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Franklin Street Properties Corp (NYSEMKT:FSP)
Q1 2021 Earnings Call
May 5, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Franklin Street Properties Corp First Quarter 2021 Earnings Conference Call. [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 first quarter 2021 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, 2020, which is on file with the SEC. In addition, these forward-looking statements represent the Company's expectations only as of today, May 5, 2021. 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 John Demeritt. John?

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

Thank you, Scott, and good morning, everyone. I'm going to give a very brief overview of our first quarter results and afterward I'll pass the call to George for his comments. And 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 $18 million or $0.17 per share for the first quarter of 2021. Turning to our balance sheet at March 31, 21, we had a total of $947.5 million of unsecured debt outstanding, including $27.5 million drawn on our line of credit. At quarter end, between cash on hand and availability on our line, we had a total liquidity of about $577 million. As a reminder, all of our debt is unsecured and we have no debt maturities until November 30, '21 when $155 million of term loans will become due. Our debt is at fixed rates, other than the $27.5 million that sits on our line of credit, which is a floating rate.

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

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

Thank you, John. And again, welcome to Franklin Street Properties first quarter 2021 earnings call. As the vaccinations against COVID-19 continue to steadily rise in the U.S., so too, are we seeing a slow but steady increase in existing office tenants personnel returning to work at our properties and corporate decision makers more actively considering there are future locational office space needs. Trying to determine the ultimate strength, timing and longevity of the post-pandemic U.S. and global economic reopening is a significant challenge for companies trying to make intelligent new leasing decisions today. But real on the ground, very early activity surrounding potential new leasing prospects that FSPs portfolio properties has not been this robust since before the start of the COVID-19 pandemic.

As 2021 progresses, assuming continued successful vaccination efforts against the virus, FSP is optimistic that one of its two major objectives for 2021, that is leasing progress, will achieve positive results. Our other primary objective for 2021 is debt reduction. From a debt reduction perspective, we are actively working on the potential sale of select properties that we believe have their near-term value objectives, and where we believe such value may not be fully reflected in our share price.

We are reaffirming our previously announced 2021 disposition guidance to be in the range of $350 million to $450 million in aggregate gross proceeds. Disposition proceeds are intended to be used primarily for debt reduction. If successful in our property disposition efforts during 2021 and along with our previously achieved sale of our f Emperor Boulevard property in the fourth quarter of last year, FSP is projecting it will reduce its total indebtedness by approximately 35% to 50% by the end of the year. And while losing some of the current positive FFO spread that is generated between rental constance and debt constance from the property disposition debt pay down plan, we believe shareholders should maintain our NAV per share with less risk to their NAV from lower debt levels capitalizing the remaining property portfolio, while the company gains more overall flexibility in it's ongoing real estate investing activities.

We also believe that along with meaningful dividends that may be distributed during 2021, the remaining lower leverage property portfolio moving into a post-COVID 2022, has a significant value-add proposition associated with it, that if achieved, could meaningfully enhance shareholder NAV values further from 2021 levels.

At this time, due primarily to the uncertainty surrounding the timing and the amount of proceeds from property dispositions, we are continuing suspension of net income and FFO guidance. FSP remains committed to its Sunbelt and Mountain West office focus that emphasizes markets and properties with compelling long-term population and employment growth potential. We continue to look forward 2021with anticipation and optimism.

And now I will turn the call over to John Donahue, President of FSP Property Management Company. John?

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

Thank you, George. Good morning, everyone. At the end of the first quarter, the FSP portfolio including redevelopment was approximately 81% leased. The average leased occupancy of the portfolio for calendar 2020 was approximately 83.6%. Rent collections were greater than 99.5% for the first quarter of 2021.

The physical occupancy of the majority of office buildings continues to increase with suburban assets leading the way, particularly in the Sunbelt markets. The typical occupancy in FSPs suburban office buildings now exceeds 20%, with some buildings approaching 40%. Urban buildings in FSPs markets has not exceeded 20% occupancy on average yet. However, we expect that to change during the summer months as the new school year arrives in the fall. The number of announcements for large companies that are inviting employees back to the offices by July have been increasing during the past month. These are all positive signs and we expect this trend to continue.

We are extremely encouraged by meaningful growth in FSPs pipeline of prospective tenants. During the last two months, FSP has witnessed a significant increase in property tours, submitted RFPs and counter proposals. FSP is currently tracking approximately 800,000 square feet of new prospective tenants that have shortlisted FSP assets compared to approximately 300,000 square feet last quarter. FSP has been engaged with existing tenants and sub tenants for approximately 250,000 square feet of renewals and expansions.

Barring any surprises, the potential for aggregate net absorption over the next six months to 12 months is approximately 600,000 square feet. These figures are the highest we have witnessed since the first quarter of 2020. During the past six months, FSP has finalized renewals and expansions with tenants exceeding 870,000 square feet. As a result, we have reduced the near-term rollover exposure of expiring leases through 2023 to approximately 18% of the total portfolio. This equates to roughly 6% of annual lease expirations from 2021 through 2023. Coupled with improving demand in FSPs office markets, the foundation appears to be set for FSP to make meaningful progress regarding net absorption and higher leased occupancy. 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 that everyone remains safe and healthy. I wanted to discuss FSPs disposition goals for 2021 and our in-progress work to achieve these objectives and then shift gears to provide some insight as to what we are seeing on the ground at this early stage of our price discovery work in the marketplace.

First, though, FSP is reaffirming our guidance of between $350 million and $450 million of select dispositions for calendar year 2021. The objective of our disposition plan once again is primarily to pay down debt in order to gain greater financial flexibility and to position for stronger value and returns for our shareholders. The key determinant for any dispositions will be an assessment of whether a property has met its respective near-term value objectives, which we also believe has the potential to capture embedded value for our shareholders that may not be accurately reflected within our current share price. We also would like to reemphasize that FSP remains committed to our Sunbelt Mountain West strategic market focus, where we continue to believe long-term business and population growth has the potential to exceed the national average.

Looking at potential dispositions for 2021, at this time, FSP is working on the following properties; River Crossing in Indianapolis, Timberlake Corporate Center in Greater St. Louis, Meadow Pointe in Northern Virginia, Innsbruck Corporate Center in Greater Richmond, Laven Tech Center in Northern Virginia, One & Two Ravinia Drive, and One Overton Park, all in the Greater Atlanta. For both competitive purposes and reasons of confidentiality, we will not be discussing specific property pricing or targets, cap rates or related information at this time. However, we do anticipate that if we are successful with our efforts under way, that FSP would satisfy our disposition guidance for 2021.

Lastly, we wanted to share what we are seeing at least in an aggregate sense within the investment marketplace at this early stage of our price discovery process work, especially since the volume of office sales nationally has declined over recent quarters due to the pandemic, as FSP and our associated professionals work on price discovery, we have experienced solid initial interest. Feedback is generally fallen within three basic views with respect to investment in office properties. One view is from a segment of investors who have a generally positive view of office at this time. And this group of investors are by and large bullish on the reopening of the economy and the potential power that the vaccine rollout across the nation and globe can have on office assets. Generally, these investors, while selective, are looking at both multi-tenant and single-tenant profile assets in high-quality buildings and some also appear to be selectively underwriting value add upside potential.

A second view comes from investors who are also interested in an office investment, but was a bit less conviction and our accordingly more focused on fully stabilized properties with compelling weighted average lease terms and high quality. We are currently seeing interest from both of these two profiled groups via confidentiality agreements as well as from property tours, and largely coming from an array of mostly private investors. And we recognize and appreciate that interest is only their interest, it has not defined pricing yet, and certainly not actual closing numbers, but it is at least a gauge of potential activity at this early stage of our price discovery process work and so should be viewed within that context.

A third segment of investors also exists, who're yet to be convinced of economic stabilization from the pandemic and so are reluctant to commit to investment at this time. These three views are all being seen in our disposition work and show us that there is indeed a market to be made for price discovery and over the coming months, we will continue to keep the market posted as we learn more about true pricing and actual demand.

And with that, we thank you for listening to our earnings conference call today. And at this time, we'd like to open up the call for any questions. Andrea?

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Frank Lee of BMO. Please go ahead.

Frank Lee -- BMO Capital Markets -- Analyst

Hi, good morning, everyone. I appreciate the commentary on the asset sales, but can you talk a bit more about the composition of the buyer pool that're looking at your assets. Are these more local buyers or buyers looking to enter a specific market or even any foreign capital? And have you seen any recent pickup in competition there?

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

Good morning, Frank. Important question, I appreciate it. We have seen a real mix of investors -- prospective investors at the assets that are in price discovery. They range from both local and national investors, primarily private. Haven't seen a lot of international investors yet, but I'll keep the market posted on that as I update next quarter. The interest has been, though, primarily from private investors and it's been a diverse mix of local and national.

Frank Lee -- BMO Capital Markets -- Analyst

Okay, great. And then regarding the lease amend with CITGO this quarter, are you able to disclose the impact to net effective rents? And are there any other tenants that you're currently working with on similar lease amendments with?

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

Good morning, Frank. It's John Donahue. I'll hand it over to Toby Daley shortly to share what he can with CITGO, although we signed a nondisclosure agreement, so that's somewhat limited. We are currently working with about 250,000 square feet of existing tenants that includes their potential expansion space. Very few of those tenants are in our top 20 list. In fact, the majority of those tenants range from 5,000 square feet to 20,000square feet. So I would say the answer to your second question is, no, not really. But we're very encouraged by tenants getting out six months to 12 months early to talk about their renewals, whether not they can space plan early to see what their space utilization is going to be, density does not appear to be getting -- could be increasing, density appears to be going the other way. So I think that's why we're hearing about so many potential expansions. Toby if you're with us, if you could share what you can on CITGO.

Toby Daley -- Senior Vice President, Director

Hi Frank, Toby Daley here. There isn't a whole lot I can share because of the fact that we're under strict confidentiality on the terms and conditions of this lease extension with CITGO. I can tell you that the lease was extended out from February of '22 through March of 2033. So that's an 11, excuse me, a 10-year 13-month extension. And CITGO shopped the market for about a year and we were pleased we were able to keep them on as a tenant, and that's-- unfortunately frank, that's really all I can share. I can point do you on Page 16 of the supplemental where you can see the GAAP rent at Eldridge and you can compare that to the supplemental from Q4 2020 to get a handle on how rents are impacted. But unfortunately I can't discuss more than that with you.

Frank Lee -- BMO Capital Markets -- Analyst

Okay, great. Thank you.

Operator

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

Robert Stevenson -- Janney -- Analyst

Good morning, guys. Just to follow up on that, I mean the 250,000 square feet for CITGO, that's in the 377 [Phonetic] of leasing activity for the quarter.

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

That is correct, Rob.

Robert Stevenson -- Janney -- Analyst

Okay. And I guess put it differently, not to talk to the CITGO lease, but to the other, call it 125,000 of space. Was there any deals in that extra 125,000 square feet of space that had outsized tenant improvements, free rent or other cost to you guys?

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

Rob the short answer is no. I want to point you to Page 21 of the supplemental where you can look at how the concessions have been quite, quite different in Q1 '21 versus the prior two years. And in fact, if you go back, quite different than the last three years. The TIs and commissions on all deals including CITGO were about $3.11 per square foot per year in Q1, and that is dramatically down. If you look at calendar 2019 and 2018, those averaged about $5.50 per square foot per year. So those numbers are down 40% or so. And then free rent, if you layer that in within those other concessions were still down that -- for first quarter 21, will that be about $5.37 per square foot per year. And if you look at last year, it's about $6.92. So total concessions are down despite the fact that the average length of terms is up. So I think that dovetails with the fact that we had mostly renewals in the quarter. We'll watch that over the coming months as we hopefully will have a much more on the new leasing front.

Robert Stevenson -- Janney -- Analyst

Okay, great. That's exactly what I was looking for. Thank you. And then my other question is on the potential disposition properties that you guys listed and talked about earlier in the call. Is your intention to sell all of these assets if pricing meet your expectation? Is this a pull that you're basically putting out there and then you'll pick which ones price the best out of this and pull back the others. How are you guys sort of thinking about that?

Jeffrey B. Carter -- President and Chief Investment Officer

All right. Rob, this is Jeff. Thanks for the question. Important question. All these properties that are in the perspective disposition list that we put out if we hit our target pricing and value objectives would likely be sold.

Robert Stevenson -- Janney -- Analyst

Okay. And then I guess concurrently, I mean, what do you -- I mean, obviously, you've talked about in detail in the past that the proceeds will be used for debt reduction. But you concurrently also exploring selective acquisition opportunities should you guys wind up selling all of these properties and having the full level of proceeds available to you, are you evaluating that at this point in time? Or are you guys basically going to wait on that?

Jeffrey B. Carter -- President and Chief Investment Officer

Rob, this is Jeff again. We -- our primary objective as we've indicated is debt reduction, and that's where you'll see our greatest efforts and focus on the primary use of these proceeds. Ultimately, we're continuing to look at investments in our Sunbelt and Mountain West markets, and those investments could also be in existing properties, and we're continuing to watch the market. But our primary objective at this stage is on debt reduction.

Robert Stevenson -- Janney -- Analyst

Okay. Thanks guys, appreciate the time.

Operator

[Operator Instructions] And our next question will come from Dave Rodgers of Baird. Please go ahead.

Dave Rodgers -- Baird -- Analyst

Hey, good morning everybody. George, maybe from a high level perspective, wanted to start with you. Obviously, the reason to sell the assets is to pay off the debt. But from a strategic perspective, I'm curious about selling as we talked last quarter, maybe a lack of a commitment in the future to Minneapolis, which is a core market, selling down quite a bit in Atlanta. So how do you balance selling what you think is achieve fair value with also selling your strategic assets that you guys have laid out is kind of a five-market strategy. How do you balance that and how do you kind of backfill that over time?

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

Dave, it's not -- there is not a single answer or sort of laying you can run down to get your arms around that. It is property by property and market by market. And it really revolves far more around what we believe our ability is to effect value near-term on any property against one, that property in that market is telling us is a level of interest and so some properties, I mean, now [Indecipherable] property that Timberlake is, so Tim is a major tenant. Now in that market, for example, because that's a longer-term lease, so that leased fully occupied property [Technical Issues] in that market, that property is highly, highly, highly sought. And we have been told by outside professional who we use to really evaluate the whole portfolio for us, not just properties that we are listing, that market -- that particular market, that particular property would be very interesting to potential acquirers.

Now, for example, if you take Innsbruck, which got -- which has some vacancy in Richmond, you would be -- we were told and we are seeing evidence of that. There is interest in the Richmond market and particularly the submarket that were in there from value-add players. And so you take a look at each property and see what value you can get from that property if sold today, whatever market it's in, whatever property it's in versus what FSP believes it can do with the property over the near-term. And properties that we have shown in the earnings release that we're trying to initiate price discovery on our properties that basically being those kinds of criteria rather than our five strategic markets as you would call them and our non-strategic. Those are really not -- that's not really how we're looking at.

Dave Rodgers -- Baird -- Analyst

Thank you, George, for that. Jeff, I wanted to talk about the asset sales a little bit further, and I realize you don't want to talk about too many specific assets noticed in the 10-Q, though you didn't have any assets as held for sale in the bucket, but you had a March 5th 8-K out there about the asset sales in Atlanta for the Overton and the two Ravinia assets. Those were set to close I think this week. Can you give us a little color on that? Did that fall through? is that still happening? It just didn't kind of line-up. And I guess since you've already put out some public information, can you update us on that?

Jeffrey B. Carter -- President and Chief Investment Officer

Good morning, Dave. Yes, absolutely. For purposes of confidentiality there are -- that are specific to the Atlanta transaction that we are under confidentiality regarding that deal. So I can't discuss too much about it. But we did file an updated 8-K on April 20th. If you haven't seen it, I would encourage you to look at it still accurate today. And in that updated-K from April 20th, among other things, were contemplated a good closing on or about May 17th for that transaction, which is also subject to our mutual day 30 -- 30-day extension right for either party. But that filing is still up to date from April 20th and I'd encourage you to take a look at it if you haven't seen.

Dave Rodgers -- Baird -- Analyst

Just looked at it now. So thank you for the update. I think I missed that one, I had seen the earlier ones. So thanks for the update. So I, I guess about halfway there. Maybe wanted to shift on the leasing front -- you added the 500,000 square feet or so of prospective tenants, John Donahue. Can you give us a little bit of a better sense of of where that's coming from? And maybe what what vacancies that would look to fill? I think about Midtown Atlanta, you think about Blue Lagoon and Minneapolis and some of the work that you've done recently and some of the larger vacancies. Can you provide us an update on that?

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

Hi, Dave. Good morning. So yeah, we're seeing activity in our largest markets. So the larger percentage of prospects by square foot would certainly be consistent with our markets as you go down the list from largest to smallest. The prospects that have narrowed their search to several buildings and shortlisted our assets are in the largest market I said with the highest rent. So Denver has been the one market that has surged recently with the most significant improvement demand between the year-end and today, representing maybe 40% to 50% of our high probability prospects. That is followed by Atlanta and Dallas, and those have been active but increasingly more active as time goes by, and then followed by Virginia, Houston in Miami. So most of the prospects that we've been tracking for quite a while have fully negotiated leases and we're just waiting on them to execute those. So we're very optimistic. Hopefully, we'll get some of these tenants to execute soon.

Dave Rodgers -- Baird -- Analyst

All right. Thank you, everyone.

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 taking the time to listen to our earnings call and participate in the questions, we appreciate it, and we look forward to talking to you next quarter. Thanks, again.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

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

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

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

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

Jeffrey B. Carter -- President and Chief Investment Officer

Toby Daley -- Senior Vice President, Director

Frank Lee -- BMO Capital Markets -- Analyst

Robert Stevenson -- Janney -- Analyst

Dave Rodgers -- Baird -- Analyst

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