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Franklin Street Properties Corp (NYSEMKT:FSP)
Q3 2020 Earnings Call
Nov 4, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Franklin Street Properties Corporation Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Carter, General Counsel. Please go ahead.

Scott H. Carter -- Executive Vice President, General Counsel and Secretary

Good morning and welcome to the Franklin Street Properties third quarter 2020 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's 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, 2019, as updated for the COVID-19 pandemic in the Risk Factors section of our quarterly report on Form 10-Q for the quarter ended September 30th, 2020, both of which are on file with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today, November 4th, 2020. 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 in the Investor Relations section of our website at www.fspreit.com. Now, I'll turn the call over to George Carter, George?

George J. Carter -- Chief Executive Officer and Chairman of the Board

Thank you, Scott. Good morning everyone and welcome to Franklin Street Properties third quarter 2020 earnings call. I would like to start my portion of this earnings call by making a few brief comments about FSP's current operating environment in the COVID-19 pandemic. Our home office located in the Greater Boston, Massachusetts metro area has remained fully open and available to all of our employees as a work environment during the quarter. However, working-from-home policies are still in place for any employee who desires to work remotely.

We have continued to average about 30% of our workforce physically present in the home office. All of us continue to appreciate the exceptional efforts and dedication by all FSP employees over the last seven months during these difficult times and at our 35 office properties around the country that have been kept fully open throughout the pandemic. To our people on-site operating those properties, managers, maintenance engineers, security personnel, cleaning crews, vendors, and so many others, thank you for your continued great job.

All of these efforts are for our customers, our valued tenants, each one of them grappling with their own challenges, responses, and business realities resulting from the COVID-19 pandemic. They have been understanding, collaborative, and appreciative of the unique situation we all find ourselves in. They along with FSP remain committed to the health and safety of all employees, vendors, and visitors at each one of our office buildings.

For the full third quarter of 2020, we collected approximately 98% of contracted rent and as of October 31st, we have collected approximately 98% of October rents. However, at this time, we are not able to predict whether and to what extent our level of rental receipts may change in future months. Consequently, we are continuing suspension of net income and funds from operation (FFO) guidance and will not be providing additional guidance until such time as we have a better understanding of the duration of the COVID-19 pandemic and its impact on our business and the businesses of our tenants. With those opening comments, let me turn the call over to our CFO, John Demeritt. John?

John G. Demeritt -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, George and good morning everyone. I'm going to have a brief overview of our third quarter results and afterward, I'll pass the call to John Donahue, our President of the Asset Management team 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 $20.4 million or $0.19 per share for the third quarter of 2020. During the third quarter, we worked with tenants that were impacted by the pandemic. As part of that, we determine whether a lease is collectible or not. If we determine it is no longer collectible, we write-off receivables and do not report current rents unless they are paid in cash. So part of this loss is receivable write-offs, which is more of a one-time event and part of the loss is current rents that we stop reporting.

During Q3, we had write-offs and lost rent of only $108,000 and on a year-to-date basis, the total is $631,000 [Phonetic]. Going forward, the amount of lost rent from tenants that we wrote off would be reduced by any cash rents that we receive from them. We also reached agreements with a number of tenants on rent deferrals using lease amendments, modifications, and other tenant agreements. Total rents deferred by us during Q3 were only $27,000. On a year-to-date basis, it's about $1.5 million at this point, which is below six-tenths of 1% of annualized revenue. Where these agreements generally result in us being repaid, there is no significant GAAP or FFO impact from them. We are working with other tenants that are having issues and we'll provide updates periodically like we have here.

Turning to our balance sheet, at September 30th, 2020, we had $1 billion of unsecured debt outstanding and had $30 million drawn on our line of credit, which is the same amount we've had drawn at the end of June and March this year. Our total debt of $1 billion at the end of September was also the same that we had at the end of June and March of this year. So even with all the activity we've had, our debt -- total debt level remained the same. From a liquidity standpoint, we have $570 million available on our line of credit as we look ahead. As a reminder, all our debt is unsecured and we have no debt maturities until November 30th, 2021 and about 92% of our debt is at fixed rates. With our debt stack more termed out and our rates mostly fixed, we believe we have aligned our capital structure with the more long-term value-add properties that we have in our portfolio. With that, I'll turn the call over to John. John?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Thank you, John. Good morning everyone. At the end of the third quarter, the FSP portfolio including redevelopment properties was 84.3% leased, which is an increase from 83.3% leased at the end of the second quarter and represents a total portfolio high point for calendar 2020. Rent collections during the second quarter and third quarter have averaged approximately 98.4% and rent collections for October are approximately 98% thus far.

FSP's asset management team and our property management teams continue to work with tenants seeking many different forms and levels of relief. There have been fewer formal requests during the past few months and certainly not as significant as the number witnessed in the second quarter. That said, there appears to be growing dialog with a select number of tenants about potential leads for extended relief due to economic uncertainty. We may not fully understand the impact of the pandemic on annualized rents and cash flow until later in the fourth quarter or perhaps next year.

During the third quarter, FSP leased approximately 282,000 square feet, which included 181,000 square feet of net absorption with new tenants. Total leasing finalized year-to-date for all three quarters was approximately 606,000 square feet, of which approximately 347,000 square feet was with new tenants. We are pleased to report that the asset known as 801 Marquette is approximately 92% leased. In our Midwest portfolio consisting of approximately 1.7 million square feet is now 95% leased.

We have approximately 240,000 square feet of potential net absorption over the next three to six months, including 180,000 square feet of new prospects. We are able to finalize deals with the majority of the potential prospects and barring any surprises, we expect leased occupancy and economic occupancy to both trend upward over the next several quarters. Thank you, I will now turn it over to Jeff Carter.

Jeffrey B. Carter -- President and Chief Investment Officer

Thank you, John. Good morning everyone. We here at Franklin Street Properties hope everyone remains safe and healthy during these trying times. FSP maintains its focus on owning high quality properties in amenity rich locations within the U.S. Sunbelt, Mountain West as well as several opportunistic markets. Although difficult to look past the current pandemic gripping the nation and world, FSP continues with our conviction that the long-term prospects for job and population growth within the Sunbelt and Mountain West regions remains and possesses positive long-term potential for upside performance. Given the COVID-19 pandemic, I wish to briefly discuss what we are seeing around the country within the investment marketplace.

Not unexpectedly and largely due to uncertainties stemming from COVID-19, the third quarter continued to see reduced office sales volume on a national level. Despite such reduced sales volume, investment capital remained selectively available for high quality and well performing assets. Risk-off properties in compelling locations are still garnering attention while the pendulum has largely swung away from value-add properties that possess significant leasing uncertainties. Financing conditions appear to be slowly improving, but pricing disconnects can still be a factor between buyers and sellers in some cases with buyers hoping for more distressed pricing opportunities than are often presenting.

On the disposition and asset recycling front, FSP continues to monitor our portfolio for potential opportunistic dispositions. Our criteria for potential dispositions focuses first and foremost on achieving value maximization at the asset level. With any potential property disposition in the future, FSP would ultimately look to redeploy such proceeds into their highest and best use, which at this time, would likely initially include debt pay down and looking out further, potential new property investments. We'll keep the market up to date as appropriate.

On the acquisition front, FSP continues to track all suitable investment opportunities within our markets. We will continue our efforts to identify high quality properties that possess the ability to credibly add value over the short to intermediate term. And with that, I thank you for listening to our earnings conference call today and now at this time, we'd like to open up the call to any questions. Thank you. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question today comes from Dave Rodgers of Baird. Please go ahead.

Dave Rodgers -- Baird -- Analyst

Yeah, good morning everyone. John Donahue, maybe start with you on some of the leasing. You guys signed a number of leases during the quarter, which was a positive trend for you. I'm wondering if you could talk a little bit more about the actual GAAP and cash occupancy commencements for Deluxe in Minneapolis as well as Forest Park. And then just confirm that Polte [Phonetic] is on track for the fourth quarter move in?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Sure, Dave, good morning. So starting with Deluxe, we are expecting that lease to commence early in the third quarter of next year and that would be a relatively short free rent period. So at cash rents, I don't have that information handy, but I'm recalling that, that would probably be near the end of the year or early the following year, but the FFO would commence early third quarter. And then similarly, the lease that we executed in Charlotte would have the same time frame, very similar time commencement for the FFO.

And last but not least, the commencement of Lennar in the fourth quarter or the first quarter is largely dependent upon substantial completion of construction, which we believe at some point -- they will occur at some point in December and then we hope to welcome Lennar to Blue Lagoon shortly thereafter. We don't have an exact date yet of lease commencement and we'll let you know as soon as we know more.

Dave Rodgers -- Baird -- Analyst

Yeah, thanks for correcting me. I had the tenant wrong. So apologize for that. The leasing pipeline that you mentioned the 240,000 square feet. Can you you talk about those discussions. I mean were those pre-COVID that have come back. Are these tenants that are looking to expand footprint so they can put more people in office more distanced. Maybe some conversation around that would be helpful just from a broader office context and then any comment on where that might happen would be helpful as well?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Sure, Dave. The activity that we're seeing now is split as far as number of tenants go in regards to pre-COVID origination versus post-COVID origination. So the number of prospects is almost split evenly down the middle. There is for our company a weighting toward square footage of companies that we've been in dialog for longer than the COVID period. So we hope to finalize those deals because we've been working on them for a long time. Our activity right now is in Virginia, in Texas, and then Denver and Atlanta in that order as far as materiality and weighting and we feel really, really good about a good batting average of getting those deals done over the next three, four, five months or so.

Dave Rodgers -- Baird -- Analyst

Thank you for that. And maybe last question and I'll pass it to Jeff or to George, throwing the Chantilly asset Stonecroft into redevelopment maybe that dovetails, Jeff, with your comments that the market for value-add isn't as strong, but I guess as you think about kind of putting more assets into redevelopment, what type of returns do you expect to get, if any. It sounds like leasing is picking up and then I guess maybe dovetailing that also with the Jones Day space would we expect that to move into redevelopment as well or is there more you can do there?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

I can answer the question about the redevelopments. Dave, in regards to the redevelopments, as you know, the 801 Marquette building was moved out as we reached lease stabilization and we are now adding the Stonecroft building into the redevelopment. The anticipated investment there has moved up a little bit due to multiple factors. One is that we're investing more for the multi-tenancy and because of COVID, the lack of demand, we feel like we need to step up the game a little bit there and invest more.

We do have some prospects for the building. We don't know exactly how much space those prospects will take and it might take a little longer as well because of COVID. In the future, it's a complete guess at this point in time, but the Pershing Park Plaza building is already a double A building, exceptional YOD [Phonetic], high quality building and location. I don't see that as a repositioning. Even though it's a large vacancy, we're already seeing some activity and interest in portions of the building. So my guess at this point is that, that would not be added to the redevelopment category, but stay tuned.

Dave Rodgers -- Baird -- Analyst

Okay. Thanks, John.

Operator

The next question today comes from Rob Stevenson of Janney. Please go ahead.

Rob Stevenson -- Janney -- Analyst

Hi, good morning. Just to follow-up on Dave's question, John, is that tenant demand concentrated in certain markets. Is it more broad across the portfolio, how would you sort of characterize where the demand is for space these days?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Good morning, Rob, it's John Donahue again. So I would say that we have superior demand in the suburbs than we do in the urban locations. As far as where in the country, it is probably highest in Virginia and then Dallas and then moving into the other markets, excuse me. Houston and Denver probably trailing.

Rob Stevenson -- Janney -- Analyst

Okay and then how are you guys thinking about the sort of trade-off between tenants wanting some shorter-term leases given all the uncertainty versus the costs on the tenant improvement and leasing commission side, etc and the trade-off back and forth. Are you guys agnostic at certain sliding levels? Are you guys pushing for longer-term leases at this point in time? Is a 24-month or lease just too good to pass up given vacancy? How are you guys thinking about all that?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

So it's difficult or challenging to give you a broad-brush answer because every deal is different. I would say that we are focused mostly on retaining our tenants and listening to them on what they would like to do. We're not yet seeing, Rob, any real significant downward pressure in rents. The national stats are showing that asking rents are actually rising primarily due to new deliveries, but there is downward pressure on effective rents. So if you think of IRRs and returns in regards to rising concessions and effective rates going down, you know, you would maybe assume that you are better off with a short-term as is deal, but right now tenants are uncertain if they're going to need less space or [Phonetic] new space because of COVID.

So kicking the can down the road for six, 12 months getting to 2022 is prudent for some of those companies. As far as what we'd like to see, all things being equal, we would love to have a streamlined exposure over the next 10 years of equal expirations in every year to mitigate our risk, but really, we don't have that luxury. So we're just working with the tenants as they come. For new demand, for those that are actually truly engaged and want to strike a deal in the near-term, the large share of those groups are looking for long-term big TI deals. The other side of that coin would be tenants looking for really short-term high-end space in upgrading their image and their occupancy at maybe a discount whether it be a sublease space or a direct space with a very flexible term and flexible options. So hopefully that helps you out, but it really is deal specific.

Rob Stevenson -- Janney -- Analyst

Yeah, thank you. And then last one for me, George, how is the Board thinking about the sustainability of the common dividend? Are they just viewing this as a COVID driven event and that you could still grow into it fairly easily on lease up? Is some of that money better spent on redevelop and retenanting cost? Can you provide some insight into the discussions there?

George J. Carter -- Chief Executive Officer and Chairman of the Board

Yeah, Rob. Nice to talk with you. So -- I say this every time I'm asked and it's important to say is that the dividend is reviewed thoroughly by the Board every quarter and the decision is made about the dividend every quarter and that decision can be anything at any quarter and we do look at many, many, many factors. The value-add proposition and the leasing proposition and the TIs, leasing commissions, large capex that goes out to achieve this value-add proposition that we believe is inherent in our portfolio and which will stabilize the portfolio at higher economic occupancies and higher cash flows etc and more leveled out ongoing TIs and leasing commissions definitely has been delayed in terms of our plans and opportunities by COVID.

And so as we look as a Board to the dividend each quarter, we consider the original objective, which we had planned for and which we were on track for until COVID and then try to analyze what COVID is doing currently, what it will do next quarter or the quarter after and again, it's some give and take between economic occupancies, TIs and leasing commissions for slower leasing and then the faster leasing that we were experiencing pre-COVID. So it ebbs and flows. And we try to look at it from a longer-term perspective, our liquidity is fine and we do believe that we will achieve economic occupancy and stability that will not only cover longer-term future dividends, but allow us to raise them in the future, but between now and then it is quarter-to-quarter, all factors considered, including taxable income and dividend requirements under REIT rules against that taxable income. So everything's in the beaker and it goes quarter-to-quarter.

Rob Stevenson -- Janney -- Analyst

Okay, thanks guys. Appreciate it.

Operator

[Operator Instructions] The next question comes from Frank Lee of BMO Capital Markets. Please go ahead.

Frank Lee -- BMO Capital Markets -- Analyst

Hi, good morning, everyone. You previously talked about pulling forward several TI projects and that we should expect some elevated capex in the near-term. Can you provide an update on how these projects are going and should we continue to expect elevated level of capex?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Good morning, Frank. It's John Donahue. I can talk a little bit about where the market conditions are currently and how they're trending, give you a general idea of what we expect over the short-term. We are seeing a concentration of companies that want a longer-term commitment and so inherent in a longer-term commitment, that would give you higher costs, higher concessions. The trade-off is when you're doing leases with great credit, then you are enhancing the value of the portfolio and pushing out your rollover risk. So that is what we're seeing for a healthy number of our larger prospects. Now there are -- because of COVID and what we've seen over the last six to seven months, there are quite a few prospects especially on the smaller size that want ultimate flexibility and that is shorter-term and so those costs will be much lower.

There will be cheaper and faster paybacks. What should we expect over the near-term as far as a blended portfolio or weighted average is I would say we'll see more of the same over the next 12 to 24 months. One thing to note though is that we have seen a large percentage of our tenants defer their usage of their TI. They are in a period of replanning, trying to figure out their future uses of space and they are doing a lot of that work themselves and haven't requested TI reimbursements. So could there be a little bit of volatility or sporadic where one quarter is very light and then one quarter is larger? Absolutely, but I don't think we're going to see a significant difference over the next 12 to 24 months than what you've been seeing the last few quarters.

Frank Lee -- BMO Capital Markets -- Analyst

Okay, thanks. And then just wanted to clarify on the 240,000 square feet of net absorption. Last quarter, you mentioned an active 500,000 [Phonetic] pipeline and with the leases signed in third quarter I understand this comes down, but are there any prospects in addition to 240,000 square feet that you have in this active pipeline category?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Yes, correct. Thanks for clarifying that. We certainly do have other prospects above that number. We try each quarter on the earnings call to give you a sense of what we believe are high probability deals. Deals that were either in leases, in amendments, shortlisted, and our asset management team believes that we have a very, very good chance of finalizing in the near-term. So that's what the 240,000 square feet represents. In addition to that, we do have prospects in our markets, but because of COVID, those deals are in a category that we deem to be not quite as high a probability, maybe a moderate probability or we haven't been shortlisted to one or two buildings, maybe three or four buildings. So I can't give you an exact number of that right now, but that number is a little bit impacted by COVID.

Frank Lee -- BMO Capital Markets -- Analyst

Okay and then is any of the 240,000 square feet related to any redevelopment leasing?

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Short answer is yes. We do have prospects for our redevelopment and we believe that we have a good chance of getting another deal done for the redevelopment here over the next 30, 60 days. So hopefully we'll make an announcement and you'll be the first to know.

Frank Lee -- BMO Capital Markets -- Analyst

Okay, great. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to George Carter for any closing remarks.

George J. Carter -- Chief Executive Officer and Chairman of the Board

Thank you everyone for attending the earnings call. We look forward to the next one for the fourth quarter and hope you all stay safe. Have a happy holiday season and again, as John said, we will announce leasing and leasing activity that is meaningful as it occurs. Hopefully, we will give some of that during the fourth quarter. Thanks again.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Scott H. Carter -- Executive Vice President, General Counsel and Secretary

George J. Carter -- Chief Executive Officer and Chairman of the Board

John G. Demeritt -- Executive Vice President, Chief Financial Officer and Treasurer

John F. Donahue -- Executive Vice President of FSP Corp. and President of FSP Property Management LLC

Jeffrey B. Carter -- President and Chief Investment Officer

Dave Rodgers -- Baird -- Analyst

Rob Stevenson -- Janney -- Analyst

Frank Lee -- BMO Capital Markets -- Analyst

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