Good day, and welcome to the Franklin Street Properties Corp. First Quarter 2024 Results Conference Call. After the speakers' remarks, there will be a question-and-answer session. 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.

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 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, 2023. 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, 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 on the Investor Relations section of our website. Now I'll turn the call over to John Demeritt. John?

Thank you, Scott, and good morning, everyone. I had spoken at Linx during our call on February 27, 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. 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. We reported funds from operations, or FFO, of about $4.2 million or $0.04 per share for the first quarter of '24. We also reported a GAAP net loss of about $7.6 million or $0.07 per share for the first quarter of '24. With that, I'll turn the call over to George. George?

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, 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. The macro update, at least so far in early 2024, is that number one, continued FSP property dispositions are 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. 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 in the already thin disposition market that is trying to attract the limited amount of investment capital currently available. So at least at the start of 2024, 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 for the corporate decision makers. We are finding that both investor and tenant viewpoints 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. All of this on the ground reality that we are seeing is part of the mix as we go into the second quarter of 2024 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. 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.

Thank you, George. Good morning, everyone. 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 leased 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. FSP finalized approximately 197,000 square feet of total leasing during the first quarter of 2024, which included approximately 136,000 square feet of renewals and expansions along with 61,000 square feet of new tenant leases. FSP is currently tracking over 700,000 square feet of prospective new tenants, including approximately 350,000 square feet of prospects that have identified FSP assets on their respective shortlists. FSP's assets in suburban Houston and Downtown Denver have witnessed an increase in overall new tenant activity during the past 5 to 6 months. 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 expansions 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 leased occupancy over the next few quarters, barring any surprises or the impact of potential dispositions. Thank you. I will now turn it over to Jeff Carter.

Thank you, John, and good morning, everyone. 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. 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, with the objective of using a 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. 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. 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. First, prospective buyers and their capital sources currently favor stabilized properties from a lease perspective at about 75% leased or better. Second, that buyers and their potential capital sources are focused on WAULT 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 number of potential lease expirations that are approaching rapidly with doubts about renewal probabilities. 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. 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 interests of our shareholders remain best served by not highlighting prospective disposition information beyond what is in our current filings until appropriate. 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. 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?

And the first question comes from the line of Steve Dumanski from Janney.

I noticed that there has been a pickup in renewal leasing this quarter. Do you expect this leasing velocity to go forward?

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. 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 the term. So it is more engaged, and we're finding more tenants in total numbers that are engaged at this time, so it's quite encouraging.

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 receives greater demand or interest? I would just like a general picture if tenants were predominantly looking to size down or maybe maintaining certain space?

Well, the shortest answer is it depends. I would say that looking in the rearview mirror over the last four years, it certainly has been predominantly smaller needs that we have been finding the demand 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 come to the table and appear to be more serious. 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 from about 40,000 square feet or so. So it just depends. 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 the floor.

And congratulations on that opportunity in Richmond. And in terms of tenant improvements, has there been more of a paradigm shift where tenants can now demand a higher amount on a per square foot basis on 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?

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 5 to 10 years. The majority of tenants want a turnkey. 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 solve for. Now with the supply chain issues and inflation, the cost of everything from labor to materials has risen. So if you look at the overall dollars, of course, you're going to see higher costs today than you did 5 years ago. But really, when you look at what—removing inflation, it's really quite comparable. 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, we're looking at that average term length between 6 and 7 years. Many renewals are 3 years to 5 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 supplemental on Page 20. And you'll see going back to calendar '22 where—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 transaction, and that hasn't really changed a whole lot.

Got it. Just would like to hear your thoughts on co-working spaces and whether they would be beneficial or not for your portfolio?

Well, we certainly believe that flexible office and/or co-working has a place in a portfolio. The size of the space and/or the location of the property really dictates what you're dealing with. We, in the past, have used different operators for co-working and flexible office, typically for 10,000 to 15,000 square feet or so, in rare cases, a full floor 20,000 to 25,000 square feet. In my personal opinion, I think co-working is a fantastic addition of amenity to a property that is well above 500,000 square feet with easy access to public transportation, maybe to provide a satellite office as well for large corporations. We still have a very small use of co-working flexible locks in our portfolio, but nothing really significant, nothing with multiple floors. So yes, I think it will definitely be part of many owners' portfolios for years to come.

Are there certain geographical markets, whether it's in terms of leasing or potential disposition opportunities that are perhaps not as strong as others? Any cities or metros?

I'll let Jeff Carter address the disposition side of that. I think that 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 most recently has been heading 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. Jeff, on dispositions.

On the—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 they can— 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 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. And that story just varies from asset to asset.

Thank you, Jeff and John. And lastly, thank you for 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 or convert office to multifamily?

This is Jeff Carter again. Steve, I appreciate the question. We—I have not had buyers specifically talking about redeveloping a property that they were looking at acquiring from us specifically for some sort of a 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.

There are no further questions at this time. So I'd like to hand back to George Carter for closing remarks.

Thank you, Gavin, and thank you for 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.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.