Good day and welcome to the Franklin Street Properties Corp. Third Quarter 2016 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Carter. Please go ahead.

Good morning and welcome to the Franklin Street Properties third quarter 2016 earnings 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, Senior Vice President and Regional Director of Atlanta and Houston; and Will Friend, Senior Vice President and Regional Director of Denver and Minneapolis. Before I turn the call over to John Demeritt, I must read the following statement. 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, 2015, which is on file with the SEC. In addition, these forward-looking statements represent the company’s expectations only as of today, October 26, 2016. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statement 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. A reconciliation of FFO to GAAP net income is 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 John Demeritt. John?

Thank you, Scott and good morning everyone. On today’s call, I will begin with a brief overview of our third 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 will be happy to take your questions. As a reminder, our comments today will refer to our earnings release and our supplemental package and 10-Q, all of which were filed yesterday and as Scott mentioned, can be found on our website. We reported funds from operations or FFO of $26.7 million or $0.26 per share for the third quarter of ‘16 and $79.4 million or $0.78 per share for the 9 months ended September 30, ‘16. Compared to 2015, our 2016 FFO is about $300,000 lower for the third quarter and about $400,000 lower for the 9-month period. The FFO decrease was primarily from the impact of asset sales and loan repayments we have received during that time and was partially offset by three acquisitions we have made, one on April 8, 2015, June 6, ‘16 and lastly, this past August, on the 10th – August 10th. FFO on a per share basis decreased a $0.01 quarter-over-quarter for the third quarter and $0.02 year-to-date compared to – mostly to a higher share count that we have in 2016 compared to ‘15. Our FFO per share of $0.26 for the third quarter was in line with our expectations. Turning to our balance sheet and current financial position at September 30, ‘16, we had about $898 million of unsecured debt outstanding and our total market cap was $2.2 billion.…

Thank you, John and welcome to Franklin Street Properties’ third quarter 2016 earnings call. As John just said, for the third quarter of ‘16, FSP’s funds from operations or FFO totaled approximately $26.7 million or $0.26 per share. These results are within our guidance range for the quarter. Our dividend was $0.19 per share for the quarter and the FSP Board of Directors continues to feel very comfortable with that level of dividend payout. At this time, our FFO guidance for full year and fourth quarter of 2016 is being adjusted to an estimated $1.03 and $0.24 per diluted share respectively. These adjustments to our FFO guidance primarily reflect the increased shares outstanding from our recent equity offering. More importantly, we continue to believe that 2016 will mark the bottom of the reductive effects that our ongoing property portfolio transition is having on FFO. We are reiterating our forecast for resumed FFO growth in 2017 and beyond propelled primarily from our projected realization of increased rental income from select new property investments, select new development or redevelopment efforts such as 801 Marquette and additional leasing in our more recently acquired urban office properties, many of which contain meaningful value-add square footage. Prospective new tenant leasing activity at these properties remains strong. We anticipate providing the market initial full year 2017 FFO guidance before year end. I will now turn the call over to John Donahue, President of our Property Management Company. John?

Thank you, George. Good morning, everyone. The third quarter can be summarized as a continuation of the second quarter. There was positive momentum for new deals and we are encouraged by the solid activity, including tours and letters of intent. FSP remains bullish at Minneapolis and Denver, which happened to be the same markets with our most significant upside due to the current vacancy. The upcoming transformation underway at 801 Marquette in Minneapolis has been well-received and is gaining momentum and serious interest. Atlanta continues to be very consistent with steady activity and that market has the largest amount of rollover for FSP in the next 12 to 15 months. Dallas incurred several expirations in Q3 and we are excited for that market to contribute to FFO growth in the near future. Houston has witnessed a slight pickup in touring action, which maybe assigned at the energy sector is looking forward to 2017. With that, I will now turn over to Jeff Carter.

Thank you, John. Good morning, everyone. I will discuss and update our current investment picture and strategy. First through the strategic investment focus at FSP remains on building sustainable FFO growth and value creation within our portfolio and in particular, within our five core markets and we continue to believe that there is three key drivers to achieve those results. The first is through select new investments. The second is through leasing. And the third driver is through select new development and redevelopment efforts such as those occurring at 801 Marquette and downtown Minneapolis. On the disposition and asset recycling front, during the third quarter, FSP continued our efforts to selectively dispose of non-core assets, if appropriate, pricing results. We are looking at currently and working on at various stages, several potential dispositions, none of which are firm or hard on their deposit at this time, but they could result in up to $100 million plus in gross proceeds over the coming quarters. Again, it is uncertain and too early to say whether any or all of these prospective transactions will occur, but we will keep the market notified on any specifics if warranted. Also, FSP is currently identifying properties for potential disposition in our further properties for potential disposition in our portfolio and we will keep the market posted on that when warranted. To-date in 2016, FSP has disposed of approximately $58.19 million of assets. Lakeside Crossing 1 in St. Louis in the second quarter for $20.19 million and the repayment of our first mortgage loan on 385 Interlocken during the first quarter for about $38 million. Since 2014, we have sold properties where we had mortgages that we held repaid to us of approximately $180 million through our repositioning program. This program has allowed us to recycle out…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Guinee of Stifel. Please go ahead.

Great. Thank you. I realized that raising the equity was probably a very smart move at the time you did it and we have got this inevitable short-term erosion of FFO, the scary part is, is that you can buy a limited amount of assets, I think given that your debt to total market cap is 40% and your debt to EBITDA is about 6.9x, so you really – it appears to me, don’t have a lot of FFO growth simply through acquisition, can you talk a little bit about assuming no equity is raised in 2017, what the maximum acquisitions exceeding dispositions would be. And then talk a little bit more about this seems to me a lot of lease roles that are going to happen in ‘17?

John, this is George. I think on the acquisition front, our view is acquisitions will match off against disposition proceeds so that the transition from suburban to urban will continue. The timing differential there between disposition proceeds and acquisitions will vary. But I think you are exactly right, that sort of net additional acquisitions over and above disposition proceeds are not likely. The equity offering that raised that capital was earmarked for a couple of things, but the two major ones were the Pershing Park purchase in Midtown, which we completed. But also capital to in fact, complete the redevelopment of Marquette and hopefully the successful leasing of Marquette, which will be – if we lease Marquette at the rates and goals that we have, will be actually very accretive to the equity compared to what again what was that before when we did the redevelopment. So there is some – there is as you said some near-term dilution until when and if Marquette gets redeveloped and leased. But again I think the matching of acquisition and disposition proceeds is where we go in ‘17. And where we raise – where we really raised the bar and where we really raised, get the FFO rising again and we absolutely believe it, will be in leasing space that we have in the portfolio. And to that regard, let me just to the second part of your question turn it over to John Donahue.

Thank you, George. John, as you probably have noticed the bulk of the leasing activity over this year and last year have been predominately renewals. And we have been chipping away with early renewals at the exposure in 2017, so there really are not too many significant hits in 2017, in fact for the next 15 months. Murphy Oil being the one exception, which is a known departure. And we are already seeing activity there. So the combination of the remaining explorations in 2016, which include a bunch of month-to-month leases that we don’t expect to go away, along with the expirations in 2017, is a little bit less than 9% of the portfolio. So we feel that, that’s very manageable. And as you probably have read and seen the bullet points, we are gaining momentum and encouraged by the activity. Hopefully, that answers your question.

Okay. Do you think you will end ‘17 at a higher or lower occupancy than you have right now, because obviously...?

Yes. We have been absolutely expecting it to go up quarter-by-quarter. We will have the hit in the second quarter for Murphy. But we are expecting the 801 Marquette property to come online near the end of the first quarter. We got great activity, steady activity in Atlanta, which has the bulk of the role in 2017. And then on current vacancies in Minneapolis and Denver, we have had encouraging, increasing momentum. In fact for the quarter, we actually had slight net absorption at Denver, which is a great sign. We have improved those buildings with great amenities and we are looking forward to seeing the results.

So 801 receives the COO, certificate of occupancy in late 1Q, but my understanding is there is no leasing, so essentially that’s a 2018 income event?

The majority of it, yes, I would say that that’s – is fully ramped up and contributing fully. But we are marketing and we would hope that we would get ahead on the leasing and have some contribution in ‘17 as well. And the rest of the TCF vacancy from that space in 121 South Eighth as well. So Will, would like to add anything there on the color of Minneapolis, we have had great activity. So, we would think that 2017 would have meaningful contribution in Minneapolis.

Great, thank you.

Our next question comes from Dave Rodgers of Baird. Please go ahead.

Yes, good morning. I may want to start with George and Jeff, just want to talk about the asset recycling a little bit more. You just looked through the supplement I think you guys have 36 assets in total, 15 by your own definition or kind of in that non-core bucket. You sold one asset in 2016 so far. You are in San Francisco, Seattle, markets that are pretty healthy or varieties of those markets. What should we expect from asset recycling? What’s the path and the plan here because as you talk about being kind of a neutral capital deployer that seems to be the best source of your capital, but we really haven’t seen that accelerate. So, maybe you could dive into that a little bit?

Dave, this is Jeff. On the asset recycling front, we are – we continue every quarter to look at our portfolio to determine which assets we think we have maximized value on are ready to test and see what the results are in the market. Right now, we are looking at and working on several potential dispositions that could total up to about $100 million. We are also identifying a couple other assets that would be in excess of that for potential marketing in 2017. And so for us, asset recycling is going to be a prominent part of our investment plan and the determination will – of which ones gets sold and when will be a function and part of do we get pricing that matches whereas close to our expectations of value or is it more value that we think we can add to the properties. But I do think that you will see 2017 and even through the end of this year continue to see us focus on dispositions at the right moments and we are going to identify the right assets at the right time to do that with.

And so Jeff, you talked about $150 million of acquisitions of urban assets kind of in the pipeline right now. Obviously, you must have pretty good comfort with some of those to kind of talk about them. Do you have the amount of assets to be able to put into the market and sell fairly quickly to fund that if you need to?

Yes, we do anticipate being able to fund acquisitions with dispositions. The timing, as George mentioned, of when exactly that occurs is difficult to predict, but we do anticipate dispositions in 2017 and through the end of this year that would fund the acquisitions.

Okay, thanks. And then a couple of questions for John, John, in the quarter, the leasing economics that you achieved were a little bit lower than what you have been achieving. Was that a function of space, mix, location, just curious on kind of what drove that? Are you trying to lease up some of the under-leased non-core assets to position for sale? Some color on that would be helpful.

Yes, sure. I think what you are looking at is probably the result of some early renewals in non-core markets. As you saw in our bullet points, we had a few deals that were in the Midwest that were non-core markets. The numbers that I am looking at for comparing 2015 to 2016, we are seeing an increase in GAAP rents from expiring leases. And the average cost of deals actually this year is slightly down versus last year, but it continues to be in the $4.25 to $4.50 range per year, which I think is on the low side for CBD urban assets and I think is reflective of quite a few renewals in the non-core market suburban assets. So, I would expect the cost to be trending closer to $5 a foot per year for TI and leasing costs and I would expect the rents to be increasing. I was looking at the most significant 23 leases that we have done year-to-date. And on a GAAP gross rent basis, those new rents compared to the expiring leases are up approximately 8%, and on a net GAAP rent basis, those are up even more in the 13% to 14% range. So, I think those trends are positive. And as you see more urban leasing, you will see those rents – the waiting towards urban properties, you will see those rents increase. Hopefully that answers your question.

It did. And obviously there are two more in there very specific questions, one I think Burger King for 2018, do you have any color on that? And then can you dive a little bit more into 121 South Eighth and kind of what you are seeing activity-wise for backfill?

Sure. I will tackle Burger King and then let Will Friend talk about Minneapolis. The Burger King space, as you probably have heard, is an expected departure. We have gotten out in front of it and we have had some great credit tenant prospects for multiple floors. Working with Burger King is proving a little bit challenging to try to arrange those tenants to takeover and create a multi-tenant property, but the reception of that property has been really great. It’s a beautiful building and just trying to get Burger King out of the way and get started. So, all things static, if there is no significant changes we expect that property to do well. Will, you want to spend a little bit of time on 121 South?

Yes, sure. Good morning. We are seeing, as John said, activity in Minneapolis has been very good at 121. We are also seeing activity and tracking deals on 801 Marquette, and I think the two go hand in hand as 801 Marquette’s development is moving along and the market has a better understanding of what’s going to be happening right next door or actually right in the lobby of 121 South Eighth. We are starting to see more real activity and interest in the tower building or 121. So, we are tracking about 200,000 square feet of real active deals right now in the market that have expressed interest in 121 toward it and are working on a number of exchanging proposals on some of those. And some of those are looking at both projects. So, I think all-in-all, we are really positive about the activity at the building and as 801 progresses, I think it just bolsters the activity in the tower as well.

Great. Thanks for all the answers guys.

Our next question comes from Tom Lesnick of Capital One Securities. Please go ahead.

Hey, guys. Good morning. Thanks for taking my questions. I guess, first on 801 Marquette assuming that it’s going to take 60 or 90 days for TI build-out. What’s kind of the internal deadline by which you guys would need to have a tenant in hand in order to hit that and the first quarter target?

This is John Donahue, Tom. The end of first quarter is when we expect the development to be completed. As far as the leasing effort goes, we are canvassing a wide range of prospects and so whether that be a single tenant for the building or multi-tenanted is unknown at this time, but it has been very well-received. And so I am expecting over the next few months hopefully next quarter into the next quarter, we will have some news for you to share details. Will, am I missing anything? Is there anything else that...

No, I mean, I think that, that answers the question. We are seeing increasing activity at the property. It is a construction site right now. It’s not a building that a prospect can tour physically. So, it’s a lot of presentation of materials and what’s coming. But so the activity is good. But as far as the timing of leasing, that’s all to come. We continue to work with prospects and market the property and we are delivering I think one of the most exciting projects in the market and with best-in-class amenities and we are getting the commensurate reaction and response to that, so...

Appreciate that insight. And then I appreciate the color earlier on the disposition front, but regarding the acquisition strategy given where we are at this point in the cycle, I have to imagine that most solely marketed deals are coming in at full pricing, especially in some of your more institutionally heavy markets like Atlanta, Dallas and Houston. Are you guys seeing a lot of off-market deals come about and was the Atlanta acquisition in 3Q off market as well?

Hi, Tom. This is Jeff Carter. The Atlanta acquisition was a marketed deal. The acquisitions that we are working on right now, which comprised with one or more deals in our five core markets that are similar to what you have seen us acquire this year in downtown Minneapolis and Midtown, i.e., there are CBD urban deals really in terrific locations. We are looking at one or more deals that comprise a total of about $150 million. And all of what we are looking at right now is off market. Every property that we are looking at is off market. And so, which is why I am not going to give very much detail right now for competitive reasons. And we are not under, firm on any contract or anything with that. So the deals we are looking at our off market and we think it has very similar characteristics than what you have seen us acquire this year and before this year, i.e. prices that are well below their estimated replacement costs, properties that have compelling value creation opportunities and the near, intermediate and longer term, depending on the asset and properties that have good in place intrinsic as well. So – but they are off-market deals at this time.

Got it. Thank you. And then just one last one for me, on the $0.24 guide for 4Q, was a little confused just given on the basis of that guide, the one or three for the full year makes complete sense given the equity offering in 3Q, but last quarter I asked for clarification on whether guidance this quarter reported and you guys said it was on a reported basis. And from that standpoint, it appears that consensus is mostly clustered around $0.26 and that’s inclusive of the offering, so is there anything there that we are missing?

Tom, this is John. I think what may be missing is the effect of the offering in the fourth quarter with other analyst reports. I think if you look at where were on the range, we reported in Q3 which was out since any of the capital activity we did in Q3. It numerically makes sense to come out where we did. The full amount of shares outstanding for the fourth quarter will be the 407 million we have post equity offering. So that would definitely impact the fourth quarter. Hopefully, that answers the question for you.

Then Tom, this is George. I think that again the main effort from the offering was to put that equity into producing real estate. And a great part of that equity has not yet done that. That is really the Marquette property. It did pay down debt. But that when we do our projections, our guidance, it is always guidance that is given without regard to capital market activity. And that includes major acquisitions, dispositions and equity offerings or debt offerings. And so when those occur, then the former guidance does need to be adjusted. We haven’t done an equity offering in a number of years. And again, this deployment into rent producing real estate has yet to occur for a large part of that equity offering, hence the lower fourth quarter.

No, I fully understand and I appreciate that. Was just confused between kind of full year consensus at $1.03 and 4Q consensus at around $0.26 and the 4Q guide coming in at $0.24, so I will follow-up off line. But appreciate the insight. Thanks guys.

[Operator Instructions] Our next question comes from Craig Kucera of Wunderlich. Please go ahead.

Hi, good morning guys. We had the big drop in occupancy in the Legacy Tennyson center. I think that was then vary, but I know you said in the past that market has been pretty strong, can you give some color on kind of how things are progressing there and how much downtime you think you might have at that asset?

Yes, sure. Craig, it’s John Donahue. So as you know yes, you are right that, that is primarily due to the Danbury expiration, a little over 100,000 square feet. We had mitigated that partially with one of the subtenants by leasing about a third of the building. So 60,000, 70,000 square feet roughly still remains to be leased. That property was a single tenant building and self-managed by Danbury. And so it’s taking some time to take over the building which we did in the middle of the third quarter and put in some amenities, given a bit of a face lift and get the leasing activity ramped up. The summer slowdown due to the heat, taxes certainly was felt, but Dallas as you know, is extremely strong. The legacy market in general is one of the best submarkets in Dallas. And so we are expecting that to yield great results. The early interest in the property, again some household names, some good credit tenants and so just a matter of time, we believe before that we get that property re-stabilize.

Got it. And was the rent rolling off, was that – where was that relative to current market?

It’s comparable. It was in the 17 net range as far as expiring rent. And we are seeing rents in the core of legacy between 23 and 27 net. So we think that property, which is not in the core of legacy, just a little bit offset arise, we certainly think we can get in that 18 to 22 range net. So we would expect it to increase slightly.

Got it. And I just want to double check I appreciate the color on your lease rollover here over the next 12 months to 15 months, sounds like it’s mostly Atlanta, but is that where the Murphy E&P building is located?

No, the Murphy building – the Murphy lease is at Park 10 in Houston.

Got it, okay. And what about the Houghton Mifflin tenanted space, is that in Atlanta, where is that located?

That’s in the Chicago suburbs. And we did a long-term renewal in downsizing. We have had great reception there from the subtenants going direct as well as activity for new tenants. So, that is – Evanston is a very small urban environment and we have a great competitive advantage there. So, we are expecting good things in short order there.

Okay. Thanks, guys.

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

Thank you, everyone for turning into our earnings call. We look forward to our next earnings call for sure and seeing many of you in Phoenix. Thank you.

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