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Edited Transcript of FSP earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Franklin Street Properties Corp Earnings Call

WAKEFIELD May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Franklin Street Properties Corp earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George John Carter

Franklin Street Properties Corp. - Chairman & CEO

* Jeffrey B. Carter

Franklin Street Properties Corp. - President & CIO

* John F. Donahue

Franklin Street Properties Corp. - Executive VP & President of FSP Property Management LLC

* John G. Demeritt

Franklin Street Properties Corp. - Executive VP, CFO & Treasurer

* Scott H. Carter

Franklin Street Properties Corp. - Executive VP, General Counsel & Secretary

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Conference Call Participants

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* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Franklin Street Properties First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Scott Carter. Sir, please go ahead.

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Scott H. Carter, Franklin Street Properties Corp. - Executive VP, General Counsel & Secretary [2]

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Good morning, and welcome to the Franklin Street Properties First Quarter 2019 Earnings Conference Call.

With 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 with me this morning are Toby Daley, Executive Vice President of FSP Property Management; and Will Friend, also 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, 2018, which is on file with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today, May 1, 2019. 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 operation or FFO. A reconciliation of FFO to GAAP net income is contained in the yesterday's press release, which is available in the Investor Relations section of our website at www.fsp.com (sic) [www.fspreit.com].

Now I'll turn the call over to John Demeritt. John?

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John G. Demeritt, Franklin Street Properties Corp. - Executive VP, CFO & Treasurer [3]

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Thank you, Scott, and good morning, everyone. On today's call, I'll begin with a brief overview of our first quarter results. Afterward, our CEO, George Carter will discuss our performance in more detail and provide some of his remarks. John Donahue, our President of the Asset Management team, will then discuss recent leasing activities. And then Jeff Carter, our President and CIO, will discuss our investment and disposition activities. After that, we would be happy to take your questions.

As a reminder, our comments today will refer to our earnings release, supplemental package and 10-Q, which were filed last night with the SEC and, as Scott mentioned, can be found on our website.

We reported funds from operations, or FFO, of $22.1 million or $0.21 per share for the first quarter of 2019.

Turning to our balance sheet. At March 31, 2019, we had about $1 billion of unsecured debt outstanding and our debt service coverage ratio was about 3.3x.

During the first quarter, we placed 2 interest rate swaps, one started right away fixing $100 million of our floating rate term loan, and the other was a forward swap on about $220 million of our term loans that were extended last year. Each of these swaps go to maturity of the loans.

We executed these swaps fixing LIBOR between 6 to 11 basis points below where the 30-day LIBOR was trading at the end of March. We believe we've taken some interest rate risk off the balance sheet for some time with these transactions.

We have no debt maturities until November 30th of 2021, and about 91% of our debt is now at fixed rates. With our debt stack more termed and our rates mostly fixed, we believe we have aligned our capital structure with a more long-term value add properties that we have in our markets.

From a liquidity standpoint, we had $560 million available on our revolver at the end of the quarter, an $8.8 million in cash on our balance sheet. So we have total liquidity of about $568.8 million at quarter end.

With that, I'll turn the call over to George. George?

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George John Carter, Franklin Street Properties Corp. - Chairman & CEO [4]

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Thank you, John. And again, welcome to Franklin Street Properties First Quarter 2019 Earnings Call. So we have talked about this large, approximately 3-year lease roll bulge the FSP is dealing with, the bulk of which occurs in 2018, 2019 and 2020. A large lease roll that is both a challenge and an opportunity. We like and are optimistic about our current portfolio of office properties, and the concentrations of square footage in targeted markets with strong infrastructure and long-term growth dynamics.

We have financially prepared for the current effort by increasing our available liquidity as well as terming out and fixing rates on much of our debt, all of which remains unsecured. Leasing activity within our portfolio continues at a record pace, much of it renewing or backfilling existing tenant lease rollover space. But successfully handling this rollover space is important and must be achieved before net new absorption can take place. We believe net new absorption is on the way in 2019 and 2020 in our 32 operating properties as well as our 3 redevelopment properties.

We are generally seeing rising rents and longer leases at our properties as we work through this period, and continue to believe that 2019 is likely to be the trough in our percentage of lease space.

As John said, our FFO for the quarter was $0.21 per share. And at this time, we are maintaining our full year 2019 guidance. However, the most important metrics for FSP in 2019 and 2020 will flow from our leasing results.

For some commentary about the property portfolio activity so far in 2019, I will turn the call over to John Donahue, President of our Property Management Company. John?

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John F. Donahue, Franklin Street Properties Corp. - Executive VP & President of FSP Property Management LLC [5]

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Thank you, George. Good morning, everyone. The FSP operating portfolio was 88.5% leased at the end of the first quarter compared to 89.0% leased at the end of calendar 2018. Including the redevelopment assets, the entire portfolio was 85.4% leased at the end of the first quarter. Barring any surprises, we believe that leased occupancy will trend upward during the next several quarters due to strong perspective interest in the largest vacancies, including the redevelopment assets.

The total leasing achieved for the first quarter was by far the best first quarter, a record for FSP. Following 2 record calendar years of leasing in succession, we are hopeful this trend will continue for the balance of calendar 2019.

Many of the FSP markets across the Sunbelt and Mountain West regions show signs of making progress during 2019. The Atlanta portfolio continued the upward trend of leased occupancy, reaching its highest level incentive quarters and finished the first quarter at 86.4% leased. We believe that Atlanta will continue this upward trend for the balance of the year.

Leasing activity in Denver, FSP's largest market, has been very strong and Denver appears to be well poised to anchor the FSP portfolio. Leasing progress in both Houston and Minneapolis has been relatively slow for the last few quarters. But perspective tenant activity has been encouraging, and we believe there will be further progress in both of those markets over the next 2 quarters.

Dallas continues to be FSP's most consistent and resilient market overall. The 3 redevelopment assets have been enjoying strong perspective tenant interest and appeared to be on track to gain leased occupancy this year. Although there is work remaining to do, the transition of all 3 assets from single-tenant buildings to multi-tenant properties continues as planned.

Similar to calendar 2018, the bulk of known tenant downsizings and/or departures in our portfolio are expected to occur late in the year during quarter -- during the fourth quarter of 2019. The majority of the known decreases are expected to be in Dallas and Houston. Our assets in both Dallas and Houston have been active and appear to be well positioned as we work through the rollover exposure. We have an excellent opportunity to make leasing progress in both of those markets during the next several quarters.

With that, I will turn it over to Jeff Carter.

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Jeffrey B. Carter, Franklin Street Properties Corp. - President & CIO [6]

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Thank you, John. Good morning, everyone. At FSP, our strategy is to own high-quality office properties, primarily within the U.S. Sunbelt and Mountain West regions as well as several opportunistic markets. We focus on dense infill locations with efficient access to both amenities and housing. FSP believes in the long-term potential of employment and population growth within these markets, which may work to drive demand and rents over time.

Enhancing value across our portfolio primarily through leasing efforts is at the forefront of our thinking and our work. Such efforts will focus on both current and newly available vacancies as well as working on possible renewals of our existing tenant relationships. At this time, the U.S. economy continues to display aggregate strength and a number of economic indicators are tracking positively with respect to potential office demand in well located and high-quality properties. FSP continues to see a relatively low supply of high-quality office properties for sale in strong locations within our markets, and available sales comparables indicate that value is embedded within our portfolio.

On the disposition and asset recycling front, during 2019, we continue to anticipate the potential for dispositions within our managed property portfolio, specifically, and as discussed during our last quarterly call, we are working on a potential disposition of the asset known as Energy Tower 1. For both confidentiality and competitive reasons, we will not provide additional commentary on this prospective transaction until and unless it is appropriate to do so. In this case, specifically FSP possesses an economic interest in the form of secured loans, totaling approximately $51 million. Any disposition proceeds received would be evaluated at such time in order to determine the highest and best return for our shareholders, which may include the potential debt pay down.

Also as a reminder, FSP has worked to reshape its portfolio over the past 4 to 5 years by completing, since 2014, dispositions and/or mortgage repayments of over $300 million.

On the acquisition front, we continue to track and screen all suitable opportunities within our markets, and we continue to screen for infill and urban properties that possess the ability to credibly add value over the short, intermediate term.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Dave Rogers with Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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I wanted to start with John Donahue and just some of the larger vacancies. And John, just kind of ask if you could kind of dive a little bit deeper in terms of kind of what you're seeing in terms of downtime, which of the assets you want to go multi-tenant with and then kind of where you see market rents relative to where the tenants expire, just expect to give us a little bit more comfort because you do have a lot of opportunity, but certainly a lot of wood to chop as well?

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John F. Donahue, Franklin Street Properties Corp. - Executive VP & President of FSP Property Management LLC [3]

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Sure, Dave. I'll start with the largest vacancies and work my way through that. We're seeing very good activity in Miami at Blue Lagoon, which is our largest vacancy in the portfolio. We're in discussions with a handful of prospects there, nothing to announce yet, but that's been going very well. That property has -- we just received control of that property back in -- late in the fourth quarter and everything's been going as planned with the recent restoration, refurbishment of the Burger King improvements and working our way through the common areas and setting that building up to be multitenanted. We do expect it to be multitenanted. We think that, that's the best approach for value enhancement. We also have worked our way through the large Fannie Mae vacancy in Dallas, about 75% of that has been leased and we're having great activity on the balance of that space. Nothing to announce yet, but I think that, that that space will be mostly stabilized here by the third quarter. We also have a large vacancy in Charlotte in the Forest Park property. We just got that property back in the first quarter. That property may be multitenanted, has the ability to be multitenanted. We'll see how that progresses throughout the year. And then we have a large vacancy in our Innsbrook property that was vacated by SunTrust in the fourth quarter of last year. And the activity on that building is strong as well. So we're pleased with the action on the properties, a wide range of industries. We tend to have quite a few industries because we have so many markets. We have seen a significant interest from the coworking industry, finance and banking and then the creative brainpower industries, affectionately referred to as STEM and TAMI, and then also from the energy industries. Lastly, addressing your question on rents, we had one of our -- actually our best quarter ever as far as lease economics. Certainly, better than the last 2 years. Those numbers are trending upwards with gross rents. And as we compare the cost of leasing, the average -- the weighted average cost per square foot per year was actually lower than calendar 2018 and 2017, and we saw leasing spreads in the 9% to 10% range. So feel really -- feeling really good about the rental rates at this time.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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And then, I guess, maybe two -- one other question about Petrobras and Northrop both coming up in the next year for the expirations, you've mentioned about kind of that bulge in your expiration. Can you talk about activity on those potential spaces? And then maybe just a broad comment, as when you go multi-tenant from the larger space, how long do you kind of anticipate internally that it would take, on average, to kind of fill that space back up?

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John F. Donahue, Franklin Street Properties Corp. - Executive VP & President of FSP Property Management LLC [5]

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Well, for the redevelopment properties, I would refer you to Page 23 of the supplemental to get a sense of the timing of the stabilization of those properties. When you refer to properties that are outside of the redevelopment properties, usually, we need to get control of the space. Petrobras is not a single-tenant building, that's just one of many tenants at Westchase. Northrop Grumman is a single-tenant building, and it does lay out well to be a multi-tenant property. From gaining control of the property and setting it up for multi-tenancy, that could be anywhere from 3 to 6 months physically. But we're showing the property in the meantime, and if there are prospects in the market, we're not letting any grass grow. Hopefully, that answers your questions.

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Operator [6]

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(Operator Instructions) I am showing no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to George Carter for any closing remarks.

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George John Carter, Franklin Street Properties Corp. - Chairman & CEO [7]

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Thank you very much for tuning into our earnings call. We look forward to talking to you next quarter. Thank you.

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Operator [8]

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