Good morning. Welcome to Franklin Street Properties Corporation Second Quarter 2020 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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.

Good morning. And welcome to the Franklin Street Properties second 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. 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 June 30, 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, August 5, 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 will turn the call over to George Carter. George?

Thank you, Scott. Good morning, everyone. And welcome to Franklin Street Properties second quarter 2020 earnings call. My written comments about the company’s second quarter of 2020 are in last night’s earnings press release. I won’t repeat them now, but I do encourage you to read them. I would like to start this earnings call by making a few brief comments about FSP’s current operating environment in the COVID-19 pandemic and then turn the call over to other Franklin Street team members. First, our home office located in the Greater Boston, Massachusetts metro area is now fully open and available to all of our employees as a work environment. However, working from home policies are still in place for any employee who desires to work remotely. Recently, we have been averaging about 50% of our workforce physically present in the home office. All of us have come to appreciate the exceptional efforts and dedication by all FSP employees over the last several 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. Great job. All of these efforts are for our customers, our 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. We can’t thank them enough. Now, I would like to turn the call over to John Demeritt, our Chief Financial Officer. John?

Thank you, George, and good morning, everyone. I am going to give a brief overview of our second quarter results, and afterward, I will 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 $20.2 million or $0.19 per share for the second quarter. During the second quarter, we worked with tenants that were impacted by the pandemic. As part of that, we determined whether a lease is collectible or not. If we determine it’s no longer collectible, we write off receivables and do not record current rents unless they are paid in cash. So part of a loss is the receivable write-off itself, which is a one-time charge and part of the loss is the loss of current rents that we don’t report. During Q2, we had write-offs and lost rent in the aggregate of $600,000. Approximately $400,000 of that were receivable write-offs so there is the onetime charge. The remaining $200,000 is the ramp that we would have charged these tenants for the quarter and will as we look ahead. Going forward, that amount of loss rent would be reduced by any cash rents we received from the tenants we wrote-off. We also reached agreements with a number of tenants on rent deferrals, using lease amendments, modifications and other tenant agreements. The total of rents deferred by us are about $1.4 million at this point, which is below 0.6% of our 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 will provide updates periodically like we have here. Turning to our balance sheet. At June 30th, we had $1 billion of unsecured debt outstanding and we have $30 million drawn on our line of credit, which is the same amount we had drawn at the end of March. Our total debt of $1 billion at the end of June was also the same amount of debt that we had at the end of March. So even with all the activity we had in Q2, our 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 of our debt is unsecured, and we have no debt maturities until November 30, 2021, about 92% of our debt is at fixed rates, with our debt stack more turned 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 will turn the call over to John. John?

Thank you, John. Good morning, everyone. At the end of the second quarter, the FSP operating portfolio, excluding redevelopment properties was 84.5% leased, compared to 87.6% leased at the end of calendar 2019. The decrease of approximately 3% was primarily due to the anticipated tenant departures in Virginia and Texas that totaled approximately 200,000 square feet. After relatively strong leasing results over the past eight consecutive quarters, the second quarter of 2020 was full of uncertainty as the pandemic essentially shutdown the economy and appeared to close the window of opportunity that FSP had forecasted to occur in the first half of calendar 2020. Although, many prospective tenants hit the pause button prior to June, I am pleased to report that we have over 500,000 square feet of active tenant prospects that represent potential net absorption as the window of opportunity now appears to be open again. Approximately 200,000 square feet of the active prospects have selected FSP buildings and are either currently in leases or extremely close to finalizing letters of intent. We look forward with cautious optimism that the second half of calendar 2020 will bring favorable leasing momentum and results. The amount of scheduled lease commencements for FSP’s portfolio in the second half of 2020 are expected to exceed the number of lease expirations and departures. There are approximately 324,000 square feet of scheduled commencements and approximately 176,000 square feet of maturities. Therefore, barring any surprises, the economic occupancy for the portfolio is expected to rise over the final six months of the year. If the economy trends in a positive direction and if we are able to timely finalize leases for a high percentage of the active prospects then the percentage of leased occupancy for our portfolio should also rise by a meaningful amount prior to year end. Rent collections during the second quarter were approximately 98% and rent collections for July are approximately 97% thus far. FSP’s asset management and property management teams have done an outstanding job of proactively engaging the tenants seeking many different levels of relief. Although the pace of requests have slowed significantly since early in the second quarter, we don’t know the full impact of the pandemic on annualized rents or near-term cash flow. Thank you, and with that, I will turn it over to Jeff Carter.

Thank you, John. Good morning. We here at Franklin Street Properties hope everyone remains healthy and safe during these turbulent times. FSP remains focused on owning high quality office properties in amenity rich locations within the U.S. Sunbelt, Mountain West, as well as several opportunistic markets. Despite all of the current difficulties stemming from the pandemic, long-term job growth, population growth, cost of living data and quality of life information for the Sunbelt and Mountain West regions continue to demonstrate positive potential for future upside performance where our largest markets reside. By focusing on delivering excellent service at all of our locations, we continue to believe that our portfolio is well positioned to generate the conditions for future value creation. Given the COVID-19 pandemic, I wish to briefly discuss what we are seeing around the country within the investment marketplace. Not unexpectedly, due to the uncertainties stemming from the pandemic, the second quarter saw a steep decline in office sales volume, and although, there is some chatter that more properties will be coming to market as the year progresses, consensus is that aggregate volume will remain well below normalized levels. Pre-COVID-19, value-add properties were a primary target of investors due to their potential upside and a much wider level of risk tolerance. Conversely, what we are seeing today is far more targeting of well-leased, fewer moving pieces, high quality properties due to a greater risk off focus and desire for safe yield. Dry investment powder appears to be plentiful, but two factors seem to have mitigated its deployment into assets. The first relates to securing financing with more challenging underwriting assumptions being utilized. And the second relates to a disconnect between owners’ pricing expectations and buyers’ desire to achieve more distressed price levels. Specifically, on the disposition and asset recycling front, and although, difficult to gauge with any precision given the greatly reduced national investment sales market, FSP will monitor our portfolio for potential opportunistic dispositions. Our criteria for potential dispositions is focused, first and foremost, on achieving value maximization at the asset level, as well as consideration for the redeployment of any such sale proceeds, which would likely initially include debt pay down and looking out further potential new property investments. Broadly speaking, though, we currently view our directly owned portfolio as possessing upside potential that we are striving to capture and we will keep the market up to date as appropriate should circumstances warrant. Specifically on the acquisition front, FSP continues to track all suitable investment opportunities within our markets and we will continue our efforts to identify high quality properties that possess the ability to add value over the short- to immediate-term. And with that, I 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. Operator?

[Operator Instructions] Our first question is from Rob Stevenson from Janney. Go ahead.

Good morning, guys. Can you characterize the discussions you have been having with your tenants with lease expirations over the next 18 months? What percentage are you looking to do short-term renewals given the uncertainty and how receptive are you guys to those type of discussions and whether or not it’s premium rents to do that, et cetera?

Hi, Rob. It’s John Donahue. The short answer to your question is, yes. We are receptive to a wide range of length of terms that our tenants are discussing. I would say that, most of the tenants that are expiring within the next 12 months are engaged in discussions of what they want to do and then beyond 12 months, it drops off pretty precipitously, although, there are several large tenants that have begun discussions. And as you would expect, they are requesting multiple proposals and those range from short-term two-year or three-year proposals, mid-length term of five years and 10 years or longer. So they are looking at a wide range of options. For tenants that are expiring well inside of 12 months and most of those tenants are probably under 50,000 square feet and maybe heaviest weighting below 20,000 square feet, those tenants are being cautious and conservative in re-planning whether they are going to need more space because of new office requirements, social distancing, whatever or if they are going to contract due to work-from-home. So we don’t have a good sense yet of how all of that trends out over the long-term. But we are certainly entertaining one year kick the can down the road extensions for tenants that want it and we are also accommodating those tenants that want expansion options and maybe looking a little long term. I hope that helps you.

Yeah. That’s very helpful. And then in terms of ongoing discussions that you are having with new tenants, I mean, how many of these would you say, are -- have basically taken any type of COVID and working from home sort of factors into play in terms of how many needing much less space but also needing much greater spacing and how the common areas are configured, I mean, are basically these -- the new tenants still operating as they would have in January or February or has the new sort of reality set in, in terms of their demands and what they need from a space standpoint?

There’s a lot there, Rob. So I will start with the smaller tenant universe in many of our suburban markets. They are looking at occupancy, occupancy is probably within the next six months to eight months and they are looking at buildings currently with only 10% to 20% physical occupancies, because many people are not back to work yet. And so they are getting a good sense of what landlords are doing with reduced occupancies and they are planning probably more for the short-term than long-term in regards to what the office environment is going to be like. I will say, though, that many of those tenants are trying to lock in expansions and asking landlords to keep additional space off the market, so that they can grow over the next year or two. And for the larger tenants that are looking well into 2021, back half of 2021, they are re-planning and looking at more space in our portfolio. I can’t speak in terms of trends of the entire market, but for our portfolio we are hearing more cases of them wanting options to grow as they figure out what their space needs are going to be.

Okay. How meaningful for you guys has been the hit to parking revenues?

I don’t have that number handy, but I do know that we did have a hit on three properties in particular in the second quarter. John, do you have that number handy?

Yeah. I think it’s around $300,000 a quarter that’s sort of transient parking, a lot of the parking we have is contractual, so it’s part of the rent. But the transient number, as I recall, is about $300,000 in the quarter.

Okay. And then last one for me, with the leases you have already signed, how significant should we be thinking about tenant improvement, leasing commissions, CapEx, that you will still need to fund and will hit the AFFO in the back half of this year?

That is really hard to say, Rob. The lion share of capital expenditures that we are incurring currently are from leasing that we did last year or even before that. And then we also have a certain percentage of CapEx for our improvements in common areas, as we had in our release, we had the ability because of lower tenant populations to move forward on some projects that might have been otherwise deferred. I would say that in terms of the cost of new leasing, you are going to continue to see an average cost in between $5 to $6 per square foot per year, as you have been seeing in the last two years and I believe that most of that the lion share of that will be a lag effect. That will be more than six months out. That will probably be in the majority in 2021. And so to summarize, I think, what you will see in the back half of calendar 2020 are going to be TIs and other capital projects that had already started over the last year.

Okay. Because if I look your sort of six-month number between on the -- in the supplement between tenant improvement, leasing commissions and noninvestment CapEx is, call it, $40 million for the six months, so just trying to get a handle whether or not the $40 million is likely to be higher, lower or about the same as we think about the next six months.

Well, we hope it’s a lot higher because that means we have done a lot of leasing.

Okay.

But the number that is the biggest variable for the next six months will be commissions and commissions for large deals in particular. But I think the trend that you have seen for the last few quarters will be roughly the general rule unless we can get it at nice surge in leasing here over the next three months or so.

Okay. Appreciated it guys. Thanks. Be safe.

Our next question is from Frank Lee from BMO. Go ahead.

Hi. Good morning. I have a follow-up question on your $0.5 million leasing pipeline. How did the pipeline change versus the $300,000 you mentioned on the last call, I wasn’t sure if a new category was added this quarter in terms of what you guys categorize as early discussion stage or are you actually seeing some new incremental demand stemming from the pandemic?

Hi, Frank. It’s John Donahue. Yeah. The numbers are fluctuating over the last six months or so. I believe at year end we had announced that we had approximately 400,000 square feet of active prospects and that number decreased a bit at the end of the first quarter. We try to be careful to distinguish between what are tenants that are in leases, meaning that they not have only selected an FSP building, but were actually in the lease process of getting that lease finalized. And also careful to distinguish among those that might be just in the earlier process and have shortlisted our properties. So the 500,000 square feet represents those tenants that are all of those. The tenants that are in leases, near final LOIs and also prospects that have shortlisted us, typically down to a shortlist of three buildings or two buildings and we believe that they are very warm or hot prospects. In my remarks, you probably heard me say that about 200,000 square feet of the 500,000 square feet have selected FSP buildings and are either in leases now or extremely close to a final LOI.

Okay. Thanks. And then can you remind us of some of the larger known move-outs that will occur in the remainder of 2020 and into 2021? Thanks.

Sure. Frank, so I am happy to say that we are not expecting any more large outs in calendar 2020, and for the first quarter of 2021, we are not expecting any large move-outs as well. We do on our top 20 list of tenants we are expecting the IRS to finally downsize at some point in the first quarter of 2021. But they have been slow to -- with their build out and I wouldn’t be surprised if that gets postponed again. And then as of now, the largest move-out over the next 12 months is expected to be Jones Day in Atlanta, which is scheduled for May of 2021.

Okay. Great. Thank you.

The next -- [Operator Instructions] The next question is from Nick Thillman from Baird. Go ahead.

Hey, guys. Hey, guys. Just a quick question on the vacant building from first quarter in Chantilly, are you seeing any demand from government contractors or interested users to buy the building as opposed to the company putting some capital into it?

Hi, Nick. John Donahue here. We have had the lion’s share of interest in leasing and inquiries to potentially purchase the building are sporadic and opportunistic, most often those kind of offers are not very appealing. So I won’t get into that here on this call, but suffice it to say that we do have a number of potential prospects for the building that we call Stonecroft to backfill Northrop Grumman and we are working with those prospects. And they are related to government work, not necessarily government contract, but companies that you would be familiar with that are working with the government.

Okay. Great. And then, I guess, this has already kind of been touched on, but I just wanted to clarify. So for the rent expiration in 2021, what’s the status there, are you expecting a renewal, I didn’t see it on the -- when you were talking about known move-outs. So I just want to check that one?

I believe you are asking if there’s a rent roll-down expected in 2021 or an increase. Is that what you are asking?

On -- so there’s -- on your expiration schedule, it says that, there’s a Randstad, there’s a 98,000 square foot expiration in 2021. I am just asking are you expecting a renewal there, and if so, like, could you talk about that a little bit?

I believe you might be looking at the GSA, is that the U.S. Government. Is that what you are looking at?

Randstad on the top tenant list, Randstad General Partners.

Oh! Okay. Thank you. Yeah. That’s 12 months out and so we are in discussions with Randstad to renew and like many tenants of that size, they are trying to determine what their future space needs are if they are going to need less space or more space. So although discussions are continuing, they are engaged, we don’t know exactly what their space needs are going to be.

Okay. And then I have -- my last question is on the balance sheet, you have $200 million maturing late ‘21. What is your ability to refinance that early and like at what rate could you finance that at?

Yes. It’s John Demeritt. I will answer that for you. We have a terrific bank group with 12 banks that we work with and two of the sets of the bank group are represented in that maturity and we have good relationship with them. They have expressed a lot of interest in wanting to renew with us and work with us, so I don’t anticipate having an issue with that. As far as rates right now, currently, spreads have widened as a result of the pandemic and we have heard that from a number of the banks we deal with. So the spreads would certainly be much higher right now. But we are hoping -- and they are hoping that things will settle down by the time we actually start having discussions with them about replacing that debt. So we will be talking with them at the end of this year, beginning of next year and we will see what the interest rate markets and spreads look like at that time, so that’s it. That’s the way I can answer that for you.

Great. That’s all from me. Thanks.

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

Thank you everyone for attending the call and I hope you all stay safe. We look forward to talking to you next quarter. And again, I think, as John Donahue said, I think, the window is starting to open again. We all are watching these flare ups around the country and where this whole pandemic goes over the next quarter or two. As well as vaccine promises that do look promising on a number of fronts, but we are active again on leasing and we are very optimistic about the next six months and look very much forward to talking to you next quarter. Thank you again. Stay safe.

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