rent period when that occurs? Or is that when they actually start paying rent?

Craig, it's John Donahue. You're correct. There is a free rent period that will go into calendar 2024. So the straight line FASB 13 rent should commence in December if we get them in on time.

Okay. Great. And as far as the extension at Kaiser, which was a nice win, what did you have to give to Kaiser in exchange for the five-year lease extension? Was that a TI package? Was there any adjustment to rent? Just some color there would be helpful.

Yes, absolutely, Craig. That was an exception to the norm, pretty rare situation where the tenant exercised an option and that was an as-is deal, no free rent. The rent was negotiated. And it is a pickup from the expiring rent, but could be considered slightly below market. So if there was any concession at all, you could say that the rent is slightly below market, but it was a huge win on a net effective rent basis as well. The great news there is that Kaiser is planning to grow the property. We don't know exactly the timing of that, but we're happy to have them as a tenant and keep them for the future.

Great. Changing gears, you extended the Monument Circle loan until the end of this quarter. What is the game plan there, considering we're halfway through the third quarter?

Hey Craig, it's George. The game plan as it has been. We are actively searching for existing tenants to take occupancy and have some prospects. And we are actively searching for potential buyers of the property at the same time. Some of the prospects are both. In other words, some are potential tenant owners. And so we're active on that property in the marketplace, running down both paths. And again, so those paths are crossing a lot as we do that. Downtown Indianapolis, where this property is, has had its issues over the last few years but seems to have stabilized now. We are cautiously optimistic going forward on getting leased and/or sold or some combination thereof of Monument Circle.

Got it. And just one more for me. Just given your commentary on the liquidity of the buyers and sort of their access to debt and equity, you've been working on getting these assets sold for some time. Could you give any color or sense of how financially qualified these three buyers are? Do they need to go down the path of raising debt and equity capital? Or do they come to you already with sort of a proof of sources of capital as you worked with them?

Greg, this is Jeff. I appreciate the question. The buyer profile we've seen on many of our deals varies from property to property, so it's hard to generalize. But I will say that as part of our price discovery processes through buyer interviews, we try to really work through who has the equity and who has access to the debt capital, and that remains the case on these transactions as well. Nothing is done till it's done, but we run a rigorous process and have in these instances. It's a challenging market, but we think we've got a good chance of success, and we'll keep the market posted.

Okay, that’s helpful. Thanks, guys.

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

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

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