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Franklin Street Properties Corp. (AMEX:FSP) Q1 2024 Earnings Call Transcript

Franklin Street Properties Corp. (AMEX:FSP) Q1 2024 Earnings Call Transcript May 1, 2024

Franklin Street Properties Corp. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Scott Carter: 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 President 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.

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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. The 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?

John Demeritt: Thank you, Scott, and good morning, everyone. I had spoken at [length] 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 in per share for the first quarter of '24. With that, I'll turn the call over to George. George?

George Carter: 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 2 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. A value that we strongly believe is intrinsic to and embedded in FSP and its properties.

Aerial view of a bustling urban skyline, reflecting the growth of the real estate investments.
Aerial view of a bustling urban skyline, reflecting the growth of the real estate investments.

We will update shareholders and the markets on our progress as soon as specific events and situations unfold. Now for more color on our leasing activity, I will turn the call over to John Donahue, President of FSP Property Management Corp. John?

John Donahue: 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. The 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 and 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.

Jeffrey 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. If 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 4 primary factors that have influenced our disposition efforts to date.

First, that prospective buyers and their capital sources currently favor stabilized properties from a lease perspective at about 75% leased or better. Second, and relatedly, 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 amount 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 interest 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 that 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?

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